GoDaddy Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2018. GoDaddy operates as one reportable segment, selling domain, hosting and presence, and business-application subscriptions. Customers generally pay at sale, while subscription revenue is recognized over the contract term.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $651.6m (+16.8%) | $557.8m | $1,284.8m (+22.7%) | $1,047.5m |
| Operating income / margin | $43.5m / 6.7% | $6.1m / 1.1% | $70.3m / 5.5% | $11.8m / 1.1% |
| Net income | $20.2m | $18.1m | $24.4m | $15.0m |
| Net income attributable to GoDaddy | $18.1m | $20.8m | $21.4m | $21.4m |
| Operating cash flow | $128.9m | Not stated in the filing text | $277.3m | $239.9m |
| Cash and cash equivalents at period end | $809.7m at June 30, 2018 | $582.7m at December 31, 2017 |
Q2 revenue by line: domains $304.8m (+15.8%); hosting and presence $244.6m (+13.8%); business applications $102.2m (+28.4%). International revenue was $233.3m, up 24.3%; total bookings rose 13.0% to $754.2m. Customers grew 6.5% to 18.0m and trailing-period ARPU increased 10.2% to $142. Management attributed growth to customer and domain-base expansion, international growth, stronger adoption of non-domain products, and aftermarket domain sales. Foreign exchange added to reported growth; management said constant-currency Q2 revenue growth would have been about 110 basis points lower.
Q2 cost of revenue, excluding depreciation and amortization, was 34.0% of revenue versus 35.2% a year earlier, implying an improvement in gross margin on that basis. Operating margin improved to 6.7% from 1.1%. Despite revenue growth, income attributable to GoDaddy was $18.1m, down from $20.8m; consolidated net income was $20.2m versus $18.1m. Q2 2017 included a $32.0m benefit from a tax receivable agreement (TRA) liability adjustment. H1 2017 included a $37.0m benefit from that adjustment; H1 2018 recorded a $0.1m expense.
Liquidity, debt, and balance sheet
- At June 30, 2018, current assets were $1,350.8m and current liabilities $1,854.1m. Current liabilities included $1,385.2m of deferred revenue, reflecting advance customer payments.
- Long-term debt was $2,469.8m principal, or $2,419.2m net of unamortized discount, issuance costs, and current portion as presented on the balance sheet. Cash was $809.7m; no revolving-credit borrowings were outstanding, and $200.0m of revolver capacity was available.
- H1 operating cash flow was $277.3m; investing cash outflow was $70.8m and financing cash inflow was $21.9m. Cash increased $227.0m during the half. Operating cash flow growth reflected bookings growth, higher operating income, and HEG acquisition contribution.
- Debt carries variable-rate exposure; the company had hedged approximately $1,308.9m of debt with an interest-rate swap. It reported compliance with credit-facility covenants at quarter-end.
Changes, outlook, and risks
- H1 2018 revenue growth included the contribution of Host Europe Group (HEG), acquired in April 2017; the filing also cites HEG-related increases in expenses, amortization, and interest costs. H1 2017 investing and financing cash flows were unusually large in part because of the HEG acquisition and its debt financing.
- In July 2018, after quarter-end, GoDaddy completed its acquisition of Main Street Hub for approximately $126.8m net of cash acquired, with contingent earn-outs of up to $50.0m.
- No numeric full-year revenue or earnings guidance is provided in the filing text. Management stated that existing cash and internally generated cash flows were expected to cover anticipated operating cash needs for at least the next 12 months. It expects costs to rise in absolute dollars as the business grows and noted planned product, infrastructure, international, and customer-care investments.
- Key stated risks include competition, customer retention and acquisition, service interruptions and security or privacy breaches, scaling and integrating acquisitions, foreign-exchange and interest-rate movements, substantial indebtedness, and the ability to fund future investments. The company uses derivatives for hedging, not speculation.
- TRA liability was $179.2m at June 30, 2018; management did not expect payments on the existing liability to begin before 2022. If use of certain tax attributes becomes more likely, the company could record up to an additional $942.1m related to basis adjustments and $328.4m related to NOL and credit carryforwards; actual amounts depend on future taxable income and tax-attribute utilization.
- Ordinary-course litigation accruals were described as immaterial. Estimated indirect-tax liabilities were $19.8m; final audit or litigation outcomes could differ materially from estimates. Management reported disclosure controls effective at quarter-end and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether customer growth and higher ARPU persist, and whether growth remains strong after accounting for acquisitions and foreign-exchange effects.
- Operating-margin progress against rising compensation, technology, marketing, support, and amortization costs; also track equity-based compensation, which was $28.2m in Q2 and $59.7m in H1.
- Debt service and variable-rate exposure, covenant headroom, and cash requirements following the Main Street Hub acquisition.
- Future TRA payment timing and potential liability changes, plus developments in indirect-tax assessments and litigation.
- Integration results from HEG and Main Street Hub, and the effect of the expected 2019 lease-accounting adoption on reported assets and liabilities.