Good afternoon, ladies and gentlemen. My name is Julie, I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Marta Nichols, VP of Investor Relations. You may begin your conference.
Good afternoon. Thank you for joining us for GoDaddy's second quarter 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. 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-K filed with the SEC with today's earnings release.
The matters we'll be discussing today include forward-looking statements, which include those related to our future financial results, new product introductions, 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 PlusServer 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 8th, 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, Marta. Thanks for joining us today to discuss our second quarter results. The second quarter was our first including Host Europe Group, HEG. 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. We've signed an agreement to divest PlusServer for an attractive price. In the second quarter, we've grown to serve nearly 17 million customers, up 2.6 million from a year ago, aided by the 1.6 million HEG customers we brought on this quarter. With the combination of our multi-year 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 four 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 HEG only contributing one 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, first, organic customer adds, and second, expanding our ARPU. With the HEG acquisition, we have many more opportunities to do both.
We're making continued progress on our 2017 product and strategic initiatives, including, one, growing penetration of GoCentral, our entirely new mobile-optimized website builder. Two, bringing new security offerings to market on the heels of the Sucuri acquisition. Three, launching our new telephony offering, SmartLine. Four, 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, our 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. Well over half of those new sites are being published within one hour of when the customer signs up. One hour. That's just wicked fast. Second, 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. Third, 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 fourth 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, we're directing customers who publish sites to our new domain suggestion engine, which is actually making domains an attached product. We're now offering more choice on payment plan terms from annual to monthly. Fifth, the reviews of GoCentral thus far have been outstanding, with nearly 80% of the ratings at four or five stars. The two 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 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 five stars, the feedback is largely about wanting GoCentral to do more. More features, functionality, and flexibility. This is exactly what we expected and planned for. 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 product for our customers, to something that can auto-render across thousands of verticals, from photographers to home builders, 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. Beyond GoCentral, we're also now offering security products from our recent Sucuri 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. Sucuri 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 four bucks 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.
We're making great strides on our product roadmap this year with GoCentral, security, and SmartLine, and we feel very good about our goals for 2017 and beyond. 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 million domains globally and serves nearly 17 million customers around the world. Those are big numbers. When we told everyone when we announced the acquisition that we expected $20 million in annualized revenue and cost synergies by the end of next year, 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 DomainFactory. Going forward, we have a number of integration efforts running in parallel, I'll touch on just a couple. First, 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. Second, 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 one-quarter 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. Third, we're preparing to introduce more GoDaddy products to HEG customers, including our managed WordPress offerings, GoCentral Office 365 and more, which we'll 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 U.S. and the former HEG, now GoDaddy EMEA, working in really seamless collaboration towards the goal of establishing a single European business. 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. At Q2, we continued 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 million, and bookings grew 24% to $668 million. On an organic basis, GoDaddy grew 12%, in line with our expectations, while HEG contributed $46 million 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 1.6 million 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 one quarter of revenue from HEG in 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 three 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 one to two 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 million 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, the 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 million. 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 2017 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&A this quarter includes nearly $14 million in costs associated with closing the HEG transaction and the incremental costs 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 million in cash and short-term investments and net debt of $2.5 billion. We bought back $275 million in stock in early May alongside a secondary offering by our four large holders, which we viewed as a cost-effective mechanism to accretively reduce our share count by approximately $7.3 million without reducing our public float.
Finally, we reached an agreement to divest PlusServer at an enterprise value of €397 million. After transaction fees and taxes, we'll net approximately €350 million. 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 million bridge loan. You'll see a pro forma net debt calculation in the back of the press release, reflecting the anticipated sale of PlusServer and pay down of the bridge loan. The divestiture of PlusServer, 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 two to four times 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. Let's discuss our outlook for Q3 and the full year. Note that this outlook includes no contribution for PlusServer. 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 million to $582 million. For the full year 2017, our revenue range is $2.215 billion to $2.225 billion. 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 million.
This number reflects the purchase accounting adjustment and leaves $104 million 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 million-$485 million, 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've 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.
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 million next year. 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, 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, we're ready to open the call to your questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. 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 Host Europe Group. Maybe I can eke out a couple more. Can you talk about how much Host Europe Group contributed to bookings and unlevered free cash flow during the quarter? Blake, you talked a lot about GoCentral. Can you talk about where those 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 actually 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. The decisions we're making are to get the best out of both of these businesses, so it's blurring the lines of separation. 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. 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 million. If you look at the growth in that context, you'll see that the GoDaddy range is in that 12%-13%, and GoDaddy did about 12% in the first quarter as well.
Same commentary around unlevered free cash flow, not breaking out the specifics between the two businesses because of the intermingled operations. Bigger picture and stepping back there, we've guided unlevered free cash flow to $480 million at the midpoint in 2017, and growing that to $600 million in 2018. 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. This is Blake. 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. 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're 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 text and MMS and 800 numbers as well.
Yeah
anything that you could add on that'd be great. Thanks.
Sure. This is Blake. 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'll see that roll out in the next couple of weeks more broadly. 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.
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're pretty darn happy with it, and the installation and the usage is steadily climbing.
Great. Thank you.
Yeah. Hey, this is Scott. 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 $ a month and a second line. 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-digit conversion you noted from free to paid is pretty strong. Can you talk about a bit on the trajectory of the product that you have seen 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? Then Ray, it seems like purchase accounting impact was lower in 2Q. Does that mean it's going to slightly be higher than your expectations in 3Q and 4Q? What's kind of like the contribution from Host Europe in the 3Q guidance? I know you raised the full year expectation to $150.
Hey, Deepak, this is Blake. On GoCentral, we're seeing, I'll call it mid-single-digit conversion. 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 access to the product and making it just, frankly, easier and easier to build a website. We're seeing folks quite pleased with the tool, with the results the tool creates, and then they start converting. You got to think of this business, though, I think, in terms of contribution. Remember, a lot of our revenues, as you know, are already in the franchise because we're a renewal business.
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 hundreds of thousands of customers at 5%, hundreds of thousands of publishes at 5% conversion, you can kind of just do the math from there. I think that we will continue to see that grow and start lapping itself in terms of subscription services.
Hey, Deepak, just to tack on, it's Ray, to tack onto Blake's point, if you look at that hosting and presence line now, it's an $800 million-plus annualized revenue line item. 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. Because of the confusion around that haircut and the deferred revenue, we wanted to give you guys a point estimate for the year. It's $150, up from $140 last quarter. We've recognized $46. As you look at the third quarter guide and then the implied fourth quarter, as we give the full-year guidance, you'll see that tick up.
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 their shorter term on their customers. Hopefully that helps you out.
Yeah, that's helpful. Thanks, guys.
Sure.
Your next question comes from Jason Helfstein with Oppenheimer. Please go ahead. Your line is open.
I want to understand the logic of putting presence with hosting as the way you report it. Why not put presence and business applications? The second question, the 28% growth in hosting and presence, if you back out HEG, would it have had an impact on that? Kind of perhaps you can give us like a pro forma growth for that. Lastly, when you're thinking about the conversion opportunity in presence, how are you thinking about that? Because, Scott, 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? If there's any kind of numbers you want to share. Thanks.
Hey, Jason, this is Blake. I'll cover one, let Ray cover two, and then Scott will cover three. 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. Remember that more than 50% of websites today are built by a professional, not built by a business owner themselves. 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 are advanced enough to go use a more advanced hosting product, and that's why we put those things together.
Hey, Jason, it's Ray. On your HEG question, specifically around hosting and presence. Give you a little context on HEG's impacts on the different product lines. A very rough split, HEG's about 30% domains, 60% hosting and presence, and 10% biz apps. If you apply those ratios to the $46 million in revenue that we put in this quarter, that'll give you a good sense of what it contributed. The GoDaddy hosting and presence is still growing at double digits, very similar to first quarter rates.
Hey, Jase, help me out on the last one, just around conversion on GoCentral or SmartLine.
Yeah. I mean,
That I'm able to answer it accurately.
Sure. I guess the point is, as customers go to renew their plan, their hosting subscription, that'll be your opportunity to try to effectively offer them GoCentral to existing customers. Is that kind of the idea, and just any anecdotal on where you think conversion rates could go with that business over time?
Yeah. Okay, thanks. Helpful. Well, yeah. Part of the renewal, Blake's renewal comment, is this is just, it's a renewal business, right now, we're getting new builds from both new builds from existing customers and attracting new customers to the franchise. New by itself on top of a big renewal base is just tough to move sort of a P&L needle. The focus is get new builds, again, new customers, and even with their existing customers, and as those new builds flow into a renewal cycle, at, frankly, the conversion rates and the resonance that we're seeing with customers, that should produce a positive lift to renewals and you're getting the flywheel going of more new coming into a renewal base.
The focus on the product is still get a new idea and whether it's to a new customer or 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, 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. Blake, I just want to maybe comment that we met with a company in your space, that they're 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? 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, Ryan, 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?
Yeah, please. Thanks, Ryan. We're really pleased with the progress we, and it's now the collective of my 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. 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. 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.
Obviously, when you're dealing with hundreds of agents and reps in different calls, that's not a snap-your-fingers business practice, and then it rolls out. 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 can I follow up with a question on Office 365? I know penetration's pretty light in HEG. Now that you've been in there for a couple of months, any traction there? Can we infer anything from recent traction onto the growth of that business for the rest of the year?
Yeah. You want to cover that, Scott, or you want me?
Oh, sorry. O365, 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 productivity suite, that the value proposition is just a super strong one.
Yeah, just to pile on to Scott's comment, Ryan, one of the things we did with Office 365 when we introduced it into our own GoDaddy customers years ago, was we modified the installation process to go from 22 individual screens down to one 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. We will absolutely do the exact same thing at HEG to make it just a wonderful product experience.
You'll see the same kind of traction that we've had in our franchise at HEG, 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 J.P. Morgan. Please go ahead, your line is open.
Hey, hi, guys. This is Ugam Kamat on for Sterling Auty. Thanks for taking my question. Firstly, I just wanted to look at the pro forma income statement and was wondering how much did the PlusServer business contribute to the revenue and the EPS? 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 HEG?
PlusServer, because you sold the business also.
Yeah. The PlusServer, when you see it in the P&L, it's being treated as a discontinued operation, so it won't show up in the revenue or the expense. Its own line item, and it's a relatively small contribution this quarter.
Got you. 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. 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 Chinese Mandarin language. That's going well. Obviously, we're starting from a smaller base. 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. What we're building is a global platform to be able to serve that need state 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 two things. One, the marketing advertising for the quarter. It grew less than I had modeled what I would expect, especially since you've talked about marketing advertising kind of growing with revenue there. I would think that with rebranding from HEG to GoDaddy EMEA and other marketing efforts that you're launching there, it would have been a lot higher. Just a little color there. 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 HEG. Just curious from the customer retention
perspective, how you compare to HEG and if that's improved with HEG. Thank you.
Yeah. Hi, Jonathan, it's Scott. First, on the marketing and advertising side. We've talked about it growing in line with revenue, if you go backwards over time with us, you'll see in some quarters it's a little lower than revenue, sometimes it's a little more. 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 CAC 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.
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 Ken Derelend from Mark. Thanks for taking my questions. Just two. One on customers. I believe you guys disclosed that you had over 1.7 million customers for HEG at the start of the second quarter, then reported this quarter that it was 1.6. Can you discuss what caused that decline in HEG customers throughout the quarter? 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 aligned those metrics to our definitions. 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 definitional alignment.
Yeah, it's Scott. In terms of the conversion from free trial, solid. Again, 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. 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 Cakmak 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. Previously that's been de-leveraging from, I think, somewhat attributable to the growth in domains. I guess as we look forward, given the higher concentration of hosting and presence at HEG 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? Then I have a follow-up.
Yeah. As you looked at the leverage we got this quarter, we're fairly small year-over-year. HEG's helping with that a little bit, just given the size of their hosting business, how much more they're levered there. I think I'm going to stick to the same script that we've been telling you guys over the past six, eight 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 buy, build or partner, and depending on that decision, that's going to drive a different P&L perspective. Like we always have, we're managing to the adjusted EBITDA margin.
Where it lands in the P&L is based off of those decisions.
Okay. Steady it is. Blake, I think you had mentioned that domains are starting to become an attached product.
Yeah
if you look at GoCentral. Just before, domains were the hook. Obviously, these new products are going to be the newest drivers for you. How should we just think about domains in general? I mean, is this just going to become a secondary attached component?
Yeah.
Do you still expect that to be kind of an engine for you guys? Because you still had all the gTLDs and whatnot.
Yeah. James, domains is still going to be a very big, and our biggest by far, engine of attached. 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 that's happened over the last few years where I'm going to go play with a 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 industry. 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.
We can put up four or five 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.
Our next question comes from Lloyd Walmsley with Deutsche Bank. Please go ahead, your line is open.
Hey, guys. This is actually Matt Sorenson on Lloyd's behalf. Congrats again on the solid quarter. I'm curious, have you seen any particular verticals where it's ramping notably higher than the corporate average and where your optimism's especially strong?
Yeah, this is Blake, Matt. 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. What we're seeing is that we're 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're seeing user behavior when in the creation process. Adding capability that we know that these folks are interested in. We're scanning any kind of feedback where we're 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, et cetera, start to change as well as whether it becomes a takeout business or not. There are some really interesting things that we're getting a signal on from folks that are using the product today, and we're using that signal to tailor the product going forward.
Got it. 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. Let me just explain the framework. The way that we built the product is incredibly programmatic. 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. If they had a guest list or they had an an invite list and they wanted to have a registry gift area, we just change the names in a file that is super simple and programmable that makes it very easy for us.
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.
That makes a ton of sense. The 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 will the Website Builder 7 and GoCentral be run as two separate assets?
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. 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 we would not gain operational capability with that product. As we add more and more vertical capability, we'll start seeing people migrate across from Website Builder 7 over to GoCentral. Again, we're not going to force that migration.
Understandable. Thanks so much.
Yeah, sure.
Again, if you would like to ask a question, press *1 on your telephone keypad. Your next question comes from Sumeet Sinha with B. Riley. Please go ahead, your line is open.
Hey, guys. This is actually Lee Krowl filling in for Sumeet. Thanks for taking my questions. Just two relatively simple ones. First, on GoCentral, 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 a competitive displacement from some of your peers? Secondly, just on the full year for HEG, what's baked into that in terms of cross-sell of existing GoDaddy products?
Yeah. Hey, Lee, this is Blake. I'll answer the first one, then I'll hand it over to Ray. 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. We've 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. 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." These are folks new to the franchise that are showing up, that are playing with the tool, trying it out, publishing sites, then activating them against a domain name. That is a new cohort for us. Frankly, we've even seen folks that are displaced, 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're left in the lurch. What we've seen happen are folks that are actually rebuilding websites that they've had before with a developer who's no longer there and being happier with the results of this new website. This is somebody who may not have been a customer of ours.
Coming in and building one from scratch and being happier with the results than they were with the WebPro site that was built for them. There's actually a dog rescue business. It's highlighted on one of our earning slides, that you can go check out to get a flavor for that. I'll pass it over to Ray on HEG.
Yeah. 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. You won't see a lot of uplift 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. I'd like to thank all of you for spending time with us on our second quarter earnings call. And yeah, Mark, I was just told, tell everybody it's your birthday. There's no better way to spend a birthday than doing an earnings call. Thanks, everybody, and we look forward to talking to you in the third quarter. Bye now.
This concludes today's conference call. You may now disconnect.