All right. Sorry for the delay there, everyone. Good morning and welcome to Wednesday on the UBS Tech Conference. Really pleased to have Mark McCaffrey here, CFO of GoDaddy. Chris Zhang joining me as well as usual. Let's jump right into things. I guess maybe we'll kind of kick it off high level. Really, what's changed this year the most? What are those kind of two, three key changes here and kind of how are you thinking about 2025?
Yeah, and you know it's been a big year for us, no doubt about it. Last year when we sat here, we were talking about Airo, a new product that was fueled by AI that we had launched. And remember, we're known as a domain company, but we've broadened our spectrum of products we offer. We're now a one-stop shop for the entrepreneurs, micro businesses. And Airo was an introduction into a consolidated technology stack that allowed our customers to discover and engage more quickly. Probably the biggest change now is we are entering into what I call the monetization phase, discover, engage, and now monetization. And as we've launched Airo, we've seen our customers engage with it. We've seen them starting to use the products. We've seen them be successful with the products.
We've seen things that generally used to take months for them to do now being done in minutes. And the power of Airo is, listen, we've been around a long time as a company. We have 21 million customers. We have 13 million interactions with our customers through our care organization every year. We get 1.2 billion signals from our technology stack every day. We have a lot of data that we turn into useful insights for our customers to make them better. What we're really excited about it, and for those of you who were at our dinner last night, we held an investor dinner. We're headquartered in Arizona. It makes it very easy for us to do this with the UBS Conference. We announced Airo Plus. And Airo Plus is a premium service.
And for a $5 a month subscription, you get access to various functionalities from a premium logo maker to insights around your site and to social media, again, which is our entry now into actually having a fee around the AI functionality within Airo itself. So you think about it, you come into Airo, it allows you to build a website instantly. It gives you a domain name that's good for your business. You have an email. You can bundle that now with email security. And then you go, and if you pay a subscription now for $5 a month, you're able to generate a premium logo that goes across all your platforms. You're able to plan your social media around a calendar. You're allowed to, we talked about insights. Insights is it takes a look at your website and sees where you can be better at your website.
Regardless of who is hosting your website, it'll allow you to optimize your website for its functionality, so those are the things we announced, and I look at it as the evolution of the AI engine that we've built, and the AI engine in and of itself is based on the data that we have engaging these customers for a number of years, so a lot of excitement. Hopefully, you picked up on it last night. For those of you who were there, our entire management team was out there, and other than the planes flying over every few minutes, we had a good time.
I thought it was a great product event. I guess the thing that really caught my attention the most was what you were doing from being able to effectively kind of scrape existing pages. I think it was on, is it just Facebook and Yelp?
Anywhere.
So Google as well.
Yeah, it can go into any, wherever you're at, it can go in and get your data and basically create a website from that data, which is, again, that would have taken somebody months probably to do, and now it can be done in, I don't want to overly brag on this, it can be done in seconds, right, and it creates a website based on everything you have out there already, so if you just launched on Facebook and that's all you're doing right now, ultimately you want to expand your business, and you want to go and have your own website. This will take everything you've done and now bring it into your own website, give you a domain name, give you a professional email, and allow you to be a much broader business.
Again, I come back to, for an entrepreneur or a micro business, you've heard me refer to them, it's the underdog, it's the mom-and-pop shop, it's people who don't have the capability to really do this on their own every day. This is a huge asset to allow them to compete against much bigger players.
Totally. I guess just as we think about the overlap of companies that currently don't have a website, but do have that Facebook page, that Yelp page or Google page, any sense of kind of the magnitude or how are you kind of framing that as that opportunity at this point?
Yeah, so I always just say it's a big opportunity. What ultimately it is, we'll see. But when you think about the amount of traffic those platforms are getting today and the amount of people who are just experimenting with launching something, it's pretty big. And the ability now to bring them into this platform, we think is going to be a huge, huge opportunity for us going forward.
Yeah, looking forward to it. Maybe just a setback here for folks in the room and who are listening who aren't as familiar to the GoDaddy story. Maybe just quickly, how do you frame that shareholder value creation?
Yeah, so I'll always say I love to use the term free cash flow. Our shareholder value is based on driving our free cash flow equation. And we combine that with a very disciplined share buyback program. And we call it our North Star at the end of the day. Everything we do is around optimizing for that equation so we can drive shareholder value. Now, the model itself for GoDaddy has been the same for a number of years. We attract customers with one product. Traditionally, it's been a domain. We're very well known for the domain. But when we get to a second product, our retention rate and our retention rates for our customers are 85% on average. That's great. When we get to a second product with a customer, it actually goes up from the 85%.
If we get to a third product, we get to a customer for life. If you take that down the traditional path of going from a domain to an email to a website and then to commerce, if you assume a domain is 1X, by the time you get to commerce, it's 83X for us, LTV. And that equation just continues to build within our customer base. And again, we're around 21 million customers, so we have a very large customer base. As we build and we continue to connect and we continue to drive that model, it drives our free cash flow. And that free cash flow continues to compound because you're just building off a base of a very loyal customer that is getting a lot of value.
When you have an ARPU, sorry, early morning coffee still kicking in, when you have an ARPU of above $200, we're not talking economics to an entrepreneur that are so extraordinary that they can't get value out of that. That value equation continues to drive our model.
Got it. Very helpful. And as we just kind of maybe take it back to the model, nice EBITDA margin expansion. Just talk to us about the drivers of EBITDA growth in 2024, maybe how that could evolve on the margin in 2025 and how we should be thinking about your investment priorities.
Yeah, absolutely. And we've been on this journey for a number of years. Aman always talks about it. It's something that we've been very focused on. 2023 was the year of the transformations, as we call them, the two transformations. And as we did that, we continued our journey and expanding our normalized EBITDA margins. The three drivers are based on what we've done and now that rolling out into future years. Number one, we've talked about our A&C segment. Our A&C segment is a lot about the innovation we've done around software. And because a lot of it is our own software, it comes at a higher profitability. It's about a third of our business today, but it is the fastest growing part of our business. As that becomes a bigger part of the overall GoDaddy story, it generally creates a tailwind for normalized EBITDA margins.
We also, in 2023, we went through, I would say, a lot of infrastructure simplification. We've done it all along, but in 2023, we hit, I would say, the big spots around it, getting out of things like data centers, disposing of non-strategic assets. As we've been able to accomplish that, we've seen the benefit on our Normalized EBITDA margins very front-loaded, but start to take effect in 2024, and as we've simplified our technology stack, it has really allowed us to look at our access to global talent pools. Think about it from a care organization. When we had multiple technology stacks, we had to maintain care organizations for all of them. Now that we have a simplified, consolidated technology stack, we have the ability to have one care organization that covers it all.
When you have a simplified structure, you're able to expand into other regions to make that more cost-effective. That leverage, those three buckets that we talk about are the tailwind around our Normalized EBITDA margin. That's why at Investor Day, we said we thought we were going to be around 33% by the time we get to 2026. Put that in perspective. When I started, we were around 20%-21% Normalized EBITDA margin. Over a number of years, we've expanded hundreds of basis points to get to where we are today. The journey continues. We continue to focus on profitability because we continue to have it as part of our DNA around how do we just do this more cost-effectively.
Got it. Chris, you want to jump in?
Yeah, sounds good. So I guess maybe just taking a look at the gross margin, I think you mentioned a number of things around EBITDA is super helpful. We saw one and a half points of gross margin leverage in the third quarter on a year-on-year basis, which likely benefited from some of the slowdown in the aftermarkets. How should we think about the factors beyond the mix that has driven gross margin leverage in the last two quarters? And how do you think about this as a leverage, a source of leverage in your 33% normalized EBITDA target?
Yeah, it's a great question. Generally, the way I think about our gross margin, it's going to be driven by product mix. And generally, we'll be around 64%, give or take a point, up or down, depending on that product mix. That obviously can drive any given quarter a little bit of, I would say, benefit or up and down in our normalized EBITDA margin. Doesn't necessarily change trajectory because we're getting leverage all the way down the line. So a great point out, aftermarket is a lower margin business for us. So to the extent there's volatility in the aftermarket, for those of you who are new to the story, we have what we call a secondary market platform for domain names. There are only so many dot-com names out there. So the secondary market has become very popular.
It's about a $400 million business for us and allows a buyer and seller to basically come to terms on a domain name. And then we, how do you say, make that transaction happen on our platform. Because we are the largest domain player, we feel it's very, very important for us to be the secondary market within that as well. But those are lower margin transactions for us. And to the extent there's volatility in that market because it's a transactional business for us, that'll impact our margin. That's why I always say we're always going to have a little bit of that around 64, but up or down a point, depending on if Aftermarket is overperforming any quarter or we see a slowdown in that Aftermarket. What I always say is that market, the pricing and the pricing isn't controlled by us.
It's controlled by the buyer and seller. The volume is great, but it'll always have a little variability. And every once in a while, one of these large transactions come in for a domain name that is unexpected, but can influence that model a bit. So you have that. You have commerce is a big part of our business now, which is an A&C, also at a lower margin for the commerce part itself. So the GPV has become a bigger part of our puzzle. We have that within our margin. But we also have the offsets around it because of the subscription software. So there's a lot of variability within our margin itself. That's why I always say product mix at any given time can influence that.
There are some things that are very certain, and there are some things that are always going to drive that to go up or down a little bit in any given quarter. The trajectory itself, though, remains the same on normalized EBITDA, even though we will see a little bit quarter to quarter, depending on the timing of certain things. And Q3, I talked about we were moving some marketing to Q4. I think everybody figured out what I was talking about two weeks after when we made the announcement. But the trajectory remains the same given regardless of any movement quarter to quarter.
All right, that's awesome. And I guess in terms of your capital allocation framework, and I think at the beginning you alluded to the free cash flow and buybacks for North Star. And so far you've deployed around two-thirds of your free cash flow to buying back shares year to date, but the repurchase activity is slowed materially in the third quarter. Maybe you can talk about the drivers for pulling back on the share repurchase and maybe what valuation KPIs you look at the most closely if the valuation is a driver for your tactical purchase.
I never want to get into too many of the details of how I do this. I always say, well, we'll start with the premise of the $4 billion program we have. We're about $3.2 billion in. So we're ahead of schedule on our buyback to what we said we were going to do through 2025. Buybacks are still a big part of our levers around returning shareholder value. That has remained unchanged. Our capital allocation strategy remains unchanged. We will always look quarter to quarter, and we will always look at what's going on in the market. We'll look at other things going on to make sure we're putting ourselves in a good position. What I always say is every quarter we make a determination. Every quarter we have a healthy discussion on it. Don't ever read into one quarter versus another quarter.
I think there was a year or two ago where everybody started to wonder why we slowed down a little bit, but it also happened to be the quarter Silicon Valley Bank was having some issues, so in that case, we decided liquidity, let's slow down to see how this all played out. Those are the type of decisions we're making all the time to make sure that our balance sheet remains healthy. We remain strong. As I say, we get stronger by the day because of our free cash flow, and then we'll implement it to take advantage and make sure we're prudent in how we optimize the capital allocation strategy, and that could change from quarter to quarter, but it doesn't, again, change the overall philosophical view that we've put in play.
All right, that all makes sense. I guess a question on your guidance philosophy. So back in March, you laid out the 68% revenue growth kicker that factored in what you had visibility into at the time. Maybe can you talk about what you have visibility into today and how that differs versus what you had the visibility into back in March?
Yeah. So Investor Day, we laid out a great framework for the next few years. We are comfortable with that framework. There's always going to be what I call. We're a data-driven company. So for us to even how I guide, how I talk to all of you, it's based on what we're seeing, what the data is driving, what we believe is reasonable. Again, our North Star optimizes for free cash flow, so we try to keep everything within the guidelines of what is going to drive that free cash flow and continue to compound it, and we acknowledge we have a very stable, durable, predictable business for a lot of it. There are portions of it that are not so predictable. Aftermarket was one we talked about, and that gives the variation in any given quarter to how we determine the range, and there could always be overperformance.
There could always be, I would say, tough comps going back to prior years where maybe a large aftermarket transaction came in. So we try to keep it very consistent and stable based on what we see in front of us and try not to anticipate things that maybe aren't as clear to us in our model today. And we feel we're in a great spot to do that. We don't feel we're driving towards any short-term gains. We're in this for the long term. We have a great model that just compounds on itself. And we've done so much work around our infrastructure and our ability to continue to drive that North Star that we believe we just have to make sure we're prudent, practical, and don't get ahead of ourselves.
Even the way we look at marketing investments today, it's based on making sure that we are getting the return on that marketing and that we see a path to that return, not anticipating something that we can't see the data points around. So those are the theories. And we'll continue to do that because we continue to believe that is the right way to project our business. And because we are at these margins, we are profitable. We do have a healthy balance sheet. We do generate a lot of free cash flow. We can continue to make sure we're making the right decisions on investments, the timing of them, making sure we're getting the right return on them.
All right, awesome. Appreciate it. Can you maybe talk about how the new cohorts of subscribers you added this year shaped up from our pool perspective versus your original expectation and maybe how you would stack rank the monetization versus subs growth and retention as a driver for the upwards revision to guidance this year?
Okay. So I didn't catch that last part on the upward revision to guidance. I don't want to get out ahead of myself there. Okay. Well, we will talk about 2025 soon as we close out this year. But the cohorts that are coming in, we talked about our strategy last year that we want to attract customers that are coming in with intent. That is our focus. We are not looking just to grow customer numbers. And with that, we changed our philosophical view and did some things around our product portfolio to move away from things that were non-strategic. And that caused some headwinds in our customer numbers. But on the flip side, it started to attract customers that were coming in with higher intent.
So when we talk about the cohort for 2024 without getting into very specific elements of it, what we are seeing is customers are attaching to the second product much faster than they did years ago. So they're coming in and looking not just for the cheap domain. They're looking for, okay, I need a domain and I'm going to do something with that domain. And they're getting to that second product. And I talked about earlier, when we get to that second product, it drives that LTV equation for us to get to that higher number later on, the retention numbers. What we're seeing is the initial order size within those customers coming in is higher than it's ever been, which means they are paying more and they are perceiving that the value they're getting for what they're getting from us works for them.
And that's exactly in line with our strategy. I will trade the low-calorie person who is coming in on the viral discounting to buy a very low-cost domain name and not do anything with it for that entrepreneur who's coming in and wants to start selling quickly, wants a website, wants a domain name, wants to have a professional. I will make that customer trade-off any day. And you're seeing it this year in our ARPU. Our ARPU is growing. We're seeing that trajectory grow. We're excited about it. This is the beginning of that journey. So as we go out, and this is why I always say this will just compound on itself as we get to every year. But that switch over in the cohort, we're very excited about that. And we're very excited that we're seeing that type of customer come in.
We're seeing it come in consistently, very strong numbers. As we get through some of these headwinds in our customer numbers, we expect that to continue into 2025.
All right, appreciate the color. And I believe you've been very consistent in your description of the macro and the top-of-the-funnel trends this year being stable. And you have one of your competitors calling out what seems like a bit of an uptick in the third quarter. Maybe just a couple of questions from that. Has the health of the top-of-the-funnel or macro conditions been a bit of a surprise to you as you look across the space more recently or throughout the year?
I don't know if I would use the word surprise. I have been encouraged, excited that we're seeing a consistent, strong funnel, and we've seen that not only in Q3. We've seen that. We saw that start to develop through 2023. We're seeing it in 2024, and that consistency is in line with what our strategy is. When we talk about other people, remember they have different funnels than we do. They have different models than we do. They attract customers different ways than we do. We're the only one who has the domain all the way through the commerce transaction, and we have multiple on-ramps, but domain is still a big on-ramp for us, and a lot of our traffic comes directly to us just because we're known for the domain. It doesn't come through any other sites.
Our traffic, when we look at it, we look at it on a basis that we are very unique as a company. There is no one else who has the type of model we do. We've built off of that model. Getting consistent traffic means that we're starting to reach the customers, like I said, that are coming in with that intent. Traffic is an interesting thing. You can determine traffic and get it higher by doing crazy things at the top of the funnel. It doesn't mean a year from now you're really going to be happy about it. We've been around long enough. We know how to work the funnel. We know when to put a little gas on the marketing. We know exactly how that funnel should respond. We're not looking to change that dynamic in any way, shape, or form.
We're not trying to reach a different customer base and change our funnel in that determination. We are laser-focused on entrepreneurs, micro-businesses, exactly what we do best where we have a right to win. And we'll continue to do that.
All right, Chris, want to take one more?
Yeah. Maybe just to kind of shift it over to the existing customer base, it's based off over 20 million customers. I guess the thing that surprised me over the last year and a half is just I would consider it kind of a degree of under-monetization. I'd be curious kind of as you've progressed over the last year and a half here, how you see that progression and how deep of a well. And yeah, I guess is under-monetization a way to be appropriately framing it here?
I would use the term pragmatically monetizing it versus under-monetizing. Our existing customers and the fact that they stay with us for so long, the fact that we have great relationships with them through our care organization is a huge competitive advantage for us. And we've talked about our care organization and what it does for us. Again, for those of you who are new to the story, we have, I will call it the best-in-class care organization. Why? Our customers are very, very unique to us. We've established that customer relationship. They also generate a lot of revenue for us. And it's because they have the ability to connect with our customers and make sure they're getting additional products. When it comes to monetizing our customers with additional products, we have to understand our customer base.
I always use the example of when a customer is calling in and they're trying to fix a certain problem, you're talking to them about maybe being more active on social media. If you were to turn to them and say, "Hey, by the way, you want some tax software?" It's probably not going to be an efficient call within the care organization, our care organization is about listening to our customers and making sure they're getting what they need, in those cases where we believe we can provide value, we have the ability to flip them over. Commerce is a perfect example of that. We have been hugely successful in converting our customer base for our commerce platform. Why?
When you think about an entrepreneur or a mom-and-pop shop that is dealing with multiple applications and one of them being a payment processor, that's a lot of work for them. If they have a problem with that payment processor that they're currently using, they have to go through another customer service. That customer service generally is not going to be as high a quality as our customer service. And I may be polite on that. So when they realize that through all their applications, they can use a one-stop shop and only have to deal with one care organization, for our customer base, that's a huge opportunity. And we see them flipping over. Where we have found that we can meet our customers on their journey, that's when we see them converting over. And that continues to be a huge opportunity for us.
When they grow, we see them signing up for more email seats. When they grow, we see them flipping over to our commerce. That continues to be something that we will monetize going into the future, and there's two things that drive it at the end of the day, and I'll always come back to it. As a technology company, I always believe that you have to have two things to be successful in the long term. You have to innovate. You guys have seen Airo Plus, our ability to innovate, provide value, but you have to own that customer relationship, and that customer relationship is what we own and what we protect and make sure that we're providing value to, and we'll continue to be a key source as we meet their needs as they grow.
So I think it is one of the biggest opportunities in front of us. And we continue to look at it. And as Airo Plus starts to hit out to our existing customer base, we think that's going to be a huge opportunity to continue to give them value. And of course, get value ourselves out of it.
Very helpful. I just want to talk about the idea of kind of value-based pricing here. Can you just talk about the range and value of the customers that you're capturing today and the prices that they're paying? As you think about this going down the value-based pricing road here, how should we be thinking about your plans to close some of those gaps on customers that are currently capturing the most value? Is this something that you kind of plan to do over one renewal cycle? Or are there cases where the value is so high that you have concern about sticker shock?
Yeah, so pricing is always a great element, and the next evolution of our pricing will be value-based pricing, and one of the advantages we have within the consolidated technology stack of seeing everything from the domain to the transaction again is our ability to see where they're getting value across that technology stack. As we start to look at our customer base within that, it'll give us an opportunity to start to see what customers are getting value from which bundles and start to price based on that versus a customer who may not be getting value. There is much more to come on this. We've just started to scratch the surface with bundling itself, but as we use the data within our grasp of understanding the customers, that'll allow us really to penetrate into that value-based pricing, so it's an opportunity out there for us, more to come.
But it is a huge opportunity given where we are.
Got it. Look, we're in the final minute here. I ended on the same question every year. What are we most excited about at this point? What are we going to be talking about this time next year?
Yeah. So we just launched Airo Plus. And I couldn't be more excited because you think about that we just launched Airo last year at this time and almost in the same cycle because we do this along with your conference. I think Airo Plus is going to be a game changer. It allows the monetization of AI within our platform that we're just launching now. So it's a huge opportunity for us. We also talked about Conversational WordPress yesterday. And that's at the beginning stages too. And if you didn't we don't have time to get into all the details of the technology. But Conversational WordPress just makes WordPress in and of itself so much easier for pros to manage. That is the beginning stage. So I think you're going to see the continued evolution of this journey we've been on around innovation.
And then now as we're crossing over the bridge to discovery, engage, and now monetization, I think that's what we're going to be talking about next year. What's next?
Sounds good. I think we'll leave it there. Thanks again, Mark.
All right. Chris and Chris.
Thank you.