GoDaddy Inc. (NYSE:GDDY) Q4 2023 Earnings Call Transcript

GoDaddy Inc. (NYSE:GDDY) Q4 2023 Earnings Call Transcript February 13, 2024

GoDaddy Inc. beats earnings expectations. Reported EPS is $7.85, expectations were $1.03. GoDaddy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Christie Masoner: Good afternoon, and thank you for joining us for GoDaddy’s Fourth Quarter and Annual 2023 Earnings Call. I’m Christie 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. [Operator Instructions] 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.goddady.net or in today’s earnings release on our Form 8-K furnished at the SEC.

Growth rates presented 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, February 13, 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.

Aman Bhutani: Good afternoon, and thank you all for joining us today. At GoDaddy, our mission is to empower entrepreneurs and make opportunity more inclusive for all. Our strategy centers on creating customer value, driving profitable growth resulting in compounding free cash flow per share and long-term shareholder value. Our focus remains on margin expansion and growth in our Applications and Commerce segment. 2023 was a pivotal year for us and I am pleased with our financial and operational results. Innovation accelerated as we brought together our technology capabilities into a unified technology stack, enabling us to launch our compelling GoDaddy Airo experience. We also drove 2023 normalized EBITDA margin ahead of our guidance as we balanced investment in growth and cost structure management.

Full year normalized EBITDA margin increased approximately 200 basis points, resulting in a 12% increase in free cash flow and a 21% increase in free cash flow per share. In Q4, we drove 16% bookings growth for our high margin segment, Applications and Commerce segment and this momentum continued into January. Our focus on the combination of optimizing costs and driving growth in Applications and Commerce, has positioned our business well to exit 2024 with a normalized EBITDA margin of approximately 31%. At the Investor Day in November, we showcased how GoDaddy Airo delivers a seamless experience for identity and presence and our teams have launched even more capabilities since then. At our upcoming Investor Day on March 6, we will showcase these new capabilities as well as provide a sneak peek into what is coming soon.

Airo enablement of Commerce features will also be showcased, which now expands the Airo experience across the entire entrepreneur’s wheel, fully unlocking the full power of GoDaddy’s software platform for our customers in a seamless and intuitive manner. Over the last few quarters, we covered our continued efforts to optimize our marketing spend and G&A expenses. We have had similar efforts in technology and development and care as well. In technology and development, the simplification and unification of our technology stack led to a material reduction in our server footprint and multiple areas of costs associated with it. We also expanded our access to talent globally and together, these items benefited both our capital and operating expenses.

See also 20 Fastest Growing Energy Companies in the US and 15 Easiest Countries to Immigrate to from Mexico.

Q&A Session

In care, we are harvesting the benefits of our investments in technology and global scale as customer preferences shifted towards asynchronous chat, and with continued room for leverage through the automation of tasks and the rollout of GoDaddy Airo for our care guides. Additionally, the power of data from our GoDaddy software platform bolsters our ability to drive faster decision-making and is expected to benefit both our margin and revenue opportunities. We are excited to share more about continued leverage opportunities driven by innovation in technology and care at our Investor Day in Tempe. As always, I would like to cover our high priority initiatives, but I will keep my comments here brief since we plan to share an expanded set of demos in March.

To start, bundling has been a key focus for us as a part of our innovation in domains and productivity to drive attach. This initiative primarily benefits our high margin Applications and Commerce segment, and we expect our Airo experience to drive this higher over time. Airo has also created new engagement surfaces allowing us to deliver automated customer experiences that we will continue to improve over time. On GoDaddy Airo, I have an update on its performance since launch. I am happy to share that in a controlled experiment, customers that were part of the first test cohort for the Airo experience monetized at rates higher than those customers in the control group that were not exposed to the Airo experience. The increased monetization was due to attach and shifting the mix towards higher price and higher margin products.

This is particularly encouraging because significant customer experience changes like Airo typically take many months of iterative improvement to outperform the control group. With this initial promising result, we have rolled out GoDaddy Airo to more customers in the U.S. We have also launched tests in international markets a few days ago. Our goal for Airo is to help more customers discover more products and engage with them at higher rates, leading to even greater monetization opportunities. As a result, we are closely monitoring cohort performance across discovery, engagement and monetization. Components of the GoDaddy Airo experience are also currently being tested in our Managed WordPress and hub experiences, creating opportunities to save our designers and developers time and effort.

We are also testing the Airo experience in care so guides can support our customers better and faster. Our platform approach to GoDaddy Airo means that new capabilities are quickly coming to market. For example, we will test Airo Commerce functionality in the first half of this year, and these capabilities will extend to our partnerships as well. On Commerce, over the last year we proved that we can sell our payments solutions into our customer base, and it was the largest driver of GPV growth last year. In fact, annualized GPV for 2023 exceeded our expectations and grew a 125% year-over-year. As we enter 2024, we are looking forward to surfacing our Commerce capabilities more seamlessly with our Airo experience and doubling down on selling the full omni-commerce solution, driving higher margin subscription revenue.

This is the last of a series of proof points that set up the Commerce business for the long term, which is aligned with our overall strategy of creating customer value that ultimately drives profitable growth. As Commerce subscription revenue takes center stage and GPV growth takes lower priority, we still expect to continue to scale our base of Commerce customers by growing GPV at healthy double-digits. In closing, as I look ahead at the rest of 2024, I am excited by our ability to drive margin improvement and growth in Applications and Commerce, which we expect together will result in impressive improvements in free cash flow per share. Behind these improving metrics is a talented workforce that is committed to ongoing innovation. For example, every week we launch new tests, methodically track results, and share results broadly across the organization, making us better every day.

The operational discipline of compounding improvements and doubling down on proof points continues to crystallize our path forward and raise our confidence to achieve our targets. With that, here’s Mark.

Mark McCaffrey: Thanks Aman. Hello everyone and thank you all for joining us. In 2023, we made significant strides in our ability to deliver a unified GoDaddy software platform for our customers. These efforts are reflected in our results that drove sustained double-digit growth of our Applications and Commerce revenue of 13% in the quarter, expansion of our Q4 normalized EBITDA margin above our target, delivering 29.5% and free cash flow per share above our target delivering $7.50 for the full year. Beginning with Q4 results, our high margin Applications and Commerce revenue grew 13% to $377 million and we delivered an expanded segment EBITDA margin of 44%, increasing 100 basis points since last quarter and 300 basis points since last year.

ARR for Applications and Commerce grew 10% to $1.4 billion and our Create + Grow ARR was up 8% to $481 million. In Commerce, we drove significant growth in annualized GPV to $1.7 billion, more than doubling last year’s performance as conversion of our existing customers to the GoDaddy software platform remains strong. Core Platform revenue grew 2% to $723 million in the fourth quarter and segment EBITDA margin grew to 32%, increasing 200 basis points since last quarter and 250 basis points since last year. ARR for Core Platform was $2.3 billion consistent with prior year. Growth in Core Platform during the fourth quarter was supported by domain’s growth of 4%, a continued strong demand and price increases. Bookings growth in domains was 7%, providing a positive leading indicator for future domain revenue.

In addition, aftermarket grew 14% to $118 million on increasing volume and easier comps. As a reminder, while aftermarket is stable on an annual basis, it is more difficult to predict quarter-to-quarter compared to our other businesses due to its transactional nature and that it relies on third-party sellers and buyers to determine a mutually acceptable price. Our gains in Core Platform were partially offset by an 11% decrease in hosting, as we continue our efforts to integrate GoDaddy’s software platform. Bifurcating the hosting business, the continuing GoDaddy hosting revenue remains a stable, strong cash generator with high retention. The remainder of the portfolio decreased over the past several years and we have taken deliberate steps throughout 2023 to rationalize the business.

We will continue to evaluate the components of this business, integrating platforms that are strategic and rationalizing platforms that are not accretive to our long-term financial model. Total revenue in Q4 topped $1.1 billion, growing 6% on a reported and constant currency basis. International revenue grew 4% on a reported and constant currency basis to $354 million. As a reminder, our migrations and our divestitures are primarily impacting international regions. Q4 bookings grew to $1.1 billion, up 7% or 6% on a constant currency basis. Applications and Commerce bookings grew 16% on strong attach of productivity solutions and continued strength in our Create + Grow products. Core Platform bookings increased 3% due to the strong fourth quarter performance in domains, offset by migration and divestiture headwinds in hosting.

Subscription bookings grew 200 basis points ahead of subscription revenue. Normalized EBITDA in Q4 grew 22% to $324 million, representing a 29.5% margin, and an expansion of nearly 400 basis points compared to Q4, 2022. The continued margin expansion was driven by the leverage gains we achieved in the second half of 2023 across all spend categories. As we shared last quarter, we continue to expect Q4, 2024 normalized EBITDA margin of approximately 31% with continued margin expansion in the out years, while also driving innovation, like you saw with our GoDaddy Airo experience. As we think about this seamless experience for customers, Airo is possible, thanks to the work we have done to unify our technology stack into one software platform that include ownership of the data from domain through to transactions.

And this serves as an accelerant to our model as we bundle and bring more products to market faster on the platform. With that, during the fourth quarter, we reduced our combined technology and development and capital spending by 7% from our migrations, divestitures and restructuring efforts throughout 2023, as well as from reduced data center capital expenditures. We expect that our technology and development spend will continue to decline in absolute dollars in 2024 compared to 2023, as most of this work was completed in 2023. Moving onto cash generation. Unlevered free cash flow grew 46% to $347 million, while free cash flow grew 51% to $305 million, despite a 13% increase in cash interest expense year-over-year. Free cash flow per share increased 21% to $7.50 per share, driven by growth in Applications and Commerce, operating leverage improvements and share repurchases throughout 2023, which is partially offset by an increase in cash interest expense.

Turning to the balance sheet. We exited the year with $0.5 billion in cash and short-term investments and total liquidity of $1.5 billion. Net debt landed at $3.4 billion, below three times net leverage on a trailing 12-month basis, and near the midpoint of our targeted range of 2 to 4 times. In January 2024, we refinanced $1.8 billion of outstanding principal to secure a 50 basis point interest rate reduction. This strategic adjustment along with the repricing completed in July 2023 are together expected to reduce annualized cash interest expense by approximately $22 million. Additionally, the cumulative shares repurchased under our current authorizations totaled $2.6 billion, representing 34.2 million shares retired. This reduced our fully diluted shares outstanding since the inception of these authorizations by over 20%, achieving our three-year targeted reduction ahead of schedule.

Our buybacks over the last two years have driven impressive ROI for this capital outlay, demonstrating our disciplined capital allocation framework and dedication to driving long-term shareholder value. Moving onto our annual financial results. Total revenue grew 4% or 5% on a constant currency basis to $4.3 billion. ARPU grew 3% to $203 as we added 100,000 net new customers, despite the elevated churn from our ongoing platform migrations and divestitures. Customer retention remains 85% as we drove improvements in 2+ product attach, with greater than 50% of our customers paying for at least two products. These high-quality customers are stickier and give us greater pricing flexibility. Applications and Commerce revenue grew 12% to $1.4 billion and Core Platform revenue was flat, totaling $2.8 billion.

International revenue grew 4% to $1.4 billion. Total bookings grew 4% or 5% on a constant currency basis to $4.6 billion. Full year normalized EBITDA grew 12% to $1.1 billion, representing a 27% margin for the year, an expansion of nearly 200 basis points over the prior year. Lastly, full year unlevered free cash flow grew 14% to $1.3 billion and free cash flow grew 12% to $1.1 billion, both exceeding our guide for the year and showing impressive normalized EBITDA to cash conversion of nearly one to one. Moving onto our outlook. For the full year, we expect total revenue to be within a range of $4.48 billion to $4.56 billion, representing growth of over 6% at the midpoint of the range. When excluding the approximate 100 basis point impact of divestitures and migrations, that we will lap in the year, our growth would be 7% at the midpoint of the range.

In Application and Commerce, we are projecting revenue growth of low to mid-teens for Q1 and the full year. In Core Platform, we are projecting revenue growth of low single-digits for Q1 and the full year. As we have shared previously, the entire GoDaddy team is committed to maintaining operational discipline and deploying opportunities to gain further leverage within our model. We delivered on this commitment in 2023 and expect to continue this trend in 2024, resulting in an expected normalized EBITDA margin of approximately 29% for the full year. We are targeting unlevered free cash flow of at least $1.4 billion, free cash flow of at least $1.2 billion, and free cash flow per share of approximately $9, representing a growth rate of 20% for the full year of 2024.