Hello, everyone. Alexei Gogolev here from J.P. Morgan Software team, today I'm delighted to welcome, Mark McCaffrey, with us from, GoDaddy. Thank you, Mark, for joining. Could you talk about the different parts of your operations that have been impacted by broader macro headwinds in the most recent quarters?
Absolutely. Thank you for having me, by the way. It's always great coming here to Boston and seeing everybody in the tech industry all together. You know, we're still in interesting times and, you know, we have a fortunate business that we are very broad, so we have a lot of things going on. As we come into this year, we're looking at, you know, the signs of, you know, demand is strengthening. We're seeing a lot of the top of the funnel come back in a more consistent manner, so a lot of positive signs as we enter the year. Now, the one I've talked about a lot that's still subject to macroeconomic is aftermarket. You know, we have the platform around aftermarket, which buyers and sellers can exchange.
It's the only part of our business that we don't set the price. It's subject to a buyer and a seller coming up, with, you know, a valuation on a domain name. That market, while we're seeing the flow come back and the quantity of the deals, we're still seeing, you know, softness in the valuations around some of those deals. You know, the overlying aspect of, hey, we're seeing retention rates at 85%. We're seeing the cash flow, you know, that we've seen in the past still remain consistent and strong. We're seeing more top of the funnel and quicker attach happening. When we get to attach with our customers, our retention rates get even higher than our average, right?
We're seeing a lot of positive signs coming into this year and in Q1. Obviously, there's a lot of things still going on in the marketplace that we continue to monitor.
Perfect, Mark. Do you believe there is a path to double-digit revenue growth even if current macro headwinds persist?
We do. Like, we feel really good coming back to the signals we're seeing in the market around the demand. You know, we put a little bridge together in Q1. I get a lot of Q&A around that right now. When you look at our exit from this year and you look at the, you know, the headwinds becoming tailwinds, you know, we're exiting the year around 7% growth, and that is assuming no change in the macroeconomic environment. That momentum, based on a lot of the work we've been doing in the first half of the year, will continue into 2024. You know, you start looking at the execution around commerce. We're starting to see the activity.
We're starting to see, you know, the conversion of our existing user base into our payments platform. You're starting to see 90% of the time when people are selecting Websites + Marketing, they are choosing our payment platform when they have choices. We still give them choices to which platform they wanna use, and 90% of the time they're using us. As commerce, and the attach and customers are going from the one product to the two products to the third products, now commerce, you know, and we've said this publicly, the LTV goes up 83 x for us. That momentum is building as we go through this year, and we always said that. Last year was commerce. It was about testing the go-to-markets, getting the muscle around selling into our existing user base.
This year is the first year that we had all four of the pillars around commerce in the market. We saw, you know, great activity in Q1. We love the momentum. As some of those headwinds that we've talked about, I always talk about the FX hangover that we had in our bookings last year. As that starts to, you know, abate, it gives us the momentum. I'm looking forward, before anybody asks me the question, I'm looking forward to talking about 2024 later in the year. We're only one quarter in, but we like the momentum that we have going through 2023 and into 2024, and we believe we will get back to double-digit growth.
Mark, this wouldn't be a[audio distortion] discussion without the question on AI.
Oh, I was waiting. I'm surprised it lasted...
Took me a while.
to the third question, right?
Could you talk about your AI journey? When did you first start investing in this technology?
Yeah. Listen, AI has been part of the business and growing part of the business now for some time, a few years. And we're, you know, we're in a position where we help... Remember, our customer base is the micro business, and they benefit from tools that help them do business, and AI is one of those tools that will help them do business in the future. We've been experimenting with, we've been looking at how to, you know, come up with those tools that allow our customer base to do better, and that's not something new. And I always have to come back to, 'cause it's, again, AI seems to be the topic these days. You know, there's a big difference between a landing page and running a business, right? We help people run their business.
We help people engage their customers, and those tools are very important, and we will continue to experiment, and we've continued to invest, and we have a lot of stuff, you know, we haven't talked about publicly, but we'll be hitting the market here. We think, number one, that's gonna put us in a unique position with 21 million customers to help them use AI to do better at what they do. You know, lot of talk in the market around it, but, you know, a lot of this has already been in play for a while. It just seems to be gathering steam in a lot of the Q&A right now.
Could you maybe double-click on some of the potential benefits that AI could bring to website building?
Yeah, absolutely. When you think about, you know, content and trying to choose between content, when you think about, you know, what different choices, maybe a video you wanna use that may be easier to get to and create. It's about creating that optionality to get done quicker and get it up and running. Then having the analytics behind it allow you to analyze it. You have a whole breadth of, hey, this is what customers need to do, you know, better at their business. You can get there faster using the tools that allow you to absolutely engage your customers more proficiently on their end. You have things like, you know, helping in pricing, right? What pricing do you use in which different markets?
There's so many different aspects that can come into play right now that I think is going to be very beneficial going forward. You know, you even get to, you know, being able to provide, let's say, in our customer base, for example, the personal touch is very important. You're talking about people who are, you know, small shops, some of them, you know, are selling out of their garage, some of them do it online, some of them have small brick-and-mortar. That personal touch is very important, but having the tools in place that allow you to have the choices for them to engage in that personal touch really creates a benefit for them.
We've seen and we've talked to our customers, and those are the things they're looking for help with is, hey, when someone calls into my shop and they want blank, how do I engage them back? Having a tool that allows them to say, "Hey, you know, here are four things you can approach them with right now that will help, you know, create value for that customer," that becomes an important interconnection. That's why AI is not gonna replace that personal touch, but it will help make that personal touch more efficient and drive the revenue and the value within that exchange. When our customers do better, we do better. That's always been our model.
Absolutely. Changing gears slightly, would you agree-
No more AI, is that what I'm hearing?
There's so much we can talk about, but I wanted to ask you a bit more about the growing part of your business, Applications & Commerce, and specifically the Create & Grow segment of it, which I feel compares really well with some of your public competitors like Wix and Squarespace. Could you maybe discuss some of the growth trends you're seeing in that division?
Yes. This is where, you know, just a reminder, we have the two segments. We have the Core Platform, and we have Applications & Commerce. Although we talk about the two segments, I always have to say, you know, remember, our customer can go across both segments. It's about attaching within the Entrepreneur's Wheel that allows us to get that value. Applications & Commerce, we continue to see momentum in the business, and we continue to see the demand at the top of the funnel. What we're seeing that's really encouraging is people are going from the domain name to the website to the payments very quickly. Sometimes now with Payable Domains, we're even seeing them going to payments going to the website as the third choice.
All that is helping us within our Applications & Commerce grow that business. Websites + Marketing is doing very well. Managed WordPress is doing very well. We are encouraged with all the four pillars of commerce, and it's really about providing that one-stop shop and allowing our customers to have those choices early in their journey. We are seeing that journey start to take place, and we're seeing that momentum. We're really encouraged about the growth in Applications & Commerce. We had a good Q1. A lot of that was driven by, you know, GPV.
We're seeing those choices, and we're seeing the conversion now of our existing customers that do have Websites + Marketing or another platform within our portfolio, switching over to our commerce solution as well. You know, there was a lot of people that would say, you know, "Hey, that's gonna be a tough journey for you to convert your existing customer base over to a new payment platform." We are finding that they are switching, and we are finding with, you know, the customer care we have, when they're calling in, they are able to convince our existing customers of the value proposition our commerce provides. When you look at it as a one-stop shop, they pretty much say, "Well, let me get this right.
I can do everything just with one care guide and have it all under one umbrella." They're choosing. The, I would say, the aggressive pricing that we put out there to make sure we're providing value to those customers is working. Like, we're seeing them come over. Remember, we've only launched in the U.S. at this point, so we still have a lot to go, but that playbook around the conversion of our existing customer base is working for us. That is driving that momentum in Applications & Commerce right now because the one-stop shop, right? Again, microbusinesses, they just want to deal with one application, and they just wanna deal with that one relationship through our care organization and all that's coming together.
I feel like given that you have such a great visibility into the business, you have such high market share in the domain space, you must have a good understanding of market share trends. Could you maybe talk about, first of all, how your tools differentiate from your competitors and what you've been seeing in terms of your market share dynamics?
Yeah. So, you know, listen, we've been a domain company for a long time. It's our brand. It's what brings people to us, and we've now been able to create that one, you know, Entrepreneur's Wheel Aman loves to talk about, and that one-stop shop. What we're seeing is, you know, we are still attracting the market share that we want to attract. We are attracting customers that have that propensity to want to build a business, and we still go after that very aggressively. And as we've got into this branding and the right to play within the payments, we've seen that expand as well. I would say, you know, the market share around domains, we're still, you know, the leading player, no doubt about it.
What I think has changed is identifying who are those domain, you know, people coming into the funnel that really want to start a business and really start to drive that LTV. We will continue to look at that as the area we want to play in. A lot of the moves we've made and talked about, you know, our restructuring in Q1 have been about, you know, looking at those, you know, higher value customers and then really looking at customers who were not building a business off their domain name. Yes, they're important, but they're not the ones that are gonna drive that 83 LTV for us going forward. That shift, you know, has always been there for us, but we're seeing it now with Entrepreneur's Wheel really come into play.
Building on that, you know, your very strong presence in domains, how your web tool solutions differentiate versus some of your peers and what trends you're seeing in website building?
It comes down to easy to use and easy to get up and running and intuitiveness and, being able to connect all the pieces together into that intuitive experience that allows us to, you know, engage that customer. There's two things I always say in the tech industry you need to own. You need to own the relationship, and you need to innovate. We've done both. You even look at things like Payable Domains, which is, okay, we're the only company who has the capability to pay enable a domain name now.
Our ability to do that because we own the whole technology stack really allows us to differentiate and innovate, and we continue to look at different ways to innovate and continue to look at different ways to make sure that we're providing that value to the end user or to our customers that allow us to stay within that Entrepreneur's Wheel.
Perfect. Can you talk about some of the efforts that you've made in the commerce vertical? What levels of attach are you seeing within both new and existing customers?
We've talked about publicly that 90% of the time, and I think I said this before, 90% of the time when people are choosing Websites + Marketing, and they're given a choice on which payment platform they want to use, they're choosing us, and we're giving them all the options. Again, we're an open platform. You know, we wanna see that they're choosing us for the value. We've seen that attach happening. We haven't given out numbers on the existing customer base, but we are seeing them convert, and that's what's driving our GPV hitting a billion dollars+ this first quarter here right out of the gate is a lot of that momentum around it.
The biggest opportunity we have right now in front of us is that existing customer base and the conversion of it. You know, a reminder, we have four things in play with commerce. We talk about GoDaddy Payments a lot, but at the end of the day, there's four things that go into our commerce solution. There's hardware and software, which we continue to do very well at the point-of-sale devices. Many of you have seen us, you know, display them in different venues, but we continue to do very well with that. We have GoDaddy Payments, which we talked about. We have a reseller business where we're actually providing the payment service on the back end to other software vendors who may be in a vertical that we don't have the capabilities with right now.
We have the payment-enabled commerce on Websites + Marketing and Managed WordPress. We have four pillars in play today. All of them are doing very well. We have the Worldpay agreement, which we announced at the end of the year, which we are still looking for a launch in the second half of the year. We think that's gonna create a lot of tailwind for us going into 2024. You know, this is a customer base that we normally wouldn't have had access to or would have taken us a while to get to, but now we have Worldpay's sales force working for us and engaging their customers with our payment solution. The beauty of it is, we co-own the customer, even in that case.
When they choose our, you know, our software, hardware through Worldpay, they call our customer care to enable it. We become the onboarding device for the Worldpay customer, and at that point, it becomes our customer as well, and we have the ability to sell into that customer things like Websites + Marketing or Managed WordPress or anything else we can attach to it. It becomes a win-win for both of us. They get to, you know, obviously have a consistent point-of-sale service that they can sell to their customer base, and we get to co-own the customer 'cause, again, coming back to my original thesis, owning the customer and innovating are the two things you need to be successful in the tech industry.
Just double-clicking on that payments strategy that you have, quite surprising that you offer relatively low payment fees on transactions. How are you able to achieve that?
The secret sauce. All right. You know, we haven't publicly disclosed how we do it, but we are a PayFac in the U.S., and we've built a technology stack around our ability to do that. That gives us the ability to do this. I'm a CFO, so I wanna be clear, I'm here to make money, right? That's my goal. And we've set it up so this works within our system. While we haven't gotten into the individual components of how we make that work, you know, when you look at our acquisition of Poynt several years ago, bringing in a team who had a lot of experience about setting up these processes, our ability to do it internally versus have external, you know, reliance allows us a lot more flexibility within the pricing.
We're doing it because we believe this is a price. You know, we're not buying it here. We're making money. We're doing what we need to do in order to make sure our customers feel like they're getting value and not being, you know, I would say, you know, the service fees and everything else go on top of that. We're providing the value that allows them to be successful in the marketplace. It's one of the compelling things in our customer base right now is in this environment, everybody's calling them up and saying, "I'm gonna charge you a little bit more money," and we're saying, "Hey, we have a way to charge you less." That becomes a little bit of that compelling argument of our existing customer base to convert over right now.
Perfect. just changing gears slightly with, moving to your shareholder capital allocation priorities.
Ah.
Could you maybe discuss that in a bit more detail and how do those stack against your M&A strategy?
Yeah. So, you know, we talked about now it feels, I guess it is a few years ago, at our Investor Day back in February of 2022, you know, we laid out our disciplined approach to our capital allocation. We said, you know, it was gonna be something that we would look at the ROIs, we would look at quarterly. We've done that. We've talked about back then the $3 billion, you know, authorization for buyback. We exited the year ahead of schedule, and we continue to be aggressive in the market to look at, you know, what makes sense for us on a quarter-by-quarter basis. You know, M&A, same thing, right? Our strategy hasn't changed around M&A. It needs to fit three criteria.
It has to be part of our strategy, has to work financially, and has to be something we believe we can integrate in a reasonable per-period of time. Too many times through experience, I've seen, you know, inability to integrate appropriately be the downfall of getting the value out of an acquisition. It's something we take very seriously, not only on the technology but on the people side. You know, as, you know, we're fortunate. We have a strong balance sheet. We, I guess I haven't said it, but we generate a lot of free cash flow, which allows us options to look at stuff. Unless it meets those criteria, you know, we are not inclined to, you know, do something just for the sake of doing it.
If something comes along that we believe does fit the criteria, we'll take a look at it. Right now, you know, we focus. We've done some small stuff. They've been accretive immediately, usually, very complementary to the existing products that we have out there. Some of them are within the domain space or the registry. Those are very cash flow positive for us. Some of the smaller ones work a little easier within our criteria. Yet, you know, nothing's changed about the discipline we apply in evaluating whether it's the capital allocation or the M&A strategy going forward.
Are there specific markets or regions that you're now more focused on or interested in, that could strengthen your platform?
Nothing that nothing has changed on the geographic front. We at some point will launch commerce into other areas. We haven't said anything publicly about where next. Having said that, you know, stay tuned. Hopefully, we'll be talking about that here in the near future. That would be the biggest next step for us is, you know, now that we have the playbook for commerce and how to convert our existing customer base in the U.S., and we've got, you know, we've trained our care guides, you know, to engage the customer base on that.
Now that we feel good about that playbook, it's about where do we go next with that playbook, being able to execute on that playbook, and how do we expand our commerce capabilities throughout, you know, the regions that it makes sense to go to next. We're pretty excited about it. you know, like I said, we're only one quarter in fully in the U.S., but we're seeing what we needed to in order to say, "Okay, the playbook is working. Let's go.
You know, indeed, the very impressive free cash flow and profitability of your business. One of the elements, of course, is that Application & Commerce vertical, it's growing fast, but it's also a very profitable business. Could you talk about your strategy to sort of change this revenue mix towards more Application & Commerce business?
Yeah. It's the wheel, right? I keep saying it, and we'll keep going back to it. We have a great funnel. In the past, we were a domains company years ago. People would come to us and get the domain, they go elsewhere to get other applications. We provided that ability once they get the domain name, now they have the ability to get all the other applications under the one-stop shop. That comes at a higher profitability for us. You know, we have great operating efficiency within our P&L. We talk about it all the time. We're ahead of schedule from where we said we would be a year ago on expanding our margins, right?
We're looking at exiting around 28% in the fourth quarter. We continue to be able to get the leverage because once the customer comes into our wheel, if they don't have a reason to leave, that growth comes at a more efficient rate. In other words, we're not acquiring the customer, we're just attaching the customer. It gives us that momentum around profitability and allows us to grow Applications & Commerce in a very profitable manner because we're servicing that same customer. We will continue to focus on that. Now, as payments click in and get more a part of our Applications, Commerce, and our overall business, yes, our gross margin will be impacted by that. We've been very clear where we see our gross margins going.
Our operating efficiency down the P&L gets much better, and that allows us to really expand our operating margins as that business grows, because the volume within the customers is just coming at a more efficient rate for us to service.
Could you maybe build a little bit on that, on what are some most recent restructuring and optimization strategies that you applied?
Absolutely. You know, as we, you know, started to look at our business and we started to look at our ability to become more efficient, we believe, and we've talked about this in our restructuring is, hey, our hosting business and our non-core platforms, in other words, platforms that were the technology stack was kept separate, weren't as efficient as our technology core GoDaddy stack, right? Without the efficiency, you know, think about it, once they come into the platform, whether it's hosting or a managed hosting WordPress, our ability to attach within the core GoDaddy portfolio is a lot greater. That allowed us to really look at some of these technology stacks and make a choice to integrate them into those customers, into the core GoDaddy stack.
That's what we're going through right now. With that comes some actions that we took. Obviously, we're shifting people out of some of those traditional older businesses, we're putting them into Applications & Commerce. Why? Well, you know, I don't need as many Guides over here on this anymore. I can retrain them to sell my GoDaddy Payments, right? Once they start engaging with that, obviously that comes with a greater proficiency and profitability for us. We're taking those actions as we speak. We announced there were a couple non-Core Platforms that we sold off this quarter. Excuse me, we announced that we were selling. We haven't closed the deals yet. That's part of really taking a hard look at the Core Platform, at the hosting platform, and consolidating it into one core technology stack.
With that stack, our ability to attach, coming back to the Entrepreneur's Wheel, becomes a lot greater. Once we start attaching, and I'll always come back to this, when the first product or the second product gets attached, you know, we. Hey, we have great average retention, at 85%, but it goes up from there once they go to a second product. That's where we want to drive the LTV, right? Is, hey, continue to push the ability to attach within that customer base allows us that ability to drive that 83 LTV we always talk about.
I believe that earlier this year, there was somewhat of skepticism on both buy side and sell side around your ability to reach some of those profitability targets that were set last year. Could you maybe talk about what gives you the confidence to reach some of those free cash flow per share targets?
Yeah. I'll start with, you know, 85% of our revenue comes from our existing customer base, and that is always a great place to start at any position, any point in time. 85% of our cash flow comes from, you know, obviously existing subscriptions within our customer base. Our ability to grow off that and our ability to hit those targets, we're very comfortable, right? We've seen in the last year, we're ahead of schedule on our profitability metrics, which, you know, I think we, when we first went out with our 3-year thesis, we said we would exit the three years around 26% margins. We're now exiting this year, our year two at 28. We hit 26 in the first year.
Our ability to drive that profitability and the cash flow and ultimately the cash flow, our free cash flow per share we talk about, you know, we believe is still within our thesis of the 3-year investment, if not our ability to exceed it. Revenue growth, no doubt. We've talked about it. You know, we've had to come off of that thesis. You know, FX is something I never wanna talk about again, but continues to be out there. We have a little bit of a hangover this year coming into our bookings, into revenue. You know, we still have that ability to run our business very efficiently. We have always been a profitable cash flow generating company. This is about getting to incremental steps to just make that better. We've always been aggressive.
We talked about, you know, actions we were taking last year when we signed our AWS contract, locking in our energy costs around our data center, refinancing our debt. Like there are things that we have actively managed through to make sure we're, you know, maintaining that profitability level and expanding on it as we go so that we can continue to deliver on our, you know, what we think is a great business. Remember, it all starts with the customer, but at the end of the day, when you have really strong retention, you have a really strong customer base, and you continue to engage them and provide them innovation and new products for them to service, that really makes a difference. This is, you know, remember, we're in an ARPU, you know, in the high 100s.
This is a business that continues to renew, and people do not give up their dream very easily. I bet you, hopefully, you all have your domain names with us out there. I hope so. You know, it, you keep those domain names, right? You keep them 'cause you want them. You know, if you haven't bought them for all your kids and stuff like that, you know, please do so with us. That, at that ARPU level, at that customer base with 21 million customers, that really allows us a lot of proficiency and ability to really look at how do we maintain our profitability by providing them value.
The targets that you've given, I think, last year of $7 per share in free cash flow this year or more than that actually, and more than $8 next year, you feel those are achievable?
Yeah. We continue to work towards delivering on the cash flow that we've talked about, and we believe we have the ability to do that. Obviously, we're assuming the macroeconomic environment continues as is, but we see line of sight to doing there, getting there.
Perfect. Mark, this has been great. Thank you very much for joining us today. Appreciate your time.
I love being here.
Thank you.