GoDaddy Inc (GDDY) 2015 Q4 法說會逐字稿

Good afternoon, my name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Marta Nichols, Vice President of Investor Relations, you may begin your conference.

Thank you, Connor.

Good afternoon, and thank you for joining us for GoDaddy's fourth-quarter 2015 earnings call. With me today are Blake Irving, Chief Executive Officer, and Scott Wagner, Chief Operating Officer and Chief Financial Officer. Blake and Scott have some prepared remarks, which will follow with a question-and-answer session.

On today's call, we will be referencing both GAAP and non-GAAP financial results, such as total bookings, adjusted EBITDA, un-levered free cash flow, net debt, ARPU, and constant currency. A discussion of why we use non-GAAP financial measures, and reconciliations of our non-GAAP financial measures to their nearest GAAP equivalent, may be found in today's press release, the presentation posted to our IR website at www.investors.godaddy.net, or on our Form 8-K filed with the SEC with today's earnings release.

The matters we will be discussing today include forward-looking statements which are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today February 17, 2016, and we undertake no obligation to update these statements as a result of new information or future events.

I'll now turn the call over to Blake.

Thanks, Marta, and thanks to all of you for joining us today.

GoDaddy's fourth quarter was a good one, with contributions from all of our major product lines driving strong top-line growth and exceptional cash flow. The strength of our execution and our financial results has remained just as consistent as the vision we shared with you on our road show last year.

Our vision is to radically shift the global economy toward small business by helping individuals easily start confidently and grow, and successfully run their own ventures. Millions of global customers use our growing suite of elegant, easy to use, and increasingly integrated cloud-based products built on a single global technology platform, and supported by outcome-driven personalized customer care to create a successful online presence.

I'd like to share three big themes around our recent progress and accomplishments with everyone today. First, we're consistently posting strong financial performance and growth. Second, we're continuing to expand our portfolio and our geographic footprint with our recent entry into Asia. Third, we're making meaningful shifts in the way we communicate with our customers through merchandising and marketing.

On my first point on our business results, GoDaddy's unique combination of great products, fast reliable and high-performance technology, and empathetic customer care, continue to differentiate what we do, and have together yielded a large high-growth business with strong cash flow. At the end of 2015, we've grown to serve nearly 13.8 million customers, an increase of more than 1 million customers versus a year ago. Our annual average revenue per user, or ARPU, rose over 6% to $121 at year end, in spite of currency head winds.

Q4 bookings grew nearly 17% on a constant-currency basis, or over 13% on a reported basis, to $464 million. Strong customer and ARPU growth together drove our fourth-quarter revenue up 17% in constant currency, or over 14% on a reported basis, to $425 million for the quarter.

Full-year bookings grew to over $1.9 billion, and revenue rose to $1.6 billion, both up over 17% in constant currency. Our adjusted EBITDA jumped 30% to almost $74 million in the fourth quarter, bringing our full-year adjusted EBITDA to over $337 million, an increase of more than 24%.

For the year, we converted over 87% of adjusted EBITDA into un-levered free cash flow, near the high end of our long-term expectations. We feel great about our delivery of consistently strong top-line growth, expanding margins, and nearly $300 million in un-levered free cash flow for our shareholders in 2015.

On my second point about our expanding product portfolio and geographic footprint, we reached another major milestone in our Company's history in January 2016 with the launch of key new markets in Asia, bringing our total there to 10 languages and 14 markets, including Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. With this launch, we're now in 26 languages and 53 markets globally.

Customers in these markets visit GoDaddy today. They see content that looks and feels local. Our scalable technology platform enabled us to roll out these Asian market simultaneously, including a localized suite of GoDaddy products and CCTLDs, with advanced personalization and flexibility, like allowing customers to toggle between languages and switch currencies, payment types, and more.

Same time, we also deployed a new in-region customer care team and facility in Dalian, China, providing local language care for all these new markets. Today, when a customer in South Korea comes to GoDaddy.com, they are directed to KR.GoDaddy.com. They see Korean language and imagery on our site and in our products, have the ability to pay in dollars or won, and when they need help, call a local phone number and have the ability to speak with a care professional in our Dalian care center in Korean.

Looking across Asia immediately after closing the books on our very strong 2015 illustrates the power of our strategy and our financial model. We brought all these new countries on line and launched local language support in Asia simultaneously, even as we were continuing to grow the business in 2015, and delivering huge un-levered free cash flow growth. It demonstrates our ability to meaningfully expand the markets we serve and produce operating leverage in our model in time.

We have steadily and deliberately expanded our overseas presence over the last several years, from English-speaking markets to Latin America to Europe, now Asia. International countries now contribute more than 25% of our annual revenue. In 2016 we expect more new customers to come from international markets than from the US for the first time. This is a huge move for a Company that was nearly entirely focused on the domestic market just a few years ago.

My third theme on this call, directly connecting with our growing global presence, is making a real shift in how we communicate with our customers, including both how we market to them and invite them to experience GoDaddy, as well as how we present and bundle products to better match customer needs.

One example of this is a clear shift you've seen in our approach to marketing. As you know, we already have over 80% brand awareness in the US, so we've been strategically shifting our marketing effort from a singular big bang, and mostly US events, which focused primarily on driving name recognition, to increasing our customer touches through much broader reach and greater frequency at the top of the customer acquisition funnel.

You saw this illustrated in our approach to the Super Bowl this year. Instead of spending on a traditional 30-second spot sponsoring the broadcast game, we reached a sizable audience through digital channels, notably social and display, which included video content from Fox Sports, pre-game, free-time, and post-game feeds, or socialized the major presence across a number of large digital publishers like CBS Sports.

In 2016, you'll see several major extensions of this new marketing strategy. First, we're planning a larger and much more consistent presence in top-of-the-funnel channels like TV and radio throughout the year, versus singular events and sponsorships in years past. Second, you'll see more deliberate and consistent linkages between our top-of-funnel customer acquisition activity and our mid-funnel. (inaudible) digital channels, similar to our multi-channel Super Bowl approach this year.

Third, brand creative and messaging that are distinctive and resonate specifically with the value proposition we offer our customers. (inaudible) a real change for GoDaddy, and the right approach as we build on our exceptional brand awareness and (inaudible) to extend our reach globally. As we market more consistently throughout the year, we expect to see more balance in our business pacing throughout the quarters of the year, versus the seasonally stronger Q1 we saw in past (inaudible) also absolutely the right approach.

Another example of our changing approach to how we interact with our customers is the product bundling Scott mentioned in our last earnings call. Historically, domains was really our primary customer on-ramp. For the last couple of years, we've presented customers a much broader range of offerings, often merchandising and marketing domains, presence, and our e-mail together, and introductory offers to make it super-easy for customers to get started.

When we make it easy for customers to attach and use our core products like site-building or e-mail, they renew at very healthy rates, and have attractive long-term economics. This evolving approach to marketing, product presentation, and bundling are all designed to better engage with our customers and address our increasingly global (inaudible).

We feel really good about the quarter and the year. I'm super proud of what our teams across the Company delivered in 2015. We launched new capabilities with a comprehensive and wicked-fast domain search; added over 100 top-level domains; expanded our domain after market liquidity. We grew to 62 million domains under management.

We introduced GoDaddy Pro Tools and launched our new search engine visibility service; and we rolled out hundreds of features, performance, and availability improvements across the Company; as well as filling out our international footprint of 53 markets and 26 languages. It all feels very good and creates a great foundation for growth in the years ahead.

As an aside, and before I turn it over to Scott, just yesterday I noticed another timely proof point that reinforces the incredible importance of owning your own personal identity and presence online. I would encourage you all to check out what's presented when you type JebBush.com into your browser.

Whether you're a presidential candidate, a small business, or even a sell-side analyst, I think we can all agree that, with the increasing importance that the Internet plays on our daily lives, claiming and (inaudible) your digital identity does continue to become more and more important.

Let me turn the call over to Scott, and we'll talk about the finance results (inaudible).

Thanks Blake, and thank from me, as well. Everybody, sorry about that, we had some feedback from the main line. Thanks, Blake.

There's three financial points I'd like to cover with everyone today. First, we continue to deliver strong consistent revenue growth, with a really nice balance between customer and ARPU increases. As Blake said, our bookings grew 17% in constant currency in Q4, or 13% on a reported basis. Revenue also grew 17% in constant currency, or 14% reported.

Looking at our two revenue drivers, customers grew nearly 9% during the last year, and we ended Q4 with approximately 13.8 million paying customers. Our annual average revenue per user, or ARPU, grew over 6% to $121, up from $114 a year go, even while absorbing the impact of the stronger dollar.

Second, we're consistently delivering even faster growth in cash flow. Adjusted EBITDA grew over 30% year over year in the quarter. Frankly, we had a spectacular performance in un-levered free cash flow, with an increase of more than 145% last quarter, and more than 50% growth for the full year 2015 versus 2014. Those are great gains in our two key profitability measures, achieved while we continue to invest in growth. Third, we feel well-positioned to continue delivering a strong combination of top and bottom-line growth going forward.

I'll provide some color in the performance of our three product lines. First, domain revenue finished the quarter at $218 million, up 9% year over year. Our domains business continues to be fueled by international growth, strong and improved renewals, and continued expansion in the domain after market.

In recent months, we've received a handful of questions about China, specifically on the surge of domain registrations coming from mainland China in Q4, and how it's affected us. Here's some background.

For several months in Q3 and Q4, interest in short domain names spiked in China, particularly those with three to six characters, both in pinyin and numeric names. The vast majority of these registrations were done through Chinese-based registrars, often at below cost, so that activity didn't affect our results. We do believe that most of the incremental registrations were by local Chinese domain investors.

The surge was positive for our domain after market business, as we facilitated the secondary sale of several short-character names, given our unique position as the largest domain market place in the world. While the surge in the primary market didn't affect us, we do see it as great proof point of the value of domains in character-based languages, and the prospect for our growth in Asia over time. With our January launch of localized GoDaddy offerings in Asian markets and languages, we look forward to building our presence and participation in those markets in a meaningful way going forward.

The interest we saw in the purchase and sale of domain names in the after market also highlight the value of domain names as unique digital assets with real value. With our growing domain marketplace, we're well-positioned to help grow the global after market in names and make these secondary name transactions both easier and more transparent for our customers and for the industry.

Now today, Asia is still small for us, generating less than 4% of our total Company bookings. We're excited about our recent launches, and the opportunity to build those markets into more meaningful business for us over time. This will be a multi-year process that I will address a little bit more when I discuss our outlook.

Now turning to our products beyond naming. Our hosting and presence revenue was $156 million in Q4, up about 13% year over year. As Blake mentioned, we're increasingly bundling our products, bringing domains, our basic presence offerings, and e-mail and productivity products together in introductory offers, which we believe will benefit renewals and the long-term economics and value of our customers over time.

Recall that when we sell products in a bundle, revenue gets allocated across all the products in the bundle according to their list prices. Bundling like this -- for example, combining our website-building tool with free Office365, shifts revenue recognition among product lines in the short term. But our focus is always on the overall lifetime spend of our customers in aggregate.

When you look at the growth rates of our three business lines this quarter, they shifted several hundred basis points of growth to business applications, from domains and hosting and presence lines in the fourth quarter. Business applications revenue of $52 million accelerated the growth of 50% year over year in Q4, driven by continued strong growth in both productivity and e-mail marketing, and the bundling effect I just mentioned.

Like all companies with a meaningful international presence, our 2015 top-line growth also reflected the impact of currency, which became more pronounced throughout 2015. For the full year 2015, bookings growth would have been 17%, or 320 basis points higher, and revenue growth would have also been 17%, or around 140 basis points higher in constant currency.

Most importantly, we remain happy about our international growth and our future prospects. Our international business now represents 26% of total revenue, and grew 25% in constant currency in Q4.

Over the last three years we've grown share and accelerated growth in our primary non US markets at attractive economics. Looking ahead, we're going to continue to focus on extending our gains in Asia, the UK, and other key geographies, while building up our Asia business.

Turning to profitability, we continue to deliver strong cash flow. I mentioned adjusted EBITDA grew over 30% in Q4 to $74 million. For the full year, EBITDA grew over 24% to $337 million, producing a 21% margin, and a gain of 140 basis points versus 2014.

Un-levered free cash flow was up dramatically, growing 147% in Q4 to $52 million, bringing our full-year un-levered free cash flow to $294 million, a gain of almost 54% versus 2014. In 2015 we converted 87% of adjusted EBITDA into un-levered free cash flow, near the high end of our long-term target range of 70% to 90%.

Now, just a minor point on our operating cost lines in Q4. Two items in the fourth quarter a year ago produced somewhat unusual growth for a couple of our cost lines. Specifically, our tech and dev costs would have grown a bit faster than we reported in Q4, more like 7% year over year; and our G&A growth would have been quite a bit slower, about 8% year over year without the non-recurring items in the year-ago quarter. Looking forward, both tech and dev and G&A should be sources of operating leverage for us in 2016.

Overall, our combination of strong top and bottom-line performance demonstrates the inherent leverage in our business model, allowing us to steadily grow the top line, invest in growth across the business, and deliver excellent un-levered free cash flow, all which contributed to de-levering the balance sheet throughout 2015. We finished the year with approximately $353 million in cash and short-term investments, and net debt of $731 million, for about 2.2 times our 2015 adjusted EBITDA.

Turning to our outlook for 2016, today we are providing guidance for revenue and adjusted EBITDA for both the first quarter of 2016 and the full year. Our strategy is designed to generate consistent, steady growth over the long term, and that's reflected in our outlook, which is right in line with the expectations we shared with you at the time of the IPO, and throughout all of last year.

For Q1, we expect revenue in the range of $428 million to $432 million, implying approximately 14% year-over-year growth at the mid-point. For the full-year 2016, we expect revenue of $1.82 billion to $1.845 billion, also implying approximately 14% growth at the mid-point.

Now, this outlook incorporates the continued impact of currency as past bookings translate into revenue in 2016. In other words, without the dollar strength to trim bookings in 2015, our 2016 outlook would've been a bit higher than what I just shared. But even while absorbing this, the ranges are right in line with the long-term revenue expectations we've shared with everybody before.

We expect adjusted EBITDA in the first quarter in the range of $111 million to $114 million, and the full-year 2016 of $400 million to $410 million. The mid-point of our full-year adjusted EBITDA range implies 20% growth year over year, also in line with the long-term targets we have shared.

Two quick comments on our 2016 expectations. First, this outlook incorporates the costs associated with our recent entry into the new markets in Asia, but relatively limited top-line impact from that region. We expect to spend 2016 tuning our offerings and marketing in these countries to lay the foundation for more meaningful contribution from these markets in 2017 and beyond. Although Asia won't dramatically affect our P&L much in 2016, we are excited about the long-term potential there as these geographies build into meaningful contributors over time.

Second, Blake described our marketing evolution, specifically our focus on reinforcing our brand message more frequently and consistently throughout the year, as opposed to our historically big brand awareness pull-push in Q1. As we broaden our marketing reach and expand the tactics that we use, our Q1 and full-year outlook reflect our expectation for slightly less first-quarter seasonality than we have experienced in past years.

Overall, and taking a step back, we are well-positioned for continued growth at scale in 2016 and beyond. We serve a huge market of small businesses, organizations, and individuals who are looking to build an online presence.

We deliver a true life-cycle experience to these customers that combines products, an integrated (inaudible) form, and care in a distinctive way. The products and services that we offer grow their customers over time. This value proposition translates into a proven financial model, with great customer unit economics and strong and consistent overall revenue and cash flow growth.

To wrap, our Q4 performance and execution were strong, and we're focused on continuing to deliver for our customers and our shareholders over time.

With that, we'll open it up for questions.

(Operator Instructions)

Hi, everybody. While the operator gets the queue going, we understand that the phone line was cutting out a bit during Blake's remarks. We apologize for that. Let us know if there's any elements that people need us to come back to during the Q&A. We're certainly happy to.

Ron Josey, JMP Securities.

Great. Thanks for taking the question. I wanted to spend a little more time on international expansion and the plans around Asia, specifically. On international, I think, Blake, you said that more users come from international this year than in the US. I wanted to see if you could remind us. I think you said there was about 4 million international users as of 3Q, so maybe an update there?

Given Asia just launched, to Scott's point, where do think these users will be coming from in 2016 going forward? Obviously your more-established markets, but any specifics would be helpful. Lastly, on marketing, any more details on how you plan to grow that brand awareness in those 11 Asian countries throughout 2016 would be helpful. Thank you.

Yes, we'll knock those off. This is Blake. In order, we're roughly about 4 million customers internationally today. This year will be the first time that we'll take on more international customers then domestic customers this year. We cross that last -- more new customers, I should say, internationally. Very good for us.

Which markets do the new customers come from? We see them coming primarily from big tier 1 markets, whether it's Brazil, the UK, Canada, India. Then we've got tier 2 and tier 3, but the majority are coming from those large tier 1 markets.

Honesty, we do brand spend, and we do -- in those big tier 1 markets. That is something where we -- you'll see it on the street with the new top-of-funnel advertising. In tier 2, we do things that are more search engine marketing in direct and display. Brand is done in the US, the UK, Australia, India, a little in Brazil and Mexico, for the most part.

We've seen good uplift and good uplifted brands when we've spend in to them. When we do localized markets. When we globalize and make sure we're managing payment types and currencies and languages, and we spend into those markets, we see an immediate lift.

We're pretty happy with what we've been doing so far over the last few years internationally, and think that Asia is going to follow that pattern, follow that same pattern that we've seen in both Latin America, Europe, India, and the other English-speaking markets we cover. Does that cover it, Ron?

Yes, that's great. Thank you.

You bet.

Jason Helfstein, Oppenheimer.

Great, thanks. Maybe just two things. Products are becoming more important. Maybe talk about how the mix and how what you're offering is impacting the bundled packages? Then can you give us a sense of perhaps some product pipeline coming over the next 12 to 18 months? Thank you.

Yes, Jason, I would characterize us as being a product portfolio Company, so we actually have a number products, both domains, presence in commerce, and hosting and productivity. We have seen, frankly, faster growth in our productivity area. We talked about 50% growth in that area. The pipeline of offerings that will come into the next 12 and 18 months will be in the area of what we believe our customers are looking for.

You've seen our business shift from primarily being a domain business to being much more of a portfolio of digital presence products that help people get found online, be able to go transact with our customers, acquire customers, retain them, and then helpfully help them run their back office, as well. We're seeing good growth in the business, both on digital presence and on productivity.

Thank you.

Deepak Mathivanan, Deutsche Bank.

Great, thanks. This is more related to the prior question. Business applications revenue growth accelerated nicely for a few quarters since you launched e-mail marketing. You called out bundling as one of the reasons for that due to the dollar shift. But can you perhaps qualitatively touch upon what the penetration rate currently is there? In terms of the total customer base, and how you are driving the attach rate for that product? Can you also give some color on the adoption curve of the product -- the e-mail marketing product for Office365 and Professional e-mail that you saw in the past?

Hi Deepak, it's Scott. From a business application standpoint, I think we had said last call, as well, that we had passed 2 million customers that are using one of our business applications products. We continue to see nice increases in attach. As our products, both within productivity and e-mail marketing, again, continue to get more -- what's called robust. You are also seeing some nice movement and migration into high-value packages within those SKUs.

As I've described and talked to you about before, look, we continue to use bundling as ways -- allow our customers to easily acquire and activate these business application products, because we've found, and our customers certainly find that once they start using them, there's huge value, and they renew for a long time. Look, we're going to continue to drive both attachment and activation of these. Over time, that (inaudible) these categories.

Got it, that's helpful. Another one for you Scott. Refund rates, if you look at it as a percentage of bookings, was creeping up slightly for the past few quarters, but seemed to have stabilized in 4Q. Will you call out anything specific this quarter, or is it just due to the mix shift in the business?

No, we're running the business, Deepak. I think that stability is probably the right way to think about it.

Okay, great. Thanks, Scott.

Yes.

Mitch Bartlett, Craig-Hallum.

Sure, maybe a question for Blake. Could you describe what it's like to enter a new market? You just entered 10 Asian markets in early January. What are the assets and the people that need to be in place, and maybe the product -- initial product strategies? What does it look like to start in a new market, and what will it look like over a number of years? I get that you're saying very little revenues from these Asian markets, but what does the trajectory look like for a normal market, like perhaps Thailand or something like that?

Let me -- I'll talk quickly about how we approach international markets. First of all, international markets for us is primarily initially a software problem. It's making sure that the code that we have written is globalizable and localizable, which means we're separating the function of the code away from language, away from market, and in market you have both currency, you have payment type, and you have imagery.

We separate those things out that allows us from a platform perspective to have very small nuances in the products, and to be able to enter markets with literally no personnel inside those markets. With the exception of a singular care facility that can be in-region that manages the languages, the individual languages of those different markets.

What we have found over the last couple of years when we've entered markets with that strategy, we have seen an immediate lift, just because we are actually looking, We look a lot like a very local company who knows the market will. India example, we entered in 2012, we ramped up products, we added a local care organization, we added marketing on top of that; and we've seen a 3X growth rate in India over time. For the cost perspective, I'll hand it over to Scott and let him talk about it.

Yes. No, thanks. Mitch, let me pick up on the India example that Blake just gave, which is you've got scaled engineering and then market-ramping marketing air and marketing, which in India drilled a 3X-plus growth, and it has for the last three years. Think about these markets that we're entering first on their size growth and competitive potential, so we're looking at these geographies and thinking, okay, where is there embedded growth, particularly in naming; and the local competitive context, mostly of which is local people.

Then we are purposefully in year one for a couple markets that are big and large, and we think we've got a way to really meaningfully accelerate growth, spending year-one marketing dollars to activate customers. Based on that customer growth rate plus their spending profile, we're measuring the lifetime value relative to our cost of acquisition over time. Then, frankly, we're spending marketing dollars and into that market based on that attractiveness.

What I'm describing is a very clear formula for growth that frankly has been at work for the last three years in our international markets. I'd encourage you and everybody to think about these Asia markets as just another play in the international play book that we've been running for three years.

All right. That's great, thank you.

Yes, very welcome.

Paul Vogel, Barclays.

Great, thanks. I just have two questions. In terms of the big picture macro, any impact at all that you guys are seeing right now in the business, and is there anything in your guidance that would imply any change to the macro?

Then a more modeling question. When we look at margins for the business, how much of a mismatch is there between where you recognize your revenue and where you recognize your costs? Obviously you talked about the FX-neutral revenue growth, but is there a negative impact to margins based on a mismatch between revenue and costs?

Hi, Paul, Scott. I'll take both. Look, on guidance, certainly one of the appeals of our business and financial model is that we do have quite a bit of predictability and visibility into growth. Look, I think the biggest macro factor is just what we're experiencing in currency. If you think about the range that we just provided, I think movements in these dollar amounts, which have been pretty unpredictable, will more than anything else push us towards one side of the range or the other.

Again, relative to constant currency versus reported, we've got 200 to 300 basis points of impact happening now and that are going to show up into 2016. That's the macro factor. Frankly, the fundamentals of business of our market performance of our attachment, they're all doing great. I think that's the highest -- that question on point number one.

On two, bookings and EBITDA, we don't have a lot of costs that are actually sitting outside the United States. Again, as Blake described as international, as we talked about international, we don't -- we're a scaled expansion model, so we don't have a lot of costs that actually sit outside the US. Our EBITDA performance and growth is -- it is actually reflective of a cost structure that largely in terms of people sits here in the United States.

Okay, great. Thank you.

Sterling Auty, JPMorgan.

Thanks, hi guys. I've got one question and one follow-up. The first question is the comments you made on seasonality, I'm really interested in. Is it that you think that just changing the marketing programs is going to help smooth out? To your point, March has been the seasonally strongest quarter for the naming business since -- back for 15 years-plus. I'm wondering is that going to be enough to smooth things out, or is there anything else that you think will help change the seasonality?

Sterling, Scott. First, the seasonality -- it's a slight change. Again, we're a subscription business. We've got a big amount of renewal business, plus new business from existing customers. From a quantum standpoint in the quarter it's a relatively small amount, but it is a bit of a smoothing from Q1 into the quarters throughout the rest of the year. Truly it is not a huge change. It's a very modest shift from Q1 into the other quarters. Does that make sense?

It does. It does. Then --

Again to be clear, that's affecting bookings, right? Because bookings is the in-quarter billing, so that slight taper and shift for 2016 is going to just be more reflected in bookings than in GAAP revenue.

As a follow-up, the commentary about -- I think you said renewal rates actually improved. Kind of curious, are you seeing that across the board, or is it a pick-up in renewal rates of the customers that have more than just domain names? Maybe a little bit more either qualitative or quantitative color on the improving renewal side?

It's positive across, frankly, our product categories. And again, I think it's slight change in improvements, not dramatic ones; but again on a subscription business, renewal rates that are consistent and steady, particularly at our size and scale and what we're doing from an expansion standpoint, is fantastic.

Within certainly even domains, but then around products and categories like productivity, we're seeing nice metrics in renewal rates. But again, I think if you're sitting there and thinking about models, put it into the category of slight shift, comfort in the business as we expand, but not a huge dramatic change that's going to show up next quarter.

Got it, thank you.

Sterling, I'm just going to build real quick -- this is Blake -- build on Scott's comments. What we have found as we improve the products and we start seeing better activation and usage, and folks really enjoying the products and using them, we see folks renew at a much greater rate.

That make sense.

Brian Essex, Morgan Stanley.

Great, thank you, and thank you for taking the question. Either Blake or Scott, I was wondering if you could talk a little bit about -- I know it's early days, but some of the dynamics of what you're seeing in the new Asian markets, and maybe relate that to India and what you've seen there, both from a pricing mix, and attach rate perspective? Are you seeing the similar profile of customer? I have to imagine that in some ways it's different, but maybe a little bit of color in terms of your initial take on penetration in those markets?

Sure, Brian. We've been in Asia, we've had customers in Asia for quite some time, so we've been doing analysis and modeling the way that they look. The dynamics in Asia are quite similar to what we've seen in India. The mix of products quite similar, pricing in local currency quite similar.

The customer profile generally is pretty homogenous. What they're trying to accomplish is the same. They're trying to get a digital presence, starting with the name, and trying to attach a website to it, and many times an e-mail address, as well. The dynamics for Asia are quite similar to other markets that we've entered in the last two years.

Okay. Is there anything about the experience that you've built penetrating other geographies that might make you do this more efficiently? What are some of the major things that you've learned, whether it's India or Brazil or other geos that have been stumbling blocks up front that maybe you've solved that equation going into Asia?

Look, we certainly have gotten better, I think, at entering, just because we've had the experience in other countries. We've certainly learned both, I think, in product deployment and how we -- our product performance, on how we do regional data centers that serve up speed and availability in local markets; then also how we spend into most markets at top-of-funnel and mid-funnel. We've spent time learning quite a bit on conversions and on how to really products that our customers feel are local. They feel local.

Hi, Brian, it's Scott. I'd add two things. One is the marketing spend and the activation to a market has been the learn. We've done this now in a half-dozen-plus big tier 1 markets, plus lighter and more direct spend in others. We're dialing in our formula for how much and the tactics around how we enter the market, and then grow it over time. That's been the big learning over the last three years. Frankly, it's just giving us confidence in our ability to enter additional markets, and grow share, and do so in a really scaled way.

Okay, anything you'd highlight as the biggest risk for you? The key thing you would have to get right as you penetrate that market?

This is Blake. The approach that we've taken, and being primarily software-driven and then spending into the market is very low risk for us. We learned quite a bit in India, and we grew our way into that over time. You'll see us take the same approach. As Scott said earlier, there is not a whole lot of dollars at work that are outside of the country. The engineering team that actually builds these capabilities is here in the US. We see good leverage from the work we've done in the US in these markets. It really takes a lot of risk out of the equation.

What's really helped has been, frankly, just a very clear name-centered offer and translation, and doing that with the local CCTLB and price points and payments that allows people to get that name and start to build their online presence, which has been the foundation of the business, has been the key to entering these geographies. Frankly, more than anything else, that's the thing that I think has given us confidence in entering these categories, because it's really anchored on name and then connecting that name to a digital identity and a larger online presence.

Great, thank you.

James Cakmak with Monness, Crespi, Hardt.

Hi, thanks. Just two, please. The first one on the gross margin. Obviously you guys have been able to expand that every quarter now with the growth in higher-margin categories. But with the bundling that we saw last quarter, I guess we perhaps should have expected somewhat of a slow-down in the rate of the gross margin expansion because of that bundling, but it was on par with 3Q. How should we think about the potential slowing of the leverage there as we look into 2016?

Secondly, on the macro comments that you made, largely 4X related, what we're seeing is weakening SMB environment, at least domestically. Can you talk a little bit about what you're seeing from small businesses in general at a high level? Thank you.

James, it's Scott. I'll take the gross margin one, and then Blake can talk about the SMB environment. On gross margin, you said it well. It's right, which is we've put up large gross margin expansion over the last six to seven quarters. We expect that to pretty much flatten -- you've seen it taper and it's flattening out, both as we bundle and merchandise, and frankly think about some of the new categories that we're going to add, and what that might mean from a gross margin percentage profile.

Again, the incremental products that we're adding and the merchandising approach from a dollar basis and a gross margin dollar basis is really attractive. Your point on tapered gross margin as we look into 2016 is exactly right, and that's the way to think about it. Blake, if you want to talk about the SMB macro environment?

Yes, James, thanks. This is Blake. Our businesses isn't counter-cyclical, but we see pretty meaningful resilience from small businesses. If you look back in time, the Company between 2006 and 2010 had double-digit growth. I think what it speaks to is that it's not just established small businesses, it's people that have new ideas and trying to take that idea online.

Frankly, that, I think optimism, that folks rely on themselves. When times get tough, they get a new idea and they're going to go do something with it. It usually starts with a name and then a digital presence after that. We see a pretty resilient market compared with some of the reports on that SMB environment. It's a positive trend.

Brent Thill, UBS.

Thank you. Blake, just following up on international. With the business application uptake, I wanted to be clear that you're seeing similar uptake that you would see international as you are seeing in the US, or is there any differences as you see the first-time customers coming in, as they look at maybe going with one product, or are they starting to bundle, similar to what you're seeing in the US?

Yes. Hi Brent, this is Blake. We see -- it's a subscription business, so it starts out with starts out with a first purchase and then builds it over time. As we enter our market, we see attach rates that start to model the other countries that we entered into. As O365 was rolled out around our e-mail applications roll-out, we see those things being attached, similar to the markets that are more mature internationally today, which start to look a lot like the US over time.

We'll see, I think, increasing penetration of O365 as an example. We offer that, frankly, in every language and market that we entered, and that's 53 markets and 26 languages. We expect to see a good penetration there.

Okay, great. Scott, just on the ARPU, you're been running double-digit for the last couple quarters. It's been mid-single digits, and I think you've been clear to not expect a double-digit pace. Can you remind us going forward your expectations for ARPU? Is a mid-single-digit number a number that we should think about for modeling purposes?

Yes, and Brent, ARPU over the last several quarters has been mid-single digits, so the pacing from the fourth quarter has actually been pretty consistent with how we have been running. Honestly, that's the way to think about it going forward, too. I think we are running the business with a nice balance between customer adds and ARPU growth. Frankly, I think what we've seen in the fourth quarter is a good way to think about it going forward.

Great, thanks.

Mark Mahaney, RBC.

Great, thanks. I think most of my questions have been asked. I hope this isn't a repeat. Can you comment on the net adds? They came in a little light versus what we expected this quarter. Did those come in largely in line with your expectations? Any color around them -- were the net adds -- was the source geographically, vertically similar to what you've seen in the past? Any trends in terms of retention or in terms of the gross adds, the churn? Thank you very much.

Hi Mark, Scott. In terms of the quarter on net adds, the total customer one is the right way to think about it, just given the size of the base and the dynamics across markets. The total customer growth was 9%. It's steady-as-she-goes stuff.

I wouldn't -- frankly, I wouldn't look too much about the immediate quarter over quarter, like just the translation of both year over year and what happens in the market is -- might make a quarter-to-quarter comparison a little wonky. But look, if you take a look at the customer adds, you're looking at 1 million-plus net new adds every single year, and that's the way to think about the business going forward. We're positioned and at the trajectory to absolutely deliver that.

Thank you, Scott.

Yes.

Gene Munster, Piper Jaffray.

Great. Thanks guys, and congrats on a solid quarter. First, on GoDaddy Pro, can we get a quick update on where the progress on that initiative is? Second, can you talk more broadly about India? How have the investments from VCs and big tech firms impacted the Internet adoption in that country?

Sure. Hi Gene, this is Blake. Look, we continue to add thousands of Pros through the program, a lot of Pros entering the GoDaddy franchise, which is great. When you think that 50% of websites are not built by individuals, they're built by professionals for small businesses or large businesses, for that matter. We've added the ability for our Pros to start including showcase on their portfolio works and previous work. We've added the ability for customers to actually find a Pro in our system and in our program. I think that we're, frankly, quite optimistic about it.

Half the Pros that are entering the program today are coming from outside of the United States. If you take India as an example, many and most websites in India are developed by a web professional, not by an individual. We think internationally the Web Pro program will have a pretty big impact for us.

On India, Internet adoption is -- it correlates with market growth, and we're seeing very fast Internet adoption in India. It's helping fuel the market there. We've seen a very nice growth profile there, and we see similar things in other countries as they start to model that same type of penetration and growth. It's a positive thing.

Great, thanks guys.

There are no further questions at this time. I will turn the call back over to the Company for closing remarks.

This is Blake, everyone. I want to thank all of you for joining us today. And most importantly, I want you to take a lesson from Jeb Bush and JebBush.com and go buy your name, and own your identity before somebody else does. I think I just ended on a cheery note like that. Anyway, have a good day, and we will talk to you next quarter. Goodbye now.

This concludes today's conference call. You may now disconnect.