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.