GoDaddy Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results are compared with Q1 2017; the company reports as a single operating segment. The quarter’s results include the impact of the April 2017 acquisition of Host Europe Group (HEG).
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $633.2 million | $489.7 million | +29.3% |
| Operating income | $26.8 million | $5.7 million | Operating margin 4.2%, versus 1.2% |
| Net income (loss), consolidated | $4.2 million | $(3.1) million | Returned to profitability |
| Net income attributable to GoDaddy Inc. | $3.3 million | $0.6 million | Basic and diluted EPS: $0.02 |
| Cash from operating activities | $148.4 million | $126.6 million | +17.2% |
| Total bookings | $783.1 million | $624.8 million | +25.3%; non-GAAP operating metric |
| Customers at period end | 17.7 million | 15.1 million | +17.4% |
| ARPU | $138 | $130 | +5.8% |
Revenue by category: Domains $291.7 million (+21.1%); Hosting and presence $239.8 million (+34.5%); Business applications $101.7 million (+44.1%). International revenue was $226.6 million, up 68.7%; U.S. revenue was $406.6 million.
Cost of revenue excluding depreciation and amortization was $215.3 million, or 34.0% of revenue, versus $176.8 million, or 36.1%. Total costs and operating expenses were $606.4 million, or 95.8% of revenue, versus $484.0 million, or 98.8%. Depreciation and amortization rose to $57.8 million from $31.6 million, primarily reflecting acquired HEG assets. Interest expense increased to $23.8 million from $12.8 million, mainly due to debt used to finance HEG.
Cash, liquidity and debt
Cash and cash equivalents were $710.7 million at March 31, 2018, up from $582.7 million at year-end 2017; short-term investments were $18.8 million. Operating cash flow was $148.4 million; investing activities used $33.5 million and financing activities provided $11.9 million. Cash increased by $128.0 million during the quarter.
Term-loan principal was $2,476.1 million; reported long-term debt, net of discounts, issuance costs and current portion, was $2,406.6 million. The term loans’ effective interest rate was 4.2%. The company had no revolver borrowings and $200.0 million of revolving capacity available; it reported compliance with debt covenants. A portion of variable-rate debt was hedged with an interest-rate swap. Management said cash and internally generated cash flows were expected to cover anticipated operating cash needs for at least 12 months.
Deferred revenue totaled $1,968.5 million, including current and noncurrent balances, representing remaining performance obligations. This is generally recognized as services are delivered and is not equivalent to cash immediately available for other uses.
Material changes, outlook and risks
- Management attributed growth in revenue and bookings to HEG, customer and domain growth, stronger international activity, increased adoption of non-domain products, and aftermarket domain sales. HEG contributed $68.5 million of revenue in the quarter.
- Operating performance improved, while acquisition-related amortization and higher interest expense remained significant. Equity-based compensation expense was $31.5 million, compared with $16.4 million.
- In January 2018, GoDaddy agreed to acquire Main Street Hub for approximately $125 million in cash plus contingent earn-out payments of up to $50 million. Closing was expected early in Q3 2018, subject to customary conditions.
- Management expected technology and development, customer care, and other operating costs to rise as the company grows; it also planned continued product investment and migration of infrastructure to a cloud-based third-party provider. The filing provides no specific revenue or earnings guidance.
- Key risks include competition; customer acquisition, retention and service quality; service outages, security and privacy incidents; integration and execution risks from acquisitions; foreign exchange exposure; and substantial indebtedness. Management noted that currency movements added to reported growth: constant-currency bookings growth would have been about 250 basis points lower and revenue growth about 120 basis points lower.
- Indirect-tax accruals were $20.2 million. Management estimated reasonably possible additional indirect-tax losses of $0–$10 million. Ordinary-course litigation accruals were not material, though litigation could entail costs and adverse outcomes.
- The tax receivable agreement (TRA) liability was $167.6 million. The company did not expect payments on the existing liability to begin before 2021, but potential future TRA liabilities could increase substantially if tax attributes become more likely to be utilized.
- The new revenue standard was adopted January 1, 2018, with no material impact; prior-year amounts were not restated. Management expected the lease-accounting standard, effective for the company in 2019, to increase reported assets and liabilities.
Important facts for investors to verify
- How much of growth and customer expansion is organic versus attributable to HEG and currency movements.
- Whether bookings growth and deferred-revenue conversion support sustainable revenue growth, and how acquisition-related seasonality affects comparisons.
- Whether operating improvement persists after higher amortization, interest expense, equity compensation and ongoing integration costs.
- Debt repayment capacity, interest-rate exposure, covenant headroom and the cost and progress of the planned Main Street Hub acquisition.
- Potential changes in TRA obligations, indirect-tax exposure and litigation or other contingencies.