GoDaddy Inc.

Good afternoon, and thank you for joining us for GoDaddy's third quarter 2020 earnings call. I'm Mark Grant, Vice President of Investor Relations. With me today are Aman Bhutani, Chief Executive Officer, and Ray Winborn, Chief Financial Officer. Following prepared remarks, we'll open up the call for your questions. If you'd like to ask a question on today's call, please use the raise hand feature in the webinar to be added to the queue. On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics, such as total bookings, unlevered free cash flow, normalized EBITDA, net debt, gross merchandise volume, and annualized recurring revenue. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our investor relations website at investors.godaddy.net. or on our form 8K filed with the SEC with today's earnings release. The matters we'll be discussing today include forward-looking statements, which include those related to our future financial results, new product introductions and innovations, partner integrations, our ability to integrate acquisitions and achieve desired synergies, as well as the impact of the COVID-19 pandemic on our business, customers, and employees. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, November 4, 2020, and we undertake no obligation to update these statements as a result of new information or future events unless required by law. With that, here's Iman.

Thank you, Mark, and thank you all for joining us. Today, I'm excited to share the details on a record quarter for GoDaddy. Before we get started, though, I want to announce a change to our leadership team. Andrew Loakey, our Chief Operating Officer, is leaving GoDaddy, effective November 13th. after nearly a decade with the company. As a colleague and friend, I'm grateful for his significant contributions over the years. He was a key part of building the great company we have today and I wish him all the best in his new adventure, which will be announced over the next few days. we stand today with a deep leadership bench including both tenured and new leaders organized to deliver on the needs of our customers and our strategic priorities with this full complement of leaders in place we will make a few adjustments but we will not backfill the coo role This will allow for a seamless transition so we can stay focused on executing against our strategy. And every day, our passion for that strategy grows as more entrepreneurs trust and partner with GoDaddy to start with a dream and then create and grow that dream. We are pleased with our progress, and today I would like to highlight three key areas. First, our strong execution against our strategy with a few notable milestones. Second, our continued progress in online presence solutions, including leaning into commerce capabilities. And third, our continued investment in marketing to capture demand. Q3 was another record quarter of customer growth, and we are seeing sustained momentum into October. In Q3, we once again added over 400,000 net new customers while also seeing improved customer retention. We continue to see increased demand for online solutions due to the pandemic, and coupled with higher marketing spend, our website traffic has increased by an average of 20% year over year since April. We have seen increased adoption of our website creation platforms, Websites Plus Marketing and Managed WordPress, as well as our content and commerce tools, Over and Sellbrite. As an additional insight into this part of the business, we are excited to share that together, these solutions reached an annualized recurring revenue of nearly 350 million in Q3, growing at approximately 40% year over year. This group of products now accounts for more than 2.2 million subscriptions, growing over 20% year over year. Additionally, this quarter, we saw an acceleration of Sellbrite's GMV growth. Between websites plus marketing and Sellbrite, GoDaddy now has more than $4.5 billion of annualized GMV transacting through our platforms, growing at nearly 80% year over year. These proof points reinforce our strategy of driving scale in the grow phase for customers by focusing on commerce. Business applications as a product line continue to accelerate in the third quarter, surpassing the milestone of 3 million customers with nearly 9 million seats of email. Best of all, these numbers continue to grow at a healthy pace. While we're pleased with the growth in these key areas, we're not resting on our laurels. We're driving product enhancements and increasing our marketing efforts to facilitate profitable long-term growth. We continue to charge towards the massive opportunities of content creation and commerce. This quarter, we accomplished this through deep partnership integrations, internally developed software releases, and an important commerce acquisition. In partnerships, we recently announced a deeper integration with Facebook's business extension. GoDaddy websites plus marketing customers can now create shoppable posts as well as set up shops on both Instagram and Facebook with automatic syncing between both platforms, offering yet another channel for our customers to easily sell their products. Additionally, our new partnership with Vimeo allows customers to upload, preview and insert videos, including using a video as a header to their website. We've also continued to accelerate our velocity internally, delivering a busy product launch schedule in the quarter. We released a full integration of our Over app within Websites plus Marketing a short few months into the acquisition, making it even easier for customers to market their businesses with creative content. This seamlessly intuitive experience has driven over 50% growth in posts. We've also extended the Over app across 12 new languages, giving more customers access to this powerful set of tools. Additionally, GoDaddy released a powerful Social Composer dashboard in Websites Plus Marketing, giving customers a single place to rapidly create polished social content and view and schedule their social posts across connected social media platforms. What's more, users can track the performance metrics of each post by platform. We also introduced a simple and intuitive one-page e-commerce template in Websites Plus Marketing, which has quickly become our most popular template, and it has reduced time to publish for our customers by 40%. Continuing on the theme of commerce, we launched our online store capabilities in Argentina, Peru, Colombia, and Chile, positioning GoDaddy to serve customers in these markets. We also continue to innovate for our domains customers. In Q3, we introduced revamped bulk search and file upload tools for domain investors and rolled out free global who is masking and a new paid security services with greater domain protections. And we are super excited to welcome the Skyverge team. With nearly 60 WooCommerce extensions spanning payments, email marketing, and memberships, Skyverge is a leading WooCommerce product developer. This acquisition furthers our commitment in WordPress to help entrepreneurs and web professionals succeed online with high-performance stores that are feature-rich and quick to build. Lastly, in Q2, we talked about our plan to deliver marketing for as long as we continue to see returns on our investments. While the investment increased, we also delivered another record quarter for both customer ads and total cohort size. Obviously, it's something we're quite pleased to see, particularly as we've coupled these strong marketing gains alongside the great product enhancements we've talked about today. In closing, our focus is to build simple and easy to use tools with a focus on helping everyday entrepreneurs succeed. Online commerce and marketing are areas where this need has become significantly more pronounced in 2020. We are seeing rapid adoption of these new tools, giving us the opportunity to help more customers succeed. Solid execution in an elevated demand environment powered a strong third quarter. We are poised for sustainable, profitable, long-term growth, and we continue to be confident in our ability to hit our 411 target in 2022. With that, here's Ray.

Hey, thanks, Amant. I'll touch on the financial results for what was a great quarter for GoDaddy and then provide our outlook for Q4. Q3 reflected a strong performance across the board with another record quarter of customer growth and acceleration and top line growth and margin expansion. And new customer bookings continue to hit records. While small relative to total bookings, they're an important contributor to future growth. We've also continued to experience low customer churn rates and resiliency and subscription renewal rates, proof points to the durability of the business model. Total revenue came in at $844 million, growing 11% year-over-year, while currency impacts were negligible. Growth rates accelerated across all three product categories and re-accelerated in our international business. Business Applications was our fastest-growing product line, increasing 19% year-over-year on continued strength in branded email and productivity solutions. We delivered 12% growth in domains across new registrations, strong renewals, and aftermarket sales. And finally, hosting and presence grew 6%. Inside that, Aman highlighted the tremendous growth in products comprising our website creation platforms. In contrast, it also reflects a headwind from the GoDaddy social product due to the elimination of the outbound sales force in June. Total bookings grew to 945 million, rising 11% year-over-year while currency impacts were negligible. Strength in bookings was broad-based across products and geographies as our brand and product offerings positioned us well to capture demand as businesses continue their digital transformation. For many small businesses, establishing an online presence was once seen as a competitive advantage. It's now table stakes. Gross margin came in at 66% in the quarter, a 40 basis point expansion year over year. We also delivered operating leverage as the June restructuring actions reduced costs and care, while G&A continued to benefit from both scale and lower discretionary expenses. As we highlighted on the second quarter call, we stepped up our investment in marketing to capture market demand, resulting in a $36 million year-over-year increase in marketing expense. We've been able to elevate our investment while remaining within our target months to break even and customer acquisition cost, even as we saw increased competition in performance advertising channels. And we'll continue to invest in marketing as long as we're meeting our return metrics. The net sum resulted in normalized EBITDA of $199 million in Q3, or approximately two points of margin expansion over last year. Moving to cash flow, unlovered free cash flow for the quarter was $224 million, growing 17% year-over-year, with margin expansion of over a point. Trailing 12-month unlever-free cash flow was over $800 million and margin topped 25%, illustrating both the size and scale of this business. Now, on to the balance sheet. We finished Q3 with $622 million in cash and total liquidity of over $1.2 billion. We were able to capitalize on favorable market conditions, issuing a new $750 million 7-year term loan with an all-in yield of 2.7%, a record for a double B-rated company. With this issuance, net debt stands at $2.5 billion, or about three times net leverage on a trailing 12-month basis. That's the middle of our targeted range of two to four times. And we have no significant debt maturities until 2024. In view of our ability to deleverage, this leaves more than ample liquidity to fund the business, execute the strategy, and pursue our stated capital allocation priorities. Now I want to take a moment to reiterate that any potential increases to the corporate tax rate will not have an immediate impact on GoDaddy's cash flow. As a reminder, given our net operating loss position, we don't expect to pay U.S. cash taxes before 2027. A higher corporate tax rate would, however, enhance the value of the recent settlement of the TRA. For example, a 28% rate increases the future tax savings associated with the TRA attributes by over $700 billion, further enhancing the already strong returns on the settlement. The strength and resilience of our recurring business model has fueled a strong balance sheet and has enabled us to execute across our capital allocation priorities in 2020, including completing four acquisitions, repurchasing nearly 6% of our outstanding equity, and settling the TRA. We have the flexibility to take advantage of opportunities that arises, and we'll continue to be prudent allocators of capital in pursuit of long-term growth and leveraged free cash flow per share. With that, let's turn to our Q4 outlook. We expect total revenue of approximately $865 million, or 11% growth year-over-year. You should expect double-digit growth in domains, mid-single-digit growth in hosting and presence, and high teens growth in business applications. Remember, those products that relied on the outbound calling motion, like GoDaddy Social, disproportionately impact the hosting and presence line. On Unlevered Free Cash Flow, we expect 2020 to land at approximately $820 million, the midpoint of our previous guidance range. As a reminder, Q4 has a highly anomalous 27th pay period this year, without which our Unlevered Free Cash Flow guide would have been approximately $18 million higher. In closing, digital migration is definitely an accelerating trend and it's here to stay. Our business is well positioned to meet the needs of entrepreneurs around the globe as they bring their ideas to life online. GoDaddy has long been known as an industry leader with profitable growth at scale. Now, with a set of subscription software tools, enabling websites, content creation, and commerce, that's approaching $350 million in annual recurring revenue, we're as confident as we've ever been that we can continue to grow, take share, and generate significant cash flow. With that, we'll have Christy Masoner from our Investor Relations team open up the call for questions.

Thanks, Ray. As a reminder, if you would like to ask a question, please use the raise hand feature at the bottom of the webinar screen to be added to the queue and unmute your line. Our first question comes from the line of Jason Helfstein at Oppenheimer and Company. Please go ahead.

Unmuted. Thank you. So you notice 400,000 net ads or over 400,000 net ads in the third quarter. Can you comment how the second quarter compared to this? And then when we think about versus a year ago, can you just comment on customer churn? Are you seeing higher or the same churn? And then secondly, appreciate the $350 million in ARR gross bookings, or the $350 million in ARR related to e-commerce. If we divide that into gross bookings, it's about 9%. Is that a reasonable way to think about kind of sizing the e-commerce business today relative to gross bookings? Thanks.

Hey, Jason, thanks for that question. This is Aman. You know, when we look at the third quarter, it represents record organic net sub growth for GoDaddy. You know, we're really happy with the progress here. And as we look at Q2, you know, like we said in some of our prepared remarks, October continued to be in line with September and did really well year over year as well. You know, in terms of churn rates, they continue to be stable, slightly better. Just going back to the idea that our customers truly are the everyday entrepreneurs. And, you know, if they hit roadblocks, they're creative, they innovate, and they start something else and get on with it. And then I'll turn it to Ray for maybe a little bit more color and to your second question on the 350. Okay.

Hey Jason, it's Ray. AR is not apples to apples, obviously with booking, so it's cash versus revenue, but really happy with what we're seeing there from those products from a bookings perspective as well, growing at relatively similar levels.

Our next question comes from the line of Nick Jones from Citibank. Please go ahead.

Great. Thanks. Could you touch on some of the integrations you talked about in the press release and the deck today? What kind of uses are you seeing by subs with these integrations, whether it's over Instagram, Facebook? And then I guess the follow-up on that is as you integrate all of these great products for subs like Vimeo, you know, Skyverge, things like that. How does that impact kind of the funnel for subscribers? Is it, you know, I guess, how do you prevent them from getting confused by, I guess, all the options you're introducing? Thanks.

Yeah, let's take the specific examples, you know, from previous quarters, and then I'll briefly touch on Skyverge and how we look at the funnel. Our goal bringing in over, bringing in the experience from Uniregistry was that we wanted to bring to the GoDaddy family companies, teams that were building amazing experiences for customers, sort of best in class experiences. And then we want to take those experiences and bring them into our mainstream products like websites plus marketing. So when we talk about overs integration, it's all very new right now. So it's less about what subscriptions it's driving, and it's more about what level of engagement we're getting from the functionality we're putting out there. For example, with the over integration, There was a 50% increase in posts, sort of content creation and people posting that content on social media, which shows immediate customer value. And that's our core formula, right? We want to introduce these pieces, whether it's Vimeo or others, into the core experience at the right place. It's not early in the funnel. It's fast. As these customers are using these products, it shows up in a simple way at the right place. And it's just intuitive for the customer to use it. And as we continue to create customer value, over time, we could turn it into shareholder value by sort of moving people through the tiers, by taking pricing action and such. But the first step is really creating customer value. And in terms of Skyverge, you know, it's the same formula. Skyverge team is fantastic in the WooCommerce space and they have 60 plugins. They just are completely focused on building the best experience for customers. And it's super new right now, but you can expect the same thing from us, that it will become part of our managed WordPress experience and it will just be simple for customers in terms of their commerce experience with WooCommerce as well. To touch on the funnel just slightly, keep in mind that as we add these capabilities, they are coming in at the right place where the customer is using the product. These things don't sort of, in a sense, clutter the buying experience or the freemium experience in any way. In fact, if anything, as we layer on more and more capability and provide it as part of the freemium package, we feel it encourages people to use the product because they've got more functionality that they can use as part of the product.

Great. Thank you.

Our next question comes from a line of Ron Josie from JMP Securities. Ron, please go ahead.

Great. I think I'm unmuted. Hopefully you can hear me. Great quarter, guys. And Aman, thank you for the additional details on the business metrics. I wanted to talk about commerce specifically and the $4.5 billion in GMV and also integrations with Facebook and Instagram, which you just talked about. But can you just talk about what tools you think are still needed to fully take advantage of this commerce opportunity that you're seeing with the 80% growth in GMV? Or do you have Do you think you have a fully integrated approach now to fully take advantage? And then as a follow-up to that, can you talk about sort of, you know, we're two quarters into the freemium approach with websites and marketing, a quarter in with Sellbrite. Just talk about how freemium has maybe changed the complexion of these new subs and these record new subs that are growing on the platform. Thank you.

Yeah, happy to do that, Ron. Thanks for the question. You know, on the first piece about, you know, the 350 and just the color, you know, we're super excited about that part of the business and how quickly it's growing. You know, I think I'm blanking on the exact word you said, but just on the second part of your question, you know, when I look at the subs growth, what I'm really focused on is are we providing the customers the product that they can try out? And as an example, you mentioned Sellbrite. Sellbrite is doing really, really well, right? The GMV growth that we're seeing, you know, it's fantastic, but it's because we're getting the product in the hands of customers and more and more merchants are quickly using Sellbrite. By the way, we're seeing the same in websites plus marketing. Premium means that more customers are using it. And yes, we're a couple of quarters in. And what that's done is it's given us enough confidence that we are rolling the freemium piece out sort of 10 to 20% at a time. It's not 100% in the US yet as we get into every part of our website and our sales path, but that's the place we're going.

Hey, Ramesh, it's Ray. I want to clarify one point on that. Within our customer count number does not include freemium. Those are paid only subscriptions. So that record organic growth is for paid subscriptions, not freemium.

Yeah. And I'll also clarify the numbers that we gave for subscriptions. The 2.2 million doesn't include subscriptions for Over or Sellbrite. Those are core websites plus marketing and managed WordPress. And what we say, what we believe is that Over and Sellbrite sort of, you know, customers use that as part of our core platform. And then you asked a question, sorry, back to me, around gaps in our offering. The commerce offering is driving a ton of that growth in those suite of products, right? So that's really fantastic. And we serve the needs of a certain set of customers really well already. The way I think about it is that as we grow to, sort of cover more and more customers, we are going to have to add feature set. But that's sort of an order of operations. Say, what's the next thing that we need to go after? And let's build that capability or buy that capability, put it in place, and then offer it to customers in as simple a way as possible.

Great. Thank you.

Our next question comes from the line of Egal Arounian from Wedbush Securities. Egal, please go ahead. Egal, please unmute your line.

Oh, hey, can you hear me now?

We can.

All right, great, thanks. So I wanted to ask a couple of big picture questions. One related to commerce and what you're doing there. And obviously you're doing a lot Um, you know, it's, it's a feature that, you know, within your space is kind of growing, um, you know, pretty competitive, uh, across the space. Um, you guys have always viewed yourselves as, uh, focused on that, you know, micro businesses that does what you're doing here. You know, when you think about Skyverge and sell bright, um, you know, integration into Facebook and Instagram, um, How do you guys see yourself playing in that market, in the e-commerce specifically? Is it still kind of focused towards that micro SMB? Does that change any of your philosophy in terms of go-to-market and who your target customer is? And then... Related to that, I think a lot of investors think of GoDaddy still very exposed to SMBs, which you are. And I think that's something maybe some people have a hard time getting over in terms of the risk from COVID and businesses shutting down and the overall health. We saw in 3Q new business applications for SMBs. SMBs, but really businesses in general were up over 50%. So there's a lot happening in that space too. Is there anything you're seeing that gives you extra confidence? Aman, you touched on entrepreneurs and shutting down and reopening. What are you seeing within businesses closing and opening and that overall environment that gives you maybe more or less confidence than typical environments? Thanks.

Yeah, thanks. Let me address some of the target customer micro SMB commerce part of the question and then take some of the pieces on, you know, turn and what exposure we see in the SMB space and then maybe Ray can touch on it too. If we take a step back, what we're seeing in the numbers is that customers, our customers, people that have great relationships with GoDaddy are coming to us and saying, I want a commerce offering from you. We shared with you a quarter or two ago that 25% of customers signing up for websites plus marketing are signing up for the commerce tier. These are people by themselves going there and saying, I want this product from GoDaddy. So what we're focused on is when we see those early signals and we see people starting to click stuff, we're like, this is an offering that we have the right to serve. This is a target segment of customers that have the best relationship with us. Let's meet their needs. And my view on the competitive space and such is that there is so much opportunity still in the micro businesses, in the everyday entrepreneur space that we define, that there is really a lot to do there. And my view is that as we look into the future, there's no difference between a micro business and an online micro business. Every micro business is going to be online. Right. That's just how people are going to find things. That's just how people are going to want to transact because it's going to be simpler for them and it will allow them to scale in a way that previously they couldn't. In terms of the exposure, and I'll just point again to the steady churn rates at GoDaddy and just the creativity of the customer. And maybe for one click deeper, I'll turn it to Ray and say, you know, do you want to talk a little bit more about that?

Yeah, I mentioned this maybe on the last call, but a lot of our confidence is coming from the recurring nature of the business model. A couple of things I'd point out. To your very point, our core customer is a solopreneur. It's one to five employees in a lot of cases. And when they get knocked down, they get back up. We are providing them all the tools they need. for 20, 25 bucks a month is an incredibly valuable service to them. And it's one of the primary reasons our customer retention rate's been so strong for, gosh, 20 plus years now. I think folks have consistently gotten it wrong about what's perceived to be as exposure to volatile small businesses. These are entrepreneurs, not necessarily small businesses. So when one fails, they pick up the next idea. Amman hit on the renewal rates. They've been very stable. The natural flow renewal events is roughly evenly spread over the year for us. We're 10 months into 2020, seven and a half months into the pandemic and renewal rates are holding. So it's instilling confidence in us despite the uncertainty in the market.

Great. Thanks so much. Very helpful.

Our next question comes from the line of Brent Phil from Jefferies. Brent, please go ahead.

Thanks. Ray, 11% bookings. I know you had a tougher 15% comp. I guess with all the talk of e-com and business apps and more attached, I think maybe some thought you'd see a little more acceleration than that. I'm curious if you can just comment on the puts and takes and kind of what you're seeing. I know it's all not going to flow in in one quarter, but it seems like directionally you're heading in the right direction. Yeah.

Yeah, obviously, you recall last year was a really tough comp. There was over a point of lift in bookings related to credit card abuse. So I think, one, I would look at net bookings as a cleaner view of the growth, which is closer to 13% year over year. Beyond that noise, I mean, Aman hammered it in the opening comments. We are seeing historic growth. in new customer ads. But remember the new bookings are small relative to the base. It's roughly 10%. So you're not gonna see that inflection immediately, but they're super critical for future growth. And there is strong demand for our offerings in the market. We're investing to maintain that while maintaining our threshold. So you saw us pour on the marketing. We're seeing the results of that. and new is growing very, very strong.

And you've been fairly colorful in past calls just looking at what's been happening inside the quarter and linearity. Was there any color just as it relates to, was it fairly steady improvements throughout the quarter or was it evenly based? How would you describe the linearity of the quarter into the start of this current quarter? Thanks again.

Yeah. I think what I would say is we hit the peak mid-summer. The growth rates are still spectacular. I mean, these are record growth rates, but we're starting to see some seasonality, some waning in demand in the market. But, you know, I would still tell you these are historic growth rates that we're looking at right now. Great.

Thanks.

Bottom line, the guide that we put out reflects what we see from a trajectory standpoint for Q4.

Our next question comes from a line of Matt Fowle from William Blair. Matt, please go ahead.

Hey, thanks for taking my question, you guys, and great quarter. Just wanted to ask on the guidance, so full year revenue expectation up a bit from your previous expectation and free cash flow expected to be in the sort of middle of the prior range. So is this related to you liking what you're seeing from the increased marketing spend and continuing to lean into that? Or is there something else going on? And then on gross margins, as websites and e-commerce continue to be a faster growing component of your business, how do we think about that impact on the gross margins?

Yeah, Matt, on the revenue growth, glad you're noticing. We're happy with what we're seeing there from an acceleration perspective. And what we've messaged in the past remains true. Any upside we see in cash flow, we're putting back into the business. We invested a lot in marketing this quarter. We'll invest again in the fourth quarter. And we're going to continue to lean in there as long as we're seeing the returns. On gross margins... Don't forget, Q2 was weighed down by the COVID impacts of the top line with honestly no relief in cost as we maintain salaries across the board. Q3 does include a benefit now consolidating GoDaddy registry. We talked about that acquisition and the benefits there of eliminating the domain costs that we formally paid out to an external party. Final thought on gross margins though, right? We've consistently messaged for forward modeling, keep us both safe by staying in that mid 60s. Yes, you're right. As we move more into these software centric offerings, those are higher margin, but we're continuing to put more into that bundle and we want to maintain the flexibility on pricing. So I think it's still mid 60s is a good place for your models.

Great. Thanks guys. Appreciate it.

Our next question comes from the line of Mark Mahaney from RBC Capital Markets. Mark, please go ahead.

OK, two questions. One, any more color on the marketing that you're talking about? And are there other channels that are working better for you than those in the past? I think in the middle of the year, there was probably some very good ROI out there to be had. Those, you know, with kind of a pullback in marketing from a lot of different verticals. I assume that the ROI has become a little bit more efficient. back to pre-COVID norms, but just talk about what you're seeing in terms of ROI and in channels. And then one other question related to marketing, and that is the lapsed customers, you know, customers that were on the GoDaddy platform in the past. Have you had much success during this kind of time of what must be really elevated demand for digital presence solutions? Have you had success being able to go back to some of those lapsed customers and getting them to re-engage with GoDaddy? Thank you.

Thank you, Mark. Regarding the first part of your question on the marketing costs and the return we're seeing, you know, we continue to see strength on the brand side as we have historically core metrics like aided, unaided brand awareness consideration, you know, something we measure, which is, you know, for people like me, we continue to see sort of good performance and numbers heading in the right direction. Our performance marketing, you know, continues to show strength as well. You're right, you know, there were some differences in the quarter and, you know, cost per impressions have gone up a bit, but we're still seeing good cost per impression for the business as a whole. And the overall result, you know, as we mentioned, it has been amazing. We've had a super valuable cohort. It's the biggest cohort in the company's history, which is the third quarter cohort. And it's not just because, you know, we're growing every quarter or every year. This cohort is 30% sort of more valuable than other cohorts. It's really, really a big increase in what we're seeing. In terms of the lapsed customers, as we talked about, a lot of our customers stay with us even after their ventures go away. So some of that happens within our system already. It's not new, but I'm not aware of anything special in terms of that changing during COVID, but I'll turn it to Ray to see if there's something he wants to mention about that.

Yeah, Mark, let me put a little finer point on that. The growth in new purchases from the existing base is up year over year relative to the trend before COVID. Not as high as we're seeing certainly in the new, new customers, but still solid growth year over year. So definitely demand spiked as well in the existing base.

Okay. Thank you very much.

Our next question comes from the line of Mark Zagotowicz from Rosenblatt Securities. Mark, please go ahead. Mark, please unmute your line.

Sorry about that. A couple of questions on W plus M. And I got on the call just a little late. So I apologize if this question was also already asked. But just on the freemium side of things, I was curious what the read is initially on conversion and what sort of the dynamics that you're seeing. I know it's been, I guess, a couple of quarters now. Just sort of your thoughts on how that model has played out and And then the second one is just in terms of trajectory, revenue trajectory of W plus M over the next 12 months. Is there a greater pricing component in the, you know, I guess pricing unit mix equation? And is that sort of required as you think about your comps that you have? Obviously, we'll be heading up against the summer comps, if you will. Is there necessarily a greater pricing mix necessary? Appreciate that. Thanks.

Thanks, Mark. On the freemium piece, yes, we're a couple of quarters in and It's given us the confidence or the experiment has given us the confidence to continue to roll out freemium. It's still early to talk about specific metrics on those cohorts. But generally, we're happy with the experiment. This is the path forward for us. And we want more and more and more customers to be using our freemium products. And we will get better and better and better at converting them. over time. You know, the more feature set that we're including in the freemium product, sort of the more usage we see, you know, we'll be able to optimize a number of things over time. In terms of pricing and, you know, I don't think we can comment much in terms of what pricing actions might be there in the, you know, going into next year or what we need to do, but I'll turn it to Ray to see if there's some commentary that he wants to include here.

Yeah, Mark, I think if you look at the disclosures we made this quarter around those products, there's a mix of both volume, unit growth, as well as positive mix. The percentage of customers coming in at the higher tiers has been favorable since COVID hit. So that's helping as well. But yeah, no comments, specific comments around what that will look like in the next 12 months.

Okay, great. Thanks, guys.

Our next question comes from the line of Deepak Mathavanan from Barclays. Deepak, please go ahead.

Hey, guys. Can you hear me?

Yes, we can.

Great. Two questions. So first on the e-commerce side, you've obviously improved the product pretty nicely, added a lot of feature set and also have done a lot of integrations. When should we expect monetization initiatives, particularly in areas like payment, shipping, potentially partnerships on fulfillment and sourcing and a lot of other areas where some of your peers generate nice revenues? And then the second question is, you know, a little bit related to the customer cohorts. Given the big renewal base, it's somewhat harder for us to parse out, but can you provide some color on the quality of our customers that you have seen over the last, you know, three, four months in the more recent cohorts? How much is the R book higher compared to your typical customer? You know, what's the term like and what are the additional products that they are buying? Thanks.

Yeah, maybe I'll take the first and Ray can take the second. On the e-commerce side, you know, websites plus marketing is growing amazingly well by itself. And the commerce tier is growing much faster than websites plus marketing overall. So, you know, Yes, we've improved the product, we continue to invest in it, and we're seeing good results there, good demand from customers there. In terms of monetization options, Deepak, the focus for us right now is to get to scale, right? We have a great offering by making it easier for customers to use, by getting them premium tiers, by inserting more and more capabilities for them, by increasing usage like MAL, increasing the use of certain features. We are creating that surplus for the customer. And definitely, you know, the areas that you talked about continue to be future opportunities for us, but it's an order of operations. You know, first we want to get the scale and we share the GMV numbers with you. And then we want to look at the future options of monetization. And then I'll turn it to Ray for the second question.

Yeah, obviously we talked about the size of the cohorts that we've seen over the last couple of quarters being historically largest we've seen. As far as performance wise, you know, still really early to be able to tell how they're going to perform over the longer period. We flashed up, you know, a cohort we picked up in the great recession in 2008. And you can see the long-term performance on that turned out to be, you know, right in line with other cohorts. So I have no reason to suspect these cohorts are going to perform any differently, but we'll see over time. One thing I would point out, is in these cohorts post-COVID, we are seeing a heavier mix of attachment for websites plus marketing and managed WordPress.

Great. Thanks, Ray. Thanks, Aman.

Our next question comes from a line of Brent Braceland from Piper Sandler. Brent, please go ahead.

Good afternoon, and thanks for taking the question here. I had two, if you could. Certainly appreciate the record customer growth you're seeing, but if I look at international in particular, it's the highest growth rate we've seen in a year, two quarters of accelerating international growth. Could you just provide a little more color on, as you think about this record, really strong customer growth, how much of it is coming from international and maybe what countries you're seeing adoption drive this acceleration?

Yeah, Brent, it's broad-based, right? We started increasing the spend on marketing when we saw demand spike back in May, June timeframe. And that was pretty evenly split domestic and international. So the incremental spend is going towards both of those and obviously seeing some nice improvement in trajectory there. Nothing specific to any one geo. It's strong around the world.

Okay, that's super helpful. And then just one quick follow up as we think about kind of ARR. I think you talked about that $350 million ARR business growing. 40% year over year. How should we think about that growth profile on an organic basis? I assume there's some acquisition kind of revenue in there. So as you just think about ARR kind of organic growth potential, how should we kind of think about that go forward?

Guys, vast majority of that's organic, right? Those acquisitions were both small on an ARR basis, less than 5%.

Okay, great. Super encouraging. Thank you.

Our next question comes from the line of Navid Khan from Truist. Navid, please go ahead. I think Navid, we're going to have to skip you for a second. Our next question comes to the line of Chris Kuntarich. Chris, please go ahead with your question from Deutsche Bank of Colleges.

Hi, can you hear me?

Yes, we can.

Great. Maybe just on one of your milestones, you guys talked about business apps customers now over three million. So that's roughly, give or take, mid-teens percentage of your total customers. I think back in 2015, you had talked about roughly a third of your customers were buying hosting. So maybe two questions around that. First being, is a third of customers hosting? Purchasing hosting from you guys still the right way to think about it. And then second on business apps, how would you think about the opportunity to kind of close that penetration of your customers to more maybe in line with where hosting penetration is with your customers? Thanks.

Yeah, I think, Chris, we continue to see great growth with business apps. And we're able to attach that product along with domains. We're able to have customers reach us. And we're offering sort of best-in-class service for them, offering for them, both in terms of tool set and in terms of support. It's hard for me to talk about how the percentages may line up over the next few years. But generally speaking, We feel we have a great product. We feel that customers are very appreciative to have it. We see really good responses in terms of NPS from customers on this product set. So our intention is to continue to invest into it and make it easier and easier for customers to use. You know, we've had a couple of sort of innovative ways of being able to support customers so that customers can get themselves set up with email in a really, really simple way. And then I don't know, Ray, if there's anything else. Some of the other comparisons, I don't know, Chris, that you can sort of – they're kind of apples and oranges in my mind, but, Ray, I don't know what you'd add.

Yeah, Chris, the only thing I might put on top of that is that our focus, both from a product perspective and go-to-market right now, is only software products, right? Websites plus marketing and managed WordPress and then all of the marketing tools that go in with that. marketing commerce tool. So less focused on hosting, whereas, you know, we may have quoted that years ago. We now have more prominent software products that we're pushing on the go to market.

Got it. Appreciate the color.

Our next question comes from the line of Drew Glasser from JP Morgan. Drew, please go ahead.

Hey, this is Drew on First Sterling. So another question on the hosting area. So given the positive results in hosting and presence, do you think that you guys have hit the bottom in that segment and could we see improved growth in that segment going forward?

Yeah, Drew, it's Ray. Obviously, we saw nice improvement, a lot of that being driven off the back of the growth in our software products there. Still seeing headwinds and will until we lap the restructuring actions we took in June. But, you know, I think all clear as far as, you know, the pressure we're seeing there.

Okay, got it. And then secondly, so we're seeing a surge in new business applications according to some government data. Are you guys seeing that benefit your business at all? Or could that start benefiting it in coming quarters?

Yeah, I think the fact that we had a record organic net customer ad this quarter in the company's history tells you a lot. So we are seeing a demand.

Got it. Thank you.

Our next question comes to the line of Navid Khan from Truist. Navid, please go ahead. I think we don't have audio from Navid, so apologies. Everyone, thank you so much for joining our call today. And I'll turn it back over to Aman.

Thank you, Christy. You know, I'll just say a huge thank you to all GoDaddy employees all over the world for a strong quarter. And we're looking forward to the next quarter. Thank you very much.