GoDaddy Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in millions of U.S. dollars unless otherwise noted. The filing is unaudited.
Business context
GoDaddy provides domain, hosting and website-presence, and business-application subscriptions. It typically collects subscription payments in advance and recognizes revenue over the service term. The company reports as one operating segment.
Key financial and operating metrics
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Revenue | $679.5 | $582.2 | +16.7% |
| Operating income / margin | $37.5 / 5.5% | $32.1 / 5.6% | Income +16.8% |
| Income from continuing operations | $14.1 | $7.1 | More than doubled |
| Net income attributable to GoDaddy | $13.2 | $22.4 | Down; prior period included discontinued-operation income |
| Diluted EPS attributable to GoDaddy | $0.08 | $0.17 | Down; prior period included discontinued operations |
| Total bookings | $741.8 | $668.0 | +11.0% |
| Customers at period end | 18.3 million | 17.1 million | +6.7% |
| Average revenue per user | $145 | $134 | +8.6% |
| Operating cash flow | $154.0 | Not stated for quarter in the filing text | +17.2%, as reported by management |
Q3 revenue by category: domains $309.5 (+14.0%); hosting and presence $263.2 (+16.5%); business applications $106.8 (+25.9%). International revenue was $236.0, up 19.1%.
For the nine months, revenue was $1,964.3 (+20.5%); operating income $107.8 (5.5% margin), versus $43.9 (2.7%) in 2017; net income attributable to GoDaddy was $34.6 versus $43.8. Net cash provided by operating activities was $431.3 versus $371.3. Investing activities used $195.3 and financing activities provided $34.0.
Liquidity and debt: Cash and cash equivalents were $851.2 at September 30, 2018, up from $582.7 at December 31, 2017. Current assets were $1,345.2 and current liabilities $1,900.9; deferred revenue totaled $2,029.5. Term-loan principal was $2,463.6, with $2,398.4 reported as long-term debt net of discounts, issuance costs and the current portion. The $200.0 revolving facility was undrawn, and the company reported compliance with debt covenants.
Material changes and notable items
- Revenue growth reflected customer and ARPU growth, international expansion, broader adoption of non-domain products, and acquisitions. Domains under management rose 6.3% to 77.5 million.
- Q3 net income was lower than in 2017 despite improved continuing operations: Q3 2017 included $22.9 of income from discontinued operations. For the nine-month comparison, 2017 also included discontinued-operation income and a $37.0 TRA liability adjustment benefit.
- Q3 operating expenses increased, notably technology and development (+23.3%), marketing and advertising (+19.2%), and general and administrative (+37.2%). Management attributed increases to growth and headcount, international advertising, acquisition costs, and MSH integration. Equity-based compensation was $30.6 in Q3 versus $19.8 a year earlier.
- In July 2018, GoDaddy acquired Main Street Hub for $182.0, including estimated contingent consideration of $43.4 and potential earn-outs up to $50.0. Preliminary goodwill was $135.0; purchase accounting remained subject to measurement-period adjustments.
- On November 5, 2018, after quarter-end, the board authorized repurchases of up to $500.0 of Class A shares. The program has no time limit and does not require the company to repurchase shares.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management said existing cash and internally generated cash flows should meet anticipated operating cash needs for at least the next 12 months. Future capital needs depend on growth spending, acquisitions, capital expenditures, and possible repurchases.
- Management expects absolute technology and development costs to rise as products are enhanced and infrastructure migrates to a third-party public cloud; operating costs may also rise with customer growth and international expansion.
- Risks highlighted include competition, customer acquisition and retention, service interruptions or security/privacy breaches, system capacity, international and foreign-exchange exposure, acquisition integration, substantial indebtedness, and regulatory compliance. Currency movements affected reported performance; management estimated Q3 bookings growth would have been about 110 basis points higher in constant currency.
- The company had $189.3 of recorded TRA liabilities and said payments on the existing liability were not expected to begin until 2022. If tax attributes become more likely than not to be used, additional TRA liabilities could be recorded, potentially up to $1,110.1 for basis adjustments and $354.9 for NOLs and credit carryforwards; actual utilization and payments are uncertain.
- Ordinary-course litigation was described as non-material based on current estimates, but outcomes cannot be predicted. Estimated indirect-tax liabilities were $13.9; audits or changes in tax determinations could produce different results.
Investor verification priorities
- Reconcile headline net-income and EPS declines with prior-period discontinued-operation income and the nine-month TRA adjustment.
- Assess whether bookings, customer growth, and ARPU gains persist, including the impact of shorter subscription terms and foreign exchange.
- Review debt service, interest-rate exposure, covenant headroom, and the possible cash demands of the announced repurchase program and acquisition earn-outs.
- Monitor MSH integration, final purchase-price allocations, and whether expected acquisition benefits support goodwill and intangible-asset values.
- Track TRA and indirect-tax exposures, including any material changes in expected tax-attribute utilization or litigation outcomes.