GoDaddy Inc.
Q1 2020 Earnings Call Transcript

Published: 6 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the GoDaddy First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mark Grant, Vice President of Investor Relations. Thank you. Please go ahead, sir.

[Mark Grant:]

Good afternoon and thank you for joining us for Godaddy's first quarter 2020. With me today are Aman Bhutani, Chief Executive Officer; and Ray Winborne, Chief Financial Officer. Aman and Ray will share some prepared remarks, and then we'll open up the call for your questions.

[Aman Bhutani:]

Thank you for joining us today and thanks again to those who joined us for our Investor Day in April. While it has only been one month since we spoke to you, we have several important updates to share today. Plus, in Q1, we delivered strong financial results which included the early impact of COVID-19 as expected changes in consumer behavior rippled across the globe along the COVID-19 arc, with the last two weeks in March being the toughest in the U.S. as everyone focused on safety first. Second, there are definitive proof points that we are creating significant value for our customers. We are seeing an uptick in customer demand as new customers are exploring how to build the website and everyday entrepreneurs in fashion, beauty, health, professional services and many other verticals are forging ahead with new ideas. Those with the website are expanding the online scope of existing ventures, adding commerce and payment features, creating digital content and downloads, adding virtual classes, appointment scheduling and much more.

[Ray Winborne:]

Thanks, Aman. I'll touch on the financial results for the quarter and the outlook for Q2, along with some additional commentary on the impacts of COVID-19 to our business, and finally, the contribution we expect from Neustar's registry. Q1 reflected good top line performance and strong operating leverage in the business. Despite some softness in the last few weeks of the quarter, initial impacts of shelter-in-place began to materialize. Revenue came in at $792 million, growing over 12% on a constant currency basis, with 80 basis points of currency. Looking at product categories, we delivered double-digit growth in domains on higher average selling price. Growth in hosting and presence accelerated, higher subscriptions to Websites + Marketing and our managed WordPress offering. And while business applications grew 14% year-over-year, growth rate was reduced by roughly 4% point due to the cancellation of CloudFest, our annual hosting industry conference response to COVID-19. By geography the U.S. grew 14% versus last year. Our international revenue was $260 million in Q1, growing 9% year-over-year on a constant currency basis. The international revenue growth rate was reduced by approximately two percentage points due to the cancellation of CloudFest. Total bookings grew to $951 million, rising 10% on a constant currency basis with an estimated two points of pressure from the effects of COVID-19, roughly a point of currency headwind. The US dollar has continued to strengthen against the basket of currencies we collect, and we expect currency to remain a headwind in Q2.

[Operator:]

Our first question comes from the line of Yigal Iranian from Wedbush. Please go ahead. Your line is open.

[Yigal Iranian:]

Hey, guys. Thanks for the question. Two, if I could. So, let's see here a little bit more about the Neustar Registry acquisition, the strategic importance of that, how verticalization helps that segment over time, especially given that there's some sensitivities around favoring GoDaddy products. So, that's the first one. And then maybe if you could give both on the revenue impacts from the free trials and the freemium website offer that you're giving customers, if you could help quantify the impact there? And then also if you could help quantify the impact of bringing new customers onboard and keeping the retention rate up, how those free trials are impacting growth. Thanks.

[Aman Bhutani:]

Hey, Yigal. It’s Aman. Thank you for your question. Unfortunately, the tech issue and we didn't catch the first part of your question, only the second part. Would you mind just repeating the question for us.

[Yigal Iranian:]

Sure. So, the first part was just on the Neustar Registry acquisition. If you could help, maybe give a little bit more color around the strategic importance of it. Why verticalization is important. How that could help the domain business grow over time, especially given that there's some sensitivities around not favoring GoDaddy products when you're in the funnel for that. That was the first question..

[Aman Bhutani:]

Yeah. Thank you. Let me take the first piece of that and Andrew can talk to the governance pieces and sort of creating opportunity across the industry. If we take a step back and look at the dream phase for the customer, we've continued to be a leader in that space, with our domains product and we've been in many parts of the domain business. We mentioned the aftermarket as an example of something recent that we did that went across the industry. But if you look at the registry business, that's the business we have not been in the past. And if you think about creating just new different kinds of offering -- this very innovative different ways to think about domains as competitive price points to go across organizations involves a certain level of risk and just challenges to coordinate all of that. With vertical integration, we can experiment at a much faster pace. We can sort of wave all of those things and say we want to test this, let's get this in front of customers and let's see how it works. And while we do that, we can do it in a manner where it's open to the whole industry where the line of governance is clear. And just like the aftermarket value is created not just for the customer, but for everyone in the industry that participates as well. And Andrew, do you want to add a bit to it.

[Andrew Low Ah Kee:]

I think to Aman's point this idea that we innovate and we bring value across the entire industry is something we've got a track record with today in our aftermarket business on our Afternic platform. We actually partner with virtually every major registrar in the industry and that's created a ton of value for all of the participants, and we look forward to doing the same with our registry business. We do have a clear governance model in place that create separation between these businesses to address concerns folks might have, and we're confident in our ability to implement that. There are a number of vertically integrated registrar registries in the industry today. They're able to stand by that commitment to offer equal access to everyone and we feel very comfortable with our ability to do it as well.

[Aman Bhutani:]

And then on the question on premium, it's pretty recent. We moved quickly to put it out there. It started as an experiment. We did roll it out to all customers in the U.S., but it's still very, very early and we designed it as an experiment. So, we're tracking a lot of data around it. And over the next few months, we'll be able to tell you a lot more about it. But it's still pretty early, yeah.

[Yigal Iranian:]

Thank you. Thanks so much

[Aman Bhutani:]

Thank you.

[Operator:]

And our next question comes from the line of Deepak Mathivanan of Barclays. Please go ahead. Your line is open

[Unidentified Analyst:]

Hey, this is Thomas on for Deepak. With the free cash flow guidance withdrawn, can you help us with how we should think about the underlying variables here? Are there any changes in the contract term or product mix during this time that we -- that might weigh on free cash flow? Thank you.

[Ray Winborne:]

Yeah, Thomas. Hey, it's Ray. The bookings growth, I think, is where you should look. I mentioned in my prepared comments that we expected to grow roughly in line with revenue. Bookings translates to cash. And then the other thing that I pointed out is that we had timing impacts of capital payments from Q1 to Q2, so be looking at. But stepping back more broadly when you look at what's going on, Aman has talked about before, we're looking at the financial certainty for our employees, we're putting out attractive offers for our customers. So, those are going to pressure cash flow, but obviously there are a lot of discretionary expenses that we're managing very tightly to mitigate the impact of that.

[Unidentified Analyst:]

Thank you.

[Operator:]

And our next question comes from the line of Mark Zgutowicz of Rosenblatt Securities. Please go ahead. Your line is open.

[Mark Zgutowicz:]

Thanks much. Just curious on the customer acquisition front, you are thinking about LTV here and going. I guess, pressing the pedal down a bit as you mentioned. Just curious how you think about returns longer term, I assume most of who you're acquiring today are either out of work or potentially furloughed for a period of time. So, I'm just curious how you're considering that and when you look at potentially converging here down the road. Thanks.

[Andrew Low Ah Kee:]

Hey, Mark, it’s Andrew Low Ah Kee here. I'm happy to talk to that one. We're definitely seeing an increase digitization of small business, the everyday entrepreneurs who maybe weren't online, didn't have a presence or even had one and needed to get it refreshed in an environment where everyone is finding and discovering things online is absolutely a tailwind for the sector at large. And so we are leaning in with our marketing spend. Aman in his prepared remarks referenced OpenWeStand. That's an important thing for our customers. It's an important thing for our brand. And equally, it has the same return profile that we typically would be looking at. In fact, when we look at our April cohort, our April cohort is the strongest we've ever had for in April. And so, we're absolutely seeing that demand come to bear in the marketplace.

[Mark Zgutowicz:]

Okay. Thanks much.

[Operator:]

Your next question comes from the line of Brent Thill of Jefferies. Please go ahead. Your line is open thanks.

[Brent Thill:]

Thanks. On business apps, it was a little light of where the Street was modeling and some of the explainable late in the quarter. But I'm just curious if you saw that rebounding in April and into May, that the move to doing more with you than just buying one piece of the solution?

[Ray Winborne:]

Hey, Brent. It’s Ray. There was one item that really drove a lot of that desale that you saw in the biz apps line and that's our CloudFest event. It's an annual event for the hosting industry and that created four point headwind on the growth rate there. Beyond that biz apps actually landed exactly where we had guided to earlier and right within our expectations.

[Brent Thill:]

And Ray, any color April through May listen to a number of these earnings calls you saw stabilization and improvement, are you seeing that follow-through through April into May.

[Ray Winborne:]

Yeah, I think, Aman highlighted a lot of what we're seeing in his prepared comments. We are seeing green shoots. I mean, if you look at -- renewal rates are absolutely holding steady. We're seeing good growth in new online sales. It's the couple of areas we pointed out before at the Investor Day where we're still seeing challenges and watching. One was around our Care Guides being at home and productivity sales hit. And then our higher price point products, which are generally the do-it-for-you products.

[Brent Thill:]

Thank you.

[Operator:]

And our next question comes from the line of Mark Mahaney of RBC. Please go ahead. Your line is open.

[Mark Mahaney:]

Okay. Thanks. I'm sorry I'm going to ask a question, I may have missed some of the first part of the call. One of those issues that you just mentioned, Ray, that Care Guides efficiency. Did you -- did you already say whether you've seen some recovery in that? I understand the efficiencies that it's created from kind of taking people away from the -- whatever the synergies of a centralized place. Is it clear to you that there's a path back, or is that just going to be the case until people are able to get back in work in their shared centers.

[Ray Winborne:]

Yeah. Hey, Mark. Thanks for the question. And obviously, when we first went home, that was the greatest impact. While they were adjusting to the new environment, we really did see a pretty significant drop. We've been seeing continual improvement since then in the productivity, but there is a gap, right? These guys have been working out of offices in high energy sales environments for most of their careers and we're not going to get to that level of productivity, be working from home with those groups. So, I think, as far as where we are today and early May, we've seen a pretty significant improvement in the productivity of those Guides. Probably seeing what we're going to see until we're going to back in the office at this point.

[Mark Mahaney:]

Could you just remind us please where are those basic customer care centers, where are they located geographically? And in those areas what are the -- what's there -- what's the visibility and to when offices will be reopened?

[Ray Winborne:]

We're watching the local regulations and health announcements around the world. The vast majority of our Guides or a large majority of our Guides are based in Arizona and Iowa. But beyond that India is probably the next biggest that we've got. So we're watching each one of those locations will be treated differently based on the local conditions.

[Aman Bhutani:]

And Mark, this is Aman. We're actually in touch with local offices on a daily basis to see how the situation is developing for that city for the area around our office. And we're listening to politicians, we're listening to scientists. We also have our own criteria of one when we can take people back and we'll take a prudent approach to that. And we'll put some people in and experiment and have the proper office distancing and sort of make our way back as things improve.

[Mark Mahaney:]

And I'm sorry if I could throw in one other question. Andrew, you'd mentioned something about the big -- the April being a very strong month in terms of new customer acquisitions. I think, this is one of those hard questions to answer, because there's so early on. But can you tell whether that cohort -- April cohort, I know it's very early -- very recent. Is acting any different than cohorts you brought in, in the past. More engaged less engaged, any way to tell?

[Andrew Low Ah Kee:]

It's early to be talking about that. The reality is we're seeing very strong demand for our presence products. We shared with folks obviously the strength that we're seeing in the create space whether Websites + Marketing or WordPress with you all at Investor Day and those are areas we're seeing continued goodness in, in April, but it's early.

[Mark Mahaney:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Naved Khan of SunTrust. Please go ahead. Your line is open.

[Nate Mitchell:]

Thanks. This is that Nate Mitchell on for Naved. Aman, thank you for the color on Germany. One, I was wondering if you could maybe speak to the growth in customer adds across geos in April. And then two, wondering if you can help us -- how to think about -- how big of an on-ramp the freemium offering and Website + Marketing can be for you guys. Thanks.

[Aman Bhutani:]

Yeah, thank you Nate for the question. We wanted to give you a little bit of color, so we took two markets in Italy and Germany and it's obviously hard for us to comment on each market and growth rates there. But as I said in my prepared remarks, there's an arc of COVID-19 and how it sort of progressed across the world where you saw every market sort of going to some level of lockdown and then sort of open up a little bit. And what we saw with that when there was unknown, right, people seem to clamp down and really worry about a lot of things and focus on safety. And in the U.S. that period seemed to be the last two weeks of March more so than other periods. But that same arc has sort of pretty much repeated itself across the world. And in terms of the on-ramp for freemium, it's just too early to be talking about it. We're super excited to have freemium there. We're super excited that we were able to bring it forward at a time when our customers needed most. But it's just too early to talk about -- just yet.

[Nate Mitchell:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Lloyd Walmsley of Deutsche Bank. Please go ahead. Your line is open.

[Lloyd Walmsley:]

Thanks. Just wanted to ask about M&A and wondering if you're seeing anything in the current environment, maybe that starts to look more interesting, particularly given the use of leverage in the space privately. And then, I guess, related to that, is the current environment change at all? How you guys think about leverage and what you'd be willing or possible to take on as part of any M&A. Thanks.

[Aman Bhutani:]

Now let me take …

[Ray Winborne:]

Hey, Lloyd. It’s Ray. I'll start and Aman can come over to talk. You look at our leverage today, we've got a target range of two to four times. We're right at the bottom of that range today, so feel comfortable. Obviously, given the uncertainty of COVID and how long it's going to go on, what the depth is going to be, we're obviously focused on liquidity like others. And we'll provide any specific comments around the pipeline on M&A right now.

[Aman Bhutani:]

Yeah, I think, Ray covered. You've seen us have been quite active over the last few months. And we have a pipeline, as we've said previously and we don't comment on any specific company which may or may not be part of our pipeline.

[Lloyd Walmsley:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Mark Zgutowicz of Rosenblatt Securities. Please go ahead your line is open.

[Mark Zgutowicz:]

Thanks. I just had a follow-up on the Guides productivity question. I guess, the flip side of that question, when they are back in office, what do you expect to see in terms of lift and where would we see that? And then separate question on WooCommerce. Just curious what your long-term -- your near-term, long-term objectives are there. And so what we should expect for future, I guess, discussion on progress there. Thanks.

[Andrew Low Ah Kee:]

Sure. As both come back in the office, it's going to be a ramp as we get people back into the game. It is not like overnight. We're going to flip a switch and 7,300 Guides are going to be sitting back in the office. So, it's going to be a slow and long ramp as we get folks back into the office. And then in terms of how they perform, we think there will be an improvement. Again, as Ray mentioned, folks have built up a system over many years that that drive sales engagement. That said, I think, the unknown will be customer demand on the other side, and how customers behave particularly for those higher priced offers. That's a question, Mark, that we yet to see.

[Aman Bhutani:]

And then maybe just touch on the WooCommerce point. We have a great position in the WordPress ecosystem, the WooCommerce product. And we have a tremendous partnership with automatic as well there. So, we have a great offer in the market. Now, I mentioned that in my prepared remarks and our customers are loving it. So, we continue to like the offer we have there and continue to love customers coming to us with their WordPress and WooCommerce needs.

[Operator:]

And there are no further questions at this time. I will turn the call back over to Aman Bhutani.

[Aman Bhutani:]

Thank you. I'll just say a quick thank you to all the employees across GoDaddy globally. A tremendous amount of work has gone in over the last few weeks that have been challenging to say the least. But while all of us focused on supporting each other every person at GoDaddy has worked hard to support our customers and for that I'm truly grateful. Now, thanks for joining our call today and we'll see you next time.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.