GoDaddy Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2019. GoDaddy operates as one reportable segment, offering domain, hosting and presence, and business application subscriptions. Revenue is generally recognized over subscription terms, while customer payments are typically collected upfront.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $760.5M | $679.5M | $2,207.7M | $1,964.3M |
| Operating income / margin | $91.4M / 12.0% | $37.5M / 5.5% | $129.1M / 5.9% | $107.8M / 5.5% |
| Net income | $76.8M | $14.1M | $77.3M | $38.5M |
| Net income attributable to GoDaddy | $76.2M | $13.2M | $76.5M | $34.6M |
| Diluted EPS | $0.42 | $0.08 | $0.42 | $0.21 |
| Operating cash flow | $200.2M | Prior-quarter comparable not stated in the cited highlights | $561.2M | $431.3M |
Q3 revenue grew 11.9% year over year (approximately 13.3% in constant currency). Domains revenue increased 11.6% to $345.3M; hosting and presence rose 8.3% to $285.0M; business applications grew 21.9% to $130.2M. Management reported 19.1 million customers (+4.6%), ARPU of $155 (+7.1%), and bookings of $851.0M (+14.7%, or approximately 15.7% in constant currency). Bookings included roughly 100 basis points from credit-card abuse transactions that were reversed through refunds and did not affect revenue.
Cost of revenue was $265.0M, or 34.8% of revenue, versus $226.9M, or 33.4%, a mix-driven headwind to gross margin. Q3 operating margin improved to 12.0% from 5.5%; net margin was 10.1% versus 2.0%. Nine-month net margin was 3.5% versus 2.0%.
At September 30, cash and cash equivalents were $966.7M and short-term investments were $23.5M. Total debt was $2,438.6M, comprising $1,838.6M of term loans and $600.0M of senior notes; the $600.0M revolving facility was undrawn. Current assets were $1,484.6M and current liabilities were $1,969.3M, including $1,539.9M of deferred revenue. Cash plus short-term investments less reported debt implies approximately $1.45B of net debt. The company said existing cash and internally generated cash flows should cover anticipated operating cash needs for at least 12 months.
Nine-month investing cash use was $117.4M, including $71.1M of property and equipment purchases and $40.3M of acquisition spending. Financing cash use was $407.4M, including $399.6M of share repurchases and $618.7M of term-loan repayments, partly offset by $600.0M of senior-note proceeds. Cash increased $34.3M from year-end 2018 to $966.7M.
Material changes and unusual items
- Q3 net income rose substantially year over year, alongside higher revenue and operating income. The quarter included a $20.4M reduction in equity-based compensation expense to correct prior-period expense recognized before grant dates were established; management assessed the prior-period error as immaterial and recorded the cumulative reversal in Q3.
- Q3 G&A expense fell 19.5% year over year to $72.2M, including the $7.9M portion of that compensation reversal. Nine-month G&A included an $18.1M provision recorded in Q2 for a proposed class-action settlement.
- In June 2019, GoDaddy issued $600.0M of 5.25% senior notes due December 2027 and used the proceeds to prepay an equal amount of term loans. The transaction produced a $14.5M debt-extinguishment loss in the first nine months.
- During Q3, the company repurchased 6.166 million shares for $399.6M. In October, it repurchased a further 959,000 shares for $59.0M and authorized a new $500.0M repurchase program. Also in October, it refinanced term loans, lowering interest-rate margins by 0.25%.
- Operating lease adoption added recognized lease assets and liabilities; at September 30, operating lease liabilities totaled $220.7M. The adoption did not materially affect the statements of operations or cash flows.
Outlook, commentary, risks, and contingencies
No specific forward revenue or earnings guidance is provided in the filing. Management expects operating cash flows to be affected by bookings growth and anticipates continued investment in product development, marketing, customer care, international expansion, and migration of infrastructure to public cloud providers. Management also identified potential future need for additional capital if it pursues acquisitions or repurchases.
- Key risks include customer retention and renewals, competition and pricing, product execution, service outages and cybersecurity, reliance on third-party and public-cloud providers, foreign-exchange movements, and substantial debt and related covenants. The company reported covenant compliance and $600.0M of revolver availability at quarter-end.
- A proposed settlement of a Telephone Consumer Protection Act class action remains subject to court approval. It provides for up to $35.0M in total settlement-related payments; $18.1M was accrued in Q2, with no change to the estimate in Q3. GoDaddy denied the allegations.
- The recorded tax receivable agreement (TRA) liability was $175.3M. The company disclosed potential additional TRA liabilities of up to $1,151.4M for basis adjustments and $436.1M for NOL and credit carryforwards if future utilization becomes more likely than not; these amounts were not recorded.
- Foreign-exchange and interest-rate risks are managed partly with derivatives. Derivative liabilities were $60.6M at quarter-end; the interest-rate swap notional was $1,292.3M. Management stated that a hypothetical 10% interest-rate change on debt not subject to that swap would not materially affect interest expense.
- The CEO transition became effective September 4, 2019, with Aman Bhutani succeeding Scott Wagner. The filing identifies successful transition and retention of key personnel as risks.
Most important facts for investors to verify
- How much of the sharp Q3 earnings and margin improvement reflects underlying operations versus the $20.4M equity-compensation reversal and other expense changes.
- Whether customer growth, ARPU, bookings, renewals, and business-application growth continue, and how bookings translate into recognized revenue and cash flow.
- Debt costs and refinancing effects, covenant headroom, cash available after repurchases, and the pace of any further buybacks.
- Final court approval and total cost of the proposed settlement, and any developments in the Domain Factory data incident or other legal matters.
- Future realizability of tax attributes and potential TRA obligations, as well as progress and costs of the public-cloud migration.