Great. Thank you. I have the pleasure of hosting CDW for the next session here. We have with us Chris Leahy, who's the CEO, and Al Miralles, who's the CFO. Thank you both for coming to the conference, and thank you to the audience. Chris, Al, I'll start you off with a question that we plan to ask most companies we talk to over the next couple of days, which is, you talk to a lot of customers, you get feedback continuously from the ground. How concerned should investors be that we are potentially looking at a significant macro slowdown in the second half, or a recession scenario in the second half? How likely are you thinking that is?
I'm not going to try to predict something that others can't predict also. I would just say that there's a lot of volatility. I'm sure your other clients are all saying the same thing. A lot of volatility, a lot of uncertainty. All that said, what we're finding is that technology still is non-discretionary, really, in terms of it's essential to building out competitive advantage. It's essential to attracting employees. It's essential to achieving the mission. It is still central and essential to what our customers are doing. What I would say is, earlier in the year, we saw caution start to tick up as a result of the uncertainty and the, I'll say, policy volatility and uncertainty. We're still seeing that caution.
However, customers have a lot of pent-up needs, whether it's on the client device side or whether it's on digital transformation or whether it's on cost optimization, whether it's on innovation. They are all needing technology to drive that forward. We are seeing the demand that we have talked about over the last couple of years really come to fruition. What we have done is we have baked into our forecast for this year those areas where we think we are going to see more muted growth, federal space in particular, education space in particular, and a couple other areas where we are being cautious. Overall, we are just trying to be prudent with our outlook, understand there might be some delays during the course of the year. I would also say customers across the board are committed to spending on technology and actually are in various areas.
Now, the value we bring obviously helps in capturing that demand and driving some of the demand. I'd just say it's a very cautious environment. Technology is central to what everybody is doing. We're using our competitive advantages to win in the market. It's been working.
I know tariffs are a pass-through for you, so it doesn't impact you directly as much. How much have the changes or the overall tariff landscape created challenges in terms of predicting the business or in terms of visibility that you get through your pipeline? How are you navigating or sort of what are you seeing in terms of impact from the tariff landscape itself?
I'll start. I'd say on tariffs, number one, we've been able to use the uncertainty and volatility to help our customers and therefore to our advantage. It's like funding. It's what we do. We help customers understand what partners are contemplating and where we think the pricing is going to go. In the first quarter, you saw that, especially in K-1 2, where we were able to get ahead of potential tariff price increases and provide client devices at pricing that was pre-tariff. We could do that because we get the pre-buys and we could take them into inventory. There's talk, there's concern, there's uncertainty. It's changing. There are a lot of moving parts. When that happens, that just creates more complexity for our customers. We always say complexity and choice are our friends, and we can help in those circumstances.
Particularly when you have such a strong relationship with your customer base that you build over years, when you are in times like this, that trust really comes into play. The confidence in CDW's ability to understand what partners are doing and what they're going to be doing is critical.
Yeah, I would just add, I think it's a bit two sides of the coin. For the last two quarters, we've seen a return of growth. I think we've noted that, particularly in the commercial space, steadier, more stabilized return to growth. That has felt good underlying. At a broad level, I'd say certainly better in the last two quarters. At a more micro level, and to Chris's point, we've seen different actions on the education front, a bit of a pull forward of activity, particularly in the client device space. Maybe the other micro theme would be more in enterprise solutions, a bit of a pause for the quarter. We saw growth return in Q4 and Q1. There was a bit of a pause, a bit more enterprise customers sweating those assets.
Two sides of the coin, kind of underlying solid demand that we've seen for the last two quarters, but with quite a bit of variability in these particular spaces. What we're looking for as these quarters play out for the rest of the year is can we see kind of a balanced growth projection, if you will, across the categories. Our outlook calls for continued caution in that regard.
I'm trying to compare what's happening now to the dynamics we saw during COVID and the digestion of inventory post that. You talked about some of the pull forward in K-12, but how much visibility are you getting now in terms of inventory at the customer level? Do we eventually have a situation where there's an inventory digestion like we had after the supply chain challenges that led to inventory digestion? What level of visibility are you getting in terms of inventory with customers? Where is that today?
I'll just say our sellers are very, very close to our customers, right? They pride themselves on being deep with customers, knowing their estates. I'd say visibility broadly solid in that regard. I think there are some parallels to COVID, a bit maybe reversal effect. I'll start with that. We saw significant demand from COVID. We had a period of digestion. We've been saying for a while we think we will get back to these vectors of growth, particularly when you think about refresh opportunity. Two quarters in, knock on wood, we're seeing some of that return to growth. It's really begun, most notably in clients. If you subscribe to the FIFO effect, we're seeing their growth in client.
It's been a little bit more volatile on the solution side, but we do believe that there are definitely drivers there that will ultimately produce growth in solutions, including just need to modernize networks, continue to advance in terms of security needs, and the like. That is how I would describe it.
On the last earnings call a few weeks earlier, you outlined that you're seeing a slowdown in large enterprise, whereas your SMB segment was really strong. Can you sort of parse that out for us a bit? I mean, what's probably driving that dynamics? Is it fair to expect that the SMB eventually follow suit of where the large customers are?
Yeah, on the enterprise side, and I think Al just touched this, which is we've just seen some caution in the solution space. On the SMB side, we continue to see customers moving to ratable consumption models, elastic pricing, et cetera. Again, back to this notion that technology is needed to drive success, we are not seeing that need slow down in the small and medium-sized business, which I think is a really good indicator. On the enterprise side, we're really talking about larger projects, making decisions about where you have trade-offs, how you cost optimize, how you create competitive advantage. There just was a little bit of more cautiousness there is how I'd say it.
Before we move forward, I mean, I know we're discussing all this sort of volatility in the macro and tariffs from a U.S. perspective, but overall, have you seen any spillover effects in your international business from all the discussions we're having about the macro in the U.S.?
Yeah, it's been very interesting on the international side because we've expected volatility, particularly when you think about the geopolitical environment and then, again, the uncertainty coming from our country. We had a really strong quarter. The teams are just delivering in the face of all of that. We're, again, cautious in our fiscal outlook, our fiscal year outlook for international. I think they're just outperforming and out-executing in the market.
I'll sort of move you a bit faster along since we started a bit late, but I do want to get to a discussion on sort of how CDW helps customers, particularly in this AI landscape. Where do you find customers are looking to invest? Where's the broader enterprise in terms of focusing on AI investments? How is CDW going to help them?
CDW, as you know, is a full-stack, full-life-cycle organization. We have invested over the years to ensure that we can deliver across the full spectrum of our customers' needs and that we can go to market in the full way that our customers want us to and that our capabilities are superior to those in the market. That is where we stand today. When we think about AI investment, how CDW can help, you think about it in terms of almost a flywheel. Professional services and discussions around what is happening in the landscape around three areas: efficiency, personalization, and customer experience. Customers are now on the ROI-heavy discussion.
About eight months ago, I'd say customers were squarely in the, "What do we do?" Now it's becoming clearer how we can use AI, how quickly it's going to develop, and how CDW can deliver both strategic services as well as then implement. I always think about it as the art of the possible and the science of getting it done. That is a very unique position to be in the market. You can have consultants come in and suggest ways to create value. CDW comes in and shows you ways to create value based on referenceable clients. With our partnerships, we can actually help you execute. That full-life-cycle, full-stack value has been very well received in the market. We're seeing AI as an entry point actually increase at CDW.
Some of your peers have talked about AI initiatives that they're doing, including labs for customers to come explore some of these solutions. Maybe just provide us an update on what you're doing in terms of actually letting customers try out solutions or what does that sort of overall sort of exploration for customers look like?
Yeah, we're doing a lot of that. I'd share with you, I think I've mentioned on earnings calls, our healthcare innovation labs. That's a great example of bringing partners and bringing customers together so they're learning collectively. Patient Room 'Next' is a terrific example of a company that we've actually invested in. We're using our own investment dollars behind some of these solutions, which is about the patient room of the future, which is fewer pieces of equipment, more intelligent monitoring of patients, higher cost optimization, et cetera. Having those innovation labs has been a real game changer in the healthcare space. We do that across all of our segments in different ways, sometimes with our partners at their locations, sometimes in our innovation centers. We have six of those now.
Hands-on experiences with customers so they can try out and see exactly how the technology works is critically important. We continue to do that.
Maybe moving that conversation to AIPCs and how do you view it in terms of an opportunity? Do you think there's a large opportunity around it? How would sort of CDW benefit from that?
Yes, I do. I think we think of AI as very much kind of functionality that's embedded across the full stack. Hardware, software, across cloud capabilities, et cetera, AI is going to just become part of how things operate. If you look at any of the OEM cloud providers' roadmaps, you can see that very clearly. AIPCs is another example of that, where if at some point in the near future, if your PC does not have the kind of AI capabilities that drive the efficiency and productivity of your workforce, the creativity, the innovation that comes with those capabilities, it's going to set you behind. We see AI in every part of the stack as a significant growth factor going forward.
I'll just add, I think what we've seen the way of PC growth to date has not been significant in the AIPC space. Some of the market constituents have called for AIPCs ultimately or soon kind of represent about single-digit mix of PCs overall and then growing from there. We'd still call it early days, but we do think the opportunity and as the apps grow in this environment that AIPCs will become more prevalent for us, ultimately that will be a great opportunity. That's both in terms of richer configurations, kind of higher ASP, but also opportunity for us to wrap more services around AIPCs.
On that point, not to extend the session, but one of our most popular offerings right now is driving business results with assistance, Copilot in this case, but driving business results using AI. It is not just selling the AIPC and the opportunity there. It is that full-stack, full-life-cycle capability, which is helping our customers actually drive value out of it that they can recognize. Big differentiator in the market.
Since we're discussing PCs, let me sort of go back to the reporting in the quarter where you had a strong print on client devices. As you mentioned, there was some sort of K-12 pre-tariff. As for the enterprise side, how much of the momentum there in client devices is buying ahead of tariffs versus end-of-life Windows-led upgrades? If enterprises are now coming in choosing their next PC platform, are you seeing any demand for AIPCs?
I'll start. First of all, growth in client devices for the quarter pretty much across our channels, which was certainly encouraging. As you noted, Samik, we did see some pull forward on the education side, less in the way of pull forward in terms of enterprise, but broad-based overall. The kind of difference or the attribution across those channels, I think when you think about education, a bit more focused on Chromebook, when you think about country of origin of those products, that drove some of the pre-buying. The other thing I would say is education a bit more cost-sensitive than some of the other channels. On enterprise, which is a bit more Windows and Apple focus, less concerns there. Therefore, there was less pre-buying on that front.
What I wanted to sort of move the discussion next to is the cloud discussion. Taking it back to, I think this was a couple of quarters ago when you mentioned that the company's recent performance, which has been less of an outperformance to the underlying industry than we've been used to seeing historically, is probably being driven somewhat by the enterprise workload migration to the cloud. Maybe you can sort of clarify overall sort of how you think about cloud as sort of playing out in terms of CDW top-line dynamics, whether that is actually translating into a lower outperformance than what we've historically been used to seeing CDW from. In terms of what's the strategy to then sort of go ahead and attack that opportunity?
Yeah, I would say looking at net sales is one thing. If we adjust for customer spend because the sales net down, we still believe we outperformed the market last year. We get that data direct from our partners, which is a very trusted source, and we get it relative to others in the channel. From a customer spend perspective, we are seeing significant growth in our cloud business. Where we're focused is on scaling that business up, driving to a larger scale base to drive efficiencies to ensure we've got the capabilities across our value proposition landscape. Mission Cloud is a great example of an acquisition to do just that. When we think about our opportunity in cloud, we really think about it like a flywheel where you've got professional services, you've got managed services.
We often wrap around that, which is obviously monitoring, optimizing, et cetera. You have got marketplace transactions, and you have got infrastructure consumption. We look at that as an absolute way to keep customers engaged with CDW. We are seeing through the Mission Cloud complementary capabilities to CDW, we are seeing a very nice uptick in that area for CDW and for our customers.
You'd mentioned the acquisition that you've done. Is it fair to think that when we think about future sort of focus on for acquisitions, cloud is going to be a big focus area for you? Or do you see other areas where you can potentially sort of leverage more value-added services as well?
Yeah, we've continually focused our M&A efforts on high-relevance, high-growth areas for customers, and particularly those that are moving very fast. The areas that we continue to be focused on, obviously, are cloud, particularly services wrapped around cloud, particularly managed services around cloud, security. Security is not going anywhere. It's just increasing in importance and demand. The newer areas of technology, AI, and I would say data because that's directly related to AI capabilities, cloud capabilities, digital capabilities. We will continue to look at all of those areas and weigh whether we are building from within, whether we're buying or investing in companies or a combination of both. The other area that we look at is geographic capabilities. In an uncertain geopolitical world, we are cautious there.
That said, we are still considering how we service multinational customers across the globe and other markets that might be contributing to our growth.
Okay. Let me take a pause and open it up to see if anyone in the room has a question. Sure.
It appears you have, well, I guess the first question I have, it almost feels like right now that CDW is more of a technology consultancy that happens to source the actual end products that clients will use. Can you talk about the revenue model that's associated with more of the technology consultancy as opposed to the providing of the products that you then deliver to them?
Yeah. When we talk about full-stack, full-lifecycle, that's exactly what we mean. When I think about CDW historically, our ability to help customers buy, source the product, et cetera, has been who we are. We've been expanding on either end of what I'll call the value spectrum into the consultancy, but also managed services. I see those two as intricately linked. Consultancy is important to illustrate the expertise and bring the depth of expertise and industry-specific expertise to the table as a trusted advisor to be able to design and help architect. Managed services are equally important and obviously create a recurring revenue source for us to help our customers manage those things that we're building. The sourcing in the middle is exactly as you said.
What we're doing is driving efficiencies across the full level of that, the full lifecycle, and increasing our investment and expertise on the front end and the managed services end so that we can cover the full spectrum for our customers.
Can I take a dispute to viewing the.
Your clients probably view that. I don't know if this is working.
I can hear you.
I assume your clients are viewing the fact that you can also help them with the end sourcing as well too, in addition to the consultancy and the managed services is sort of a distinctive factor in why they work with you over potentially, let's just say, an Accenture or something like that.
Yeah. I think of what CDW is the art of the possible in technology and the science of getting it done. The ability to do both of those things is a differentiator in the marketplace. Customers, I think, are seeking that value more and more, and we're seeing it in our results.
Final question.
Yes.
When you look across your portfolio of clients, and probably you have a healthy number of enterprise legacy clients who grew up with you on this sourcing platform, how much have you kind of audited what the organic opportunity in these other areas are? Can you kind of give us some range of what you think the opportunity is in those buckets?
We are looking at the IT potential of various customer segments all the time. That actually is what's driving our go-to-market refinement. If you know CDW, that's an evergreen process. We view consultancy, the procurement and deployment and managed services, as I said, is intricately linked. For customers, it creates a holistic experience with a number of touch points across the lifecycle. For CDW, it creates opportunity to sell at every point. It creates stickiness. It creates an ease of experience for customers. We look at each of those buckets, but frankly, the most important thing, and they're all big, the most important thing, though, is how they interact together and ensuring that our go-to-market is capturing the drag that comes across all of those buckets. It's the formula that is unique to CDW. Yeah.
Moving to a couple of questions on the financials. Gross margins expanded significantly over the last couple of years, but now when we look at the recent trends, it started to, I would say, plateau at a high level at this point. What are the drivers you would call out for the slower sort of expansion that you're seeing now compared to what you saw a couple of years back? Do you view it as more temporary, or do you view this as sort of the peak level that you're going to hit in terms of gross margin?
Sure. Yeah, you're right. In the last six years, our gross margins have increased by about five points, so really significantly. We would say on the back of our three-part strategy, continue to focus on new acquisition and growing market share, expanding our capabilities and solutions, and continuing to drive growth in services. That strategy has worked quite well. Keep in mind as well, though, we have a diverse portfolio, right? We're focused on full stack, full lifecycle, which means that mix does matter. What you've seen in the last couple of years is pretty significant mix shifts. While we're certainly pleased to be there for our customers across all of the mix components, when you have stronger growth in client device, which can be a bit lower margin and less in the way of solutions and services, you can have movement in your gross margin.
Look, we are long-term focused. We continue to believe in our strategy and ability to serve our customers best with our three-part strategy. We expect that over time, we'll continue to move up the curve on the gross margin front.
Okay. Got it. On the operating expenses, you've consistently expanded operating expenses in this even in sort of challenging macro backdrops. In some cases, one of the things that has come up even on the earnings calls has been more flexibility around sort of tweaking that envelope on the operating expenses. How should we think about flexibility on that front versus what are the long-term drivers you're investing towards that give you maybe less discretion at this point on that spend?
Sure. Again, I'll go back to the point of our investments in the strategy, including investing in the way of expenses and M&A, and that's what's helped us to drive our gross margin. The way we think about the expense front is our goal is to balance growth initiatives with providing exceptional customer service while driving cost leverage. Even in the last couple of years that we would say growth has been more challenging, we've continued to invest underneath. That includes across our own kind of digital transformation capabilities, but also growing our technical capabilities as a firm. At the same time, we seek to drive productivity and efficiency and cost leverage. We are still very much a variable cost model, right? In up and down markets, we will get the benefits from that perspective.
We have made significant investments in our fixed cost base that ultimately will pay off in the long run.
Okay. Got it. You just reported earnings. You had a very strong Q1. When we think about the full year guide, which you primarily reiterated at this point, just help us think about the drivers or what's embedded in the assumption for that in terms of how to think about potentially any upside risk or any downside risk you think for the year.
Yeah. Headline is low single digits growth pretty much down the P&L. That is notwithstanding the fact that we had a really strong quarter. The way we think about it is really, again, kind of two sides to it. One, there has been solid underlying demand, and we expected this was coming. We have said for a while now it is a when, not an if. I think while we do not want to declare victory, we are seeing elements of growth over the last two quarters. The flip side of that is there is still caution. There is still uncertainty. On a micro level, we are seeing that most pronounced in our government business and maybe secondarily education. We are also making space that in our other channels, some of that uncertainty could weigh on spend. Therefore, we are being prudent, notwithstanding that there are elements of growth underneath.
Since you mentioned government and education, can you just remind investors in terms of government, what's the sort of, I'm assuming you're more referring to federal at this point, but what's the specific exposure there? When you're again thinking about education, maybe narrow it down for us, like where do you see more likelihood of a pressure?
Sure. Yes, it is more pronounced in the federal space. As a proof point for the quarter, federal experienced a modest decline in growth, and state and local, which is the other side of government, grew modestly. It is more pronounced in federal. Now, federal business is split between Department of Defense and then civilian. Department of Defense, we would say, is more insulated from some of the effects we have seen with this friction in this space. The civilian business, civilian business, we would have said more exposed. That being said, what happened in the first quarter was pretty consistent with our expectations. We are, though, being cautious, and we would expect, given the overhang in the federal space, that the next couple of quarters would be muted. That is our expectation. I would call education secondary.
The more pronounced elements that we would anticipate here would be more in the K-12 space. Again, from a top-line perspective, education had a good quarter, but we want to make space that you could see some secondary effects in K-12 and thus muted spend.
Okay. Got it. Last couple of quick questions. One, I mean, to the extent that you've seen some price increases already being passed through to the customer on account of tariffs, what have you seen in terms of price elasticity for demand from the customer? How much of a pushback have you seen from customers to any price increases that have been passed through?
To date, I would say it's been pretty orderly. I would say customers have largely gotten on with their spend despite the environment we've been in. As you know, education, particularly K-12, actually pulled forward some of that demand in anticipation of prices going up. I'd call them the channel probably most cost-sensitive, but the spending has continued, notwithstanding the overhang of tariffs.
Okay. The last one, which is more, I guess, nuanced at this point, but investors sometimes care, is when you're passing through the price increase, are you able to protect your gross margin or are you passing through it at absolute terms?
Yeah. We are a cost-plus provider. So for the most part, or substantially, when there are price increases, like in this case with tariffs, we are passing those on. We are holding our gross profits neutral, if you will, which means you get a bit of a kind of a benefit on the net sales as prices go up, and then you get a little bit of dilution from the gross margin.
Great. I will wrap it up there since we are out of time. Thank you for coming to the conference. Thank you to the audience as well. Thank you.
Thank you so much.
Thank you. Thank you all.
Hello, everyone. My name is Alexei Gogolev, Head of the Vertical SaaS and End-to-end Infrastructure team here at JP Morgan. I'm delighted today to welcome Mark McCaffrey, CFO of GoDaddy. Welcome, Mark. It's good to see you.
Thank you for having me.
Yeah. No, absolutely. Still rather early West Coast time, so I hope you had a few.
It is. I've had a few cups of coffee. Hopefully, they're a little kicking here.
Great. As you get fired up, maybe we can start discussing some of the macro trends you're seeing. Part of the consumer audience that you have is very resilient, it seems. Maybe you can talk about some of the trends that you've seen, discuss the survey that you published recently.
Yeah. We came out with a survey from our venture forward. We do these surveys every so often to get the pulse of what's going on out there with small businesses, micro businesses. If there's one thing I would like everybody to walk away from hearing, it is these small businesses, these micro businesses remain extremely optimistic about their ability to do what they love doing, whatever it is, a pizza oven or a downtown store. They remain optimistic. Now, we've seen that resiliency time and time again for years. This is a customer group that is putting food on their table. They want to do better. The value they get from the GoDaddy products far exceeds the value they're getting. Even at times like we're seeing now, they become more mission-critical for them. Our relationship with this customer group is fantastic.
We have so many different touch points with them, from customer visits to our care organization to surveys. We keep getting the same message back from them. We feel really good about what we're doing. Yeah, there's some uncertainty out there, and that'll happen from time to time, but it doesn't change how we feel how we are going to be successful doing what we love to do. That's why we always check their temperature.
Obviously, many investors, after the most recent earnings, have been focusing on the headline number of customers, while your priority seems to be focusing more on high-intent customers. Could you maybe highlight some of the metrics we should look at when judging your success with high-intent customers, and how should we think about the growth algorithm, ads versus?
Absolutely. I'll take it in two parts. Let's take it up a level. Our strategy is working. We're getting to a higher-intent customer. When we look at our overall business, we're growing 6%-8%. We've expanded our normalized EBITDA margins by 900 basis points in five years. We've, at the same time, improved our free cash flow, our free cash flow per share. We bought back 25% of our fully diluted shares outstanding in the last four years. Not many companies can say they've done that. At a high level, our model, our algorithm is showing the resilience. Our strategy is going after higher-intent customers. We've taken people through the customer count. We've done some divestitures. At the end of the day, and this is in our 10-K, so I'll point to it. It's not a new number.
If you look at the amount of customers that are spending more than $500 with us, it went to 1.8 million from 1.5 million in 2023. Those are the customers we're going after, the customers who are going to attach products, who are going to get value out of our technology stack, who are going to have higher retention over the long term. Why? Because our LTV compounds on itself. It compounds. It starts in the year a customer signs up. It gets bigger when they go to a second product, and that retention rate improves on every single renewal cycle. That is our strategy. That is our intent. Those are the customers we're going after. I will trade what I call lower-calorie customers or customers who aren't doing anything with our products for customers who are getting value out of our products any other day.
That’s that resilient customer group that we keep talking about.
Any comments about the e-commerce trends that you're seeing? How does typically an entrepreneur start their journey on GoDaddy?
Yeah. So we see many different avenues. Traditionally, the domain was the beginning of ideation. I have an idea. I have to come up with a domain name. That starts your journey because from there, you realize you need a website. Oh, and it would be nice to have a professional email. Then ultimately, you can get into transacting. That was the normal journey. I would say today, we are seeing customers come in from multiple different avenues. Sometimes they're coming in wanting a logo first. Sometimes they're going right to wanting a website. I do not want to say domains is not still a very popular on-ramp for us. It is still our largest on-ramp. Having said that, the ideation phase starts in many different directions now. We see that top of the funnel coming from different avenues.
For example, we have Airo Plus now as a separate SKU. It's our AI-driven platform for those of you who are new to the story, Airo. The main intent of Airo Plus SKU is to tap into premium logos, which are a very popular on-ramp and getting better and stronger every day. Part of our having the one-stop shop is to make sure that we're capturing the customer where they are in the ideation and getting to them at the top of the funnel and then allowing them to expand that business in a seamless, easy way. I always say if you go and buy a domain now and you go through our Airo experience, you can be up and running with a website, email, logo, everything you need to do business within minutes. That's part of the advantage we offer in our technology stack.
Maybe we could still go back a little bit and talk about the domains business. Your market share has been very sustainable and strong for more than 20%. How do you think about retention rates for the domains business? What is the mix between pricing and volume growth in that business?
Yeah. So we're the largest domains player out there. I think the statistic is you could put the next 10 together, and it's still not as large as us. Domains is where we started. We're obviously very good at it. We have over 500 TLDs today. Not only .com, .ai, you can go to almost any TLD out there. We can provide that to a customer. The domain space in and of itself provides that on-ramp for us. Again, we see strength in the second attach. Often that comes with a domain first, then getting to the second product. We use it to get to that high-intent customer that we always talk about. In and of itself, the domain space is a very constant grower for us. It's a combination of volume plus price. I will say every TLD out there has a different price point.
Some are more profitable than others. .com is very popular. We all know about how .com comes to GoDaddy. I won't dig into that too much. Remember, we offer so many different ones today that our customers can come in and get almost any TLD they want to start their business and then move into whether it's Websites + Marketing, Managed WordPress, whether it's Email, professional email, whether it's transacting through our Commerce engine. All that's available to them. When we report our business out, we have a core platform, which is what I would say our traditional business. It includes the domain space. It also includes the aftermarket. We do believe that having a secondary market for a domain space is something we're the largest player. We should have the largest secondary market as well. It's a very good business for us.
That's the core platform. Applications and Commerce in and of itself is usually that second product attached, third product attached. It's proprietary software that we create. It's also third-party software that we sell out there. That comes at a highly profitable point for us, which is why as that gets larger, it drives our expansion of our normalized EBITDA.
Perfect. Thank you, Mark. You have touched upon ROI. Can you maybe talk a bit more about how you have been investing into this technology and what benefits do you think AI could bring to the website building space?
Yeah. Let's start with the technology basis itself. We are the only company out there that has the technology stack from the domain all the way to the transaction. That's a lot of data consolidated. That fuels Airo for us. It's the first place Airo goes to get that data. You think about how much data exists. We have 14 million interactions through our care organization every year. We get 1.2 billion signals from our technology stack every day. All right? We have over 20 million customers. We've been around 28 years. We have that in a consolidated technology stack that allows us to understand our customers, know what our customers like, know what they need, know when they're having problems. We can respond to them through our care organization.
When we talk about Airo, the primary driver and the work we did over the past few years is to access that data in a manner that we can flip it back to our customers and say, "Hey, here's a great website. We think you want to do a bike shop in Arizona. Here's some websites for a bike shop in Arizona. Oh, this is a perfect email that goes along with that. We think this logo you might like based on the history we've seen in our databases." That provides us the ability to have more unique responses back to our customer group. Not that we don't use LLMs at some level, but we control that because it fills in the blanks to our own technology and just provides value. We have one choke point that we also can control the volume that's going there.
That is why it does not impact our cost basis as much as some others talk about out there. All that works very well within our technology stack. We are seeing our customers discover Airo. We are seeing them engage with Airo. Obviously, we have now entered into the monetization stage, a little ahead of schedule. We are very happy about that. This was the investment we made because we knew that for the micro business, these tools, their ability to use AI themselves to do business better, we were going to be able to provide them that ability.
Amazing. Can you maybe give us a bit more of an update on the AI rollout?
Today, as we stand, Airo for all new customers will be thrown into the Airo platform. Airo provides that easy experience, whether they're coming in, like I said before, via domain, logo, or they're coming in directly from a website. All new customers come in through the Airo experience. On our existing customer base, many of them have been exposed to Airo through the renewal cycle. We continue to make sure they're getting exposed as they get into their dashboard. We have an opportunity to upsell. We have an opportunity to look at what products might be useful for them. In certain cases, we have the ability to convert them over from an existing competitor, like in payments, to our platform because it's easier to use. We're, I would say, in a good spot on that journey.
With 20+ million customers, we have a lot of space to continue to move and continue to get them exposed to Airo in and of itself.
Can you maybe provide a few use cases on how Conversations tool is driving engagement?
Of course. I have to talk about Larry and Leroy, the pizza guys, right? Conversations is becoming very popular. It's part of Websites + Marketing. I laugh. I love going out and visiting with customers. Sometimes I bring customers to us. In this case, it was a mobile pizza oven. He's got it on the back of a trailer. They bought their own pizza oven. They go from place to place. A tool like Conversations has become key to them. It takes 90 seconds to make a pizza. I had to learn this. I never knew it took 90 seconds to make a pizza. In those 90 seconds that the pizza is being made, one of them is making the next pizza. The other one is responding on Conversations to all the inbound that are coming in through the website.
Why was that important to these guys? If you're looking for someone to help you at an event or a party with food, the first call you make, if the person doesn't respond, they go from the pizza oven to the taco truck, right? They don't wait around for you to return that call. Their ability to set up their next gigs in the coming weeks through our Conversations tool, which is AI-driven, they can automatically respond. Wrong door. They can automatically respond. Allows them to make sure that they're staying current with their business, that they have gigs for the next couple of weeks out there.
To me, that was the perfect example of when you're a mom-and-pop shop, an underdog, and you have all these inbounds coming in, you can't wait till 11:00 P.M. to sit down at your computer and start to filter through all the social media platforms to figure out who's reaching out. You need someone to actively engage while you're doing what you do. This is what our tools allow them to do. It prompts the response that they can make immediately to their customers to set this up. It writes it for them, and it uses their voice because it goes back to what they've done before. You can tweak it a little bit, or you can just let it fly instantaneously, but now they have the response, and then it goes right into scheduling for them on our tool.
They have it all lined up. They do not have to come home at night and figure all this out. It is done automatically through Airo, through our AI tools. For a micro business who is just trying to compete with bigger players out there, this is an amazing resource for them. It is a resource. It is a tool that actually keeps them from having to incur cost or hire people to do this for them. They can do this themselves. I still laugh. He was on his mobile device, sitting there responding as we are talking. I am asking him, "What are you doing?" He is like, "Oh, I have to get back, and I am using your Conversations right now in between each of these pizzas." By the way, great pizza. Great pizza. I say that as a New Yorker who moved to the West Coast.
This was great West Coast pizza.
Mark, how did you decide on the current price point of Airo Plus? In general, what is the thought process for these AI features as they evolve?
Yeah. Airo Plus is the first separate charged SKU that we have in our portfolio. It's really early stage. We just launched it. We basically get certain functionality in a premium SKU that you can use, and we are charging $5 a month for it. Now, we experiment. If you've heard our CEO, Aman, talk at all, he will talk about we are an experimentation culture. We look at what the different price points are. We look at what we think is going to be attractive. We came up with the $5 a month, $60 a year, based on what we thought would be the surplus of the value that the customer is getting based on what we were giving them. We've been around doing this for a while. We also know that if you come in too high, you will lose customers right off the bat.
People will not engage with it based on the price point you set. You have to set it in the initial stages based on a point that seems economical to the person coming in, that it just makes sense for them to come in and then obviously renew. Our initial price is $5 a month. Doesn't mean that it will stay that way necessarily. We'll continue to look at what the overall impact of it is. Everything we do is based on initial experimentation, how our customers are reacting, how they're renewing, what we're seeing in that renewal basis. Are they getting the value out of it? Are they using the functionality we're giving them? Everything's designed.
If the five areas that are in there now today do not seem like they are landing, or there is a sixth area we can put in, or we can flip out functionality based on behavior, we will do it. We are very agile that way, and it was part of the process of getting a consolidated technology stack that we have the ability to use our products to interact to get to the best value proposition for each of our customers.
I think it's also worth discussing kind of the broader pricing and bundling initiatives. Can you talk about how you moved from the so-called product lens to customer lens of that pricing and bundling?
Yes. Last year, when we launched pricing and bundling, we were very much on a product-based focus. That was the natural evolution of launching bundling in and of itself. We focused on launching. We have talked about it. The major one was Email plus Security last year as a bundle to all of our customers based on a product lens. It was very successful. As we've come into 2025, sorry, I always have to think about what year we're in, 2025, we've gone to what we call cohort-specific, which means we are looking at specific customers and the attributes they have of the products they're using today and creating bundles around those attributes. We have multiple bundles based on these cohorts in play today.
We are going into the cycle now of testing what I call the cohort-specific bundles for 2026 as we go into the back half of the year. We have a cycle set up now that basically says we launch at the beginning of the year, we test into new bundles by the end of the year, and then we launch those based on the testing that we see out there. How this works, when the bundle is introduced, you get two flavors of it. You get new customers coming in that are choosing those attributes. We'll get offered a bundle, right? You have customers who are renewing now have the ability to go to a bundle. How does that work? It helps us with our uplift around new coming into the year.
The most important part of it is as we go to the next year renewal, we see the strength in the renewal rate because now they're moving from one product to two product to three product. As I've always said, our retention rate is great at 85%. Once they get to the second product, it goes up from there, gets to a third product, it's a product for a customer for life. Our ability now to move that within the customer view allows us to really focus on that second and third product attach and get to those retention rates. That's what we saw in Q1. We talked about we've seen improvement coming into the year around the retention rates of our customers. A lot of that's driven by the bundling that happened last year.
Again, we continue to test into that cycle, and it continues to compound on itself, and it continues to drive the long-term model that I talked about at the beginning of our conversation of how we can grow, how we can be more profitable. Obviously, we have capital allocation, and then we're growing our free cash flow per share at a 20% CAGR.
How individualized do you think those pricing points could become, and what role do third-party products play in those bundling?
We have the ability to do across our products that are on the consolidated stack, and most of our products are on the consolidated stack as we sit here today. We have the ability to do it with third-party products. We have the ability to do it with our own proprietary software. We can combine the attributes based on any element that we think our customer is getting value out of it. One of the important things we do, absent a partnership that we may have on our site, is we own the customer relationship no matter what. Our ability to own that customer view becomes very important to us and a key advantage to us in launching these type of cohort-specific bundles. It's all in play. It's all our strategy is what I keep coming back. Strategy is working.
Perfect. This is probably a good time to talk about your payments business. Can you maybe remind us what is your strategy in the payments arena and the implications of your recent rollout of phased transaction fee increases?
Yeah. We launched into the commerce, I should say the payments business several years ago, and we continue to see steady growth in our GPV related to, I would say, signing on new customers into our payment platform, but also converting existing customers over to our payment platform. Right now, our biggest growth in GPV is being driven by the conversion. When you think about it, most of our customers in the ideation stage that are going to do transaction, it takes a while for the volume for them to build up. When we convert an existing customer who is already transacting, we get all that GPV onto our platform immediately. That has been driving our GPV growth. Perfect example of the pricing and the transaction fee we have talked about is our ability to be agile. We are the lowest transaction fee out there.
For our customers, that's a big deal. It means a big difference to the money that goes into their pocket. Even in that circumstance, we saw the ability that we could move up pricing, still remain the lowest, and still get the conversion rates because our, I would say, our ease of use was really attractive to our existing customer base and keeping them at a lower point. Again, we continue to look at the surplus they're getting out of the value of our technology. I'll never say we won't use pricing occasionally. We will. This was a case that we did raise our transaction fees. Having said that, we're still well below the market of what other people are charging on transaction fees, which allowed us to do that and allowed us to make that evaluation.
Are these point-of-sale type of transactions?
Yes, they are point-of-sale.
These would be like Square and other companies that these customers are using, and you give them a lower price so that they can continue using it?
That's right.
As we speak about Commerce & Application segment, how much of the A&C division is driven by price versus cross-sell and new customer additions?
It all comes into play. And keep in mind, when you're talking bundling, it's a combination of volume and getting price value. So it's hard to say, "Hey, pricing is this much versus product is this much," because it's all combined into the strategy in and of itself. The idea is to drive more value to our customers and therefore be able to take a little bit of that customer surplus back to us. When our customers are successful, we are successful, and we continue to look at it from that angle. I would say you look across A&C and you look across the different product groups, they all are growing at a healthy state. Double-digit bookings, I think, is what we've set out there publicly. We continue to see the strength in our bookings coming out of 2024, coming into 2025.
Obviously, we have tougher compares this year in bookings. We had a very good year last year. The comparables for this year get a little harder for us. Q2 is probably the hardest comparable quarter we have going for this year. The momentum in and of itself around how we're engaging customers, how they're getting value, how they're converting over to two-plus product, how the average order sizes are going up, that has continued through Q1.
Obviously, you have recently come out with this multi-year target of 6%-8% for revenue growth. A lot of it is driven by this revenue mix towards A&C, as we discussed. Do you see a long-term path to double-digit growth at some stage, and what would be the sources of that growth?
I'll come back to where I started. Our model works. Our strategy is working. 6%-8% revenue growth, improving our normalized EBITDA margins the way we've done it, buying back over 25% of our fully diluted shares outstanding and getting to our CAGR. This all works, right? We feel really good about executing our strategy and this model continuing to compound on itself. I always say our North Star is free cash flow. Everything else is a lever to get to the highest free cash flow we can because that strengthens our balance sheet. It allows us to return value to our shareholders. It allows us to continue to invest in the business. It allows us to look at different areas based on the ROI.
There is no strategy that says we have to do A, we have to do B, or we have to do C. The idea is this model continues to compound on itself. Our North Star continues to be the free cash flow. We continue to expand our profitability, our operating leverage. We're growing revenue over two times the rate that we're growing our operating expenses. This model continues to compound on itself. It continues to grow. It's a great model. We're getting to the customers we need to get to. We're getting to the higher intent customers. We're getting to the higher retention rates we talked about coming out of Q1 earnings. It works.
Perfect. Maybe we can take a few questions from the audience.
Do you have any targets on the free cash flow?
We've put out there at our investor day a few years ago our free cash flow per share target of a 20% CAGR over the three years.
Is that going forward or do you have already achieved that?
That's through 2026.
You talked about multiple product lines within A&C growing in double digits. What are the key ones? Is it Outlook, Microsoft Security? Do you see new products being layered in over time? You're going to start selling Copilot to your base or something else?
Yeah. The major product groups within our A&C are website builders. That includes Managed WordPress and Websites + Marketing. Email, which part of that is Microsoft Email. We have some other options as well. Commerce. I think that's about it. All those are the major product groups. It doesn't mean we won't have other product groups. It doesn't mean we don't have complementary add-ons within each of those categories in and of itself. We're a one-stop shop for our customers. We have great relationships with our customers. If there is something they need, we will know about it. Obviously, we'll consider that within our A&C or core platform depending on where it fits. Right now, we feel really good about the entrepreneur's wheel, where we stand today, our ability to innovate for our customers, our relationship.
I always say there's two things you need in technology. You have to be able to innovate, and you have to understand your customer needs. We're doing both. Right now, we feel really good about where we are, but we are always challenging ourselves based on what we're hearing from our customers about what they might need and our ability to provide that.
As far back as I can remember, is it on? GoDaddy has favored share buybacks over dividends. Are you monitoring this new tax bill? I've seen that there may be taxes on share buybacks. At what point would you rethink that?
We look at everything based on what I call a very rigorous framework on ROI. We apply that to how we return value to shareholders as well. Right now, very attractive to do share buybacks. No immediate change to that equation. We are always looking at what the best ROI is for our capital using what I would say is a very consistent framework.
Could you talk a bit about competition? As you continue to evolve the product, how that shift, any share shifts, or how you see that going forward?
When we think about competition, we take a few different angles here. We are the only company in the world that owns the technology stack from the domain all the way to the transaction and everything in between. Within each of those, I would say, product groups or point products, we have different competition. There are some people who do domains, some people who do websites. Obviously, we talked about payment processing. There are some people who do that. We look very much, we want that customer that is going to use all our products. This is why our bread and butter is the micro business and that we remain focused on that because they really value the one-stop shop, only using one application. We do monitor competition within each of those groups, but we also know that when it comes to entrepreneurs and micro business, this is our sweet spot.
This is where we do the best. Not many people can compete with us in this market, and no one can compete with us across the whole technology stack because we're the only ones who offer it.
I think there's another question over there.
Quickly, just curious about how you're thinking about equity compensation as you continue to retain and attract talent. Is it more or less or just the same as important as it's been in the past?
Yeah. We've had, I would say, a very consistent application of stock-based compensation or equity grants to our employees. We continue to make sure we're attracting the right talent. I would say one of the great things about GoDaddy is we have a culture around innovation and experimentation, which attracts a lot of talented people in and of itself. When we talk about equity grants, we've kept the consistent process. I think we're about 2%-3%. We've kept it very consistent to our metrics within a percentage of revenue. We did have an uptick one year. We did move vesting from four years to three years to make sure we were staying within industry guidelines or standards or competition. There's no major change to that, or we're not contemplating anything different than what we've done in the past. We love our model.
We have a great culture. We have a great employee base, and we can continue to think they want to be here, if that makes sense.
Mark, maybe I'll close the conversation with a final question about free cash flow.
Please.
To ask it differently, Q1 was a very strong quarter for free cash flow, and you have a rather broad guidance of $1.5+ billion as your target for this year.
Plus.
How much can this plus be? How confident do you feel five months into the year?
Yeah. Listen, we are reaffirmed guidance out there. Thank you for pointing out it's $1.5+ billion . We feel very good about our ability to meet all the, I would say, the guidelines that we put out there, not only for the remainder of this year. We put some markers out there for 2026 in our investor day. That's what I keep coming back to. Our strategy is working. We're executing. Everything's going according to plan. We have a resilient model. We continue to compound on our success every single year. We're doing it in a manner that we're honoring our North Star of free cash flow.
Considering how strong your free cash flow generation is right now, does it make sense to look elsewhere for M&A opportunities either in the U.S. or abroad?
Yeah. We will always have a seat at the table around anything that comes up. There is nothing to call out. We feel really good about where we are today. That does not mean there might not be something down the road that may be of interest. I never want to rule things out. We always said it has to meet three criteria. Those criteria have not changed. It has to be strategic. It has to work within our financial model. We have to be able to integrate it within our core technology stack. Our success has raised the bar on the need for anything that we would look at to be better than what we are doing ourselves today. We feel really good about where we are. Our balance sheet keeps getting stronger. We have talked about our leverage ratios.
We've talked about our free cash flow generation. Right now, we feel really good about the execution and the strategy we have in place, our ability to really serve the micro business, our focus on the entrepreneur and the ideation, and our ability to make this model compound. We'll see what the future holds.
Perfect. Thank you very much, Mark. Appreciate your help.