GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

All right. Good morning, everyone. My name is Chris Kuntarich. I'm with the UBS Internet team. I have Chris Zhang up here as well from UBS Payments team. We co-cover the web builder space. And we're really excited to have the GoDaddy team here and Mark McCaffrey. So thank you very much for joining us here today.

Great to be here. Thank you for having me, Chris and Chris.

We're easy to remember. Well, yes, let's jump right in. Mark, you've been in the seat for 2.5 years now. I guess what has changed the most, kind of what's changed the least here and really what are you most excited about over the next year?

Yes. So it's been, I would say, a very active 2.5 years when you look at the macroeconomic environment that we've been in. I always say, you always have to remember these are cycles, right? And you're going to go through cycles no matter what. And I think looking back in 2 years, even coming into the role, one of the things that attracted me about GoDaddy was just the strength of the balance sheet, the cash flow, the free cash flow and some of the advantages that created. Little did I know those advantages would be placed in a recessionary environment, I don't know if we're in a recession or not, but that type of environment. And it really came into play, allowing us to maneuver and make decisions and really look at the business as things were unfolding in front of us. There was a lot that was within our control, but a lot that was outside of our control, And we took advantage of it. We took some time to look at our infrastructure, look at where we were going, look at what made sense. We've talked about the transformation we did on our technology stack. I know you both were at dinner last night, and we launched Airo, which is launching today live, which we're really, really excited about. But that really is the accumulation of the work that has been done over the last year, even probably a little longer, around that transformation. And what I'm excited about today is we're at that inflection point. Airo launched, Payments is now fully in market. We have a consolidated technology stack. And with that consolidated technology stack, we own the data all the way from the domain to payments now. And with that data, feeding that into a machine-learning model, we're able to create an experience -- a seamless experience for our customers that really takes the friction out of discovery, engagement and then, ultimately, monetization for us. So we demoed it last night for people live. The websites actually went up live. I knew all of you would be checking it as soon as we were talking about it and you've got to see just how the friction has been removed from it. So really, really excited about it.

Got it. Yes. And maybe just a little bit more on Airo before we jump into some of the other topics. It was a great demo last night. The way we're kind of looking at is this is kind of the GenAI, the new GenAI-based onboarding flow. But I guess just as far as, yes, just for investors that may not have had the chance to tune in last night, what should be the key takeaway from -- on Airo?

I'll talk about it in the financial aspects of it. We have often talked about our model and our ability to generate LTV and really going from one product to two products with our customers to three products. And what that does is our retention rates are great at 85% on average. When we get to that second product, it goes up even further. Get to a third product, we almost have a customer for life. When you think about Airo and generative AI and taking the friction out of the choices around products, that gets those decisions faster in the funnel for us. And if we can have it faster in the funnel with a greater experience using generative AI, then we can get to those equations. Now I would also point out, this is really new, right? We're so excited about it, but it's only -- we've had it out for about 10% of our customers right now. We'll launch it full today. The engagement we're seeing around it, it's pretty positive. When we launched Payments, we saw a positive engagement around website plus marketing, attaching our Payment processor to it. It made us really excited, and now we're seeing that roll out into what we're seeing in our Commerce. We're seeing those similar statistics now, right? When you put it in front of them, you take out the friction, they're going to those choices. So again, brand new, but it really has us now evolved. And we've always said it, we were a domain company. And as a domain company, you come to us for the domain and that was yours, you'd go somewhere else to get other services you needed through your web presence. Today, it's all in one platform. And literally when we demoed -- what did it take, 5 minutes to get it up and running on the web last night? That's how quick it is to get an online presence out with e-mail, with a logo, with social media posts. And those social media posts are generated by the AI machine that allow -- remember where the micro business is, and allows them to get online in social media almost instantaneously and then schedule things out based on things happening. And we're even seeing engagement along the lines that says the generative AI social media post our customers are using are actually more -- or are getting more reception or click-throughs on our customers' customer, right, which again, those are just all positive signs out there. But it's the evolution, I would say, of us now taking the Domain business and taking it all the way through Payments and combining that into that frictionless experience.

Lot to be excited about.

Yes, it is, right? And as you heard last night, you heard Aman talk about it, you heard some of our products people talk about it. And we're really excited just how well this is working right now and the initial engagement we're seeing in the market.

And how should we think about the cost side of that? How much was kind of built? How much is the upfront investment that you've already made versus how much of this is going to be kind of ongoing reoccurring?

Yes. So the great thing about this is the product itself calling Airo, the -- we'll call it, the engagement or front of funnel now has become so efficient it actually helps us on a profitability standpoint. Now this is early stage. So the numbers I've talked about coming out of Q3, we haven't really put it into any model at this point in time because we're really still seeing how people are engaging. But the idea of the care organization, the marketing organization, which used to really facilitate that second and third product for us, now that's happening much faster, which allows us to get better leverage out of our P&L. On the tech investment, we -- this is the transformation we have talked about earlier of combining the tech stacks to put all the data on one platform. We're well into that. We completed a lot of it first half of the year. We still have some going on. So I don't want to say we're done, done. But I think we're past the heavy lift. And that's why when I talk about tech and dev going into next year, I phrase it as we're coming off a cycle where we've made all this happen. We knew we had to transform but we're at an inflection point now where things should start to level out and get back to, I would say, a normal basis and allows us, again, to get better leverage in our operating model going forward.

Got it. Well, yes, good transition here to really talking about the margin targets that you've laid out. You laid out the 31% normalized EBITDA margin exiting 4Q '24, so 2 points of leverage versus where you guys have guided for 4Q of '23. I guess just maybe philosophically first, should we be thinking about there being kind of like a shift in focus from you guys from growth to profitability?

I don't -- I wouldn't call it a shift. When I came in 2.5 years ago, we were at about -- I think we exited then at 23% margins. Last year, we exited at 26%. This year, we're exiting at 29%. We put the target out there for 31%, right? So I would say the philosophical view of profitability has always been there, and we continue to look for efficiencies in the way we do things. Now we also knew we had to do a couple of things. I've said often innovation in the technology space is necessary. You have to innovate or ultimately someone else will for you. And we knew we had to make those investments at the same time. So again, looking at how we went forward with the transformation, we were very, very purposeful on how we positioned everything so that we could get to this inflection point, knowing that it would create the tailwinds we have going into the future.

Got it. And I guess, just as we're thinking about where that leverage is going to be showing up at the segment level here, I guess, do both segments -- should we be thinking about both segments showing leverage in '24 here? And -- or should most of that be really kind of flowing through the Apps & Commerce business?

The Apps & Commerce definitely has the most leverage for us. And think about it from the second product that I talked about and going into the third product, We still see the Domain as the primary top of funnel, which is our core platform. So once they get into the domain, when we start talking about 2-plus products, 3-plus products, most of the benefit of that is happening in A&C. So A&C comes at a more efficient revenue because it is more of an attach to the primary and the Domain still remains for the most part, the primary within our, I'll call it, one-stop shop. Now as we've moved to business in a box. So we've always talked about the one-stop shop that is our goal. I would say now you're going to hear business in a box, which is what we're offering our customers today. As the A&C becomes a larger part of the portfolio, obviously, it has a natural, I would say, tailwind again, to our overall margin position. So we're really excited about that. Now on core platform, we're still working on a few things. We've been talking about hosting and what we're doing around some of the nonstrategic brands in hosting and we've disposed of a few, we've integrated a few, we've end-of-lifed a few. That journey continues for us. Aftermarket continues to be a great business but it is subject to macroeconomic reactions. We don't set the price there. So it's depending on the buyer and the seller. And depending on the average transaction, that can sway that stream. But taking it down to the core domain business, we're still seeing -- we talked about it, that strong demand, 4% growth, 8% bookings growth in domains in and of itself. Again, that's what's really now driving that, I would say, model of the attach that's coming over into A&C. So I would say A&C is the growth, all right? And that's where we're going to see the growth show up. We'll see Domains continue to be a strong funnel for us. We'll get leverage more on the operating basis as we complete some of this transformation work that we've talked about within core platform. But both of them should start to see the benefit of that as we move forward.

Got it, got it. And you touched on it a bit through a couple of these questions here. But maybe just kind of bringing it down to the cost line item. Tech and dev, that's obviously -- you've talked about for next year. Thinking about that falling in absolute dollars and a percentage of revenue in '24. As we think about it, and I think, infrastructure costs, those account for a little over half of the line items. Like should we be thinking about that tech and dev, what you're guiding to for '24, is that more the infrastructure side slowing down on a year-over-year basis? Or is this more -- should we be thinking about this as far as kind of like the product development, more related to Airo, kind of some of those costs coming out or a combination?

So it will be a combination of both, right? We're -- I would say, on the infrastructure, we are moving off of data centers. We're moving into the cloud. We're using AWS. That does add a cost that offsets the data center cost. So the benefit we see there is limited. As more and more volume goes into AWS, we see a significant benefit in our cash flow because we don't have to support the CapEx around the data centers, so we see a benefit to our cash flow per share. But that line item will continue to get efficiencies. Now on the development side, which is the other half of the pie, like we talked about, we're coming off an investment cycle. We still want to invest in innovation, but we're coming off the heavy lift around Airo, around Commerce, all that now should be -- is in market, it should be leveraging out. I don't want to get too far ahead into exact numbers and all that fun stuff. But we definitely are looking at it from a, hey, we can optimize both these for a more efficient operation going forward and we have a lot of opportunities. And we have more to do on it, but that is part of it. You saw the jump from Q2 to Q3, right? And a little bit of that is, okay, that is the pattern we will start to see.

Got it. And as we think about those kind of 2 points of leverage here, maybe just moving on to the marketing side of things, Is it kind of the right way to be thinking about that we'll be seeing leverage on marketing? And then maybe just kind of to up-level the question here, just the web builder space as a whole, we've seen a lot of efficiency on the marketing side. Just curious if we were to think about where the web builder space is on kind of a growth versus a profitability spectrum right now, kind of how you see that and whether some of these cost savings that we've seen in marketing as a space here are more structural going forward in your view?

Yes. So marketing for us, and we, several years ago, came to a conclusion that the marketing dollars were not as efficient as they needed to be in the market. We were in an interesting time coming out of the pandemic, going into the economic environment we're in. We made a switch back then 2 years ago to use our own technology to figure out how to spend our marketing dollars and get the best return. We stopped relying on third-party data. I always say we have 21 million customers. We have 13 million interactions with our customers every year. We have a lot of -- we've been around, we have a lot of data, right? And using that data and creating that engine that allows us to get that efficiency on the marketing was a big deal for us over the last couple of years. So from a marketing leverage perspective, we don't look at it as, hey, we're cutting back or this is the new norm. We look at it as we can now really see where we get the return on our marketing dollars and where to put that dollar in order to get that return. And we feel much better about our ability to do that. Now there are always decisions we'll have to make, what markets we are going into, what that takes to get to a market. An example I give is we've now launched Commerce in Canada. We have only launched it in the U.S. So there is an area where we will look to launch the Commerce and we'll start to get the returns. But spending marketing in markets that we haven't launched Commerce maybe isn't the answer right now because we won't get that full benefit of that return related to not having the Commerce part of the equation yet in that. So it becomes very tactical for us, and we feel really good about our ability now to measure that and see the returns on it. Aman always says, as a CFO, I always have to kind of choose. I want to spend marketing dollars. I just want the return on it. I spend $1 billion in marketing, if I got $2 billion back, I don't want to do that. Having said that though, we will continue to look if there's an opportunity to get market share at a profitable basis. We'll do it. No doubt.

Makes sense. Yes, maybe just kind of wrapping up on OpEx before I turn it over to Chris here. Just sort of your OpEx is G&A and customer care, just kind of how should we be thinking about the puts and takes? And again, we saw last night the presentation really blowing it out to the broader theme of GenAI, how does that kind of fit into the customer care organization and efficiencies you're going to be gaining here over the next 12, 24 months?

No doubt, without going into exact dollars or percentages, we do expect efficiencies in care. Part of it is already starting to happen. When you don't have to maintain separate technology stacks, you don't have to maintain care around those technologies stacks, you don't have to have expertise in those areas anymore around this technology stack. So there's an efficiency just from the transformation we've done already. Now you start to put in data, machine learning, AI within the care organization itself, so they can use that tool. And we had Demetria on stage yesterday. Their ability to use that to get customers' needs met quicker, whether it's in a chat or whether it's live or also to target where we think a customer is coming in, that is prime for maybe a conversion on the Commerce platform, we have that ability to do that much more efficiently right now. We also have, I think, as we've come out of the pandemic, our Care organization has just gotten better in and of itself. Our footprint now doesn't have to be around having Care in one location. We can actually spread it out because you learn through crisis sometimes. Our Care organization works just as well remotely as it did in our Tempe office. And that was something we would have never realized had we not put everybody remote. And we continue to take advantage of that because that gives us more opportunities to hire people that are more effective but not having to worry about what location they're in.

Makes sense. All right. I'm going to switch a little bit. I'll face this way here.

All right. Awesome. Yes. Great answers so far. Really appreciate all the details. So I guess maybe if we jump back up to the top line, and you've mentioned that you didn't [ meet ] double-digit growth next year, assuming somewhere in the single-digit range to be high single-digit range. So maybe can you just walk us through how people can potentially build to the high single-digit growth next year? And how does this align with your growth initiatives?

Yes. So I'll give a few breadcrumbs. I don't want to -- we're going to have an Investor Day next quarter. We'll announce the date here shortly. I'm looking at Christie over here in the audience. And it will be in Arizona, just so everybody knows that. The way we look at it, and I just want to be clear, when we talk about the percentages and the operating profitability and the normalized EBITDA targets, my basis for wanting to give people an idea that it's not dependent on double-digit growth was to give comfort that we don't need to chase growth in order to obtain profitability. We have a plan on profitability and we have the momentum. We feel really good about the tail -- headwinds becoming tailwinds going into next year, and that gives us the confidence of, hey, we will accelerate growth. Now I haven't gotten into what that means exactly other than to say I'm not chasing double-digit growth to make this whole model work. I feel really good that our ability to make it work within the parameters that are in front of us today. Now I will say, where we are really excited and has started to show up is within our A&C segment, which is that second product attach that we've talked about. We've talked about the demand coming in our core platform, but they're moving to that second product. Now this is not an Airo at this juncture. This is just a pattern we've seen all year around that we are accelerating to that second product faster, and we're seeing that acceleration start to show up in our A&C platform right now, which really gives us the excitement around the momentum. You also look at some of the areas that haven't -- we talked about hosting. We will have some headwinds around hosting going into next year as we've disposed of some of the entities that we've also end-of-lifed or integrated. That comes with a natural -- we will tail off on some customers there that weren't transferred over to the core GoDaddy stack. So we'll keep everybody informed of what those pressures are within our hosting business. I think that's some of the feedback we got from investors over the last few weeks as we've done our investor reachout, so please give us more details on what that means. But eventually, as we start to lap those events, that creates a better environment for us. And then in the aftermarket as well, we're coming off of, I would say a 2021 that was extremely strong in the aftermarket. Valuations were very high. We saw that a little bit in '22. We saw it tail off into '22. We're entering a more normalized, I think, market for the aftermarket now. So again, those headwinds start to become the tailwinds that we've talked about. Without getting into exact numbers, you're starting to see our bookings exceed our revenue. Some of the FX hangover that we've always talked about coming out of last year now is starting to abate itself. So we're seeing some strength there. We'll get into more detail when I get to Investor Day of what that will look like exactly within 2024. But we feel really good that this isn't about chasing a specific number to get to our profitability, to get to the free cash flow we talk about, to get to the unlevered free cash flow. We really feel good about our increasing ability to do that. And ultimately, it starts to show up in our free cash flow per share, which we -- I said at the end of Q3, we're on target to deliver that for this year. And obviously, we'll start to give the -- what that will look like for 2024, but we feel really good about the momentum going in.

Okay. Sounds great. I appreciate all the color on the building blocks. I'm sure we're all going to get more concrete answers in a couple of months or so.

Yes. If I told everything now no one would show up to Investor Day, right? .

All right. Awesome. So I guess before moving on to the segments, can you just comment on the pricing environment? And what do you think about the opportunity set for potential pricing increases in 2024 versus the pricing actions you've taken in '23? And then maybe just layer on top of that, how do you feel about the health of SMB trends at this point in time?

Yes. So I'll start with the last part and then move it into the front part. We do our survey, Venture Forward. We look out into small businesses and we kind of get the reaction and There's a clear statistic out there. Over 70% of entrepreneurs right now feel really good about their opportunities out there to grow their business. That same group also doesn't feel very good about the economic environment they're in today. So you have to balance the 2 of them, but we feel really good about the fact that people are engaging at the micro business entrepreneur level in a manner that we haven't seen this demand for a long time this consistent, right? So there is a strength out there that we are seeing, we feel good about, and we believe that is starting to transform itself into people doing what I would call the side hustle or the side business. And that's an environment that we thrive in. Again, we're the micro businesses. When people -- other people talk about small businesses, they're talking about a level up from our micro business, right? And that is a very, I would say, durable, resilient group that does things because they love it, and therefore, tries to keep doing it. Maybe they slow down a little bit. But generally, when you look at the value they're getting out of GoDaddy, our ARPU, when you look at it overall, is at a level that the value they can achieve versus what they're paying for, there's -- we believe there's surplus there. So it's not something they generally will give up. We haven't seen it in our retention. We haven't seen it in any aspect of our business, even when we've talked about the strength of the front of the funnel and Domains. What that does from a pricing? We continue to use pricing as a lever, no doubt about it. I never want anybody to walk away saying where we think we're getting our customers more value, we're not going to try to achieve more pricing on it. We do balance that very, very much with retention. Our 85% retention rates, we think, are just fantastic. And we never want to put pressure on that number because that hurts LTV ultimately. And so we balance where we think we can take price versus our retention rates to make sure that what we're doing keeps that, I will say, leverage in place in the model. Having said that, we're in an environment where, one, depending on what products we talk about, there's ability to take price. We also think in things like commerce, we're very aggressively priced, but it's allowing us to take market share. And we'll make those decisions as we go forward, right, as to what is our ability to do that, what are our successes around it, how do we continue to generate those, I would say, value points within our model. Going into next year, one of the things, again, now that we're on a common technology stack -- I haven't even put Airo into the model at this juncture. It's early stage and we think it's going to be a great tailwind. But when you just take the technology stack in and of itself, the customer now has the ability to bundle more, again, getting to that second and third product, which gives us pricing elasticity. Once we see the data around what bundles are creating more value, that gives us the ability to go in and say, okay, you're getting more value out of this bundle, that gives us a pricing opportunity. And again, we're at such a level, we're not the ones that are going to sit there and double their price overnight, but we'll take advantage of it. right? And as long as our retention rates stay strong, we feel really good about it. And again, it's a balance between once you get to that second product, the retention goes up, which gives us pricing elasticity to maybe get more value because our customers are getting more value in a bundle. And that is, I would say, something that is evolving more strongly for us versus in the past where you just -- you passed on the price increase in domain names and you just passed it on, right? But I would say those were more of a blunt instrument type pricing events versus now we're getting more into that value-based pricing that we can do within our customer base.

All right. Awesome. I guess with 2 minutes left, I just want to see if there's questions from the audience. And I do have...

This is a great audience, by the way. All right. Thank you. At 8:15, I do appreciate you all being here.

All right. So I guess maybe just a rapid fire on one topic definitely we want to get to. Recent highlights, 50% of subscribers now have 2-plus products, and this is where you're seeing growth and potential more leverage. So I guess, first one, does this include managed [ WordPress ] accounts?

Yes. So it includes all of our products, right, across the board. And just to give you a little color, I all of a sudden came up with a new metric and threw it out there in Q3 earnings. The plan for that is to show that and talk about that more going forward. So we wanted to give a baseline this quarter. It's been improving, but now that Airo has launched, to me, we've been talking about leading indicators and lagging indicators within metrics. We realize that with our business model, while things like ARPU and ARR we give out, they're more lagging indicators. And we have to give a few more leading indicators of where we think the business is going. So things like the attach and the 2-plus products, we're trying to -- we get more into it in Investor Day, but those are -- we're trying to give more leading indicators so people can see the progress.

All right. Maybe just a quick one. What are the most common two products? Payments, shipping or [indiscernible] comes to mind...

I would say we haven't gotten into what are the most common two products, right? I will say on an overall basis where we see strength -- when you think about domain, website, e-mail and now payments, those four pillars for us are probably at the core of everything else. There are other things out there that do well, whether it's logos, whether it's partners, like forming an LLC. There are other aspects that do very well that we're seeing within that environment. But one I always come back to with the four things that you think about when you're creating a business is, okay, what -- I got to get a domain name, right? I need a website. How do I do that efficiently? Having a professional e-mail versus a generic e-mail makes people feel like they are really doing something, gives them more credibility in the market. And my ability to take payments as fast as possible. Those are the four pillars that I would say have hung together mostly within our strategy right now.

All right. Awesome. I guess that's it.

That's great. Thank you. I did a little bit. I looked down and I'm like, wow, we're at 0 here. But thank you both. That was great. Thank you so much.

All right. Thank you so much. Bye.

Thank you. Bye.