GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

So good morning, everyone. My name is Trevor Young. I'm one of the Internet analysts here at Barclays. I'm pleased to be hosting Mark McCaffrey, CFO from GoDaddy. We've had him now for a few years.

Yes.

So welcome back. Thanks, as always, for the support.

I guess, to start, Mark, what are you seeing in terms of overall top-of-funnel demand? Industry data points to domain name base as declining slightly, while your domains under management is trending maybe a bit better than that. And you've actually consistently commented now for several months, if not quarters, about really strong gross add trends. So how are those trends persisting into year-end, both on a gross and net basis? What are you seeing today?

Yes, it's been a good year. And I say that coming off of a couple of years of what I would call inconsistent demand at the top of the funnel, driven by many different factors. But what's really encouraging for us today is we're seeing that strong demand at the top of the funnel. We talked about Q3. We talked about the growth in domains in Q3, with growth in bookings as well. But what really has us excited is the customers that are coming in are attaching to that second product faster. And that, to us, is a big part of our model. And when we get to that second-plus product, now if a customer comes in with a domain, we've talked about this a lot, and they go to a second product, it's an indication of intent. And that means they're doing something with their domain. They're interested in creating a business. They have something going on. And getting to that second-plus product is an important factor. And when we talked about it often, our retention rates are at 85%. When we get to that 2-plus product, paying product from a customer, that retention rate goes up significantly. So we're excited about the consistency of the demand from period to period we're seeing right now, and then we're excited that they're coming in with intent. So those are the customers that we want in the funnel. And their intent is to do something with that domain name, ultimately create a business, and ultimately, get to that third-plus product. We've seen that trend start to develop as we have gone throughout the year.

So more consistency in top-of-funnel and seemingly better-quality customers or at least higher intent.

That's right. And we've talked about it. We've been transparent. We've done a lot of transformational work around our technology platform. We've divested of a couple of smaller entities that were noncore to our strategy. We've integrated a few more. We're still in the process of doing that. And with that comes some natural churn that will happen when you do that. So what we're seeing today is that development of the strong funnel coming in with intent. And the churn is going as anticipated, but they were not customers with intent for that second or third product. So it's a good trade-off for us in the long term.

And at some point, that churn will begin to abate, particularly on like the hosting side.

That's right. That's right.

Okay. You mentioned that higher initial attach or the inclination to have that higher attach, a lot of that is within the A&C segment. Revenue is exiting 3Q. I think you mentioned mid-teens exit rate. You guided 4Q to about 13% growth, if I'm not mistaken. So just help us understand how bundling or that earlier attach of an e-mail solution, a website builder tool, or maybe even payments on top of a domain are contributing to that acceleration specific to A&C? And are there any other factors at play? Are some of those drivers expected to sustain these elevated A&C growth rates beyond the near term?

Yes. And I don't want to get out ahead of myself on growth rates. We have an Investor Day coming up in Q1. But what we're seeing is the initial product, pay product, is similar to what we saw in the past, domain names. While people come in for different reasons now, still, the strength is in the domain name, and that's where they're starting. That attach, now we've seen across the board, changed, right? We've always talked about the linear type of environment, where you go from a domain to an e-mail to a website to payments. Reminder, beginning this year, we had all 4 in market, right, which allows us a lot more flexibility when our customers are in the discovery phase of what do they want to do with their business. So that shows up in our A&C. Our A&C is generally the attach part of the domain name, so our segments benefit in different regards when that happens. And I would say, in the past, when we historically had been a domain company, people would come to us, get a domain and then go elsewhere for other products. We have focused on making all that available within our discovery experience now. We've talked about Airo a little bit, making that even more seamless. But a lot of that work came in integrating into one technology stack. So the discovery phase happens in the front of site on one platform. And we're seeing that ease -- or the ease of use is just starting to work as we're getting more known for providing a full solution now. For those of you who may be new to the story, we focus on small businesses, but we focus on microbusinesses. We're the entrepreneur. We're the mom-and-pop shop. I always like to say we're kind of helping the underdog, who's usually trying to compete against much larger players in the market, not only in their local market, but also on a global basis now for websites. So that ease of use within the microbusiness, the mom-and-pop shops down the block from you, that's a big deal, right? They don't want to be dealing with 8 applications to run their business. They don't have a full-time IT department in the back. They want to deal with 1 customer service across the entire platform. They want to be dealing with their customers. So that frictionless experience, coming in with intent, creating that frictionless experience and getting to value for them becomes a big driver of what we're seeing in our funnel today and what has us really excited about having that consolidated technology stack.

That makes a lot of sense. And we've long argued that being that most-in-one solution for an SMB definitely matters. And I want to come back to Airo in a second, but just sticking with A&C...

Please. You know better, all right?

We'll get there. We'll get there. It's 2023, we have to hit on AI.

I know. I know.

But first, commerce-related revs, which maps into your A&C segment, that's jumped around a little bit from triple digits earlier in the year, now low 20s. Meanwhile, you've indicated that gross payment volume is still on track to double this year versus last year. So just help us unpack some of the moving pieces there within commerce-related revenues between the hardware piece, the payment revenue and commerce subscriptions. Can you just help us frame what kind of normalized growth might look like once we get beyond some of these noisy periods?

Yes. And we're early stage on commerce. I mean this is the first year we've had our full commerce offering across platform, and we pay-enabled almost every surface that you can do, from the domain all the way to the website. And obviously, you can do the hardware and point-of-sale and everything is in market today. So we're early stages. What we're seeing today is growth in GPV based on converting our existing customer base. We're seeing top of the funnel very strong, but those are early-stage customers. If you think about it, you come in, you form an idea, you want to transact. When people are in websites plus marketing with us and they have an option for what payment provider they want to use, over 90% of the time, they're choosing us. Again, one application, it's easier to use for them. So that's great. But those are new businesses, so that volume will build over time and create that tailwind.

They're earlier in their maturation.

Yes, they're earlier in the process. Now what we're seeing in our GPV is the willingness to convert from an existing user payment provider to our payment provider. And we've developed -- it's a different muscle. You're not talking about the funnel now. You're talking about the care organization and being able to take an inbound call and identify it as somebody who's transacting and then giving them the value proposition that, hey, not only are we going to charge a lower fee, you can simplify this within 1 platform. We can convert you now. The value is there for our customer, again, the microbusiness. And that's working, and that's where we've seen the acceleration in the GPV. Now as we start to continue to grow, commerce for us is more than just GoDaddy Payments. You have hardware, software sales. You have subscriptions related to Websites + Marketing. You have some other software subscriptions related to it. We also have partners like WorldPay, which we announced last year. So you have the momentum now building around that customer base just getting larger and then transacting over time, which, to me, the beauty of all this is that it works -- it actually strengthens our entire product portfolio, not just payments in and of itself. So again, as these businesses grow, as they're getting more value out of the bundles of products they're using with us, payments being one of them, they're achieving more value. And therefore, that allows us to really look at how do we get more surplus in our pricing related to those customers achieving value. So it's early stage. And I always say, we're a big company, right? We're over $4 billion in revenue. All of this is incremental to growing over time and creating that LTV equation we often talk about.

And lots of levers for growth in that payments business.

Absolutely, lots of leverage.

Okay. Now we can hit on Airo. I got to see it actually in action a week ago, pretty cool tool. It's making with the website-building experience much easier for domain customers on GoDaddy as well as potentially being a meaningful conversion driver for additional products as well as partnerships. Just for the audience who haven't maybe experienced it, just walk us again through what Airo is? Why it's exciting? Why it's different from competition? And what's -- what are the opportunities you see with it?

So really excited about Airo. You can tell probably, my voice has gone up a level here. This is a game changer, okay? Take everything we've talked about, the ease of use, the microbusinesses, the frictionless experience and going from discovery to engagement to monetization just faster. Now think about the AI application here. And this is why, for us, consolidating the technology stack into 1 platform and having all that data available was so important. We're the only ones in the world that have the technology stack from domains to payments all integrated. Now what does that do for our customers? It provides them an experience. Not that they have to go discover now, that it is giving them options when they select a domain name to create a business in a box. And at the investor dinner, which I think some of you attended, we were able to show, starting from scratch, about 5 minutes later, there was a business up and running on a website ready to go. Social media -- published website, social media post ready to go out. Everything was done by the AI engine, and you had to select playing cards of what you wanted engage with and how fast you wanted to go. And when we think about that, you come in, you pay for a domain name now. This is fully launched in the U.S. I encourage you all to go buy a domain name and see this pop up. And what will happen is you don't even have to have an idea of what domain name, you only have to have an idea of what you want to do. I want to open a juice -- I think we said juice shop in Arizona, and it gives you a list of potential domain names that are available. You choose that. You pay for it. Now it gives you playing cards. What do you want next? Do you want a logo? Do you want a professional e-mail? Do you want a website? Do you want a coming-soon website? Do you want to form an LLC? All right there for you to choose from, and it gives you options on what to do. So it's not like I have to go find content for my logo. It says, "Hey, here, based on the name of your company and where you're located, are potential logos you can use. Here, is the e-mail we suggest for professional purposes. Oh, you want a website? Here, here's all the content for that website based on what you described." It gives you choices to change it up a little bit, but it's all presented to you, changing the discovery cycle, not from you having to discover what you want, but it being presented to you instantly. And once that happens, right, now you're at a first playing product, you could be up and running with a fully functional business within minutes, LLC, Inc., all right. And then even the social media posts, AI writes them all for you and then gives you a potential time line of when you should send all these out. So if you want to just let it go, you can just say, "Yes." Boom, it's all done. You're posting on any social media platform you want, trying to now engage your customers. This is early stage. We only introduced it in the U.S. about a week ago. I really encourage you go try it out. It is an unbelievable experience. And I say it from our customer base -- but what they want is to transact and get value as soon as possible. They have an idea and they want to take that idea and they want to be in market with it as fast as possible. This allows them to do that in a frictionless way and really get the benefit or the value themselves from engaging there. I could go on talking. So I'll...

Well, just to summarize though. So right after the domain, they're now made aware of all the different products.

All the different products.

Partners have drive that attach potentially much earlier in the process where they're not necessarily looking at a competitor for -- I'm going to go there for a website builder tool. Like I can get it here from GoDaddy, but also in a frictionless way. And then presumably, better ARPU, better monetization, better retention kind of OmniCom?

It works within our model just exceptionally. We always talk about the drive to LTV. We had given the statistic. Assume the domain name is 1x LTV, by the timing you get across the payments, we're at 83x on that LTV. Having that happen faster drives our model. This isn't a change in the model, this is an acceleration of the model. When you get to that second paying product, our retention rate goes up. You get to a third paying product, we're basically a customer for life. And that helps drive the value within GoDaddy. But it's really premised on the customer is getting value faster, therefore, we're generating the value on our end faster. That's why we're so excited about it.

Clearly, I can tell. You jazzed up about it. That's a good thing.

Yes, yes.

Shifting gears a little bit. Nearly every time you and I speak, I bring up international. GoDaddy's a huge company, international is actually an underappreciated part of the story here, about 1/3 of the business, but closer to half of your customer base. Can you just talk a little bit about the big picture international strategy? Which markets are most attractive versus highly competitive? Where do you think you can win? Will international be bigger over time? How does Airo maybe fit in with that longer term?

Yes. So great segue. Airo is introduced in the U.S. We obviously see great opportunity to rolling it out internationally. Our philosophy on international, it's a big part of our business, but we're very pragmatic and purposeful when we enter into markets, what products we put into markets. Not every international location is of a maturity on Internet that others are. So you have to be careful of when and how you're offering things. And even things like payments probably have a little bit more friction. We're a PayFac in the United States. We've now launched in Canada, but you almost have to do that region by region. So there is a lot of upside opportunity for us internationally as we expand out this business. Obviously, we're excited with the Airo launch in the U.S. But when you think about the ability to really go into other markets, it really creates a little bit of a snowball effect that we'll see as we continue to do that. Now we do believe into developing models and testing them. One of the things I think we've done very well with payments is we created the top of the funnel end of payments, where we saw work with Websites + Marketing very well. And the statistic I always use is when you're choosing a Websites + Marketing and you have a payment choice, over 90% of the time now, people are choosing GoDaddy Payments. But we had to develop another muscle to convert our customers, right? So developing those models and those muscles and then taking them out into other markets becomes a big part of how we're successful in those markets versus just trying and seeing if it works. So I would say, international, a big part of our business. Absolutely an area of focus. But from a mature market perspective, we're being very pragmatic in how we launch our product suites in what markets and how we continue to do it. But unbelievable upside as we continue to roll that out.

So some of it is building the model as well as just kind of basic blocking and tackling, getting payments sorted right for a given market?

Yes, that's absolutely right.

Got it. Okay. I know you get asked regularly about the 10% growth threshold. I realize you're not giving '24 guide yet. But as we contemplate your 8% bookings growth in core domains, aftermarket compares are getting a bit easier from here, hosting potentially reaching stability in '24 as you lap some of your divestitures and consolidating some brands there and also a lot of levers in A&C like you already alluded to, all of that is indicative of growth accelerating from here. Is 10% growth still achievable at some point, even if that maybe isn't your medium-term expectation?

I think the great thing about our model and where we are today is, as we've laid out our profitability, our cash flow, our targets that none of it's premised on us reaching double-digit growth, right? We're able to do that with what's in front of us today, with the actions we've taken, with the leverage in our model and the efficiency. Without getting too far ahead, right, I know everybody wants to know exactly what that number is. But without getting too far ahead, we feel good about the tailwinds. This year was a big year of headwinds. We were in a transformational stage. We're in an inflection point now where the products are in market. We're really looking at the go-to-market, the attachment, the reaction from our customer base, which has been very positive in the early stages. And we love those tailwinds going forward. And we're excited about that ability. And remember, even with things like Airo, it's only been in the market 1 week. We haven't built anything into the model around Airo today. When you think about the possibilities of that going out and the attaching faster and the engagement in the market we're in, there's a lot of things to think positively about.

Yes, a lot of potential levers. But just to be clear, like getting to your margin goals into next year isn't predicated on getting the 10% growth?

That is right.

Okay. Great. Last one on the revenue side. Hosting is an area where you're doing a lot of work, culling some legacy brands, selling some noncore assets. What's the plan for hosting beyond these actions? Can there be innovation or maybe even a change in strategy on hosting, like maybe migrating more towards cloud solutions for clients that could drive structurally better growth at some point in the future?

Yes. So -- and definitely calling out, we've taken a lot of actions around our hosting business. We've had what I would call non-GoDaddy-branded assets around hosting. We've made decisions, a lot of which we've executed upon this year to either integrate those into the core GoDaddy hosting stack. We've sold some of them. We've end-of-lifed some products, all with purpose because we want to focus on the combined technology stack. When all is said and done, primarily, we'll have the GoDaddy hosting stack. And what's great about the GoDaddy hosting stack is it is an extraordinary loyal customer base. Their retention within that group is significant, like very much higher than our average. They don't churn when they're in the core GoDaddy hosting stack. They don't churn very often. And it's a big cash flow generator, but it is not a grower, right? It is not a grower. I assume, in my model, flat and slight churn year-over-year. And the good news about that churn is we are seeing the few who leave it go to either managed WordPress within our core GoDaddy stack or Websites + Marketing. So they're staying in the GoDaddy family. But right now -- listen, it's a good product. Loyal customer base generates a lot of cash flow for us, and we'll continue to maintain it, secure it and make sure customers are getting that experience. And then when they need other products, it creates an opportunity, even with something like Airo, to now say, "Hey, you've been -- haven't updated your website for 5 years, you're on a hosting platform. Here's a quick way to update it and make it more modern and make it more easy to use and easier to maintain." We think that will be an opportunity.

To get some of that cross-sell going.

Yes, that's right.

Got it. Makes sense. Shifting gears a little bit, just on the cost side. Obviously, you've been much more aggressive on cost reduction here in '23 than in prior years. You're signaling you expect further improvement in tech and dev expenses, specifically into '24. How do you balance your efforts there and making sure you continue to invest on the product side, which is nearly half of that R&D spend, to drive that continued innovation, which, I know, Aman has been very focused on for years now, driving the cadence of innovation there. And then between the continued benefits from restructuring, integrating the noncore brands, more flexible cloud contracts, what are the key factors driving that go-forward tech and dev leverage?

Yes. I always say this, and I'll continue to say it, a tech company that doesn't innovate is not going to be a tech company for very long. So you have to continue to invest in innovating, but also acknowledge we're coming off a heavy cycle of investment. Between payments, Airo, some of the technology we've used internally around marketing, we're at that inflection point now where we believe a lot of the products are in market and will start to generate benefits for us going into the outer years. But we will continue to look at how do we make that experience better. Now the leverage, when you think about it, part of the benefit of having 1 common technology stack, it allows you actually to take products to market faster. It allows you to be more efficient in your engineering and how you test those in market. There are so many benefits we get now that we've had that heavy lift around the technology stack. That is why I can sit there and say, "Hey, we're looking at that inflection point around tech and dev." The other part of it is, a lot of that tech and dev is around infrastructure. We're well on our way to moving to the cloud. We've reduced our dependency on data centers. We will continue to look to reduce our dependency on data centers. We'll never be fully out of it, but we're going to get as lean as we possibly can in that area. AWS has been a great success with us, and resigning up in that relationship last year has allowed us a lot of benefits going out into the future years. So we continue to see that efficiency hit our tech and dev line. And so while we'll continue to invest in innovation, our ability to innovate and get to market should shorten the cycle. And also acknowledging we're coming off a big cycle, like this is what we were going for.

You got out of that J curve of spend.

We're in a transformational period. We said it was going to be the first half of the year as we hit that inflection point, and now we're starting to see that. And we saw that in Q2 to Q3 spend as well.

You said more to come?

Yes.

Okay. Great. Just sticking with OpEx. Care organization, for years now, you've done a good job driving pretty consistent leverage there. At the end of last year, though, you had about 6,000 customer care employees and contractors, some in-house, some third-party contractor. Is there an opportunity to decrease headcount here and drive maybe a step-function improvement in customer care costs, either through like AI tools or better self-help tools, that sort of thing? Or if not, why not? And are you using AI and other tools to drive leverage in customer care?

So the statistic I always use is we have 13 million-plus interactions with our customer base every year. And those are valuable interactions. Some of them are through our care organizations, some of are automated. We now use a lot of AI bots and any form that our customers want to talk to us and we will now provide. We have a lot of opportunities within our care organization to get more efficient. We've done some of that. You've seen some of that throughout this year. We'll continue to look for those opportunities. The care organization is a part of our secret sauce and is part of our ability to make sure that our retention rates stay high, that our NPS scores stay high, and we're very proud of that. And especially with our customer base, they need that ability to go in that direction. But again, coming back to the efficiencies on having 1 technology stack, that allows me to focus that care organization on that technology stack. Now reminder, if I had different technology stacks and I had different products, I had to maintain care organizations around that. So there's opportunity as we consolidate that to put that effort into the areas that are really going to be more efficient and drive that leverage we talk about. AI is also a big deal internally for us in that it allows us to drive the interactions to, what I would say, a positive resolution or positive advice based on either a, hey, we -- you're coming in to change your password. We don't need to put you to a care guide. We can do that automated now today. But knowing the difference of that call coming in and what is the intent of that call coming in, and then being able to put it into the actual area that needs to give that advice, becomes an important part of the machine learning. Even when they get to a care guide, using the AI to get the information to the care guide to help the customer becomes an important part of it. And then, ultimately, there is a -- I would say, a sales element of this, right? Where, for example, if someone's calling in and we see they're transacting with another payment provider, we have the ability now to steer that to a care agent who is trained on, how do I convert them over to our payment plan? And how do I use that muscle to create that opportunity? Not because, well, we are being opportunistic, but also it's a better experience for our customer. And ultimately, we feel we can take care of them within that combined technology stack. From a customer front, it works great because now they're only dealing with 1 care guide across the platform versus having to deal with multiple care guides.

And just to be clear, so care isn't just a cost center, it also drives revenue.

It drives revenue.

It's not quite self-funding, but pretty close.

Yes. So it drives revenue for us and it drives the experience for us, too. So we think there's definitely leverage, and we'll continue to show that. That's why when I talk about normalized EBITDA margins and exit rates, we're able to build that into the equation. But it's always with the idea we will continue to provide that service to our customers to make sure they're getting what they need.

Makes sense. Now tying all the OpEx pieces together, pull forward of profitability already here in 2H. And you gave the preliminary guide for 31% normalized EBITDA margin exiting '24. That's obviously been well received by investors. What sort of underlying revenue assumptions are baked into achieving that? And what are the puts and takes that could drive upside from that?

Yes. Great question. And I'll come back to what we talked about earlier. The numbers I've given aren't predicated with reaching double-digit growth. We have an ability within our structure right now to get more efficient within our operating model. And we feel really good about -- we feel good about the exit rate of 31%. We feel good about our ability to continue that journey. After that, obviously, we'll talk about that a little bit more in our Investor Day. We've been working on this. And I'd like to remind everybody, I think my first Q4 I was here, we exited 23% normalized EBITDA margins. Last year, we exited 26%. Next year -- sorry, this year, we're targeting 29%. We've given the target for next year of 31%. This has been a continuing journey for us around the transformation around this technology stack and creating this Airo and the seamless experience for our customers. That allows us to continue to get more efficient within our model and build off what we have today and be able to do it in a manner we're still in market being competitive with our products.

I think it makes a lot of sense. I know we're almost up on time here, but if you want to hit on...

It flies.

If you want to hit on capital allocation because I know this is important to the story here. Obviously, investors are really encouraged by the aggressive buyback program in recent years, which is actually trending ahead of your commitment of the $1 billion annually. With the incrementally positive margin story coming into play, what are your priorities as we move forward? And where do you deploy that additional free cash flow? Because, frankly, you're going to be surpassing that $1 billion run rate that's being funded from cash flow.

Thank you for pointing out that we generate a lot of free cash flow, right? I just -- I'll pause there and just make sure everybody heard that part. It's a great problem to have, right, a lot of free cash flow. We feel really good about our capital allocation strategy that we put in place a couple of years ago. When we did it, we talked about targeting about $1 billion buyback. But I was also clear I would take advantage of accelerating or decelerating it based on what we saw in front of us at any given moment. And kudos to the teams. The way we approached it, we were able to really, I would say, have success in pulling triggers when we needed to. To give everybody an idea, our original target on the $3 billion was around a 20% reduction in fully diluted shares outstanding. We've already hit that target today, and we're not even through the $3 billion. And our Board has authorized another $1 billion for us to use through 2025 to make sure we have enough, how do you say, fuel in the engine. So we feel really good about the success of the program, and we haven't fully executed the original $3 billion today. When we get to what does it make sense for us going out, we're going to look at different things. When we sit down and do Investor Day, we will refresh it. Listen, we really like the stock buyback where it is today. And I don't want to think -- anybody to think that we're discontinuing that in any way, shape or form. We will continue to be opportunistic in the market around that. But we'll also look at what else do we do and what are the other opportunities, and how do we provide that value back to our shareholders to make sure we continue that momentum.

So more to come in February?

More to come -- and I don't know...

1Q.

1Q.

Okay.

February is a pretty good guess, but you know.

Great. Well, I see we're up on time. So Mark, thank you so much.

Thanks, Trevor. Always a pleasure. Always a pleasure. Thank you.

Thanks.

That was really good.