Chit Chat Stocks - GoDaddy (GDDY) Not So Deep Dive

Episode Date: December 13, 2022

GoDaddy is most well-known for its domain name registration service. The company assists customers at the initial stage of establishing a digital identity. At the end of the month, we will publish an Arch Capital episode that will cover the company: Wix. Listen closely as Brett and Ryan go through the history, financials, and future prospects of GoDaddy. Enjoy the show! ****************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (3:29) Industry | (19:00) Management & Ownership | (26:14) Earnings | (32:27) Balance Sheet | (37:25) Valuation | (41:57) Our Analysis | (43:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay, welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. My name is Brett Schaefer, and I'm here with Ryan Henderson. As always, this is our weekly,

as I said, Not-So-Deep-Dive episode where we go through the basics of a single stock and hopefully give listeners inspiration to either further research a company or toss it into their too hard pile or not. You may not like it after we go through it. Today, we're talking GoDaddy, which is a company a lot of people have heard of. As we learned from some of their investor slides, there is 70% brand awareness for their name. But a lot of people actually don't know what they do. They know they have something to do with domains. And I'm going to go Ryan introduce that. But first, we're going to talk about our advertiser quick, and then some housekeeping items. So the housekeeping items first, along with this episode, there will be a newsletter on our sub stack.

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Second, make sure if you enjoy the episode to give us a five-star review on either Spotify or Apple Podcasts. And next, I guess we should talk about our sponsor through the end of 2022. We're closing out the month of December, so time is running out. You already know them if you're listening to the show. I bet 90% of the listeners already know who we're going to be mentioning here, and that is 7investing. if you use code money through the end of 2022, you can get two things. One, a seven-day free

trial. So there's no excuse not to try them out at least once. The service might not be for you, but you should at least try them out. And also, if you use code money, you get $100 off your annual subscription for life if you decide to continue being a member. So again, $100 off and a seven-day free trial. Really, the seven-day free trial is perfect because you can check out all the different things that they offer. You're not going to be able to read everything because they have such a comprehensive library of research reports.

But again, try it out. Seven-day free trial. We don't need to go through all the details of what they are, but seriously, it's a research service we really like and use. Ryan, anything else before we go into GoDaddy? Well, just to create a little bit of a sense of urgency see for the listeners here that code will expire and i believe the free trial expires eventually as well so um now it now really is the time to check it out uh and i mean that wholeheartedly

it's free so it's not like we're there isn't a whole lot of cost uh to trying it out but exactly all right let's talk go daddy uh ryan what do they do because there is this is the website software month and e-commerce software month and most people might not know that they're actually in this game right now yeah they are um and it's it's on it's trying to figure out what they do is a little bit of a task because there is some complexity to it but godaddy in a single sentence is the world's largest domain registry and website hosting platform um and i'll try to break that down into that's not that's not very intuitive uh web web hosting and domain registry.

There's some backend stuff there that I'll try to talk about as well. But they break the business down into two reporting segments now. It used to be three. They've restructured how they report. So there's two, it's core platform and then applications and commerce.

And applications and commerce is trying to basically compete with the other companies we're going to talk about this month and extend the value of what they provide to their users. And so when we talk about core platform, This consists primarily of domains and web hosting and combined domains and web hosting accounted for 81% of revenue in 2021. It's since declined a little bit because applications of commerce outgrew and the restructuring of the product segments has mixed the revenue shift.

But domains, I like to think about it. I saw this analogy on a YouTube video, but if you think about a website like a house, the URL or the domain name is the land on which the house sits. And so GoDaddy's core business, and this is really where they got their start, is helping customers find and secure the right domain name for them. um and so that is typically if you've ever used godaddy you'll go to the website you'll look up the kind of url you want maybe you know your company name and then it's got all these dot coms dot cos dot net dot a whole bunch of different i believe those are called it's the abbreviation is gtld but it's uh i'm blanking on what it means but that's that's kind of the the end domain. And so the, uh, the, the actual registry is that GTLD, the end of it, the.com, the.co. So you might build your land there, but when it comes to.com, GoDaddy actually has to

pay out a company, pay a company called VeriSign for all those registries. So they, they, they pay a big chunk to them. And then they sell the website to their users. GoDaddy does with a little bit of a surcharge on top. But they are actually the registry for a lot of different endings, just not .com. .com is exclusive to VeriSign through some contract that they have with the government. But that's kind of beside the point. Basically, 84 million domains are managed by GoDaddy. And that's 23% of all domains registered worldwide. So that is the actual domain registration business, but then there's the actual hosting component of it. And so in addition to domains, hosting services includes things like data storage at GoDaddy has anytime

you've got a website with actual content on it, that data is being stored somewhere on a physical server. And so GoDaddy's got co-location data centers located all around the world. They do a lot of their business internationally. And so they're actually storing that data for you. And there's a lot of backend work that since I'm not really that technically proficient or that much of a computer guy, I don't quite understand it, but they're doing kind of all that backend work. And then on top of it, it also includes things like security. And then included here is even content management systems. And part of this may be lumped into the applications in commerce now. It's kind of hard to tell since they haven't had a 10K since they switched their

reporting segments. But the content management solutions that they provide, they have a do-it-yourself and this is where it really kind of competes with the Wix and the Squarespace. They have a do-it-yourself, set up your own website design platform called, I think it's websites and marketing, which is a pretty bland name. I think they should rename it. So there's that component. But then the part that gets a lot of attraction is the managed WordPress. So a lot of WordPress customers use GoDaddy for their hosting services. So it's 10% of WordPress websites. And WordPress is the largest content management system in the world. And most websites, active websites that aren't custom HTML coded from the ground up are using WordPress. And so you have basically this

manage, this ability to manage your WordPress within GoDaddy and you can rely on GoDaddy's hosting services. So that's a big part of the business. It attracts a lot of new hosting customers because WordPress and them have that tight partnership. And then the other element, So that's kind of core platform and that accounts for the most of business. The other element here is- One thing on WordPress for people to know, and hopefully, I think this is important when referencing them throughout this episode and throughout this month, WordPress is open source. So GoDaddy technically doesn't have a partnership with WordPress.

They just use it a ton. And over time, people have associated them together because GoDaddy, WordPress as an open source platform with just again we don't have to go through the details of wordpress but they have a lot of plugins a lot of companies that are built on top of it they're they're they weren't an integrated domain provider so godaddy and wordpress have people have used them in tandem when building a website when you buy a domain from godaddy who has the highest market share within domains the next step a lot of the times was to build a website through wordpress so you'd have that you know relationship and it's why they've probably been so successful with this

managed by WordPress stuff as well. But the reason they moved into websites, and we'll talk about this later, is because of all the competitors from Wix, Shopify, and Squarespace who have integrated this into a single use thing where you can buy the domain and do the website all in one, which has been gaining market share. And that's the reason, I guess, for all this stuff. But yeah, continue. Yeah. And another interesting part is with GoDaddy, a lot of their customer journeys start with establishing the domain name and then building the website. So you can either go into the do-it-yourself platform that they have or the managed WordPress solution that they have. Whereas when you look at, and we'll talk about this in the upcoming weeks with a Squarespace

and Wix, it's the opposite. You're designing the website first and you're finishing with the domain name. So kind of just interesting dichotomy there. what do you think okay i typed buy a domain into google what what do you think the first ad was who won the first ad i would bet godaddy no actually it was uh actually squarespace really second is godaddy um third was mailchimp mailchimp that might be some poor ad there first true search was Google Domains, which I don't think actually gets much use. And then the second true search

that wasn't advertised was GoDaddy. So they definitely have the number one market share within domains by far. But again- And they're spending way less as a percentage of their business on sales and marketing, SEO, that kind of thing, compared to the Squarespace's

and the Wix's of the world. And the Shopify's, yes, they are much more profitable than those. So we'll talk about all that stuff later. So continue on what they do. All right. Applications and commerce. So this is just on top of the design component of the website, like establishing the internet presence. They actually offer some solutions to help customers better run their businesses. So if you've ever looked at Wix, this is comparable to their business solutions in a way, but there's also some other elements. So it's in-house products as well as distribution of third party applications. One big one that they have is they help customers set up Microsoft 365 accounts with their own custom domain name. You can also do that for other email accounts. Um, so they're kind of a distributor of Microsoft 365 licenses. I imagine they get kickbacks from Microsoft for that. Um, and then they have other in-house solutions, like I mentioned, with online store integrations, GoDaddy payments, even physical point of sale systems. So there's a lot of businesses that run on WordPress, or not WordPress, GoDaddy. And they're trying to provide additional functionality to those, especially for the businesses that get set up on the DIY solution, the do-it-yourself within GoDaddy.

It's a really good, it's really helpful for those customers if you can actually allow them to run their business and provide them kind of the functionality to be the back office, the solutions that you need. Or maybe not back office isn't the word I'm thinking of. Front office. It's front office, customer facing stuff. Yeah. Yeah. Just all the functionality required to run an online business. But if we talk about the history, I think that covers hopefully the business well. In terms of economics, I guess we'll talk about that in a little bit, but it's fairly high margin. They do have some costs, like I mentioned, to registration sites like VeriSign, but I'll talk about that in a bit.

But history, GoDaddy was founded in 1997 by a man named Bob Parsons. I also didn't put this anywhere in here, but it's always been an Arizona-based company. Originally, I believe it was in Scottsdale. It's now, like 2021, they relocated their headquarters to Tempe. Not sure what the rationale is for that. So it's always kind of been outside of the valley, which I think has helped the business stay profitable and kind of have just a different focus and culture than a lot of those companies. But the company was founded by a man named Bob Parsons, 1997. Bob Parsons is pretty unique.

So I think it's worth kind of spending some time on him. He's not really associated with the business anymore. He may have some stake still in it, but he's generally out of it. But Parsons grew up pretty poor in everything I could read about him. Apparently, his parents were big gamblers and they worked kind of the low paying jobs. And he almost flunked out of high school, but ultimately ended up joining the Marines. After serving for several years, he ended up attending and graduating the University of Baltimore with an accounting degree. So nothing here like shouts, this guy is going to start a tech company and be extremely successful.

However, after he got his accounting degree, he started a career in IT and software sales where he kind of found a love for it. And he ended up working to develop his own home accounting program in his free time, which was called Money Counts. He worked on this while he was still working his job. And after three years, he decided to quit and start this thing full time, start selling the software. And eventually, he named the company Parsons Technology. And after lots of success, he sold the business to Intuit for $64 million in 1994. So really successful, but I feel like you hear these stories a lot where big companies end up having success because a founder had success prior. And so that's basically what happened here shortly after Parsons used the money to start a new company, which would eventually become known as GoDaddy.

The business was initially named Jomax Technology, apparently after a street name in Arizona. Um, now I think the question, a lot of people are probably thinking about is how on earth did they get to the name GoDaddy? I don't, I don't know what the inspiration was. They wanted something random that would stick. And originally they tried to name the business Big Daddy. Um, but the domain name was taken. And so they ended up, someone said, how about GoDaddy? And, uh, I think a lot of people get confused with the branding, especially when they had those weird commercials for like a whole decade with that NASCAR driver. And they were the Super Bowl commercials. So everyone saw them. Yeah. Anyway, they ended up, apparently the CEO said he would

tell people about the company and he'd say the name and they would laugh and smile at it and it ended up sticking. So it's still around today. It's still what they call themselves. I'm not And I tried to kind of look into it, what drove their success versus other domain registries. I don't know. Maybe it was just like simplicity of design being sort of just an easy solution. But by 2005, they were the largest accredited registrar worldwide. And just so everyone knows, in order to be a domain registrar, you have to be accredited by – it's like – I can't remember what the abbreviation stands for, but it's ICAAN, which is basically a government agency that gives you the accreditation. And in 2011, they were still one of the largest worldwide, and 70% of the company was sold to a private equity consortium. So Parsons kind of sold his stake. He was out of the picture by this point, still owned a little bit, but not really on the day-to-day operations. Sold that stake to a private equity consortium. I know KKR was a part of it. There were some other big private equity backers as well. And then in 2015, the company was IPO'd on the New York Stock Exchange. And I haven't checked overall stock performance, but I imagine it's done pretty well just based off the performance of their fundamentals.

Yeah, I think it's up 200%, something like that. Yeah, 184% all time. So, solid returns. I imagine that's probably just outpacing the index, right? Yes, I checked it during this. I actually compared them to VeriSign just because I wanted to understand if there's been some profit pool that's gone more to VeriSign because they have that control of .com. But GoDaddy and VeriSign have actually traded really closely in tandem, which is quite interesting in both of them. have outperformed the S&P 500 on a total return basis. But I mean, we're going to talk about this, but they are just big beneficiaries of the growth of the internet.

That is correct. Yeah. And they're trying to, this is the big question that we're going to ask by the end of the show. They're trying to counter position themselves. I think I'm using that term, right? Versus the Wix's, the Squarespace's, the Shopify's as WordPress declines in market share, which that's a perfect segue to industry and competition. If we look at the web domain registration industry, it's estimated to be valued at about

$8 billion this year. And then it grew at a compound annual growth rate of about 4% from 2017 through 2022. So I think you can most likely guess that domain registrations will grow along with the internet. Although one long-term thing to watch out for is, I think, if businesses are just only on say social media websites or whatever, that could be a long-term competitor. We probably won't focus on that much during the show, but again, something to consider. The non-open source, so this means non-WordPress website building market is actually much smaller than people

think. Again, like we mentioned, WordPress has the majority market share, I think 65-ish percent. Ryan, you have something to add here? Yeah, I could be wrong. This is speculation, But the 4% CAGR over the last five years is slightly slower than the last 10 years. I believe it was at like 6% over the 10 years. So maybe that is the proliferation of social media as well, businesses moving towards specifically social media. Yeah. And I think it also could be because the internet growth is just slowing in general.

So there's multiple factors at play. But I would expect since we're in, say, the third decade of the internet now or fourth fourth decade. We probably should expect growth to slow, but I think it should outpace GDP growth worldwide. But yeah, if we look at non-open source website builders, the estimates from third parties were too low versus the revenue I knew the leaders had. But for what I could find, because we know the big leaders, again, are Shopify, Wix, Squarespace, and then increasingly GoDaddy, the revenue per year is probably closing on $5 billion and is growing faster than web domain registration.

And from my seat, if we look at, say, the website building market at $5 billion a year, and again, non-WordPress, versus the domain registration industry at $8 billion a year, I see no reason why website building should be a smaller industry than domain registration. And it's not if you include WordPress.

But again, over time, if you think WordPress is going to die, which we can maybe discuss on why that's going to happen, And there's just a huge market opportunity for the website builders in general. Ryan, some to add here. And one other thing I didn't mention is not everyone buying a domain. There's a lot of, I don't know what you want to call them. They call them domain investors. They're people that buy up domains in anticipation that someone else is going to need them down the road.

And they sell them at a markup. They actually help facilitate the aftermarket transactions GoDaddy does. So if you are someone that's selling it and already has it, they'll connect you if you're a buyer that really wants a specific domain. So that is a part, I think a decent chunk of their domain sales aren't always to people that are actually building websites. That is true. And that's definitely more insulated from the CMS providers, the vertically integrated providers that are trying to sell domains themselves. because a lot of times you'll have the investors and they'll transfer it over to someone

who wants to own that website. And then that person will either build a website on WordPress, build it on Shopify, build it on Wix, build it on GoDaddy, whatever. But again, GoDaddy has that tremendous market share within the actual domain buying process when it's just the domain buying. If we look at competition within domain,

I mean, they're the clear leader. You have some really small players out there like Donuts, Automatic, Newfold, WordPress Engine. And then again, I mentioned like this before, companies like Wix and Squarespace are trying to have an integrated solution where you start with, say, okay, I'm designing a website, and then you buy the domain with us

in combination. We should have confirmed this before the show, but I'm not sure exactly if those companies are registrars or however you want to whatever the name is. So I'm not sure if they're actually giving money back to GoDaddy or maybe they're, well, they're definitely giving money back to VeriSign, similar

to GoDaddy if it's .coms. but Ryan, you may have more information because you've reached that for the show. I know if it's a.com, it has to go through VeriSign. Right. But I don't know. GoDaddy mentions that they have more than they can do the registry for more

than 200 different. And I should probably just look up what the abbreviation stands for GTLDs, which is that ending the.co.com.net, that kind of thing. So they do it for 200 of those. I'm not sure if that's exclusive. like they have to go through GoDaddy, but I can probably check. Yeah. I think we maybe should confirm that. But again, if you're thinking about investing in

these companies or GoDaddy, I think that's an important relationship to look at. And it's an example of why during these shows, these are not comprehensive deep dives that should allow you to buy the stock after. It's kind of an exploration with us and maybe inspire you to research it further if this looks like a promising business. Ryan. It's worth noting, though, that that actual registration cost is a like a really small percentage of if you're a user and you've built a website and then you're like registering the domain, the domain cost is like I think it's like seven or eight bucks. The actual website building, you have to pay like one hundred, two hundred and sometimes three hundred dollars, depending on the pricing and the length of the contract for the hosting services. So it's a really small percentage. That's right.

Yeah, the actual website building process, and especially the e-commerce and payments, has much larger revenue opportunities, which is why GoDaddy is going to there. Now, if you look at competition within websites, CMS, which is just the content management systems, and I guess just the website building in general, the leader is WordPress,

and WordPress technically isn't a CMS. But again, since they're open source, you'll have your CMS or the content management system, or however you're building the website through WordPress. through all the plugins and all that good stuff, which again, it's complicated sounding. And as someone who has built a WordPress website and then one through a vertical one,

WordPress is very clunky and tough to do if you're not an expert. And then there's also the integrated, what I'll call the big three, which are Shopify, Wix, and Squarespace. Wix and Squarespace have more exposure to non-e-commerce. And as most people will know by now, Shopify is the leader by far

with do-it-yourself websites. for e-commerce functionality. Now, one important thing to note is that WordPress has steadily lost market share this decade. There's a good chart that they have in their investor day from earlier in 2022 that outlines the steady decline since I think it was 2010 or 2013. And that has left the door open for companies like Wix, Squarespace, and increasingly GoDaddy to gain market share. And this is an important thing because maybe GoDaddy should have explored to website building before WordPress started losing market share. But this probably accelerated their plans because they saw the writing on the wall and how WordPress continues to lose market

share every year and how they need to get into this business to further solidify their competitive position. All right. Enough of that. Let's move to management and compensation. The CEO is Aman Bhutani. He was brought into managed business in 2019 after the PE firm started to fully sell their stakes. Also lives in Seattle, which shout out to the local business leaders helping driving up home prices here. No, that's a joke. But it's interesting. He lives in Seattle and he probably does here because he worked at Expedia for a long time period before joining GoDaddy. So he has lots of corporate experience. He's not associated with the company as any sort of founder, as we know from the history Ryan laid out. But he's very experienced in software and speaking

about reading all their documents, reading all their earnings releases, reading their proxy and all that good stuff. I do like him a lot. I think he seems like a really good fit as sort of these mercenary CEOs that come in after the PE firm.

If we look at the board of directors, there are nine members of the board. Majority are being independent or current or ex-executives from the software market, which I think was good to see. They also have one person from Silverlake from the PE firm still there,

but Silverlake does not own that much of the stake anymore. And then Bhutani himself is on the board. If you look at total board compensation, it was $2.5 million in 2021, or a negligible amount of gross profit. So no concern about overpaying the board of directors. If we look at executive compensation, $36 million in 2021, or 1.5% of gross profit. Again, no concern about overpaying the executive team. We kind of look for about 5% gross profit being paid out as executive compensation as a sort of something to be concerned about of whether they're just paying themselves over trying to focus on creating value for shareholders. If we look at the compensation metrics and hurdles, you'll never

guess, but they have a base salary, short-term annual bonuses, and long-term stock awards that it seems every compensation consultant designs for these companies. Short-term bonuses are based on bookings, which are just a revenue equivalent, but more on a cash basis. Oh, no, no, excuse me, bill. That's not true. Bookings, that's billings is on a cash basis, cash basis. But bookings is the amount of future revenue they have booked in that quarter or that time period. So I like that metric. And then the other one on the short term bonuses is unlevered free cash flow targets. I think both check out to me as solid metrics to track every year. I think the unlevered free cash flow may incentivize them to take on a lot of debt without a regard for interest rates,

maybe. And then it might incentivize them to target stock-based compensation if the target is not free cash flow per share. But not bad. It's a lot better than adjusted EBITDA. The long-term stock rewards are based on a total shareholder return hurdle versus the NASDAQ internet index. And then there also are some non-performance RSUs as well, giving that to executives. The total return target is unlocked if they are at the 50% median percentile of returns for the index. I think the total shareholder return hurdle is fine. It's not great. I would much rather look at, say, something like a three-year free cash flow per share target, which is their core metric that they look at when they speak with investors.

But looking at these, it's OK. It's fine. It's not a huge deal. But one thing to note here is that they are heavy stock option, RSUs, whatever you call them, PSUs, issuers. And when they talk about buybacks and they talk about returning cash to shareholders, similar to companies we've talked about before. Actually, I don't think we've talked about Dropbox because it is

something we own, but not something I guess we've discussed on the show, where they are generating cash and they are buying back stock. But again, you have to look at that as a way where there's some SBC headwinds and there's a bit of a tug of war between the dilution coming from the SBC and then the buybacks. And we'll talk about that later. But overall in the proxy, no major red flags I could find, which is great. And then I think an interesting note on the ownership is that 40% of the shares are held by what I would call non-passive investment funds, which are listed in the table that'll be in the newsletter. You have someone like Starboard Value, which is an activist fund and value fund. You have Wellington Management Group, Select Equity Group,

Capital International Investors, FMR, LLC, who all have sizable stakes here. And the executive directors only have 0.4%. And then we have some Vanguard and BlackRock in there as well. So I think it's quite interesting to see that a little bit unique compared to a lot of other companies we've looked at. Right. Right. Where it's just basically you have some maybe the founder owns a big stake and then you have some maybe one fund that owns a stake. And then you have the passive holders that are in that five percent share category. This one seems like there's a lot of active funds that are pretty. They have high conviction on GoDaddy. Yeah, I like to see that just because it means they are perfectly aligned with people that are listening to this podcast if they were to invest.

I mean, they have the same basic interests. They own the equity. They want the same outcomes as the traditional investors, and they probably have similar time horizons. So I like to see that. That to me, if I'm looking at a company, is always a bit of a vote of confidence. That's right. And I think looking at someone, say, they can help, yeah, how do I say it? Maybe not even just be an activist, but they want what we want as individuals or smaller shareholders.

Where you look at something that's founder controlled with a double dual class, you just have those concerns about what they truly want. And that concern is not here at GoDaddy. Agreed. All right. Should we talk earnings? Yeah. All right. So just in terms of the annual numbers for this business, over the last 12 months, they've

done a little over $4 billion in revenue. That was growing at 11% year over year, 64% gross margins. As I mentioned, there's a big chunk of cost that goes out to the other registries since most domains, especially where most of their business is done in the US. A lot of them go to the dot coms. So 64% gross margins and then $884 million in free cash flow or 22% free cash flow margins. However, when you think about them paying off that debt, they also report an unlevered free cash flow number, which is slightly higher. So for reference this year, I believe they're targeting it's like $1 billion to $1.1 billion in unlevered free cash flow. So that's the cash

that they generate prior to paying their debt. That doesn't really matter for shareholders because it's not payable out to shareholders. Yeah, yeah, Brett. Is unlevered, I know that there's kind of a standard definition that maybe something like Investopedia would have, and you probably didn't check this, but do they include their interest expense in the unlevered or not? I read the definition yesterday. I think it was just free cashflow prior to debt repayments. Okay. So it's just the standard one, It's not a big deal. That's the standard one that most people use. Yeah. But it's just important when you think about when you're looking at the balance sheet,

maybe not that important in terms of distributable cash flow to shareholders. But when we talk about the most recent quarter, the business is still growing. They are seeing a little bit of foreign exchange headwinds. So just over a billion dollars in total revenue, up 7% year over year. It was growing 9% in constant currency. So 32% of revenue comes from outside the US. So they're seeing those when they have to exchange back to dollars, they're seeing the revenue they lost. The core platform, so the domains and the hosting business grew 2%. And that's in reported currency. So it was actually growing 2%. And then applications and commerce ARR grew 10%. So like I mentioned, that business is growing slightly faster. $257.5 million in true free

cash flow. That was up 18% year over year. So I think part of the one thing I like about seeing a whole bunch of value funds in ownership, they get management's priorities straight pretty quick. And this is a business that's reined in costs in a big way. And they've constantly grown free cash flow at a slightly higher rate than revenue. And we're seeing that this quarter. So that free cash flow number is up 18% year over year, 13% operating margins. They do have some SBC. And then another important number that I wanted to mention is they spend 10% of revenue on marketing and advertising.

So that includes the Google search stuff. For them to be able to do that and still maintain as much market share as they have is really impressive, considering that a lot of their peers, especially Wix, Squarespace, Shopify, by spending a much larger chunk of their revenue on sales and marketing. We're shareholders, so we know they spend a ton. They are. Yeah, they're not profitable. They are breakeven on a free cash flow basis right now.

It's a testament to Godot's brand power. Yep. And I think when looking at them, they might be growing slower, and maybe even not. It's probably about the same right now. But when you look at the ones that aren't profitable, You probably would expect them to grow faster in the next few years. And if they're not, then maybe GoDaddy is actually a better opportunity, which we'll

probably discuss later where, yeah, yeah, I will say that for the end of the podcast. But again, the note there that Ryan mentioned on the SBC, when you look at the 13% operating margins versus the 22% free cash flow margins, a lot of that is going to becoming some of that depreciation and amortization. But again, GoDaddy probably doesn't have that much. A lot of that is because of the stock-based compensation, so make sure to take that into account. The free cash flow margins aren't that high, and they are investing a lot for growth.

But the one they state, that 22%, they are being a bit generous to themselves, right? Yeah, but they are using, I believe, all of their cash to buy back stock. So it isn't their true earnings power. So not $0.22 on every dollar is true earnings. Yeah. And when you get the newsletter along with this episode, I will make some charts that outline how many options and RSUs they're giving out per year. Their total dilutive securities is kind of what I would call that versus how many shares they bought back. So you can kind of net that out each year and look at on a percentage basis how much cash or on a percentage of their market cap they're returning to shareholders. All right. Let's talk balance sheet and liquidity. Pretty lovely balance sheet, honestly. And they do a really good job explaining their debt and the filing. So I know some companies try to be rather discreet about the cost of their debt and stuff like that.

It's confusing with lawyer speak, and that can be a bit of a yellow flag where it's like, huh, they might not be hiding something, but the way they're treating the debt or how they talk about it is if they want to hide something that's not as nice for shareholders to look at. Yeah, and if management communicates it clearly, it's usually, to me, a sign that it's a good balance sheet. And they're honest. Yeah. So $826 million in cash, so slightly less than a billion. 3.9 billion in long-term debt. And that consists of two layers. So they've got term loans, which is a variable rate, and then senior notes, which is a fixed rate. Majority, slightly more than 50% is term loans. And so something that they do with those term loans, and it's 2024 term loans and 2027, it accounts to about $2.5 billion worth of term loans. The effective interest rate on the 2024 loans is 3.2%, and the effective rate on 2027 is 3.6%. However, it is – so I mentioned it's variable rate. It accrues interest at – it's like you could choose one, but it's basically the LIBOR plus 1.5 or LIBOR plus 2.

However, in conjunction with the term loans, they entered into interest rate swaps when they first went into the term loans. So why not take fixed instead? It seems just like too much work. I don't get it. Maybe it was cheaper. Yeah, I went to the same thing. They did take some fixed, but it was – I mean, ultimately, they have lower effective rates on their term loans than they have on their fixed-rate bonds. One of them, right, if I'm reading this correctly? Yeah. Both of them are generally in line with their really cheap bonds that they issued in 2020, but it seems like it was the right move. And I think the interest rate swaps, they maybe got a little lucky in not knowing how fast rates would rise because the value on those swaps went up really quickly. And the effective rate, which is what they quote, takes into account the value of those interest rate swaps. And so that's not something you're going to see in the income statement, but it's something they would generally report if you just look up effective rate. They've kind of done the math for you. And then the senior notes, they've got a fixed 5.25% interest rate on 2027 notes, and then $800 million in 2029 notes fixed 3.5%. Basically, if you aggregate this together, it's around high 3% rate.

So I'm not doing the weighted average math, but I'm guessing it's 3.75, somewhere around there. They've got $3.1 billion in net debt. $1.1 billion in unlevered free cash flow expected this year. So a little under three times EV to payable free cash flow to the debt holders. You wrote EV here? Sorry. Net debt to free cash flow. Net debt to free cash flow.

Yep. I really like that. Really attractive rates. They raised at the right time, entered into interest. If they didn't enter into those interest rate swaps, I'd be a little more concerned since it's variable rate. But it wouldn't be too bad if those would be at like 5%. so yeah it still wouldn't be horrible so they did a they did a pretty good job seems like a

rational strategy one thing to note is that they're going to probably roll this over so they're going to pay back say the 2024 soon i actually think that i read something about them paying it back but again not a huge deal for this show but they're going to pay it back eventually soon and they're going to take out more because their strategy is to have a leverage ratio of about two to four times and i think it's like an evita ratio which for them evita converts to of free cash flow pretty consistently. So they're going to take that out and have new debt out there. So the interest rate on, say, they take out something that might be 20, 31 notes. Could be higher, but we'll see. We'll see what happens. All right. Let me hit valuation quick and then we

can get the discussion section. Pretty simple one here. I like to use EV to sales, EV to gross profit, and then EV to free cash flow. And again, for any novices out there listening, this is just taking enterprise value dividing by the training 12 month metric that I'm looking at. So I think we're going to look at these for all the software providers. They're not the exact same, but I think a gross profit and free cash flow one is pretty interesting to look at. Will you define enterprise value just for the people that don't know? Yeah. So enterprise value, you just start with the market cap, which again, is just the share price times the shares outstanding. And that's the market value that investors are valuing the company at. And then you add back net debt.

So in this case, they have a market cap of about $11.6 billion. You add in the $3.1 billion in net debt that shareholders are on the cuff. All the shareholders are on whatever the business is on, needs to pay back eventually, right? And we get an enterprise value as of today's writing of about $14.7 billion, which is kind of what you're paying for as an investor. So going into the ratios, EV to sales on a trailing 12-month basis is 3.6. EV to gross profit is 5.7. And EV to free cash flow is about 16.7.

Looking at that gross profit and free cash flow ratio, I think very... And again, remember the free cash flow is going to be a little... They're SBC heavy, so it's a little bit depressed. But it seems very market average-y, right? We're right around the market average for, I think, a lot of the key ratios that we look at. Repeat it one more time. I didn't hear it, but it was EV to free cash flow of what? Like 15 times?

16.7 EV to gross profit, which I think is another important one to track because they are investing a lot into growth, was 5.7. So 5.7 is pretty darn close to the market average for gross profit multiple. All right. Next up is anecdotal evidence. I think we've both seen the commercials plenty of times, but any anecdotal evidence, Ryan, for buying a domain? I know we've bought a couple of domains for, say, chitchatmoney.com and the investment funds website. Any anecdotal evidence here for the listeners?

It feels like they have a pretty solid brand. I think the messaging around the brand is a little confusing because I think most people probably recognize the name GoDaddy without having any idea what it does. But if I'm going to go reserve a domain and I'm not doing it through a software as a service content management system, so one where I've designed the website and then I'm buying the domain at the end, if I'm just going for the domain first, I think it's probably a no-brainer to go to GoDaddy. Yeah, I agree. I think I have the same thing here where most people recognize the name. They have fantastic name recognition, but I don't know how strong the brand is. I think the Super Bowl commercials will do that, which probably were a waste of money, I think. But we'll see, you know, that they're really water under the bridge now. It doesn't matter today. But I think a lot of people don't really care about the brand at all.

It doesn't, right? Maybe there's a few million domain, maybe not a few million, but there's some domain investors or really domain centric people that care about the brand GoDaddy. But besides that, when you're looking at a website provider, you don't think GoDaddy first. When you think in e-commerce, you think Shopify. And I think when you think websites design, the first thing you think of is WordPress, which again, with the decline in WordPress market share, there's a lot of opportunity out there. But right now, I don't think they have that. Okay, I'm going to design a website. Boom, let's go to GoDaddy.

All right. Future growth opportunities, Ryan, what do you have for the listeners? I think the logical growth avenue here is the business solutions. There's a lot they can do with this, and you're going to talk about one of the big ones, but just continuing to add functionality for the businesses that are on their software or their platform that they host for. If they can add some functionality here, it just adds incremental revenue. It's a pretty easy upsell. I would imagine. But the other one, this one's a little more far-fetched, is I think they kind of dropped the ball on the website building, the internal website building platform. They were late to the party.

it's hard to do it's hard to do it right but I think they could acquire one Squarespace and Wix now it depends if they're for sale but both are trading in a

range where they could definitely acquire them they did a stock deal it would take some stock some financing but they're smaller than GoDaddy and they have significantly better DIY solutions or solutions to basically drag and drop. Their website design platform is just significantly better. And it feels like such a logical next step after the domain is built

to have this platform where it's just really easy to build a website. So I don't know, maybe they either improve their own or they go out and try to buy one. But But I just think that's an area that it's one of the fastest growing areas in the content management space. That's SaaS, CMS. So I just think they should take part in it a little more. Yep. And we'll hit this on the low lights, but definitely check out. We're going to have it in the relevant links or further reading links on the newsletter. the reviews from... There's a great website that I found that it's called Site Builder Report,

where this guy does really comprehensive reviews on all the different companies and GoDaddy's big lowlights where the e-commerce stuff is not as good. If you're going to grow, you'll grow out of it, is what he said. And then with the building of the websites, it's a lot less robust than Squarespace and Wix. All right. My future growth opportunity will be Point. And that is spelled P-O-Y-N-T. they acquired this business in early 2021 and it is a payments provider for small businesses that included point of sale loyalty rewards invoicing and other features so think of them similar to a square maybe uh i guess block but the square business within blocks those credit card readers point of sale stuff everyone knows that those type of businesses within um there's a lot of them out

there right uh but when looking at that i think important to note is that that business did 16 billion in gross merchandise value, or GMV, at the time of the transaction. And it's now merged into GoDaddy Payments. GoDaddy Payments now has an annualized GMV of $29 billion, which might, when you first see that number, that seems very impressive for a company that just went into these verticals over the last few years. They really invested into this stuff. But remember, they acquired a lot of this GMV. So when comparing that to, say, Squarespace or Wix or whoever. GoDaddy made a large acquisition here. Now, upselling their domain and website S&P customers to these payment solutions can really, really increase lifetime value by a

significant manner. And they said that there is plenty of runway left to do that. I think GMV, payments volume, whatever you want to call it, e-commerce revenue will be a key metric to track for investors over the next few years because if they're right and management is correct that they do have this really green space opportunity to take their domain customers,

even the website building customers and add on all this payment functionality, GMV should continue to grow. I think any sort of concern I would be looking at is if they stop reporting GMV on a consistent basis. So yeah, I think definitely looking at that

for the future. They acquired them in 2021. So, I mean, that's pretty impressive GMV growth. The GMV was 16 billion. Well, it was 2020 was when they announced it. So it was late 2020 when they announced the acquisition. That's when they referenced the $16 billion. And I think GoDaddy already had some payments, GMV themselves. And if you look at that 2021, pretty good hype cycle on e-commerce growth in general. I just kind of question how many businesses are really in a position to add this solution.

Especially the point of sale stuff. Yeah. My thought is how many businesses are running on GoDaddy's websites plus marketing, their internal service. Now, maybe Point or GoDaddy Payments is a plugin on WordPress too that a lot of the people using managed WordPress could potentially add. But it just feels like they don't have as big of a pie to upsell this to. Yep. And I think the key thing here is acquiring CMS customers because they mentioned in the investor day or maybe one of the conference calls that when they have a person that buys a domain and builds a website through their CMS, they, I think it was over 50% of the

time, but again, a lot of the time. So a really significant amount that opened my eyes was that they adopted GoDaddy payments if they were going to start selling things online. I think that is indicative of the entire market opportunity here where the most important thing for either Shopify, GoDaddy, Wix, Squarespace, any other companies that we're missing. I know there's not just those four. The most important thing is to acquire the SaaS CMS customers because it provides you a ton of optionality, which I guess is going to lead into our high light to low light. So, Ryan, what did you like and dislike about GoDaddy's business? I like the strong brand. I think it helps them spend less than competitors and still get a lot of the domain registry attractions.

They also, having the managed WordPress seems like a really good solution, especially because I read a stat that 50% of WordPress sites are built by partners and agencies. and that demographic in particular is going to have a harder time switching to a SaaS CMS because they're so used to WordPress and they've worked on the WordPress system for so long that it's just easier for them to do that. Maybe that changes, but- It's been a really, I mean,

we've talked about them, WordPress losing market share. It's been fairly slow. um so it i would expect it to take at least a decade or longer if they're totally going to become irrelevant yeah and over the last 10 years it's actually grown and i think it might that might change but well uh that's that's kind of a um sass cms wasn't really around until the yeah we're the chart there's two i guess things because the if we're talking go daddy managing wordpress that if that's included then they haven't lost market share and then other companies that do that as well. But if we're talking about the pure old school WordPress

offering, that has a decrease in market share. And again, check out their investor day. There's a great slide in that that shows the loss in market share. Other things I like, the upsell opportunity seems like it should be high here. There's just so many top of the funnel customers for GoDaddy. And I expect that should continue to outpace the core platform growth. Worth noting though, that's not margin accretive. It's lower margin products. So you should see probably some margin contraction if that business grows really quick, but ultimately it's additive to free cashflow. The other thing that I love, and this is really probably one of the biggest parts of investing in this business right now is they've got low cost debt and they've

used it and are probably going to continue to use it to acquire shares at a high free cash flow yield. I think the free cash flow yield right now is what's 7%? Ish. Yeah. Just one divided by 17. Let me do that for everyone. So you can borrow at 3.75 and buy back at 6%. That adds a lot of value to the business and it's very accretive to shareholders. I really like to see that. I think management's heads are in the right spot. Well, I'd say it doesn't add value to the business. It adds value to the stock. Right.

Low lights for me, though, VeriSign price increases. So this is something that I kind of had to – you kind of have to dig through the risk factors to find this. And I saw it on a Value Investors Club write-up as well. Um, so a lot of their 21, a little over 20% of GoDaddy's total costs are fees paid to VeriSign. Um, and during the Obama administration, they weren't allowed to raise prices. VeriSign wasn't for the.com, uh, TLD, which by the way is just, let me make sure I get it right. keep referencing this. It's general top-level domain. I probably could have known that. Top-level domain. So they now, however, have entered into a new contract with that government agency that I mentioned that allows them to raise prices by 7% per year in the last four years of each six-year contract. I know that's weirdly complicated, but

Basically, they're raising prices by 6% to 7% annually, which GoDaddy is either going to have to pass that through to their customers or eat the cost themselves. If they're not able to absorb it, you could see some compression in the gross margin here. Yeah. I think it's pretty clear that they'll be able to absorb it, though, because everyone within all their competitors are going to have to absorb that as well. So generally, just domain prices are going to go up, at least for .com. Yeah. And I don't see that having too much of an impact on end demand, but it could potentially, if someone's really sensitive to an $8 versus a $7.80 domain registration, maybe it has on the margin some impact on building websites.

Probably not though. Anyway, that's a little low light is just that they're The big.com registration is given to someone else, and that's exclusive. And so they're going to always have to pay costs out to VeriSign as long as that contract exists. Second one is the website building space overall is increasingly moving towards SaaS CMS. I'm not just saying that because I'm a Wix shareholder. According to – I don't have the source, but CMS websites overall over the last decade grew 10x. and SaaS CMS, so the actual managed, the software-based CMS solution, so the non-open source, so the Squarespace, the Wix, the Shopify, the world, their percentage of CMS websites went

from 18% to 37% during that time. It also just feels like the most intuitive solution for people that are starting on their own that don't have any technical proficiency. So I think that SaaS CMS is going to continue to grow, and I don't really like GoDaddy's position in that space. Yeah, I agree. That is a big low light for me as well. But I'll hit my highlights. I think, again, a highlight was just management focusing on growing free cash flow per share. I think when we look at Wix, we would wish we can combine their capital allocation framework with Wix's competitive position, and maybe that's a hint for GoDaddy to acquire them for a hefty multiple and create a really, really nice business. But again, the focusing on growing

free cashflow per share, I think it's rare to find businesses that do that. We don't predetermine what businesses we're going to look at on this show based on whether we think we want to invest in them. So a lot of the times we find in the proxy statement, in their investor decks and all that good stuff, they're focusing on stuff that's just not shareholder friendly. In this case, they are, which is fantastic. Now, when you combine the focus on free cash flow per share with the smart levered buyback program, I think you can drive fantastic shareholder returns here, even if the core top line numbers don't look as good as people might think at first glance. And I also think they understand capital allocation from a minority shareholder's

perspective. So all those boxes check off for me. Other highlight is that the expansion into website building has been strong for them as they were even fairly late to the game so as the dominant domain slash uh provider for a lot of smbs they have a ton of or they did have a ton of optionality i think to add on this website stuff and now that they have uh some core website customers i think that gives them even more optionality to offer new features which include the e-commerce stuff the payment stuff as well so you have um that you also have which i think is kind of a mixed bag where you have uh traditional wordpress hosting losing market share which in a vacuum should benefit someone like godaddy but again ryan already mentioned how

they're kind of behind the other players in the space uh lowlights though um i think for me a low light when I look at GoDaddy. The domain business, it's solid. They retain market share for over a decade. They show a chart in the investor day where their market share has really been very, very flat, which is quite nice to see. It is more of a commodity than a website building. So yes, they retain the market share, but I worry they could lose a bit of market share if people don't go to them first when signing up for an online business. for example, when we set up our investment funds website, we went solely through Wix. And I think increasingly, people are going through Wix, Squarespace, Shopify, and others.

When doing that, I would worry... It hasn't shown up in the numbers yet, but that's something I'm watching on. It's a bit of a low light. I don't think it's a risk for me. Second low light for me is the reviews for GoDaddy's eCommerce tools are very weak. Here's a quote from the review that I link in the further reading in the newsletter. If you are serious about e-commerce, you will outgrow GoDaddy quickly. That was the headline on the review. So I don't like that because when someone's thinking about what website to sign up for, they're going to click on those type of reviews.

That's not going to lead to much, right? That's just a concern for me. So I worry about the value proposition that GoDaddy can give to SMBs versus, say, again, we've said these three names a lot, Wix, Squarespace, and Shopify, where you go to Shopify for e-commerce. If you want to be a full-on e-commerce provider, Wix and SquarePace offer better design tools plus e-commerce that's better than GoDaddy's. So they've attracted a lot of website customers so far.

But the big question is, at least in my mind, are they just attracting the easy customers from their domain business? And is that easy greenfield opportunity that they have an advantage in going to run out? And that's the big question in my mind. All right. We've gone a little long, so let's go bull case and bear case here. I'll go first. I'm just going to put some numbers on it.

If core platform ARR grows by 7% annually, which is them just passing through the VeriSign cost increases basically, and applications and commerce ARR grows by 10% annually, I think both those are certainly achievable and could probably exceed that. And then free cash flow margin reaches 25%. GoDaddy would generate $1.3 to $1.4 billion in free cash flow. That's not the unlevered free cash flow. That's free cash flow that's distributable to shareholders. Assuming that they continue using free cash flow to buy back shares, that means share count's probably going to shrink by about, I'd guess, 2% to 3% a year. That's fair. Yeah. You've got easy free cash flow per share growth north of 10%, probably around 15%. I know they personally strive for 20%, I believe was in their investor day deck. So if they get anywhere near that and they traded a reasonable multiple, there's upside on the stock from here. Stock

returns would probably be very similar to growth and free cash flow per share. Preston Pyshko Yeah. Yeah, I agree. Yeah. That 20% seemed like a high hurdle, but maybe they'll hit that and the stock will do quite well. Yeah, I have a current one. I think at the current earnings multiple, it'd be hard to allude whose money if they keep up this current growth rate in free cash flow per share. And I guess that includes repurchasing the stock consistently. But in order to think about hitting double digit returns from here. I think you need to be confident that the business deserves a premium earnings multiple where, again, a premium in my mind is something above 20 plus because

the buybacks aren't that accretive at this level. Yes, they're fairly accretive, but it's not like it's trading at a sub 10 times free cash flow multiple. So it's not. And again, the difference between something trading at 17 times free cash flow versus sub 10, that is an aggressive repurchaser of stock is huge. And you got to be confident in that growth because again, if they hit that 20% free cash flow per share growth, yeah, you'll probably do fine here, but you also need to be confident that they deserve an earnings multiple, maybe around 20 if you're going to hit those good returns. All right, bear case for you, Ryan. I know we both had trouble hitting the bear case here, which is usually a good sign, but also might be a sign

that we don't understand the business deeply enough, but go ahead. What do you think? Oh, no, I think we understand the business well. It's just really predictable. The outcome distribution is kind of limited. I don't think it's that... It's not going to do crazy well.

I don't think this is going to be a five-bagger in 10 years, But people are going to continue to go here for the domain business and they're probably going to continue to upsell to some of their solutions at least. My only concern is that you get underwhelming growth and then not enough margin expansion. I think to hit their target on free cash flow growth, a lot of margin expansion is required. If they're not able to do that, I think this could underperform the market. But like I said, the ceiling's fairly low and the floor's pretty high. i think i'd agree with that um my bear case is no or low growth uh as they stop attracting these easy customers from the domain business for websites e-commerce payments whatever um and

they lose to you know the more robust options that we've outlined during this episode um don't even forget about we talked about maybe the competition within the cms don't forget about the payments competition that there are you know if you're a restaurant why would you not go with toast instead of them. If you're a big restaurant, why would you not go with Olo or a combination of Olo and maybe Square, whatever. We don't need to get to those details. But under this bear case scenario, if revenue growth slows, I think the earnings multiple would likely compress to maybe a free cash flow multiple of 10, something like that. Again, this is not guaranteed to happen. I'm just trying to go through a scenario of what could happen. And the stock

might go nowhere for five years or something like that from these prices. Now, if it did collapse there and they're still generating cash, but they're just slower growth. Maybe that's a sign that it's a saver stock to buy at that point. But from these prices, I think it's a slight concern if revenue growth slows significantly because the expectations are there for them to grow at 10% plus a year. However, I think it is a good sign that we're having trouble coming up with the bear case because I don't have as much confidence in that scenario outlined. I kind of think they're going to continue riding the steady tailwind that we've talked about for website building. All right, let's close things out. More or less interested, Ryan? More interested. I think

that the future is going to look a lot like the past here, which is good. But my only concern is it's not that attractively priced. It feels like it's sort of become a value favorite and it's been more reasonably priced now, especially given how much they've returned to shareholders in the last couple of years. So it feels to me very, and we've talked about this before we hit record, feels very similar to Dropbox, a steady business that may have some long-term concerns, but really it's just more of the same each quarter. However, Dropbox trades at 10 or 11 times the free cash flow they generate. GoDaddy is just a little more expensive. I agree with all that. Yes. I think as we go through this month of um website builders e-commerce sites the listeners are going to know

that we're attracted to these type of businesses but because of the basically that the the wordpress dying is really what we're attracted to and that gives an opportunity for all these companies um so i'm definitely more interested in godaddy gonna attract them love the management at least their framework uh as a first glance but yeah at this price it's a i hate to say something at 17 times cash flow is expensive but it's slightly expensive versus i think the risks that they grow slower um than people yeah all right well that's gonna do it next week we're hitting square space and we're going to close things out we have adobe in there too i guess they're a website builder and they're in this space as well because they kind of relate to a lot of the stuff that people will

be doing. And then we're going to close out the month with Wix. We probably should have done VeriSign, which I guess we didn't know going in, but we'll maybe cover them sometime in the future. But yes, next week is Squarespace. Let's head to the disclosure. Remember, we are not a financial advisor. Anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening again. Subscribe to the newsletter. We'll see you next week. We'll be right back.