Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy first 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. 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. Thank you. Marta Nichols, Vice President of Investor Relations, you may begin your conference.
Thank you, Kelly. Good afternoon, and thank you for joining us for GoDaddy's first quarter 2017 earnings call. With me today are Blake Irving, CEO, Scott Wagner, President and COO, and Ray Winborne, CFO. Blake, Scott, and Ray have 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 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 possible 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, May 2nd, 2017, and we undertake no obligation to update these statements as a result of new information or future events. I'll now turn the call over to Blake.
Thanks, Kristy, and thanks to all of you for joining us today. GoDaddy's first quarter was another great one. We've seen consistently solid growth. We closed the HEG acquisition right after quarter end, and we're executing on a strong product and marketing roadmap for 2017. GoDaddy's unique combination of easy-to-use products, performant technology, and consultative customer care continue to differentiate what we do and have together yielded a large, high-growth business with superb cash flow. In the first quarter, we've grown to serve 15.1 million customers, an increase of nearly 7% versus a year ago. The composition of that customer base has changed dramatically over the last few years. At quarter end, we reached nearly 10 million domestic customers and over 5 million international customers. Our average revenue per user, or ARPU, also rose over 6% to $130, in spite of continued currency headwinds.
Our growth strategy in 2017 remains consistent with what we've done over the past two years since the IPO. We're focused on continued double-digit top-line growth fueled by organic customer adds and expanding ARPU, with the addition of the contribution from the Host Europe Group, or HEG, acquisition, which we closed last month. We continue to see a big opportunity to serve small businesses globally, and we have plans to bring them more and better services this year and beyond. Look, we started 2017 with some big product and strategic initiatives, including, one, welcoming HEG's employees and customers to the GoDaddy family and preparing to do much more for them and the millions of potential customers we see across Europe. two, the launch and growth of GoCentral, our entirely new mobile-optimized website builder.
three, the soft launch of our new telephony offering, SmartLine, and four, adding new security offerings via the acquisition of Sucuri. I'll spend a little time on our progress on products including GoCentral, SmartLine, and Sucuri, then I'm going to turn it over to Scott to discuss the HEG, and Ray for our financials. First, on GoCentral, look, we're just stoked about its progress. As we developed this product, we focused on making it possible for a small business or anyone with a great idea, not just to build a great-looking and super functional website quickly, but more importantly, to drive real success, to help our customers attract visitors, promote their ideas, and drive engagement. While it's early, and we're still doing lots of testing, we're seeing great initial traction with a completely new product and business model.
By the end of the quarter, the number of new websites published each week was growing by more than 50% year-over-year, and mobile usage remains really impressive. About 20% of sites built with GoCentral were started, edited, or published from a mobile device. Over 60% of the customers visiting the e-commerce sites built with GoCentral are buying goods on these sites via a mobile device, which really underscores our mobile optimization thesis. In short, our customers are using mobile devices to build websites using GoCentral, and their customers are using their mobile devices to buy goods from those sites. At the end of March, we launched a first version of GoCentral in over 40 countries in 27 languages, which we'll be iterating on throughout 2017. It's too early to conclude anything from the results, but anecdotally, we've been super pleased with the initial results.
International customers of GoCentral already make up about half of our GoCentral signups. It's clear that customers love building a website super easily in less than an hour with GoCentral. You will too. If you haven't tried it, go for it. I think you'll love it. Beyond the results we're seeing in market, we're also really encouraged by the release and iteration cadence around this product. We're operating with a level of agility and sophistication we simply didn't have a couple of years ago. We're iterating very quickly on GoCentral, rapidly spinning up new markets and new features, evolving our merchandising, and more. Where we see better results, we're immediately moving toward the winning models.
All that is giving us the ability to continue to quickly add new mobile-focused features that customers want, including SMS messaging for e-commerce and popular payment options like Apple Pay and PayPal One Touch. We also added a new blog feature complementing our marketing integration features, as well as tons of new content and images supporting nearly 2,000 categories of near complete website templates for everyone, from electricians to dog sitters to florists. With this GoCentral product launch, GoDaddy now has a full range of options. We can help customers build a great online presence any way they choose, whether they want to do it themselves with GoCentral or develop and host a WordPress site with more sophisticated templates and plugins, or have one of our professionals build or remake a site to their specs.
As I said, it's still early, but I honestly couldn't be prouder of what the product team has built and what we're continuing to bring to market here. Beyond GoCentral, our soft launch of SmartLine is also now available at godaddy.com/smartline. SmartLine is built on the technology from our FreedomVoice acquisition and allows our small business customers, and every one of you, to add a second and completely separate phone line to an existing iOS or Android phone. This offers a really intriguing value proposition for anyone who wants a second line or doesn't want to publish their personal phone number on their website. Here too, we've been consistently iterating on the product flow and design specs to make it feel super intuitive and familiar. We're optimistic about SmartLine's potential.
It's so easy to sign up and use, and the price point is really compelling at just a few bucks a month. We're going to be iterating on adding features over the next several months, including SMS and MMS texting, 800 numbers, and custom vanity domain numbers, and more. We see real potential here, but this is an entirely new product line, so we expect 2017 will be a year of testing and iterating for us. We also recently acquired Sucuri, a small website security company led by an exceptional team of experts who've developed a very innovative and up-and-coming website security product portfolio. Sucuri is very familiar to our FreedomVoice acquisition in that it provides a strong, specialized product to a small cohort of customers but has a much larger opportunity.
Sucuri gives website owners tools to scan their sites, respond to hacks when they occur, virtually patch vulnerabilities, and more, and it provides a great complement to our growing WordPress presence. Sucuri is a leader in security awareness and security management of WordPress websites. Their customers are very similar to ours, and we expect them to benefit from Sucuri's strong legacy products, including malware scanning, web application firewalls, and other offerings, which will be introduced into our customer base later this year. With the launch of GoCentral and new products like SmartLine and Sucuri in the offing, we have a lot going on and see a lot of opportunity in 2017 and beyond. With that, I'll turn the call over to Scott now to talk a little bit more about our integration with HEG. Scott?
Thanks, Blake. My recent focus has been on our big go-to-market efforts, specifically the evolution of our marketing strategy and execution, our international growth, and how we can do more with our customers through care. Since we closed the HEG transaction in early April, and our integration touches on all these topics, I'll provide a quick update on how we're progressing there. Overall, we feel great about where we are with HEG, which, combined with our existing European business, has been renamed GoDaddy EMEA and is being led by the fantastic HEG leadership team. Combined with HEG, GoDaddy now manages over 71 million domains globally and serves nearly 17 million customers in over 100 countries around the world. We told everyone back in December that we expected $20 million in annualized revenue and cost synergies by the end of next year. We're making good progress against these targets.
On the product front, within days of the close, GoDaddy's SSL certificates and domain aftermarket experiences were fully integrated into HEG's legacy brands. On the expense side, our joint integration teams have also begun executing on go-to-market and technical infrastructure opportunities. Finally, we welcomed our new EMEA colleagues with a tight onboarding experience. On day one, every one of our over 1,000 new employees had a godaddy.com email account, access to many of our internal employee systems, and walked into GoDaddy rebranded offices. Looking ahead, we expect to bring a broader range of products to GoDaddy EMEA customers and to grow ARPU by bringing our consultative care practices to bear there as well. We'll scale administration, technical infrastructure, and care as we build a single EMEA operation. That's a quick update on HEG.
I'm going to hand it off to Ray now to cover the financial picture, including our Q1 results and full-year outlook, which now includes HEG. Ray?
Thanks, Scott. In Q1, we continued to execute well on all fronts with a strong product roadmap, revenue at the high end of our guidance, 25%+ underlying growth and unlevered free cash flow, and new opportunities to leverage the business model with the closing of HEG. Our total revenue grew 13% to $490 million year-over-year, and bookings grew 12% to $625 million. Currency impacts abated a bit this quarter, yielding only a 70 to 80 basis point headwind to revenue and bookings. We saw a nice balance between our two primary revenue drivers, with 7% growth in customers and a 6% increase in ARPU versus last year. Briefly on our three revenue lines. Domains revenue grew 10% year-over-year in Q1. This continued above-market performance was fueled by international growth, strong renewals, and higher aftermarket domain sales.
We continue to look for our organic domains business to grow closer to our customer growth over the medium to long term. Our hosting and presence revenue increased more than 11% versus Q1 a year ago, in line with our expected growth of roughly 1-2 times our customer growth rate.
As expected, growth slowed a bit versus 2016 as we began shifting our website builder business model. As we rolled out GoCentral on a free trial basis, we're driving strong adoption and publish rates, as we expected, we're seeing less near-term revenue and bookings versus our traditional pay up front model. Business applications revenue grew 30% in Q1, driven by our growing product suite and customer base. International continued to grow nicely, up 20% year-over-year on a constant currency basis, and contributing over 27% of total revenue in Q1. We continue to believe international will be a key growth driver in the years to come, given our footprint, the horizontal need for our products, and the strength of the GoDaddy brand and value proposition. Beginning in Q2, HEG will be consolidated into our reported results.
Before the next release, we'll file an 8-K with HEG's historical financials and pro forma financial statements to reflect the combination of GoDaddy and HEG for the full year 2016. As you're building your models, I'd point out a few differences between historical numbers and future results. HEG's historical results were reported under International Financial Reporting Standards and included PlusServer, which we intend to divest. The pro forma financials reflect adjustments for purchase accounting, conversion to U.S. GAAP, changes to the capital structure, and the expected carve-out of the PlusServer business. Accounting rules require the pro formas to be presented as if the acquisition took place on January 1, 2016, so they won't be apples to apples to the results we'll report in Q2. As we begin consolidating HEG, we'll highlight the differences so that you can model the combined business appropriately.
Turning to cash generation, unlevered free cash flow grew 13% in Q1 to $114 million. Unlevered free cash flow growth would have been more than 25%, excluding the impact of an extra pay period in Q1 this year versus a year ago, which I mentioned to you on our last call. This is just timing, we'll see the reverse effect in Q2, producing an easy comp versus the prior year. For the first half of the year, we expect the unlevered free cash flow growth rate to normalize at approximately 20% for standalone GoDaddy. One quick point on cost. Higher than usual G&A expense in Q1 included about $6.7 million in acquisition and debt refinancing cost. Excluding these costs, we're getting leverage in G&A and technology and development spending, as we expected.
On the balance sheet, we finished Q1 with approximately $671 million in cash and short-term investments and net debt of $402 million. We closed the HEG transaction after the quarter end, we provided a table at the back of the earnings release highlighting changes to the capital structure, namely a new $1.4 billion term loan, a $533 million bridge loan, and incremental cash added back to the balance sheet. This puts our post-close leverage at roughly 4 times. For those of you modeling cash flow, we expect cash interest payments to be approximately $25 million per quarter, including $5 million per quarter associated with the bridge loan. We expect to pay off the bridge loan when we divest of Plus Server.
Quickly on the status of that divestiture, we recently launched the sales process in earnest, and our goal is to complete the process before year-end, and we'll certainly update you further when we have something definitive to share. As we told you in December when we announced the HEG deal, the divestiture of Plus Server, combined with growth in cash flow, is expected to bring our leverage ratio down to roughly 3 times by the end of 2017. As you all know, our business generates a lot of cash, and we remain mindful of the opportunity we have to use our cash flow and balance sheet to effectively enhance equity returns. Let's discuss our outlook for Q2 and the full year. Just a quick note that the outlook I'll provide includes no contribution from Plus Server, as we intend to divest of it.
For Q2, including HEG's contribution, we expect revenue in the range of $548 million-$553 million. For the full year 2017, we're raising our revenue range to $2.195 billion-$2.225 billion. Let me provide a bit more color on HEG's expected contribution to and impact on our reported results this year. First, HEG's revenue will be reduced by a standard purchase accounting adjustment. The HEG revenue included in GoDaddy's financial results will initially be lower than what HEG would have recognized on a standalone basis. Throughout 2017, HEG's reported revenue contribution will ramp as the impact of purchase accounting lessens. That translates into a Q2 revenue contribution from HEG of $40 million, which we expect will move higher in Q3 and Q4 to yield a full-year revenue contribution of approximately $140 million. Second, a quick note on ARPU.
Reported ARPU next quarter will be lower, as it will only include 1 quarter of HEG revenue rather than a full year, as the GoDaddy calculation does. We intend to provide you with a pro forma calculation so that you can see that underlying trend. For the full year, we are raising our expected unlevered free cash flow range for the combined company to $465 million-$485 million. Implying approximately 33% year-over-year growth at the midpoint. This excludes expected acquisition and integration costs, which we intend to break out for you through the course of the year. While that's a lot of detail, we hope it provided some clarity on expectations for this year, both on an organic basis and including the contribution we expect from HEG.
Taking a step back, we continue to create franchise distinction and competitive advantage with the business growing double digits on the top line, 20%-plus unlevered free cash flow, and even higher growth on a levered free cash flow per share basis over the long term. Looking out to 2018, assuming continued organic growth, along with an incremental quarter of contribution from HEG, plus our expected acquisition synergies, we continue to feel confident the business can generate unlevered free cash flow of approximately $600 million next year. That's a look at the financials and outlook, and I'll turn the call back over to Blake.
Thanks, Ray. We hope you can see how we're continuing to deliver on our strategy and our financial expectations. We see a very big global opportunity to keep growing this business over the long term, and we're very excited about the prospects for 2017 and beyond. Hey, thanks for your time, and we're ready to open the call to your questions. Operator?
Certainly. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Samuel Kemp from Piper Jaffray. Your line is open.
Great. Thanks for taking the question, and congrats on a really solid quarter. This is the highest net add quarter that you've had since early 2015. Is there a way to break out the impact of the Super Bowl ad impact? Can you give us an update on the international customer count at this point? Then secondly, one of the benefits that you guys had talked about from having a better DIY website-building product is the ability to participate in DIY-specific customer acquisition channels like SEM. Is that something that you're already putting to work? If so, have you seen any early traction there? Thanks.
Hey, Sam, it's Scott. Thanks. You're covering a bunch of ground there. First of all wrapped into customer adds. First, I think if you take a big step back and you look throughout our history, not just 2015 to today, but certainly from 2012 forward, you're seeing our net customer adds being really consistent, hovering around 1 million net adds, plus or minus in every given year. You're kind to point out that this quarter was an uptick, but again, we're not managing our customer add number on a quarter-over-quarter basis, so this isn't something to get particularly excited about for the quarter. However, if you take a step back and again, look at the consistency of what we've been able to deliver around the 1 million net adds every year, that's something I think to get excited about.
When you ask about the Super Bowl and GoCentral, I think the Super Bowl is one element of our marketing mix, and so when we use marketing, it is strategic to get our brand and our value proposition in front of our customers, and we use top of funnel and very direct marketing to do that. There's not one single marketing tactic or lever that you can attribute things to. It's just the strategy and the value proposition overall. Now, I will say that GoCentral is and will, as it continues to build up, serve as an additional on-ramp. Again, it's too early to actually see any immediate contribution. There's nothing necessarily that GoCentral's contributing in that number. I think the last comment or question you had was around international.
As we said in the script, GoDaddy's organic business, international customers were just a shade over 5 million at the end of Q1, and now including HEG, it's nearly 7 million.
Great, thanks for the color.
Your next question comes from Ron Josey from JMP Securities. Your line is open.
Great. Thanks for taking the question. I'm going to dive a little bit deeper on GoCentral and maybe, Scott, on your comment there on it will serve as an on-ramp eventually. Can you just talk about maybe the attach rates you're seeing on those using GoCentral and those that are coming through and building their websites in a more traditional manner? Then bigger picture here on GoCentral, I think you're still seeing a 30-day or offering a 30-day free trial. Wondering why even offer a 30-day free trial? Why cap it, and why not let the customers decide how long they can keep it and then pay up if needed? Thanks.
Thanks, Ron. In terms of attachment rates, we're happy out of the gate with not only the level of attachment, but just the activity on the product. Blake mentioned the number of new publishes. That's the metric that we're really looking at right now, which is just getting a raw number of sites published and, in the first weeks of launch, obviously, that's garnering a lot of activity. In terms of free trial, when we think about not only GoCentral, but our other applications like email, we're finding that a 30-day trial is just a terrific merchandising mechanism to allow customers to try to sample the build up their initial step from a product, and then those who have an intended use at the end of 30 days convert and pay.
We found not only through GoCentral, but certainly our experience with business applications, that it's a great, consistent merchandising tactic to bring people into the franchise. Now, in terms of how we evolve that going forward.
Free experience, that is something that we're going to think about and work over time.
Ron, this is Blake, just kind of piling on. One of the things that we were pretty explicit about, just in our call script with you, was we are A/B testing quite a bit. I think that is in terms of what the product packages are, what conversion looks like. Is it a 30-day free trial? Can it be longer? Do we sample with email and pulse email at a different rate to try to get somebody to initiate not just a publish, but a conversion? All these things we'll be doing over the course of the coming months to learn more about what our customers look like globally, we just entered 40 new countries within the last 35, 40 days. We're learning a lot about these customers.
We'll continue to A/B test our way into what we think is just frankly better and improving performance.
Blake, that's super helpful. If I could just follow up on that A/B testing, is that something that's available for all products within GoDaddy or built specifically into the GoCentral infrastructure? Thanks.
Yeah. Hey, Ron. We A/B test more than GoCentral. We A/B test even the front of site. The merchandising we do on the front of site, you will not find the same thing there from one browser session, clear your cache to the next session. You can find something very different because we're running tests on that site for merchandising as well. All the way through the GoDaddy system, you'll see us doing things that are different, depending on who you are as a user, whether you have signed in, whether you're cookied, and whether we think we've seen you before. We're pretty precise on how many different tests we'll run, just to make sure we're doing the right thing from a merchandising perspective and trying to personalize for a customer segment.
Thank you.
You bet.
Your next question comes from Lloyd Walmsley from Deutsche Bank. Your line is open.
Thanks. I think you guys had said last quarter, you expect hosting and presence in Biz Apps lines to grow at approximately the 4Q exit rate. It looked like hosting and presence slowed a little bit. Is some of that, just the timing associated, you kind of alluded to in the script, timing associated with GoCentral? Do you expect that to kind of catch up as new subscribers age and start moving beyond the free trial? A follow-up on GoCentral. Just curious what you're seeing in terms of sign-up mixes for the higher priced products. Are you seeing more and more people opt for those higher priced products? Any color you can share there would be great.
Hey, Lloyd, it's Scott. In terms of the growth rates of the specific segments, the direction that we've given around domains growing roughly at the rate of our customer base, hosting and presence being one to two times the rate of the customer growth, and business apps being three to four, are really the best goalposts to think about the growth rates on a particular quarter and kind of what we can see ahead. If we look at each of those, the applications, both hosting and presence and Biz Apps, fell into those ranges pretty nicely. Domains was a little over that one-time guidance, but again, we're going to hold and counsel everybody in the mid to long term to kind of think about domain growth being roughly in line with our customer base.
In terms of the sign-up mix for higher priced products, what's nice about GoCentral is we have a rich set of features, whether you're selling physical goods or adding certain applications like email marketing or productivity or SEO optimization, that can be added right through the app, the app meaning the GoCentral editor. As customers are building sites, then particularly as the customers who have, let's call it, a more purposeful intent for their site, we're seeing a nice mix of those applications being either added to GoCentral or just the feature mix within GoCentral reflecting the intent of those customers.
Yep. Lloyd, let me pile on. This is Blake. One of the things that we know about our customers is it's a life cycle type of business for folks that are starting out. What we wanted to do with GoCentral was provide them an easy path to get their website started, make it super simple, as an example, when they want to add a product, they don't intend to sell initially, but they're just a service provider, they want to add a product to make it super simple for them, while they're in the editor to just say, "I want to add the ability to sell products," which actually initiates a new plan with a new price point, which we're very clear with them about.
It allows them the flexibility to start simply and then move up from there without having to go through a natural axe to move to the next tier. Hope that fills it out for you.
That's helpful. Thanks, guys.
Sure.
Your next question comes from Jason Helfstein from Oppenheimer & Co.. Your line is open.
Thanks. I'll ask two questions related to HEG. Just now that you've closed and spent time looking at business, can you talk about your thoughts about accelerating the business applications there as far as upselling your relationship into that business? Also, thoughts about the HEG customer acquisition and kind of how that compares to yours. Thanks.
Hey, Jason, Scott. In terms of applications specifically, I'd probably elevate it out and say we got a very purposeful product strategy that we're executing against. The two things that I mentioned on the call, SSL certs and Our domain aftermarket experience, literally within two to three days of the close, those were up and running and transferred. The next set are the whole domain purchase flow and search experience, which is a proprietary advantage of ours. The second, we're jointly merging some of our hosting products. There are some things that HEG does really well. There are a couple of things, particularly around managed WordPress, that we're bringing that way, that's in the tier 2.
The third thing, as you mentioned, is business applications. We continue to feel good about the prospect of both what we build here and its potential over in Europe. I'd say it's one of a number of product things that we're pretty excited about in terms of bringing the full range to the product portfolio over to Europe and building it up. Overall, I'd say customer acquisition, as we shared from the stats on the investment, HEG has not built as much of a customer acquisition engine. The customers that HEG has, have fantastic retention rates, great value, it's a terrific, stable franchise.
Obviously, what we're doing now with the joint team now, our joint EMEA team, is looking at each of the specific markets and building go-to-market plans, which are going to be a little different whether you're in the U.K. or Germany, around how we can enter the market. It's going to be with the same lifetime value to cost of acquisition stats and the same go-to-market model that we've been running for a long time.
Jason, it's Ray. The only thing I would add onto that is, I think we've mentioned in the past, the main branding spend will be behind the GoDaddy name. To Scott's point, the LTV to CAC on that has been pretty consistent and strong, we think we'll be able to get a little advantage there relative to what HEG was doing.
Jason, Blake, I'd just characterize generally the entire integration operation, what we've been able to accomplish with the teams just up to this point is pretty amazing. We feel good about the integration, the planning that we've got. We've got great leaders on both sides that are engaged and moving really fast, we're feeling great about the progress.
Thank you.
You bet.
Your next question comes from Brian Essex from Morgan Stanley. Your line is open.
Hi, good afternoon, and thank you for taking the question. Maybe if I could point to HEG, if I were to look at their historical performance, could we get a sense of how much was organic versus acquired, how much was customer growth versus pricing, just to get a sense of the kind of core drivers to their revenue growth?
Yeah, Brian, if you look at their historical numbers, obviously, they've been adding acquisitions through their history, on an organic basis, they're growing in the mid to high single digits. From a customer perspective, a little lower than that. There's a nice mix of price and customer adds on a historical basis.
Got it. Maybe if I can kind of switch gears a little bit and get into ARPU. You had nice consistent ARPU growth on an average bookings basis. LPM bookings per customer is up very nicely. How much of that is mix shift towards business applications hosting and presence versus any kind of recent catch rate for the core GoDaddy business?
Really haven't seen any shift there, Brian. If you look at the quarterly pacing on that, it's right where we would've expected. It's consistently growing there, no changes.
Got it. Maybe I can sneak one last one in. The process for selling PlusServer, sounds like you're at the early stages, but I guess, what gives you the confidence that you can get that done by the end of the year?
When we made this acquisition, we did a fair amount of diligence on that particular business, in anticipating that we would divest of it. We know the market, we know the natural buyers, and have had some preliminary discussions. That's giving us some confidence that we'll be able to get it done.
Got it. Very helpful. Thank you very much.
Your next question comes from Mark Mahaney from RBC. Your line is open. Mark Mahaney, your line is open.
I'm sorry. I muted myself. Thanks for all the color on the HEG integration impact on the P&L. That was very helpful. Two questions, please. I think you're going to give a non-answer, but there was a small acceleration in biz apps growth, revenue growth. Is that just kind of in the line of the normal, or is there anything you'd point to there? I know it was roughly in line with your guidance, but a little bit of acceleration. Then I think last quarter, you talked about potential rollout of security-oriented products in the back half of this year or in Q3. I'm sorry if you already talked about it, but if you could provide an update on that, please. Thank you.
Hey, Mark, Scott. The small acceleration in biz apps, no, nothing really to see there. It's just steady trajectory, so really, the uptick was more rounding than anything else. I will say, we continue to be proud of and happy with the continued growth rate in business applications, which is turning into a really big segment right now. Don't read too much into the single quarter acceleration. Again, going forward, just think about that broad category being three to four times the rate of customer growth. In terms of security services, we just closed on Sucuri, which is this really nice product portfolio, and we're going to be building up and probably rolling out some of those services in the second half of this year.
Thank you, Scott.
Your next question comes from Sterling Auty from J.P. Morgan, your line is open.
Yeah, sorry for the wind noise. One quick question. In the domain business in the quarter, in the growth you saw, can you comment about the aftermarket impacts on it this quarter?
Hey, Sterling, it's Scott. Yeah, again, if you look at the 10% growth rate for the quarter are above, call it, the industry unit growth of 3%-5%, there's three contributors to that. One is the fact that we continue to gain unit share in com. The second is our continued international expansion in terms of ccTLDs and growth there, the third is the aftermarket. If you parse those apart, it's roughly they're all contributing and they're not precisely a third, a third, a third, but it's kind of balanced across all three.
Got it. Thank you.
Your next question comes from Sameet Sinha from B. Riley. Your line is open.
Yes. Thank you very much. A couple of questions. If you can talk about the refund rates, seeing that as a percentage of revenue or bookings, it continues to come down year-over-year. Is there anything specific that you have put into place? It has been about six quarters since coming down, and how much more do you think it will go down? Secondly, saw some deleveraging in the marketing and advertising line. I guess it is the Super Bowl and the push behind GoCentral. How should we expect that to trend through the year? Is that a line item that we expect to delever throughout the year?
Hey, it is Scott. In terms of refund rates, thanks for pointing out that it has been declining over the last six quarters. That is just the natural result of building great products and great services and getting our customers into the product that both they want, need, and it is best for them. If you look at GoDaddy's refund practices and our approach relative to others in our industry, and certainly in the technology world, we are really generous, and we bend over backwards to help out our customers. If they end up in the wrong thing, we bend over backwards to get them in the right product for what their need is. That is a nice balance. It is a great place for us to be.
When you see a declining refund rate like that, I think it is just reflective of us doing our job, maybe right up front and getting customers into the right thing right up front. In terms of marketing and advertising, we are investing in marketing and advertising, but again, this is a business generator, and we look at our marketing spend on a lifetime value to cost of acquisition basis, and in our developing markets like the U.S., on a return on new revenue sold through existing customers. Going forward, you are going to want to think about marketing being roughly in line with revenue growth, and in some cases, marketing might be a little faster than revenue growth, like in this quarter, where we are going to ramp up new services like GoCentral or security services.
It may tick up a little bit more, but we will definitely be getting leverage in other lines on the P&L, particularly G&A and the infrastructure elements of tech and dev.
Thank you.
Your next question comes from James Cakmak from Monness, Crespi, Hardt. Your line is open. James Cakmak, your line is open.
Hi, thanks. Just one question, please. You guys have been really good about managing the leverage ratio. As the cash balance is built, can you just talk about how you think about your allocation of that cash? Obviously, you're going to be managing to your target ratios, but with all these irons in the fire with the different products, do you feel there's more tuck-in opportunities, or do you have the capability to absorb something maybe not as big as HEG, but something some scale? Is that how you think about your cash in general right now with HEG closed?
Yeah, James, this is Ray. You'll see we closed the quarter out with almost $700 million in cash on the balance sheet. When you think about further M&A, always opportunities. The focus right now, we've got the leverage at four, coming down to three by the end of the year, but it's bringing this HEG business together with our European operations, creating value for customers, and generating the synergies that Scott talked about. I would look at the ability to do further M&A really in two buckets, one operational and one balance sheet capacity. When you think operationally, we've got a business system in place now that will enable that integration that we're doing, especially with HEG as we speak. Our products are APIable. We've got a global tech platform. We've got a scalable customer care system.
From a leverage standpoint, again, I don't think you'll see anything the size of HEG, for sure, but if the right opportunity comes along with a tech or product-type tuck-in, we'll have the capacity as we move into the latter half of 2017.
Thank you.
Your next question comes from Naved Khan from Cantor Fitzgerald. Your line is open.
Yeah. Thanks very much. Just a couple. If I look at the ARPU, it was flat sequentially. I think this is the first time in a while that we have seen flat ARPU. Did you run any promotions that kind of affected this metric, or is there another explanation for it? With respect to the SmartLine product, what's the timing in terms of the bigger launch, and what are your plans for spending marketing dollars behind it?
Hey, Naved, it's Ray. On the flat sequential ARPU, nothing to read into that. If you just look back at the quarterly pacing on ARPU for the last call it four, six quarters, nothing has changed really in that trajectory. In fact, we just continue to balance customer growth and ARPU growth there. You'll see slight bounces back and forth, but again, as we would've expected, growing in that mid-single-digit range.
Navid, yeah, this is Blake. On SmartLine, launch timing for the bigger launch, frankly, I talked about three sets of features, both vanity numbers, 800 numbers, SMS and MMS texting. You'll see those happen in the summer, last part of the summer. That is likely when we actually go big with a launch and actually make a claim. We will be testing our way into that. I'd characterize marketing spend on that as being, I'd call it pretty small, just again, testing our way into seeing what's working with our customer segments. You're going to see some very interesting and unique in-product marketing for that product as well, one of the things we believe is that people shouldn't put a personal phone number on their website.
When we suspect somebody's doing that, we're going to surface a message that says, "You know, you really ought to try the SmartLine product because you shouldn't put your personal phone number on a website for all to see." Those types of things, that kind of clever integration around the way that we can have products do marketing for us, are things that we think are really, frankly, good leverage advantage for us.
That's helpful. Thank you.
Your next question comes from Tom Davis from Summit Redstone Partners. Your line is open.
Hey, guys. Thanks for taking my call. I just had a quick question here on FreedomVoice. Is that going to be rolled out internationally, or is that going to be mainly just a U.S. product?
Yeah. Hi, Tom. This is Blake. FreedomVoice is, of course, responsible for the SmartLine product. As you know, the regulatory environment in different countries differs pretty dramatically. What we're going to do is we're going to basically introduce it in the United States, get very successful with it, make sure that we're happy with the results that we're seeing. Once we believe we've got that dialed in, and we have a product that we feel very confident, then we'll look at other markets outside the United States where we think the regulatory environment is friendly enough for us to enter. I would not look at it as an international, something that we're going to blow out internationally. It's just a very different market country by country. We're going to go pretty deep in the United States, and think we've got a great opportunity.
You always want to just be stepwise when you're doing things like this, whether you have the crawl, walk, run mentality. I think you want to be pretty thoughtful on how you enter markets versus trying to do something that's a big blow-out, especially when there's heterogeneous environments in different markets. For telecom, there could be almost no market more heterogeneous. They are very different throughout the world.
If I could have a quick follow-up question. I know you guys hit on the free trials. Could you give any color on the win rate, the conversion rate, for free-to-pay?
Yeah. I said a little earlier that free trial, since we're so early and we're doing so many tests on when we convert, what the timing of conversion is, how we pulse email to customers, that it's difficult for us to actually give any kind of indicator that would be worth publishing. Publish rate's really good. That's indicative, we've been in 40 countries only about 30 days, so we haven't seen that come in yet. The number of published sites has grown really nicely. We believe, and our hypothesis is, that publishes turn into conversion for a reasonable percentage of customers. That new on-ramp and the attach of domains to that on-ramp, we're actually getting pretty interested in, and it looks like the investment thesis was solid.
When we think we have enough information to actually start being able to dial it in, and then it might be worth sharing. Up till now, it's just the changes and the tests that we're running are so extreme that it's really hard to get any indication from it.
All right. Thanks, guys.
You bet.
Your next question comes from Mark May from Citi. Your line is open.
Thanks for taking my questions. I had two, if I could. Just looking, I wonder if you could comment a little bit on the month-on-month trends in the business, as you worked your way through the quarter and into April. Then, I think, Ray, you mentioned earlier, I think domain revenue growth was around 10% in the quarter, and I think you mentioned that we should expect that to trend towards customer growth, which was, I think, around 7% in the quarter. Is that a good guidepost for how to think about the near term, Q2? Just trying to get a sense of your timeframe there. Thanks.
Yeah, Mark. It's Ray. The month-over-month trends through the quarter, really nothing unusual there. Again, year-over-year, we had to comp against leap year, which was affecting the numbers. But on a sequential basis, nothing unusual to read out on. As far as domains being 10%, what to expect, Scott said it well. The direction we've given you guys over the long term is that roughly at the approximation of customer growth. You're not going to see it bounce around a lot. You're going to see a pretty smooth trend as we move throughout the year, plus or minus off that mark we're on today.
Thanks.
Our next question comes from Deepak Mathivanan from Barclays. Your line is open.
Great, thanks. Two questions for me. First, I know last year in 1Q, you took steps to move away from multi-year discounts on the hosting side that impacted bookings growth. Can you talk about whether there were any such initiatives in 1Q this year, and how should we think about the contract duration going forward? Second, on the HEG, you noted that $40 million contribution in 2Q. Can you give about the seasonality expectations for maybe the next few quarters as well? That'd be helpful. Thanks a lot.
Hey, Scott. Hey, Deepak. It's Scott. I'll do the first one, and then Ray can handle the second. Nothing of note in terms of merchandising tactics or differences to call out this quarter that really affected the P&L. What that means from a contract duration standpoint is it was pretty stable. I think there's nothing really all that different. Obviously, we keep trying different bundling merchandising approaches, but in terms of you guys outside in, nothing different, both on merchandising and then contract duration.
Hey, Deepak. It's Ray. Nothing seasonal about the HEG revenue stream. I gave you a point estimate for the second quarter of $40 million. The $100 that will come in in the back half of the year will ramp up slightly. If you were going to try to plug it into a model, take the $100 remaining amount and spread that slightly lower in the third and a little higher in the fourth. They're bookings, though.
Right.
When you ask from a seasonality standpoint, not a lot of seasonality in their bookings.
Okay, that makes sense. Great. Thanks, Ray.
Certainly.
There are no further questions at this time. I will now turn the call back over to the presenters.
Great. Well, thanks, everybody. Thanks for your questions. Thanks for listening. We look forward to talking with you in another few months at our second quarter earnings call. Have a great rest of the week.
This concludes today's conference call. You may now disconnect.