GoDaddy Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; amounts in U.S. dollars unless stated otherwise.
Business context
GoDaddy provides domain, hosting and presence, and business application subscriptions. It generally collects subscription fees upfront and recognizes revenue over the contract term. The company acquired Host Europe Holdings (HEG) on April 3, 2017; its results are included from the acquisition date. GoDaddy sold HEG’s PlusServer business on August 31, 2017.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $582.2 million | $472.1 million | $1,629.7 million | $1,362.0 million |
| Operating income | $32.1 million | $21.2 million | $43.9 million | $32.2 million |
| Income (loss) from continuing operations | $7.1 million | $8.3 million | $27.4 million | $(21.1) million |
| Net income (loss) | $30.0 million | $8.3 million | $45.0 million | $(21.1) million |
| Net income (loss) attributable to GoDaddy | $22.4 million | $4.8 million | $43.8 million | $(14.6) million |
- Q3 revenue grew 23.3%; nine-month revenue grew 19.7%. Q3 operating margin was approximately 5.5%, compared with 4.5% a year earlier.
- Q3 revenue by category: domains $271.5 million (+14.8%); hosting and presence $225.9 million (+29.8%); business applications $84.8 million (+38.1%). Management attributed growth to HEG, customer and domain growth, international expansion, and broader adoption of non-domain products.
- Q3 total bookings were $668.0 million (+25.0%); nine-month bookings were $1,960.3 million (+20.2%). Customers reached 17.1 million (+17.7%) and average revenue per user was $134 (+5.1%). These are company-defined operating metrics, not GAAP revenue measures.
- Cash and cash equivalents were $536.9 million at September 30, 2017, versus $566.1 million at December 31, 2016. Nine-month operating cash flow was $371.3 million, compared with $297.4 million; net cash used in investing was $1,497.9 million, and financing provided $1,094.0 million.
- Debt principal was $2,488.6 million; the balance-sheet carrying amount, net of discounts, issuance costs and current portion, was $2,415.8 million long-term plus $16.1 million current. The company had no revolver borrowings and $200.0 million available. Deferred revenue was $1,849.1 million.
- Q3 interest expense was $24.4 million, up from $14.4 million. Nine-month interest expense was $59.2 million, up from $43.0 million.
Material changes versus comparable periods
- HEG added $52.8 million of Q3 revenue and $98.7 million for the nine-month period, but contributed a $6.1 million Q3 and $15.5 million nine-month loss from continuing operations.
- Q3 net income included $22.9 million of income from discontinued operations; the nine-month amount was $17.6 million. The sale of PlusServer generated a $36.7 million gain, net of tax, and $447.7 million of net proceeds.
- The HEG acquisition substantially expanded assets and debt: total assets increased to $5,695.0 million from $3,786.9 million at year-end 2016; long-term debt carrying value increased to $2,415.8 million from $1,035.7 million.
- Nine-month investing outflow reflected $1,875.7 million of acquisition spending, partly offset by the PlusServer sale proceeds. The company used the sale proceeds and $148.9 million of cash to repay the Bridge Loan in full.
Outlook, risks and unusual items
- Management stated that cash and internally generated cash flows should be sufficient for anticipated operating needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management expects operating expenses to rise in absolute dollars as the business grows, including spending on technology and development, customer care, international operations, and product development.
- Key risks discussed include competition, customer retention and acquisition, service interruptions or security breaches, integration of HEG, foreign-exchange exposure, substantial indebtedness, and the ability to maintain cash generation and profitability.
- Debt bears variable rates; interest-rate and cross-currency swaps hedge portions of the exposure. Derivative liabilities totaled $184.9 million at quarter-end. The company reported compliance with credit-facility covenants.
- The company recorded a $220.1 million tax receivable agreement (TRA) liability. It said payments on the existing liability were not expected to begin until 2020, but future tax-attribute utilization and LLC-unit exchanges could materially change the liability; additional potential TRA liabilities were disclosed.
- Estimated indirect tax liabilities were $6.8 million; management estimated reasonably possible additional losses of $0–$22.0 million. Ordinary-course litigation accruals were described as not material.
- Management reported effective disclosure controls. The internal-control assessment excluded HEG while the company continued evaluating its controls.
Important facts for investors to verify
- How much reported growth reflects HEG versus underlying organic growth, and how HEG integration affects margins and cash flow.
- The recurring earnings profile apart from PlusServer disposal income and other acquisition, financing, and TRA-related items.
- Debt reduction capacity, variable-rate exposure, covenant headroom, and the timing and amount of required debt and TRA payments.
- The final HEG purchase-price allocation and the subsequent performance of acquired goodwill and intangible assets.
- Potential indirect-tax exposure and the adequacy of related reserves as jurisdictions’ rules and audits evolve.