GoDaddy Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Comparisons are with the three months ended March 31, 2015, unless otherwise stated. Financial statements are unaudited and consolidated.
Business context and performance
GoDaddy provides domain registration, hosting, website and security products, and business applications to small businesses, web professionals, and individuals. Revenue is generally collected when subscriptions are sold and recognized over the contract term. The company reported one operating segment.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $433.7 million | $376.3 million | +15.3% |
| Operating income (loss) | $1.3 million | $(20.5) million | Turned positive |
| Consolidated net loss | $(18.3) million | $(43.4) million | Loss narrowed |
| Net loss attributable to GoDaddy Inc. | $(10.5) million | $(13.1) million | See note below |
| Class A diluted loss per share | $(0.15) | $(0.34) | Loss per share narrowed |
| Adjusted EBITDA (non-GAAP) | $115.6 million | $93.9 million | +23.1% |
| Total bookings (non-GAAP) | $557.8 million | $498.7 million | +11.9% |
The filing’s statements of operations show 2015 net loss attributable to GoDaddy as $(43.4) million, while the EPS reconciliation allocates $30.3 million of that loss to non-controlling interests and reports $(13.1) million attributable to GoDaddy. The latter reconciles to reported 2015 loss per share; investors should note the presentation difference.
Revenue by product was $218.9 million from Domains (+9.9%), $160.4 million from Hosting and presence (+14.4%), and $54.4 million from Business applications (+47.4%). Business applications grew fastest. International revenue was $112.7 million (+16.7% reported; approximately +25.1% constant currency). U.S. revenue was $321.0 million.
Operating expenses totaled $432.4 million, or 99.7% of revenue, versus $396.8 million, or 105.5%, a year earlier. Cost of revenue excluding depreciation and amortization was 35.6% of revenue versus 36.5%; the corresponding gross margin was approximately 64.4% versus 63.5%. Management cited customer and ARPU growth, broader product adoption, acquired-business revenue, and improved operating efficiencies as drivers. Interest expense declined to $14.3 million from $23.5 million, primarily because the YAM senior note was repaid in April 2015. Q1 also included a $4.6 million charge for an adjustment to the tax receivable agreement (TRA) liability.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $431.7 million at March 31, 2016, up from $348.0 million at December 31, 2015. Short-term investments were $8.4 million.
- Operating cash flow was $105.3 million, versus $72.1 million; investing cash outflow was $15.9 million, versus $7.4 million; financing cash outflow was $5.7 million, versus $6.9 million. Net cash increased $83.7 million.
- Capital expenditures were $12.0 million. Operating cash flow benefited from improved operating results and lower interest payments; deferred revenue increased $82.3 million.
- Current assets were $811.8 million and current liabilities $1,194.8 million. Current liabilities included $994.2 million of deferred revenue; total deferred revenue was $1,498.5 million. The current-liability profile therefore includes substantial subscription revenue to be recognized in future periods.
- Term-loan principal was $1,080.7 million, with a reported balance-sheet debt carrying value of $1,042.9 million including current debt and net of discounts and issuance costs. The loan matures in 2021; $150 million remained available under the revolver, with no borrowings. The company reported compliance with debt covenants.
- Management believed existing cash and cash equivalents would meet anticipated cash needs for at least 12 months. The filing also notes that debt restrictions could limit financing and business flexibility.
Material changes, outlook, and risks
- Customers increased 7.6% year over year to 14.1 million; domains under management rose 4.5% to 62.5 million. ARPU increased 6.1% to $123. Bookings and revenue growth would have been approximately 13.5% and 17.6%, respectively, on a constant-currency basis.
- No specific numerical full-year revenue or earnings guidance is provided. Management expects cost of revenue, technology and development, and customer-care expenses to increase in absolute dollars as the business grows; marketing spending may fluctuate. It plans continued product development and international expansion.
- Foreign exchange remains a risk: adverse currency movements reduced reported growth. GoDaddy had $74.9 million of foreign-exchange forward contracts, all with maturities of 12 months or less; management stated hedges reduce, but do not eliminate, currency exposure.
- TRA liability was $156.2 million at March 31. GoDaddy expected to begin payments on the existing liability in 2017. Following April exchanges of LLC units, it estimated a possible TRA liability increase of up to $181.0 million, subject to final calculation. The filing says up to a further $109.4 million could arise if certain tax attributes become more likely than not to be utilized.
- In April, existing holders sold 18.975 million Class A shares at $30.25 per share; GoDaddy received no proceeds from the share sale, but received $6.3 million from related option exercises. The company also completed an acquisition for $42.0 million cash consideration.
- Other risks include competition, service interruptions, security or privacy breaches, capacity constraints, international expansion, substantial indebtedness, and uncertain indirect-tax exposure. Indirect-tax accruals were $7.4 million. The company disclosed ordinary-course litigation, including patent and trademark claims, and did not expect the matters to have a material adverse effect, while noting litigation costs and outcomes are uncertain.
- Adjusted EBITDA and bookings are non-GAAP measures. The company cautions they are not substitutes for GAAP measures and may not be comparable with similarly named measures at other companies.
Most important facts for investors to verify
- Reconcile the prior-year net-loss attribution presentation between the statements of operations and EPS note.
- Track whether customer, ARPU, bookings, and business-applications growth continue, and how currency movements affect reported results.
- Assess cash generation alongside the $1.08 billion term-loan principal, debt covenants, and future maturities.
- Monitor the final TRA liability from the April unit exchanges, timing and amount of TRA payments, and the assumptions underlying tax-asset utilization.
- Review acquisition integration and the effect of continued investment and operating-cost growth on GAAP profitability and cash flow.