GoDaddy Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparative figures are for Q1 2018 unless stated otherwise. GoDaddy provides domain, hosting and presence, and business application subscriptions; it reports as one operating segment.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $710.0 million | $633.2 million | +12.1% reported; +13.6% constant currency |
| Operating income | $18.8 million | $26.8 million | Down $8.0 million |
| Operating margin | 2.6% | 4.2% | Down 1.6 percentage points |
| Net income | $13.2 million | $4.2 million | Up $9.0 million |
| Net income attributable to GoDaddy Inc. | $12.9 million; diluted EPS $0.07 | $3.3 million; diluted EPS $0.02 | — |
| Operating cash flow | $199.7 million | $148.4 million | Up 34.6% |
| Cash and cash equivalents | $1,090.3 million | $932.4 million at Dec. 31, 2018 | Up $157.9 million |
| Long-term debt, including current portion | $2,451.1 million principal | $2,457.3 million principal at Dec. 31, 2018 | Down $6.2 million |
| Bookings | $870.5 million | $783.1 million | +11.2%; +13.5% constant currency |
| Customers / ARPU | 18.8 million / $150 | 17.7 million / $138 | Customers +6.4%; ARPU +8.5% |
Revenue grew across all product lines: Domains $319.6 million (+9.6%), Hosting and presence $268.9 million (+12.1%), and Business applications $121.5 million (+19.5%). Management attributed growth to more customers, higher customer spend, broader product adoption, aftermarket domain sales, and the July 2018 Main Street Hub acquisition. International revenue was $245.1 million, up 8.2% reported and approximately 12.2% in constant currency.
Operating expenses rose 14.0% to $691.2 million, faster than revenue. Technology and development, marketing and advertising, and general and administrative expenses each increased about 21%; customer care increased 12.3%. Equity-based compensation expense was $46.9 million versus $31.5 million. Operating margin contracted despite revenue growth. Net income improvement was aided by non-operating items, including an $8.7 million benefit from the tax receivable agreements (TRA) liability adjustment, compared with a $0.1 million expense in Q1 2018.
Cash, debt, and liquidity
Operating cash flow increased primarily with bookings growth. Investing cash use was $29.0 million, including $29.4 million of property and equipment purchases; financing cash use was $11.9 million, including $22.2 million of contingent acquisition consideration payments and $6.2 million of term-loan repayments, partly offset by stock-option proceeds. The company had $200.0 million available on its revolving credit facility and reported no covenant violations. Term loans had a 5.0% effective interest rate and mature in February 2024; the revolver matures in February 2022.
Current assets were $1,611.8 million and current liabilities were $1,970.5 million; current liabilities include $1,474.6 million of deferred revenue. Deferred revenue totaled $2,122.7 million, with $1,280.3 million expected to be recognized over the remainder of 2019. Management said existing cash and internally generated cash flows should meet anticipated operating cash needs for at least the next 12 months.
Material changes, outlook, and risks
- Margin pressure: Operating income fell as product development, advertising, customer care, and administrative costs grew faster than revenue. Management expects several expense categories to increase in absolute dollars as it invests in products, international operations, customer care, and infrastructure.
- Leases: Adoption of the new lease standard on January 1, 2019 added $111.3 million of assets and $108.0 million of liabilities at adoption. At quarter-end, operating lease liabilities were $156.7 million. Adoption did not materially affect operating results or cash flows.
- Tax receivable agreements: The recorded TRA liability was $175.3 million, and management did not expect payments on the existing liability to begin before 2022. If tax attributes become more likely to be utilized, additional liabilities could be recorded—up to $1,193.1 million for basis adjustments and $403.2 million for NOL and credit carryforwards under the filing’s Q1 disclosures. Payments can exceed realized tax savings in some circumstances.
- Technology and execution: GoDaddy continued its migration toward third-party public-cloud infrastructure and planned to migrate financial processing systems, including the general ledger, to Workday during Q2 2019. The filing identifies potential service, security, transition, and financial-reporting risks.
- Security and regulatory exposure: The filing discusses a 2018 Domain Factory customer-data incident; the Bavarian Data Protection Agency had not issued a final decision, and potential fines were uncertain. The company also cites privacy-law, cybersecurity, service interruption, competition, foreign-currency, and domain-industry regulatory risks.
- Contingencies: Routine litigation accruals were described as not material, but outcomes remain uncertain. Estimated indirect tax liabilities were $13.1 million at March 31, 2019, versus $11.6 million at year-end.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. It discusses expected ongoing investment and states that cash resources should cover operating needs for at least 12 months.
Key facts for investors to verify
- Whether bookings, customer growth, and ARPU continue to translate into revenue growth while operating expenses moderate and margins stabilize.
- The drivers and sustainability of Q1 net income improvement, particularly the $8.7 million TRA liability benefit and tax effects.
- Debt-service capacity, variable-rate exposure, and the timing and potential size of future TRA payments or accelerated obligations.
- Progress, cost, and operational or control impacts of the public-cloud migration and planned Workday financial-system implementation.
- Developments in the Domain Factory data-protection investigation and any other material security, litigation, or indirect-tax exposures.