Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like welcome everyone to the GoDaddy Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Marta Nichols, VP of Investor Relations. You may begin your conference.
Good afternoon, and thank you for joining us for GoDaddy's Q2 2017 earnings call. With me today are Blake Irving, CEO Scott Wagner, President and COO and Ray Winborne, CFO. We'll share some prepared remarks and then we'll open up the call for 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 ks 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, our ability to integrate recent or potential future acquisitions and achieve desired synergies, including our recent acquisition of HEG and the divestiture of HEG's PlusSilver business. 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, August 8, 2017, 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. I'll now turn the call over to Blake.
Thanks, Martha, and thanks for joining us today to discuss our Q2 results. The Q2 was our 1st including Host Europe Group, HEG, and we're really pleased with the combined results. We're continuing to see steady growth in customers and ARPU, solid execution on our HEG integration plans, as well as our product and marketing roadmap for 2017, and we have signed an agreement to divest Plus Server for an attractive price. In the Q2, we've grown to serve nearly 17,000,000 customers, up 2,600,000 from a year ago, aided by the 1,600,000 ATG customers we brought on this quarter. And with the combination of our multiyear organic international expansion and now the addition of HEG, the composition of our customer base has changed a lot.
While we were primarily a U. S. Centric company when Scott and I came to GoDaddy over 4 years ago, now nearly 40% of our customers are in markets outside of the U. S. Our combined ARPU rose approximately 3% year over year in Q2 to $129 with ATG only contributing 1 quarter of revenue to our annual measure as we mentioned on our last call.
GoDaddy's organic ARPU excluding HEG, was $132 rising 6% year over year, similar to growth in our past quarters. Our growth strategy in 2017 remains consistent with what we've done over the last several years. We're focused on continued double digit top line growth fueled by 1st organic customer adds and second, expanding our ARPU. With the HEG acquisition, we have many more opportunities to do both. And we're making continued progress on our 2017 product and strategic initiatives, including 1, growing penetration of GoCentral, our entirely new mobile optimized website builder 2, bringing new security offerings to market on the heels of the Sucuri acquisition 3, launching our new telephony offering SmartLine and 4, as I just discussed, our HEG integration.
I'll spend a little time on our product progress, including GoCentral Security and SmartLine, and then I'm going to turn the call over to Scott to discuss HEG and Ray for our financials. On GoCentral, we're very pleased with the progress across many measures, including website publish rates, international sign ups, paid conversion, a rapid pace of iteration on product and marketing and most importantly on customer reviews. Let me hit each one of those briefly. First, on publish rates, since our late 2016 launch, the number of websites published using GoCentral continues to march steadily upwards with hundreds of thousands of websites now published. Every one of these sites can be edited and managed entirely from a mobile device or a PC and is mobile optimized on both performance and conversion for customers.
And well over half of those new sites are being published within 1 hour of when the customer signs up, 1 hour. Now that's just wicked fast. 2nd, on GoCentral usage, since we launched dozens of international markets at the end of March, customer sign ups in markets outside of the U. S. Now account for half of all new GoCentral sign ups.
Our thesis about having an entirely end to end mobile website builder is really proving out in international markets. 3rd, on paid conversion, we've been thrilled to see conversion from free trials to paid subscriptions moving up quickly. Around the world, we've seen a mid single digit conversion rate from free trials to paid subscriptions. The improvements we've been driving in publishing conversion rates since launch are coming from a wide range of factors that we're working on in parallel from feature improvements in the product to better merchandising on our sites and purchase flows to increasing sophistication in our marketing and communication with customers, which brings me to my 4th point on our product and merchandising work. We're continuing to improve the customer experience with everything from new GoCentral features to purchase path improvements.
Just in the last few months, GoCentral customers can now sync content with Facebook, easily integrate with Google AdSense, add audio or video features, choose from hundreds of new themes, fonts, photos and layout options and better merchandise their e commerce inventory. We're also engaging customers at more points along the purchase path. We're now successfully funneling domain purchasers to GoCentral free trials and we're directing customers who publish sites to our new domain suggestion engine, which is actually making domains an attached product. And we're now offering more choice on payment plan terms from annual to monthly. And 5th, the reviews of GoCentral thus far have been outstanding with nearly 80% of the ratings at 4 or 5 stars.
The 2 big wins are in ease of use and the exceptional support we provide. Many people assume that a DIY website builder leaves them entirely on their own. And when they discover they can get knowledgeable and consultative support from GoDaddy, they absolutely love it. We've provided a couple of direct customer quotes in the earnings slides that reflect customer sentiment. Now while we love to hear positive feedback of how we're helping customers succeed, we consider the negative feedback even more important.
It tells us precisely where we need to improve. Where GoCentral isn't 5 stars, the feedback is largely about winning GoCentral to do more, more features, functionality and flexibility. And this is exactly what we expected and planned for. And the modularity we built into the platform is allowing us to run really fast at product improvements. We have dozens of feature enhancements on the near term roadmap from expanded and deepened verticals to better UI to much more social sharing, language translation, integration with Google Analytics and OpenTable and more, and while maintaining our exceptional ease of use.
Zooming out, I think the meta point here is that our roadmap will move GoCentral from what it is today, an exceedingly easy website creation thousands of verticals from photographers to homebuilders, allow flexibility around design and features and put content everywhere it needs to be in social, search and more without sacrificing ease of use. Look, it's still early, but the velocity and the results are positive and we're gaining momentum. So beyond GoCentral, we're also now offering security products from our recent Securi acquisition to our customers. In fact, speaking of velocity, we had our new security offerings in the market within 60 days of the acquisition. That's a testament to the quality of the product and the quality of the product teams.
We're now providing website owners with tools to scan their sites, respond to hacks when they occur, patch vulnerabilities and more. And Securi is a leader in security management of WordPress websites, which is an important growth area in our hosting business. Turning to SmartLine, we've seen thousands of sign ups for our soft launch, which is available at godaddy.com/smartline. Smartline is built on the technology from our FreedomVoice acquisition and allows our customers to add a second and completely separate phone line to an existing iOS or Android phone for as little as $4 a month. We'll add SMS and MMS texting in the next couple of weeks with 800 numbers, customized vanity numbers and more coming next.
We'll begin to ramp up our marketing spend behind SmartLine this fall as we hone our messaging and our tactics. So we're making great strides on our product roadmap this year with GoCentral, Security and SmartLine and we feel about we feel very good about our goals for 2017 and beyond. And with that, I'm going to turn the call over to Scott to talk a bit more about our international footprint, particularly the integration of HEG.
Scott?
Thanks, Blake. As Blake mentioned, our HEG integration continues to go really well. Our combined company now manages 72,000,000 domains globally and serves nearly 17,000,000 customers around the world. Those are big numbers. When we told everyone when we announced the acquisition that we expected $20,000,000 in annualized revenue and cost synergies by the end of next year, and we're making really good progress towards our targets.
We hit the ground running immediately after we closed HEG in early Q2, integrating GoDaddy's SSL certificates and domain aftermarket experiences into the company's heritage brands such as 123 Reg and Domain Factory. Going forward, we have a number of integration efforts running in parallel and I'll touch on just a couple. 1st, we're focused on the merchandising experience across HEG's heritage brands. For example, we're testing the results of product and purchase flows on HEG sites, comparing them to GoDaddy's and implementing what performs best for customers and for us. We're also taking our industry leading domain search capabilities and implementing them throughout HEG's brands.
As a result, we expect to match more domain name searches, providing value to our customers and better business for us. 2nd, we're in the process of building an integrated European customer care operation with A plus support and consultative sales. We've already deployed a number of our care leaders to the heritage HEG teams in Europe and are seeing good results. Recall that GoDaddy today generates nearly onefour of our bookings from customer care, while HEG's percentage is lower. Helping their care teams learn how to engage empathetically with customers, identify specific needs and match those needs to our offering holds a lot of opportunity for our new European customers and also for GoDaddy.
And 3rd, we're preparing to introduce more GoDaddy products to HEG customers, including our managed WordPress offerings, GoCentral, Office 365 and more, which will roll out to European markets over the next several quarters. There's also background work being done to optimize pricing and returns on our marketing spend, align procurement and contracts, rationalize facilities and more. I have to say that with everything that we're doing, we're particularly pleased with the alignment across our teams with several leaders from GoDaddy US and the former HEG, now GoDaddy EMEA, working in really seamless collaboration towards the goal of establishing a single European business. So that's a quick update on HEG. I'm going to hand it over to Ray now to cover the financial picture, including our Q2 results and our full year outlook.
Ray?
Thanks, Scott. In Q2, we continue to execute well on all fronts with a strong product roadmap, solid financial results and new opportunities to leverage the business model with HEG. On a consolidated basis, revenue grew 22% to 558,000,000 and bookings grew 24% to $668,000,000 On an organic basis, GoDaddy grew 12%, in line with our expectations, while HEG contributed $46,000,000 in the quarter, a bit higher than our guidance, driven by the completion of the preliminary purchase price allocation. Customers grew nearly 18% with the addition of 1,600,000 customers from HEG. Organically, GoDaddy's customer growth was about 7%, in line with our recent trends.
Consolidated ARPU came in at $129 up roughly 3% year over year. As we highlighted last quarter, that growth rate is a little lower than recent trends due to the inclusion of only 1 quarter of revenue from HEG and what is an annual calculation. GoDaddy's organic ARPU growth was approximately 6% following a similar mid single digit growth trajectory as in recent quarters. Briefly on our 3 product revenue lines, domains revenue grew approximately 15% year over year in Q2. The majority of the growth was organic, driven by international, strong renewals and aftermarket domain sales, with the remainder attributable to the addition of HEG.
We continue to look for organic revenue growth in our domains business to move towards our customer growth rate over the medium to long term. Hosting and presence revenue increased over 28% versus Q2 a year ago, with the majority of the incremental revenue coming from HEG. Organic growth was in the low double digits similar to Q1 and also in line with our expected longer term growth of roughly 1 to 2 times our customer growth rate. Business applications revenue grew 35% in Q2, driven by our growing product suite and customer base, along with a small contribution from the addition of HEG. International revenue grew 57% year over year or 61% on a constant currency basis.
Beyond the addition of HEG, GoDaddy's organic business continued to grow nicely in the high teens. International is now at roughly a $750,000,000 revenue run rate with significant scale on its own. We continue to believe international expansion will be a key growth driver in years to come given our global footprint, horizontal need of our products, the strength of the GoDaddy brand and value proposition and the contribution from HEG. Turning to cash generation, unlevered free cash flow grew 61% in Q2 to $135,000,000 Unlevered free cash flow growth was boosted both by the HEG acquisition and the favorable impact of a shift in pay periods versus last year, which we mentioned on our last call. GoDaddy's organic year over year growth and unlevered free cash flow for the first half of twenty seventeen was over 20%, continuing our recent trajectory.
Looking at expenses, other than higher amortization related to the purchase accounting, the inclusion of HEG didn't have a perceptible impact on expense as a percentage of revenue for the combined company. Gross margin ticked up sequentially and for modeling purposes, we'd recommend holding it more or less in line with Q2 going forward. I'll point out G and A this quarter includes nearly $14,000,000 in costs associated with closing the HEG transaction and the incremental cost incurred as we integrate operations. The takeaway is that we're getting operating leverage and we're seeing continued margin expansion year over year. One other item of note for the quarter is the TRA benefit below the operating line.
This liability moves every quarter based off several factors. However, you'll note that the adjustment is larger than usual due both to the secondary offering that occurred in May and a recent favorable tax ruling. As a reminder, adjustments to the TRA liability are non cash items. Turning to the balance sheet, we finished Q2 with approximately $591,000,000 in cash and short term investments and net debt of $2,500,000,000 We bought back $275,000,000 in stock in early May alongside a secondary offering by our 4 large holders, which we viewed as a cost effective mechanism to accretively reduce our share count by approximately 7,300,000 without reducing our public float. And finally, we reached an agreement to divest Plus Server at an enterprise value of €397,000,000 After transaction fees and taxes, we'll net approximately €350,000,000 The transaction is expected to close in the next month or so and we'll use the net proceeds and cash on hand to pay off the €500,000,000 bridge loan.
You'll see a pro form a net debt calculation in the back of the press release reflecting the anticipated sale of Plus Server and pay down of the bridge loan. The divestiture of Plus Server combined with expected cash flow growth this year is expected to bring our leverage ratio down to near the midpoint of our target range of 2x to 4x by the end of 2017. Our long term focus remains on driving strong and consistent cash flow. As our cash flow and balance sheet capacity expands and consistent with our stock repurchase earlier this year, you will continue to see us be thoughtful stewards of capital with the ultimate goal of prudently driving attractive growth in levered free cash flow per share for our owners. So let's discuss our outlook for Q3 and the full year.
Note that this outlook includes no contribution for Plus Server. For both revenue and unlevered free cash flow, we're tightening our full year ranges and raising the midpoints. For Q3, we expect revenue in the range of $577,000,000 to $582,000,000 For the full year 2017, our revenue range is $2,215,000,000 to $2,225,000,000 As I mentioned earlier, we completed the preliminary purchase price allocation for HEG and now expect its full year 2017 revenue contribution to be approximately 150,000,000 This number reflects the purchase accounting adjustment and leaves $104,000,000 to be recognized over the back half of the year. For the full year, we expect unlevered free cash flow for the combined company of $475,000,000 to $485,000,000 implying 35% year over year growth at the midpoint. Consistent with past practice, our cash flow outlook excludes expected acquisition
and integration costs.
Taking a step back, our first half results and our full year outlook should paint a familiar picture for you. We have included HEG for the first time, but the takeaway is that nothing in our story has fundamentally changed. We feel good about the progress of GoCentral, security, SmartLine and other product initiatives. We feel good about the trajectory of the HEG integration. We feel good about our operational and financial execution.
And we're focused on leveraging our brand and scale to extend our global competitive advantages, growing our customers' ARPU and top line and delivering strong unlevered free cash flow and margin expansion over time. Finally, we remain confident the business can generate unlevered free cash flow of $600,000,000 next year. So with that, I'll turn the call back to Blake. Blake?
Hey, thanks, Ray. As Ray said, we're continuing to deliver on our strategy and financial expectations and we see a very big global opportunity to keep growing the business for many years to come. We thank you as always for your time and we're ready to open the call to your questions. Operator?
And your first question comes from Sam Kemp with Piper Jaffray. Please go ahead. Your line is open.
Great. Thanks for taking the questions and congrats on a solid quarter. Ray, thanks for all the disclosures around ATG. Maybe I can eke out a couple more. Can you talk about how much ATG contributed to bookings and unlevered free cash flow during the quarter?
And then Blake, you talked a lot about GoCentral. Can you talk about where customers are coming from? Are those customers that have previously been part of the GoDaddy customer base that are now upselling themselves into GoCentral? Or are you finding that you're acquiring customers at a substantial rate using GoCentral as the actual on ramp? Thanks.
We'll let Ray take the first question, then I'll follow-up, Sam.
Hey, Sam, it's Ray. Effective with the close of the transaction, we're running these businesses together now under the GoDaddy EMEA banner. And so the decisions we're making are to get the best out of both of these businesses. So it's blurring the lines of separation. So you'll see we provided you with some of the key metrics, but we're not going to get down into the details of every revenue and expense line item, because frankly, it's just an exercise in precision without accuracy.
But to give you a little insight into bookings, when we closed the transaction last year, we highlighted that their annualized bookings in 2016 were $240,000,000 So if you look at the growth in that context, you'll see that the GoDaddy range is in that 12% to 13%. And GoDaddy did about 12% in the Q1 as well. And same commentary around unlevered free cash flow, not breaking out the specifics between the two businesses because of the intermingled operations. But bigger picture and stepping back there, we've guided unlevered free cash flow to $480,000,000 at the midpoint in 2017 and growing that to $600,000,000 in 2018. So that 20% growth algorithm that we've been discussing on past calls continues to be our target.
Hopefully, that helps you out a little bit with looking underneath the covers there.
Hey, Sam. So this is Blake. So we actually are really pleased with the hypothesis, which was if we added a new on ramp for folks that were not GoDaddy customers that they would start coming into the franchise. So we're using GoCentral as this new on ramp and it's working. You heard me mention in the comments that we actually are seeing domains become an attached product for GoCentral customers, which is something we're doing with some really nice algorithmic suggestions on what a customer should do based on what they've actually entered into their website.
We're not going to split between how many are new versus GoDaddy customers, but we're absolutely attracting new customers with GoCentral that have not been in the GoDaddy franchise before and we are quite pleased about that.
Great. Thanks for the color.
Your next question comes from Ron Josey with JMP Securities. Please go ahead. Your line is open.
Hi. This is Shweta for Ron. Could you talk a little bit about SmartLine, a little more detail on your marketing plans and early traction on the product. You've mentioned you will be introducing tests and MMS and then 800 numbers as well. So really anything that you could add on that, that would be great.
Thanks. Sure. So this is Blake. So SmartLine, you'll start seeing us start actually marketing at top of funnel in the fall. We have certainly thousands of them in the hands of users have just introduced texting actually to the users that have the SmartLine capability today.
You will see that roll out in the next couple of weeks more broadly. And I think that the two features that I mentioned, one was 800 numbers that will come out in the remaining of the year, calendar year and vanity numbers that are numbers that feel like they are the same name as your website. And we intend to do some pretty interesting bundling between, frankly, GoCentral Mail and SmartLine, so you can have a full business package between having a website, a professional email and a professional phone number that will make you feel like you are in business and have all the advantages of a large business. We are pretty darn happy with it and the installation and the usage is steadily climbing.
Great. Thank you.
Yes. Hey, this is Scott. And when you talk about marketing spend, the promise of SmartLine is a broad one when you think about being able to get full functionality of a phone for a couple of bucks a month and a second line. And so from a go to market standpoint, as these features come online, we're going to start to test marketing spend all around the LTV to CAC economics and see what kind of spend, what channels and messaging works, and we'll go from there.
Thank you, both.
Your next question comes from Deepak Mathivanan with Barclays. Please go ahead. Your line is open.
Great. Thanks, guys. First question on GoCentral. The mid single digits conversion you noted from free to pay is pretty strong. Can you talk about a bit on the trajectory of the product that you've over the last few months?
Has it been consistent? And when should we overall expect GoCentral to become a material contributor to revenues or revenue growth on the hosting segment? And then Ray, it seems like purchase accounting impact was lower in 2Q. So does that mean it's going to slightly be higher than your expectations in 3Q and 4Q? What's kind of like the contribution on from Host Europe in the 3Q guidance?
I know you raised full year expectation to 150.
Hey, Deepak, this is Blake. So on GoCentral, we're seeing, I'll call it mid single digit conversion. And I'd say over the last couple of quarters when we introduced the product, we've seen a steadily increasing conversion rate as we've dialed in sort of the purchase path flows and actually letting people get an access to the product and making it just frankly easier and easier to build the website. So we're seeing folks quite pleased with the tool, with the results the tool creates and then they start converting. You have got to think of this business though I think in terms of And so until we start rounding, I think some of these New GoCentral users into renewals, we're not going to see, I think, a substantial contribution to the hosting line.
Certainly, it's going to grow. But if you think about 100 of 1000 of customers, 5% 100 of 1000 of publishes at 5% conversion, you can kind of just do the math from there. And I think that we will continue to see that grow and start lapping itself in terms of subscription services.
Yes. Hey, Deepak, just to tack on, it's Ray, to tack on to Blake's point, if you look at that hosting and presence line now, it's an $800,000,000 plus annualized revenue line item. So it's going to take a decent number to start moving the meter there. On your question around purchase accounting, obviously completed the preliminary allocation. The numbers came in a little better than what we had guided to the Street last quarter.
And I wanted because of the confusion around that haircut and the deferred revenue, we wanted to give you guys a point estimate for the year. So it's 150, up from 140 last quarter. We've recognized 46. So as you look at the Q3 guide and then the implied 4th quarter as we give the full year guidance, you'll see that tick up. Now one thing to note, if you look back at historical GoDaddy, the haircut and the purchase accounting impact is not as extreme.
It happens mostly upfront in HEG given they're shorter term on their customers. Hopefully, it helps you out.
Yes, that's helpful. Thanks guys.
Sure.
Your next question comes from Jason Helfstein with Oppenheimer. Please go ahead. Your line is open.
Hey, thanks. A few questions. So just I want to understand the logic of putting presence with hosting as the way you report it. Why not put presence in business applications? The second question, the 28% growth in hosting and presence, if you back out ATG, would it have had an impact on that?
So kind of perhaps you can give us like a pro form a growth for that? And then lastly, when you're thinking about the conversion opportunity in Presence, how are you thinking about that? Because that's your point or I guess the point on when the renewals come in, that's really where you have the opportunity to try to kind of then sell that feature, upsell that feature. And just I guess, how are you thinking about it longer term? Is there any kind of numbers you want to share?
Thanks.
Hey, Jason. This is Blake. I'll cover 1, Let Ray cover 2 and then Scott will cover 3. Look, the logic of putting hosting and presence together is they're both websites. When somebody wants to put a presence on the web with a URL, they want to be found, right?
You're either going to go do a DIY website builder, you're going to hire a professional to build a website for you or you have advanced skills and you're going to build it yourself. And remember that more than 50% of websites today are built by a professional, not built by a business owner themselves. So we look at that hosting business, whether it's being built by a professional or an advanced user or somebody using a DIY website builder as being frankly elastic. They're going to make a choice on whether they're going to use a simple DIY website builder, have somebody build it or advanced enough to go use a more advanced dosing product. And that's why we put those things together.
Hey, Jason, it's Ray. On your HEG question, it's specifically around hosting and presence. Give you a little context on HEG's impacts on the different product lines. Very rough split. HEG is about 30% domains, 60% hosting and presence and 10% biz apps.
If you apply those ratios to the $46,000,000 in revenue that we put in this quarter, that'll give you a good sense of what it contributed. But the GoDaddy hosting and presence is still growing at double digits, very similar to Q1 rates.
Hey, Jaeson. Help me out on the last one, just around conversion on GoCentral or SmartLine. I just want to make sure that I'm able to answer it accurately.
Sure. So I guess the point is as customers go to renew their plan, their hosting subscription, that will be your opportunity to try to effectively offer them GoCentral to existing customers. I mean, is that kind of the idea? And just any anecdotal on where you think conversion rates could go with that business over time?
Yes. Okay. Thanks. Helpful. Well, yes, So part of the renewal Blake's renewal comment is this is just it's a renewal business.
And so right now, we're getting new builds from both new builds from existing customers and attracting new customers to the franchise. But new by itself on top of a big renewal base is just tough to move sort of a P and L needle. And so the focus is get new builds, again, new customers and even with their existing customers. And as those new builds flow into renewal cycle, add frankly the conversion rates and the resonance that we're seeing customers that should produce a positive lift to renewals and you're getting the flywheel going of more new coming into a renewal base. So the focus on the product is still get a new idea and whether it's to a new customer a new idea from an existing customer or a new one.
Now over time, there are interesting ways that we can think about and play with conversion of old sites into the new content platform, but that's maybe down the road.
Thank you.
Your next question comes from Ryan Essex with Morgan Stanley. Please go ahead. Your line is open.
Hi, good afternoon and thank you for taking the question. I just wanted to maybe comment that we met with a company in your space that's trying to use you as a benchmark for their customer care and they noted how difficult performing up to your standards are. Given that backdrop, how much progress have you made at HEG And what are the barriers that you see towards getting their customer care business up to your standards? How quickly might we expect that to have an impact on their platform?
Hey, Brian, I'm going to hand that question over to Scott because he's been intimately involved in the HEG integration. Scott, you want to handle that one?
Yes, please. Thanks, Brian. We're really pleased with the progress we and it's now the collective EMEA team have made creating a single care operation. I'll tell you one of the things that we were excited about, the HEG business was the commitment to care, particularly as a support mode. So the business in the European operations of HEG had a similar ethos around support and had been trying and experimenting with, again, intelligent next product additions, all again support turning into sales, which is really the method that we've been operating in and perfected over 20 years.
And so what's nice is it's actually been pretty easy to describe the model that we're trying to get to and then build it up in Europe. And obviously, when you're dealing with hundreds of agents and reps in different calls that that's not a snap your fingers business practice and then it rolls out. But we feel really good about the practice of A plus quality support and being able to translate that into a revenue event and being able to have an operation that's going to operate at that way very well in early 2018 in Europe.
Got it. Maybe I can follow-up with that question on Office 360 5, I know penetration is pretty light in ATG. Now that you've been in there for a couple of months, any traction there? And can we infer anything from some traction on to the growth of that business for the rest of the year?
Yes. I think you want to cover that, Scott, or you want me?
Sorry, I figured I'd just it was 365. I think the reinforcement of productivity and branded email as a value proposition that certainly extends into Europe is strong. I'm not sure there's any immediate thing that we'd call out in the results relative to O365 other than the confidence that when we add a fantastic simple onboarding experience plus the ability to migrate from an older email system, whatever it might look like into a branded, both email and One
of the things we did with Office 365 when we introduced it into One of the things we did with Office 365 when we introduced it into our own GoDaddy customers years ago but we've modified the installation process to go from 22 individual screens down to 1 with a lot of deep programmatic capability on the back end that made it super simple for somebody to get exactly the name they wanted on one of the domains that they owned. And we will absolutely do the exact same thing at ATG to make it just a wonderful product experience. So you'll see the same kind of traction that we've had in our franchise at HEG, but we're going to make sure that we offer the exact same quality level from an experience and customer delight perspective that we've done at GoDaddy, which has given us that nice lift that we've had in that business.
All right. Thank you very
much. Sure.
Your next question comes from Sterling Auty with JPMorgan. Please go ahead. Your line is open.
Hi, guys. This is Ugam Kamath on for Sterling Auty. Firstly, I just wanted to look at the pro form a income statement and was wondering how much did the Pluslever business contribute to the revenue and EPS? And secondly, on the international front, can you break it down by geographies? How are you seeing the demand, particularly in Asia Pacific?
Sorry, I missed that first part. How much did PlusServer contribute or did you say ATG?
Plus Server because you sold the business also.
Yes. So the Plus Server, when you see it in the P and L, it's being treated as a discontinued operation. So it won't show up in the revenue or the expense. It's on line item. And it's a very relatively small contribution this quarter.
Got you. And on the international front, how are you seeing the demand with respect to Europe versus Asia? And what do you feel can be the demand drivers moving ahead?
Well, I think this is Scott. As we've talked about in past calls, we have a global business. We have operations in Asia and in Europe. Obviously, now combined with HEG, we're getting to be a pretty big size in Europe. In Asia, our markets, India, which we've talked about in the past, is a very big and growing market.
And then an effort over the last year has been to pick up our investment effort in several of the countries both around China and outside in, in Chinese Mandarin language and that's going well. Obviously, we're starting from a smaller base. And I think we had quantified that in past calls on the size of the Asia base, but we continue to see nice growth as we build up our businesses there. I think the important point is again the need state that we serve is a pretty horizontal one around the world, which is customers getting an idea not only up and running online, but having it grow and thrive both with front office and back office solutions. And what we're building is a global platform to be able to serve that needs data around the world.
Got you. Thank you so much.
Your next question comes from Jonathan Kees with Summit Redstone. Please go ahead. Your line is open.
Great. Thank you for taking my questions. I wanted to ask about 2 things. 1, the marketing advertising for the quarter, it grew less than I had modeled what I would expect. So since you've talked about marketing advertising kind of growing with revenue there, I would think that with rebranding from Hague to GoDaddy, EMEA and other remarketing efforts that you're launching there, it would have been a lot higher.
Just a little color there. And then second thing I wanted to ask is, you've done a good job in terms of talking about the conversion from the customer care perspective, turning that into a sales experience and how that's higher than HAG. Just curious from the customer retention perspective, how you compare to HAG and if that's improved with HAG? Thank you.
Yes. Hi, Jonathan, it's Scott. So first on the marketing and advertising side, we've always we've talked about it growing in line with revenue. And if you go backwards over time with us, you'll see in some quarters, it's a little lower than revenue and sometimes it's a little more. And I'd tell you to not hone in on any particular quarter, but that trending roughly in line with revenue is still the right long term trajectory.
Remember, when we think about our advertising and our marketing lines, we're really using these on an LTV to TAC basis. And going into either geographies or particularly product lines, looking for ways and continuing to grow around the world while maintaining what are pretty nice lifetime value to CAC returns and economics. And so when we think about our marketing spend, it's really around those metrics and not necessarily sort of what it looks like in any particular quarter. In terms of your second question on care and retention, remember at the acquisition we shared that HEG's retention was actually really strong. Now on a customer level, remember customer GoDaddy is at about 85% customer retention at an annual core level.
HEG was actually at about 88%. Again, those brands underneath HEG offer a great experience and higher retention was a big part of that business model and why we felt really good about bringing those businesses in.
It sounds like it. Thanks a lot. Good luck.
Your next question comes from Mark May with Citigroup. Please go ahead. Your line is open.
Hi. This is Kendarell on for Mark. Thanks for taking my questions. Just 2. One on customers, I believe you guys disclosed that you had over 1,700,000 customers for ATG at the start of the second quarter and then reported this quarter that it was 1.6.
Can you discuss what caused that decline in ATG customers throughout the quarter? And then one on GoCentral conversion, you talked about it being in the mid single digits. Can you compare how that compares with free trials run for other products that you have? Thanks.
Hey, Ken, it's Ray. I'll take your first question. It wasn't necessarily a decline in the quarter. Obviously, as we closed the acquisition, we brought all of the receipt level detail, all their key metrics into GoDaddy and align those metrics to our definitions. So that change in the number we had disclosed before to where it landed is really removing the duplicates across the brands.
That's just a definition alignment.
Yes, it's Scott. In terms of the conversion from free trial, solid. Again, when you if you look not only at our products, but others using that sort of model, mid single digit conversion tends to be a pretty good number. So we feel good about where it is now and obviously we're going to keep trying to work that as we go in the quarters ahead. Great.
Thanks for the color.
Your next question comes from James Kaczmaki with Monness, Crespi, Hardt. Please go ahead. Your line is open.
Hi, thanks. Ray, you had mentioned kind of the outlook on the gross margin line to kind of think about it in terms of 2Q. And previously, that's been deleveraging from more attributable to the growth in domains. And so I guess as we look forward given the higher concentration of hosting a presence at ATG and some of these newer products? Is that something that we can see a line that we can start to see leverage from as we look forward?
And then I have a follow-up.
Yes. So as you looked at the leverage we got this quarter, we're fairly small year over year. HEG is helping with that with a little bit with just given the size of their hosting business, how much more they're levered there. But I think I'm going to stick to the same script that we guys have been telling we've been telling you guys over the past 6, 8 quarters. You're going to see that number move over time as we hit more of the higher growth products with higher margins.
You should see that increase. But for modeling purposes,
I
want you to keep it steady because as we add more products in, we want the flexibility to put them either by build or partner. And depending on that decision, that's going to drive a different P and L perspective. So we're like we always have, we're managing to the adjusted EBITDA margin. So where it lines in the P and L is based off of those decisions.
Okay. Steady it is. And then Blake, I think you had mentioned that domains are starting to become an attached product. If you look at GoCentral, just before domains were the hook. Obviously, these new products are going to be the newest drivers for you.
But how should we just think about domains in general? I mean, is this just going to become a secondary attach component?
Or do you still expect that
to be kind of an engine for you guys because you still had all the GTLDs and whatnot?
Yes. James, domains is still going to be a very big and our biggest by far engine of attach. So folks, generally the pattern is, I have an idea, I'm going to name it. That is still largely the way most people get online today. This other path and on ramp happened over the last few years where I'm going to go play with the tool, see if I can stand up a good website and name it is something that is happening not at the same volume, but it's certainly happening across the across the industry.
And what we have seen is because we have as much expertise as we do in domains to use our algorithms to help somebody find exactly what they want, Once they have built a website and we can actually look at all the texts that they've entered in that website, what category of business they've chosen, what they've named their business, we can actually just suggest domains from the information they've already provided us without them ever having to search for a domain. So we can put up 4 or 5 suggestions that are very close to what they had in their mind when they started creating their website and it's become a pretty powerful attach mechanism for us. We still think that domains will be the giant hook that people use mentally when they say, I've got an idea and I want to name it. But we know that this is going to be an important on ramp for us going forward.
Perfect. Thank you.
You bet.
Your next question comes from Lloyd Walmsley with Deutsche Bank. Please
This is actually Matt Simon on Lloyd's path. Congrats again on the solid quarter. Sounds like everything with GoCentral is going pretty well to start off, but I'm curious, have you seen any particular verticals where it's ramping notably higher than the corporate average and where your optimism is especially strong?
Yes, this is Blake, Matt. So we're actually seeing verticals that are sort of what you'd expect, restaurants, real estate, photography and I won't go through the list. We've got 16 that we think are the big hitters. And what we're seeing is that we are seeing behavior of those individuals and knowing exactly what they are doing. And then we can take the product and start tailoring it to what we are seeing behavior user behavior in the creation process.
So adding capability that we know that these folks are interested in, we are scanning any kind of feedback where we are missing something that they think would be perfect for their site and then addressing those and you'll start seeing us start lifting features and start seeing those broad categories plus subcategories underneath those broad categories. If I use restaurants as an example, there are many categories underneath restaurants by type of restaurant that are also important and imagery and menu items, etcetera, start to change as well as whether it becomes a takeout business or not. So there are some really interesting things that we're getting signal on from folks that are using the product today and we're using that signal to tailor the product going forward.
Got it. And with the modularity that you're adding to GoCentral, I'm curious, is there any ramifications for OpEx in the second half? Or is there still some leverage to be seen there?
No, it's all leverage. Like really the let me just explain the framework. So the way that we've built the product is incredibly programmatic. So if you think about if you play with GoCentral, you have right rail editing tools that allow you to make changes to the site. If I use a wedding site as an example, all we have to do is to make that a wedding specific product is make sure that we have the editing tools named in a way that somebody building a wedding site would think of it.
So if they had a guest list or they had an invite list and they wanted to have a registry gift area. We just changed the names in a file that is super simple and programmable that makes it very easy for us. So we get a ton of leverage out of the product without having to spend a lot more into it to produce the verticals. That was the premise and the hypothesis of going super simple and horizontal to start with and then building vertical depth on top of that capability.
And it makes a ton
of sense. Last one from me, How should we think about customers on Website Builder 7 and GoCentral? Is the idea to eventually migrate them over to the latter or would they the Website Builder 7 and GoCentral be run as 2 separate assets?
Well, I mean, ultimately, we would like folks that are on Website Builder 7 to migrate to GoCentral. We're not going to force a migration for people because it's an unpleasant experience when that happens. But picking up all the features and one of the things I'll say is GoCentral had a deeper feature sorry, Website Builder 7 had a deeper feature set that was not modular and was not we would not gain operational capability with that product. So as we add more and more vertical capability, we'll start seeing people migrate across from Website Builder 7 over to GoCentral. But again, we're not going to force that migration.
Understandable. Thanks so much.
Yes, sure.
And your next question comes from Sameet Sinha with B. Riley. Please go ahead. Your line is open.
Hey, guys. This is actually Lee Krowl filling in for Sameet. Thanks for taking my questions. Just 2 relatively simple ones. First on GoCentral, kind of curious as to kind of the user base as they adopt.
Are they first time users to kind of domains and websites? Or do you feel like you're having ATG, what's baked into that in terms of cross sell of existing GoDaddy products?
Yes. Hey, Lee, this is Blake. I'll answer the first one and then I'll hand it over to Ray. So we are seeing folks that are showing up that are new to our franchise that are considering building a website first. They can do that with us.
They can do that with other competitors. And what we have we have got a pretty interesting set of on ramps for somebody who's going to build a website. We have a WordPress on ramp that is much more complex that allows unbelievable extensibility and flexibility and frankly has more development capability for folks that are pros and developers. And then this new cohort that we're seeing show up in our customer base are folks that are saying, I really don't know anything technically. I just want to build something super simple.
Please make it easier than PowerPoint. And these are folks new to the franchise that are showing up that are playing with the tool, trying it out, publishing sites and then activating them against a domain name. And that is a new cohort for us. And frankly, we've even seen folks that are displaced and this actually happens quite often, where somebody will have a website developer build a site for them. The website developer gets a full time job because they were a freelancer and they kind of disappear and now they are left in the lurch.
And so what we have seen happen are folks that are actually rebuilding websites that they have had before with a developer who is no longer there and being happier with the results of this new website. And this is somebody who may not have been a customer of ours. And then coming in and building 1 from scratch and being happier with the results than they were with the Web Pro site that was built for them. So there's actually a dog rescue business. It's highlighted on one of our earnings slides that you can go check out to get a flavor for that.
Then I'll pass it over to Ray on HGG.
Yes. Lee, as far as what's baked into that full year guide on 150 in revenue, it's the current product set that we've got to put in place that Scott mentioned, SSL certificates and domain aftermarket experiences, as well as the pipeline that we've got coming along of WordPress offerings, GoCentral, eventually O365. A lot of that is moving into next year though. So you won't see a lot of lift this year from that product integration because it's being done over time.
Got it. Thanks guys.
Sure.
Well, it looks like that's the last question everybody. So I'd like to thank all of you for spending time with us on our second quarter earnings call. And yes, I was just told, tell everybody it's your birthday. There's no better way to spend a birthday than doing an earnings call. So thanks everybody and we look forward to talking to you in the Q3.
Bye now.
This concludes today's conference call. You may now disconnect.