GoDaddy Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 16 speakers on the call.

Operator

Welcome to GoDaddy's Q3 2024 Earnings Call. Thank you for joining us. I'm Christi Messner, 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.

Operator

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. Godaddy.net or in today's earnings release on our Form 8 ks furnished with the SEC. Growth rates represent year over year comparisons unless otherwise noted.

Operator

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.

Speaker 1

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.

Speaker 1

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.

Speaker 1

As we have said before, we view the pricing and bundling initiative as a multiyear 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 A and C 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.

Speaker 1

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 2 new SaaS plans we launched last quarter, Point of Sale Plus and Invoicing Plus, have had positive adoption trends since being fully rolled out.

Speaker 1

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 16,000,000 incremental contact minutes without sacrificing customer satisfaction. We are excited with the progress on the conversational bot. And along with Gabi, we expect these to continue to drive leverage in care while delivering a better experience globally.

Speaker 1

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.

Speaker 1

Even before celebrating the 1 year anniversary of the initial customer testing for aero, it was available in over 180 countries globally. Nearly 3,000,000 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 Engage users published a Coming Soon page, which is a customizable 1 page website.

Speaker 1

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 Arrow experience. Our goals with Arrow 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 onramps at GoDaddy, and we plan to increase investment in marketing initiatives to support this broader launch.

Speaker 1

So far, the customer exposed to aero starts with a domain purchase, And in the next few weeks, we will start rolling out aero to customers that start with a website purchase. Just as websites have become the highest attached product for domains on aero, we expect to drive attach with other products when every website customer starts with an aero experience. This underscores our commitment to rapidly scaling products enabled by aero 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.

Speaker 1

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.

Speaker 1

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.

Speaker 2

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 Q3, we drove sustained double digit A and C 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 percent to $363,000,000 In addition, we continued to execute our disciplined capital allocation strategy, which focused on share buybacks, reducing our fully diluted shares outstanding to 144,000,000.

Speaker 2

Total revenue grew to $1,150,000,000 up 7% on a reported and constant currency basis. For our high margin A and C segment, we drove 20% growth in bookings and 16% growth in revenue to $423,000,000 in line with our guided range on the strong performance of the growth initiatives Aman spoke about earlier. The segment EBITDA margin for A and C 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 3rd party solutions. A and C segment EBITDA was also boosted by significant leverage gains across all operating expenses. Our proactive effort to simplify our infrastructure and recruit global talent were the main driving factors behind this strength.

Speaker 2

In addition, ARR for applications and commerce grew 15% to $1,600,000,000 We delivered $725,000,000 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 $2,400,000,000 ARPU grew 8 percent to $2.15 on a trailing 12 month basis, while our customer count declined slightly to $20,700,000 With the previously mentioned divestiture and migration efforts behind us, we expect to return to customer growth in 2025. Currently, our consolidated customer retention rate remains at 85%, and over 50% of our customers have 2 or more paid products with us. Moving to profitability.

Speaker 2

We drove expansion in normalized EBITDA in the Q3, growing 24% to $367,000,000 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 and 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.

Speaker 2

On bookings, we delivered $1,200,000,000 in the 3rd 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 2 points ahead of subscription revenue. Unlevered free cash flow for the quarter grew 25 percent to $399,000,000 and free cash flow grew 29% to $363,000,000 Capital expenditures were down approximately 46% because of data center divestitures. Through October 28, we repurchased 5,200,000 shares year to date totaling $668,000,000 We repurchased 39,400,000 shares for $3,200,000,000 under our current authorizations and we have $767,000,000 remaining.

Speaker 2

We drove a 23% reduction in gross shares outstanding since January 2022, 3 points ahead of our 3 year targeted reduction of 20%. At the quarter end, 144,000,000 fully diluted shares remain outstanding. On our balance sheet, we finished Q3 with $767,000,000 in cash and total liquidity of $1,800,000,000 Net debt was $3,100,000,000 representing a net leverage of 2 times on a trailing 12 month basis. Pivoting to our outlook, we are raising the full year revenue guide to $4,545,000,000 to $4,565,000,000 representing growth of approximately 7% at the midpoint of our range. For the Q4, we are targeting revenue between $1,165,000,000 $1,185,000,000 also representing growth of approximately 7% at the midpoint.

Speaker 2

In applications and commerce, we expect midteens revenue growth for Q4 and the full year. In core platform, we expect low single digit revenue growth in the Q4 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 Q4, 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%.

Speaker 2

Keeping in mind our nearly one to 1 normalized EBITDA to free cash flow conversion ratio, we are also raising our unlevered free cash flow target to $1,475,000,000 plus and free cash flow to $1,325,000,000 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 $4,500,000,000 plus in cumulative free cash flow generation, supported by 6% to 8% annual revenue growth and expansion of our normalized EBITDA margin 33% by 2026.

Speaker 2

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.

Speaker 3

Thanks Mark. Our first question comes from the line of Vikram Kesavopodla from Baird.

Speaker 4

Hey, thanks. Can you hear me?

Speaker 2

Yes. Hey, Vic.

Speaker 4

Hey, great. Thanks. Hey, I want to ask 2 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 Q4 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.

Speaker 4

And then second, this is your 3rd straight quarter now with applications and 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 momentum that you've seen year to date, should we be thinking about a higher level of growth in the near term for that segment? Would be great to get any thoughts on those topics, and I'll leave it there.

Speaker 4

Thanks.

Speaker 2

Hey. Thanks, Vic. And and, you know, a couple of things. Right? 1, yes, bookings acceleration can be a tailwind for us in revenue.

Speaker 2

So that is a factual statement. Things to consider when we're really looking at the difference between the two is the timing. With especially with our A and C, we have multiple different timing depending on the product mix within that group. For example, we have transactional and commerce, we have 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.

Speaker 2

And yes, it will help our be a tailwind for us on revenue in general. We're really excited about the momentum. Obviously, we'll talk a little bit more when we get to the Q4 earnings call about 2025. But we're comfortable with the 6% to 8% growth we talked about over the 3 years. We do think for the year, overall bookings will outpace revenue by about 2 points.

Speaker 2

And that is obviously being pushed a lot by the ANC.

Speaker 4

Okay, great. Thank you.

Speaker 2

Thanks, Zach.

Speaker 3

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

Speaker 5

Great. Thanks. First, just on the pricing and bundling going forward. I think you made comments that it's an opportunity near term in core platform. Can you expand upon that a little bit?

Speaker 5

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 what's going on in aftermarket would be helpful.

Speaker 1

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 course where we can sort of balance attrition or for customers, right.

Speaker 1

Or let's say retention of customers with the pricing opportunity in front of us. And that, and that's a great balance, right? At the company, we wanna drive as much growth as we can while maintaining our high 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 what we're really 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.

Speaker 1

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.

Speaker 2

And, Trevor, on the aftermarket, yes, just a reminder, it's a volatile business. We think it, over time, it'll be a low single digit dollar. We always talk about there could 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.

Speaker 2

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, with thesis still holds. We believe it will be a low single digit grower over time, and we'll see a little bit of variability quarter to quarter and we'll just call it out.

Speaker 5

Great. Thank you, both.

Speaker 1

Thanks, Kevin. Thanks.

Speaker 3

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

Speaker 6

Can you guys hear me okay?

Speaker 1

Yes. We can. Okay,

Speaker 6

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 sort of as you anniversary the divestitures or should we assume a heavier pace of investments in 2025 to kind of pursue a more attractive growth opportunity?

Speaker 2

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

Speaker 1

Yeah, look, we're super excited Ken about the product portfolio we have in play right now, brought together by Aero, 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.

Speaker 1

It also includes some actions that we took with viral offers that we have out there, and we're going to lap some of that

Speaker 6

too. Got it. And then maybe a quick follow-up on a similar question to Vikram. ANCARR accelerated on a tougher comp. Is that something we could continue to see considering the pace of A and C bookings at that 20% level?

Speaker 2

Yes. So just high level, obviously, as we go into Q4 and into 2025, the strength of A and C will get harder to compare to. So on a percentage basis, we like the momentum overall that will continue, but obviously the percentage comps get a little harder as we go on into next year.

Speaker 1

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

Speaker 6

Perfect. Thank you, guys.

Speaker 1

Thank you.

Speaker 3

Our next question comes from the line of Ygal Arounian from Citi. Ygal, please go ahead.

Speaker 7

Hey, guys. Good afternoon.

Speaker 2

Hey, Ygal.

Speaker 7

Great to see some of the early starting points with ARO. And Mani 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 wanted 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 at 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 website sales marketing subscriptions are originating with ARO?

Speaker 7

That means yes, but maybe just help us understand that a little bit better.

Speaker 1

Yes. Thanks, Yigal. So the progress with ARO 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.

Speaker 1

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 2 is that we started to put up paywalls where, along with that engagement, if, for example, a 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 and websites plus marketing. Now it is possible that that customer would have bought it anyway 2 months, 3 months down the line and we would have gotten that attached. But what Arrow offers is the ability for us to paywall right there, get the customer to make that decision.

Speaker 1

And that paywall is actually connected to the 40% that I talked about today. And what that is about is that eru is becoming a bigger and bigger on ramp for our website products. And today, you know, we're we we have 2 in Arrow. We have a coming soon. Pay that's doing really well.

Speaker 1

And we have websites plus marketing subscription. And and as Arrow 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.

Speaker 1

But Arrow is going to let us do that, which is follow the customers. They have those subsequent needs with the paywalls in front of them. So this this website payroll 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.

Speaker 1

These are things we're gonna demo at the investor dinner. We have some work happening with PayLinks that come with Arrow and a couple of the others as well.

Speaker 7

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?

Speaker 7

And could we expect to see that come out with commerce in the coming quarter or 2? Thank you, guys.

Speaker 1

Yes. 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, Igal, that are much larger in terms of the base of customers.

Speaker 1

So we think that those likely are gonna offer some of the better opportunities. But we'll we'll keep you informed just like we did with productivity. You know, I think you'll remember last year, we did apply this thinking to 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.

Speaker 1

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 4. So you'll likely see a little bit different behavior going into next year than you did this year.

Speaker 7

Got it. Thank you so much.

Speaker 1

Thank you.

Speaker 3

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

Speaker 8

Hi, everyone. I'm Willow on for Arjun Bhatia. Thanks for taking our questions. So just wanted to ask on macro questions. Last year, you called out you're seeing stability in your base.

Speaker 8

Can you comment if you're seeing any changes here? And then also comment on any impact to net new as well, please?

Speaker 1

Yeah. Overall on the macro, we track the metrics. I think we've talked about before. And sort of if I look at my dashboard, generally we see some good, but we're keeping a close eye on things, especially with elections in the US 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 attention base, and I'm sure he'll jump in with that.

Speaker 1

We were absolutely proud of that. But when we look at traffic coming in the door, we continue to see good gross adds. 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 segments in pockets where we do see, you know, some different 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.

Speaker 1

So I feel, if there are a few, those are more than overcome. But broadly speaking, we continue to get good traffic, continue to get good gross adds and continue to maintain our higher retention rate for customers at 85%.

Speaker 2

Yeah. And just to add, when you take out the divestitures, when you take out the decisions we made around virals and you look at the strong top of the funnel, what we are seeing is covered 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.

Speaker 2

We see our customers attaching overall at 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 to 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.

Speaker 8

Got you. That's helpful. And one more follow-up, if I may. Can you comment on, the bookings growth? So it looks like for A and C, it decelerated quarter to quarter.

Speaker 8

It seems like customer strength is good, and pricing and shipping are continuing. But just and take that acceleration so I can understand it better.

Speaker 2

So I heard the deceleration part there and I'll address that. And maybe if you can if you had another part to that, let me know. It was cutting out. So on the deceleration, it's simple tougher comps.

Speaker 1

We

Speaker 2

went from Q2 comparison in 'twenty three to Q3 comparison in 'twenty three. It was just the most difficult comps. The momentum in and of itself is the same.

Speaker 8

Okay. That answers my questions. Thanks.

Speaker 2

All right. Thank you.

Speaker 3

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

Speaker 2

Hey, Elizabeth.

Speaker 9

Hi. Thanks so much. I wanted to circle back on the pricing and bundling expanding into the core platform in Q4. And when we think about the A and C 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 this bookings have been a little bit more muted in the 3% to 4% range?

Speaker 9

Is there anything we should consider about the opportunity in core being larger or smaller than what you saw with productivity?

Speaker 1

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. You know, 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 q 4, but likely it'll take a quarter or more for us to get that run rate going where we can talk about it with a little bit more data than we have today.

Speaker 2

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 Q4 earnings call.

Speaker 9

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?

Speaker 9

Is there anything else to call out? And then what are some of the puts and takes set up more broadly as we think into next year? What are some of the key levers that can offset increased marketing spend around ARO?

Speaker 2

Yeah. Thanks, Elizabeth. And just a couple high level comments. In Q3, 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.

Speaker 2

We saw a favorable mix within Q3. We saw after for example, aftermarket was down about 1% and that's a lower margin business for us. As we see our higher margin proprietary software be a better part of the mix, our margins will lean towards the high side. If we see transactional having strength, we'll see that towards the lower side. So again, there'll be product mix in there that will determine or impact on the gross margin.

Speaker 2

We had seen some front loaded benefits from some of the restructuring, simplification efforts we had, global recruitment we talked about that hit 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 the timing of the expenses and how they're hitting.

Speaker 9

Got it. Thank you.

Speaker 3

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

Speaker 10

Yes. Thank you so much for the question. Wanted to go back to some of the Arrow comments realizing that you kind of had this discover, engage, monetize framework. So I think that this discovery element of it was up maybe 3x quarter over quarter to $3,000,000 So is that when we think about this marketing spend that Elizabeth just asked about, is that really the key metric that we should be thinking about in terms of it really ramping up in the year? And is there some type of maybe not specific goal, but could it reach a pretty sizable could it be half of your base?

Speaker 10

Just curious on how we should be considering that.

Speaker 1

Yes. 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, you know, we want to keep very, very healthy. And it is very, very healthy because as we spend in marketing, you know, discovery will definitely go up, but we don't want engagement as a percentage to drop down too much.

Speaker 1

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? Call 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. While I'm very happy about the multiple paths to monetization for ARO and we'll show you the paywalls and the teams are doing good stuff and the website paywall doing well and even sort of monetization on coming soon and other being great opportunities for us.

Speaker 1

I would say overall in our 3 year plan at the Investor Day earlier this year, we purposefully put Arrow outside of the 3 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.

Speaker 10

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, 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 and L? So just curious how we can think about maybe where that could end?

Speaker 1

Yes. Containment rate is like a deflection rate. 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 the bot being able to resolve the customer query or issues is a great first step.

Speaker 1

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 2 to 3 years. It's 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 is a line item.

Speaker 1

We'll 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 while retaining some of the secret sauce of care that we have as a company.

Speaker 10

Really helpful. Thanks a lot.

Speaker 3

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

Speaker 2

Hey, Ella.

Speaker 11

Hi, Aman. Hi, Mark. Hi, Christy. I hope you're all doing well. So first, I have yet another question on Arrow for you.

Speaker 11

So, Aman, Arrow is clearly a powerful open to all augment 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?

Speaker 1

Yeah. Ella, thanks for the question. We our first goal is to big the largest mode of discovery and engagement. We, you know, we want to be able to spend against Arrow and build a virtuous cycle of 5 role, if you will, where customers get, hear about Arrow, they come in, they discover the set of products we have, and they engage and buy into those products that that has a really good flywheel effect where, you know, it drives average order size up and it allows us to bid more in marketing to bring more customers to our site. Right.

Speaker 1

And that's that's a lovely flywheel that can build 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.

Speaker 1

You know, it's great to see her 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.

Speaker 2

Yeah. And I think when you think about our overall framework, 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.

Speaker 11

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

Speaker 1

Yeah. The reseller program is just about the maturity of our products. It's pretty simple from, 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 sites.

Speaker 1

If you build a website plus marketing, it's going to build a very, very capable website for you that will form 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 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 to access plus marketing, but be able to leaf in APIs that power other things that arrow can bring into the mix.

Speaker 1

Right? 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 toolset where our product offering can show native show up natively in our partner experiences.

Speaker 11

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

Speaker 1

Thank you.

Speaker 3

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

Speaker 12

Hi, thank you. This is John Bien for Brent Thill. Two questions. 1, as you made the error available in over 180 countries, just wondering if you could talk about what's been how the response has been different versus, let's say, the initial launch within the U. S, any sort of change difference in behavior attached?

Speaker 12

And then the second question is around the normalized EBITDA margin. Obviously, that's been expanding faster than expected. And your goal is still 33% in 2026. So it seems like that looks very likely going to overshoot that. Wondering if there are any factors of why that may not be, why we shouldn't be extrapolating from here?

Speaker 12

Thank you.

Speaker 1

Jan, maybe I can take the first one and Mark you can take the second. So on the launch of Aero, John, the way we look at it is that we've got the US 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.

Speaker 1

Just what you would expect them to be like Canada, UK, Australia. And then we have set of developed markets and I would say emerging markets. And it's too early to talk about sort of those emerging markets and how Arrow is going to perform there. It's still relatively new as an off rate. But in the broader English speaking markets, we're actually taking the learnings from the US and looking to apply them in all the other English speaking markets.

Speaker 1

And of course, you know, we expect it to perform maybe not exactly the same, but at a similar level in those markets.

Speaker 2

And then I'll just on the normalized EBITDA, we've talked about the 3 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.

Speaker 2

If you remember, we took restructurings last year that are really showing up into our expansion of normalized EBITDA this year. Some of that was front end loaded. So we'll start to see continued benefit in those 3 buckets to get to the 33%. We feel really comfortable with that. But we did see some of that front loaded related to the restructure.

Speaker 12

Thank you very much.

Speaker 3

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

Speaker 2

Chris?

Speaker 13

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?

Speaker 13

Then I have a follow-up.

Speaker 2

Well, Chris, we'll talk about 2025 when we get to Q4 earnings. No doubtably, we'll give some details of where we think things like our investments are going to be. But there are areas we talked about on this call. Marketing is one of them. We continue to see the ability to accelerate Arrow.

Speaker 2

We see the customer engagements and the behaviors around it. And then we also think about, I always say there are 2 important things within our growth, which is innovation and owning the customer relationship. And those are about what we spend to innovate, 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.

Speaker 1

Yeah. Maybe just to add as 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 the components of it, 68% growth and 33% margin in 26%. Those continue to sort of be the path.

Speaker 13

All right. Sounds great. 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 A and C portfolio?

Speaker 1

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 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 kick starting that flywheel with a great product suite we have in place now.

Speaker 1

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.

Speaker 13

All right. That's great. Thank you for the color and I look forward to seeing your team in Arizona. You

Speaker 2

too. You too.

Speaker 3

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

Speaker 14

Hi. Thanks a lot. So I got a couple of questions. One is, this 40% of paid WplusM subscribers coming originating through Aero. That's pretty impressive.

Speaker 14

I'm just wondering how that share that comes through Aero has kind of trended over the last 3 or 4 quarters since this Aero 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 are 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. Like, how should I what's the right way to think about domains versus websites?

Speaker 1

Yeah. The share for Aero over the last few months, we're not quarters. We don't have quarters of data. It's months. Right?

Speaker 1

Over the past few months has been increasing, but obviously, it's accelerated by some of the payroll work. Right? And then it's going to take a couple of quarters to see how they say they all performs versus our regular all the on ramps together with Arrow. Right? We're trying to take these things that today are different and make them very similar so that for the customer, you know, in the future, it doesn't matter what product they bought, they actually end up in Arrow.

Speaker 14

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

Speaker 1

I think we're just starting on the arrow still. We're not even a year in, right? We haven't celebrated the 1st year anniversary for Aerieva.

Speaker 14

Great. Thanks, Aman.

Speaker 3

Our last question comes from the line of Karpark Jefferies from Piper Sandler.

Speaker 15

Hello. Thank you for taking the question. So first, I wanted to ask about specifically a call out in the prepared remarks about the 46% of EBITDA margin A and C being driven by the strength of high gross margin proprietary solution. I just wanted to ask, is that principally website than marketing or is there any other kind of driver in that bucket of proprietary solutions? 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.

Speaker 15

Aman, do you see that as largely irrelevant to the long term progress of WordPress? Have you seen any kind of conversation in your customers or partners that have reacted to that out to that event? Any kind of thoughts on that would be really appreciated. Thank you.

Speaker 1

Yes. Happy to take that. And then Claude, you're generally thinking about it correctly in terms of the high margin products, the proprietary systems, the ones we build and those that have higher margin, and then maybe the subscription products that are higher margin. And then the 3rd party products that we still tend to be a little bit lower margin, right, versus the first set. Now, if you sort of stack them together, of course, websites with marketing ranks very, very high than them.

Speaker 1

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, you know, as you're aware, WordPress is the largest content management system in the world, right? 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 top 3 or top 5 contributor to WordPress, depending on how you calculate contributions.

Speaker 1

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 I'm actually excited to show you conversational WordPress at our investor dinner, which takes the harnesses, 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.

Speaker 1

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.

Speaker 15

Thank you very

Speaker 1

much. Thank you, Claude.

Speaker 3

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

Speaker 1

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

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Earnings Conference Call
GoDaddy Q3 2024
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