GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Okay everybody. Thanks for joining us again. I'm Brad Erickson. I cover Internet here at RBC. Very pleased today to have Mark McCaffrey, CFO of GoDaddy, straight in from Tempe, Arizona. I assume. Thanks for being here.

Redwood City. Close, close.

Like I said..

Our headquarters talk us to and [indiscernible].

All right. Well, good of you to make the trip. Thanks for being here. So I have my list of questions. We always say if anybody has a question, feel free to raise your hand, and we'll get you a mic and get that to Mark. But I think starting out, you guys just printed, maybe always good to just take a minute or 2 and just talk us through the print. And particularly, what are the kind of 1 or 2 items you're feeling in terms of questions from investors following the earnings last week.

Yes. So everybody has seen the reaction. We're really happy with the momentum we have in Q3 going into next year. We've laid out some of the framework. Now some of those key items were -- we're going to exit this year. We're targeting around 29% normal line of EBITDA margins. That's gotten a lot of questions, but that's ahead of where we originally thought we were going to be. And we put a target out there of 31% for exiting next year to give an idea of the momentum we continue to get. So a lot of positive reaction that as we have gone through our integrations and some disposals of assets in the first half of the year, we're starting to see the momentum in the back half of the year around our cost structure. We're starting to see that come into the fruition. The other item that has been talked about a lot is A&C growth. And taking it up a level, we're seeing really strong demand at the top of the funnel, which is very encouraging. We're seeing it consistently, which is something, again, in prior years, it was very inconsistent. But we're seeing that demand, and if you look at our domain space, in our core platform segment, you're seeing the growth in bookings around 8%, growth in revenue around 4%, the -- which is great, but the best part about it is our customers are attaching that second product a lot faster. And we gave the data point that more than 50% of our 50% of our customers now have a second product with us. And why that becomes important. Well, that gets to the third product, it gets to the LTV equation, we've talked about, it gets to those retention rates. But that -- benefit of that shows up in the momentum in A&C, right? Because those are, in essence, the second products now where it helps us on a margin basis is that's at a higher segment margin as well because it is our mostly our technology. So therefore, we're getting it at a higher basis, which is helping them momentum. Last but not least, a lot of -- we've been buying back stock, right? Our capital allocation strategy and our ability to hit our cash flow per share using the combination of operating efficiency as well as being in the market, doing the right thing around capital allocation. Again, led to a good story that those 3 points continue to be, hey, we like that. We like what we're hearing -- so good reaction.

Yes, nice to -- good to hear. Yes, so in terms of -- let's just start out with the macro question, obviously.

We're going right to macro. Al right, al right.

[indiscernible] times. It's going to happen in '24. No, I'm just kidding. Let's assume kind of a stable environment into next year. And obviously, just the uncertainties that investors tend to price in, talk about this -- the business' resilience, the durability under kind of these, I don't want to call them tough times, but certainly uncertainties.

It's uncertainties, right? And we've been around for a while. This isn't our first -- I don't want to say the word recession because apparently, it's here or it's not here, but in a down cycle in the economy, we've seen these before. We have a very resilient customer base. You look at our ARPU, you look at the micro business, you look at the [indiscernible] with their venture to grow that, but they're bullish on their own ability. And we've actually done surveys through our venture forward program, and I think it's over 70% of them are very, very encouraged by what they're seeing out there -- and it's this weird inflection point in any macroeconomic environment where the popularity of the side hustle. I always call it, starts to come into play or that micro business that they want to do out of their home or locally starts to come into play. And so it adds to this resilience that we see in our customer base, right? So I want to be good -- like the demand part of this is really where we spend a lot of time. And what we're seeing in these times is that demand is there. And that intent is there and that's why we feel good about [indiscernible]. We not immune to macro now. but in a normalized state, everything going into next year has a lot of the -- we're not immune to macro economic. And I never want to -- there used to be the story that we were recession-proof. We have to monitor the business. There are certain aspects of the business on a broad basis. Aftermarket, one of them I've talked about a lot. We see the valuation in the aftermarket, something that continues to be volatile. We've done a lot of work on things like our infrastructure and our data centers of less reliance on them. So energy costs learn a variable. We have to worry about going forward. Great work there. Interest rates, again, we had an opportunity last year to refi our 2024 debt. We were aggressive in the market, thanks to a lot of help out there. But we were able to get ourselves to a point where we really created, I would say, security in the sense that we weren't subject to future interest rate hikes going up. So there are things like that on the macro environment. We continue to monitor and aggressively go through. But from a customer base, we feel like that demand and that positivity coming out of the customer base right there is really almost encouraging. And I always use the comment we're here for the underdog. We're here for that mom-and-pop shop who is competing against all these other elements that wants to do better, wants to sell in more places and that kind of drives us in our mission right now is how do we do that and how do we keep that very efficient.

Yes, yes. You can't lose with the under pitch.

The underdog pitch, you're going to hear it a few times. I'll know I'm successful when a man says underdog in on the status, right?

Maybe just a follow-up on the funnel. You mentioned you're seeing kind of good trends, better trends, et cetera. I think others in your space have spoken to some ongoing softness, maybe a little bit of directional improvement. Where is the difference do you think, from your perspective?

Well, it's hard to say what they're seeing from that. We continue to be the biggest player in the domain space. So that continues to be a big part of our funnel. And I would like to say because our technology has become more seamless that once people are coming to us for a domain, they're not leaving to go elsewhere, and that's creating that, I would say, second product, third product type of equation we're talking about right now. But the demand -- that intent is there. Now we have talked about net adds on a quarterly basis of disclosure we added this year at the request of a lot of people. We've talked about the churn we're seeing in some brands that we're integrating and even have sold. So that's creating some negative churn for us right now. But on the growth side, it, it -- again, I think it's the encouragement of the micro business on the side hustle of people wanting to put that into effect wanting to sell faster in those environments that is really kind of driving a little bit of a differential for us, right?

Yes. Yes. Got it. And how do we think about the churn on that front? Because I know there were the new business formations right, skyrocketed during COVID, they're still pretty elevated though. In fact, they're still above pre-COVID levels, I think. What's the churn characteristics, though, on the new business formation that we think we're seeing these days?

Remember, we're engaging customers and we look at many data points around our market. We're engaging customers often before the new business formations, right? So that is a step in a process for them. But we're at the, hey, I have an idea. I have a dream. Let me see if I can get a few transaction level, right? And that is where we're seeing the encouragement. It's not always correlated directly to new business formations and failures. There are business failures, there's no doubt about it. But more often than not, we even see in that case, they're just flipping their dream to somewhere else, right? And they keep their domain name, but now they get another domain name and they add a website there or maybe they have now 2 or 3 that are in play. We were out visiting a customer not too long ago, and the wife was running a business out of a shop. They had just moved out of their living room a year before as we're going through how she's engaging on our platform and what's working for her, all of a sudden her husband pulls me aside and says, "I just started personal training". And I'm like, Well, that's great. You look pretty fit to me but -- and he said, "No, no, no, I'm actually training people, and I've created my website and my wife likes to talk about her business, but look at what I did, and I'm a customer now", and I felt a little awkward there for a minute. But it went to that resiliency of them coming back and seeing the success of their ability to do business in that market. And that's where I love kind of seeing it just multiply even within family units, right? So it's good -- we're feeling good about the momentum. And that's what I said is if we have that seamless experience, we feel we're going to keep that momentum going. Arrow, which we announced I never get to announce something before the marketing team just show you now. And the fact that I announced it on our earnings was a big deal, right? Arrow is here. We have it in market go on our website. If you see it, you're one of the 10% that have been designated as a kind of modeling for us to see people's reactions, but Arrow is here. It's AI generated. It basically goes through a seamless attach. It is so cool. We're going to display it more at our investor dinner in November. But that is all about that seamless experience of engaging people to get them to transacting faster. And we spend a lot of time on our technology stack integrating. We're the only company in the world that has domains all the way to payments on one technology stack integrated in its entirety. That creates a ton of data. We have a ton of data. We now are going to have it all consolidated within one stack. Why does that matter? Well, AI needs data to keep improving. It needs to keep updating. We have the ability to look across the platform even to the transaction level right now from even the domain to see what they are doing and help them with solutions. And that's why we get excited about, hey, that seamless experience is just carrying our model and momentum going into the future.

Got it. Okay. Let's talk about apps and commerce...

Any questions? We're good. All right. I always like to check it.

On apps and Commerce, obviously, that's kind of the big focus point of the business growing really well. And you talked about having the funnel for new subscribers. On the ARPU side, though, you're also seeing a nice accretive mix shift there. Can you kind of walk us through like a typical customer's journey, if you can, that's driving some of that? Is it just new customers signing up and they're going all in on commerce and payments? Or is it -- you're seeing people sort of dip their toe in the water, smaller business and they expand, Walk us through kind of what you're seeing there?

And -- yes, it's everything, which is the best part of it is because if you come in, you come in with, hey, I have an idea, mybaseballcard.com. Yes, I use it again, all right. Christie's shaking her head at me at the -- in the [ tram ]. But I can go in multiple different directions now because everything is available. I can go right to taking payments to sell my baseball cards. I don't need a website to do that, but I may want, oh, maybe I just want to set up my e-mail first that -- all the choices are there. It's not a linear process anymore, which allows our customers to kind of get to right where they need to be to jump into the market and start selling what they want to sell. So it's less right now about, hey, is there a certain path they have to follow to get everywhere to it's engaging the customer on the platform to say, what do you need? And it's even now with Arrow giving the ideas of I buy mybaseballcard.com, it's going to give me if you want a logo and then it's going to give me sample logos of baseball cards. And then I say, "Well, I'm not really doing a baseball card, I'm going to be an investment banker. I just wanted to use that name", then it will change immediately, right?

it actually happens.

So it's -- what we're finding is it's less about the linear path of the journey and more about engaging the customer to get them thinking about what exactly they need. And that intuitive process that one, again, coming back to the technology stack is working tremendously well. And I know we've sent out invitations to our investor dinner. But we can't wait to get that out more broad-based right now. And again, keep trying until you're in that 10% if you want to get on our website and check it out earlier.

Got it. And when you think about the growth algorithm, for apps in commerce between kind of some of that ARPU mix shift and then just subs, are they kind of equal contributors, is one greater than the other as you think about the next few years?

It's both, right? And it's both. And remember, ARPU for us is a lagging indicator because we do it on a TTM basis, and then on top of that, it's based on revenue, not on bookings. So bookings is usually the leading indicator and ARPUs are a lagging indicator. And that's why we get excited with the bookings momentum within A&C right now. So we believe the demand, coupled with the intent in that second edition product, remember, the other data point we always use is our retention rates are grade at 85%. When we get to that second customer attach, our retention rates go up even higher than that. If we go to a third product attach, we basically have a customer for life. So getting to those decision points faster has that, I would say, momentum effect of just growing and growing and driving the LTV, we will always talk about the 83x getting all the way to payments from [indiscernible]. So...

Got it. Okay. And then maybe just a finer point on the domains business as kind of that distribution point. You guys, I think, talked to having a structural advantage with that and separate from just top of funnel. Talk about how you guys think about that structural advantage? Like why -- what specifically happens that drives that from your perspective?

Well, it helps having come up in the domain space and having the brand around it. We're the biggest domain player in the world by far, right? So that is a natural funnel for us. Being able to take the domain technology, which, again, is something that we've done for a long time, there's -- it's in the technology stack and add functionality to it, is not something that can be replicated very easily. So having a domain that automatically attaches a website or having a domain that has payments attached to it, that is something that you have to own all those pieces in order to make it happen. We own all those pieces. We -- and we've made it and differentiated ourselves. No one can do a payable domain in the world. Why? Because you need both the payment functionality and you need the domain functionality, and you need them integrated together. Our domain names now accept payments. It's a pretty easy process. You can set up your kids on a domain name instead of have their birthday money come in right to the domain name, right? So you don't -- there's not a business, but its ability to transact very easily without giving away personal information that you may not want to give out at this point.

Got it. Okay. And on domains, one more there. I mean, I think it's pretty well known that markets fairly mature. You guys have been able to grow actually fairly well, high singles, low doubles somewhere in there. I know there's been some volatility in there, here and there. But how have you guys been able to do that? How durable do you think that model is going forward?

By broadening our demands. We -- a lot of other players out there are very focused on certain areas of the domains. We have over 400 TLDs. We're a registry and a registrar it allows us to really have a broad base of ability to sell into the domain space keeps us as the biggest player. And from time to time, there are different TLDs that are going to be more popular than others -- surprise, surprise. .AI right now is a popular TLD, right? It helps drive the growth, but having that broad base of opportunities around TLDs allows us to really maintain that. Now a couple of other things, again, coming to the technology around it as well, offering a differentiated TLD also allows us to continue to grow in that space. While you're getting more value out of just a domain name. So when we talk about actual innovation and being able to put this all together, the domain is part of it, right? Like it's a key part of it. And our ability to do that really again comes back to that structural, structural advantage. Got it. Okay.

And then let's talk margins a little bit. Yes, margins. You guys came out with obviously some pretty strong results, raised the outlook both for this year and kind of in the next and exit rates and all that. On the Tech and Dev costs, in particular, product development, R&D, what were you able to identify that stuck out to be able to execute on some of those cost reductions? And in particular, you did it very fast, right? Like last quarter, 2 quarters ago, we weren't necessarily talking about, this all of a sudden, it's on the table. It's in play for next year. How did you do that? And what did you identify there?

Thank you for the very fast comment. I would say it appeared faster than most people maybe thought, but it's something we've been working on, right? And if I go back to several years, but let's just take the last couple of years. We went from 2 years prior to last year, we exited at 26% on our normalized EBITDA margin. This year, we're looking at 29%. Obviously, this has been an incremental journey as we've gone on that we've targeted exactly in the fourth quarter where we want to go for the next year as far as our margins are concerned. But this took effort in the sense that we had to get to less reliance on things like data centers and infrastructure that was driving our core segment, our slower growth segment and get to areas that we're going to have more efficiencies in our cloud contract is well known right now. That continues to allow us a lot more flexibility in our workloads and creates that efficiency. So we took restructuring actions at the beginning of the year. We talked about the integrations of some of our noncore brands that we were going to bring into the core GoDaddy stack. We talked about the fact we were going to get rid of a couple of noncore assets out there that weren't really driving any future benefit for us. And we did that as we went through the first half of the year knowing that we would start to see the benefit of the -- of some of this in the second half of the year. What happened is we hit some of our milestones around this faster than we thought. I mean this was a concerted effort. And so some of that started to show up in Q3 a lot faster than we had anticipated because we were able to sell a couple of those entities, but we closed the deal. I think it was either July -- June 30 or July 1, but it didn't have an impact on Q2 anymore, right? We were able to hit milestones with workloads going into the core GoDaddy stack that help us with more efficient pricing within our AWS structure, right? So there was multiple elements of just executing to the timing and seeing those benefits start to be realized within the second quarter, and they're not one -- to be clear, they're not onetime benefits. There are benefits that will continue as we continue this journey, and we continue to get more efficient in everything we do. So it allowed us to say, hey, we're really pushing this in the right direction. And on top of that, when we talk about the growth in A&C, which we're really happy with and the progress there, that's the more efficient segment for us, right? That comes at that higher segment margin that we've talked about, which again helps with that momentum as that becomes a bigger piece of the pie, it allows us to get more efficiencies and has a bigger impact on our bottom line, normalized EBITDA. So this is a continued journey of just making sure we're improving every step of the way and having the most efficient structure. And the ultimate goal is we have one technology stack that we're maintaining and that we're adding to that in and of itself is easier to maintain. It comes with tech and dev efficiencies, but it also goes with care efficiencies. We don't have to maintain a care organization now for multiple different platforms. We can focus on the care organization around that one. We can start to use AI for care within that one tech stack, which becomes more efficient, right? We're allowed to see the results of our marketing technology even better within that one tech stack without having to support other tech stack. So there is an added element of just continual improvement that makes this model more efficient, which gets us really excited and allows us to say, "Hey, not only are we putting a target out there, but if you look at how we've taken each year, it's kind of just putting out the -- that we have been doing, right"? So we're going to continue it. We're not stopping.

Sounds good. I have to -- I'm a channel [ treks ] guy. I have to ask you, it's a quick channel check, right? So almost ask you to take your CFO hat off, all right. So everybody saved money on cloud, right, over the last year, optimization, rationalization I think Amazon's CEO used the word attenuate in the last quarter, meaning those optimizations are kind of bottoming after we all looked it up in the dictionary.

I was going to say can you tell me what that means?

Yes, exactly. So I guess you just spoke about seeing sort of further optimization. But I think setting aside some of the company-specific stuff that you guys are running your own play, just industry-wise, do you think some of these optimizations that companies made, do you think there's more to go in '24, meaning do you think there's further opportunities to identify? Or was '23 kind of like this big rationalization year and we're kind of at a new baseline, and then it's back to normal. What would you say?

Well, that's a loaded question. I feel like there is a lot of digging into there. Listen, I think...

13 words or less?

Yes, I think this was the year to start the efforts. Like in other words, this is the year where everybody focused on, you know what, optimization. And if you've been around right now for more than 15 years, this is a cycle, right, especially in the technology industry. And when we get to the cycle, all of a sudden, the mindset shifts, and everybody hey, we have to be more efficient. We have to look at returns on our investment. We can't be doing everything. We have to focus on what are we going to invest and that's really going to create incremental value? That's just a mindset that happens. And I think what we saw coming into this year is, yes, we have to do that, right? And if you were a mature technology company, you probably had a little bit better of an idea of how to make that all work. I think that was helpful for us. If you were a newer company than you were probably having to reshift a lot of your focus around, okay, in a non hypergrowth environment, what does that mean for my cost structure? How do I get more out of it? So I think that journey will continue into 2024. I think that's just the nature of where we are today, a macroeconomic environment. Now what does it hold beyond? I always say this, technology industry has short memories. So at some point, you shift back to, hey, IPO market comes back, M&A comes back, everything goes in that direction. But I think this cycle feels a little bit longer than some of the ones we've seen in the past. And therefore, there's going to be a little bit more of a focus on operational efficiencies, improved margins, making sure you're structure from a balance sheet all the way down to your infrastructure are ready to go to -- for the next cycle. And with that, those that can do it, will have a better opportunity when the cycle starts to changing.

Yes. Got it. Okay. And then just one more. From a margin standpoint, you've spoken to kind of the longer term, obviously, giving people a little bit of a sort of early expectations there. Aman's talked about kind of being a 10% grower. That's kind of where he views the business from a normalized growth perspective. Anything to read into those margin comments? And I assume, obviously, there's been no deviation there. But maybe give us a little bit more on why 10% is the right number?

Yes. So at different times, we focus on different numbers. So I don't want to over pivot to hey, double-digits. Our feeling in the way we look at our model assumes that we're -- double digit may not be there, right? So what do we need to do to operate in an environment that is efficient, but not necessarily dependent on hitting growth numbers? And that's how we have focused our structure going forward. So while we have said that in the past, hey, I like the momentum. I like where we're going. Some of it's natural. FX falls off. We'll see that. We're seeing it in our bookings today. We're seeing a lot of that momentum. Let's not assume things. And I say that in a nice way of we're going to -- we can do what we're doing on margins without assuming we have to get to a certain level right now.

Got it. Okay. Any last questions? I get -- 2 more lightning round questions if nothing -- these really -- oh yes.

The commerce business is accelerating. Can you talk about the competitive dynamics there? Are you thinking about share away with someone? Or is it kind of a net new product for customers?

Yes. So it's both, right? What we're seeing is a great attach within the commerce element. So when people are coming in, going to websites' marketing, over 90% of the time when given all the options of payment processors, now they're taking the GoDaddy payments. Now there's a couple of reasons. One, we're more cost effective for them. But two, it's also a consolidated platform coming back to the one technology stack, which for our customer base is really an advantage. They don't want to be dealing with mobile applications. If they can do it all in one spot, that's always going to be a competitive advantage for us and works in our market and allows us to grow with our customers. And that is a great place for us to be. The other muscle that we saw, which -- listen, we had to experiment with it and get it to where we thought was our existing customers in our 21 million customers that are using a different payment processor are switching over to our payments. And why are they doing that? Because one, the same reason, it's one consolidated stack. But when we're engaging them in our care organization, and we're talking to them about how we charge them, and we don't have any, I would say, hidden fees anywhere else, but that we're giving the data back to them on the transaction basis. And that you -- we can convert them over pretty quickly and they can now just use one app. That actually has become a compelling selling point. This is where technology comes into play, too. You have to identify those customers in your customer base who are at that point where it seems like they would be willing to switch, and that's some of the technology we've built into the care organization today.

All right. One last true lighting around 10 words or less, most interesting Gen AI use case, like something you can actually do with it. hopefully generate some revenue. Most interesting Gen AI use case that you see that no one is talking about.

This -- well, I'm talking about it. So I'm going to cheat a little bit here. No one else -- you have to see [ CRL ], right? And please check it out if you can't make it to the dinner, it is just unbelievable and it's a game changer in that within seconds now, products are getting attached and websites are getting built and customers can take payments. It really is impressive. It is Gen AI built and takes advantage of that entire technology stack and that ability to read that customer and what they want. It's really, really [indiscernible].

That was way more than 10 words.

Yes. I know I'm going to count, but I never counted very well.

So Mark, thanks so much for being here. Appreciate it.

Thank you.