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 Third 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. Martha Nichols, VP of Investor Relations, you may begin your conference.
Thank you and good afternoon. Thank you for joining us for GoDaddy's Q3 2016 earnings call. With me today are Blake Irving, Chief Executive Officer Scott Wagner, President and Chief Operating Officer and Ray Winborn, Chief Financial Officer. Blake, Scott and Ray have some prepared remarks, which will follow with a question and answer session. On today's call, we'll be referencing both GAAP and non GAAP financial results and operating metrics such as total bookings, unlevered free cash flow, net debt and ARPU.
A discussion of why we use non GAAP financial measures and reconciliations of our non GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations website at investors. Godaddy.net or on our Form 8 ks filed with the SEC with today's earnings release. The matters we'll be discussing today include forward looking statements, which 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, November 2, 2016, and we undertake no obligation to update these statements as a result of new information or future events.
With that, I'll turn the call over to Blake.
Thanks, Martha, and thanks to all of you for
joining us today. GoDaddy's Q3 was another very good one with our results again exceeding the top end of the guidance ranges we shared with you last quarter. GoDaddy's distinctive combination of easy to use products, speedy, performant technology and consultative customer care continue to differentiate what we do and have together yielded a large high growth business with strong cash flow. In the Q3, we've grown to serve over 14,500,000 customers, an increase of over 7% versus a year ago. Our average revenue per user or ARPU also rose nearly 7% to $127 despite continued currency headwinds.
We feel great about the consistency of our results, what they say about the power of our strategy and execution over the last several years and more importantly, where we're headed. We've doubled the size of the business over the last 4 years on both the top and bottom lines, and we're now building on the foundation we've created with an eye toward doubling the business again over the next 4 years. As we look to the future, I'll share a bit about what we're doing to expand our product portfolio. Scott will give you some color on our go to market efforts and then Ray will review our results and our outlook. On our product portfolio, I'll highlight 2 key elements of what we're doing.
First, expanding into new on ramps beyond domains and second, extending our product portfolio into natural adjacencies to our core product offerings. First on expanding on ramps. As you know, historically, most of our customers have started their relationship with GoDaddy by buying a domain and then building a web presence or attaching a domain specific email. So domains have been our primary customer on ramp. 1 that has propelled us to over 14 point 5,000,000 paying customers and over 63,000,000 domains under management.
And we believe domains as an on ramp will continue to thrive in the future. Over the past year, you've also seen us experiment with additional on ramps. For example, offering free trials of our DIY website builder to customers in a couple of countries, enabling them to try our website builder tool for a short period and then purchase a domain and attach other products. We've been pleased with the results so far. So we've extended free trial into a number of new markets and we'll do more of that in 2017.
Another potential on ramp is voice service. We hope to close the FreedomVoice acquisition this quarter and will soon begin offering voice service for small businesses, allowing them to add a second and completely separate phone line to an existing cell phone. Our customers have told us they often use their personal cell number to support their business venture and they don't like it. They're looking forward to the greater privacy and professionalism that a second line provides. With our new voice service, it's like getting another phone for just about $6 a month.
Voice is a new potential on ramp for us giving GoDaddy yet another way to introduce a customer to our services for the first time. Now, we're really optimistic about these efforts, but they are very early. So voice in particular is an entirely new product line for us. So 2017 will be a year of testing and iterating in the category. And look, we know that most people will still name their idea with us as the first step in their journey.
And that implies that domain names will be GoDaddy's primary customer on ramp for a long time. With that said though, we absolutely believe our broader and deeper product set now gives us permission to introduce new customers to GoDaddy using new and different on ramps. So that's where we're headed with offerings like site building and voice focusing with new product adjacencies, we often get asked, hey, what's next? What new product or category is the next big opportunity for us to offer our customers? We listen closely to the needs of our customers when considering new categories and it's clear they have many needs we can address over time.
For us, the most important factor in deciding what's next is that any new product set should be a close adjacency. Our best opportunities are those that are very tightly aligned with our core products, our customers value offering and solve real life problems for them. Let me touch on 2 examples, website design and security. First, we continue to see a big opportunity in website design and development across a range of products and services, and not just as a product on ramp as I discussed a minute ago. From simple DIY offerings like GoDaddy's website builder tool to the most popular open source tools like WordPress, which can offer pixel perfect placement and greater flexibility.
We recently launched WordPress websites by GoDaddy, which makes it much easier and more intuitive for small businesses with limited design experience to get started with WordPress with an easy startup wizard, mobile responsive themes, thousands of high quality images and plug ins and much more, all in over 30 languages and 50 markets globally. If you want to see an example of a great managed WordPress site that we host, check out weirdal.com. And yes, it's that Weird Al. Now we're also investing in Do It For Me Services or DIFM, where GoDaddy builds and manages a customer's online presence, not just for websites, but also for search results, social engagement and more. And while DIY site building gets a lot of attention, half the websites in the world today are built and managed by someone other than the business owner.
In fact, we're finding that many more of our overseas customers and especially in key markets like India and Mexico ask for site building services instead of buying DIY tools. You can see examples of the website design services we're offering at jbgolf.net here in the U. S. And atlosarellcafe.com and in Mexico for prices as low as $130 a year, including staking our claim in one area like domains as our only on ramp or DIY as the only avenue to building an online presence, it's our goal to make use of our brand and our depth to meet customers wherever they are and whatever their needs. Whether they're ready to do everything on their own or want to handle from start to finish and beyond.
And what further distinguishes GoDaddy here is not just that we're offering a range of robust site building tools from DIY to WordPress to DIFM, it's that we've built a global and scalable common technology platform that allows us to offer every one of these options to all of our 14,500,000 customers globally. Now another example of an obvious product adjacency for us is security. It's clear the need for security products has never really been greater. We hear about security challenges in the news constantly. So we all know the quantity, breadth and severity of breaches is growing for organizations of all kinds, large and small.
GoDaddy has always been a leader in securing our customers' domains and an SSL certification. We also know that many small businesses lack the capability, understanding or resources to fully secure their technology and online presence. We've developed some really differentiated offerings like secure email, which allows encryption and archiving for customers like medical practices, which require HIPAA compliance and we're testing several other complementary offerings including site backup, secure storage, site scanning and malware removal just to name a handful. The demand is absolutely there. So you'll see us offer a broader range of security tools going forward.
Website building and security are just a couple of examples of product adjacencies. We believe the combination of our breadth of products and our focus on what really matters to our customers will allow us to continue to meet their needs and grow with them with these and other products over time. So we're continuing to build on the product foundation and geographic breadth we've established in recent years. We feel great about our continued progress and how our organization is now positioned take us into the next phase of our growth. And with that, I'm going to turn the call over to Scott.
Scott?
Thanks, Blake. Since Ray's arrival, I've been focusing my attention on our big go to market efforts, specifically our international growth, the evolution of our marketing strategy and execution, and how we can do more with our customers through care. Let me say a bit more about each of those 3. On international, we've expanded tremendously over the past few years. We've entered dozens of global markets with localized products, payment types and customer care in a very scaled way with a centralized engineering platform augmented by in country marketing spend.
And this playbook has worked. Our international customer MACE has more than doubled over the past 4 years to more than 4,500,000 international customers. Our international revenue grew approximately 25% in constant currency over the last several quarters and grew 27% in constant currency in Q3. New markets launched earlier this year in Asia, while still small, are seeing accelerated growth. And our core Tier 1 markets like India and the UK continue to scale.
For example, in India, GoDaddy is now the largest registrar of both .inand.com.
And in
the UK, we've recently passed 1,000,000 domains under management and our .UK domain portfolio has grown over 50% in just the last 24 months. Going forward, with a localized presence in over 50 markets around the world, the next phase of our international growth emphasizing growing the markets that we're in versus simply adding new markets. This phase will further our organic growth efforts through continued localization of both our product and marketing experiences. In addition, with over 4,500,000 international customers in a scalable global platform and operating system, we're very well positioned to add to our footprint via inorganic activity as well. Turning to marketing, we're focused on 2 things.
The first is extending our brand to represent the full suite of online products and services online over time. We're extending our brand with a combination of creative messaging and highly efficient and effective marketing tactics across TV, sponsorships and PR. Over the last several weeks, you're seeing GoDaddy show up in global markets with increasing presence across sporting events like the English Premier League, football and the baseball playoffs as well as relevant sponsorships like Shark Tank in Mexico and Make Me A Millionaire Inventor in the U. S. As we look to 2017, we're exploring a number of interesting opportunities both in the U.
S. And around the world that we believe will resonate and connect with our customers in terms of both creative messaging and tactics. 2nd, we're working on the lifecycle experience of our existing customers. We're working to increase engagement with our customers using our data to help trigger the right next step for each customer. Now in some cases, the right next step may be activating and using the product that they've just purchased.
In other cases, they're ready to move on to the next product or service. Here's a very specific example of that in action. When a customer is managing their GoDaddy account, we detect that they have a domain that is yet to be connected to a site or email, we provide them with a very simple flow to activate that domain, guiding them to our website builder product or Office 365 right in the account management screen. We're also replicating the experience in our email and hosting control panels for critical add on services like email archiving, encryption and migration, all with one click. Ultimately, we believe success in these efforts will translate into improved value for our customers and better ARPU for us.
Our 3rd go to market pillar is customer care. We've always been known for customer centric consultative empathetic inbound customer support. This is a special asset for us that in some ways is still quite underutilized. Even today, most of our customer interactions are reactive, responding only when our customers ask for assistance. In 2017, we'll do more to proactively engage with our customers in productive and intelligent ways.
Here's a quick example. We identified a segment of our customer base, which are naturals for our Office 365 email solution. These are slightly larger organizations with 10 to 100 employees who typically have 1 generalist IT person and they particularly value GoDaddy's product suite and our high touch service for installation and simple migration. Over this past year, we created a dedicated team within customer care to serve these slightly larger customers and proactively reach out to both existing customers and potential new customers outside of our base. This pilot has been successful and we'll be expanding this effort in 2017.
Overall, we feel good about these go to market opportunities in front of us, both how they'll enable us to grow our customer base, increase customer engagement and ultimately grow ARPU. With that,
I'm going to turn it
over to Ray, who will run through the Q3 results and our outlook.
Thanks, Scott. As you've heard, Q3 was strong on all fronts with our results again exceeding the top end of the guidance ranges we shared with you last quarter. Our total revenue grew 15% to $472,000,000 year over year and bookings grew more than 12% to $534,000,000 dollars Currency translation this quarter was an approximately 100 basis point headwind to both revenue and bookings. As you heard earlier, we continue to see a nice balance between customer and ARPU increases with both growing roughly 7% versus last year. Turning to our revenue lines, we saw attractive growth across all three of the product lines this quarter.
Domains revenue finished the quarter at $237,000,000 up 10% over year. This above market performance continued to be fueled by international growth, strong renewals and higher aftermarket domain sales. Our hosting and presence revenue was $174,000,000 in the 3rd quarter, up more than 15% versus Q3 a year ago. As Blake mentioned, we've rolled out free trial of our website builder product more broadly, and we've seen some good uptake in security products as well. Business applications revenue grew 36% in Q3 to $61,000,000 driven by continued strong growth in both productivity and email marketing.
Looking at our international results, our revenue outside the U. S. Now represents over 27% of total revenue. It also grew 27% on a constant currency basis in Q3, ahead of reported growth of over 21%. We continue to believe international will be a key growth driver in the years to come given the horizontal need of our products and the strength of the GoDaddy brand and value proposition.
Turning to profitability, we continue to deliver solid top line growth and demonstrate good operating leverage across the expense base. As we discussed with you on last quarter's earnings call, you'll see in our release that we don't refer to our historical measure of adjusted EBITDA. We've instead provided you with the 3 components of that measure on the 3rd page of the release and Slide 15 in our presentation to allow you to sum them and see that it yields a total above the high end of the Q3 range we provided to you in August. As an aside, we won't provide adjusted EBITDA guidance going forward, but because that measure is a key operating metric for us internally, we will continue to report these 3 components so you can compare our future performance to past results. Briefly on cost lines, gross margins were down slightly versus prior year as expected as license fees to Microsoft for Office 365 have begun to normalize.
Going forward, we expect gross margins to stay close to the current range. We've gotten some leverage in technology and development spending as we expected. G and A rose a little unusual amount this quarter due to one time stock comp expense, spending on our Workday ERP implementation and recent acquisitions, as well as a tough comp against the year ago quarter. On a normalized basis, we remain within the range of the last couple of years. Maybe most notably, growth in our marketing spend was a little lighter in Q3, but you'll see growth pick back up again in the 4th quarter.
Turning to cash generation, unlevered free cash flow grew 20% in Q3 to $96,000,000 continuing to demonstrate strong cash conversion. Over the last 12 months, unlevered free cash flow was about 16% of revenue. We finished Q3 with approximately $566,000,000 in cash and short term investments and net debt of $510,000,000 dollars As you all know, this 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 through M and A and potentially share repurchases as well. So let's discuss our outlook for Q4 and the full year. For Q4, we expect revenue in the range of to $487,000,000 which for the full year 2016 implies a range of $1,845,000,000 to 1.849,000,000,000 dollars and approximately 15% growth at the midpoint.
Our 4th quarter and full year revenue guidance incorporate the expected impact of past currency movements. As I said earlier, we came in above the high end of our Q3 guidance range for adjusted EBITDA. And while we will no longer guide on this measure, I'd note that nothing has changed fundamentally since we last provided you with full year guidance on this measure in early August. Looking instead at cash flow for the full year of 2016, we expect unlevered free cash flow of approximately $350,000,000 representing roughly 20% growth versus the $294,000,000 unlevered free cash flow we generated in 2015. In summary, our outlook for the remainder of 2016 remains strong and very consistent with what we've shared previously.
Solid teens top line growth and faster growth in profitability and cash flow. So that's a quick look at the financials. Blake?
Thanks, Ray. So you can see that we're continuing to deliver on our strategy and financial expectations and we see a big global opportunity to continue to grow the business long term. So thanks for your time folks and we're ready to open the call to your questions.
Certainly. Your first question comes from the line of Naved Khan from Cantor Fitzgerald. Your line is open.
Yes. Hi. Thanks for taking the question. Just a couple. I think Blake or maybe Scott, you spoke about the opportunity in the 10 to 100 employee segment, which is kind of new.
Just curious to know how you sort of plan to go about addressing that in terms of having a dedicated sales force? Or are you thinking about some other channels?
Thanks, David. It's Scott. Yes, 10 to 100 employees is an adjacent segment to our core. And as I said, they particularly value Office 365, not only the product and pricing, but the whole installation and migration service. And relative to our base, it's interesting, we have 700,000 approximately customers of our 14,500,000 fit that bill.
And we ran a pilot this year with exactly what you described, which is not only a dedicated sales force, but the installation and migration team, we liked what we saw. So we're going to be adding a couple dozen more people both to contact and serve this population and audience. And frankly, we're excited about what it could be for us. And this is just going to be about expanding that and growing it as we succeed.
Got it. And then since you've changed your branding message a little bit, kind of moving away from the high impact messaging, can you talk about any kind of impact that you might be seeing on the ROI for these marketing dollars?
Well, on messaging, to be clear, you always want high impact marketing messaging. And from a brand standpoint, we're at this point where we as GoDaddy have 80% plus awareness certainly in the United States, but it's frankly been fascinating to see how quickly we can ramp our awareness numbers around the world as well. So in our core Tier 1 markets, whether it's India or the UK, we have very solid awareness numbers relative to the time that we've actually been spending marketing dollars. So on messaging, our strategy right now is about connecting this awareness with the full suite of products and experiences that we provide to our customers. And that has frankly both messaging and creative attached to it as well as tactics.
And again, that's you're going to see top of funnel that's TV sponsorships, signage and billboard that are all resonant ways to connect with people and then the creativity is around the messaging to extend our brand and connect it from awareness to frankly everything we can do for our customers to bring their idea to life over time.
Great. Thank you.
Your next question comes from the line of Deepak Mathivanan from Deutsche Bank. Your line is open.
Hey, guys. Thanks. Two questions for me. First, on the business app, different merchandising between different line items. Perhaps maybe you can give some color on that.
Yes. I think different merchandising between different line items. Perhaps maybe you can give some color on that with respect to bookings growth or maybe customer growth for that? And then second, you called out the DIFM opportunity. What is the go to market strategy for DIFM services?
And how should we think about the economics, ways of the current products that you offer? Thank you.
Yes. On the biz apps item, we did about $60,000,000 this year in this quarter. You look at the growth on that, we're in the 36% range, a little slower than what we've seen in the trend, but it's only much bigger base. If you just go back 2 years ago in the same quarter, we were at $30,000,000 in that line item. So we're very happy with that growth rate.
Even though it's decelerated slightly, it's just continuing to grow off a nice base. It's a victim of our own success there.
And Deepak, it's Scott. I'll talk about the second. On DIFM or really assisted services, our go to market right now consists largely of ways to serve our base through care and frankly a little bit more targeted email interactions that we're finding. And again, that has nice return and we're seeing nice pickup to it. What we're not only experimenting with, but moving towards is obviously a more mass articulation of those kinds of services.
Again, not only to provide that kind of activity for our existing base, which is quite large, but possibly as a way of serving new customers as well.
Thanks, Scott. Thanks, Ray.
Your next question comes from the line of Sam Kemp with Piper Jaffray. Your line is open.
Great. Thanks, guys. On the topic of DIFM, historically you've rolled out GoDaddy Pro as one way to address this market. And now we're hearing more about kind of the internal DIFM opportunity. I guess if you had to force rank your preference between the 2 of them, whether it be economics or scalability, which would come first?
And then the past two calls, you've discussed doubling the size of the business over the next 40 years. I guess, should we start to take that as a rough form of long term guidance?
Yes. Sam, this is Blake. So on the pro versus do it for me service, the good news is we don't have a tyranny of the ores issue here where we can actually do both. We build products for pros. So when we do a new WordPress feature that allows immediate updating of multiple sites all at once, that's a feature for a pro.
When we do a good job with our managed WordPress offering, which the Weird Al is a great example, that is built by a pro using our services and using the GoDaddy Pro offerings today. DIFM are a lot of our small business customers today that don't have a pro nearby or don't understand what that marketplace looks like around their neighborhood or even in a city. So what we do is offer an integrated service that once somebody has contacted us, once they've got a domain, they simply call our care organization and we put them in touch, basically a hot transfer over to somebody that can take an analysis of what they're trying to accomplish with their website and then really just get artwork from them, get some creative iteration going with them and for very low cost be able to build it for them. Now, we don't offer a lot of complexity in those sites like a Web Pro does, but we have a great opportunity for a low cost to offer a super high quality website that will help one of our customers acquire customers for themselves and retain customers, including getting them ranked high in an SEO service or even managing their social presence.
So we don't have to fight that tyranny to yours issue.
Hey, Sam, it's Ray. Regarding that comment about doubling the business over the next 4 years, yes, that is our vision and that is a long term guidance, if you want to say it that way. We did that over the past 4 years with the first turn of the crank with expanding around the world, and now we're going to continue with that second crank, both on product, going deeper in geographies and more on ramps as you heard us talk about earlier.
Great. Congrats on quarter.
Thanks.
Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.
Hey, how are you?
Good, Jason.
So two questions. 1 and multitasking, so I apologize if you already answered one of them. What was behind the slowdown in business applications revenue in the quarter? And then secondly, on the more positive side, pretty much every line of the income statement on the expense side shows positive operating leverage. And maybe talk about the long term opportunity kind of to continue to drive margin in the business and why it makes sense for you to bid for this German hosting company that you've been reported to be in the process for in the press?
Thanks.
Hey, Jason. I'll take the first part around biz apps. We're really happy with that growth. It's 36% year over year. It's just growing off a much larger base now, dollars 60,000,000 in the current quarter.
If you look back just 2 years ago, that was a $30,000,000 number. So doubling the business in 2 years is pretty impressive. So that growth rate is still a very solid growth rate. We're really happy with it.
I think from the leverage standpoint, it's Scott, Jason. Thanks for pointing it out. Yes, it is nice to see that kind of operating leverage flowing through the business. And it's nice frankly to see that also frankly build for several quarters in a row. And that maybe not that won't happen nor are we promising that every single quarter, But we have ability to scale through our technical platform, certainly through the G and A infrastructure of the company.
And but and we are still investing through marketing and care in what we think are really productive ways. All of which wrap up to the ability to drive faster flow through and faster growth to the bottom line. In terms of acquisitions, look, we're not going to comment on any specific acquisitions. We've to date made a couple of frankly quite small ones in terms of product adjacencies, but the business is in a position scale platform operating rhythm wise where we certainly feel like we're in the position to do something much larger, frankly, productively and accretively.
Thank you.
Your next question comes from the line of Sterling Auty from JPMorgan. Your line is open.
Yes, thanks. Hi, guys. I want to start with, I think it was either last quarter or the quarter before you talked about taking away some of the multi year packages and having an impact on the bookings in the quarter. Any impacts from that that you can quantify this quarter?
No, really nothing there, Sterling, to speak of as far as extending the or pulling back in on the years. Really, the only thing I might highlight for you this quarter from a bookings perspective is free trial. You heard Blake mention that we've rolled that out and continue to expand in other geographies. So that's obviously having a little bit of impact on bookings right now because we don't count those customers until they are on subscription.
Okay, makes sense. And on some of these new programs, specifically security, can you talk us through what the economic model for GoDaddy looks like? In other words, are you in a revenue share arrangement with technology partners? Are you paying a fixed fee? So what is the margin profile on some of these new solutions they've got, especially in security?
Sterling, this is Blake. So we have a variety of make basically it's either build it or partner or could even be an acquisition of when we're rolling out of products in the market that we've got products in today, whether it's an SSL, which is completely our own with site lock, that's something that we have a partnership with. We don't really disclose the terms on that. And there is a lot of other opportunities for us for backup, for storage, for the HIPAA compliance with archiving and archiving of mail. Those kind of things are different business models for each one.
And frankly, the way that we package them and integrate them together to make it incredibly simple makes it kind of a no brainer for a customer to go acquire it from us. And frankly, it doesn't matter whether it's partnered or created by us or it's part of another package. And the business model and margin profile of each one of those is a little bit different, but aggregating up into a hell of a good business.
But would you characterize it as being on par with the rest of the corporate gross margins
or Oh, for sure. Yes, absolutely. Yes, it's a great business that fits very nicely within the margin profile of the rest of the businesses we're running.
All right, perfect. And last question and I'm jumping between calls as well. So if you touch on it, I apologize. But digital marketing, I think is an area that you've looked at in terms of the adjacency. Where do you feel like you are in terms of the evolution of GoDaddy strategy on that digital marketing front and what might we expect here in the near term?
Yes. So, hey Sterling, Blake again. So from a product perspective, I'd tell you, I think we're probably in the 3rd inning of the game and I'm not sure if the game goes into overtime or not, which I hope tonight doesn't. But the general notion is, look, we're doing email marketing today. We do a pretty good job with that.
We know there's a lot that we can do in the SMS area. We know there's a lot we can do in helping customers acquire customers on mobile devices. And frankly, nobody does it all together as a package and nobody does it super well for this little customer. So, the products that we're offering and I got to stress this really importantly. Our LTV to CAC is such that we can acquire customers at a very low cost and we can offer email marketing products for such a low cost and integrated into a website building product or email that just makes it again just a no brainer to do that next thing to attach customers.
And we get them really early in their cycle of like I have an idea, I want to build a site and I've got now 50 customers and have signed up on my website. I'm going to offer them the free use of an email marketing product that eventually they'll buy for us. And it's really early for us. So I'd say 3rd inning probably, maybe even that's deeper in the game than we are.
That's great. And I agree. I hope it doesn't go that strange either. Thanks guys. All
right. See you, Storm.
Your next question comes from the line of Jonathan Kees from Summit Redstone. Your line is open.
Great. Thanks for taking my questions and congrats on the quarter. I just had a couple of questions. First one is more of a clarification, more for confirmation. And second is more of a general question.
The first one being, you mentioned you're doing a lot of in country sponsorship, local marketing. You mentioned some TV shows, but you also mentioned like the English Football League and also the baseball playoffs that's here. You're not going to the marketing costs are going to be still more spread out, right? You're not going to have the Super Bowl spike or the NASCAR spike like in the past. Jonathan, it's Scott.
You should see a pretty stable level of marketing spend. Put the tactics aside, the strategy is around a pretty consistent marketing spend invoice across our markets.
Okay. All right. Just wanted to confirm that sound like it too. You had plenty of things for spending on. And then second, for your international expansion, you touched on like that package that you're offering in Mexico and includes hosting and it was at a very competitive price.
I guess the ARPU from my calculations here for the international customer a little bit lower. What can you talk about price sensitivity there and kind of margins you get there for the international customers, especially for the non Western Europe Tier 1s like Mexico, India, China?
Thanks. It's Scott. So in the emerging markets, we're seeing very nice customer pickup. And again just from a relative return, what's great about the margin profile of these markets are they're incremental. Remember, our in country execution is pretty light.
Most of the spend we have is frankly go to market dollars and that's how we manage the geography. Now when you ask at the unit customer level, what's the level of price sensitivity? It's not surprising that those customers are more price sensitive. And that's frankly what we're working towards in these markets are having fantastic solutions for these customers still at a really attractive and valuable price point, but that makes money for us. So all of these examples that we're describing have good economics for us to deliver and are hitting affordability and value positions for customers that makes it really valuable for
them. Okay, great. Thanks for that explanation. Good luck, guys.
Thank you.
Your next question comes from the line of Ron Josey from Jason Mary Peter Securities. Your line is open.
Hi, thanks. It's GMP Securities. This is Shweta for Ron. I have a couple of questions. On WordPress websites, you talk about any early learnings and where you all are in rebuilding GoDaddy's website builders?
And have you taken some learnings from there to implement on the GoDaddy website builder? And then how about the domain marketplace? How are you increasing liquidity with millions of websites and about 500,000 if I'm right, traded each year? So how do you think about it? How is the traction there?
If you could give more color there. Thanks.
Yes. This is Blake Schwanter. Thanks for the question. So our Web site builder product, which is a simple DIY tool is good today. It's not good as it can be.
And I think what you'll see over the next couple of quarters is some pretty innovative technology from us that I think is going to be a pretty big sea change in our DIY website tool. I would also say, so then I'll just say that's the simple DIY one. We have another product that we just announced and released in the past month, which is GoDaddy WordPress offering, which provides a super simple, easy to use WordPress offering with thousands of themes, lots of flexibility, more flexibility than any DIY tool today. So if somebody's got a little bit more technical capability, they can have a much richer tons of plug ins available for them to do something that's very, very flexible. So we've actually got those 2 products that kind of bracket both the very simple and the more technically complex trying to make sure that we're targeting folks that are more technically capable and those that are really just learning and want to treat website building as a PowerPoint tool and doing it with really good intelligence and frankly machine learning capability, it makes it super simple for people to build a site for them.
In the domain business, we have we run the largest aftermarket service in the world today. And the number of offerings that we've got in that aftermarket allow us to have a whole heck of a lot of liquidity. We've been making sure that that's available to every registrar, that. It's not just GoDaddy owned domain name. That.
It's not just GoDaddy owned domain names. It's domain names that are owned by anybody who wants to participate as a seller in that aftermarket or buyer. And we've done some really interesting tools both on mobile devices and frankly on a PC that allow you to manage an auction professionally, capably and for the domain investor. It's a really good set of tools for them and a great way to go reach their potential customers in our aftermarket marketplace.
Great. Thank you.
You're welcome.
Your next question comes from the line of Brian Essex with Morgan Stanley. Your line is open.
Hi, good afternoon and thank you for taking the question. I was wondering if we could maybe put a finer point on a subject I think that Sterling had touched on. And that's when you guys talk about offering free trials, I'm going to go out on a limb and guess that's maybe why net subscriber adds are sequentially a little bit softer. Can you quantify the impact there? And then can you offer, I guess, a little bit of insight in terms of how that's going to impact the platform longer term when they renew at a higher price?
I mean, I think it makes all the sense in the world. I just and I'm sure they're very strong LTV to cap. I just want to understand conceptually how to wrap our heads around it and model it going forward.
Hey, Brian, Scott. Thanks. It's a look, it's a good question and thank you for it. On free trial, it has since it is free upfront and we're not counting a customer until it's paid, there's certainly some impact, but it's not something that frankly we should quantify and communicate to everybody. It's one of those precise without accurate probably measures.
I think when you bring up customer adds, I'd actually highlight two things just specifically in the quarter that probably have a bigger impact than just the free trial, one of which was in our international markets. We actually made a shift in a couple of these emerging markets to focus more on monetization than just gross customer adds. And the second thing I'd point out is, if you look at our marketing spend in the quarter, it was lighter on a year over year basis and it certainly may be a little bit of impact. I think the broad point is we don't manage to the quarter over quarter net or gross adds and are focused on good customers who are going to stay with us for a long time. And that's the purpose and goal of what we think about customers, period, point, stop.
Obviously, we, you, everybody on the phone wants that number to be as high as possible, but quarter to quarter, we're staying pure to the goal, which is add good customers, have them grow and evolve over time. And the ideas of new organic product on ramps plus geographic scope are going to be the levers that are going to allow us to continue to grow that customer base over a long period of time.
Look, I think it makes a lot of sense. And certainly, your performance in the quarter is a testament to that philosophy. And I guess as a tangent to that too, I mean, I think we've talked about before, Scott, like your net refund rate is improving and you've shown a second quarter of sustained improvement. Is that something you believe is sustainable? And what's primarily driving that improved net refund?
Yes, this is Ray. We are continuing to see some improvement there and it's really coming off the improvement in the products and the customer experience. And I would anticipate us to start to continue to see those improvements. Obviously, there's some type of natural floor there because as these customers grow, they're going to have knee changes over time. So you'll always have some level of refunds, but we've been pretty pleased with where that number is going.
It's Matt.
Thank you
very much.
Yes, we at GoDaddy know we've always had friendly and very customer friendly refund policies and that's not going to change. Meaning, if somebody is in the wrong thing, we want to make sure we get them to the right thing. And relative to the industry, I think that is quite a favorable policy that puts us in good light relative to everybody else. I think Ray hit the relevant point on the why for the drop, which is when the quality of everything we do gets better and the merchandising continues to improve, then you just end up with people just in the right thing right at the right point in time.
Makes sense. Thank you.
Thanks.
Your next question comes from the line of Brent Thill from UBS. Your line is
open. Thanks. Good afternoon. The international growth ticked up this quarter versus the first half of the year. I'm just curious what you saw there, where that contribution came from?
And then the flip side of that is the U. S. Has slowed a little bit. Is there anything you're seeing in the U. S.
Market that leaves you somewhat concerned? I had a quick follow-up.
Scott, Brent. So international growth being slight uptick, that's nice, but honestly relative to our pacing, it's rounding. So I guess it's nice, feel good about it, but also don't celebrate really it's just kind of business mix relative monetization focus, but it's not a sustainable thing that we're going to say is a different pacing. It sort of was what it was, but frankly relative to the pacing of the last 3, 4, 5 quarters, it's kind of dead on where we are. When you look at the U.
S, that is our business apps conversation applied to the U. S, where there's nothing different in our market performance. It merely is lapping this really big base and growth. So it's terrific growth. It's just our Office 365 revenue and implementation has a slightly higher mix towards the U.
S. Than elsewhere. And so that's our business applications year over year lapping of what's just a really big number.
Okay. And I know Ray had mentioned you were happy with the business apps, but when you look at 4% sequential growth to effectively 2 years of straight 10% sequential growth, we all look at that metric and say there's more than a slowdown there going on. And when you look at that, is that just an anomaly this quarter and you expect it to pick back up? Or is this sequential ramp the right way to think of it going forward?
So Brent, we're business apps right now is productivity, right, as we've described for the most part. And the trajectory is one that frankly is still a really nice year over year. You're talking about sequential, but year over year it's still a nice one. Ultimately, adding other legs to that biz app stool will be what inflects it over the current trajectory. But to say that business apps could continue, we're not going to come here and say, boy, you're going to get 10% sequential growth in business apps right now.
But again, thinking about it over time, this is all about what products we can add to that container and what kind of success we can achieve.
Yes. This is Blake, Brent. Just adding to that a little bit, remember that the voice service, which again is something that's new for us, it's a new product line, that does get added to that line next year.
Your next question comes from the line of Mark May from Citi. Your line is open.
Hello?
Hey, Mark.
Can you hear me? Yes. I got you. Thanks a lot. Thank you.
Appreciate it. Question on marketing, just want to get an update. When you're marketing for customer acquisition, are you still are you mostly advertising against the Gilgames business as sort of a customer acquisition tool? Or how are you thinking about kind of leading with some of your non domain offerings from a marketing perspective? And then a question in terms of some of the WordPress website offerings.
It looks like you've got some promotional pricing there right now that I think even at a fairly nice discount to your web builder product. Can you talk a little bit about how those two offerings kind of fit together and sort of what your strategy is around the website building offerings? Thanks.
Mark, it's Scott. I'll do the first and Blake will do the second. In thinking about the marketing strategy and execution and how it relates to domains and non domains, think about our marketing in 2 categories. 1 is top of funnel, which is TV sponsorship, brand related activity and then direct, which is very specific spend, whether it be SEM, display advertising, social advertising, etcetera. Over the past year, we've expanded our direct spend across the product portfolio in pretty surgical ways around supporting our product portfolio and that's been a very effective way of building up these services tactically, particularly to our existing base and ultimately that translates into ARPU.
On a top of funnel basis, that's really the work to come, to be frank, which is having our external messaging connect very directly to not a specific product per se, but to the broad range of experiences of our customers. And that's the work from a messaging standpoint to come.
Yes. On the second question, Mark, your question was about DIY, our website builder product in WordPress. The interesting thing about a customer who comes to our site, when somebody comes looking for a website builder, they have been told that they should be using WordPress. So, the really interesting thing is they don't make a trade off of an easy to use DIY website builder or WordPress by price. They do it by recommendation and web influencers, I'll say technology influencers that are usually professionals that somebody might know recommends that they use WordPress and then they start looking for it online.
We happen to be one of the largest or the largest WordPress provider in the world today commercially. And we've made that a very simple product. So many small business folks who actually want to build a website have been told go use WordPress. And so they go to GoDaddy, they click on websites and WordPress shows up, they click on it and they go down that funnel. And then we're just trying to build a very attractive price for them to get into the product, try the product, use it and have a great experience.
On the DIY website builder product, and I've kind of characterized these things as one's a little bit more technical and pixel perfect than the other on a DIY website builder product. It's somebody who says, I just want to build a website and this one says I can do it myself. Therefore, let me go ahead and click on that. What's the value proposition and how is that priced? If they went to WordPress and they tried to use the product, but even as simple as we can make it, it might not be simple enough.
So the DIY product that we have built that you'll see us evolve pretty substantially over the next couple of quarters We'll be incredibly easy to use. We'll not have that perfect that pixel perfect ability because customers can get themselves in trouble actually when they have that much freedom. So we put up what I'll call really good guardrails, really good intelligence, good machine learning, great library of photos and templates that will make it really easy for customers to build something they want. And our goal is to get them into a product that allows them to have a great outcome, right, to meet customers on their site, to acquire customers, to retain customers, to market to them and frankly whatever they want to choose, whether they've been told to go get WordPress by a pro or they say, I want to build a website, make it easy for me, we're doing both of those things.
Great. Thanks a lot. Thanks for the color. Sure.
Your next question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is
open. Hey, guys. This is Dylan Haber on behalf of Mark. Just as a follow-up on Tishweta's earlier question, can you provide some more color on how big of a potential revenue catalyst the Domains aftermarket is and what sort of contribution it is making now? And then also based on what you discussed earlier in the call about creating new customer on ramps, can you provide examples of which products you see becoming potential feeders for the overall business?
Thank you.
It's Scott Dillon on the aftermarket. If you look at domains, our revenue performance has been 10%, right? We're putting up 9%, 10% growth over the last several quarters. And if you think about unit growth in the industry, unit growth is anywhere from 3% to 5%. And really our above market performance is both our international share gain in markets outside the U.
S, which is part of it. And then the other part is the success of stimulating the aftermarket and trying to get more names that are already bought to change hands. So without giving you a specific number, it's certainly a contributor and a decent sized one to that above industry growth performance.
One other thing that I'd just add on the domain side, Dylan, is that we have entered roughly 56 markets over the course of the last couple of years. And as we enter markets, we've been starting to offer a country domain country top level domains like .mx for Mexico, .br for Brazil, etcetera. And those are brand new for us. And in many countries, ccTLDs actually take precedence over a dotcom and actually have more meaning than a dot com certainly in Germany, Brazil, Mexico as examples. India's dotin is very important.
For the on ramp question, we talked about 2 new on ramps. 1 is, hey, I want to build a website and then I'm going to go attach a domain to it. And I want you to think of that as I want to try the tool, I want to see how beautiful I can make this thing and then I'm going to commit. And that's we're frankly moving the paywall from in front to behind it, allowing somebody to try a website builder and then attach a domain. And that's is
voice,
where we think that somebody is going to say, man, I've been is voice where we think that somebody is going to say, man, I've been using my private phone number, my cell phone number for my business. I put it up on my website, it's there for everybody to see. I feel like I might be in danger of having either my identity ripped off or maybe being encroached. So providing them a number on that on their cell phone that rings through to either a business voicemail and that can transcript into a text that shows up in your inbox. Those things are super powerful features that a small business can or small business or somebody with an idea can use.
And frankly, they may do that without getting a domain name or without getting a website from us. We're going to package them up in ways that make it look like it's absolutely perfect to get all three of these things at a really attractive price, but it's an on ramp all by itself. We think it could be a really interesting way for people to get a service relationship with GoDaddy.
Great. Thank you very much.
There are no further questions in queue. I will turn the call back over to the presenters.
Great. Thanks everybody for our Q3 results call. We look forward to talking with you in one more quarter. Thanks and enjoy the game tonight.
This concludes today's conference call.