GoDaddy Inc. (NYSE:GDDY) Q3 2023 Earnings Call Transcript

Mark McCaffrey: Thanks, Aman. The product enhancements over the last few years have put GoDaddy at the forefront of one of our most exciting eras yet. And we are poised to deliver a complete integrated software solution to our customers spanning every facet of their needs. We have seen the positive traction from these efforts in terms of faster product attach, stable retention rates as well as the strong sustained double-digit growth of our applications and commerce revenue, which has also contributed to us expanding our normalized EBITDA margin ahead of schedule. Moving to our financial results for the quarter. Applications and commerce grew 11% to $363 million, delivering at the high end of our guided range. Additionally, we delivered an expanded segment EBITDA margin of 42% from 41% last quarter.

The related ARR for applications and commerce grew 11% to more than $1.4 billion. Create and grow ARR grew 9% to $478 million as bookings trended ahead of revenue growth. Like last quarter, GPV continues to grow at an impressive rate as our customers within our 21 million base convert to GoDaddy Payments. Core platform revenue totaled $706 million, flat year-over-year and in line with our guide. The segment’s EBITDA margin accelerated to 30% from 27% last quarter. ARR for our core platform segment was $2.3 billion, flat year-over-year. Core platform revenue was supported by 4% growth in domains on stronger customer additions from higher demand and price increases. Additionally, domains bookings growth accelerated to 8%, showing a strong recovery for future revenue growth.

This was partially offset by aftermarket, down slightly 2% to $107 million as it begins to reverse prior quarter trends, and the 150 basis points of headwind from migration and divestitures of certain assets previously mentioned. Total revenue grew to $1.07 billion, up 4% on a reported and constant currency basis and above the midpoint of our guide. Within total revenue, international revenue grew to $346 million, up 4% on a reported basis and 5% on a constant currency basis. ARPU grew 2% to $200 on a trailing 12-month basis, and we added 100,000 net new high-quality customers despite the headwinds from our migration efforts. We are happy to share that the number of customers with two or more products now sits above 50%, and retention rates for the GoDaddy products remained at approximately 85%.

Bookings totaled $1.1 billion, growing 5% on a reported basis and 4% on a constant currency basis. Excluding the impact of aftermarket, the drivers of growth in bookings were strong customer additions and price increases in domains as well as strong attachment applications in commerce. We expect these factors to contribute to accelerated revenue and normalized EBITDA growth next year. Normalized EBITDA grew 13% to $296 million while delivering an expanded margin of 28%. These margin gains were driven in part by the two points of leverage achieved this quarter from a reduction in normalized tech and dev spend, decreasing 140 basis points sequentially as a percent of revenue. With that, we want to shed some further light on the components of tech and dev to give you an appreciation of the nature of the spend categories.

There are two distinct categories of spending, one that drives product innovation and the other that supports our operations. First, we invest in driving innovation that enables our customers’ success by providing competitive tools and interactions to enhance customer lifetime value through improved attach, retention and pricing. In the second category, we invest in our infrastructure to support our operations by maintaining, unifying and securing our technology platform, delivering a seamless experience for our 21 million customer. In addition, these investments facilitate a better cash profile by reducing data center-related capital expenditures, which improves our overall free cash flow and free cash flow per share. We also benefit from technologies we build in-house that are driving efficiencies in care and marketing spend.

As a percentage of revenue, product innovation represents 7% to 8%, and infrastructure to run a secured company of our size represents 8% to 9%. Overall, during the third quarter, we reduced our tech and dev and capital spending by 5% from our restructuring efforts, the migration of noncore hosting assets and reduced data center capital expenditures. And to be clear, we know there is room to do more. We believe the strength of our product portfolio today has brought us to an inflection point, and we expect reduced tech and dev spending to meaningfully contribute to our EBITDA margin trajectory going forward without sacrificing GoDaddy’s ability to innovate and compete. Moving on to our cash generation. Unlevered free cash flow for the quarter grew 8% to $320 million, and free cash flow grew to 6% to $280 million despite increased interest expense and the timing of working capital spend, which is expected to flip in Q4 of this year.