GoDaddy Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Thank you for standing by, and welcome to the GoDaddy Q2 Earnings Conference Call. . I would now like to hand the conference over to Mark Grant, Vice President of Investor Relations. Please go ahead, sir.

[Mark Grant:]

Good afternoon, and thank you for joining us for GoDaddy's Second Quarter 2020 Earnings Call. With me today are Aman Bhutani, Chief Executive Officer; Ray Winborne, Chief Financial Officer; and Andrew Low Ah Kee, Chief Operating Officer. Aman and Ray will share some prepared remarks, and then we'll open up the call for your questions.

[Aman Bhutani:]

Thank you, Mark, and thank you all for joining us today. Since March, there has been a massive acceleration in the shift to digital for small businesses around the world. Again and again, we hear from customers how vital it is in this time of global economic uncertainty for them to have both a dedicated website for their business and the tools to help them reach their customers. We consider it a privilege to serve millions of everyday entrepreneurs worldwide as we strive to help them build their businesses and refashion the economics of their communities. As many companies benefit from the digital acceleration, I am excited that GoDaddy has continued to gain share. I want to start today by acknowledging GoDaddy team members. The level of activity in our business and our operations are at their highest, unmatched by the personal challenges all of us face in the current environment. In June, we announced a restructuring of our outbound sales team. And while it is always difficult to part ways with team members, we are grateful for their contribution over the years. Our team members are working hard and have adapted quickly to address the rapidly changing landscape.

[Raymond Winborne:]

Thanks, Aman. I'll touch on the financial results for what was a great quarter for GoDaddy and then provide our outlook for Q3 and the full year. Q2 reflected better-than-expected results on every key metric from top to bottom, as the business performed very well, setting us up for continued success through the remainder of the year and beyond. Aman mentioned customer growth, but we've also seen flat customer churn rates and resiliency in subscription renewals, proof points to the durability of the business model. Total revenue came in at $806 million, growing over 10% on a constant currency basis, with 140 basis points of currency headwind, and we're seeing the strength globally with U.S. and international both growing at a 10% clip in constant currency. Looking at product categories, we delivered 11% growth in Domains on strength in new registrations, renewals and aftermarket sales. Hosting and Presence grew 4%. Inside that, we saw terrific growth in subscriptions of Websites + Marketing, along with the e-commerce solutions Aman talked about earlier. This line item also reflects the headwinds from our higher-priced GoDaddy social product, which was disproportionately impacted by COVID-19. And finally, Business Applications growth deaccelerated to 18% year-over-year on higher demand for domain-based e-mail and productivity solutions.

[Aman Bhutani:]

Thank you, Ray. It has been 1 year since my first GoDaddy earnings call. In that year, I have talked to many everyday entrepreneurs and fallen in love with their story. I have seen an employee base that deeply cares about the mission of the company and has risen to unprecedented challenges. While there is still uncertainty ahead and no one has a crystal ball, I am inspired by the opportunity in front of us, and our path forward is clear. Our focus on customer success drives our continued development of world-class products. That, in turn, empowers everyday entrepreneurs to sell and thrive online. We have an incredible brand that is only getting stronger. We have a resilient, recurring business model, and we will continue to be prudent stewards of the significant cash that GoDaddy generates, pursuing growth organically and inorganically for years to come. GoDaddy is an amazing success story. We have a TAM of $180 billion and 20 million paying customers. And I feel like we're just getting started. Operator, let's open up the call for questions.

[Mark Grant:]

Operator, can we have the first question, please?

[Operator:]

. Our question comes from Deepak Mathivanan from Barclays.

[Deepak Mathivanan:]

Great. Congrats on a good quarter. I wanted to ask about a couple of things. So first is can you give us some color on the customer profile that you're seeing? The net adds of 400,000 was very strong. And like said, it's nearly 3x last year. How much of that on-ramp is coming from Domains? And how much of that would you say you can attribute to Websites + Marketing and then also some of the e-commerce products? And then the second question is on the Hosting and Presence. Obviously, you're seeing nice tailwinds on the e-commerce and also websites. But the overall growth is 4%. I know it's impacted by the social offering and then also the do-it-for-me cleanup. But can you give some color on the size and growth of each bucket so we can think about the confidence inside this correctly?

[Aman Bhutani:]

Thanks, Deepak. This is Aman. I can take the first part, and Ray can probably take the second. We're seeing customer growth across all the product categories. We saw growth in Domains. We -- as you see, we saw growth in the biz apps and Websites + Marketing, and Managed WordPress continue to grow at a healthy rate, right? So it's not really about one product or the other. We're seeing growth across all products, and it's a function of the demand environment and the marketing spend and the value that our products bring to our customers on sort of everyday basis. We're excited about the acceleration. And the quarter continue to improve for us, and we're excited about that. Ray, do you want to take the question?

[Raymond Winborne:]

The only thing I might tack on to that, Deepak, you may have heard Aman reference to it. We are super excited about the growth we're seeing in Websites + Marketing, 60% growth year-over-year in ARR. That is a fantastic growth rate, and so you could see the adoption and more excited about even the mix of SKUs within that adoption. So we've seen a nice uptake in e-commerce SKU takes, let's say, I think, 25% of folks taking that SKU now. So really excited about the progress we've seen there in that product.

[Deepak Mathivanan:]

Okay. Ray, if I can just follow-up on that. How much would you say the impact from the restructuring efforts is on the 3Q revenues? I mean, I know previously, you quantified it for 2Q. How should we think about that for 3Q?

[Raymond Winborne:]

Yes, if you think about 3Q and the rest of the year, you saw the impact of the headwinds in the second quarter, it's baked into that guidance for the rest of the year as well.

[Operator:]

And our next question comes from Matthew Pfau from William Blair.

[Matthew Pfau:]

Just wanted to hit on the premium offers that you've been providing on the websites business. Maybe you can just discuss how those have been performing relative to your expectations, both in terms of interest and conversion. And then what are your thoughts on using the strategy longer term, both for the existing products that you're offering it for or perhaps expanding the two additional ones?

[Aman Bhutani:]

Yes. Thanks, Matt. The freemium offering is a quarter in, and we continue to be excited about how it's performing, both in terms of attracting registered users to come in and try the product and the conversion rates we're seeing. And so it's meeting our expectations, and we continue to drive improvements in it. In terms of freemium as a model, we really feel that our customers more and more people need to be able to use our products. So the freemium model allows us to do that in a successful way. And one of the things you saw this quarter is that we added the freemium offering for Sellbrite, which is a product that allows micro small businesses to connect to many of the large platforms out there and get their products out there. So it's really a model that we're using for more and more products. And one last thing to keep in mind is that when we talk about the 20 million customers, we're talking about paying customers. That does not include freemium customers in that number.

[Andrew Low Ah Kee:]

Matt, it's Andrew. I'll just tack on one other thing. Ray mentioned we're leaning into marketing. And obviously, we've got the convictions to lean into marketing based on what we're seeing in their early. So...

[Matthew Pfau:]

Got it. Just one quick follow-up. good based on the growth that you're seeing in the websites business. But what about visibility into the future quarters, are you able to get any idea in terms of predictability of what the conversion of some of those freemium users will be? And how does that perhaps help you in terms of the visibility in your business?

[Aman Bhutani:]

Yes. I think it's a bit too early to be able to sort of set the quarterly cohorts up. We're still, like I said, only a quarter in. But over the next few quarters, we'll definitely have a clearer idea of how those cohorts perform. Early indications, they continue to meet our expectations. So we're excited to continue to move forward on it.

[Operator:]

And our next question comes from Ron Josey from JMP.

[Ronald Josey:]

Aman, you started off the call just talking about the massive acceleration of digital, and we're seeing that in your subscriber growth numbers, freemium, e-commerce adoption, et cetera. Just wanted to get your take on where do you think we are in the shift to digital and the importance of -- we just talked about importance of freemium but with 20 million subs and more freemium coming on, I just want to know, like, where do you -- curious of your thoughts on where you think we are in overall adoption of this digital transformation and where GoDaddy is there?

[Aman Bhutani:]

Yes. I do think that COVID-19 has pushed a number of people past the point of inertia where they were not adopting digital. Another way to say that is pull forward the TAM. So because people have no choice but to go digital to support their businesses, we're seeing people experimenting with ideas. We're seeing people come online, even though they had hesitated to do it in the past. When you look at that TAM of $180 billion, and it's just huge. This is a space with so many players there. And when I look at GoDaddy, I think we're really positioned well. And when I talked in the script about I feel like we're on the start line, I look back at GoDaddy and see a leader in the dream phase, doing so well in the create phase over the last 2, 3 years. And now as we put more and more attention into the growth phase, customers want to do marketing tools with us, they want to do commerce with us, and we have good offerings for them. So the more we get our name out there related to those offerings, the more we improve those offerings, I expect GoDaddy to play a very significant role in that moving forward.

[Operator:]

And our next question comes from Nick Jones from Citi.

[Nicholas Jones:]

I guess just two. First on strategic acquisitions. I mean, how do you feel about the pipeline today given kind of market multiples? And any kind of thoughts kind of how you view the environment? And then the second question would be on kind of customer acquisition and increasing investment in advertising. How do you feel about kind of the, I guess, the advertising window? Are CPM lower today and you're able to be more aggressive? How long do you think that will last from kind of where we stand today? Any color there would be helpful.

[Aman Bhutani:]

Yes. As you know, we've been quite active in the acquisition space over the last few months, just talking about closing Neustar today and super excited about that. Our pipeline continues to be healthy. And of course, valuations are what they are. But we continue to look for opportunities, which can add value to our customers and become part of the GoDaddy ecosystem. And broadly speaking, we are looking for opportunities where customers get nonlinear value, and our brand extends to be able to offer that value to customers. That's kind of the lens we're looking things at. And there's a healthy pipeline. In terms of customer acquisition, our customer acquisition costs actually went down quarter-over-quarter and year-over-year. And part of that is the CPMs, but a big part of that is just demand and intent from customers. So as we look forward, our commitment is that we'll continue to invest in marketing, looking at this demand, taking share within this demand as long as it meets our thresholds.

[Operator:]

Our next question comes from Brent Thill from Jefferies.

[Brent Thill:]

Aman, nice to see the Business Apps reaccelerate. I'm just curious when you look at the opportunity set ahead, it seems pretty massive. How are you gaining better awareness? And where are you finding the best areas for adoption? And then for Ray, can you -- maybe companies we -- I cover and check have been commenting on how things look in the month of July and August. I'm curious if you have any comments about how you exited the quarter. And was there a sugar high tail-off? Or are you still seeing the continued strength that you saw at the end of Q2?

[Aman Bhutani:]

Yes. On the business apps, the focus for the teams there is to continually improve, not just sort of awareness of that product when people come to our site or through our marketing channels, but really, really reduce the friction in terms of activation, the friction in terms of fulfillment. So that adds a customer step into that product. They're able to really get value very, very quickly. And some of those efforts that we've been making over the last few quarters has started to show value. Now clearly, part of the reacceleration here is the overall environment where customers are looking for avenues to contact their customers, and we've been telling them for years that if you use branded e-mail, you have many multiples more likely to get the attention of your customers than a regular e-mail address. And in a time like COVID, where our micro businesses, small businesses are looking to reach their customers, they're sort of thinking about all the things that we've been telling them. And we think we see that acceleration coming in Business Apps through that. And I'll turn it to Ray for sort of July and so on.

[Raymond Winborne:]

Yes. Brent, so good trends. As we look toward the quarter, it was nice progression, continued increase right up through June. I think if I recall back then, maybe it was Andrew that pointed it out on the last call saying that April -- the April cohort was our strongest we've seen in 10 years. May was better. June was better. And then we saw no slowdown in the July cohort. That should give you some sense of what we're seeing in the business.

[Operator:]

And our next question comes from Jian Li from RBC.

[Jian Li:]

Jian for Mark Mahaney. And congrats on the quarter. So just maybe piggybacking on the last answer, just given the accelerating trend you're seeing from -- in Q2 and into July, what assumptions are you baking into your Q3 guide in terms of the kind of new user growth? And what kind of macro assumptions are you baking into that? And I'm thinking that given your full year and Q3, are you assuming that macro getting better in Q4 and therefore, the higher price pressure that you're seeing that's in H&P right now will be more alleviated? I just want to see if you have any thoughts on that.

[Raymond Winborne:]

Yes. It's Ray. I'll take that one. Look, there's a lot of uncertainties at play right now. We're trying to call it like we see it, not being overly aggressive or conservative in the guide. It just reflects what we know right now and our sense of trajectory. If you look at the guide we're giving, it does imply some acceleration from the pre-COVID Q1 number. Keep in mind, the back half of the year gets a little tougher on year-over-year comps. In the demand environment, it's obviously been great. Aman talked about some of the stats and metrics we're seeing. But we don't have perfect insight into how long or at what strength that's going to continue. We're always going to strive to do more, be better every day. But the guide is what we see happening, plus or minus.

[Jian Li:]

Great. And if I may, a follow-up on the Neustar acquisition. I know it's early days, but have you looked at maybe medium term, the size of the opportunity there? And how should we think about kind of the margin accretion potential from Neustar?

[Aman Bhutani:]

Yes. I think we're just coming upon closing it, we -- just a couple of days in. So it's a bit too early to be talking about the medium-term return on Neustar. Suffice to say, we're super excited about being able to vertically integrate within the Domains space. It opens a lot of opportunity for us to create new offerings for customers to experiment at a pace and scale that we don't think the registry business has seen for many years. So that's the opportunity we're going after. And we'll be able to talk about it a lot more over the next quarter or so.

[Operator:]

And our next question comes from Ygal Arounian from Wedbush Securities.

[Ygal Arounian:]

I want to ask Ron's question maybe slightly differently and how to think about the sort of pull forward and runway of increased need for digital presence relative to the 400,000 net new customers this quarter. As we look forward, is that a number that we should kind of continue to expect to be at that level? Are we at a new run rate for new customers for the time being too held back off a little bit? Is the mix of growth coming a little bit more from new customers or ARPU? Just how to think about and frame this discussion in terms of new customers going forward. And then the second question, when you guys announced the restructuring without a lot of questions from investors around trying to understand exactly what the outbound sales team was versus the inbound sales team. So can you help just make sure to clarify and help investors understand what the outbound sales team was. Was it all related to GoDaddy Social? And then at the same time, what are you seeing from the inbound sales team in terms of productivity as we're continuing to work from home?

[Aman Bhutani:]

Yes. If I got sort of three parts to that question

[Andrew Low Ah Kee:]

Yes. Our outbound sales team was a small portion of our overall care operations. We got a history, as you all know, of uniquely selling, whether in an inbound motion or in an outbound motion. That outbound motion was a discretionary one, right? The inbound one, we take a customer's call. We have an obligation to answer the phone when they call us. On the outbound side, that's a discretionary thing. And as we looked at the productivity challenges that we were facing and what we expected ahead, it made sense for us to stop that motion and reallocate that investment, as Ray mentioned, into other marketing activities. As we -- and that outbound team, yes, they focused on social, but they focused on a range of other higher-end products and services. On the other side, with respect to productivity, we obviously took a hit there. As we've shared with you in the past, we've seen steady and continuous progress around improving it. We've embedded the level of productivity we expect to see into the guide that Ray mentioned. And importantly, we have seen consumer behavior change as we've gone through COVID in terms of how they choose to engage with care. Increasingly, it's around asynchronous chat, other digital channels, some of which we talked about in our Investor Day, but we're really seeing those different modes of engagement come to the fore in this current environment.

[Operator:]

And our next question comes from Lloyd Walmsley from Deutsche Bank.

[Lloyd Walmsley:]

First, are there any key product holes you guys would flag in Websites + Marketing, where if you kind of either add a product or improve a part of it a lot, you feel like you can unlock meaningful new TAM or growth acceleration? And secondly, when you guys announced your deal with AWS, there was talk of kind of working together, maybe AWS selling some of GoDaddy services. Wondering if there's been any movement on that side of the relationship. Is that something we should think about for the future?

[Aman Bhutani:]

When we think about Websites + Marketing and the opportunities, they're squarely in what we talked about, the grow phase for our customers. And 2 areas that we're investing in are marketing and commerce. To give you a bit flavor, marketing includes content. Marketing includes messaging, right? And when we did the Over acquisition, and we're bringing it into Websites + Marketing very, very quickly. So all of the great feature functionality engagement that Over has, all Websites + Marketing customers are going to have that this year very, very quickly. Those marketing capabilities are really core to our micro businesses reaching their customers. And similarly, as we all know, commerce is a big part of it as well. And we have a great base offering in commerce. And the more our customers use us, the more we're adding features and functionality for them in the commerce space as well. In terms of AWS, we've had some good milestones in terms of progress in our relationship there. But overall, it continues to be relatively small. We think it's a great sort of example of what GoDaddy can do for a big partner. But in the revenues -- in the total size of our revenues, it's a small item.

[Operator:]

And our final question today comes from Naved Khan from SunTrust Robinson.

[Naved Khan:]

We've been renamed Truist Securities, so change of name. But I had a couple of questions. In your April update, you guys have -- had talked about some weakness in the Domains aftermarket. Curious to know if that still persists. The results kind of indicate it might have improved. And the other question I had was just around the -- your onboarding ramps for the new customer acquisition. Is it fair to assume that with the addition of the freemium offering and the revamp in the Websites + Marketing product, it's becoming more meaningful. Is it source of new customer acquisition versus maybe just a year ago?

[Aman Bhutani:]

Yes, Naved, thanks for your question. On the aftermarket, like we said, we're seeing great traction in primary, secondary Domains sales. Overall, that business or that segment growing at 10% for us, as you know, growing much faster than double of the industry. So we're super happy with that. We did -- we had, in April, talked about some weakness in there. And there are pockets of different experiences by different countries that we're seeing. But overall, very happy with the results in that segment overall. And in terms of freemium and Websites + Marketing, the 60% ARR number just says it all, right? We continue to see healthy growth in that business on a unit basis, on a revenue basis. Super excited about what it means for the future. And it's massive LTV, right? The Website + Marketing customer drives somewhere in the order of 10 to 25x the LTV than a Domains customer for us. So being in that space, being a big player in that space and gaining share in that space has been really good for us.

[Operator:]

And that concludes our questions today. I'll now turn the call back over to Aman Bhutani, CEO, for closing remarks.

[Aman Bhutani:]

Thank you, and thank you all for joining on the call today. A big thanks to all GoDaddy team members all over the world for a great quarter, and look forward to talking to you next quarter.

[Operator:]

And this concludes today's conference call. Thank you for participating. You may now disconnect.