GoDaddy Inc (GDDY) 2018 Q1 法說會逐字稿

Good afternoon. My name is Tim, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the GoDaddy First Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you. Ms. Christie Masoner, Senior Manager, Investor Relations, you may begin your conference.

Good afternoon, and thank you for joining us for GoDaddy's First Quarter 2018 Earnings Call. With me today are Scott Wagner, Chief Executive Officer; and Ray Winborne, Chief Financial Officer. We'll share some prepared remarks, and then we'll open up the call for your questions.

On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics such as total bookings, unlevered 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 equivalents may be found in the presentation posted to our Investor Relations website at investors.godaddy.net, or on our Form 8-K filed with the SEC with today's earnings release.

The matters we'll be discussing today include forward-looking statements, which include those related to our future financial results; new product introductions and innovations; our ability to integrate recent or potential future acquisitions and achieved desired synergies, including our recent acquisition of HEG and our proposed acquisition of Main Street Hub. These forward-looking statements 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, May 8, 2018, and we undertake no obligation to update these statements as a result of new information or future events.

Unless otherwise stated, when we refer to organic measures, we're referring to those measures excluding the impact of HEG and Main Street Hub.

I'll now turn the call over to Scott.

Thanks, Christie, and thanks to all of you for joining us today. We're pleased with our strong start to 2018, with first quarter revenue up 29% and unlevered free cash flow growing even faster, up 42%.

As we discussed with many of you at our recent Investor Day, we're seeing consistently solid growth and executing on a strong road map in 2018 with particular focus on driving towards a best-in-class customer experience, increased product breadth, expanding our go-to-market approach and deepening the capabilities of our platform and our technology. Since we shared a detailed overview of our strategy and specifics on our plans and progress at our recent Investor Day, I'll quickly touch on them here and otherwise keep my remarks brief.

We want GoDaddy to be known as the place where ideas start, grow and thrive online all around the world. And we know that what we do for our customers really matters. And if we get that right, we can be a key catalyst in the success of our customers' businesses, ventures and ideas. Our strategy is about fulfilling the promise of our customers' ideas through great products, a seamless end-to-end experience and meeting our customers wherever they are in their life cycle through our go-to-market efforts. And the opportunity ahead of us remains enormous, whether it's addressing the needs of new customers or in expanding what we do with our over 17.5 million existing customers.

Each of the 5 individual elements of the strategy we shared at our Investor Day and the underlying road map are powerful alone, but the combination is what's compelling. Our strategy wraps together in a way that we believe has the potential to deliver something great. Perhaps you can think about it as the how, what and where of our engagement with our customers. Let me flesh that out a bit.

First, we've been talking this year about our intensified focus on customer experience. This is about investing in how our customers engage with us through all the different touch points they have with GoDaddy. Whether our customers experience GoDaddy through our marketing, our website, our individual products and dashboards, our customer care reps or any other channel, those experiences should be delightful and feel incredibly consistent.

This investment in customer experience extends across everything we do. For example, we're looking at unique ways to engage with our customers, including vertical merchandising, subscription options and solutions that group individual products together based on segment and vertical. Ultimately, we want to create simple, elegant, seamless experiences for GoDaddy customers. And over the long term, we believe the benefits will show up in product activation, customer engagement, success, renewal and, ultimately, in ARPU.

Turning from how we engage our customers to what we do for them, the second pillar of our strategy revolves around our product portfolio. And we continue to innovate there, building on existing products and technology where and how we can extend our products to meet our customers' needs. We're pleased with the momentum of GoCentral, and we're also addressing the expanding needs of our customers in a world where having an owned website is really just the start. A truly complete online presence includes a consistent appearance across not just a website, but social media, listing services and more. Our recent acquisition of Main Street Hub is an example of how we intend to do more to help customers manage their brands across multiple online points of presence, including social media, ensuring that they're showing up everywhere they need to be online.

I mentioned the how of customer experience and the what of our products. The third block of our strategy is our go-to-market efforts. That is, where both new and existing customers see GoDaddy. Over the last 5 years, we've proven that our product and go-to-market models work all around the world, and international expansion will absolutely remain a key component of our growth. We have an opportunity to expand our brand so that GoDaddy stands for online success globally. And we'll add both spending and capability to have more conversations with our existing customer base, which we believe will also translate ultimately into ARPU.

And all of this investment in customer experience, products and go-to-market is underpinned by our single technology platform. The fourth and fifth blocks of our strategy focus on the platform and technology that power everything we do for our customers. Our platform is built to allow all of our product applications and marketing tools to work better together and provide a highly performant, secure infrastructure and environment. We'd encourage everyone to spend some time with our Investor Day materials on our IR site for a deeper dive into our strategy and road map.

As I wrap, I want to emphasize that while we're focused on delivering results in 2018, the majority of our efforts this year are about building a business that can deliver in 2019, 2020 and the years to come. We're proud of the consistency of our execution to date, and our strategy in our investments are intentionally longer term. We've got a good business, and we're well positioned to grow it and evolve in meaningful ways, and the numbers are showing up.

And with that, I'll hand it over to Ray.

Thanks, Scott. I'll cover 3 points on the financials today. First, we're executing well, delivering consistent growth on the top line and solid growth in customers and ARPU. Second, we're getting solid margin expansion through operating leverage while continuing to invest in the business. And third, the highly cash-generative nature of this business creates financial capacity that positions us well to pursue value-creating opportunities.

On my first point about our top line, revenue grew 29% to $633 million, including a $69 million contribution from HEG. Excluding HEG, organic revenue was up 15% versus last year, reflecting a nice sequential lift from the Q4 growth rate. Roughly 1 to 2 points is incremental growth in aftermarket domain sales, with the remainder attributable to stronger performance across the board. There were 3 primary drivers of the sequential increase in HEG's revenue: the seasonal boost from World Hosting Days, a series of events primarily held in Q1, a modest currency tailwind, and the diminishing impact of purchase accounting as revenue normalizes to reflect the run rate of net bookings.

Looking at our 2 revenue drivers, customers grew 17% to 17.7 million, and ARPU rose 6% year-over-year to $138. A straight ARPU calculation would yield an increase of 11% this quarter to $145. Remember, HEG closed immediately after Q1 in 2017, so we've adjusted our ARPU calculation for this quarter so it includes both HEG's revenue and customers for the entire annual period to more accurately reflect ARPU growth versus last year and the anticipated trend line going forward.

Our total bookings were $783 million for the quarter, growing 25% year-over-year, benefiting from similar factors as revenue.

On international, revenue came in at $227 million in Q1, growing 69% year-over-year including the contribution from HEG. Organic growth returned to the high teens, as anticipated, as pressures have subsided from currency headwinds and geographic shifts in aftermarket sales. Our international business now represents over 1/3 of total revenue at a more-than-$900 million annual run rate. We're in over 50 markets around the world with leading positions in many key markets, positioning us well for continued strong growth.

Turning to my second point on cash generation. Unlevered free cash flow grew 42% in Q1 to $162 million. That's over 200 basis points of year-over-year margin expansion, bringing our cash margin to over 25%. Our scale is driving operating leverage and producing strong flow-through on incremental top line growth. Organic unlevered free cash flow growth was solid as well, growing in the 18% to 20% range year-over-year, in line with our longer-term expectations.

On my third overall point about the balance sheet, we finished Q1 with approximately $730 million in cash and short-term investments. That put net debt at $1.75 billion or about 2.7x net leverage on a trailing 12-month basis. We've delevered by over a full turn since acquiring HEG a year ago.

Our long-term focus remains on driving strong and consistent cash flow. As we highlighted at the recent Investor Day, we expect to build significant financial flexibility in the coming years through growth in cash flow and borrowing capacity. And we remain committed to being thoughtful stewards of capital, driving attractive growth in levered free cash flow per share for our investors via internal investment, acquisitions and share repurchases over time.

So let's discuss our outlook for Q2 and the full year. Given the strong Q1 performance and outlook for the remainder of the year, we're raising our full year revenue guidance to $2.62 billion to $2.64 billion, representing approximately 18% growth at the midpoint versus 2017. This includes the anticipated contribution of roughly $10 million per quarter in the back half of the year from Main Street Hub. As a reminder, we've now lapped the acquisition of HEG this quarter, so growth for the remainder of 2018 will reflect the diminishing impacts of purchase accounting each quarter. Cutting through the impact of acquisitions, we expect organic growth for the full year 2018 of roughly 13%, which backs out the HEG contribution in Q1, the impact of purchase accounting last year and the expected contribution of Main Street Hub in the back half of the year.

Turning to Q2. We expect revenue in the range of $640 million to $645 million, reflecting approximately 15% year-over-year growth at the midpoint. Q2 last year included an $11 million reduction to revenue from purchase accounting related to HEG, so the underlying growth this year is closer to the 13% full year organic growth I highlighted.

Turning to cash flow. We are raising the midpoint of our unlevered free cash flow outlook by tightening the range to $615 million to $625 million. That implies 25% year-over-year growth. Note that our unlevered free cash flow expectation for 2018 absorbs the Main Street acquisition while also creating some capacity for investment in the customer experience and some of the new moves in branding and conversational marketing we discussed with you at Investor Day.

Just a reminder that our cash flow guidance includes total cash tax-related payments in the $25 million to $30 million range, comparable to 2017, and excludes a onetime tax payment of $24 million associated with the gain on the sale of PlusServer last year.

Stepping back, we continue to create franchise distinction and competitive advantage with proven execution and a business capable of delivering double-digit top line and 18% to 20% growth in unlevered free cash flow.

With that, I'll turn the call back over to Scott.

Thanks, Ray. We look forward to continuing to deliver against our strategy, growing the business both this year and long term all around the world.

Thanks, everyone, for your time, and we're ready to open the call to your questions. Operator?

(Operator Instructions) Your first question comes from the line of Mark Mahaney with RBC Capital Markets.

Great. Could you provide a little bit of an update on the -- of the AWS decision, the rollout plans of the cloud migration? And then maybe not just on the cost side, but maybe in terms of additional business opportunities that, that could create for you. And I know that's only a month or 2 since you last talked about it, but any update on your thinking on that would be great.

Yes. Sure, Mark. First and foremost, the rollout and the logic around it is having a fantastic global, high-performant infrastructure that we can use for our applications and experience. Boy, we're in the early days, and this is going to be a multiyear journey, and so really, no meaningful commentary to speak of in terms of the economic rollout. It's super early, and we're just starting that transition, both for us using the AWS infrastructure and some of the GoDaddy products to hopefully get deployed into the Amazon experience as well.

Your next question comes from the line of Matthew Pfau with William Blair.

I was hoping to just get a little bit of an update on the international business, and specifically around HEG. How has cross-sell been going into that customer base? And what has retention been like there? And then also, now that you have more feet on the street there, how has the growth rates been in HEG's core markets in Germany and the U.K.?

Hey, Matt. It's Ray. I'll start, and I'll let Scott come over the top if he's got anything to add. We've been very pleased with the results that we've had out of HEG. And actually, it's GoDaddy EMEA. We're running those together now. So the merchandising and marketing and operations are all being run as one unit. The growth rates have been as expected there, and we're continuing to make great progress on the integration. And then lastly, these synergies that we had projected are being delivered. So overall, very pleased with the results there. I don't know if, Scott, you want to add anything around customers, but...

Growth is nice across EMEA. And again, part of the opportunity for us is to take what's a pretty large footprint in the U.K., and then build off HEG's -- what we -- niche brands in Germany and be able to accelerate, really, the GoDaddy footprint across Continental Europe. And so in addition to the cross-sell and retention efforts that you described, really, we're working on, first, a global product portfolio; second, a consistent care model into EMEA; and then, third, what's going to be more and more presence across the continent in terms of go-to-market that hopefully, over time, will show up and it's going to be focused against the GoDaddy brand. We're happy with where we are.

Your next question comes from the line of Sam Kemp with Piper Jaffray.

Great. So Scott, at the Analyst Day, you made a pretty compelling case that GoDaddy's got a large opportunity to expand the product set they're able -- that you're able to sell into your customer base and the different ways you can serve your customers. And then I'm just -- the slide that is coming to mind has got like several dozen different product ideas that you guys are going after. If you think about the remainder of 2018 and then the early 2019, can you just call out what you think are the kind of key products that you can address in the near term? And then, secondly, any particular reason that the aftermarket's been strong in Q1?

Thanks, Sam. I'm smiling with your question. I think that page in the market landscape's gotten a lot of attention from a lot of different parties. I think, in any specifics, I'd actually like to go back and highlight, really, the things that are underway on a couple of levels. One is the combination of GoCentral and extending GoCentral, which is making a ton of great progress around a DIY website building platform, but then the promise of integrating it to social media, both on a DIY basis and now in combination with Main Street Hub. Just those 2 things coming together are something that I'm incredibly excited about that I think will deliver differentiated value, frankly, in the world. And maybe a category that doesn't get as much attention but is something that we've talked about a bit in the past is security. Obviously, that's a topic across technology broadly. And one of the nice things GoDaddy's always done has had some security services, primarily in SSL, around protecting websites. Well, over the last, really, 1.5 years, we've leaned into security, both -- not only site backup, restore, but also malware scans through our acquisition of Sucuri. And that -- those products are doing really well against particularly our existing base. And I think the nice thing about that product is that, that's a focus on doing more with our customers over time and, again, helping do more with customers that are already in our portfolio. Turning to your aftermarket question, why was the aftermarket strong in Q1, I'll let Ray answer that one.

Sam, it's Ray. Nothing in particular around the aftermarket. As we highlighted at the Investor Day, we're continuing to build on that product and seeing just good solid momentum, a little bit of a softer comp for the first quarter. And as we've told you guys in the past, right, this is more of a transactional business in nature, so it can be a little bit lumpy. We don't expect this [site] same contribution the rest of the year. But we do see Domains continuing to grow at a double-digit rate in 2018 and back to our longer-term guidance of 1x customer growth as we look longer term.

That's right. I'd add on that nothing special, just, again, continued evolution of our strategy to help customers get great names, whether they're new names that are unclaimed or facilitating transactions around names that are already held.

Your next question comes from the line of Lloyd Walmsley with Deutsche Bank.

You guys talked about your kind of delevering and increased financial capacity. Can you give us an update on just your thoughts around use of capital between acquisition versus share repurchase versus further deleverage? And I guess, as a follow-up to that, when we think about M&A, can you give us some thoughts on how you see opportunities between like larger buys like HEG versus more product acquisitions like Main Street Hub, and what looks more likely in the near term?

Lloyd, it's Ray. I'll take a shot at this and Scott can come over the top. But our focus right now is just continuing to finish the swing on bringing HEG all the way into the fold. And then, obviously, we've got Main Street Hub lined up for the back half of the year. And when we look at M&A, obviously, I think we've got the financial capacity there, and we've also got the operational capacity. You saw an announcement today where we're bringing Betsy Rafael into the management team to help us on the scale there. So it's going to add another [quiver.] Operationally, we've got a business system that enables the integration. Our products are API-able. We've got a global tech platform that's capable of scale. And with the leverage that you mentioned, we should be at a point by the end of this year where we can do either product tuck-ins or larger acquisitions like HEG. As far as use of capital, that's going to be the primary strategy. But obviously, you've seen us do share repurchases. We did a 7 million-share repurchase last year alongside a secondary, and that is another option for us.

Your next question comes from the line of Mark May with Citi.

Hello? Can you hear me?

Yes. We got you, Mark.

Okay. Sorry about that. Sorry if I missed this, but in terms of the international business, I know you disclosed the organic growth ex the acquisition, but wondered if you could give some color on what the international revenue growth looks like ex -- on an organic basis and maybe also on a currency-neutral basis. And then, also, in terms of marketing and advertising expense, the ratio was up around 100 bps versus Q4. Maybe kind of what's your expectation going forward in terms of pushing the pedal on marketing and maybe being a little less efficient in the near term, but for growth purposes?

Mark, it's Ray. I'll start with the international, and Scott will pick up the marketing question. Organic growth in international bounced back, as we anticipated. It's in the high teens. FX was relatively neutral, very small positive impact there. So we've seen exactly what we were expecting as a return to growth there. Because as I mentioned to you on the last call, that business has been growing in the mid-teens. So we saw a little bit of a pickup, so happy about the progress we're making there.

And on marketing. I think, for the next couple of quarters, you should think about marketing at a similar percent of revenue as the last quarter. But remember, everybody, we don't look at marketing necessarily as a percent of revenue. We look at it as a return on a lifetime value. And at the Analyst Day, we showed the 5-year difference in our unit economics, where, approximately 5 years ago, the average customer was worth about $500 and we were bringing customers into the franchise at $50. Well, flash forward to today when the average customer's worth $700 and it's -- we're bringing people into the franchise at about $65 to $70. We've accreted a hell of a lot of value to our franchise on our unit economics. And from a marketing standpoint, we're not only using marketing as a way of initiating conversations with new customers, but we're also doing more, again, what we call more conversational marketing, which is ramping up both our spend against our base. Because with our richer product portfolio, more touch points in a logical way, there's opportunity to do more with our existing customers as well. And that's going to be an increasing focus of our marketing effort that we're going to continue to measure, still look out on a highly perform and return basis. But it's new activity that really builds on a lot of our successes over the last 5 years.

Your next question comes from the line of Sterling Auty with JPMorgan.

Yes, I wanted to follow up on the earlier question on the domain business. You mentioned the double-digit growth for the full year, but obviously you got the big tailwind from the growth in the first quarter. Just kind of curious, how should we think about the trend line of that growth? Do we quickly tail off into single digit? So blended, it's double digit for the full year and then single-digit from here out? Or is there more seasonality to it than that?

Sterling, it's Ray. No, I think you should think about that comment as second quarter through fourth quarter, right? Taking out the noise of the first quarter. So we're seeing double-digit growth there. Just want to help you guys as far as the modeling.

And -- no, that's great. And how much of that would be FX benefit?

There's not a significant amount of FX built into that. Again, stepping back with a fun fact, there's a significant piece of our international revenue in bookings that are U.S. dollar currency. So -- and we also put in hedges on our bookings. So it mutes the impact of FX pretty significantly.

All right, great. And then one follow-up question on the business apps. Strong results in the quarter. Anything different in terms of the mix of business apps? Or anything you're doing differently from a pricing perspective?

I think the success continues to reflect our differentiated value proposition around productivity, both Office 365 and GoDaddy's Workspace product. And boy, that continues to be a big need in the world that we're satisfying. And although the numbers are getting really, really large, we're growing nicely. That's a -- still the big driver of our business applications growth.

Sterling, another thing I'd tag on there is my point in the commentary that World Hosting Days is also in that line item. It's a seasonal event that HEG holds.

Your next question comes from the line of Brian Essex with Morgan Stanley.

I was maybe just -- if I could talk -- touch real quick on total bookings, and I apologize if I missed in the prepared remarks, but substantially stronger than we had over The Street as well. I was just wondering, in terms of puts and takes, how am I to interpret that strength and expectations for the rest of the year? Particularly as it translates into kind of that organic growth number, maybe a little bit lower than 1Q out for the remainder of the year.

Brian, so the trend is absolutely following exactly what you've been seeing, right? We've been pretty explicit on the revenue growth. And we haven't generally been guiding on bookings, but you should expect that growth rate on bookings to continue to be pretty strong there but to tick lower than the revenue growth throughout rest of 2018. Beyond the HEG purchasing accounting impact, there's really no one driver. I think, if you look at a lot of the customer experience initiatives we're putting in place, they're having some potential short-term impact on bookings growth, but for the longer-term growth -- or health of the business, these are the right things to be putting in place. So continued strong growth right in that organic range that we were looking at.

Got it. And maybe if I could just follow up on the leverage. Incremental margins in the quarter were much better, particularly on operating leverage side for SG&A. How might we, I guess, anticipate seasonality, I guess, specifically into 2Q? I mean, is IndyCar going to be a substantial blip on the sales and marketing front? And maybe the rationale around -- maybe, Scott, if you can just touch on the cost-benefit analysis that went into that because I know I'm going to get asked.

No, Brian. I don't think there's anything to point out from a seasonality standpoint on operating leverage. We're continuing to get good leverage out of several line items in the P&L. And we -- yes, as far as the marketing dollars, it's insignificant in the size spend that we've got on an annual basis.

Yes, and you did -- you gave a throwaway on IndyCar. I mean, actually, relative to our totality of go-to-market spend, the dollars are not big. And I think what we're happy about is, here in the U.S., Danica Patrick's going off and pursuing her next act on several of her ideas, and we've been able to help her and help message that. And it totally fits on brand with an entrepreneur and a terrific businesswoman going off to do something, her next wave of ideas, and we're helping her do that.

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Two questions. So U.S. revenue growth is accelerating on attach rate and product suite. When you think about into 2019, how sustainable in the U.S. do you think, kind of call it, that growth is? Can you maintain mid-teens next year in the U.S. or could you get there? And then, the second, just given the acquisition of Weebly, and what it looked like, it was purchased for not a very high number, can you talk about what you're seeing as far as rationalization in the present sector, which should benefit you through lower amounts of competition spend?

Hey, Jase. Yes, it's Scott. So first, on the U.S. accelerating growth and sustainability into 2019, we're happy with the momentum of the business right now. Boy, if you asked us to look ahead, I think our guidance around double -- low double-digit rates on an organic basis is still the way to think about it. But obviously, the momentum of the business is ticking along nicely. But I think, if you were asking about 2019, the growth rates that we laid out at Investor Day are kind of the goalposts that we'd still put out there for everybody. Related to Weebly, I think I'd answer that as we're really happy with how GoCentral and the capabilities have evolved, particularly over the last 18 months. And when we think about a website connecting both to social media and to other applications, which is really what online success is all about, I'd say that, that's something that we're happy with, our value proposition today. And even more importantly, we're leaning into building a truly differentiated position on those levels going forward. And so regardless of other options, it's a fragmented space. Many people can win, and we're just focused on doing things that are highly valued to customers and distinctive for them. And if it does, it'll work out well for us over time.

Your next question comes from the line of Mark Grant with Goldman Sachs.

Great. Just a couple of quick ones. On GoCentral and on the customer acquisitions you saw in the quarter, obviously, it was a strong quarter for net adds. And with GoCentral, are you seeing -- those customers coming in, are those net new to GoDaddy? Or are you seeing more of a mix within the customer base using GoCentral, coming over from maybe Domains or Hosting and Presence? And then can you give us a sense of how GoCentral did in terms of its contribution to the outperformance we saw in the quarter?

Mark, it's Scott. In terms of net adds, I think the big conclusion for everybody is that our messaging and product capability around presence and online success is continuing to capture our leadership position in just a pure Domains on-ramp. And we're both finding some amount of new customers that, again, in the totality of the millions of new customers we get every year, is still a small percentage of our customer base, but it's a contribution. And so again, the nice thing is the product is complementary to our core Domains business, which kind of makes sense because presence and names are inextricably linked. In terms of the contribution to the business and the trajectory, it was a whole bunch of drivers of strength. And really, it wouldn't be appropriate to highlight any one particular thing. It's market footprint and attachment around a couple of different products, of which GoCentral is one, but it's really the totality of the business system.

Your last question tonight comes from Brent Thill with Jefferies.

Scott, on the ARPU, double-digit growth ex HEG. I think we had to go back into our model to like 2014 to find that type of growth. How sustainable is this? Can you just maybe walk through what you're seeing that's driving that ARPU strength? And I have a quick follow-up.

Brent, boy, remember -- and I think we called this out in the release, we -- the 11% doesn't have the HEG customers in it, and we -- when you normalize for the HEG end customers, which is sort of the pure ARPU number, it's 6%. So the 6% number on ARPU is really the true apples-to-apples one, which we're happy with, but is really kind of the trend level and trajectory that we've been running at for a long time.

Okay. That's great. And then just as it relates to some of the packaging and bundling around a broader suite, can you bring us up to speed on that, how you think about that rollout this year?

Yes. We're -- I think we're continuing to maximize the -- what we'd call the attachment model, which kind of you see today. If you go onto GoDaddy and look in or experience us, it'll be one product leading to another. I think the promise of what we're starting to build out are solution-based experiences that'll bring in name, presence, e-mail together in one solution deployed against a vertical. That's -- those are things that we're -- we have engineering and product people working on those experiences. But you're really not going to see things certainly show up in the business results or the P&L in 2018. But we have teams working on those kinds of experiences that, again, are all focused around solutions, not for independent products but really a totality of a bundle that'll get people either up and running online or, gosh, if you had an online presence that's 10 years old and you need to make it over in a mobile social world, doing so in one clear value proposition. So punchline is we got teams working on it. You might see elements of it over the next several quarters. But again, that -- those won't be things that are going to totally show up in the P&L this year.

And if I could squeeze in one last one, and given I'm the last one in line. One of the questions we've been getting is just around payments, now that Square's taken approach. Are you committed to just continuing the independence and being open, even working with Square despite their change in direction, what they're doing with that acquisition?

Yes, absolutely. We've got a growing and mutually beneficial partnership with Square. We'll absolutely work with Square. We're partnered with them, we're partnered with Stripe. All around the world, we work with other merchant processors. Back to the value proposition, we think in -- a lot of our customers are early in their life cycle, our 17.5 million customers that we're focused on having applications around online presence. Boy, if you're a payment provider, we're a hell of a platform and ecosystem in which to operate. And so people like Square who are downstream from us, we'll continue to work with them and, over time, keep adding value our service and work with Square and a whole bunch of other people who are in categories like payments that connect to our platform and ecosystem.

(Operator Instructions) Your next question comes from the line of Sameet Sinha with B. Riley.

I apologize if this question has been asked, but can you speak about Main Street Hub? Last time, you had elaborated on kind of a strategy once the acquisition closes, a strategy around productizing some of their offerings. Has that process already started? And if you could provide us some insight there. And secondly, wanted to touch on SmartLine. It's been a few quarters since you launched that. And what are your thoughts in terms of that becoming an on-ramp for the company, and how is that scaling?

Sameet, thanks. So on Main Street Hub, the promise and the strategy is to wrap their capability around social media listings management, reputation management and combine it with GoDaddy's capabilities around websites, and really deliver this promise and value proposition of a complete online presence. But we're in the very early days of putting teams together and integrating operations. And so we're excited about the promise. The -- we think the Main Street Hub team is terrific. And we're thrilled and excited going forward, but it's super early days. So there's nothing really of substance to share with everybody. It's more focused on, boy, hit the ground running once we close on July 1.

Sameet, it's Ray. On SmartLine, the value prop for that product is still there, right? Our customers want something to solve that pain point they've got in their businesses and ventures. Is it where we want it to be? No. The customers that are using it today are using it more and more, but we've still got work to do as far as the customer onboarding experience as well as the performance of the app to get it to a place where we're really happy with a full launch. It's still basically a beta launch scenario at this point, but still have a lot of optimism about the product and where it fits under the product suite.

Your next question comes from the line of Ron Josey with JMP Securities.

Great. So I just want to follow up on maybe Brent's question earlier and, Scott, your point on selling more solution experiences. Coming out of the Analyst Day, I thought one of the key takeaways was just your ability -- increasing ability to target the existing, call it, 17.7 million users with all the products you offer. But one of the questions we often get is sort of what's giving you the ability to really figure out and target those digital signals of those 17.7 million users so that you can you go after those specific experiences so you can upsell? Is it the new tech platform? Like what is it that enables better targeting of consumers and upselling?

Yes. Thanks, Ron. Yes, it's several elements that we use the platform, which is certainly a broad and encompassing word. But first and foremost, it's both our data infrastructure, piping and then analytic ability, both from machine -- sophisticated machine learning models around behavior and connectivity of what customers are experiencing. And again, remember, 17.5 million customers, right, all over the world. That's a fairly sophisticated data infrastructure. And then you start to get to just the interconnectivity of both our touch points, like our website or communication modalities, whether it be e-mail or text or care, which is really our martech stack, and our individual product applications, and really, the connectivity of those via APIs and operating as a system. And so if you think about the data layer, not only from an engineering standpoint but also the analytics on top of it, we've built real capability there, not just to have data but turning into actually actionable insights. And then, products that have APIs connected together with a whole martech stack that works together allows you to actually say, "Boy, one single purpose of an event that is a recommendation for a customer is what we're capable of doing today." And that's one of the things, like you said, that -- it excites me and it excites us to be able to do that.

And would you say that these -- can you just give us some timing as to when you're able to -- I mean, obviously, you've always had the data infrastructure. But bringing it all together, is this a new capability over the last, call it, 18 months, 12 months, 36 months, and now you're able to sort of step foot on the gas?

Yes, this is -- I think it's capabilities that have been built particularly over the last, I'd say, 18 months. And at Investor Day, we shared some of the logic around, gosh, how are we actually then going to talk to existing customers, and it's starting to show up. And marketing spend, it's still a small percentage of our -- both marketing dollars and spend. But like everything, we're going to test, return. We have return thresholds around activity or spending levels, and those are happening real time. And we'll continue to go into the road maps for 2019 and beyond.

You've heard Andrew say this, Ron, at the Investor Day. This is something that's very difficult, right? You're taking a move that we've been using for a long time to broadcast at all customers and really trying just to get this down to customers in smaller, smaller groups in the hundreds instead of millions.

And from a quantum of marketing dollars, if you think about that, this is still small, right, single-digit percentages of our marketing spend. But like everything we do, we're going to start -- we'll start small, get a value proposition and build from there and ramp.

Your next question comes from the line of Naved Khan with SunTrust.

Yes, 2 questions. So I think, on the Main Street Hub, I think you're expecting roughly $10 million a quarter run rate on the -- contribution on the top line. How should we be thinking about the cost side of the equation and its impact on the free cash flow earning guides for 2018? And on -- in terms of the international performance, it seems like, as a whole, it's performing better. And I think, HEG certainly is -- I think, is starting to do better. How does the rest of international look like outside of HEG?

I'll take the first question, it's Ray, on Main Street. Yes, $10 million a quarter is what we've baked in for revenue. And as we mentioned when we announced the acquisition, it's slightly dilutive to cash flow, and that's all built into the guidance that we gave you guys. I don't think you should be expecting any dramatic synergies, either on the top or the bottom line for Main Street Hub in '18. This is going to be something -- Scott talked about putting together a more wholesome offering for presence with this product set from Main Street over the next year, 1.5 years.

I'll add, on international outside of HEG. International continues to grow nicely. I mean, I think Ray mentioned it earlier. It's the high teens. On a organic growth rate, we're looking at high-teens annual growth rate percentages, and it's broad-based across geographies.

Your next question comes from the line of Aaron Kessler with Raymond James.

Yes, sorry if I missed it. Just on COGS, it was a little higher than expected. Was that just mix? Or how should we think about maybe COGS going forward, like cost of revenues? And then stock-based comp, just any thoughts there? How we should think about stock-based comp for the rest of the year.

Aaron, it's Ray. I'll take that. The gross margin ticked up a bit this quarter. It's -- HEG's a big piece of it, where it's just a historically higher-margin business. They contributed a large portion of the incremental revenue lift this quarter. And then beyond that, it's just a continued shift in product mix away from Domains [in] the core business. And as I've mentioned on previous calls, I'd continue you guys -- continue to encourage you to model that in the mid-60s range, plus or minus, just to give us that flexibility around gross margin from a product perspective. And whether we build by partner or whether we do different pricing strategies, what we're trying to drive are gross margin dollars. We're not as focused on percentage, and we want to drive the most out of the business that we can get there. On stock-based comp, we manage equity issuance based on annual grant value, and we've been targeting a relatively modest burn of 2% to 3% of dilution. Over the past few years, obviously, we've been adding to the workforce. You've seen those grant values go up. And you've also seen dilution remain very low relative to the growth in the market cap. So happy with where that is. The expense is just an outcome of the growth of the grants that we've been making.

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

All right. Hey, thanks, everybody. Thanks for joining us today, and we'll see and talk to everybody next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.