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 speakers' remarks, there will be a question and answer session.
Thank you. I'll now turn the call over to Marta Nichols, Vice President of Investor Relations. Please go ahead.
Thank you. Good afternoon, and thank you all for joining us for GoDaddy's Q1 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 and 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 ks filed with the SEC with today's earnings release. The matters we'll be discussing today include forward looking statements, which are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward looking statements. Any forward looking statements that we make on this call are based on assumptions as of today, May 4, 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, Martha, and thanks to all of you for joining us today. GoDaddy's Q1 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 3 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. 2nd, 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. 3rd, we are 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 Q1, we've grown to serve over 14,100,000 customers, an increase of more than 1,000,000 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 1st quarter revenue up 18% on a constant currency basis or over 15% on a reported basis to $434,000,000 First quarter bookings grew 14% on a constant currency basis or 12% reported to $558,000,000 Our adjusted EBITDA jumped 23% to 100 $16,000,000 in the Q1 and we converted 87 percent 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 dotcn in China and dotjp in Japan, then further tuning the content, pricing and offers on our local sites.
And now we are 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 are excited to be in these new markets and believe there is a huge long term opportunity in Asia. That said, we really expect a 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 end 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 UK 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 3 years, we've established a global franchise with over 4,500,000 customers outside of the U.
S, more than $400,000,000 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 have recently launched our new marketing strategy and are rolling out our new global brand and campaigns 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 are 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 yes, that's a thing or carving heads out of cheese, which is amazingly also a thing, we power these ideas with simple elegant technology. And 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 shaqandcheese and if you're wondering that's shaqinchees. And no, I am not kidding. On top of all our geographic and marketing progress, we have 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. And 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, we also know our small business customers have other needs that are not being addressed. And 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. So now I'm going to turn it over to Scott for the financials. Scott? Thanks, Blake.
Hi, everyone. There's 3 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. 2nd, we continue to deliver gains in both of our key profitability metrics, adjusted EBITDA and unlevered free cash flow. And 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 2 revenue drivers, customers grew nearly 8% over the last year to $14,100,000 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 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 multiyear discounts. 2nd, we're offering free trials of our high value products like Office 365 and our website builder product. And 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. Now 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 2 key profitability measures achieved while we continue to invest in growth. On my 3rd point on growth at scale, we're continuing to see good top line and margin gains from our multiyear 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. And 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 3 product lines.
First, Domains revenue finished the quarter at $219,000,000 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 $160,000,000 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 were 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 $54,000,000 grew over 47% year over year in Q1, driven by continued strong growth productivity and email marketing. Our quarterly revenue from business applications is more than 3 times what it was 3 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 UK, 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 $116,000,000 producing a 26.7% margin,
a gain
of 170 basis points versus prior year. Unlevered free cash flow was up 18% in the quarter to 101,000,000 dollars In Q1, we converted 87 percent of adjusted EBITDA into unlevered free cash flow, again near the high end of our long term target range of 70% to 90%. And 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 $440,000,000 in cash and short term investments and net debt of 641,000,000 dollars 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. So let's discuss our outlook for Q2 and the full year 2016. For Q2, we expect revenue in the range of $448,000,000 to $452,000,000 and adjusted EBITDA in the range of $99,000,000 to 102,000,000 dollars For the full year 2016, we're raising the midpoint of our revenue range, which is now $1,830,000,000 to 1,845,000,000 dollars 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 $404,000,000 to $414,000,000 The midpoint of our new range implies 21% growth year over year also in line with our long term targets. So 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. So thanks everyone for joining and we're ready to open up
the call to questions. Thank Your first question comes from the line of Ron Josey with JMP Securities. Your line is open.
Great.
Thanks for taking the question. 2, please. Just real quick, Blake, you talked about mostly growth 2016 coming from Tier 1 markets. And now with a good amount of international users, I think 4,500,000. When do you think non Tier 1 markets can be impactful trying to 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 1Q a little bit different simply because you went on the Super Bowl and how you think that sort of goes through the rest of the year?
Thank you.
Yes. Hey, Ron, this is Blake. So as you said, we grew 4,400,000 up at 4,500,000 in international customers now. Look, Tier 2 is 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.
And we're seeing contribution there. Asia today and you mentioned Asia specifically is really only 4% of our overall business today. So it'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.
And I think new markets, we are going to be focused on making the markets that we have out and deployed and more effective with again SEM purchase and activity in Tier 2 and doing top of funnel both radio TV did search 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? And why do you feel it actually improves the health of the long term value of the customer?
Hey Sterling, it's Scott. So first, more of the, let's call it shortening term is showing up in hosting and presence and productivity on a relative basis. But so the impact is mostly in kind of those areas. And 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. But we know that when customers use these products after the 1st year that the product renewal rates are terrific, right.
And so you're getting annual renewal rates that are showing up at on in period or year over year expense, a higher dollar value, right, because you're not kind of bringing forward 5 years' billings, but at a discount. So and our focus again is around getting people to try and use more of our products, right? Because 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 kind of discounting for those significantly multiyear terms.
Does that make sense?
It does. And then one 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 you're we're seeing really nice attachment and usage in productivity, right, and that's Office 365 across the various plans and we're encouraged by those results. And obviously if you're looking at the aggregate revenue of that segment, we're continuing to put up big numbers. So 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?
And can you talk about why you're not worried about Google, Amazon, Microsoft moving into your vertical with their offering? And then just secondly, and I've asked this in the past, but you generated another $92,000,000 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. 2 distinctly different questions. I'll hit this is Blake. Hey, Jason. So I'll hit the first one and 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. But 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. And 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 has partnered with us actually on their Azure platform to offer both our domains and our SSL to target those larger enterprises, which is 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 or midsize 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. And let me hand it over to Scott on the cash use question.
Yes. Thanks, Jason. So let me start by again just describing kind of 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, 7 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. And I think we've proven over the last 2 to 2.5 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 plug in something like email marketing into our portfolio, add attractive unit economics overall. So 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. And we think there's really nice opportunities for us to continue to expand the product portfolio. And 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. So that's kind of how we think about it. And 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.
And this will probably be I'm sure as we nicely continue to generate cash, this 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. Couple of things. First, in terms of the duration of the contract, as you've been tightening that up, I think, like you had mentioned that you have high customer retention, but have you actually since it's a relatively new phenomenon, have you tightening those up, if I'm not mistaken, is there data to suggest that this will, in fact, not lead to higher churn? And then separately, you talk about some of the new tactics. This is with the cats in the hats and the cheese theme.
And are there 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. Let me so the first one around how do we think about renewal? Are we testing the impact of it? And the answer is, yes, I mean we're looking at the behavior of every single customer cohort around not only when they start with us in month 1, but then month 13 and beyond. And as we experiment with these tactics, we're watching it, right?
And 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. So generally again thematically when customers use activate and use our stuff, they're staying with us and they're buying more. And so 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.
And we haven't seen this is Blake. Just building on top
of that, the churn level of the
business has been extremely low. Our retention of customers is 85% plus. So we continue to maintain that impressive retention level. And then just a quick comment on the both the cats and hats creative execution and the cheese head 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 and 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.
And 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. And we get some good operating leverage out of providing that same creative across the world. But 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.
Your next question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is open.
Thanks. Scott, I missed something. You talked about 3 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? And then on spreading the marketing throughout the year, I think you were asked this earlier, but 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.
Yes. Yes, Mark. It's more touches. So historically, our marketing spend obviously had a weighted heavy up towards the Q1 of the year. And we really didn't have a lot of call it reach frequency touches around our customer base.
And 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. And 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. And frankly, we're looking for more not only medium, but times that we can do it. And 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. And then the other is on your first question, the other tactic is free trial of high value products like Office 365 and Website Builder.
So you'll notice that particularly at Office 365 will offer 1st month free trial again for that service and increasingly our website builder and we're finding really good activation with that starting point. And again on the back end of that month's free trial conversion in dollars. But 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.
Yes.
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? And then also how does the mix look like between these products into your new customer base?
And then I have a follow-up for Scott.
Yes. Thanks, Deepak. So on business applications, we've shared that we're over 2,000,000 paid customers into the franchise out of our $14,000,000 base. And so that's again our installed base. So business apps were $2,000,000 of $14,000,000 If we're looking at our new cohorts, our percentage of users of business applications is quite a bit higher than that.
We're not going to share the exact numbers, but it's let's just call it quite a bit higher qualitatively. On presence across the hosting and presence segment, the number is $5,000,000 So $5,000,000 of the $14,000,000 And 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. And then 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 Q2 currently reflect the flow through impact from that? Or you expect like meaningful FX headwinds to continue on revenues?
Our guidance incorporates the impact of FX on bookings. So thanks for the question, Deepak.
Your next question comes from the line of James Kakamak with Monness, Crespi and Hardt. Your line is open.
Hi, thanks. Just to go back on the contract duration, not to beat a dead horse, but is there can you just talk about the average contract length that you're targeting? Is this trying to go from like 5 years down to 2? Or I guess what's the magnitude of the narrowing of the contract wise? And then, Blake, on the kind of leadership bench, you had some churn at the CTO level.
Can you just talk about 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. And so what we're not doing wholesale dramatic changes, but 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. And so 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. And then the other thing I would say on that 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. And so as those products grow as a percentage of our mix and growth just by basic mix math, your term length is moving a little is moving in a little not for anything that we're even consciously doing. It's just the growth in these higher value services.
But again, it's important to note that the product renewal rates are as good if not even better than they've ever been. So this is sort of just good business for us.
Hey, James, this is Blake. And sorry, the second part of your question. So we had a CTO change, as you pointed out. I'll tell you, I feel very, 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 2 years ago Arne Josefzburg, who was the Chief Technical Officer at ServiceNow to be our CIO.
So we have an incredibly strong and very experienced leader who took the reins as CTO and CIO and he has 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. So 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. And 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 in class. And I think it's a good testament to the quality of the people we have on the team that frankly after 3 years of getting a whole lot of work done, our CTO 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.
And 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. So we're pretty stoked about the quality of our senior leadership team and down through the ranks.
Great. Appreciate the color.
Yes. 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, wonder if you could comment a bit on what you've been seeing recently, both in the quarter a bit over the last 6, 12 months or so in terms of attach rates from a domain to 1 or more of your non domain services? And then 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. So on the non domain products in 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. And look, O365 is sort of the big star around that, which is and showing up in the revenue growth rate, right. So our attachment and success with that attachment continues to show up in frankly, I would say very high revenue growth rate on what's become a pretty sizable business. And 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. And 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. So we're excited about that and excited about what it means for the long term.
And that this is on a pretty big base of revenue already, right, where our non domain business is already kind of 2 times the rate of domain growth and we're going to continue to build out everything in that stable.
That's great.
And if I could ask a follow-up on all of the OpEx lines showed pretty meaningful leverage in the quarter, but gross margin expanded year on 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 1 or 2 products. Can you call out anything there in particular?
Sure. So the margin profile of the non domain products continues to be really attractive. And as we're lapping really big growth in particularly productivity and 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. Now 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 and thanks for taking the question. I was wondering if I could and I apologize if I missed it, but in the cloud server and cloud apps products that you rolled out, can you offer maybe a little bit of color behind that, 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?
Okay. It's early days. Over time, this is Blake Brent. So over time, we think there is going to be some there is going to be meaning behind the product. I would say the catalyst behind the product and the reason for building it is 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, very quickly.
So we provided a situation in Application Suite that allows them to spin up whether it's a Joomla, Drupal, Ruby, WordPress instance very, 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. And frankly, it's something that competitively we did not have. We weren't in market with it before. And so 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 and 26 languages and 44 currencies all on the same day and nobody's done that before.
And our developers, in fact, you know, I'd say more than half of our developers on our pro platform, they're coming in from outside of the country. So there's actually meaning for us to provide this capability in multiple languages, making it accessible to developers all over the world. And we think that that hypothesis will prove out to be a builder of revenue and attach for developers across the globe. Yes, if I
Yes, go ahead.
I think the value so for this product is really aligned towards these web pros, right, that are pros, particularly overseas. And again, this isn't the hardcore developers who are muscling up on AWS. It's allowing this infrastructure for this audience. And look, it's early days and we'll see what the ramp is, but we think the marginal economics in the market opportunity is one that we can plan and it's early and we'll see how it goes.
Yes. And also just 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. So 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. So that is a very important thing to note across everything that we're doing.
So 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. But I'll tell you, look, it's still super early.
We're early days there. And I did learn something anecdotally that was quite surprising to me from I was personally out there launching those markets. But 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 United States and received their computer science degree, whether undergrad or master's or PhD. So 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. So when we show up in market, one of the reasons we've seen our brand, 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 in their language and in their market, in their currency and we were easier to do business with. And we expect to see similar results in Asia that we've seen in our other markets.
Great. Thank you.
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? And you're guiding for 22% annually. So you're expecting, obviously, a slowdown through the year. Why would you see that slowdown after what you just showed in the current quarter?
Yes, it's a little
Brett, if you back up the quarters, QM is always the highest margin. And so and that's just about the pacing of how really the top line is flowing in. And so Q1 is always our highest margin quarter. And so if you're looking at just operating leverage though, you're seeing really nice year over year leverage from our tech and dev, particularly infrastructure at G and A and even some on care, which is nice. And so 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 in adjusted EBITDA.
Okay. And real quickly on the ARPU, 6% growth the last three quarters. It seems like 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 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?
Yes. Brent, I mean, we're just we're layering on a big, big base. And so 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 2, we're just doing this on top of such a monstrous base that you're not going to see dramatic changes in that number.
And 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. So 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 Samit Sinha with B. Riley. Please go ahead.
Yes. Thank you very much. Scott, you kind of touched on it earlier, but the shortening contract length and I'm just trying to figure out what would be the impact on deferred revenues. And 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? And 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.
Yes. So first 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. Now going forward, again, we'll shift, we're going to our tactics are tactics designed around maximizing revenue and lifetime value.
Know we'll be clear about what we're doing with everybody, but we're not intentionally trying to land at some kind of number or term length. So and then on number 2 on international messaging, Blake, you want to take that?
Yes. So on international messaging, I'm not exactly sure which direction your question is going in. Messaging that we're bringing into market is consistent and it's targeted at small business person who's fighting a good fight and frankly in different creative, but very, very similar thematics. And then your question actually talked about I think what type of marketing. And 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. We spend our most of our lion's share of spend in Tier 2 is on search and there is some display retargeting, but it's primarily digital. Yet the themes that we are using for messaging are the same. So no big brand spend in Tier 2 markets. We benefit as I described earlier by having significant bleed through from Tier 1 markets into 2nd Tier markets.
So the brand spend that we do make in Tier 1 markets does benefit us in Tier 2 as well yet 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. And we look forward to talking with you in one more quarter. Thanks everyone.
This concludes today's conference call. You may now disconnect.