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 Second Quarter 20 16 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 Thank you.
Marta Niccol, Vice President of Investor Relations, you may begin your conference. Thank you, and good afternoon. Thank you for joining us for GoDaddy's Q2 2016 earnings call. With me today are Blake Irving, Chief Executive Officer Scott Wagner, Chief Operating Officer and current Chief Financial Officer and Ray Winborne, who's joining the company as our new CFO. Blake and Scott 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 such as total bookings, EBITDA excluding equity based comp, adjusted EBITDA and levered 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 IR site at investors. Godaddy.net or on our Form 8 ks filed with the SEC with today's earnings release. The matters we'll discuss 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, August 3, 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, Marta, and thanks to all of you for joining us today. GoDaddy's 2nd quarter was a very good one. Both our revenue and adjusted EBITDA exceeded the top end of our ranges we shared with you last quarter. GoDaddy's unique combination of great products, fast, reliable and high performance technology and empathetic customer care continue to differentiate what we do and have together yielded a large high growth business with strong cash flow. In the Q2, we've grown to serve over 14,300,000 customers, an increase of more than 1,000,000 versus a year ago.
Our average revenue per user or ARPU rose 6% to $125 despite currency headwinds. Strong customer and ARPU growth together drove an acceleration in our top line this quarter. Our 2nd quarter revenue grew 18% on a constant currency basis or 16% on a reported basis to $456,000,000 and Q2 bookings grew 14% on a constant $104,000,000 in the to $104,000,000 in the 2nd quarter and we generated strong and levered free cash flow of $84,000,000 We feel great about these results and what they say about the strength of our strategy and execution over the last several years and more importantly, where we're headed. In fact, several of us approached our 3 year anniversary at GoDaddy this year and we took a step back to review our execution against the vision and long term strategy we laid out when I joined the company. Our strategy has gotten us to much more meaningful scale, doubling 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 towards doubling the business again over the next 4 years.
I want to touch on our key accomplishments of the last 3 years and then tell you how we'll be expanding on what we've done in 2016 and in the future. Simply put, the last 3 years were about 1st building the product portfolio, 2nd expanding internationally, 3rd evolving our brand and 4th proving the strength and consistency of the business model. Let me expand on each of those. 1st on products, we've executed well in our product portfolio enhancing our capabilities primarily in pre existing categories, including domains, hosting, web presence, security, email and email marketing by making our products at deeper, broader and faster, as well as more user friendly performance, reliable and more mobile. We've also expanded into new categories to serve more of our customers' needs and integrated our products to make them more valuable together than they were individually.
You've seen us introduce new offerings like Managed WordPress, Email Marketing, Cloud Servers, Web Pro Tools, Office 365 from Microsoft, SiteLock and soon we'll add telephony with our pending acquisition of FreedomVoice. And we've been shifting our merchandising to bring our products together in bundles and allow better in application product upsells like backup and security products for our hosting customers and email marketing integrated with our website builder product. The product and platform teams have seriously been cranking. 2nd, on international, our engineering and product teams have deployed GoDaddy in all major international markets around the world. We now offer our products and services in 29 languages and 56 markets globally, including local language sites and software, local currency and payment types, local imagery, local phone numbers for customer care and live local language support in Europe, Asia, India and the U.
S. We now have over 4,500,000 international customers and generate more than a quarter of our revenue outside the U. S. With our global product and service rollout largely complete, we've evolved our focus from introducing more new markets to establishing a larger footprint and lifting growth in the many markets we've now entered. We've concentrated our efforts here by introducing a new marketing and sales organization dedicated to international.
Think of this as an evolution from getting GoDaddy into every market that matters to now focusing on growing and winning in our priority markets. 3rd, on brand. As we've expanded our product portfolio and our global reach, we've simultaneously and deliberately shifted the GoDaddy brand strategy from one focused almost totally on generating awareness to highlighting our small business customers and their experience, making it much clearer what we do at GoDaddy and who we do it for. We've made meaningful progress, meaning moving from U. S.
Centric brand awareness to connecting our brand of positive product experience and broadening our marketing reach around the world. We are now concentrating our efforts on top of funnel marketing and conversion in our priority markets globally. And 4th on our business model, following the IPO, we've consistently demonstrated our ability to generate growth at scale, significant free cash flow and business model consistency with 5 straight quarters at or above our guidance. Look, in short, we've built an engine that has demonstrated real success and we continue to tune and improve our ability to go after a large TAM of small and evolving businesses and the go gettersy stardom. Now this year, we've made a very deliberate move in our products platform and marketing organizations to put proven leaders in place for the next phase of our growth, building on our already solid foundation.
Today, we're doing the same for our operations, channels and marketing, as well as our finance organization. To that end, we will be separating the Chief Operating Officer and Chief Financial Officer roles. I'm pleased to announce that Scott Wagner is being promoted to President and Chief Operating Officer, where he will lead the company's operations, channels and markets globally. I want to personally thank Scott for carrying the double load of both the COO and CFO roles for the last several years. He's done a killer job establishing our financial functions as a public company and has set us on a great path for the future, all while also running our company's operations.
Thanks a ton, Scott. I'm also pleased to introduce you all to Ray Winborne, who is joining GoDaddy as our Chief Financial Officer. Ray has great experience in finance leadership roles for global scale businesses, serving as CFO for First Data Corporation and Controller at Delta Airlines and AT and T. Ray's technical and operational capability is proven and his leadership has made those on his teams and everyone around him just better. I'm excited to have Ray join our team at GoDaddy and know you are going to get to know him very well.
While Ray won't be speaking to the Q2 on this call, I would like to introduce him. Ray? Thanks, Blake, and hello to all of you.
I'm thrilled to be joining such a great company and a really top notch team here. In deciding to join GoDaddy, I've been really impressed with the caliber and the depth of the technical and business talent we have throughout this company. GoDaddy has clearly developed a great business and it was easy to get excited about the purpose here, which is helping small businesses be successful and also about the massive global opportunity. But honestly, it was the culture that brought me here. You can really see the spirit of GoDaddy's small business customers in everything we do.
We're entrepreneurial, fast moving and intensely focused on customer service. The energy and the passion here is fantastic. So some quick background. As Blake said, I'm a long time finance guy and I've spent my career with several large global subscription based businesses. Scott and I worked closely together when he was at KKR and I was at First Data.
So we've got a lot of shared history and personal and professional respect for each other. I'm really looking forward to digging in here and helping GoDaddy double in size yet again over the next 4 years. I'll keep it brief today, but I couldn't be more excited to be here and look forward to spending more time with our investors and analysts over the coming weeks. With that quick intro, I'll turn it back over to Blake.
Thanks, Ray. We're super happy to have you here. The story I've shared with you all today is look, it happened. I just went into, I think that accent. The story I have shared with you all today is one of strong execution over the past 3 years and continuous improvement on our strategy.
We feel really good about the quarter, our continued progress and how our organization is now positioned to take us into the next phase of our growth. With that, we'll turn it over to Scott for the financials.
Thanks, Blake. Let me add my warm welcome to Ray, who I'm thrilled to have on the team. Ray is a terrific executive, a great person who's going to add a ton of value to GoDaddy. Turning back to our results, Q2 was strong on all fronts. Both revenue and adjusted EBITDA came in above the high end of our guidance range with acceleration in year over year growth.
In Q2, our revenue grew approximately 18% on a constant currency basis or 16% on a reported basis to 456,000,000 dollars We continue to see a nice balance between customer and ARPU increases, with customers growing nearly 8% over the last year to $14,300,000 and ARPU up over 6% to $125 even while absorbing the impact of the stronger dollar. Total bookings grew 14% in constant currency or 13% reported. When we spoke to everyone after the Q1, we discussed business trends and specific merchandising tactics to drive customer lifetime value and annualized revenue and noted that some of these may impact bookings and revenue differently. These tactics continued in Q2 including 1, the ongoing mix shift to non domain products 2, the rollout of free trial of our high value products like Office 365 and our DIY website builder and 3, reductions in multiyear discounts. These actions continue to show promise in terms of customer metrics and you can see the positive impact in our strong top line performance and our raised guidance.
We will continue to focus on driving activation and usage of our anchor products because we know that when our customers try and use our products, they stay for a long time and they spend more with us. Turning to our revenue lines, we saw nice growth across all three of our product lines in the quarter. Domains revenue finished the quarter at $230,000,000 up over 10% year over year. This above market performance continued to be fueled by international growth, strong renewals and expansion in the Domains aftermarket. Hosting and presence revenue was $168,000,000 in the quarter, up more than 15% year over year.
As mentioned, we've been experimenting with 30 day free trial of our website builder product and based on positive results, we're rolling this out across the GoDaddy geographies in Q3. Business applications revenue grew 45% year over year in Q2 to $59,000,000 driven by continued strong growth in both productivity and email marketing. Turning to international, our revenue outside the U. S. Now represents 26% of total revenue and grew 25% on a constant currency basis in Q2 versus reported growth of over 17%.
We believe international will continue to be a strong growth driver in the years to come given the horizontal need for our products and the strength of the GoDaddy brand and value proposition. Turning to profitability, we continue to deliver strong cash flow. Adjusted EBITDA grew 26% in Q2 to 104,000,000 dollars also above the high end of our guidance and producing a 22.7% margin, up 180 basis points versus prior year. Unlevered free cash flow was up 9% in Q2 to $84,000,000 In Q2, we converted 81% of adjusted EBITDA into free cash, in line with our long term target range of 70% to 90%. As we've said in the past, on a quarterly basis, cash can be lumpy.
With our first tax related payments beginning this year, we were in the middle of our target range for the quarter. For the full year 2016, we still expect unlevered free cash flow to grow over 20% versus 2015. We finished Q2 with approximately $482,000,000 in cash and short term investments and net debt of 596,000,000 dollars or about 1.6 times our adjusted EBITDA for the last 12 months. As everyone saw with our announcement of FreedomVoice, we're continuing to utilize the balance sheet to help expand our product portfolio and geographic footprint over time and generate long term shareholder value. So let's discuss our outlook for Q3 and for the full year.
For Q3, we expect revenue in the range of $468,000,000 to $471,000,000 and adjusted EBITDA in the range of $102,000,000 to $105,000,000 For the full year 2016, we are raising our revenue range again, which is now $1,840,000,000 to $1,847,000,000 implying approximately 14.5 percent growth at the midpoint, in line with the long term targets we've shared. We're also raising our full year adjusted EBITDA guidance again to $410,000,000 to $416,000,000 The midpoint of our new range implies 22% growth year over year, also in line with our long term targets. Our 3rd quarter and full year revenue guidance incorporate the expected impact of past currency movements. Switching gears for just a sec. The SEC has recently issued interpretations on the use of non GAAP reporting and guidance measures.
GoDaddy has historically guided to and reported on a GAAP measure, revenue and a non GAAP measure, adjusted EBITDA. Our Board of Directors, management team and creditors rely on several GAAP and non GAAP measures, including revenue and adjusted EBITDA to assess the operating and financial health of our business. As our proxy notes, our management teams compensated on the achievement of several target metrics, including adjusted EBITDA and the investment community uses that measure along with other measures of cash flow to value the company. At the same time, we're very committed to ensuring compliance with all the SEC's interpretations on non GAAP measures. So in addition to the reconciliations we've always provided, we provided new tables today that present the most significant components of our historical adjusted EBITDA measure, which are EBITDA excluding equity based compensation and changes in deferred revenue and registry fees.
Essentially, the main difference is removing acquisition and sponsor related costs, which have been less than $1,000,000 per quarter over the past 4 quarters following our IPO. We expect that any future presentation of the components of EBITDA will no longer adjust for these typically small acquisition and sponsor related costs. And following today's call, we intend to gather feedback on this presentation of the major components of our historical adjusted EBITDA measure to help inform our future presentation. Now getting back to our business, Q2 was a very strong one. We are proud of our consistent delivery on our strategy and strong financial results.
We remain focused on delivering continued revenue and cash flow growth as we keep building and scaling our business this year and beyond. Thanks. And with that, we're going to open up the line for questions.
Your first question comes from Mark Mahaney of RBC Capital Markets. Your line is open.
Great, thanks. Two questions, please. One, any color on specific international markets that drove that 25% year over year growth? And within that, to what extent Asia is building out in line with plans, ahead of plans behind plans? And secondly, small question on the gross margins.
It looks like should we assume that going forward you kind of reached a level and this is a kind of a flatlining level? Are there any major drivers that remain to cause gross margins to continue to expand in the future? Thank you.
Hey, Mark. This is Blake. I'll kick it off. I'll hand it over to Scott in a sec. Look, most of the growth, 50% of our growth in international markets comes from our top tier countries, that's U.
S, India, U. K, Australia, Mexico, Brazil. So that's where most of our growth comes from. We don't break it out by country. I think growth overall markets is strong and it's good.
Some of those markets are new, very new for us as you pointed out Asia. Asia is super new for us. We've only been there a few months. We're happy with the results that we're seeing there. And frankly, we don't think it's going to be super contributory in 2016.
Asia is only about 4% of our total revenues. But we're happy with it and we feel good about it and think that Asia in 2017, 2018 will be a contributor. I'll hand over to Scott for some more more deets
and then to talk about that. Yes, thanks. So Mark, just to the international question, three points. One is growth is being driven by the same markets we've talked to you about. It's share gain and just continued good performance across all those geographies.
And the second is Asia still small and too small to really affect the P and L, but we're really happy with kind of how it's looking out of the gate. On gross margins, margins have flattened I think in line with what we've told everybody certainly last quarter and even the Q1 which is they've tapered particularly as we've lapped a couple of the big $0.365 incentives. But we're managing the business on gross margin dollars, not percentages and kind of are happy with the mix there. And I think for the forward couple of quarters, people should expect the gross margins to be in line with what they are right now. And again, the focus for us going forward is around adding products and continuing to add gross margin dollars per customer, not necessarily percentage.
Thank you, Scott. Thank you, Blake.
You bet.
Your next question comes from the line of Sam Kemp of Piper Jaffray. Your line is open.
Great. Thanks and welcome, Ray. So in terms of the new product map that you guys are looking at, does that include 1080purity, any e commerce or channel integration functionality, I. E, e commerce site being able to integrate directly into say Amazon or eBay? And then can you talk a little bit about what you're seeing in India?
Is that an accelerating domain environment given everything that's come in, in terms of VC and large Internet investments? And are you seeing any deviations from the historical markets characteristics as being kind of a more of a do it for me type customer base? Thanks.
Yes. So, hey, Sam, this is Blake. So in product, on e commerce, we have an online store product that does surface e commerce capability in our own website. In other markets and you use India as an example, where things like Flipkart and marketplaces are actually more important, there is some work going to integrate in those marketplaces today. We have not integrated with marketplaces in the U.
S, whether it be eBay, Amazon, Etsy, those types of things. But we do have some integration that we've done on the back end for using things like PayPal, etcetera. On India, it's an interesting market and it's actually quite similar to other markets at the same level of maturity. I'll use Mexico as an example as well. Each one of these markets has a DIY component and a DIFM component.
They all have both, But DIFM, do it for me marketplaces are much more important in India, Mexico, Brazil, because folks tend to have, I think, less ability to do those to do their own websites. So we have a Web Pro program that we've got 100,000 developers in now and frankly quite a few of those developers are from India. And they are building websites for other folks in their marketplace. And frankly 50% of websites today are not built by the owner of the business, they're built by Web Pros. And we think that's a very large marketplace and an important marketplace for us.
And your next question comes from the line of Sameet Sinha of B. Riley. Your line is open. Yes.
Thank you very much. A couple of questions here. Can you talk about the strategic importance of FreedomVoice and how we should think about that being integrated into the overall product suite that's sold? And secondly, Ray mentioned he's looking forward to doubling revenues again in 4 years. Is that sort of a goal that we should also keep in mind while thinking about the company or it was more about looking historically?
Hey, Sumeet, this is Blake. I'll handle those for a quick second. I think Scott will probably tag team on the doubling question. On FreedomVoice, look, we know that our customers have told us they have they're solopreneurs and companies of only 5 people. They have what I guess I'd call complicated lives where they're trying to manage their personal life and manage their business at the same time and many of them are trying to do it on a single phone.
So what we intend to offer with the FreedomVoice acquisition is a second phone line that exists on your mobile phone. So you can tell when a phone call is coming in from a customer versus for instance your junior high school kid's teacher and be able to separate those two roles you've got of parent and business owner. From an integration perspective, we end up with a really interesting signal strength both in website builder or managed WordPress when somebody enters a phone number on their website. We have the ability to actually make an offer for them and say, hey, we have a phone line that's available for you as well, if you'd like to manage your business as a professional phone number and then offer it for them. And if you think about philosophically about naming your business and actually searching for a good name, whether a domain name or a trademark business name.
It's another opportunity for us to get in front of them with a phone number that is more relevant to their business than otherwise would be and give them a choice that same kind of choice you have in a domain name where we can allow you to go into a local area code or have an 800 number to provide call trees that allow you to do to basically look bigger than you are or be in a very specific location by having the right area code. I'm going to hand it to Scott on the doubling question.
Yes, thanks. I think in some ways that was an acknowledgment that over the last 4 years we've doubled. And if we look at the business going forward, you think about our customers which are now $14,000,000 plus, we're on a pathway where we could see trajectory to $20,000,000 over that next 4 or 5 year period. And then ARPU looking historically, we went from the 90s ish ARPU number to now 125 and believe with the product portfolio and the merchandising approach we have that we're on a runway to 150 to 175. So at a really step back and high level math, runway to 20,000,000 customers, ARPU of 150 to 175, that's where you get the doubling, but don't hang up on the precision of the 4 years.
Okay. And one final question, if I can squeeze it in. I know that historically, the way seasonality has worked is Q3 to Q4, you see a
drop off in margins.
This year with your change in tactic and especially Super Bowl in Q1, do you think the chance that the way to ask is, are there any sort of anything stopping you, anything else apart from these marketing tactics that still suppress margins?
There is you said that's right that the seasonal profitability has a little bit of a slight downturn in the 4th quarter. Still think about that going forward and our guidance gives you the best range of where we think EBITDA is going to land and again that's nice 20% plus growth year over year.
Thank you.
Your next question comes from the line of Ron Josey of JMP Securities. Your line is open.
Great. Thanks for taking the question. I think you mentioned in the investor deck that the domain business is seeing increasingly strong renewals. And I was wondering if you could provide some additional context here just around renewal rates, perhaps how churns trended over the last year or so. And then I think your commentary around bundles and net product upsells, any update just on the updated pricing and approach maybe that helped drive bundles and upsells in the quarter around going less discounting going forward?
Thank you.
Yes. Thanks, Ron. It's Scott. Domain renewals, our rates are nice and strong. We don't share those specifically publicly, but we're on a nice trajectory there.
And really that's an offshoot of focusing on domain names that are attached to customers and even more so ideas and bringing those ideas to life. And when we get a customer a great name for their idea and then help them bring it to life online, as we've all seen, know and that when that happens, customers stay for a long, long time. And so our domain approach has been particularly focusing the business on attaching a domain name to an idea and then making it happen. And when we do it, it shows up in great domain renewal rates and that's what we're seeing. In terms of the pricing approach and impact on renewals and churn, again, merchandising goal is to get our customers into the right set of products, a name, presence, productivity that are involved around branding and naming your ID online and getting those activated.
And when those get activated, we see really strong impact on our renewal rate on a product basis. And based on that, can
you comment just on FLARE? Is that, I'm assuming, directly related to what you're seeing? Thanks.
Yes, this is Blake. On Flare, Flare is an interesting product. Flare's notion is to actually go upstream from the domain name. It's not something that we generate revenue with. We actually allow a user to put an idea out into a marketplace of folks that can comment on that idea and actually improve the idea.
It gets over 10 likes or what we call 10 loves, then they actually can go back and forth with folks and build the idea up into something significant. Now what we get from that is a large corpus of data that we store in our back end that gives us signal strength on what that idea is and how well that might perform. And with that data, we also have an opportunity to know exactly what we can market to that person in the next instant when they're ready to take that step, whether it's a domain, whether it's a website, whether it's a professional email address that lets them take that next step. But we view that not as a I wouldn't call it a money generator. It's more of a method for acquiring customers and getting them to take the first step, that first brave step of saying, I'm going to actually take a leap of faith and go in and try this thing out and get enough feedback to take the first step.
Got it. Thanks guys.
Yes. Your next question comes from the line of Deepak Mathivanan of Deutsche Bank. Your line is open.
Great. Thanks, guys. Two questions. First one, a big picture question. You mentioned that 50% of the market is still built by web pros for website building.
On that topic, can you help us parse down the growth profile between hosting and site builder? Is the demand for website building using platforms like WordPress and then using hosting products from GoDaddy still healthy given that there is some strong propensity to use DIY tools recently?
Hey, Deepak, this is Blake. We're actually yes, 50% as I said sites that are built by individuals using DIY tools and 50% that are built by pros. Some of those pros are even using what you'd consider to be a DIY tool to build for folks. Managed WordPress and WordPress products have actually gotten simpler to use. And frankly, we've seen really good growth in our managed WordPress product.
In fact, it's some of the fastest growing products we've got. Managed WordPress is doing incredibly well. And frankly, I think the market is so darn big that companies can grow in the DIY space. Our DIY business can continue to grow. Our web hosting business can continue to grow and we just get better at both of them.
The opportunity is not just in the DIY space, it's an opportunity for websites that have been out there for a while to get them refurbished, to get them on newer updated more responsive code basis. So they look great on a mobile device, they look great on a tablet, they look good on a PC. So that demand continues and frankly we do something at GoDaddy that's interesting where folks say I'm going to go build this thing myself. We actually will help them when they don't want to build it anymore. And so we have a professional web services group that will take that almost as a continuum, if you will, where I start as a DIY customer, I might get to a point where I'm doing to do it with me, a DIWM customer and then say, look, I'm going to hand this off to you and allow you to do it for me.
So that continuum really reflects the need states of customers where they say, I'm going to try it on myself and then I'm going to basically hand it off to somebody else. And we're the only company that is really doing that today and moreover and I think most importantly, we don't have an opinion that it's like it's DIY and there's a proprietary way of doing DIY. We actually believe there's DIY and people are going to do it themselves. And we also believe that the hosting business and professional business is very important and there are different tools that people use to do both. And we are the only company at scale that offers both of those things.
So we offer a great website building experience at scale and we offer a great web professional experience at scale things like Managed WordPress, Joomla, Drupal, Ruby and cloud servers that offer you pretty much any type of tool you want to use to build a site for somebody. So we're not taking sides or placing bets on either side. We're offering both, both DIY and DIFM to small companies and to developers.
Okay, that's helpful. And then second question, historically, domains used to be a key new customer on ramp channel for you. Now with the initiatives around bundling for the website builder products, etcetera, Are you can you explain what the mix is like for the new gross customers that you bring in for different products?
Deepak, we're still for new customers coming into the franchise, a large, large, large portion of them all certainly still start and have a domain, but they're also attaching that domain to some form of presence ENDO365. But domains is still a big anchor to the on ramp, but again it's being anchored with 1 or 2 or some cases all three of our other products. Now looking ahead 2, 3 years down the road, we're encouraged and we're excited by the possibility and the potential for a category like what we've done for FreedomVoice and ThroughVoice to serve as a distinctive on ramp for additional customers and to continue to go at certain segments of the market, whether they be pros, who are big influencers of downstream customers to provide experiences for those segments. So we think that there's a couple of different ways, both products and channel go to market for certain segments of the customer base that are going to add different on ramps for customers into the franchise.
Great. Thanks, Scott. Yes.
Your next question comes from Mark May of Citi. Your line is open.
Hey, thanks. And congrats, Scott, and welcome to Ray. I think most of them have been asked, but maybe Scott, just going back to the gross margin question. I'm guessing one of the reasons why it keeps coming up is a little counterintuitive because we're still seeing hosting presence and business apps, all the non domain businesses growing and becoming a bigger portion of the mix, yet you're guiding to kind of expect for stable growth. I guess we're always under the impression that the domains gross margins is quite a bit lower than the non domains margin.
So maybe if you could walk us through why that in fact is not translating into higher gross margins or if your commentary on that is just sort of in the very near term, but over the next year or 2 plus, you have a different expectation? And then on FreedomVoice, I got your sort of game plan going forward in the strategic fit. But can you confirm the deal hasn't closed yet, is that right? And if that's right, I'm assuming it's not in any of the numbers that you either provided or guided to. And if that's the case, I had a couple of other follow ups on FreedomVoice, if I could.
Okay. So first point on gross margin. The gross margin relates to the anniversary of a series of incentives with our partner in productivity that enabled us to provide special bundles around productivity suite presence in a domain name for the 1st year. And we're lapping those 1st year frankly incentives that are getting to a normalized rate in terms of licensing payments for our partner and that's normalizing gross margin at the percentage that we're at. And sorry if that hasn't been clear, we've tried to be explicit about that for the last several quarters, but that's the reason for the tapering.
I think it's important to point out that our EBITDA margins continue to grow nicely all the way down through cash flow as well because it's leverage in the model. So we've tapered the gross margin percentages now, but are seeing nice scale through our OpEx lines, particularly tech and dev and G and A and even over the last quarter care as we continue to build out the business. So these things are working together and we're intentionally working them together to continue to show nice growth on top and bottom line. So hopefully that both provides context on the gross margin and on EBITDA. Specifically on FreedomVoice, it's not closed yet.
We expect it to close later this year. There's a whole host of FCC licensing requirements when you get into the voice business that makes the close longer than expected. And so that's still TBD in terms of the close. In terms of guidance, we have a tiny bit, you could call it, expected in the Q4. I mean, we do expect FreedomVoice to close before the end of this year and sort of therefore implicitly you could say that we have it included in guidance a little bit in the Q4.
And can you comment, I think there's some reports out there that the business is doing about $30,000,000 in revenue. Is that roughly correct kind of relative growth relative to the GoDaddy business, relative margins, etcetera?
Sorry, that's way high. I think we had said before that it's per quarter, a couple of $1,000,000, 2 ish dollars per quarter in terms of what we're going to be inheriting on a size basis. So that's the quantum of the business that we're getting today.
Okay. Thanks.
Yes. Thanks, Mark.
Your next question comes from Jason Helfstein of Oppenheimer. Your line is open.
Thanks. Just Sue, so can
you talk a bit more about marketing? We kind of think about I know you generally think about relative to net bookings, but it does seem like there's some consistency to revenue and kind of how you're thinking about that. So obviously this quarter, we saw deleverage on the net bookings, but stable leverage on revenue. So just kind of how you guys are thinking that? And then secondly, any update on the cloud product, because I guess it's now what 2 full quarters since that's been in the market?
Thanks.
Yes. Scott, Jason on marketing. For our marketing dollars through this year, our spending is going to be probably a lot more proportional on a quantum basis as you go quarter to quarter to quarter from just a broad dollar standpoint. And so part of that was having a consistent level of spend and mix between the U. S.
And these different international growth markets that we're putting our shoulder behind and seeing nice results. And that's really how to think about marketing for Q3 and Q4. More importantly, into 'seventeen and beyond is about taking our go to market dollars in not only the markets that we're in and growing nicely, but adding more geographies and we think that there's several nice probable possibilities for us as well as building up and putting our shoulder behind some of these either new product customer categories or products themselves. And you'll see again our marketing just go to support these different products and different geographies. Blake, do you want
to talk Yes. Hey, Jason, it's Blake. Hey, on a cloud product, we announced in March. So we've had basically 4 to 5 months of time in market. We're happy with the results that we've seen in cloud.
It is resonating with developers and the folks that are building websites for other people, which was our assumption. Frankly, we feel like it's I wouldn't call it a significant contributor, but we're happy with where it's growing and how it's pleasing the customers that are using it. And it's a great mix for the Web Pro product line with adding a ton of languages on top of cloud infrastructure that we weren't able to offer before. So we're happy with it.
Thanks.
Yes.
Your next question comes from Aaron Kessler of Raymond James. Your line is open.
Great. Thank you. A couple of questions. First, any update on the number of domains that have been in the quarter as well as your market share? And just any do you have the amortization of intangibles for the quarter?
I believe that might be in the Q. And also do you have potentially the dilutive shares with options as well? That would be helpful. Thank you.
Yes. Aaron, it's Scott. So in terms of number of domains, we have approximately 63,000,000 domains in the portfolio, give or take, right, which again at the important number there is that that's 20% of the world's domains in the portfolio. And important note is we're focused on adding domains that have customers attached. So our focus around the domain businesses, the names that lead to other things versus just the names themselves.
So that's I think domain point number 1. In terms of the amortization question, sorry, it's going to be in the 10 Q, which you're going to see tomorrow, tomorrow a. M. So maybe we can kind of pick that up either after the call or you can just find in the Q tomorrow. And on a fully diluted basis, shares are, if you use approximately $176, that's the number.
Great. Thank you.
Your next question comes from the line of Brian Essex of Morgan Stanley. Your line is open.
Hi, good afternoon and thank you for taking the question.
I was wondering if you could just touch on,
I got the 14% constant currency bookings growth. But could you give a little bit of color on the last quarter was a little bit there was a little bit confusion around duration and how much the reduction in discounts impacted the duration and therefore, the duration Hey, Brian. The exact same stuff last quarter,
Hey, Brian, the exact same stuff last quarter that we talked about. So free trial of Office 365 and Website Builder, some of the shorter duration, which is just mix related in the reduction of discounts has continued. So all of the language and discussion that we had around bookings last quarter, we have not only continued into this quarter merchandising wise, but ramped them up in the case of free trial and the bookings number accelerated on a year over year basis.
Great. And then if I could, can't help but notice you're building a little bit of cash on the balance sheet. As rate kind of transitions in and you build that cash balance, so just kind of wondering what your priorities might be and how you might think about return on capital going forward?
Thanks, Brian. So we're certainly think that there's opportunities to add to the franchise both products that are valuable in the lifecycle of our customers that probably aren't great standalone businesses, but maybe really good products that we could attach to our customers and technical platform and care model and add value to our customers and obviously make that economic and geographies as well. So obviously that translates into we think that there's good ways to use the balance sheet to grow the franchise strategically.
But we'll
keep being and FreedomVoice is a perfect example for that, right, which was high in terms of dollars outlay, but is a good example of what we're talking about doing. And we like having the flexibility to do it and we're shareholder and economically minded people and we're going to do that intelligently and it's going to have to be strong we think accretive relative to what we're doing organically. Now, we love the flexibility of having the cash both for growth and for what it can do in terms of our share count and in terms of just the economic returns of the balance sheet over time. And so it's just nice to have the flexibility to be able to do that.
And how might you manage debt in the process? I noticed that debt picked up a little bit. So just kind of wondering how you kind of balance between the 2?
Yes. I think at this point, like you said, we have cash and relative to our leverage position, we're we have a lot of flexibility. I think that's the way to look at it. As we've shared before, the business, if you're looking at it truly from just the operational cash generation of the business, 2 to 4 times is a really nice leverage ratio given the cash characteristics and the stability of the business. Obviously, we're below that.
But we're not going to manage to that ratio, but I think that should give everybody indication of where certainly comfort lies and where we are relative to those to that ratio.
Great. Thanks for the insight and nice clean quarter. Yes. Thanks, Brian.
Your next question comes from Brent Thill of UBS. Your line is open.
Hey, Scott. Just congrats on your new role. But with the moving the CFO title, where do you expect to be spending most of your time? Where do you think you're going to have the biggest impact now with that time frame out?
Thanks, Brent. Really this is about the go to market international marketing using our care organization around the world to both deliver a great experience and to help enable the business. And so if you think about those three areas, we're really putting our foot down on the gas across all three. And if you add in corporate development and the flexibility we have in the balance sheet that Brian so nicely articulated and pointed out, those are sort of the 4 different avenues that you can think about just growth and it will be where I am spending my time. And it's great to have Ray here because the size of the company now as a global public company with the financial scale around it, it just makes perfect sense to have frankly a full time strong fantastic executive around the finance function day to day.
And it's going to let me spend my time thinking about those different areas of growth.
Okay. Thanks for that. And Blake, I know you understand the bundling concept better than most given your time in Microsoft. And when you think of the bundling opportunity going forward, it just seems like there's a lot more that you could do. Could you just talk a little bit about the strategy and what seeing?
I know you've had domain website emails as one of the hot deals on your website, if you will. And there's it just seems like there's a lot more you can do there. What's your vision in terms of where you think you can go with this?
Yes. Brent, hey, this is Blake. So there's a the bundling strategy has been working well for us. We've deployed it as you described, domain, website, email. I think not just bundling, but in application selling, which is something that Microsoft really didn't have the capability of doing back in the days of Office because it was a packaged product, where we believe that not only can you bundle products effectively and create a powerful merchandising moment for a customer, But there are other opportunities for us to sell not just a bundle, but actually sell them the thing that makes the most sense for them at a point in their product lifecycle and their customer lifecycle.
And if you use the voice capability in FreedomVoice as an example, there's an opportunity for us to offer a voice capability when somebody pushes a number, which is a phone number into a website as an example or to offer email marketing while it wasn't in the initial bundle to offer email marketing when they've got a sufficient number of folks that have entered their email address into a website. That incremental capability, which we'll offer on a trial basis, so they can try it out and see how it works and then use it and then get a response allows them to take that next step and grow their business further. If you think about the hosting business, it's exactly the same for protecting somebody's website, whether it's offering site lock to them or offering a backup capability, doing that in the product when you're in the control panel and you're actually using it. So it doesn't necessarily have to be at the point of merchandising, which we've been quite successful at. But even taking it the next step and using the cloud capability and cloud functionality that all of our products exist on to offer the next best thing based on the data we have on that customer.
And at a macro level, the vision for us is to have enough big data on customers and enough big data on customer lifecycle and product lifecycle to know exactly when to offer the right product at the right time to a customer's perfect situation. And you're seeing us start to roll that capability out. And it's I think it's pretty differentiated from what we've done before and differentiated from what other folks are doing in our business today. Just a very different approach.
Thank you. You are welcome.
Your next question comes from James Kakamek of Monness, Crespi, Hardt and Company. Your line is open.
Hi, thanks. 2 please, one on bookings, one on EBITDA. So Scott, appreciate the color on bookings. With the adjustments that you're making there, it seems to be working well. Do you think that conceivably based off of the learnings that you had, we could potentially see some further adjustments down the road or you feel comfortable that now things are working, this is the new normal for bookings?
And then secondly on EBITDA, if I understood correctly on the international, you are where you want to be right now and you're going to be scaling that business. Your long term and the EBITDA growth is only at 20% plus, you're outperforming that. So as those should we think of that as a base case kind of measure with opportunity for pretty decent upside from there or just how to think about the long term versus kind of the international investment in scaling that business?
Yes. Thanks, James. So on bookings, boy, let's think about the pacing that we're on as being a good one and think that that's probably the best thing or the appropriate thing to say publicly and given the size and scale that we're at, that's a pretty big quantum of incremental growth. So we think that that's at a pretty nice pacing for where we are right now. It is in line with the long term targets that we shared with everybody, what's now well over a year and a half ago in terms of low to mid teens top line growth and we're in that zone.
In terms of EBITDA, as you pointed out, we've been 20% plus for a while. Just thinking about the growth at scale and the balance of reinvestment, which is what we've been doing and quite focused on, the 20% number is a good one. The nice thing about this business and where we are is we're able to invest in geographies and products and capabilities like the in application purchasing that Blake's describing that are great for the long term health of the business, but we're still able to drive a hell of a lot of EBITDA and a hell of a lot of flow through P and L in the short term. And I think that's what everybody that we've been doing it and I think that's the best way to think about it going forward. And those are financial metrics and performance, but hopefully people appreciate that that's a competitive advantage of the size and scale, right, to be able to invest in either marketing dollars or engineers or markets at the size that we have and still produce these results is advantageous relative to other people in the market who are doing what we're doing.
Yes. Just a pile on that, James. One of the things, what I'll call scale advantage as well. We're the only company that services the small businesses has built a platform that is scalable at a global level that allows us to add products in market all at once. And if I use use the cloud server launch as an example, 4 months ago when we launched cloud server, we launched it in every one of the markets that we are in simultaneously.
And that type of advantage of the platform we've built differentiates us substantially from other folks that offer the same type of service we do.
Great. Thank you.
And there are no further questions at this time. I turn the call back over to presenters.
Hi, everybody. Hey, this is Blake. Again, thanks to Scott for all he's been doing. Welcome, Ray, to GoDaddy. Super glad to have you.
Congratulations Scott and we hope to speak to all of you one quarter from now. Thanks everyone.