Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'll now turn the call over to Marta Nichols, Vice President of Investor Relations. Please go ahead.
Thank you. Good afternoon. Thank you all for joining us for GoDaddy's first quarter 2016 earnings call. With me today are Blake Irving, Chief Executive Officer, and Scott Wagner, Chief Operating Officer and Chief Financial Officer. Blake and Scott have some prepared remarks, which will follow with a Q&A session. On today's call, we'll be referencing both GAAP and non-GAAP financial results such as total bookings, adjusted EBITDA, unlevered free cash flow, net debt, and ARPU. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our investor relations website at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release.
The matters we'll be discussing today include forward-looking statements, which are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, May 4th, 2016, 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 first quarter was another good one, with contributions from all of our major product lines driving strong top-line growth and cash flow. The strength of our execution and our financial results have remained just as consistent as our commitment to our vision, to radically shift the global economy towards small business by helping individuals easily start, confidently grow, and successfully run their own ventures. Millions of global customers use our growing suite of elegant, easy-to-use, and integrated cloud-based products, all built on a single global technology platform and supported by outcome-driven, personalized customer care to create a successful online presence. I'd like to share three takeaways from our early 2016 results and longer-term roadmap today. First, our focus on consistent, strong financial performance and growth continues to pay off.
Second, following our January launch of localized websites and products in Asia, we continue to feel good about the significant long-term growth opportunity in international markets. Third, we're continuing to broaden our customer reach with new marketing messages about what we do and who we do it for, delivered through a broader array of marketing tactics and channels. On my first point on our business results, GoDaddy's unique combination of great products, fast, reliable, and high-performance technologies, 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 first quarter, we've grown to serve over 14.1 million customers, an increase of more than one million customers versus a year ago. Our average revenue per user, or ARPU, rose over 6% to $123 in spite of currency headwinds.
Strong customer and ARPU growth together drove our first quarter revenue up 18% on a constant currency basis, or over 15% on a reported basis, to $434 million. First quarter bookings grew 14% on a constant currency basis, or 12% reported to $558 million. Our adjusted EBITDA jumped 23% to $116 million in the first quarter, and we converted 87% of our adjusted EBITDA into unlevered free cash flow, again, near the high end of our long-term expectations. On my second point about international opportunity, with our January launch in Asia, GoDaddy now offers localized versions of our website and software in 53 markets globally across the Americas, Europe, and Asia. Our Asia launch is following our proven international rollout playbook.
Beginning in January, with the availability of a localized customer experience across our website, customer care, and our products, followed by the addition of market-specific products such as .cn in China and .jp in Japan, then further tuning the content, pricing, and offers on our local sites. Now we're beginning to ramp digital marketing in the region with local search engines like Baidu and Naver and consumer-focused PR to build brand awareness. We're excited to be in these new markets and believe there's a huge long-term opportunity in Asia. That said, we really expect the lion's share of our growth in 2016 to come from our tier 1 markets, which are the U.S., Canada, the U.K., Australia, India, Brazil, and Mexico. Our in-market teams are driving growth for us by bringing local insight to our global platform.
Market by market, we have specific initiatives to drive customer growth, ARPU, and customer satisfaction. Everything from deploying brand campaigns in Australia to igniting outbound customer care in the U.K. to subscription billing in India. We feel good about our proven ability to continue growing our existing international markets with very attractive return characteristics, while at the same time ramping our presence in the new Asian markets. It's worth briefly taking a step back to look at what we've built in international. Over the last three years, we've established a global franchise with over 4.5 million customers outside of the U.S., more than $400 million in annual revenue, a steady growth profile, and an attractive trajectory yielding a great long-term opportunity for GoDaddy. My third point ties directly to what I just shared about our international opportunity.
We've recently launched our new marketing strategy and are rolling out our new global brand and ad campaigns now, including rebranded sites around the world. Our new ads are designed to address our new global market with messaging and imagery, focusing on what we do and the customers we do it for. Our 2016 marketing plans include pacing our spending more consistently throughout the year, with a focus on broadening our global reach and building our brand, especially in markets outside of the U.S. This year, we expect to grow our Tier 1 markets by focusing on a more consistent presence in TV and radio throughout the year, with expanded use of new tactics for us, complementing existing digital channels like search and email marketing with more social media, direct response TV, and display retargeting, so we can maintain a more consistent dialogue with our customers.
In North America, we're running an ad campaign that continues the narrative of the small business winning against the odds. No matter how crazy the idea, whether it's creating hats for cats, and yep, that's a thing, or carving heads out of cheese, which is amazingly also a thing, we power these ideas with simple, elegant technology. During the NBA playoffs, even Shaquille O'Neal was getting into the act with a bust made out of Swiss cheese and a Twitter handle to match. His handle is @shaquincheese, and if you're wondering, that's @ S-H-A-Q-I-N cheese. No, I'm not kidding.
On top of all our geographic and marketing progress, we've continued to bring a lot of new products and features to market already in 2016, including a mobile app for domain investors, domain search improvements, new themes for Website Builder, an integration between our Website Builder and SEO tools, an expanded WordPress offering, new email marketing and online store features, Office 365 encryption and archiving, and an integration of GoDaddy domains and SSL with Microsoft Azure. In short, it's been a very busy quarter for product introductions and enhancements. This quarter's launch cycle also brought a great example of the power of our platform in action. We launched our new cloud server and cloud applications offerings simultaneously across 26 languages and 53 markets. All of our markets at exactly the same time, something we believe no one else in our space has the capability to do.
As we continue to improve the user experience and features in our existing products, look, we also know our small business customers have other needs that are not being addressed. We know that with the right combination of technology and care, we can solve their problems, help them acquire and retain customers, and help them look more professional while saving them money. Our platform was architected to make it easy to bring new offerings online and integrate them with existing products quickly. All in all, we feel really good about the quarter, our progress so far this year, and our future roadmap. Now I'm going to turn it over to Scott for the financials. Scott?
Yeah. Thanks, Blake. Hi, everyone. There's three key financial points I'd like to cover with everyone today. First, as Blake said, we continue to deliver strong, consistent revenue growth with a nice balance between customer and ARPU increases. Second, we continue to deliver gains in both of our key profitability metrics, adjusted EBITDA and unlevered free cash flow. Third, we continue to deliver solid growth at scale. On my first point, our revenue grew approximately 18% on a constant currency basis in Q1, or 15% on a reported basis. Looking at our two revenue drivers, customers grew nearly 8% over the last year to 14.1 million, and ARPU grew over 6% to $123, even while absorbing the impact of the stronger dollar. Our total bookings grew 14% in constant currency or 12% reported. I'd like to touch on bookings and the relationship to revenue for a second.
There are several things that we're doing that happen to impact quarterly bookings, and we're managing them very deliberately with a focus on driving revenue and customer lifetime value. First, we're shortening our average contract length, intentionally reducing some of our multi-year discounts. Second, we're offering free trials of our high-value products like Office 365 and our Website Builder product. Third, we're spreading more of our advertising and outbound customer marketing efforts to our customer audience throughout the year, relative to historically heavier Q1 past efforts. These are all good for the business because we know when customers try and use our products, they stay with us for a long time, and they spend more with us over time. Which leads to my second point, which is we're consistently delivering even faster growth on the bottom line.
Adjusted EBITDA grew over 23% year-over-year, and unlevered free cash flow rose 18% on the heels of 71% year-over-year growth in the year ago quarter. These are solid gains in our two key profitability measures achieved while we continued to invest in growth. On my third point on growth at scale, we're continuing to see good top line and margin gains from our multi-year investments in both product and platform. We're seeing nice margin leverage through our operating expenses, even as we invest in new product categories and geographic markets. Looking ahead, we see good opportunity to continue to expand both our product portfolio and to build our global footprint at attractive economics. I'll provide some brief color on the performance of our three product lines. First, domains revenue finished the quarter at $219 million, up nearly 10% year-over-year.
Our domains business continues to be fueled by international growth Strong renewals and continued expansion in the domains aftermarket. Our hosting and presence revenue was $160 million in Q1, up more than 14% year-over-year. We're seeing nice gains in hosting and presence from our DIY presence products, as well as valuable add-ons like search engine visibility, paid backup, and malware scans, all of which we're increasingly merchandising with and in our presence applications themselves. We'll continue to experiment with both merchandising and bundling tactics, both within and across our product lines, to drive attachment, activation, and usage of our offering. Business applications revenue of $54 million grew over 47% year-over-year in Q1, driven by continued strong growth in both productivity and email marketing.
Our quarterly revenue from business applications is more than three times what it was three years ago, demonstrating the power of our platform and business model to extend beyond domains, hosting, and presence. Turning quickly to international, our revenue outside the U.S. now represents 26% of our total revenue and grew 25% on a constant currency basis in Q1 versus the nearly 17% reported growth. As Blake said, while we're excited to have added Asia to the fold this year, we're focusing in particular in 2016 on expanding in key tier 1 markets, including Canada, the U.K., Australia, India, Brazil, and Mexico. Turning to profitability, we continue to deliver strong cash flow. I mentioned adjusted EBITDA grew over 23% in Q1 to $116 million, producing a 26.7% margin, a gain of 170 basis points versus the prior year. Unlevered free cash flow was up 18% in the quarter to $101 million.
In Q1, we converted 87% of adjusted EBITDA into unlevered free cash flow, again near the high end of our long-term target range of 70%-90%. Overall, our combination of strong top and bottom-line performance continues to demonstrate the inherent leverage in our operating model, allowing us to steadily grow revenue, invest in growth across the business, and deliver excellent unlevered free cash flow. We finished Q1 with approximately $440 million in cash and short-term investments and net debt of $641 million, or about 1.8 times our adjusted EBITDA for trailing 12 months. We remain focused on utilizing our balance sheet to help expand our product portfolio and global customer base over time. However, given the solid organic growth of our core business, we have been, and intend to remain, selective about our acquisitions. Let's discuss our outlook for Q2 and the full year 2016.
For Q2, we expect revenue in the range of $448 million-$452 million and adjusted EBITDA in the range of $99 million-$102 million. For the full year 2016, we're raising the midpoint of our revenue range, which is now $1.83 billion-$1.845 billion, implying 14% growth at the midpoint of that range, in line with long-term targets that we've shared with everyone. We're also raising our full-year adjusted EBITDA guidance to $404 million-$414 million. The midpoint of our new range implies 21% growth year-over-year, also in line with our long-term targets. Overall, we remain focused on delivering our continued growth at scale. Our combination of a huge addressable global market and GoDaddy's distinctive products, technology, and care translate into a proven financial model with consistent overall revenue and cash flow growth. Thanks everyone for joining, and we're ready to open up the call to questions.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, simply press star, then the number one on your telephone keypad. Your first question comes from the line of Ron Josey with JMP Securities. Your line is open.
Great. Thanks for taking the question. Two, please. Just real quick, Blake, you talked about most of the growth in 2016 coming from tier 1 markets, and now with a good amount of international users, I think $4.5 million, when do you think non-tier-1 markets can be impactful to overall growth? Knowing, of course, that Asia just launched, but just trying to understand the cadence of how that goes over time. With the new approach to marketing being more of a consistent, always on message throughout the year, how does this impact how you feel you're adding net customer adds throughout the year? Maybe one Q a little bit different simply because you went on the Super Bowl, and how you think that sort of goes the rest of the year. Thank you.
Hey, Ron, this is Blake. As you said, we grew up at 4.5 million international customers now. Tier 2 certainly is contributing. We spend the bulk of our marketing dollars at the top of funnel, which is radio and TV in tier-1 markets, and really spend, I'd say, on search, primarily SEM, in tier-2 markets. We're seeing contribution there. Asia today, and you mentioned Asia specifically, is really only 4% of our overall business today. That's a pretty small part of our business. Yet we know that we're feeling good about the launch. We've seen increased activity there and think longer term, it provides a great opportunity for us.
I think new markets, we are going to be focused on making the markets that we have out and deployed and are more effective with, again, SEM purchase and activity in tier 2 and doing top of funnel, both radio, TV, search, and display retargeting in tier 1s and going pretty deep there.
Your next question comes from the line of Sterling Auty with JPMorgan. Your line is open.
Thanks. Hi, guys. You talked about intentionally shortening duration. Curious, is that shortening duration across all three segments, so domains as well as any bundled hosting and applications? Why do you feel it actually improves the health or the long-term value of the customer?
Hey, Sterling. It's Scott. First, more of the, let's call it shortening term, is showing up in hosting and presence and productivity on a relative basis. The impact is mostly in those areas. First of all, there's both a shortened term where you reduce long-term discounting to have people sign up for a 3 or 5-year term. We know that when customers use these products after the 1st year, that the product renewal rates are terrific, right? You're getting annual renewal rates that are showing up at, on a in-period or year-over-year expense, a higher dollar value, right? You're not bringing forward 5 years' worth of billings, but at a discount. Our focus, again, is around getting people to try and use more of our products, right?
Again, we know that when they do, the renewal rates are great, and that helps build the franchise over time. We're basically not leaving dollars on the table by discounting for those significantly multi-year terms. Does that make sense?
It does. Then 1 follow-up. Can you give us some color? You've had some success over the last couple of quarters, I believe, in some of the bundling of the business applications with the hosting. What are you seeing in that program, and what is that driving more of? Is it driving more hosted email, Office 365, or something else?
Thanks. I think we're seeing really nice attachment and usage in productivity, right? That's Office 365 across the various plans. We're encouraged by those results. Obviously, if you're looking at the aggregate revenue of that segment, we're continuing to put up big numbers. You can say that some of the merchandising tactics kind of continue to pay off there.
Got it. Thank you.
Your next question comes from the line of Jason Helfstein with Oppenheimer. Please go ahead.
Thanks. Two questions. First, can you talk about your learnings since the launch of the cloud offering? What type of demand you're seeing, and how do you think about the value proposition versus, let's say, Dropbox or Box that some of your customers might be using? Can you talk about why you're not worried about Google, Amazon, Microsoft moving into your vertical with their offering? Just secondly, and I've asked this in the past, but you generated another $92 million of free cash flow after interest in the quarter. It doesn't really make sense to pay down debt given the predictability of the business. What are you going to do with the cash? Thanks.
All right. Two distinctly different questions. This is Blake.
I'm going to jump in.
Hey, Jason. I'll hit the first one, then I'll hand it over to Scott on the what are you doing with the cash side. Look, we are super early, as you know, with this cloud-based product. It's a new product for us. We've had it out roughly a month. We saw a very good, successful pickup with it initially. Frankly, it's just too early to say what the overall impact is going to be. The customer for our cloud offering is quite different than whether Amazon, Microsoft or Google. Amazon, Microsoft, and Google are all going after very large enterprise workloads. Frankly, we service a smaller developer who is building out capability for small businesses, and we tend to see usage that isn't as expansive as an enterprise, but more targeted to the customer that we've been serving.
Microsoft's partnered with us actually on their Azure platform to offer both our domains and our SSL to target those larger enterprises, which it's not our wheelhouse and it's not who we serve today. We service that developer who builds products for either a small business, a mid-size business, and that's what we built that cloud offering for. It's a super easy-to-use set of applications that you can instantly build on top of a cloud and build resources out as you go. Let me hand it over to Scott on the cash use question.
Yeah. Thanks, Jason. Let me start by, again, just describing how we think about the business today and then our opportunities for growth, which is we're serving a customer segment and audience that our customers stay with us for a long time, seven years plus on average, with those who are engaged even staying longer, and a service and business model that grows with our customers over time. I think we've proven over the last two to two and a half years that we can expand our product portfolio and our geographic footprint productively, particularly organically, plus with a couple of the very small product-related acquisitions that we've done to really just plug in something like email marketing into our portfolio at attractive unit economics overall. It's a really nice position to be in, and obviously, we're looking at different product categories
that fit the bill for our customers, where we think we can add distinctive value with a combination of integrating it with the products we have and delivering the service in the manner in which we deliver it. We think there's really nice opportunities for us to continue to expand the product portfolio. As we've built that out, obviously then you can turn towards geographies as well and think about how and where we overlay our now increasingly robust product portfolio and go to market into geographies. That's kind of how we think about it. There's certainly opportunities for us to do it, but we're going to be pretty thoughtful and economic about if and how, and stay tuned. This will probably be, I'm sure as we nicely continue to generate cash, these will be questions that everybody will continue to ask.
We're going to think about using this, how to grow the franchise for the long term productively and distinctively.
Thank you.
Your next question comes from the line of Gene Munster with Piper. Your line is open.
Hey, congratulations. A couple things. First, in terms of the duration of the contract, have you been tightening that up? I think Blake had mentioned that you have high customer retention. Have you actually, since it's a relatively new phenomenon of you tightening those up, if I'm not mistaken, is there data that suggests that this will in fact not lead to higher churn? Separately, you talked about some of the new tactics. This is with the cats and the hats and the cheese theme. Have you been bucket testing some of these new tactics, or can you just walk through how you see this playing out in terms of the impact to revenue growth? Thanks.
Hey, Gene, it's Scott. The first one around how do we think about renewal? Are we testing the impact of it? The answer is, yeah, we're looking at the behavior of every single customer cohort, around not only when they start with us in month one, but then month 13 and beyond. As we experiment with these tactics, we're watching it, right? We're watching it and things that are working and where we're seeing good indications across the cohort, we're going to do more of it. Generally, again, thematically, when customers activate and use our stuff, they're staying with us and they're buying more. At a theme level, that is a true statement and has been for a long time, and our various tactics are just ways to introduce products in a good way to our customers.
This is Blake.
Sure.
Just building on top of that, the churn level of the business has been extremely low. Our retention of customers is at 85%-plus. We continue to maintain that impressive retention level. Just a quick comment on both the cats and hats creative execution and the cheesehead execution as well. Look, we have been bucket testing. We certainly continue to bucket test those offers and have been pulsing that across all media types, whether it's digital. You've certainly probably heard it on the radio and seen it on the top of funnel on TV as well. We continue to pulse and spend, frankly, more on social, mid-funnel stuff like retargeted, I'll call it retargeted display and email marketing. We're hitting every one of those channels with the same messages in the U.S.
Outside of the U.S., we've introduced, and you probably haven't seen this, but if you go through some of the other languages or other country websites, you'll see a thematic about customers of ours that talk about what they do, what we provide for them, and what they do with the tools and the products we give them. You can actually go to the website and pop into different countries and see the thematics playing out across the globe. Very uniform in our messaging, very uniform in our approach. We get some good operating leverage out of providing that same creative across the world. The U.S. is a rather unique market for us. We've been here quite a long time and have used humor for a heck of a long time and continue to do that, and it resonates with our audience here in the United States.
Thank you.
You're welcome.
Your next question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is open.
Thanks. Hey, Scott, I missed something. You talked about three steps that you were undertaking, shortening of the average contract length, spreading the marketing throughout the year, and there was a third one. Could you just repeat that? On spreading the marketing throughout the year, I think you were asked this earlier, I want to ask again, what's the why behind that? Why spread marketing more evenly throughout the year? Was there a learning recently that made you think that would be more optimal? Thanks a lot.
Yeah, Mark. It's more touches. Historically, our marketing spend obviously weighted heavy up towards the first quarter of the year, and we really didn't have a lot of, call it, reach frequency touches around our customer base. Now, as we're spreading things consistently throughout the year, it's allowing us to frankly reach, touch our customers in a more consistent way through different venues. If you think about, again, GoDaddy, what makes us special? The mix of the products that we have and the great way we deliver it, again, it's about exposing customers to that value proposition. Frankly, we're looking for more, not only medium, but times that we can do it. We think it's just the next way that the marketing matches the size of the franchise and frankly, the opportunities for us and our customers.
The other is, on your first question, the other tactic is free trial of high-value products like Office 365 and Website Builder. You'll notice that, particularly at Office 365, we'll offer first month free trial, again, for that service and increasingly our Website Builder, and we're finding really good activation with that starting point. Again, on the back end of that month's free trial, the conversion in dollars. To be clear, that's a free trial, right? We're bringing people into these products, allowing them to use and try them because, again, we know when people try them, they stay, and then they tend to spend more over time.
Thanks, Scott.
Yep.
Your next question comes from the line of Deepak Mathivanan with Deutsche Bank. Your line is open.
Thanks. Two questions. First, wanted to ask about the Website Builder and Business Apps products. Can you perhaps qualitatively discuss about where we are with respect to the penetration rates for these in your customer base? Then also, how does the mix look like between these products in your new customer base? I have a follow-up for Scott.
Yeah. Thanks, Deepak. On business applications, we've shared that we're over 2 million paid customers into the franchise out of our 14 million base. That's again, our installed base. Business Apps, we're 2 million of 14. Again, if you're thinking about the percentage of new cohorts that are using those products, again, it's higher than that percentage as well. Not as dramatically as Biz Apps, but it's higher.
Okay, great. Scott, one other thing. In the past few quarters, you saw some significant hit to bookings from FX. Does your revenue guidance for the full year and also for second quarter currently reflect the flow-through impact from that? Do you expect meaningful FX headwinds to continue on revenues?
No, thanks. Our guidance incorporates the impact of FX on bookings. Thanks for the question, Deepak.
Great.
Your next question comes from the line of James Cakmak with Monness, Crespi, Hardt. Your line is open.
Hi. Thanks. Just to go back on the contract duration, not to beat a dead horse, but can you just talk about the average contract length that you're targeting? Is this trying to go from five years down to two? I guess, what's the magnitude of the narrowing of the contract life? Blake, on the leadership bench, you had some churn at the CTO level. Can you just talk about kind of the team you have in place and, I guess, how you're thinking about the replacements there and confidence in the team in general? Thanks.
Sure. Hey, James. Scott on duration and term. The average term length of a product is a shade over a year, a shade meaning call it 16 months-ish. We're not doing wholesale dramatic changes. What we are doing is taking a relatively small amount of customer behavior, which had big multi-year term discounts, and kind of trimming those back a little bit. What you have is that length moving in by, you might call it an average week, and it's not a dramatic change in practices, it's just good operational tightening. The other thing I would say to that same point is the higher value services that we have, like Office 365 and some of the more advanced hosting services, we pretty much sell them on a year.
As those products grow as a percentage of our mix and growth, just by basic mix math, your term length is moving in a little, not for anything that we're even consciously doing, it's just the growth in these higher value services. Again, it's important to note that the product renewal rates are as good, if not even better than they've ever been. This is sort of just good business for us.
Hey, James, this is Blake, answering the second part of your question. We had a CTO change, as you pointed out. I'll tell you, I feel very good about the bench strength of the leadership team across the company. We had a very capable technical staff here, and actually had hired, two years ago, Arne Josefsberg, who was the Chief Technical Officer at ServiceNow, to be our CIO. We have an incredibly strong and very experienced leader who took the reins as CTO and CIO, and he's built a huge platform at scale, actually built a lot of the Azure platform at Microsoft as well, has built and assembled a great team. Across both the technical side of the business, we've got a very strong team.
The dev leads that are on that team and honestly, across the company on every product group, are rocking and rolling, and I'd put them up against any team in the industry, frankly, today. I'll just say this, when you have really great people, and this happens to every company, you are going to be pursued by companies like Google and others of that category and class. I think it's a good testament to the quality of the people we have on the team that, frankly, after three years and getting a whole lot of work done, our CTO took a role. It's a pretty important role after building out a really nice platform that we're using across the company, and it's helping us scale.
We still have a ton of folks that are great at it and are still hiring a ton of folks that are great at it. We're pretty stoked about the quality of our senior leadership team and down through the ranks.
Great. Appreciate the call.
Yeah, thanks.
Your next question comes from the line of Mark May with Citi. Your line is open.
Okay, thanks. I had a couple. Thanks for allowing me to ask a couple of questions. I guess on sort of the non-domain services, I wonder if you could comment a bit on what you've been seeing recently, both in the quarter, but over the last 6, 12 months or so, in terms of attach rates from a domain to one or more of your non-domain services. Kind of on a related point, anything from a product and/or a merchandising standpoint that could meaningfully change the mix of the non-domain revenue over the next year that we should be thinking about, and I had a follow-up. Thanks.
Hey, Mark, Scott. On the non-domain products and attach, I think similar to the color from Deepak's question, we're seeing nice attachment on our anchor products. Anchor products meaning, Website Builder, shared hosting, and particularly O365. Look, O365 is sort of the big star around that, and showing up in the revenue growth rate, right? Our attachment and success with that attachment continues to show up in, frankly, what's a very high revenue growth rate on what's become a pretty sizable business. I think that kind of leads into your next question of, boy, are there some things on product and merchandising that might alter the mix? Well, we're hoping that we see continued growth, right? We got continued growth in the biz apps category, it's productivity plus email marketing.
There are a couple other, I think, areas and categories that we think we can move into and develop franchises that are going to continue to add more legs to the product stool. We're excited about that and excited about what it means for the long term. That this is on a pretty big base of revenue already, right? Where our non-domain business is already kind of two times the rate of domain growth. We're going to continue to build out everything in that stable.
That's great. If I could ask a follow-up, all of the OpEx lines showed pretty meaningful leverage in the quarter, but gross margin expanded year-over-year, but maybe at a little bit slower rate than what we've seen in the last few quarters. Is there anything that sort of influenced that? I don't know if it was FX or mix or maybe margins at the segment level sort of changed a bit on one or two products. Can you call out anything there in particular?
Yeah, sure. The margin profile of the non-domain products continues to be really attractive. As we're lapping really big growth in particularly productivity, we're again bundling that service in, we're frankly intentionally, it's not necessarily holding our gross margin percentages, but the impact of both some of the lapping of our growth of O365 plus some of our merchandising tactics is flattening out that gross margin percentage line. As you point out, we're getting really nice leverage through our operating expenses, and that balance is intentional.
Great. Thanks.
Your next question comes from the line of Brian Essex with Morgan Stanley. Your line is open.
Hi, good afternoon, thanks for taking the question. I was wondering if I could, I apologize if I missed it, in the cloud server and cloud apps products that you rolled out, can you offer maybe a little bit of color behind that, like the catalyst, as well as what you expect the penetration to be and contribution to the platform along the recent comments that you're making with regard to margins? How profitable, how meaningful will that business be?
It's early days. This is Blake, Brent. Over time, we think there's going to be meaning behind the product. I would say the catalyst behind the product and the reason for building it is that it's clear that there are a variety of applications that our developer community likes to use, and they'd like to be able to spin up an instance of that very quickly. We provided a situation, an application suite that allows them to spin up, whether it's a Joomla, Drupal, Ruby, WordPress instance, very quickly and simply on top of OpenStack that allows them to also expand the number of instances they've got as their customers grow. Frankly, it's something that competitively we did not have. We weren't in market with it before.
Getting that launched, and getting it into the marketplace and launching it globally, and just to be really clear, when we launched this product, we launched it in 53 markets, in 26 languages, in 44 currencies, all on the same day. Nobody's done that before. Our developers, in fact, I'd say more than half of our developers on our pro platform, they're coming in from outside of the country. There's actually meaning for us to provide this capability in multiple languages, making it accessible to developers all over the world. We think that hypothesis will prove out to be a builder of revenue and attach for developers across the globe.
Yeah. If I-
Yeah. Go ahead.
For one sec. I think the value for this product is really aligned towards these web pros, that are pros, particularly overseas. Again, this isn't the hardcore developers who are muscling up on AWS. It's allowing this infrastructure for this audience. Look, it's early days, and we'll see what the ramp is, but we think the marginal economics and the market opportunity is one that we can play in and it's early and we'll see how it goes.
Yeah. Also just to, Scott and I are roshamboing a little bit, but I think the other thing to note is we built this on top of an OpenStack platform. The leverage and the operating leverage we're getting out of that OpenStack platform is allowing us to build product suites on top of it, on top of common infrastructure globally. That is a very important thing to note across everything that we're doing. This is a segment built on top of a platform that we're going to be taking everywhere.
Great. Maybe if I could just follow up on progress with Asia. I understand you're focused on tier 1 markets going forward, but any updates on Asia and how that's going, and have you learned anything since you started penetrating? Any changes to your strategy in that market?
Look, I wouldn't say that there's any change in strategy. We are going to be very consistent with the way we roll Asia out, consistent with the way we rolled out Europe, consistent with the way that we rolled out Latin America, which was, as I described, get the language in, get some products that are specific to those markets, and then once you've done that, then start tuning the site and then start doing marketing spend. The market reacted quite positively to the launch, and our PR, and we saw an immediate uplift. I'll tell you, look, it's still super early. We're early days there. I did learn something anecdotally that was quite surprising to me from, I was personally out there launching those markets.
It turns out that GoDaddy is a brand that's quite well known, both in Asia and India, and anywhere that developers have been educated in the U.S., and received their computer science degree, whether undergrad or master's or PhD. We found multiple folks that told us, "We know who you are. We're quite familiar with your brand. We just didn't know you were here." When we show up in market, one of the reasons we've seen our brand aided awareness in India move from the teens to almost 80 in the last three and a half years, is because we were known when we entered, and we just let people know we were there in their language and in their market, in their currency, and we were easier to do business with.
We expect to see similar results in Asia that we've seen in our other markets.
Great. Thank you.
You're welcome.
Your next question comes from the line of Brent Thill with UBS. Your line is open.
Scott, on the EBITDA margin side, at 27%, that's the best we've seen. Can you talk about some of the drivers there? You're guiding for 22% annually. You're expecting, obviously, a slowdown through the year. Why would you see that slowdown after what you just showed in the current quarter?
Brent, if you back up the quarters, Q1 is always the highest margin. That's just about the pacing of how really the top line's flowing in. Q1's always our highest margin quarter. If you're looking at just the operating leverage, though, you're seeing really nice year-over-year leverage from our tech and dev, particularly infrastructure, at G&A, and even some on care, which is nice. That operating leverage, we think across those expense lines are going to continue to flow through the rest of the year, which is going to drive continued really nice growth and adjusted EBITDA.
Real quickly on the ARPU, 6% growth the last three quarters. I know you're not guiding to that metric, but it seems like there's a considerable opportunity with the layered stack, if you will, of the applications that you can put in relative to what you're doing right now. Can you just walk through what you think could be the biggest driver here in the back half of the year for you on ARPU?
Yeah. Brent, we're layering on a big base. You're seeing hosting and presence and business applications just continue to grow very nicely, and those will continue to be the drivers of ARPU growth. But again, if we're looking forward a quarter or two, we're just doing this on top of such a monstrous base that you're not going to see dramatic changes in that number. I would point out again that the FX impact that is hitting us now and will continue to flow through the next couple of quarters, that shows up in ARPU, right? All ARPU. These ARPU gains are absorbing that FX hit that's going to continue for the next couple of quarters.
Thank you.
Your next question comes from the line of Sameet Sinha with B. Riley. Please go ahead.
Yes, thank you very much. Scott, you kind of touched on it earlier with the shortening contract length, I'm just trying to figure out what would be the impact on deferred revenues. I know you mentioned it's going to bring it down by a week or so, but how should we think about it over the next couple of years? Secondly, in terms of the international markets, what is the messaging that you're using there? Is it more direct response sort of messaging, branding? Can you elaborate on that? Thank you.
Yeah. The first one, it's on the deferred. You can actually see the contribution to deferred certainly in the adjusted EBITDA reconciliation, and it's a bit more than a week. Going forward, again, our tactics are tactics designed around maximizing revenue and lifetime value. We'll be clear about what we're doing with everybody, but we're not intentionally trying to land it at some kind of number or term length. On number 2, on international messaging, Blake, you want to take that?
Yeah. On international messaging, I'm not exactly sure which direction your question is going in. Messaging that we're bringing into market is consistent, it's targeted at small business person who's fighting the good fight, frankly, in different creative, but very similar thematics. Your question actually talked about, I think, what type of marketing. In tier 1 markets, we are doing, I'll call it, broad-based, top-of-funnel advertising, both in TV and radio, all the way down to direct and search and display retargeting. In tier 2 markets, we tend to go direct. Most of our lion's share of spend in tier 2 is on search, and there's some display retargeting, but it's primarily digital. The themes that we are using for messaging are the same. No big brand spend in tier 2 markets.
We benefit, as I described earlier, by having significant bleed-through from tier 1 markets into second-tier markets. The brand spend that we do make in tier 1 markets does benefit us in tier 2 as well, the spend that we actually do in those tier 2 markets is direct. Does that answer the question, Sameet?
Yes. Thank you very much.
Sure.
There are no further questions at this time. I turn the call back to the presenters for closing remarks.
Hey, everybody. Hey, thanks for staying with us for our Q1 earnings. We look forward to talking with you in one more quarter. Thanks, everyone.
This concludes today's conference call. You may now disconnect.