GoDaddy Inc (GDDY) 2016 Q2 法說會逐字稿

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy second-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you, and good afternoon. Thank you for joining us for GoDaddy's second-quarter 2016 earnings call. With me today are Blake Irving, Chief Executive Officer; Scott Wagner, Chief Operating Officer and Current Chief Financial Officer; and Ray Winborne, who is joining the Company as our new CFO. 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 results, such as total bookings, EBITDA excluding equity based comp, adjusted EBITDA and levered free cash flow, net debt and ARPU. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalent, may be found in the presentation posted to our IR site at investors. GoDaddy.net, or on our Form 8-K filed with the SEC with today's earnings release.

The matters we will discuss today will 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, August 3, and we undertake no obligation to update these statements as a result of new information or future events.

I will now turn the call over to Blake.

Thanks, Marta. Hey, and thanks to all for joining us today. GoDaddy's second quarter was a very good one. Both our revenue and adjusted EBITDA exceeded the top end of our range, as we shared with you last quarter. 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.

In the second quarter, we have grown to serve over 14.3 million customers, an increase of more than 1 million versus a year ago. Our average revenue per user, or ARPU, rose 6% to $125, despite currency headwinds. Strong customer and ARPU growth together drove an acceleration in our top line this quarter. Our second-quarter revenue grew 18% on a constant currency basis, or 16% on a current reported basis, to $456 million.

In Q2, bookings grew 14% on a constant currency basis or 13% reported, to $539 million. Our adjusted EBITDA jumped 26% to $104 million in the second quarter, and we generated strong unlevered free cash flow of $84 million. We feel great about these results and what they say about the strength of our strategy and execution over the last several years, and more importantly, where we are headed.

In fact, several of us have approached our three-year anniversary at GoDaddy this year, and we took a step back to review our execution against the vision and long-term strategy we laid out when I joined the Company. Our strategy has gotten us to much more meaningful scale, doubling the size of the business over the last four years on both the top and bottom lines. And we're now building on the foundation we created, with an eye towards doubling the business again over the next four years.

I want to touch on our key accomplishments of the last three years, and then tell you how we will be expanding on what we've done in 2016, and in the future. Simply put, the last three years were about: first, building the product portfolio; second, expanding internationally; third, evolving our brand; and fourth, proving the strength and consistency of the business model. Let me expand on each of those.

First, on products. We've executed well on our product portfolio, enhancing our capabilities -- primarily in pre-existing categories, including domains, hosting, web presence, security, email, and email marketing -- by making our product set deeper, broader and faster. As well as more user-friendly performant, reliable, and more mobile. We've also expanded into new categories to serve more of our customers' needs, and integrated our products to make them more valuable together than they were individually.

You've seen us introduce new offerings like Managed WordPress, email marketing, clouds servers, Web Pro tools, Office 365 for Microsoft, SiteLock, and soon, we will add Telepathy with our pending acquisition of FreedomVoice. And we have been shifting our merchandising to bring our products together in bundles and allow better in-application product upsells -- like backup and security products for our hosting customers, and email marketing integrated with our Website Builder product. The product and platform teams have seriously been cranking.

Second, on international, our engineering and product teams have deployed GoDaddy in all major international markets around the world. We now offer our products and services in 29 languages and 56 markets globally, including local language sites and software, local currency and payment types, local imagery, local phone numbers for customer care, and live local language support in Europe, Asia, India and the US.

We now have over 4.5 million international customers, and generate more than a quarter of our revenue outside the US. With our global project and service rollout largely complete, we've evolved our focus from introducing more new markets, to establishing a larger footprint and lifting growth in the many markets we've now entered. We concentrated our efforts here by introducing a new marketing and sales organization dedicated to international. Think of this as an evolution from getting GoDaddy into every market that matters, to now focusing on growing and winning in our priority markets.

Third, on brand. As we've expanded our product portfolio and our global reach, we've simultaneously and deliberately shifted the GoDaddy brand strategy from one focused almost totally on generating awareness, to highlighting on our small-business customers and their experience, making it much clearer what we do at GoDaddy and we do it for. We've made meaningful progress, meaning, moving from US-centric brand awareness, to connecting our brand of positive product experience and broadening our marketing reach around the world. We are now concentrating our efforts on top-of-funnel marketing and conversion in our priority markets globally.

And fourth, on our business model, following the IPO, we've consistently demonstrated our ability to generate growth at scale, significant free cash flow, and business model consistency, with five straight quarters at or above our guidance. Look, in short, we've built an engine that has demonstrated real success, and we continue to tune and improve our ability to go after a large TAM of small and evolving businesses, and the go-getters who start them.

This year, we've made a very deliberate move in our product platform and marketing organizations to put proven leaders in place for the next phase of our growth, building on our already-solid foundation. Today we're doing the same for our operations, channels and marketing, as well as our finance organization.

To that end, we'll be separating the Chief Operating Officer and Chief Financial Officer roles. I'm pleased to announce that Scott Wagner is being promoted to President and Chief Operating Officer, where he will lead the Company's operations, channels and markets globally. I want to personally thank Scott for carrying the double load of both the COO and CFO roles for the last several years. He has done a killer job establishing our financial functions as a public Company, and has set us on a great path for the future, all while also running our Company's operations. Thanks a ton, Scott.

I'm also pleased introduce you all to Ray Winborne, who is joining GoDaddy as our Chief Financial Officer. Ray has great experience in finance leadership roles for global-scale businesses, serving as CFO for First Data Corporation and Controller at Delta Airlines and AT&T. Ray's technical and operational capability is proven, and his leadership has made those on his teams and everyone around him just better. I'm excited to have Ray join our team at GoDaddy, and know you're going to get to know him very well. While Ray won't be speaking to the second quarter on this call, I would like to introduce him. Ray?

Thanks, Blake, and hello to all of you. I'm thrilled to be joining such a great Company and a really top-notch team here. In deciding to join GoDaddy, I have been really impressed with the caliber and the depth of the technical and business talent we have throughout this Company. GoDaddy has clearly developed a great business, and it was easy to get excited about the purpose here, which is helping small businesses be successful. It also is about the massive global opportunity.

But honestly, it was the culture that brought me here. You can really see the spirit of GoDaddy's small business customers in everything we do. We're entrepreneurial, fast-moving, and intensely focused on customer service. The energy and the passion here is fantastic.

So some quick background. As Blake said, I'm a longtime finance guy, and I've spent my career with several large global subscription-based businesses. Scott and I worked closely together when he was at KKR and I was at First Data, so we've got a lot of shared history and personal and professional respect for each other. I'm really looking forward to digging in here and helping GoDaddy double in size yet again over the next four years.

I will keep it brief today, but I couldn't be more excited to be here, and look forward to spending more time with our investors and analysts over the coming weeks. With that quick intro, I will turn it back over to Blake.

Thanks, Ray. We're super-happy to have you. The story I shared with you all today is -- look, it happened -- I just went into, I think, that accent. (laughter) The story I have shared with you all today is one of strong execution over the past three years, and continuous improvement on our strategy. We feel really good about the quarter, our continued progress, and how our organization is positioned to take us into the next phase of our growth. With that, we will turn over to Scott for the financials.

Thanks, Blake. Let me add my warm welcome to Ray, who I am thrilled to have on the team. Ray is a terrific executive, a great person who is going to add a ton of value to GoDaddy.

Turning back to results, Q2 was strong on all fronts. Both revenue and adjusted EBITDA came in above the high-end of our guidance range, with acceleration in year-over-year growth. In Q2, our revenue grew approximately 18% on a constant currency basis, or 16% on a reported basis, to $456 million. We continued to see a nice balance between customer and ARPU increases, with customers growing nearly 8% over the last year to 14.3 million, and ARPU up over 6% to $125 -- even while absorbing the impact of the stronger dollar. Total bookings grew 14% in constant currency, or 13% reported.

When we spoke to everyone after the first quarter, we discussed business trends and specific merchandising tactics to drive customer lifetime value and annualized revenue, and noted that some of these may impact bookings and revenue differently. These tactics continued in Q2, including: one, the ongoing mix shift to non-domain products. Two, the rollout of free trial of our high-value products like Office 365 and our DIY Website Builder. And three, reductions in multi-year discounts.

These actions continued to show promise in terms of customer metrics, and you can see the positive impacts in our strong top-line performance and our [raves] guidance. We will continue to focus on driving activation and usage of our anchor products, because we know that when our customers try, and use, our products, they stay for a long time, and they spend more with us.

Turning to our revenue lines, we saw a nice growth across all three of our product lines in the quarter. Domains revenue finished the quarter at $230 million, up over 10% year over year. This above-market performance continued to be fueled by international growth, strong renewals, and expansion in the domains aftermarket.

Hosting and Presence revenue was $168 million in the quarter, up more than 15% year over year. As mentioned, we've been experimenting with 30-day free trial of our Website Builder product. And based on positive results, we're rolling this out across the GoDaddy geographies in Q3. Business Applications revenue grew 45% year over year in Q2 to $59 million, driven by continued strong growth in productivity and email marketing.

Turning to International, our revenue outside the US now represents 26% of total revenue, and grew 25% on a constant currency basis in Q2, versus reported growth of over 17%. We believe International will continue to be a strong growth driver in the years to come, given the horizontal need for our products and the strength of the GoDaddy brand and value proposition.

Turning to profitability, we continued to deliver strong cash flow. Adjusted EBITDA grew 26% in Q2 to $104 million, also above the high-end of our guidance, and producing a 22.7% margin, up 180 basis points versus prior year. Unlevered free cash flow was up 9% in Q2 to $84 million. In Q2, we converted 81% of adjusted EBITDA into free cash, in line with our long-term target range of 70% to 90%. As we've said in the past, on a quarterly basis, cash can be lumpy.

With our first tax-related payments beginning this year, we were in the middle of our target range for the quarter. The full-year 2016, we still expect unlevered free cash flow to grow for 20% versus 2015. We finished Q2 with approximately $482 million in cash and short-term investments, and net debt of $596 million, or about 1.6 times our adjusted EBITDA for the last 12 months. As everyone saw with our announcement of FreedomVoice, we're continuing to utilize the balance sheet to help expand our product portfolio and geographic footprint over time, and generate long-term shareholder value.

So let's discuss our outlook for Q3 and for the full year. For Q3, we expect revenue in the range of $468 million to $471 million, and adjusted EBITDA in the range of $102 million to $105 million. For the full-year 2016, we are raising our revenue range again, which is now $1.84 billion to $1.847 billion, implying approximately 14.5% growth at the midpoint, in line with the long-term targets we've shared.

We're also raising our full-year EBITDA guidance again to $410 million to $416 million. The midpoint of our new range implies 22% growth year over year, also in line with our long-term targets. Our third-quarter and full-year revenue guidance incorporate the expected impact of past currency movements.

Switching gears for just a sec, the SEC has recently issued interpretations on the use of non-GAAP reporting and guidance measures. GoDaddy has historically guided to and reported on a GAAP measure, revenue; and a non-GAAP measure, adjusted EBITDA. Our Board of Directors, management team and creditors rely on several GAAP and non-GAAP measures, including revenue and adjusted EBITDA, to assess the operating and financial health of our business.

As our proxy notes, our management teams compensated on the achievement of several target metrics, including adjusted EBITDA. And the investment community uses that measure, along with other measures of cash flow, to value the Company. At the same time, we're very committed to ensuring compliance with all the SEC's interpretations on non-GAAP measures.

So, in addition to the reconciliations we've always provided, we've provided new tables today that present the most significant components of our historical adjusted EBITDA measure. Which are EBITDA excluding equity-based compensation, and changes in deferred revenue and registry fees. Essentially, the main difference is removing acquisition- and sponsor-related costs, which have been less than $1 million per quarter over the past four quarters following our IPO.

We expect that any future presentation of the components of EBITDA will no longer adjust for these typically small acquisition- and sponsor-related costs. And following today's call, we intend to gather feedback on this presentation of the major components of our historical adjusted EBITDA measure, to help inform our future presentation.

Now, getting back to our business, Q2 was a very strong one. We're proud of our consistent delivery under strategy and strong financial results, and we remain focused on delivering continued revenue and cash flow growth as we keep building and scaling our business this year and beyond.

Thanks. And with that, we're going to open up the line for questions.

(Operator Instructions)

Mark Mahaney, RBC Capital Markets.

Great, thanks. Two questions, please. One, any color on specific international markets that drove that 25% year-over-year growth? And within that, to what extent Asia is building out -- in line with plans, ahead of plans, behind plans?

And secondly, small question on the gross margins. It looks like -- should we assume that going forward, we've just kind of reached a level and this is kind of a flat-lining level? Are there any major drivers that remain to cause gross margins to continue to expand in the future? Thank you.

Hi, Mark. This is Blake. I'll kick it off. I'll hand it over to Scott in a second. Most of that growth, that 50% of our growth in international markets, comes from our top-tier countries that -- you know, US, India, UK, Australia, Mexico, Brazil. So that's where most of our growth comes from. We don't break it out by country.

You know, I think growth overall, markets, is strong, and it's good. Some of those markets are new, very new for us -- as you pointed out, Asia. Asia is super-new for us. We've only been there a few months. We're happy with the results that we're seeing there. And frankly, we don't think it's going to be super-contributory in 2016. Asia is only about 4% of our total revenues. But we're happy with it, and we feel good about it, and think that Asia in 2017, 2018 will be a contributor. I will hand it over to Scott for some more deets, and then to talk about your other question.

Yes, thanks. So Mark, just to the international question, three points. One is, growth is being driven by the same markets we've talked to you about. It's share gain and just continued good performance across all of those geographies. And the second is Asia, still small, and too small to really affect the P&L, but we are really happy with kind of how it's looking out of the gate.

On gross margins, margins have flattened, I think, in line with what we've told everybody -- certainly last quarter and even the first quarter -- which is, they've tapered, particularly as we've lapped a couple of the big [O 365] incentives. But we're managing the business on gross margin dollars, not percentages and kind of are happy with the mix there. And I think for the forward couple quarters, people should expect the gross margins to be in line with what they are right now. And again, the focus for us going forward is around adding products and continuing to add gross margin dollars per customer, and not necessarily percentage.

Thank you, Scott. Thank you, Blake.

You bet.

Sam Kemp, Piper Jaffray.

Great, thanks, and welcome, Ray. In terms of the new product map that you guys are looking at, does that include any e-commerce or channel integration functionality, i.e., e-commerce, besides being able to integrate directly into, say, Amazon or eBay?

And then, can you talk a little bit about what you are seeing in India? Is that an accelerating domain environment, given everything that's come in, in terms of [VC] and large Internet investments? And are you seeing any deviations from the historical markets characteristics as being kind of a, more of a do-it-for-me-type customer base? Thanks.

Yes, hey, Sam this is Blake. In products, on e-commerce we have an online store product that does service e-commerce capability on our own website. In other markets -- and you use India as an example, where things like Flipkart and marketplaces are actually more important. There is some work going on to integrate in those marketplaces today. We have not integrated with marketplaces in the US, whether it be eBay, Amazon, Etsy, those types of things. But we do have some integration that we've done on the back end for using things like PayPal, et cetera.

On India, it's an interesting market, and it's actually quite similar to other markets at the same level of maturity -- I'll use Mexico as an example as well. Each one of these markets has a DIY component and a DIFM component. They all have both. But DIFM, do-it-for-me marketplaces, are much more important in India, Mexico, Brazil, because folks tend to have, I think, less ability to do their own websites.

So we have a Web Pro program that we've got 100,000 developers in now. And frankly, quite a few of those developers are from India. And they are building websites for other folks in their marketplace. And frankly, 50% of websites today are not built by the owner of the business, they are built by web pros. And we think that's a large marketplace, and an important marketplace for us.

Sameet Sinha, B. Riley.

Yes, thank you very much. A couple of questions here. Can you talk about the strategic importance of FreedomVoice, and how we should think about that being integrated into the overall product suite that's sold? And secondly, Ray mentioned he is looking forward to doubling revenues again in four years. Is that sort of a goal that we should also keep in mind while thinking about the Company? Or it was more about looking historically?

Hey, Sameet, this is Blake. I'll handle this in a quick second. I think Scott will probably tag-team on the doubling question. On FreedomVoice, look, we know that our customers have told us they have -- you know, they are sole entrepreneurs in companies of only five people. They have what I guess I would call complicated lives, where they are trying to manage their personal life and manage their business at the same time. And many of them are trying to do it on a single phone.

So what we intend to offer with the FreedomVoice acquisition is a second phone line that exists on your mobile phone. So you can tell when a phone call is coming in from a customer versus, for instance, your junior high school kid's teacher, and be able to separate those two roles you've got as parent and business owner.

From an integration perspective, we end up with a really interesting signal strength. Both in Website Builder or Managed WordPress, when somebody enters a phone number on their website, we have the ability to actually make an offer for them and say, hey, we have a phone line that is available for you as well, if you would like to manage your business as a professional phone number. And then, offer it for them.

And if you think about philosophically, about naming your business and actually searching for a good name, whether a domain name or just a trademark business name, it's another opportunity for us to get in front of them with a phone number that is more relevant to their business than otherwise would be. And give them a choice, that same kind of choice that you have in a domain name, where we can allow you to go into a local area code or have an 800 number, to provide call trees that will allow you to basically look bigger than you are, or be in a very specific location by having the right area code. I'm going to hand it to Scott on the doubling question.

Yes, thanks. I think, in some ways, that was an acknowledgement that over the last four years, we have doubled. And if we look at the business going forward, you think about our customers, which are now 14 million-plus, we're on a pathway where we could see trajectory to 20 million over that next four- or five-year period.

And then ARPU, looking historically, we went from the 90s-ish ARPU number to now $125, and believe with the product portfolio and the merchandising approach we have, that we're on a runway to $150 to $175. So at a really step-back and high-level math, runway to 20 million customers, ARPU of $150 to $175, that's where you get the doubling. But don't hang up on the precision of the four years.

Okay. And one final question, if I can squeeze it in. I know that historically, the way seasonality has worked is, Q3 to Q4, you see a drop-off in margins. This year, with your change in tactic, and especially no Super Bowl in Q1, do you think there's a chance that -- the way to ask it -- are there any sort of -- anything stopping you, anything else apart from these marketing tactics, that's just depressed margins?

There is -- you said -- that's right, that the seasonal profitability has a little bit of a slight downturn in the fourth quarter. Still think about that going forward. And our guidance gives you the best range of where we think EBITDA is going to land. And again, that's nice 20% plus growth year over year.

Thank you.

Sure.

Ron Josey, JMP Securities.

Great, thanks for taking the question. I think you mentioned in the investor deck that the domain business is seeing increasingly strong renewals. And I was wondering if you could provide some additional context here just around renewal rates, perhaps how churn has trended over the last year or so?

And then I think your commentary around bundles and [that] product upsells. Any update just on maybe the updated pricing and approach maybe that helped drive bundles and upsells in the quarter around going less discounting going forward? Thank you.

Yes, thanks, Ron. It's Scott. Domain renewals are -- rates are nice and strong. We don't share those specifically publicly, but we're on a nice trajectory there. And really, that's an offshoot of focusing on domain names that are attached to customers, and even more so, ideas, and bringing those ideas to life. And when we get a customer a great name for their idea and then help them bring it to life online, as we've all seen, know and that when that happens, customers stay for a long time. So our domain approach has been particularly focusing the business on attaching a domain name to an idea, and then making it happen. And when we do it, it shows up in great domain renewal rates, and that's what we're seeing.

In terms of the pricing approach and impact on renewals and churn, again, merchandising goal is to get our customers into the right set of products -- a name, presence, productivity -- that are involved around branding and naming your idea online, and getting those activated. And when those get activated, we see really strong impact on our renewal rate on a product basis.

And, based on that, can you comment just on Flare? Is that, I'm assuming, directly related to what you're seeing? Thanks.

This is Blake. On Flare, Flare is an interesting product. Flare's notion is to actually go upstream from the domain name. It's not something that we generate revenue with, we actually allow a user to put an idea out into a marketplace of folks that can comment on that idea and actually improve the idea. If it gets over 10 likes, or what we call 10 loves, then they actually can go back and forth with folks and build the idea up into something significant.

Now what we get from that is a large corpus of data that we store in our back end, that gives us signal strength on what that idea is and how well that might perform. And with that data, we also have an opportunity to know exactly what we can market to that person in the next instant when they're ready to take that step, whether it is a domain, whether it's a website, whether it is a professional email address, that lets them take that next step. But we view that not as a -- I wouldn't call it a money generator. It's more of a method for acquiring customers and getting them to take a first step, that first brave step of saying: I'm going to actually take a leap of faith and go and try this thing out. And get enough feedback to take the first step.

Got it. Thanks guys.

Yes.

Deepak Mathivanan, Deutsche Bank.

Great, thanks, guys. Two questions. First one, a big-picture question. You mentioned that 50% of the market is still built by web pros for website building. On that topic, can you help us parse down the growth profile between hosting and site build-out? Because the demand for website building, using platforms like WordPress and then using hosting products from GoDaddy -- still how big, given that there is some strong propensity to use DIY tools recently?

Hey, Deepak, this is Blake. Yes, 50% of the sites that are built by individuals using DIY tools, and 50% that are built by pros. Some of those pros are even using what you would consider to be a DIY tool to build for folks. Managed WordPress and WordPress products have actually gotten simpler to use. And frankly, we've seen really good growth in our Managed WordPress product. In fact, it's some of the fastest-growing -- one of the fastest-growing products we've got.

Managed WordPress is doing incredibly well. And frankly, you know, I think the market is so darn big that, you know, companies can grow in the DIY space, our DIY business can continue to grow, our web hosting business can continue to grow, and we just get better at both of them. The opportunity is not just in the DIY space. There's an opportunity for websites that have been out there for a while, to get them refurbished, to get them on newer, updated, more responsive code bases, so they look great on a mobile device, they look great on a tablet, they look good on a PC.

So that demand continues. And frankly, we do something at GoDaddy that is interesting. Where folks say, I'm going to go build this myself, we actually will help them when they don't want to build it anymore. So we have a professional web services group that will take that almost as a continuum, if you will, where I start as a DIY customer, I might get to a point where I'm doing a do-it-with-me, a DIWM customer, and then say, look, I'm going to hand this off to you and allow you to do it for me. So that continuum really reflects the need states of customers, where they say, I'm going to try it myself, and then I'm going to basically hand it off to somebody else. And we're the only Company that is really doing that today. And moreover, and I think most importantly, we don't have an opinion that it's like DIY and there is a proprietary way of doing DIY.

We actually believe there is DIY, and people are going to do it themselves. And we also believe that the hosting business and professional business is very important, and there are different tools that people use to do both. And we're the only Company at scale that offers both of those things. So we offer a great website-building experience at scale, and we offer a great web professional experience at scale on things like Managed WordPress, Joomla, Drupal, Ruby, and Cloud Servers that offer pretty much any type of tool you want to use to build a site for somebody. So we're not taking sides or placing bets on either side, we are offering both DIY and DIFM to small companies and to developers

Okay, that's helpful. And then second question. Historically, domains used to be a geek, new-customer on-ramp channel for you. Now with the initiatives around bundling for the website [build-up] products, et cetera, can you explain what the mix is like for the new [gross-up] customers that you bring in for different products?

Deepak, we're still -- for new customers coming into the franchise, a large portion of them all certainly still start and have a domain, but they are also attaching that domain to some form of presence and O 365. But domains is still a big anchor to the on-ramp. But again, it's being anchored with one or two, or some cases, all three of our other products.

Now, looking ahead two, three years down the road, we're encouraged and we're excited by the possibility and the potential for a category like what we've done for FreedomVoice, and through voice, to serve as a distinctive on-ramp for additional customers. And to continue to go at certain segments of the market, whether they be pros who are big influencers of downstream customers, to provide experiences for those segments. So we think that there's a couple of different ways, both products and channel go-to-market for certain segments of the customer base, that are going to add different on-ramps for customers into the franchise.

Great. Thanks, Scott.

Yes.

Mark May, Citi.

Hey, thanks. And congrats to Scott, and welcome to Ray. I think most of mine have been asked, but maybe, Scott, just going back to the gross margin question, I'm guessing one of the reasons why, you know, it keeps coming up, is a little counterintuitive. Because we're still seeing hosting presence and business [apps] sold to non-domain businesses, you know, growing and becoming a bigger portion of the mix.

You know, you're guiding to kind of expect for stable growth, I guess. We're always under the impression that the domain's gross margins is quite a bit lower than the non-domain's margin. So maybe if you could walk us through why that, in fact, is not translating into higher gross margins? Or if your commentary on that is just sort of in the very near term, but over the next, you know, year or two plus, you have a different expectation?

And then on FreedomVoice, I got your sort of game plan going forward and the strategic fit. But can you confirm, the deal hasn't closed yet, is that right? And if that's right, I'm assuming it's not in any of the numbers that you have either provided or guided to. And if that's the case, I had a couple of other follow-ups on FreedomVoice, if I could.

Okay. So first point on gross margin, the gross margin relates to the anniversary of a series of incentives with our partner in productivity that enabled us to provide special bundles around productivity suite, presence and a domain name for the first year. And we're lapping those first year, frankly, incentives that are getting to a normalized rate in terms of licensing payments for our partner. And that's normalizing gross margin at the percentage that we're at. And sorry, if that hasn't been clear. We've tried to be explicit about that for the last several quarters. But that's the reason for the tapering.

I think it's important to point out that our EBITDA margins continue to grow nicely all the way down through cash flow as well, because it's leverage in the model. So we've tapered the gross margin percentages now, but are seeing nice scale through our OpEx lines, particularly tech and dev and G&A, and even, over the last quarter, care, as we continue to build out the business. So these things are working together and we're intentionally working them together to continue to show nice growth on top and bottom line. So hopefully that both provides context on the gross margin and on EBITDA.

Specifically on FreedomVoice, it's not closed yet. We expect it to close later this year. There's a whole host of FCC licensing requirements when you get into the voice business that makes the close longer than expected. And so that's still TBD in terms of the close. In terms of guidance, we have a tiny bit, you could call it, expected in the fourth quarter. I mean, we do expect FreedomVoice to close before the end of this year. And sort of therefore, implicitly, you could say that we have it included in guidance a little bit in the fourth quarter.

And can you comment on -- I think there's some reports out there that the business is doing about $30 million in revenue. Is that roughly correct kind of relative growth, relative to the GoDaddy business relative margins, et cetera?

No, sorry, that's way high. I think we had said before that it's per quarter a couple million, $2 million-ish per quarter in terms of what we're going to be inheriting on a size basis. So that's the quantum of the business that we're getting today.

Okay, thanks.

Yes, thanks, Mark.

Jason Helfstein, Oppenheimer.

Thanks, just [a-sue]. So can you talk a bit more about marketing? You know, when you kind of think about -- I know you generally think about it relative to net bookings, but it does seem like there's some consistency to revenue, and kind of how you're thinking about that? So obviously this quarter, we saw de-leverage on net bookings., but stable leverage on revenue. So just kind of how you guys are thinking that?

And then secondly, any update on the cloud product? Because I guess it's now what, two full quarters since that's been in the market. Thanks.

Yes, Scott, Jason, on marketing. For our marketing dollars through this year, our spending is going to be probably a lot more proportional on a quantum basis as you go quarter to quarter to quarter, from just a broad dollar standpoint. And so part of that was having a consistent level of spend and mix between the US and these different international growth markets that we're putting our shoulder behind and seeing nice results. And that's really how to think about marketing for Q3 and Q4.

More importantly, into 2017 and beyond, is about taking our go-to-market dollars, and not only the markets that we are in and growing nicely, but adding more geographies. And we think that there's several nice probable possibilities for us. As well as building up and putting our shoulder behind some of these either new product customer categories or products themselves. And you'll see again our marketing just go to support these different products and different geographies. Blake, do you want to (multiple speakers)?

Yes, hey, Jason, it's Blake. Hey, on the cloud front, we announced in March, so we've had basically four to five months of time in market. We're happy with the results that we've seen in cloud. It is resonating with developers and the folks that are building websites for other people, which was our assumption.

You know, frankly, we feel like it's -- I wouldn't call it a significant contributor. But we're happy with where it's growing and how it's pleasing the customers that are using it. And it's a great mix for the Web Pro product line, with adding a ton of languages on top of a cloud infrastructure, that we weren't able to offer before. So we're happy with it.

Thanks.

Yes.

Aaron Kessler, Raymond James.

Great, thank you, guys. A couple of questions. First, any update on the number of domains [added] into the quarter, as well as your market share? And just any -- do you have the amortization of intangibles for the quarter? I believe that might be in the Q. And also, do you have potentially dilutive shares with options as well? That would be helpful. Thank you.

Yes, Aaron, it is Scott. So in terms of number of domains, we have approximately 63 million domains in the portfolio -- give or take, right? Which, again, the important number there is that, that's 20% of the world's domains in the portfolio. An important note is, we're focused on adding domains that have customers attached. So our focus around the domain business is the names that lead to other things versus just the names themselves. So that's, I think, domain point number one.

In terms of the amortization question, sorry, it's going to be in the 10-Q, which you're going to see tomorrow AM, so maybe we can kind of pick that up either after the call, or you can just find it in the Q tomorrow. And on a fully diluted basis, shares are -- if you use approximately 176, that's the number.

Great, thank you.

Yes.

Brian Essex, Morgan Stanley.

Hi, good afternoon, and thank you for taking the questions. I was wondering if you could just touch on -- I got the 14% constant currency bookings growth. But could you give a little bit of color, you know -- I know last quarter, there was a little bit of confusion around duration and on how much the reduction and discounts impacted the duration, and therefore, the duration, if you will, the duration adjusted growth of that number. Maybe just a little bit of detail there?

Hey, Brian. The exact same stuff last quarter that we talked about -- so free trial of Office 365 and Website Builder -- some of the shorter duration which is just mix-related in the reduction of discounts has continued. So all of the language and discussion that we had around bookings last quarter, we have not only continued into this quarter merchandising-wise, but ramped them up in the case of free trial. And you know, the bookings number accelerated on a year-over-year basis.

Great. And then if I could, I can't help but notice you are building a little bit of cash on the balance sheet. You know, as [rate tax] transitions in and you build that cash balance, just kind of wondering what your priorities might be, and how you might think about, you know, return on capital going forward?

Yes, thanks, Brian. So we're certainly think that there's opportunities to add to the franchise both products that are valuable in the lifecycle of our customers, that probably aren't great standalone businesses, but may be really good products that we can attach to our customers and technical platform and care model. And add value to our customers, and obviously make that economic. And geographies as well.

So obviously that translates into -- we think that there's good ways to use the balance sheet to grow the franchise strategically. But we'll keep being -- and FreedomVoice is a perfect example for that, right? Which was tiny in terms of dollars outlay, but is a good example of what we're talking about doing. And we like having the flexibility to do it, and we're shareholder and economically minded people, and we're going to do that intelligently. And it's going to have to be, we think, accretive relative to what we're doing organically.

Now, we love the flexibility of having the cash, both for growth and for what it can do in terms of our share count and in terms of just the economic return to the balance sheet over time. And so it's just nice to have the flexibility to be able to do that.

And how might you manage debt in the process? I notice that debt picked up a little bit. So this time, I'm wondering how you balance between the two?

Yes, I think at this point, like you said, we have cash, and relative to our leverage position, we have a lot of flexibility. I think that's the way to look at it. You know, as we've shared before, the business, if you're looking at it truly from just the operational cash generation of the business, two to four times is a really nice leverage ratio, given the cash characteristics and the stability of the business. Obviously we're below that. But we're not going to [uninterested] that ratio, but I think that should give everybody indication of where certainly comfort lies, and where we are relative to that ratio.

Great. Thanks for the insight, and nice, clean quarter.

Thanks, Brian.

Brent Thill, UBS.

Hey, Scott, just congrats on your new role. But with moving the CFO title, where do you expect to be spending most of your time? Where you think you are going to have the biggest impact now, with that time freed up?

Thanks, Brent. Really this is about the go-to-market, international marketing using our care organization around the world to both deliver a great experience and to help enable the business. And so if you think about those three areas, we're really putting our foot down on the gas across all three. And if you add in corporate development and the flexibility we have on the balance sheet that Brian so nicely articulated and pointed out, you know, those are sort of the four different avenues that you can think about just growth. And it will be where I'm spending my time.

And it's great to have Ray here, because the size of the Company now, as a global public Company with the financial scale around it, it just makes perfect sense to have, frankly, a full-time strong, fantastic executive on the finance function day to day. And it's going to let me spend my time thinking about those different areas of growth.

Okay, thanks for that. And Blake, I know you understand the bundling concept better than most, given your time in Microsoft. When you think of the bundling opportunity going forward, it just seems like there's a lot more that you could do. Could you just talk about the strategy and what you're seeing?

I know you have had domain website emails as one of the hot deals on your website, if you will. And it just seems like there's a lot more you can do there. What's your vision in terms of where you think you can go with this?

Yes, Brent, hey, this is Blake. The bundling strategy has been working well for us. We have deployed it, as you described, the domain website email. But I think not just bundling, but in-application selling, which is something that Microsoft really didn't have the capability of doing back in the days of Office, because it was a packaged product.

Where we believe that not only can you bundle products effectively and create a powerful merchandising moment for a customer. But there are other opportunities for us to sell not just a bundle, but actually sell them the thing that makes the most sense for them at a point in their product lifecycle, in their customer lifecycle.

And if you use the voice capability -- and FreedomVoice is an example -- there's an opportunity for us to offer a voice capability when somebody pushes a phone number into a website, as an example. Or to offer email marketing -- while it wasn't in the initial bundle -- to offer email marketing when they've got a sufficient number of folks that have entered their email address into a website. That incremental capability, which we will offer on a free trial basis, so they can try it out and see how it works, and then use it and then get a response, allows them to take that next step and grow their business further.

If you think about the hosting business, it's exactly the same for protecting somebody's website, whether it's offering SiteLock to them, or offering a backup capability. Doing that in the product when you're in the control panel and you're actually using it. So it doesn't necessarily have to be at the point of merchandising, which we been quite successful at. But even taking it the next step and using the cloud capability and cloud functionality that all of our products exist on, to offer the next best thing based on the data we have on that customer.

And at a macro level, the vision for us is to have enough big data on customers, and enough big data on customer lifecycle and product lifecycle, to know exactly when to offer the right product at the right time to a customer's perfect situation. And you're seeing us start to roll that capability out. And I think it's pretty differentiated from what we've done before, and differentiated from what other folks are doing in our business today. It's just a very different approach.

Thank you.

You're welcome.

(Operator Instructions)

James Cakmak, Monness, Crespi, Hardt & Company.

Hi, thanks. Two please, one on bookings, one on EBITDA. So Scott, appreciate the color on bookings. But the adjustments that you are making there seem to be working well. Do you think conceivably, based off the learnings that you have had, that we could potentially see some further adjustments down the road? Or do you feel comfortable that now things are working, this is the new normal for bookings?

And then secondly on EBITDA, if I understand correctly on the international, you are where you want to be right now, and you're going to be scaling that business. Your long-term and EBITDA growth is only at 20%-plus. You're outperforming that. So should we think of that as a base case and a measure (technical difficulty) for a pretty decent upside from there? Or just how to think about the long-term versus the internationalness in scaling that business?

Yes, thanks James. So on bookings, boy, let's think about the pacing that we are on as being a good one, and think that, that's probably the best thing or the appropriate thing to say publicly. And given the size and scale that we're at, that's a pretty big quantum of incremental growth. So we think that, that's at a pretty nice pacing for where we are right now, and is in line with those long-term targets that we've shared with everybody, you know, what is now well over a year and half ago, in terms of low- to mid-teens top-line growth, and we're squarely in that zone.

In terms of EBITDA, as you pointed out, we been 20%-plus for a while. Just thinking about the growth at scale and the balance of reinvestment, which is what we've been kind of doing and quite focused on, the 20% number is a good one. The nice thing about this business and where we are is, we're able to invest in geographies and products and capabilities like the in-application purchasing that Blake is describing, that are great for the long-term health of the business. But we're still able to drive a hell of a lot of EBITDA and a hell of a lot of flow through the P&L in the short term.

And I think that's what everybody -- that we've been doing it, and that's the best way to think about it going forward. You know, and those are financial metrics and performance. But hopefully, people appreciate that, that's a competitive advantage of the size and scale, to be able to invest in either marketing dollars or engineers or markets at the size that we have and still produce these results, is advantageous relative to other people in the market who are doing what we're doing.

Yes, just a pile onto that, James, one of the things, what I will call scale advantage, as well, we are the only Company that services the small businesses that has built a platform that is scalable at a global level, that allows us to add products in-market all at once. And if I use -- I'll use the Cloud Server launch as an example. Four months ago when we launched Cloud Server, we launched it in every one of the markets that we are in simultaneously. And that type of advantage of the platform we built differentiates us substantially from other folks that offer the same type of service we do.

Great, thank you.

And there are no further questions at this time. I turn the call back over to the presenters.

Hi, everybody, hey, this is Blake again. Thanks to Scott for all that he's been doing. Welcome, Ray, to GoDaddy. Super-glad to have you. Congratulations, Scott. And we hope to speak to all of you one quarter from now. Thanks, everyone.

And this concludes today's conference call. You may now disconnect.