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.
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 1st 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 and then we'll open up the call for questions. On today's call, we'll be referencing both GAAP and non GAAP financial results and operating metrics such as total bookings, unlevered free cash flow, net debt and ARPU.
A discussion of why we use non GAAP financial measures and reconciliations of our non GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations website at investors. Godaddy.net or on our Form 8 ks filed with the SEC with today's earnings release. The matters we'll be discussing 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 Plus Server 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 2, 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, Martha, and thanks to all of you for joining us today. GoDaddy's Q1 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 Q1, we've grown to serve 15,100,000 customers, an increase of nearly 7% versus a year ago. And the composition of that customer base has changed dramatically over the last few years. At quarter end, we reached nearly 10,000,000 domestic customers and over 5,000,000 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 2 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 Grouper, 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 1, 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. 2, the launch and growth of GoCentral, our entirely new mobile optimized website builder 3, the soft launch of our new telephony offering SmartLine and 4, adding new security offerings via the acquisition of Securi. I'll spend a little time on our progress on products, including GoCentral, SmartLine and Securi, Securi.
And then I'm going to turn it over to Scott to discuss the HEG and Ray Furr Financials. 1st, on GoCentral, look, we're just stoked about its progress. As we develop 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. And while it's early, 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 Go Central 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 and 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 sign ups. 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. On a weekly basis, we're performing AB tests to look at customer responses to features and purchase flows.
And where we see better results, we're immediately moving toward the winning models. And 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. Now beyond GoCentral, our soft launch of SmartLine is also now available at godetty.com slash 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.
Look, 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 Securi, 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 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 security some 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. So with the launch of GoCentral and new products like SmartLine and Security and 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 over 100 countries around the world. We told everyone back in December that we expected $20,000,000 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 1, every one of our over a 1000 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. And we'll scale administration, technical infrastructure and care as we build a single EMEA operation. So 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 continue to execute well on all fronts with a strong product roadmap, revenue at the high end of our guidance, 25 plus percent underlying growth in unlevered free cash flow and new opportunities to leverage the business model with the closing of ATG. Our total revenue grew 13% to $490,000,000 year over year and booking grew 12% to $625,000,000 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 2 primary revenue drivers with 7% growth in customers and a 6% increase in ARPU versus last year. Briefly on our 3 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 to 2 times our customer growth rate. As expected, growth slowed a bit versus 20 16 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, but as we expected, we're seeing less near term revenue and bookings versus our traditional pay upfront 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 ks with HEG's historical financials and pro form a 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 Plus Server, which we intend to divest. The pro form a 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 $114,000,000 Unlevered free cash flow growth would have been more than 25 percent excluding the impact of an extra pay period in Q1 this year versus a year ago, which I mentioned to you on our call our last call. This is just timing, so 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 and A expense in Q1 included about $6,700,000 in acquisition and debt refinancing cost. Excluding these costs, we're getting leverage in G and A and technology and development spending as we expected.
On the balance sheet, we finished Q1 with approximately $671,000,000 in cash and short term investments and net debt of $402,000,000 We closed the HEG transaction after the quarter end, so we provided a table at the back of the earnings release highlighting changes to the capital structure, namely a new $1,400,000,000 term loan, a $533,000,000 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 $25,000,000 per quarter, including $5,000,000 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. So 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 $548,000,000 to $553,000,000 For the full year 2017, we're raising our revenue range to $2,195,000,000 to $2,225,000,000 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. So 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 $40,000,000 which we expect will move higher in Q3 and Q4 to yield a full year revenue contribution of approximately $140,000,000 2nd, 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 form a 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 465,000,000 dollars to $485,000,000 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 percent non levered free cash flow and even higher growth on a leverage 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 $600,000,000 next year. So that's a look at the financials and outlook, and I'll turn the call back over to Blake.
Thanks, Ray. And 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. Thanks for your time and we're ready to open the call to your questions. Operator?
Certainly. Your first question comes from Sam Kemp from Piper Jaffray. Your line is open.
Great. Thanks for taking my 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? And can you give us an update on the international customer count at this point?
And then secondly, one of the benefits that you guys have 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? And 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 of customer adds being really consistent hovering around a 1,000,000 net adds plus or minus in every given year. And you're kind to point out that this quarter was an uptick. But again, we're not managing our customer ad number on a quarter to 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 million net adds every year, that's something I think to get excited about.
When you ask about the Super Bowl and then go central, 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. And so 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. So there's nothing necessarily that GoCentral's contributing in that number. And I think the last comment or question you had was around international. And as we said in the script, GoDaddy's organic business, international customers were just a shade over $5,000,000 at the end of Q1. And now including HEG, it's nearly 7,000,000
dollars 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 non 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? And 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 free 30 day free trial like cap it and why not let the customers decide how long they can keep and then pay up if needed? Thanks.
Thanks, Ron. So 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 in the 1st 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 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. And so 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, there may be certain things that we allow customers to have a free experience, but that's something that we're going to think about and work over time.
And Ram, 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 AB testing quite a bit. So 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 to 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. And we just entered 40 new countries within the last 35, 40 days.
And we're learning a lot about these customers. So we'll continue to AB test our way into what we think is just frankly better and improving performance.
That's super helpful. If I could just follow-up on the AB testing. Is that something that's available for all products within GoDaddy or built specifically into the GoCentral infrastructure? Thanks.
No. Yes. Hey, Ron. So we AB test more than GoCentral. So we AB test even the front of site.
So the merchandising we do on the front of site, you will not find the same thing there from 1 browser session, Clear Your Cash to the next session. You can find something very different because we are running tests on that site for merchandising as well. So 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. So 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?
And then 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 1 to 2 times the rate of the customer growth, and business apps being 3 to 4 are really the best goalpost to think about the growth rates on a particular quarter and kind of what we can see ahead. And if we look at each of those, the applications both hosting and presence and biz apps fell into those ranges pretty nicely. And 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. And so as customers are building sites and 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 added, either added to GoCentral or just the feature mix within GoCentral, reflecting the intent of those customers.
Lloyd, let me pile on. This is Blake. One of the things that we know about our customers is it's a lifecycle type of business for folks that are starting out. And what we wanted to do with GoCentral was provide them an easy path to get their website started, make it super simple. And as an example, when they want to add a product, they don't intend to sell initially, but they're just a service provider.
And then 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. But it allows them the flexibility to start simply and then move up from there without having to go through a natural acts 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. Your line is open.
Thanks. I'll ask 2 questions related to ATG. 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 HTG customer acquisition and kind of how that compares to yours? Thanks.
Yes. Hey, Jason, Scott. In terms of application specifically, I'd probably elevate it out and say we're we got a very purposeful product strategy that we're executing against. So the two things that I mentioned on the call, RSL SSL certs and our domain aftermarket experience literally within 2 to 3 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 Word Press that we're bringing that way. And so that's in the 2nd tier. And then the third thing, as you mentioned, is business applications and we continue to feel good about the prospect of both what we built here and its potential over in Europe.
But 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 of the product portfolio over to Europe and building it up. And overall, I'd say customer acquisition, As we shared from the stats on the investment, HGG has not built as much of a customer acquisition engine. Now the customers that HGG has have fantastic retention rates, great value. So it's a terrific stable franchise. And 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 UK or Germany around how we can enter the market, but 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.
Yes, Jason, it's Ray. The only thing I would add on to that is, I think we've mentioned in the past, the main branding spend will be behind the GoDaddy name. And to Scott's point, the LTV to CAC on that has been pretty consistent and strong. And we think we'll be able to get a little advantage there relative to what ATG was doing.
Jason, Blake, I just characterized generally the entire of the integration operation and what we've been able to accomplish with the teams just up to this point is pretty amazing. So 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 and 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. And if I were to look at their historical performance, could we get a sense of how much was organic versus acquired and how much was customer growth versus pricing, just to get a sense of the kind of core drivers to their revenue growth?
Yes, Brian. If you look at their historical numbers, obviously, they've been adding acquisitions through their history. But on an organic basis, they're growing in the mid to high single digits, and from a customer perspective, a little lower than that. So there's a nice mix of price and customer adds on a historical basis.
Got it. And then 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. LTM 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, I haven't seen any shift there, Brian. If you look at the quarterly pacing on that, it's right where we would have expected, just consistently growing there, so no changes.
Got it. Maybe if I can sneak one last one in. Process for selling Plus Server, 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, and anticipating that we would divest of it. So, we know the market, we know the natural buyers and have had some preliminary discussions. So 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 HET integration, the impact on the P and L. That was very helpful. Two questions, please. I think you're going to give an odd 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 was there anything you'd point to there? I know it was roughly in line with your guidance, but a little bit of acceleration. And then I think last quarter you talked about potential rollout of security oriented products in the back half of this year or in Q3. And 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, 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.
But don't read too much into the single quarter acceleration. And again, going forward, just think about that broad category being 3 to 4 times the rate of customer growth. In terms of security services, we just closed on security, 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 JPMorgan. Your line is open.
Yes, sorry for the wind noise. One quick question. In the domain business in the quarter and the growth you saw, can you comment about the aftermarket impacts on it this quarter?
Hey, Sterling, it's Scott. Yes, again, if you look at the 10% growth rate for the quarter, are above, call it, the industry unit growth of 3% to 5%, there's 3 contributors to that. 1 is the fact that we continue to gain unit share in comm And the second is our continued international expansion in terms of ccTLDs and growth there. And then the third is the aftermarket. And 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 3.
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 put into place?
It's been about 6 quarters that's been 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's 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's Scott. In terms of refund rates, thanks for pointing out that it has been declining over the last 6 quarters. That's just a natural result of building great products and great services and getting customers into the product that they both they want, need and it's 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're 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.
And that's a nice balance. It's a great place for us to be. When you see a declining refund rate like that, I think it's just reflective of us doing our job maybe right upfront and getting customers into the right thing right upfront. In terms of marketing and advertising, we're 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 United States on a return on new revenue sold through existing customers. So going forward, you're 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're going to ramp up new services like GoCentral or Security Services.
And so it may tick up
a little bit more, but we will definitely be getting leverage in other lines in the P and L, particularly G and A and the infrastructure elements of tech and dev. Thank you.
Your next question comes from James Kaczmaki from Monness, Crespi, Hardt. Your line is open. James Kaczmak, your line is open.
Hi, thanks. Just one question, please. You guys have been really good about managing the leverage ratio. And 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 HGG, but some scale? So how you think about your cash in general right now with HTG closed?
Yes, James, this is Ray. You'll see we closed the quarter out with almost $700,000,000 in cash on the balance sheet. When you think about further M and A, always opportunities. The focus right now, we've got the leverage at 4 coming down to 3 by the end of the year. But it's bringing this ATG 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 and A really in 2 buckets, 1 operational and 1 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 ATG as we speak. Our products are API able. 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 ATG 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 twenty seventeen.
Thank you.
Your next question comes from Naved Khan from Cantor Fitzgerald. Your line is open.
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? And then 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, Naveed, 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 4, 6 quarters, nothing has changed really in that trajectory. In fact, we just continue to balance customer growth and ARPU growth there. So you'll see slight bounces back and forth, but again, as we would have expected, growing in that mid single digit range.
And Navin, yes, this is Blake. On SmartLine, launch timing for the bigger launch, and frankly, I talked about 3 sets features, both vanity numbers, 800 numbers and SMS and MMS texting. You will see those happen in the summer, last part of the summer. And 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 and just kind of again testing our way into seeing what's working with our customer segments. And you're going to see some very interesting and unique in product marketing for that product as well. And one of the things we believe is that people shouldn't put a personal phone number on their website. So when we suspect somebody is doing that, we're going to surface a message that says, you really ought to try the SmartLine product because you shouldn't put your personal phone number on a website for all to see. And 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 U. S. Product?
Yes. Hi, Tom. This is Blake. FreedomVoice is, of course, responsible for the SmartLine product. But as you know, the regulatory environment in different countries differs pretty dramatically.
So what we are going to do is we are going to basically introduce it in the United States, get very successful with it, make sure that we we're happy with the results that we're seeing. And once we believe we've kind of 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. But I would not look at it as an international, something we are going to blow out internationally. It's just a very different market country by country. But we are going to go pretty deep in the United States and think we've got a great opportunity.
You always want to just kind of be stepwise when you're doing things like this, whether you have the crawl, walk, run mentality. But I think you want to be pretty thoughtful on how you enter markets versus trying to do something that's a big blowout, especially when there's heterogeneous environments in different markets. And for telecom, there could be almost no market more heterogeneous. They are very, very different throughout the world.
And if I could have a quick follow-up question. Just I know you guys hit on the free trials. Could you give any color on like the win rate, the conversion rate for free to pain?
Yes. 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 rates really good, that's indicative and we've been in 40 countries only about 30 days. So we haven't seen that come in yet. But 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. And that new on ramp and the attach of domains to that on ramp, we're actually getting pretty interested in. And it looks like it's the investment thesis was solid. So we'll keep when we think we have enough information to actually start being able to dial it in and then it might be worth sharing. But up till now, it's just the changes in 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 2 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 kind of worked your way through the quarter and into April. And then I think, Ray, you mentioned earlier, I think domain revenue growth is around 10% in the quarter. I think you mentioned that we should expect that to kind of 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 kind of your timeframe there. Thanks.
Yes, Mark, it's Ray.
So the month over month trends to 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% and what to expect, as Scott said it well, the direction we've given you guys over the long term is that roughly at the approximation of customer growth. So 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.
Your next question comes from Deepak Mathivanan from Barclays. Your line is open.
Great. Thanks. Two questions for me. So first, I know in the last year in 1Q, you took steps to move away from multiyear 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? And then second, on the HCG, you noted that $40,000,000 contribution in 2Q. Can you give about the seasonality expectations for maybe the next few quarters as well? That would 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 and L. And what that means from a contract duration standpoint is it was pretty stable. And I think there's nothing really all that different. I mean, 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 Q2 of 40,000,000 dollars The $100,000,000 that will come in, in the back half of the year will ramp up slightly. So if you were going to try to plug it into a model, take the $100,000,000 remaining amount and spread that slightly lower in the 3rd and a little higher in the 4th.
Their bookings though, when you
ask from a seasonality standpoint, not a lot of seasonality in their bookings.
Okay. That makes sense. Great. Thanks, Rick.
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 Q2 earnings call.
Have a great rest of the week.
This concludes today's conference call. You may now disconnect.