GoDaddy Inc. (GDDY) Earnings Call Transcript & Summary

Joining us is Mark McCaffrey, Chief Financial Officer; and Christie Masoner, Head of Investor Relations. Thank you both for being here today.

Well, thank you for having us.

Let's dive right in, if we can. Absolutely. Starting with Arrow. Mark Arrow launched just months ago in that short window you've already folded in, GoDaddy payments, customer communications, commerce and other capabilities. As you keep expanding what Arrow can do -- how do you decide what gets built into it? How do you expect these aero integrations to evolve the GoDaddy platform over time?.

Yes. So we couldn't be more excited about Arrow now. Just a reminder, Arrow. We launched it a couple of years ago as a platform. And now we're revamping it as a product, and we're going to market with it. And I couldn't be more happy with the success. Q1, we launched, we disclosed run rate then and now we've seen it gone up to $50 million as we came out of Q2. And the premise here is meeting our customer where they want to be using technology today. Now remember, our customers are a unique group. They're the sole entrepreneur, the micro business, the mom-and-pop shop, -- they're not always technology savvy. So when they decide they want to engage with technology in a certain way. And we see our ability to meet that job to be done, how they want to do things. It's on us to start to give them that. And that's what Arrow represented. And the native exchange with Arrow is exactly what they need. We introduced it into our existing customer base. We saw some of our customers who had been customers of websites less marketing now shifting over to use Arrow as their primary operating system in running their business because the capabilities are so much more. Now when we look at capabilities versus product road map, we look at value. What are the value -- what is the value our customers are going to get out of it. What are the product attach motions that will come out of it. And we haven't changed the basic attach of a domain, attach of an e-mail, attach of commerce like you mentioned, and while commerce is a great example of a capability being folded in, the attach around the transaction revenue continues to be something that will act as an LTV driver for us in the future. So for us, it's looking at where the customer is going to get the value, what are the core competencies that we will put into Arrow over time. And what are the product attaches the jobs to be done, the presence that they want to have in the different areas that we can put into Arrow and create that LTV. Now remember, our product motion hasn't changed, how our model works. When we get to that first product, it's 1x. When we get to a second product, our retention rates go up significantly from the great 85% we have overall. When we get to a third product, we generally have a customer for life. And so those touch points within Arrow and the ability to attach is what drives the LTV equation, we'll continue to drive our LTV equation going into the future.

Great. I want to impact that just a little bit more. Scale largely organically to date. Can you help us understand both the drivers so far in terms of new versus existing? I know you touched on that, but also potentially marketing as a lever in the future?

Yes. So primarily now we've -- and this is a little different for us. Usually, we launch things first into our new customer channel and then we go into an existing customer base. But we found that our existing customers were really attracted to the ease of use of Arrow to manage their business -- so we launched it within our care organization. We saw customers converting over existing customers. And that's primarily what you're seeing today. We do see some natural traffic coming directly to arrow.ai. But that's more people that are organically coming on their own. We have not put Arrow into our domain purchase path. That is coming. It's imminent. We're testing into market right now. That will be the new customer, right? And that will be the new customer that is coming in with that high intent that we now will have Arrow as a primary attach motion within that purchase path. That's a big deal for us. I mean the domain funnel continues to be our largest top-up funnel. And putting something in there that attaches will be a big driver. Now as far as marketing is concerned, we talked about coming out of the call that we are pushing marketing into the second half. And we're doing that because we feel that we need the domain purchase path set up and ready to go to get the appropriate ROI on those marketing dollars as we put that into the market. Now remember, when we're dealing with our renewal base, that's not necessarily a marketing push in and of itself. That is driven a lot by the care organization and the renewal cycle, so they're existing customers. Marketing for us will primarily go in the second half into that new customer attach as we launch this in the domain purchase path.

Hopeful, it makes a lot of sense. I wanted to talk a little bit more about the domain purchase path. What are you seeing in these early tests, whether in conversion, LTV attach or otherwise to give you conviction in potentially embedding Arrow into the domain purchase path? And how would you compare the experience to, call it, the existing websites plus marketing?

Yes. So first, what we saw in Q2 gives us a lot of confidence that we're meeting our customers where they want to be using technology today. And remember, when we came out of Q1, we were focusing on developing 2 products and putting them into market by this year. One was the website development tool, AI driven, and the other was the app builder, right, both AI driven. When we put both in front of our customers early on, it was pretty clear they wanted to use the app builder. And the few differences between the 2, they wanted into 1 product, and that's what Arrow is today, that 1 product. And the amount of engagement we're seeing in our existing customer base really tells us it is meeting their needs. So that gives us confidence that once we launch this into the domain purchase path that we will be able to see them engaging, activating, signing on buying new products utilizing those capabilities to create value with what they're doing. Now the experiments are ongoing. So more to come as we get through the quarter, obviously, but right now, we're moving fast. We've seen the market. We know our customer. And remember, I keep coming back to our customers, the mom-and-pop shop. We're not creating Arrow for the developer community or the enterprise, right? We are creating Arrow to meet our customer needs and create value for them at the price points that they can basically absorb. And it's working.

Helpful. Shifting gears a little bit. Could we talk Arrow unit economics? You've said Arrow has been gross margin positive since day 1 by routing different tasks to different models based on cost and complexity as leading foundation model inference costs grow? And as you also expand capabilities, how do you maintain margin discipline?

So this is -- you use the exact word discipline, right? We do everything with purpose. We look at everything. We make sure that we maintain optionality -- so there is no doubt we are taking advantage of our technology stack and the data that we've talked about for years that creates a competitive advantage for us. So naturally, we have the ability to achieve some of the outcomes for our customers using our own technology. Now to the extent LLMs come into play. We -- because we use 1 choke point around our technology stack we have the ability to direct how those LLMs are used and how they're delivering the outcome to the customers and at what rate they're delivering the outcome to those customers. So in essence, we've provided for flexibility on both ends for us that we can control the outcome and the cost end of it, depending on where we want to send it. And that ability is designed so that we can evaluate as we go on how those costs are evolving. We all know the costs are going to evolve over time. There is a school of thought out there that they will go down, but we never know. But we have the ability to control both ends of it, therefore, to remain in our gross margin profile that we will need to continue to drive our normalized EBITDA expansion into the future.

Helpful. Any insight into the mix or frontier models versus conventional open weight models?

Yes. No mix. We haven't really gotten into that, but all I can come back to say is we've intentionally designed how we are going to market with Arrow and the token usage so that we can maintain flexibility and handle the dynamics and make the decisions based on what works for our customers and for us going forward.

Great. Let's shift gears to the developer platform. That was pretty big news this quarter. lets developers an AI agent search by configured domains entirely through APIs without visiting godaddy.com potentially. How do you maintain your ownership of the customer relationship and drive attach rates with the customer funnel moves towards LLMs.

Yes. So we talked about this and we did the press release that the week before earnings. And essentially, what it does is expands the surface area, which we can reach and expand our services to customers. So that, to your point, we don't -- they don't have to come to godaddy.com to buy our things. And when we talked about at that time, it was this is the first place that we're starting. So we're starting with that domain relationship. And it is still a customer of ours. We still maintain that relationship even if they purchase through that API in that interface. And we'll continue to expand the products and services that we offer on to those types of APIs, but there will still be on our platform and on our their sign-in will still be with GoDaddy even if they do that initial purchase through those APIs. So we expect that, that customer relationship stays the same and their purchase path will continue to evolve and the things that they can purchase through API will expand over time, too. But ultimately, the point there is adding another surface area to reach customers and to get new and different traffic into the GoDaddy platform.

Great. I wanted to talk a little bit about this transition for Arrow, broadening, absorbing capabilities that today live in separately priced products. Like the traditional do-it-for-you services template-based website builders kind of a shift to monetize through a mix of subscriptions and token usage potentially as Arrow scales. What trends are you seeing in engagement in free-to-pay conversion that maybe give you confidence that the combined offering can drive higher LTV than the separate products that it replaces.

So what we're seeing initially is customers are attaching in the Arrow cohort at a faster rate than we've seen previously. We're also seeing that the overall if you look at our customer base on a broad basis, I think it's over 50% have a second product. In the Arrow cohort, it's over 70%, right? So we're seeing the behaviors around their ability to attach within their activity that really excites us. And again, it only propels that LTV model as we continue to go. It drives that retention rate up, obviously drives our LTV in effect, higher over a period of time. Now it does change how some of the bookings translates into revenue. We are taking on somewhat of a new aspect with tokens and that becomes a usage model. But this isn't something that's necessarily new for us. We've gone from subscription. We have transaction around aftermarket. We have transaction around commerce. Now we're going to usage. So again, it creates a different dynamic but something that we've done before with other products, and we feel fully capable of being able to project out. Now the token usage is probably the most exciting part we've seen here because as customers have engaged with Arrow, their use of tokens we can see going up, right? I have to tell you, it's pretty exciting, the Arrow product. I've used it on a couple of things myself. And what you find is you maybe come in thinking about a website, but then you start to think about the other applications you can build within Arrow. And put them into play to create value from them. And when you start to do that, the token usage goes up. And the way the system is designed today is you basically get a certain amount of tokens per month. When you reach capacity within that month, right, you have the option to go up a tier and go to the next SKU level or you can just purchase tokens outright. The next month, it starts over. So if you don't use them in the first month and second month, you start all over again and you're in the same dynamic. So that ability to create really drives that token usage and as customers continue to get value and they start to deploy this within their environments. We think that, that is going to continue to propel not only the subscription but grow the token usage based going forward.

As we think about the financial implications of absorbing these capabilities, how do you think about the time line for A&C booking growth to potentially reaccelerate or even surpass revenue growth? And just what that maybe lag looks like?

Yes. So no doubt, we are moving fast here. And quite frankly, we're moving aggressively. We've seen something in our customer base that we want to take advantage of and we believe we are in a unique position to take advantage of that. And with that, that is some of the things we talked about in the transformation that we announced coming out Q2. We are doing it from a position of strength. And that's the way we continue to look at it. Now I'd also add that despite the fact that we are seeing this overlapping period, I never moved off my free cash flow promise of $1.8 billion. And I say that because, again, we've seen something in how our customer wants to engage in technology and get value, and we're taking advantage of it. Now for the time line. We've talked about the second half of the year. Obviously, we'll talk about 2027 as we get closer we see Arrow continuing to contribute to the overall bookings number. It was not an insignificant contribution in Q2. I didn't say an exact number, but it wasn't something that was insignificant and continues to grow. We've talked about that in the run rate. The 1 thing that we'll see is when we launch it into the main purchase path, what that does to the time line as to how long it will take to replace some of the other products we've built into it, like websites plus marketing like Diffy, which we've talked about, and what will that time line look like. What we feel really good about it is we have the ability to control all the levers as we go through this to maintain that, hey, we're doing great on our free cash flow per share. We're over delivering what we promised a couple of years ago. And that during this period of time, we'll continue to grow that arrow base, and that arrow base will continue to drive that -- and not only will it give us more opportunities going forward. You talk about the ability to go into verticalization offerings within Arrow. You have the jobs to be done and the adding of more products, whether they're through partnerships or our own product development. It really opens up the door to become that operating system for the entrepreneur for the micro business, and we're excited at where that's going for us.

Speaking of opening the ecosystem, today's APIs are largely focused on domain life cycle. You said over time, you see opportunity to expand that same approach across more of the platform. So can you just talk a little bit about how you see those AI systems interacting with a broader set of GoDaddy capabilities over time, both the access points, but also kind of broader usage.

Yes. I think that when we're talking about the LLM like visibility and sentiment, it's something that increasingly becomes more popular and more important over time. GoDaddy benefits from having the strongest brand awareness in the space. So we get a very large amount of our traffic over 60% that is sort of organic and direct navigation to GoDaddy. So in the period of time that LLMs have started to gain importance, that hasn't really had an impact on our traffic terribly much. But that being said, over time, that will become more and more important. And so we have work streams focused on essentially understanding that traffic and how that sort of comes to us and how we can drive better sentiment across that space. And was kind of reminiscent of the early days of SEO, right? It was a -- when Google first started, the SEO was a black box and nobody knew how to figure it out. And once everyone figured it out, it changed. And so then everyone refigures it out, right? I think that we're in a very similar situation with LLMs, where it is a new black box that we're all trying to sort of figure out. And I don't think that anyone has the silver bullet per se, but we're all working towards making sure that we are showing up, getting better traffic and getting better sentiment and finding improvements over time -- we've already started these efforts a while ago, and we've been measuring how we show up on both of those measurement factors, and we've been showing improvement over our efforts for the last several months.

And this is very important. How you show up and why you show up is very important in this aspect. Our strategy is around high-intent customers. We want to be attracting whether it's through organic to our website or through an LLM or any other search engine out there. We want the right customer. We're not a deep discounter. We're not looking for the cheapest domain out there. We want the customer who's going to come in with the idea that they're going to create something with a domain or anything else they're looking for and really wants to move to the operating system that will provide them value. And that's what we're spending a lot of time on. LLM, they're not going away. We all know that. They will become increasingly important and how you show up and why you're showing up becomes increasingly important, and that's something we're laser-focused on.

And that's something we've been getting quite a bit of questions about and because of the different pricing models of competitors in this space. And I think it's important to understand and acknowledge like what Mark was just saying. It's the high intent customer that's looking for how to build a micro small business and how to run their business on a day-to-day basis and have all the end-to-end connected applications that they need to have not just day 0 success but day 1 through day Infinity of starting their business and growing their business and managing their business over time. And those are the areas that we're putting a lot of effort towards showing up better in LLMS.

How do we think about where your customer acquisition channels evolve to, I mean, domains, as you pointed out, are still the biggest customer acquisition engine. We've seen an acceleration in registrations this year in part supported by that 499.compromotion. Beyond pricing, what do you see as the real levers in terms of attracting these new customers through the domain funnel?

Yes. So listen, again, we -- 60% of our traffic comes to us because of our brand. And that is something we've built over years. It's a huge asset, huge advantage for us. Making sure we get to that high intent customer becomes a very important aspect of that. So we are very particular in the type of traffic where those things like the $4.99 offers show up when they show up. I think while we put the 499 offer there, a lot of people lost the fact that it's only for 1 domain for a new customer because we don't want people coming in and doing multiple domains with it, obviously, we want somebody who has that high intent. So that continues to be a straightforward, very applicable strategy for us that has continued to work. I mean remember, 2 years ago, we stopped doing the discounting at the top of the funnel in a significant way. Deep discounting. And what we have today is we're seeing almost 2 years later, the stronger retention rates showing up into the cohorts that started to come into our funnel after we stop doing that. And so that becomes to us something that has worked time and time again, and we'll continue to focus, whether the traffic changes from LLM to search or other channels because there are other channels that are still very, very good out there. And it will also work within our 60% which come to us just because our brand and domains and our brand around businesses and entrepreneurs are so strong.