GoDaddy Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results; amounts are in U.S. dollars unless stated otherwise. GoDaddy reports as one operating segment, offering domains, hosting and presence, and business applications.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $737.2 million | $651.6 million | +13.1% (+14.7% constant currency) |
| Operating income | $18.9 million | $43.5 million | Operating margin 2.6%, versus 6.7% |
| Net income (loss) | $(12.7) million | $20.2 million | GoDaddy-attributable loss was $12.6 million; diluted EPS $(0.07) |
| Bookings | $846.1 million | $754.2 million | +12.2% (+13.9% constant currency) |
| Customers / ARPU | 19.0 million / $153 | 18.0 million / $142 | Customers +5.5%; ARPU +7.8% |
- Revenue by product: Domains $334.4 million (+9.7%); hosting and presence $279.8 million (+14.4%); business applications $123.0 million (+20.4%). Management attributed growth to more customers, higher customer spend, product adoption, aftermarket sales, and the July 2018 Main Street Hub acquisition.
- Costs and operating expenses were $718.3 million, or 97.4% of revenue, versus $608.1 million, or 93.3%, a year earlier. Marketing rose 34.0%, technology and development 21.0%, and general and administrative 29.4%; the latter included an $18.1 million settlement provision.
- For the six months, revenue was $1,447.2 million (+12.6%); operating income was $37.7 million (versus $70.3 million); net income was $0.5 million (versus $24.4 million). Net income attributable to GoDaddy was $0.3 million.
- Cash provided by operations was $361.0 million for the first half, versus $277.3 million. Q2 operating cash flow was reported as $161.3 million, up 25.1%. First-half investing cash use was $88.5 million, including $45.9 million of property and equipment purchases and $37.0 million for acquisitions. Cash and cash equivalents ended June at $1,198.8 million, compared with $932.4 million at year-end 2018.
- At June 30, gross debt principal was $2,444.8 million: $1,844.8 million of term loans and $600.0 million of senior notes. The $600 million notes issuance funded a corresponding term-loan prepayment; the transaction resulted in a $14.5 million debt-extinguishment loss. The amended revolver provides $600 million of unused capacity. GoDaddy reported compliance with debt covenants.
- Current assets were $1,720.4 million and current liabilities $2,020.1 million; current liabilities include $1,521.3 million of deferred revenue. Total deferred revenue was $2,173.7 million, representing remaining performance obligations. Management said cash and internally generated cash flows should meet anticipated operating cash needs for at least 12 months.
Material changes and unusual items
- Operating income and margin declined as operating costs grew faster than revenue. Q2 results also included an $18.1 million estimated loss provision for a proposed Telephone Consumer Protection Act class-action settlement and the $14.5 million debt-extinguishment loss.
- The proposed settlement could provide up to $35.0 million in cash payments and product credits, remains subject to a written agreement and court approval, and is not an admission of liability. Credits used would reduce revenue in the periods of use.
- In June, GoDaddy issued $600 million of 5.25% senior notes due December 2027 and prepaid $600 million of term loans. The term loans and amended revolver mature in February 2024. The company also increased revolver capacity from $200 million to $600 million and reduced its interest-rate margins.
- GoDaddy adopted the new lease standard on January 1, 2019, recognizing operating lease assets and liabilities; adoption did not materially affect the income statement or cash flows. The company reported $171.7 million of operating lease liabilities at June 30.
- The board’s $500 million share-repurchase authorization remained unused at quarter-end.
Outlook, commentary, and risks
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects expenses to rise in several areas as it invests in products, international growth, customer care, and migration of infrastructure to public cloud services.
- Management identified bookings growth as a primary driver of operating cash inflows and said future capital needs depend on growth, investment, acquisitions, and potential repurchases. It may seek additional financing for acquisitions or repurchases.
- Key disclosed risks include competition and customer retention, service interruptions and cybersecurity or privacy incidents, dependence on third-party cloud and other providers, foreign-exchange exposure, substantial debt and covenant restrictions, regulatory and indirect-tax changes, and execution of acquisitions and infrastructure transitions.
- The filing disclosed a CEO transition: Scott W. Wagner was expected to resign effective September 4, 2019, with Aman Bhutani appointed as successor.
- A $175.3 million tax receivable agreement liability was recorded; payments on the existing liability were not expected to begin until 2022. The company warned that additional liabilities could be recorded if tax benefits become more likely to be utilized, and that actual tax attributes and future taxable income are uncertain.
- Disclosure controls were concluded effective at a reasonable-assurance level. During Q2, the company migrated financial processing systems, including the general ledger, to Workday and modified control design and documentation; no other material control changes were reported.
Important facts for investors to verify
- Whether customer, ARPU, bookings, and deferred-revenue growth continue to translate into recognized revenue and improved operating margins.
- The drivers of higher operating expenses, particularly marketing, technology and development, and general and administrative costs, and the extent to which the settlement provision affects future periods.
- Debt service, refinancing and covenant capacity, including the impact of variable rates and the terms of the senior notes and revolver.
- The status and final cost of the proposed class-action settlement, and any material developments in other litigation or indirect-tax matters.
- Progress and costs of the public-cloud migration and Workday financial-system implementation, including any effects on service reliability or financial controls.
- Future use of the share-repurchase authorization and the timing and amount of any payments under tax receivable agreements.