ENDURANCE INTERNATIONAL GROUP HOLDINGS, INC. You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes and other financial information included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 41 -------------------------------------------------------------------------------- Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "contemplate," "continue," "could," "estimate," "expect," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "would," and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses, or SMBs, succeed online. We serve approximately 4.8 million subscribers globally with a range of products and services that help SMBs get online, get found and grow their businesses. In addition to for-profit businesses, our subscribers include non-profit organizations, community groups, bloggers, and hobbyists. Although we provide our solutions through a number of brands, we are focusing our marketing, engineering and product development efforts on a small number of strategic assets, including our Constant Contact, Bluehost, HostGator, and Domain.com brands. We previously reported our financial results in three reportable segments: web presence, email marketing and domain. In conjunction with the process of simplifying our organization, we modified our internal reporting structure to reflect certain changes in our structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of our domain segment into our web presence segment. Beginning with the three months endedMarch 31, 2020 , we report our financial results in two segments - web presence (including the former domain segment) and digital marketing, as follows: Web Presence. Our web presence segment consists primarily of our web hosting brands, including Bluehost and HostGator, as well as our domain-focused brands such as Domain.com, ResellerClub and LogicBoxes. This segment includes web hosting, website security, website design tools and services, e-commerce products, domain names, and domain privacy. It also includes the sale of domain management services to resellers and end users, as well as premium domain names, and generates advertising revenue from domain name parking. Digital Marketing. Our digital marketing segment consists of Constant Contact email marketing tools and related products. This segment also generates revenue from sales of our Constant Contact-branded website builder tool and our Ecomdash inventory management and marketplace listing solution, or Ecomdash, which we acquired in the third quarter of 2019. For most of 2019, the digital marketing segment also included the SinglePlatform digital storefront business, which we sold onDecember 5, 2019 . We have recast the comparative information for the three months endedMarch 31, 2019 to conform with the two-segment presentation. Our financial results for the first quarter of 2020 reflected a decrease in net loss, a decrease in revenue and an increase in net cash provided by operating activities compared to the first quarter of 2019. Year over year changes in revenue, net loss and net cash provided by operating activities are summarized below: Three Months Ended March 31, 2019 2020 (in thousands) Revenue$ 280,683 $ 272,194 Net loss$ (3,488 ) $
(2,244 )
Net cash provided by operating activities
• Revenue for the three months ended
compared to the three months ended
in both the web presence and digital marketing segments. Excluding the
42-------------------------------------------------------------------------------- contribution of SinglePlatform, total revenue would have decreased 1% year-over-year. The decline in the digital marketing segment was due to the sale of SinglePlatform, which occurred inDecember 2019 . Excluding the contribution of SinglePlatform from the three months endedMarch 31, 2019 , there would have been a 2% year-over-year increase in digital marketing revenue. • Net loss improved from a loss of$3.5 million for the three months ended
31, 2020, due primarily to lower interest expense, lower amortization
expense, and lower income tax expense. These factors were partially offset
by lower revenue, higher depreciation and higher stock-based compensation
expense.
• Net cash provided by operating activities during the three months ended
This increase was the result of the payment of
securities class action lawsuit in the first quarter of 2019, which did
not recur in the first quarter of 2020; lower payments for interest, due
to lower balances and lower interest rates; lower payments for taxes in
the first quarter of 2020 as compared to the first quarter of 2019; the
timing of certain payments, particularly related to payroll; lowerpayments relating to bonuses in the first quarter of 2020; and an increase
in our deferred revenue balance.
Our total subscriber base as ofMarch 31, 2020 reflected a small decrease from total subscribers as ofMarch 31, 2019 , but increased during three months endedMarch 31, 2020 . Our non-strategic brands continue to lose subscribers, but for the three months endedMarch 31, 2020 , net subscriber additions from our strategic brands, in the aggregate, outpaced losses in our non-strategic brands. Our non-strategic brands are principally web hosting brands, but also include our cloud backup brands and certain other products that we launched in late 2015 and early 2016, but have either discontinued or no longer actively market. Subscriber counts are decreasing in these brands, and we are managing them to optimize cash flow rather than to acquire new subscribers. We are closely monitoring the impact of the COVID-19 pandemic on our business. As of the date of this report, we have not yet seen a material impact on our business from the COVID-19 pandemic; however, it is too early to predict the extent of the impact the pandemic will have on us. We continue to execute our 2020 operating plan, which is focused on delivering increased value to customers of our key strategic brands by investing in engineering and development to improve the customer experience and expand product offerings. We are tracking our liquidity closely, and believe we have adequate liquidity resources available to manage COVID-19 impacts and to continue to move our 2020 operating plan forward. Finally, we are working to support our employees and customers during this uncertain time. We transitioned substantially all of our global workforce to work from home in March, and are focused on providing employees with resources to remain healthy, connected and productive in a remote work environment. We have launched resources to help our customers respond to the impacts of COVID-19, including action plans to transition more of their businesses online, advice from marketing experts, and access to information on government aid programs. Please see "Liquidity and Capital Resources" below and the risk factors disclosed in Part II, Item IA of this Quarterly Report on Form 10-Q for further discussion of the impact of COVID-19 and the actions we are taking to respond to this evolving situation. Key Metrics We use a number of metrics, including the following key metrics, to evaluate the operating and financial performance of our business, identify trends affecting our business, develop projections and make strategic business decisions: • total subscribers
• average revenue per subscriber, or ARPS
• adjusted EBITDA • free cash flow Adjusted EBITDA and free cash flow are non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted inthe United States of America , which we refer to as "GAAP" or "U.S. GAAP." Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently. In addition, there are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. For example, adjusted EBITDA excludes interest expense, which has been and will continue to be for the foreseeable future a significant recurring expense in our business. The presentation of non-GAAP financial information is not meant to be considered in isolation from, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the additional information about adjusted EBITDA and free cash flow shown below, including the reconciliations of these non-GAAP financial measures to their comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. 43 -------------------------------------------------------------------------------- The following table summarizes our key metrics (except for free cash flow, which is discussed in Liquidity and Capital Resources below) by segment for the periods presented: Three Months Ended March 31, 2019 2020 (in thousands, except ARPS) Consolidated metrics: Total subscribers 4,783 4,780 Average subscribers for the period 4,793 4,773 ARPS $ 19.52$ 19.01 Adjusted EBITDA$ 78,511 $ 72,514 Web presence segment metrics: Total subscribers 4,288 4,309 Average subscribers for the period 4,297 4,303 ARPS $ 13.80$ 13.50 Adjusted EBITDA$ 36,507 $ 34,433 Digital marketing segment metrics: Total subscribers 495 471 Average subscribers for the period 496 470 ARPS $ 69.11$ 69.50 Adjusted EBITDA$ 42,004 $ 38,081 Total Subscribers We define total subscribers as the approximate number of subscribers that, as of the end of a period, are identified as subscribing directly to our products on a paid basis, excluding accounts that access our solutions via resellers or that purchase only domain names from us. Subscribers of more than one brand, and subscribers with more than one distinct billing relationship or subscription with us, are counted as separate subscribers. Total subscribers for a period reflects adjustments to add or subtract subscribers as we integrate acquisitions and/or are otherwise able to identify subscribers that meet, or do not meet, this definition of total subscribers. Most of our web presence segment subscribers have hosting subscriptions, but web presence subscribers also include customers who do not have a hosting subscription but subscribe to other non-hosting services, such as email or office productivity software tools. These non-hosting subscribers generally have lower-priced subscriptions than hosting subscribers. Subscribers to our domain-focused offerings (which were previously included in our former domain segment) mostly consist of customers who have a domain name subscription as well as a subscription to another product, such as domain privacy, or a basic hosting, email or domain privacy service that is bundled with their domain name subscription. These subscribers also typically have lower-priced subscriptions than hosting subscribers. Digital marketing segment subscribers mostly consist of subscribers to Constant Contact's email marketing service, but also include paying subscribers to our Constant Contact-branded website builder tool and our Ecomdash inventory management and marketplace listing solution, which we acquired in the quarter endedSeptember 30, 2019 . Until the sale of our SinglePlatform business onDecember 5, 2019 , digital marketing subscribers also included SinglePlatform subscribers. The table below provides additional detail on changes in our total subscriber count by segment for the twelve-month period ending onMarch 31, 2020 : 44 --------------------------------------------------------------------------------
Web presence Digital marketing Total
# Subscribers # Subscribers # Subscribers
(in thousands)
Total Subscribers - March 31, 2019 4,288 495 4,783
Adjustments 2 1 3
Acquisitions - 1 1
Dispositions - (23 ) (23 )
Net subscriber increase (decrease) 19 (3 ) 16
Total Subscribers - March 31, 2020 4,309 471 4,780
The decrease in total subscribers from 4.783 million at March 31, 2019 to 4.780
million at March 31, 2020 was driven primarily by a decrease of approximately
23,000 due to the SinglePlatform sale in December 2019 , and to a lesser extent,
subscriber losses in the digital marketing segment. These factors were partially
offset by net subscriber increases in our web presence segment, which were due
primarily to our domain-focused and international brands.
Average Revenue per Subscriber (ARPS)
We calculate ARPS as the amount of revenue we recognize in a period, including
marketing development funds and other revenue not received from subscribers,
divided by the average of the number of total subscribers at the beginning of
the period and at the end of the period, which we refer to as average
subscribers for the period, divided by the number of months in the period. We
believe ARPS is an indicator of our ability to optimize our mix of products,
services and pricing and sell products and services to both new and existing
subscribers.
The following table reflects the calculation of ARPS by segment:
Three Months Ended March 31,
2019 2020
(in thousands, except ARPS)
Consolidated revenue $ 280,683 $ 272,194
Consolidated total subscribers 4,783 4,780
Consolidated average subscribers for the period 4,793 4,773 Consolidated ARPS $ 19.52$ 19.01 Web presence revenue$ 177,943 $ 174,290 Web presence subscribers 4,288 4,309 Web presence average subscribers for the period 4,297 4,303 Web presence ARPS $ 13.80$ 13.50 Digital marketing revenue$ 102,740 $ 97,904 Digital marketing subscribers 495 471 Digital marketing average subscribers for the period 496 470 Digital marketing ARPS $ 69.11$ 69.50 ARPS does not represent an exact measure of the average amount a subscriber spends with us each month, because our calculation of ARPS includes all of our revenue, including revenue generated by non-subscribers, in the numerator. We have three principal sources of non-subscription-based revenue: • Revenue from domain-only customers. Our web presence segment earns revenue
from domain-only customers. For the three months ended
approximately 1% of our revenue was earned from domain-only customers.
• Domain monetization revenue. This consists principally of revenue from our
BuyDomains brand, which provides premium domain name products and
services, and, to a lesser extent, revenue from advertisements placed on
unused domains (often referred to as "parked" pages) owned by us or our
customers. All of this revenue is associated with our web presence
segment.
• Revenue from marketing development funds. Marketing development funds are
the amounts that certain of our partners pay us to assist in and
incentivize our marketing of their products.
45-------------------------------------------------------------------------------- A portion of our revenue is generated from customers that resell our services. We refer to these customers as "resellers." We consider these resellers (rather than the end user customers of these resellers) to be subscribers under our total subscribers definition, because we do not have a billing relationship with the end users and cannot determine the number of end users acquiring our services through a reseller. A majority of our reseller revenue is for the purchase of domains and is primarily related to our web presence segment. Reseller revenue earned by our web presence segment and digital marketing segment was less than 10% and less than 1%, respectively, for all periods presented, and fluctuations in reseller revenue have not materially impacted ARPS for those segments. ARPS may be impacted by changes in the amount of non-subscription-based revenue and reseller activity from period to period. These changes primarily affect our domain-focused offerings, which were previously included in our former domain segment. Comparison of Three Months EndedMarch 31, 2019 and 2020: ARPS For the three months endedMarch 31, 2019 and 2020, consolidated ARPS decreased from$19.52 to$19.01 , respectively. This decrease in ARPS was driven primarily by decreases in ARPS from our web presence segment, partially offset by an increase in ARPS from our digital marketing segment. Web presence ARPS decreased from$13.80 for the three months endedMarch 31, 2019 to$13.50 for the three months endedMarch 31, 2020 . This decrease was primarily the result of new subscriber additions in our domain-focused and international brands, which generally have lower ARPS, particularly for introductory pricing (which is typically lower than renewal pricing). In addition, non-subscription-based revenue decreased from$8.0 million for the three months endedMarch 31, 2019 to$6.8 million for the three months endedMarch 31, 2020 , causing ARPS to decrease by$0.11 . Digital marketing ARPS increased from$69.11 for the three months endedMarch 31, 2019 to$69.50 for the three months endedMarch 31, 2020 . This increase was primarily due to increased purchases from existing subscribers, partially offset by the impact of the divestiture of SinglePlatform, which had contributed$7.0 million of revenue in the three months endedMarch 31, 2019 . Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding the impact of interest expense (net), income tax expense (benefit), depreciation, amortization of other intangible assets, stock-based compensation, restructuring expenses, transaction expenses and charges, (gain) loss of unconsolidated entities, impairment of goodwill and other long-lived assets, and shareholder litigation reserve. We view adjusted EBITDA as a performance measure and believe it helps investors evaluate and compare our core operating performance from period to period. The following table reflects the reconciliation of net (loss) income calculated in accordance with GAAP to adjusted EBITDA for the periods presented: 46
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