GoDaddy Inc.

Welcome to GoDaddy's third quarter 2024 earnings call. Thank you for joining us. I'm Christy Masoner, VP of Investor Relations, and with me today are Aman Bhutani, Chief Executive Officer, and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will 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 measures and other operating and business metrics. 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 site at investors.go.id.net. or in today's earnings release on our Form 8-K, furnished with the SEC. Growth rates represent year-over-year comparisons, unless otherwise noted. The matters we'll be discussing today include forward-looking statements, such as those related to future financial results, and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, October 30, 2024, and except to the extent required by law, we undertake no obligation to update these statements because of new information or future events. With that, I'm pleased to introduce Aman.

Good afternoon and thank you all for joining us today. At GoDaddy, our mission is to empower everyday entrepreneurs and make opportunity more inclusive for all. Our strategy is relentlessly focused on creating customer value and transforming it to shareholder value through better conversion, attach, and retention. This is the driving force behind our profitable growth model, propelling us towards our North Star of maximizing free cash flow over the long term. Our strong Q3 results demonstrate our effective execution of this strategy, delivering both innovation and operational efficiency. We drove meaningful growth in free cash flow, increasing 29% year over year, and application and commerce bookings were up 20%, and normalized EBITDA margin expanded by over 400 basis points. We are excited to share updates on our growth and margin initiatives driving success in 2024. Pricing and bundling, seamless experience, commerce, and cost optimization are all ahead of schedule, driving the strong results mentioned. The enthusiasm for GoDaddy Aero continues to vibrate within our teams, and along with an update today, we are looking forward to more live demos at our investor dinner in early December. Pricing and bundling continues to deliver solid results, with productivity-focused efforts remaining a key contributor to the 20% application and commerce bookings growth this quarter. As we have said before, we view the pricing and bundling initiative as a multi-year journey that leverages our software platform's vast data and machine learning capabilities allowing us to bundle solutions in a way that offers greater value to customers with pricing aligned to the value delivered. While our efforts this year have been concentrated on productivity solutions, we will expand the initiative across more of our product suite, extending this initiative beyond the application and commerce segment. Putting a finer point on this, this means the financial impact of pricing and bundling can favorably drive growth in both ANC and core platform segments starting in Q4. Our seamless experience initiative exceeded expectations as we continue to remove friction in the customer experience and improve purchase, onboarding, and renewal paths. Given our scale, even modest improvements in conversion and renewal can yield meaningful results. In Managed WordPress, we added security enhancements to all new domains attached to the platform, as well as expanded AI-powered features, making it easier for customers to build and manage their websites. Additionally, with the recent launch of the GoDaddy Digital Marketing Suite, we are giving customers an intuitive, all-in-one product to help grow and market their businesses, regardless of where their website is hosted. Features like these empower our customers to better acquire, engage, and expand their own customer base. For our commerce initiative, we continue to enhance our offering by introducing new AI-powered features that simplify operations for merchants. The two new SaaS plans we launched last quarter, Point of Sale Plus and Invoicing Plus, have had positive adoption trends since being fully rolled out. We have set aggressive attached targets, and the team is making progress against them. Finally, within our cost optimization initiative, we augmented care interactions in 20 international markets with our new generative AI-powered conversational bot. providing our customers with better instant self-service access to solutions for common issues. We found that use of this technology led to double digit improvement in containment rates, representing a savings of over 16 million incremental contact minutes without sacrificing customer satisfaction. We are excited with the progress on the conversational bot and along with Gabby, we expect these to continue to drive leverage in care while delivering a better experience globally. And Aero is starting to provide a magical experience to customers that we aspire to provide across every interaction. It is a compelling proof point to our multiple year journey to successfully leverage our software platform and unleash the combined power of our infrastructure, large scale data, experimentation, AI, and machine learning capabilities. With the capabilities of Aero, we evolved the domain to represent so much more. It is now a gateway to a true business in a box experience, allowing our customers to go from idea to online in minutes. Our teams are moving at a fast pace. Even before celebrating the one-year anniversary of the initial customer testing for Aero, it was available in over 180 countries globally. Nearly 3 million customers have discovered Aero, with over half of them engaging with the experience. We are pleased with the momentum in discovery and engagement, and just as exciting are the proof points we are driving in Aero monetization. With many months of data, we can clearly see that the largest engagement winner is website building. Over half of engaged users published a coming soon page, which is a customizable one page website. Customers engaged with Aero are quickly becoming the largest funnel for websites plus marketing, with over 40% of websites plus marketing paid subscriptions in Q3 originating with the Aero experience. Our goals with Aero are about discovery, engagement, and monetization. And with these large discovery and engagement numbers and multiple paths to monetization, Aero is off to a great start. And there is so much more we can do. Given the positive traction, we are eager to expand the Aero experience across all on-ramps at GoDaddy. And we plan to increase investment in marketing initiatives to support this broader launch. So far, the customer exposed to Arrow starts with a domain purchase. And in the next few weeks, we will start rolling out Arrow to customers that start with a website purchase. Just as websites have become the highest attached product for domains on Arrow, we expect to drive attach with other products when every website customer starts with an Arrow experience. This underscores our commitment to rapidly scaling products enabled by Arrow as it continues to transform the customer experience and drive new avenues of growth. We look forward to showing you more during our upcoming investor dinner event on December 3rd. We plan to showcase paid tiers for Aero with premium offerings like advanced logos and imagery, as well as AI-powered marketing tools to help our customers grow their businesses. Equally exciting, we will highlight our conversational experience to building and maintaining WordPress sites, which reimagines harnessing the power of WordPress through a simplified, intuitive interface. We will also demo our site optimizer tool, which can inspect any website and provide actionable recommendations to improve performance with just a click. While these products themselves will be brand new, they represent our continued focus on leveraging AI and machine learning and our unique scale and data to deliver magical, seamless experiences for our customers. We are thrilled to give you a first look at these innovations that will drive our growth and success in the future. In closing, we remain steadfastly focused on executing our key growth initiatives. I am delighted with the speed of execution and our relentless commitment to help our customers thrive. The GoDaddy team remains dedicated to propel profitable growth and create enduring shareholder value. With that, here's Mark.

Thanks, Aman. We delivered strong Q3 results, demonstrating our disciplined execution of the strategy we shared at our recent Investor Day. Our focus on building increasing customer lifetime value through developing and delivering seamless technology that drives conversion, attach, and retention is demonstrated in our financial results. In the third quarter, we drove sustained double-digit ANC revenue growth, increasing 16%, as well as impressive normalized EBITDA margin expansion to 32%. We made progress toward our North Star. growing free cash flow 29% to $363 million. In addition, we continued to execute our disciplined capital allocation strategy, which focused on share buybacks, reducing our fully diluted shares outstanding to $144 million. Total revenue grew to $1.15 billion. up 7% on a reported and constant currency basis. For our high-margin ANC segment, we drove 20% growth in bookings and 16% growth in revenue to $423 million, in line with our guided range on the strong performance of the growth initiatives Aman spoke about earlier. The segment EBITDA margin for ANC improved to 46% on the strength of our high gross margin proprietary solutions, partially offset by the strong performance and lower gross margin profiles of our commerce offerings and third-party solutions. ANC's segment EBITDA was also boosted by significant leverage gains across all operating expenses. Our proactive efforts to simplify our infrastructure and recruit global talent were the main driving factors behind this strength. In addition, ARR for applications and commerce grew 15% to $1.6 billion. We delivered $725 million in revenue for our core platform segment, representing growth in revenue and bookings of 3% in line with our guided range. Performance this quarter reflected the strength in primary domains, partially offset by hosting divestitures and end-of-life migrations. Segment EBITDA margin for the core platform grew to 33%, and ARR for our core platform segment grew 4% to $2.4 billion. ARPU grew 8% to $215 on a trailing 12-month basis, while our customer count declined slightly to $20.7 million. With the previously mentioned divestiture and migration efforts behind us, we expect a return to customer growth in 2025. Currently, our consolidated customer retention rate remains at 85%. And over 50% of our customers have two or more paid products with us. Moving to profitability. We drove expansion in normalized EBITDA in the third quarter, growing 24% to $367 million and delivering an expanded margin of 32%, up over 400 basis points. This was driven by the gross margin tailwind noted above, coupled with operational discipline that drove leverage in our P&L. The front-loaded benefits of our 2023 restructuring, infrastructure simplification, and global talent recruitment are evident, and we are pleased with these accomplishments. As we look forward, we remain on track to deliver our investor day targets of approximately 33% by 2026. Additionally, as we look to the upcoming quarters, we expect to increase investment in marketing to support our broader launch of our Arrow-enabled solutions to showcase our top-rated AI website builder and capture customer demand. On bookings, we delivered $1.2 billion in the third quarter, representing 9% growth on both a reported and a constant currency basis. As a reminder, bookings primarily represents the cash collected during the period. Subscription bookings grew two points ahead of subscription revenue. Unlevered free cash flow for the quarter grew 25% to $399 million, and free cash flow grew 29% to $363 million. Capital expenditures were down approximately 46% because of data center divestitures. Through October 28th, we repurchased 5.2 million shares year-to-date, totaling $668 million. We repurchased 39.4 million shares for $3.2 billion under our current authorizations, and we have $767 million remaining. We drove a 23% reduction in gross shares outstanding since January 2022, three points ahead of our three-year targeted reduction of 20%. At the quarter end, 144 million fully diluted shares remain outstanding. On our balance sheet, we finished Q3 with $767 million in cash and total liquidity of $1.8 billion. Net debt was $3.1 billion, representing a net leverage of two times on a trailing 12-month basis. Pivoting to our outlook... We are raising the full-year revenue guide to $4.545 to $4.565 billion, representing growth of approximately 7% at the midpoint of our range. For the fourth quarter, we are targeting revenue between $1.165 and $1.185 billion. also representing growth of approximately 7% at the midpoint. In applications and commerce, we expect mid-teens revenue growth for Q4 and the full year. In core platform, we expect low single-digit revenue growth in the fourth quarter and the full year. As our track record demonstrates, we are committed to maintaining our operational discipline, driving further operational leverage in our model, and expanding margins. Including the additional marketing investment we expect to make in the fourth quarter, we remain on course to deliver a 31% normalized EBITDA margin. Given our year-to-date performance, we are also raising our full-year normalized EBITDA expectation to 30%. Keeping in mind our nearly one-to-one normalized EBITDA to free cash flow conversion ratio, we are also raising our unlevered free cash flow target to $1.475 billion plus and free cash flow to $1.325 billion plus for the full year. Our disciplined capital allocation approach remains unchanged, and we will evaluate all opportunities for shareholder return according to our rigorous and returns-based framework. We are committed to the path we outlined at our investor day, executing our strategy to deliver both durable top line growth and expanded profitability as we drive toward our North Star. Our robust cash generation, strong balance sheet and capital allocation framework underpin our investment thesis and power our ability to create enduring value for our shareholders. We are pleased with our progress towards our investor day target of $4.5 billion plus in cumulative free cash flow generation, supported by 6% to 8% annual revenue growth and expansion of our normalized EBITDA margin to 33% by 2026. Lastly, we look forward to welcoming you to our annual investor dinner on December 3rd in our new Tempe, Arizona headquarters.

I will now turn the call over to our Vice President and Head of Investor Relations, Christy Masoner, to open the call for your questions. Go ahead. Hey, thanks. Can you hear me?

Hey, great. Thanks. Hey, I want to ask two questions about the applications and commerce segment. The first one is on bookings growth. Yeah, I realize you don't guide to that metric, but just wondering if you could give us any thoughts on how that could track in the fourth quarter this year and some of the puts and takes we should be considering for bookings growth as we go through the rest of the year. And then second, this is your third straight quarter now of applications in commerce, bookings growth 20% or higher. And so I'm wondering if you could remind us of the relationship between that metric and forward revenue growth for that segment and some of the puts and takes that influence the conversion there. And specifically, if I go back to the investor day, you talked about this segment being a low to mid-teens type of revenue grower. But just given the bookings momentums that you've seen year to date, should we be thinking about a higher level of growth in the near term for that segment? It would be great to get any thoughts on those topics. And I'll leave it there. Thanks.

Hey, thanks, Vic. And, you know, a couple things, right? One, yes, bookings acceleration can be a tailwind for us in revenue. So that is a factual statement. Things to consider when we're really looking at the difference between the two is the timing. You know, especially with our ANC, we have multiple different timing depending on the product mix within that group. For example, we have transactional and commerce. We have, you know, monthly terms. We have annual terms. We have multi-year terms. So you really have to look at it on a broad spectrum of what products are being sold, what the mix is. And, yes, it will help be a tailwind for us on revenue in general. You know, we're really excited about the momentum. You know, obviously we'll talk a little bit more when we get to the Q4 earnings goal about 2025. But, you know, we're comfortable with the 6% to 8% growth. We talked about it over the three years. We do think for the year, overall bookings will outpace revenue by about two points. And that is obviously being pushed a lot by the ANC. Okay, great. Thank you. Thanks, Zach.

Our next question comes from the line of Trevor Young from Barclays. Trevor, please go ahead.

Great. Thanks. First, just on the pricing and bundling going forward, I think you made comments that it's an opportunity near-term and core platform. Can you expand upon that a little bit? Should we assume that that's going to happen in some of the bigger line items such as domains? And then second question, aftermarket growth slowed quite a bit in 3Q, kind of flattish year-on-year versus double digits earlier in the year. Was that consistent with your expectations, and was there anything kind of one time there? I know it's very transactional in nature, so tough to predict, but just any color on what's going on in aftermarket would be helpful.

Thanks, Trevor. I can take the pricing and bundling approach. You know, as we've talked about, pricing and bundling is about, you know, finding the right cohorts of customers where we can provide the right value to customers and then price along with that value. And the way we do this is that we experiment at different price points to find the price elasticity curve. And then what that curve helps us do is find the right cohorts where we can sort of balance attrition for customers, right? Or let's say retention of customers with the pricing opportunity in front of us. And that's a great balance, right? At the company, we want to drive as much growth as we can while maintaining our higher customer retention rates. So for pricing and bundling, that approach of using machine learning, using experimentation, using the scale of our data and our competitive advantages there, we can direct that way of working across our product suite. And, and, cohorts within that product suite. So what I'm really talking about here is, you know, that we have identified other cohorts of customers that we will be applying this approach to. And some of those are going to have products that sit in the core platform, which is now going to take sort of the benefit of pricing and bundling across both the segments.

And, Trevor, on the aftermarket, yes, you know, just a reminder, it's a volatile business. We think that over time it will be a low single-digit dollar. And we always talk about there can be volatility from quarter to quarter. This quarter it was down slightly, nothing to call out in and of itself. We saw some pressure on valuations at the lower level. The demand seemed to continue. And, again, we don't control the pricing on the aftermarket. It's a buyer and a seller agreeing to a pricing. So, again, thesis still holds. We believe it'll be a low single-digit grow over time, and we'll see a little bit of variability in a quarter to quarter, and we'll just call it out.

Great. Thank you both.

Thanks, Trevor. Thanks.

Our next question comes from the line of Ken Wong from Oppenheimer. Ken, please go ahead.

Can you guys hear me okay? Okay, perfect. I just wanted to just touch on an earlier statement that you made in terms of resuming customer acquisition in 2025. Was that just generally meant as a sort of as an anniversary to divestitures or should we assume a heavier pace of investments in 25 to kind of pursue a more attractive growth opportunity?

Yeah. So, you know, the first part of it is, yes, it was just a call out that we are lapping the divestitures, the integrations and the end of lives we've talked about previously. And as we start to lap them throughout this year, you know, net customer ads will have that headwind will go away. And, you know, Ahmad, if you want to comment on the marketing, what we talked about.

Yeah, you know, look, we're super excited, Ken, about the product portfolio we have in play right now brought together by Arrow. You know, just an almost magical experience for our customers. We've got the product rolled out. You know, we've always had sort of very good guardrails for our marketing spend. But given the product offering that we have, there's an opportunity for us to spend up in marketing. And we do expect to get more customers as a result of that. And, you know, like Mark said, there is a normalization of the divestitures and, you know, some of the actions we've taken. It also includes some actions that we took with viral offers that we have out there. And we're going to lapse on that too.

Got it. And then maybe a quick follow-up on a similar question to Vikram. ANC, ARR accelerated on a tougher comp. Is that something we could continue to see considering the pace of ANC bookings, you know, at that 20% level? Yeah.

Yeah, so just high level, you know, obviously as we go into Q4 and into 2025, the strength of ANC will get harder to compare to. So on a percentage basis, you know, we like the momentum overall. That will continue. But obviously the percentage comps get a little harder as we go on into next year.

And just to confirm, you know, I think you have the sort of, ANC comparatives from last year for Q3 and Q4, and you can see the sort of step up in Q4 comps that happens.

Perfect. Thank you, guys. Thank you.

Our next question comes from the line of Igal Aronian from Citi. Igal, please go ahead.

Hey, guys. Good afternoon. Great to see some of the early starting points with Arrow and Monty called out some of these things around the engagement that we're seeing. Last quarter, you talked about starting to put in some paywalls, testing around that. I want to see how that's progressing and then maybe kind of connecting the dots with the engagement and the expectations around moving in into the starting point of the website piece versus the domain piece? And are you starting to see real kind of financial results, presumably if, what was it, 40% of websites with marketing subscriptions are originating with Arrow? That means yes, but maybe just help us understand that a little bit better.

Yeah, thanks, Gaurav. So, you know, the progress with Arrow goes on a timeline of discovery, engagement, and monetization. And discovery is about getting Arrow in front of as many customers as possible and getting them to just discover that GoDaddy has a breadth of products available to them. The engagement piece is about getting them to engage in some of those products. And you'll remember that we call those arrow cards, getting customers to click on them, engage with them, set something up. And we're seeing really good traction on discovery and engagement. And what we did over the last quarter or two is that we started to put up paywalls where along with that engagement, if for example, the customer got a coming soon page and wanted and was able to customize it a little bit, if they wanted to do more, a paywall would appear and say, you need to buy subscription of websites plus marketing. Now it is possible that that customer would have bought it anyway, two months, three months down the line, and we would have gotten that attached. But what Aero offers is the ability for us to paywall right there, get the customer to make that decision. And that paywall is actually connected to the 40% that I talked about today. And what that is about is that Aero is becoming a bigger and bigger on-ramp for our website products. And today, we have two in Aero. We have a coming soon page that's doing really well. And we have websites plus marketing subscription. And as Aero becomes a bigger on-ramp, yes, of course, we're happy to see that monetization happens. But what that opens up in the future is paywalls and opportunity to sell other products. Because we do see in the customer behavior that customers have a need for the other offerings that we have. It's just that today they don't discover those offerings, they don't engage with those offerings, and they definitely don't see a monetization for it. But Aero is going to let us do that, which is follow the customer as they have those subsequent needs with the paywalls in front of them. So this website paywall story is a very good story. It's a new – It's, of course, an early story, and it's the first big one for Arrow. But we have similar work in logos. We have similar work in images. These are things we're going to demo at the investor dinner. We have some work happening with pay links that come with Arrow and a couple of the others as well.

Okay, great. And maybe one more on the bundling initiatives. Still, I think, if I'm understanding correctly, still majority focused on the productivity suite. You called out a few specific products in the past quarters. Maybe if you could update us on where you are within productivity and could we expect to see that come out with commerce in the coming quarter or two? Thank you, guys.

Yeah, you know, our pricing and bundling initiative, the folks working on it really have the ability to test across various customer cohorts. And what they're looking for are the cohorts where we can generate the best results fastest. And the best result here means Creating that customer value and then being able to monetize that value as well. So, you know, when I look across our products, you know, we have other products that are much larger in terms of the base of customers. So we think that those likely are going to offer some of the better opportunities. But we'll keep you informed, just like we did with productivity. I think you'll remember last year, we did apply this thinking process. multiple products and then we said, you know what, you're going to see stronger or a large chunk of the return come from productivity because we're going to zone in on that because that's where we see the opportunity. Similarly, as we go over the next few quarters, we'll sort of guide you better on where we're seeing that return But our testing this year, as we plan for next year, is going well. And one of the things that we have shared today is that we see ourselves going across customer cohorts that now will be in ANC and in core. So you'll likely see a little bit different behavior going into next year than you did this year.

Got it. Thank you so much.

Thank you.

Our next question comes from the line of Arjun Bhatia from William Blair. Arjun, please go ahead.

Hi, everyone. I'm Willow on for Arjun Bhatia. Thanks for taking our question. So just wanted to ask a macro question. Last year, you called out you're seeing stability in your base. Can you comment if you're seeing any changes here? And then also comment on any impact to net new as well, please?

Yeah, you know, overall on the macro, we track the metrics I think we've talked about before. And sort of if I look at my dashboard, you know, generally we see some good, but we're keeping a close eye on things, especially with elections in the U.S. coming up. But broadly speaking, what I would say is when we think about our customer base, and, you know, Mark always likes to talk about our higher tension rates, and I'm sure he'll jump in with that. We're absolutely proud of that. But when we look at traffic coming in the door, we continue to see good gross ad, we continue to see good traffic coming to the site. And in pockets, and those pockets can be geographic, those pockets can be, you know, sort of different customer areas. segments in pockets where we do see, you know, some sort of weakness, that's more than made up by how we've improved conversion, how we've improved pricing, all the sort of mechanics that we're applying within our seamless experience initiative. So I feel, you know, if there are a few, those are more than overcome. But broadly speaking, we continue to get good traffic, continue to get good gross ads, and continue to maintain our higher retention rate for customers at 85%.

Yeah, and just to add, you know, when you take out the divestitures, when you take out, you know, the decisions we made around virals and you look at the strong top of the funnel, what we are seeing is customers coming in with intent. And how are we seeing it? Well, our ARPU is increasing. Our ARPU is being driven by higher average order sizes from our customers when they initiate with us at the beginning. We see our customers attaching overall a faster rate than they did years ago. So when you really peel through the ins and the outs of the customers, take out the divestitures, turn off the virals, we're seeing very strong behavior with intent at the front of the funnel. Now, we are always subject things like valuations and aftermarket. And we've talked about that a lot, but the overall behavior of the funnel and the attachment is strong.

Gotcha. That's helpful. And one more follow-up, if I may. Can you comment on the bookings growth? So it looks like for A&C, it decelerated quarter to quarter. It seems like customer strength is good and pricing and ship are continuing. Does this take that acceleration so I can understand it better?

So I heard the deceleration part there, and I'll address that. Maybe if you had another part to that, let me know. It was cutting out. So on the deceleration, it's a little tougher comps. We went from Q2 comparison in 23 to Q3 comparison in 23. It was just more difficult comps. The momentum in and of itself is the same.

Okay. That answers my questions. Thanks.

All right. Thank you.

Our next question comes from the line of Elizabeth Porter from Morgan Stanley. Elizabeth, please go ahead.

Hey, Elizabeth.

Hi, thanks so much. I wanted to circle back on the pricing and bundling expanding into the core platform in Q4. When we think about the ANC segment, you guys saw a big improvement with this strategy and kind of growth there almost doubled. So how should we think about the benefit unfolding for the core segment where the bookings have been a little bit more muted in the 3% to 4% range? Is there anything we should consider about the opportunity and core being larger or smaller than what you saw with productivity?

Yeah, Elizabeth, it's a little too early to sort of be putting numbers on it, but we will definitely talk more about it in the next quarter's call and from there. Generally speaking, our approach is the same. The way we're using the data, the way we're cohorting customers, the way we're testing the price elasticity curve, the way we're creating it, the way we sort of decide where to go on it, All of that methodology is similar, but it takes us really sort of getting into that customer cohort and a few weeks of executing that plan to really see what it's going to be. What we do see so far is that we are ready to start on it in Q4, but likely it'll take a quarter or more for us to get started. at that one rate going where we can talk about it with a little bit more data than we have today.

Yeah, and Elizabeth, nothing to change what we've put out there as guidance for Q4. We're talking about the initial steps of it, and then we'll talk about 2025 when we get to the fourth quarter earnings call.

Understood. Thanks. And then as a follow-up, I wanted to touch on the margin side. You referenced in the prepared remarks just increasing marketing initiatives to support the broader launch of Arrow. Is that the main factor driving some of the margin contraction to 31% in Q4 from 32% in Q3? Is there anything else to call out? And then what are some of the puts and takes kind of more broadly as we think into next year? What are some of the key levers that can offset increased marketing spend around ARL.

Yeah, thanks, Elizabeth. And just a couple high-level comments. In Q3, you know, we benefited from a favorable product mix. Generally, we think our gross margins are going to be around 64%, give or take 100 basis points. We saw a favorable mix within Q3. We saw, for example, the aftermarket was down about 1%, and that's a lower margin business for us. You know, as we see our higher margin growth, proprietary software be a better part of the mix. Our margins will lean towards the high side. If we see transactional, you know, having strength, we'll see that, you know, towards the lower side. So, again, there'll be product mix in there that'll determine or impact on the gross margin. We had seen some front-loaded benefits from some of the restructuring simplification efforts we had, global recruitment we talked about. into Q3. Those were front end loaded and we'll continue to see those. And then the rest is what we alluded to was the timing. We just had timing of expenses like marketing that we'll see start to pick up a little more in Q4. Still on target for the 31% we talked about, but some of that was just a timing of the expenses and how they're hitting.

Got it.

Thank you. Our next question comes from the line of Josh Beck from Raymond James. Josh, please go ahead.

Yeah, thank you so much for the question. I wanted to go back to some of the Arrow comments, realizing that you kind of had this discover, engage, monetize framework. So I think the discovery element of it was up maybe 3x quarter over quarter to 3 million. So is that – when we think about this marketing spend that Elizabeth just asked about, is that really – you know, the key metric that we should be thinking about in terms of it, you know, really ramping up in the year? And is there some type of, you know, maybe not specific goal, but, you know, could it reach a pretty sizable? Could it, you know, be half of your base? Just curious on how we should, you know, be considering that.

Thanks, Josh. Discovery is definitely an important metric because without the discovery metric, we can't feel confident that our customers are seeing the breadth of our products, both new and existing products. But if you had to sort of hone in on one metric and say, hey, which is the one that we really are focused on optimizing on? It's really the engagement metric that we want to keep very, very healthy, and it is very, very healthy. Because as we spend in marketing, discovery will definitely go up, but we don't want engagement as a percentage to drop down too much. We want customers engaged with this because we have data for 25 years, and we know from our own data and the data of other companies that the engaged customers enter the monetization phase in a much more favorable manner than non-engaged customers. right metrics like attached conversion do much, much better for engaged users than they do for non-engaged users. So that's, you know, if you will, that is the quality metric. That's the thing that makes sure that our efforts are valuable and are going to create more value in the future. You know, while I'm very happy about the multiple paths to monetization for Aero and, you know, we'll show you the paywalls and the teams are doing good stuff and, you know, the website paywall doing well and, you know, even sort of monetization on coming soon and other being great opportunities for us. I would say overall in our three-year plan at the investor day earlier this year, we purposefully put Aero outside of the three-year planning because we wanted to build a very large mode of discovery and engagement. because that very large mode of discovery and engagement will, we believe, generate sort of returns for years to come.

Super helpful. And then I also wanted to follow up on this stat around double-digit containment rate improvements, I think with these Gen AI bots, which I assume is something similar to a deflection rate. I just wanted to clarify that. And Could that be a much larger number over time? And at some point, could you see benefits with respect to the P&L? Just curious how we can think about maybe where that could head.

Yes, containment rate is like a deflection rate. You know, it really points to the sessions where a customer asked the question and the conversational bot was able to answer the customer's question in a satisfactory manner, and that didn't result in sort of a chat being forwarded to a human agent. So seeing that sort of double-digit percentage increase in content the bot being able to resolve the customer query or issue is a great first step. And look, of course, whether it's this or our guide assist bot, which we call Gabby, you know, these are relatively new technologies. They're off to a great start, but we see great momentum in those, you know, over the next two to three years. It's our sort of our ethos around this. And, you know, I've talked about this often, but in care, we want to provide a better experience at a lower cost. So, you know, our expectation is that care as a line item will continue to leverage and we will continue to provide a better and better and better experience for our customers. And one of the ways that we're doing that is by having better technology and care that makes our guides more successful, that makes our customers more successful, and, you know, while retaining some of the secret sauce of care that we have as a company. Really helpful.

Thanks, Amal.

Our next question comes from the line of Ella Smith on for Alexey Gogolov at JPMorgan. Ella, please go ahead.

Hi, Amon. Hi, Mark. Hi, Christy. I hope you're all doing well. So first I have yet another question on Arrow for you. So Amon, Arrow is clearly a powerful, open to all on-ramp for new customers and is clearly driving bookings. How are you balancing that with your ambitions to monetize the products and when might monetization begin?

Yeah, Ella, thanks for the question. Our first goal is to be the largest mode of discovery and engagement. We want to be able to spend against Aero and build a virtuous cycle, a flywheel, if you will, where customers hear about Aero, they come in, they discover the set of products we have, and they engage and buy into those products. That has a really good flywheel effect where it drives average order size up and it allows us to bid more in marketing, to bring more customers to our site. And that's a lovely flywheel that can build on itself. So that's the first thing that we're trying to build. And for us, the way to build it well is to focus on discovery and engagement and then monetization. In terms of monetization, absolutely super excited about it. Our teams are In fact, I would say ahead on some of the monetization experiments versus what we had originally designed, you know, it's great to see Arrow become a great on-ramp for websites plus marketing. We want it to become a great on-ramp for other products too, right? But it has to follow the discovery and engagement cycle because I would love to be able to sit here and give you numbers on discovery and engagement that are much larger than where we are today. And these numbers are pretty large and fantastic as is, but I think they can be much bigger.

Yeah, and I think when you think about our overall framework, you know, we're always trying to make sure we're heading towards our North Star that we talk about free cash flow. And that means balancing our investments with where we see the return and making sure we're doing it to drive LTV and shareholder value over the longer term without trying to push ourselves into a specific area too quickly that would basically jeopardize that over the long term.

That makes a lot of sense. Thank you both so much. And for my follow-up, we saw news the other day that you launched a reseller program. Can you shed some light on the strategic thinking around that program and how the economics will look like?

Yeah, you know, the reseller program is just about the maturity of our product seller. It's pretty simple from, you know, I would say natural progression of our product capabilities. You can imagine as our products, let's take the example of websites plus marketing where we did do a press release around APIs being available as an example. You know, you can think of websites as marketing. Not only is it, you know, fantastic website builder, it's sort of the number one in terms of producing the best content You know, if you build a website for marketing, it's going to build a very, very capable website for you that will perform very well in Google. But how do you sort of expand beyond the folks that are coming to you? And the natural extension is to be able to put people give some of those capabilities into partner systems. And the best way to do it is through APIs. But what we have as an advantage as a company is not only exposing those APIs for websites plus marketing, but be able to leaf in APIs that power other things that Aero can bring into the mix. So just like we're going out to customers directly and we're exposing them to Arrow and looking at discovery and engagement, the reseller program or the APIs is our way of trying to sort of work with partners and say, you know, let's see what we can do given our expanded capabilities, given our expanded tool set, where our product offering can show up natively in our partner experiences.

That makes a lot of sense. Thank you so much.

Thank you.

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

Hi, thank you. This is John for Brent Thill. Two questions. One, as you made the error available in over 180 countries, just wondering if you could talk about how the response has been different versus, let's say, the initial launch within the U.S., any sort of change, difference in behavior, attach. And then the second question is around the Normal EBITDA margin, obviously, that's been expanding faster than expected. And your goal is still 33% in 26. So it seems like it looks very likely you're going to overshoot that. Wondering if there are any factors of why that may not be, why we shouldn't be extrapolating from here. Thank you.

I can take the first one, and Mark, you can take the second one. So on the launch of Aero, John, the way we look at it is that we've got the U.S. market, which is obviously where we started, and our largest market, and we've shared some of the data with you on how well that is going. The next stage is the English-speaking markets. These are our bigger markets around the world. just what you would expect them to be like Canada, UK, Australia, right? And then we have sort of developed markets and I would say emerging markets. And it's too early to talk about sort of those emerging markets and how Aero is going to perform there. It's still relatively new as an offering. But in the broader English-speaking markets, we're actually taking the learnings from the U.S. and looking to apply them in all the other English-speaking markets. And, of course, you know, we expect it to perform maybe not exactly the same performance but at a similar level in those markets.

And then I'll just on the normalized EBITDA. We've talked about the three buckets that are a tailwind to get us to the 33% in 2026. We've talked about the acceleration of ANC being a big part of the picture. We've talked about the infrastructure simplification. We've also talked about the global talent pools. We're really happy on our accomplishments, especially around some of the front-loaded elements of this. If you remember, we took restructurings last year that, you know, are really showing up into our expansion of normalized EBITDA this year. You know, some of that was front-end loaded, so we'll start to see continued benefit in those three buckets to get to the 33%. We feel really comfortable with that. But, you know, we did see some of that front-loaded related to the restructure.

Thank you very much.

Our next question comes from the line of Chris Zhang from UBS. Chris, please go ahead.

Ah, there's a button to click. All right. Thanks for taking our question. So how do we think about how should we think about your investment needs in 2025 versus 2024? In addition to the market investments, can you maybe just rank order a couple of the areas you're focusing on next year? And then I have a follow up.

Well, you know, we'll – Chris, we'll talk about 2025 when we get to Q4 earnings. No doubt, we'll give some details of where we think, you know, things like our investments are going to be. But, you know, there are areas we talked about on this call. Marketing is one of them. We continue to see, you know, the ability to accelerate Arrow. We see the customer engagements and the behaviors around it. And then we also think about, you know, I always say there are two important things within – you know, our growth, which is innovation and, you know, owning the customer relationship. And those are about what we spend to innovate and meet our customers' needs and things like our care organization. We see great leverage across those lines, but we'll continue to invest in what the future is to drive the long-term value.

Yeah, maybe just to... Added a quick short summary is that our investor day framework is still intact, right? We're making great progress on it. We're working to maximize free cash flow and, you know, the components of it, 68% growth and 33% margin and 26, you know, those continue to sort of be the path.

All right. Sounds great. I appreciate the color. And I guess as it relates to marketing investment specifically, Maybe can you share with us what guardrails you're applying to determine the level of your spend or maybe just directionally how that differs from among the various product offerings in your ANC portfolio?

Yeah, you know, on the marketing spend, we've invested in sort of very good guardrails. driven by data and machine learning that gives us great telemetry on our marketing and spend and return on it. And our goal is to stay within our guidance range. What we're really building is the opportunity to drive more discovery for Arrow, drive more engagement with Arrow, and get some of those returns. and then be able to reinvest them back in. So it's really about sort of kickstarting that flywheel with a great product suite we have in place now.

Yeah. And our disciplined approach hasn't changed around this. It's about measuring the ROIs and making sure that we feel comfortable that where we invest, we will get that disciplined ROI we always talk about.

Right. That sounds great. Thank you for the color and I look forward to seeing your team in Arizona.

You too.

The next question comes from the line of Navit Khan from B. Riley. Navit, please go ahead.

Hi. Thanks a lot. So I got a couple of questions. One is... This 40% of paid W plus M subscribers originating through Arrow, that's pretty impressive. I'm just wondering how that share that comes through Arrow has kind of trended over the last three or four quarters since this Arrow has been kind of live. So that's one. And the second question I have is just around the on-ramps. So now that you're extending Arrow into the sort of website first kind of on-ramp, I'm trying to just kind of think about the relative size of the on-ramps for the business. How should I, you know, what should I be able to think about domains versus websites?

Yeah, the share for Euro over the last few months, not quarters, we don't have quarters of data, it's months, right?

Over the last few months has been increasing, but obviously accelerated by some of the paywall work, right? And it's going to take a couple of quarters to see how the paywall performs versus our regular cash.

The number jumping to 40% is a clear signal that customers prefer this app and are liking it. So that is a positive. In front of the size of the different on-ramps, ultimately what we're trying to do is bring all the on-ramps together with Aero. We're trying to take these things that today are different and make them very similar so that for the customer, in the future, it doesn't matter what product they bought, they actually end up in Aero.

Got it. So, yeah, I meant actually meant to say quarters, not months. Thanks. Thanks for correcting me. Where do you think this could land? You know, as you continue to kind of own the offering and improve it, you think it's it's not the 50 percent is. You know, high level thoughts there.

I think, you know, we're just starting on Aero still. We're not even a year in, right? We haven't celebrated the first year anniversary for Aero yet. So it's just very early. I think, you know, we have great aspirations for Aero and just looking forward to how far we can go. It's frankly too early for us to be stating what we think the percentage should be or can be. Great.

Thanks, Aman.

Our last question comes from the line of Clark Jeffries from Piper Sandler. Clark, please go ahead.

Hello. Thank you for taking the question. So, first, I wanted to ask about specifically a call-out in the prepared remarks about, you know, the 46% of EBITDA margin ANC being driven by the strength of high-growth margin proprietary solutions. I just wanted to ask, is that principally websites and marketing, or is there any other kind of driver in that bucket of proprietary solutions? Um, and then as a follow-up, you know, there is a pretty notable market event in the last quarter, a disagreement between a managed WordPress vendor and a, the largest contributor to WordPress. Aman, do you see that as largely irrelevant to the long-term progress of WordPress? Have you seen any kind of, um, conversation in your customers or partners that have reacted to that event. Any kind of thoughts on that would be really appreciated. Thank you.

Yeah, happy to take that. And Clark, you're generally thinking about it correctly in terms of the high margin products. You know, the proprietary system, the ones we build, and those that have higher margin, they tend to be the subscription products that are higher margin. And then, you know, the third-party products that we sell tend to be a little bit lower margin, right, versus the first step. Now, you know, if you sort of stack them together, of course, websites with marketing ranks very, very high in them. You know, most all of that work is done internally. And, you know, we're able to sort of put that product forward in a very, very competitive manner. In terms of the broader question about WordPress, as you're aware, WordPress is the largest content management system in the world. Over 40% of websites run on it. I'd give tremendous credit to everyone that's part of that immense success story. And we, as GoDaddy, we're the her top three or top five contributor to WordPress, depending on how you calculate contributions. There's a bunch of public data on it. So we are for the WordPress community. We are part of the WordPress community and we believe that WordPress is here to stay. Our focus really is to build magical experiences on top of WordPress. And, you know, I'm actually excited to show you conversational WordPress at our investor dinner, which takes the harnesses of the power and massive capability that WordPress has and allows our customers to do things with it without needing the technical expertise to do it. So those are the things that we're really interested in, is to take this massively capable platform and bring it to sort of empower our customers to sort of do amazing things with it.

Thank you very much.

Thank you, Clark.

I'll now turn the call over to Aman for closing remarks.

Just a quick mention. Thank you to all GoDaddy employees for another great quarter. And, you know, I appreciate how everyone has worked hard and looking forward to the next few quarters and years. Thank you.