GoDaddy Inc. — Q3 2016 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2016. GoDaddy sells domain, hosting and presence, and business application subscriptions. Revenue is generally collected upfront and recognized over the subscription term. The company reports one operating segment.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $472.1 million | $411.1 million | $1,362.0 million | $1,181.9 million |
| Operating income (loss) | $21.2 million | $10.9 million | $32.2 million | $(43.2) million |
| Net income (loss) | $8.3 million | $(5.2) million | $(21.1) million | $(119.9) million |
| Net income (loss) attributable to GoDaddy Inc. | $4.8 million | $(2.5) million | $(14.6) million | $(75.7) million |
| Operating cash flow | $99.7 million | Not stated for quarter | $297.4 million | $198.1 million |
- Q3 revenue grew 14.8% year over year (about 16.4% on a constant-currency basis). Domains revenue rose 10%, hosting and presence 15%, and business applications 36%. For the nine months, revenue increased 15.2%.
- Q3 operating margin was 4.5% versus 2.5%; net margin was 1.8% versus negative 1.3%. Nine-month operating margin was 2.4% versus negative 3.7%; net margin was negative 1.5% versus negative 10.1%.
- Bookings were $534.3 million in Q3, up 12.3%; customers rose 7.2% to 14.5 million and ARPU increased 6.5% to $127. Management cited customer growth, broader product adoption, aftermarket sales, acquisitions, and international expansion.
- Q3 EBITDA excluding equity-based compensation, a non-GAAP measure, was $80.9 million versus $61.2 million. Nine-month amounts were $192.1 million versus $80.5 million; the comparison includes 2015 IPO-related termination costs and debt-extinguishment loss.
- Nine-month cash from operations was $297.4 million; investing used $105.8 million, including $57.9 million for acquisitions, and financing provided $16.6 million. Cash and cash equivalents were $556.2 million at September 30, up from $348.0 million at year-end 2015. Q3 capital expenditures were $16.2 million.
- At quarter end, total assets were $3.74 billion, deferred revenue was $1.57 billion, and stockholders’ equity was $702.3 million. Debt principal was $1.075 billion; the $150 million revolving facility was undrawn. The company reported compliance with debt covenants.
Changes, outlook, and risks
- Profitability improved year over year, including a return to quarterly net income. Nine-month net loss narrowed substantially, helped by higher revenue and lower interest expense; 2015 included a $21.4 million debt-extinguishment loss and $29.7 million of IPO-related termination expenses.
- Management said existing cash and internally generated cash flows should meet anticipated operating cash needs for at least 12 months. No specific earnings or revenue guidance was provided. Spending needs may vary with growth, international expansion, product development, acquisitions, and capital investment.
- GoDaddy had completed two acquisitions for $61.1 million in cash during the nine months. A separate proposed Freedom Voice Systems acquisition was expected to close before year-end 2016, subject to conditions; consideration was $42 million in cash plus up to $5 million in contingent earn-outs.
- The tax receivable agreement liability was $199.5 million. Management said payments on the existing liability were not expected to begin until 2018; potential additional liabilities of up to $310.3 million depend on future use of tax attributes. Taxable-income estimates and resulting TRA obligations are uncertain.
- Unusual items included a $5.0 million Q3 benefit from correcting an immaterial prior-period TRA accounting error and $3.6 million of equity compensation for fully vested RSUs after GoDaddy terminated an employee stock-purchase offering because its corporate structure was ineligible for a tax-qualified plan.
- Key disclosed risks include substantial debt, foreign-exchange exposure, service interruptions or security breaches, competition, execution of growth and acquisitions, and uncertainty in indirect-tax assessments. The company reported $5.1 million accrued for estimated indirect-tax liabilities and described ongoing litigation, including intellectual-property claims, as not expected to be materially adverse based on current knowledge.
Important facts for investors to verify
- Whether customer, ARPU, bookings, and international growth continue, and whether bookings convert into recognized revenue and cash flow.
- How margins and cash generation develop as operating costs, capital spending, and acquisition activity grow.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and liquidity after acquisitions and other commitments.
- Future TRA payments and tax-distribution requirements, including whether additional tax attributes become likely to be utilized.
- Completion and integration of the Freedom Voice Systems acquisition, and any changes in litigation or indirect-tax exposures.