The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included in this Quarterly Report on Form 10-Q as well as our audited financial statements and related notes and the discussion in the "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our 2019 Form 10-K. (Throughout this discussion and analysis, dollars are in millions and shares are in thousands.) COVID-19 Pandemic As discussed in "Our Response to the COVID-19 Pandemic," the pandemic did not have a material impact on our financial statements for the three months endedMarch 31, 2020 and we have implemented a variety of measures to attempt to minimize its impact on our business going forward. The extent to which COVID-19 will impact our financial results and operations during the remainder of 2020 and beyond will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the domestic and international actions being taken to contain and treat it. Due to the speed with which the situation is developing, we are currently unable to fully determine the extent of its impact on our business, but the impact could be material to the remainder of 2020 as well as to any future period affected either directly or indirectly by this pandemic. We are actively monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations and cash flows. See "Risk Factors" for additional information on the risks we may face associated with COVID-19. First Quarter Financial Highlights Below are our key financial highlights for the three months endedMarch 31, 2020 , with comparisons to the three months endedMarch 31, 2019 . •Total revenue of$792.0 million , an increase of 11.5%, or approximately 12.3% on a constant currency basis(1). •International revenue of$262.4 million , an increase of 7.1%, or approximately 9.1% on a constant currency basis(1). •Total bookings(2) of$951.1 million , an increase of 9.3%, or approximately 10.1% on a constant currency basis(1). •Net income of$43.2 million . •Net cash provided by operating activities of$233.3 million , an increase of 16.8%. (1) Discussion of constant currency is set forth in "Quantitative and Qualitative Disclosures about Market Risk." (2) A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of bookings" below. 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months Ended March 31, 2020 2019 % of Total % of Total $ Revenue $ Revenue Revenue: Domains$ 355.9 45.0 %$ 319.6 45.0 % Hosting and presence 297.2 37.5 % 268.9 37.9 % Business applications 138.9 17.5 % 121.5 17.1 % Total revenue 792.0 100.0 % 710.0 100.0 % Costs and operating expenses: Cost of revenue (excluding depreciation and amortization) 277.1 35.0 % 236.4 33.3 % Technology and development 134.5 17.0 % 124.0 17.5 % Marketing and advertising 93.1 11.7 % 90.3 12.7 % Customer care 85.2 10.8 % 90.3 12.7 % General and administrative 85.5 10.8 % 93.0 13.1 % Depreciation and amortization 52.2 6.6 % 57.2 8.1 % Total costs and operating expenses 727.6 91.9 % 691.2 97.4 % Operating income 64.4 8.1 % 18.8 2.6 % Interest expense (21.2) (2.7) % (24.4) (3.4) % Tax receivable agreements liability adjustment - - % 8.7 1.2 % Other income (expense), net (1.4) (0.2) % 6.2 0.9 % Income before income taxes 41.8 5.2 % 9.3 1.3 % Benefit for income taxes 1.4 0.2 % 3.9 0.5 % Net income 43.2 5.4 % 13.2 1.8 % Less: net income attributable to non-controlling interests 0.3 - % 0.3 - % Net income attributable to GoDaddy Inc.$ 42.9 5.4 %$ 12.9 1.8 %
Revenue
We generate substantially all of our revenue from sales of subscriptions, including domain registrations and renewals, hosting and presence products and business applications. Our subscription terms average one year, but can range from monthly terms to multi-annual terms of up to ten years depending on the product. We generally collect the full amount of subscription fees at the time of sale, while revenue is recognized over the period in which the performance obligations are satisfied, which is generally over the contract term. Revenue is presented net of refunds, and we maintain a reserve to provide for refunds granted to customers. Domains revenue primarily consists of revenue from the sale of domain registration subscriptions, domain add-ons and aftermarket domain sales. Domain registrations provide a customer with the exclusive use of a domain during the applicable contract term. After the contract term expires, unless renewed, the customer can no longer access the domain. Hosting and presence revenue primarily consists of revenue from the sale of subscriptions for our website hosting, website building, website security and online visibility products. Business applications revenue primarily consists of revenue from the sale of subscriptions for third-party productivity applications, email accounts, email marketing tools and telephony solutions. 24 -------------------------------------------------------------------------------- Table of Contents The following table presents our revenue for the periods indicated: Three Months Ended March 31, Change 2020 2019 $ % Domains$ 355.9 $ 319.6 $ 36.3 11 % Hosting and presence 297.2 268.9 28.3 11 % Business applications 138.9 121.5 17.4 14 % Total revenue$ 792.0 $ 710.0 $ 82.0 12 % The 11.5% increase in total revenue was driven by growth in total customers and average revenue per user. The increase in customers impacted each of our revenue lines, as the additional customers purchased subscriptions across our product portfolio. Domains The 11.4% increase in domains revenue was primarily driven by the increase in domains under management from 78.2 million as ofMarch 31, 2019 to 79.5 million as ofMarch 31, 2020 , increased aftermarket domain sales and international growth, partially offset by the impact of adverse movements in foreign currency exchange rates. Domains under management in 2020 was impacted by the expiration of approximately 1.0 million .uk domains for which we provided free initial registration to the owners of the associated third-level domains (e.g. .co.uk) following the 2017 launch of the .uk ccTLD. Hosting and presence The 10.5% increase in hosting and presence revenue was primarily driven by increased revenue from our website building and website security products. Business applications The 14.3% increase in business applications revenue was primarily driven by increased customer adoption of our email, productivity and telephony solutions, partially offset by the loss of revenue due to cancellation of CloudFest as a result of the COVID-19 pandemic. Bookings In addition to revenue, we also believe total bookings is a useful supplement in evaluating our performance and helps provide an enhanced understanding of our business: Three Months Ended March 31, Change 2020 2019 $ % Total bookings$ 951.1 $ 870.5 $ 80.6 9 % Total bookings. Total bookings represents cash receipts from the sale of products to customers in a given period adjusted for products where we recognize revenue on a net basis and without giving effect to certain adjustments, primarily net refunds granted in the period. Total bookings provides valuable insight into the sales of our products and the performance of our business since we typically collect payment at the time of sale and recognize revenue ratably over the term of our customer contracts. We report total bookings without giving effect to refunds granted in the period because refunds often occur in periods different from the period of sale for reasons unrelated to the marketing efforts leading to the initial sale. Accordingly, by excluding net refunds, we believe total bookings reflects the effectiveness of our sales efforts in a given period. The 9.3% increase in total bookings was primarily driven by increases in total customers and domains under management, increased aftermarket domain sales and broadened customer adoption of non-domain products, partially offset by the adverse impacts of the COVID-19 pandemic and movements in foreign currency exchange rates. 25 -------------------------------------------------------------------------------- Table of Contents Reconciliation of bookings The following table reconciles total bookings to total revenue, its most directly comparable GAAP financial measure. Three Months Ended March 31, 2020 2019 Total bookings: Total revenue$ 792.0 $ 710.0 Change in deferred revenue(1) 96.3 105.3 Net refunds 63.3 55.2 Other (0.5) - Total bookings$ 951.1 $ 870.5
_________________________________
(1)Change in deferred revenue also includes the impact of realized gains or losses from the hedging of bookings in foreign currencies. Costs and Operating Expenses Cost of revenue Costs of revenue are the direct costs we incur in connection with selling an incremental product to our customers. Substantially all cost of revenue relates to domain registration fees paid to the various domain registries, payment processing fees, third-party commissions and licensing fees for third-party productivity applications. Similar to our billing practices, we pay domain costs at the time of purchase for the life of each subscription, but recognize the costs of service ratably over the term of our customer contracts. The terms of registry pricing are established by agreements between registries and registrars, and can vary significantly depending on the top-level domain. Three Months Ended March 31, Change 2020 2019 $ %
Cost of revenue (excluding depreciation and amortization)
$ 236.4 $ 40.7 17 % The 17.2% increase in cost of revenue was primarily attributable to higher domain costs driven by the increase in domains under management and increased aftermarket domain sales, increased software licensing fees resulting from higher sales of email and productivity solutions and increased payment processing fees resulting from our bookings growth. Technology and development Technology and development expenses represent the costs associated with the creation, development and distribution of our products and websites. These expenses primarily consist of personnel costs associated with the design, development, deployment, testing, operation and enhancement of our products, as well as costs associated with the data centers and systems infrastructure supporting those products, excluding depreciation expense. Three Months Ended March 31, Change 2020 2019 $ % Technology and development$ 134.5 $ 124.0 $ 10.5 8 %
The 8.4% increase in technology and development expenses was primarily attributable to increased personnel costs driven by higher average headcount associated with our continued product development and increased software licensing costs associated with the growth of our business.
26 -------------------------------------------------------------------------------- Table of Contents Marketing and advertising Marketing and advertising expenses represent the costs associated with attracting and acquiring customers, primarily consisting of fees paid to third parties for marketing and advertising campaigns across a variety of channels. These expenses also include personnel costs and affiliate program commissions. Three Months Ended March 31, Change 2020 2019 $ % Marketing and advertising$ 93.1 $ 90.3 $ 2.8 3 % The 3.1% increase in marketing and advertising expenses was primarily attributable to increased discretionary spending and personnel costs associated with growth of our business. Customer care Customer care expenses represent the costs to guide and service our customers, primarily consisting of personnel costs. Three Months Ended March 31, Change 2020 2019 $ % Customer care$ 85.2 $ 90.3 $ (5.1) (6) % The 5.6% decrease in customer care expenses was primarily due to operating efficiencies gained within our Customer Care operations as we scale our business and increase our use of alternative methods of customer interaction. General and administrative General and administrative expenses primarily consist of personnel costs for our administrative functions, professional service fees, office rent for all locations, all employee travel expenses, acquisition-related expenses and other general costs. Three Months Ended March 31, Change 2020 2019 $ % General and administrative$ 85.5 $ 93.0 $ (7.5) (8) % The 8.1% decrease in general and administrative expenses was primarily the result of reduced personnel costs due to lower average headcount and the$2.9 million reduction in the legal settlement accrual discussed in Note 12 to our financial statements as well as immaterial decreases in a variety of general expenses, partially offset by an increase in acquisition-related expenses. Depreciation and amortization Depreciation and amortization expenses consist of charges relating to the depreciation of the property and equipment used in our operations and the amortization of acquired intangible assets. Three Months Ended March 31, Change 2020 2019 $ % Depreciation and amortization$ 52.2 $ 57.2 $ (5.0) (9) % The 8.7% decrease in depreciation and amortization expenses primarily resulted from assets that became fully depreciated subsequent to the first quarter of 2019. 27 --------------------------------------------------------------------------------
Table of Contents Interest expense Three Months Ended March 31, Change 2020 2019 $ % Interest expense$ 21.2 $ 24.4 $ (3.2) (13) % There were no material changes in interest expense. Liquidity and Capital Resources Overview Our principal sources of liquidity have been cash flow generated from operations, long-term debt borrowings and stock option exercises. Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as to make mandatory principal and interest payments on our long-term debt and to repurchase shares of our Class A common stock. In general, we seek to deploy our capital in a systematically prioritized manner focusing first on requirements for operations, then on growth investments, and finally on equity holder returns. Our strategy is to deploy capital from any potential source, whether debt, equity or internally generated cash, depending on the adequacy and availability of the source of capital and which source may be used most efficiently and at the lowest cost at such time. Therefore, while cash from operations is our primary source of operating liquidity and we believe our internally-generated cash flows are sufficient to support our day-to-day operations, we may use a variety of capital sources to fund our needs for less predictable investment decisions such as strategic acquisitions and share repurchases. We have incurred significant long-term debt to fund acquisitions and for our working capital needs, and as a result, we are limited as to how we conduct our business and may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities, strategic acquisitions or share repurchases. However, the restrictions under our debt agreements are subject to a number of qualifications and may be amended with the consent of the lenders and the holders of the Senior Notes, as applicable. We believe our existing cash and cash equivalents and cash generated by operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, our future capital requirements will depend on many factors, including our growth rate, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19 pandemic, the timing and extent of spending to support domestic and international development efforts, continued brand development and advertising spend, the level of Customer Care and general and administrative activities, the introduction of new and enhanced product offerings, the costs to support new and replacement capital equipment, the completion of strategic acquisitions or share repurchases and other factors. Some of the factors that may influence our operations are not within our control, such as general economic conditions and the length and severity of the COVID-19 pandemic. Although there is uncertainty related to the potential impact of COVID-19 on our future results, we believe our business model and the strength of our balance sheet have well positioned us to manage our business through this crisis as it continues to unfold. However, we will continue to monitor our liquidity position. Should we pursue additional strategic acquisitions or share repurchases, we may need to draw down our$600.0 million Revolver or raise additional capital, which may be in the form of additional long-term debt or equity financings. Credit Facility and Senior Notes Our long-term debt includes the Credit Facility, which consists of the Term Loans and the Revolver, and the Senior Notes, as described in Note 9 to our financial statements. The Credit Facility and the Senior Notes contain covenants restricting, among other things, our ability, or the ability of our subsidiaries, to incur indebtedness, issue certain types of equity, incur liens, enter into fundamental changes including mergers and consolidations, sell assets, make restricted payments including dividends, distributions and investments, prepay junior indebtedness and engage in operations other than in connection with acting as a holding company, subject to customary exceptions. As ofMarch 31, 2020 , we were in compliance with all such covenants. We currently have no reason to believe we will be unable to satisfy these covenants; however, the COVID-19 pandemic has limited our ability to forecast our future results. 28 -------------------------------------------------------------------------------- Table of Contents As further discussed in Note 10 to our financial statements, we have hedged a portion of our long-term debt through the use of cross-currency and interest rate swap derivative instruments. These instruments help us manage and mitigate our risk of exposure to changes in foreign currency exchange rates and interest rates. See "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our hedging activities. Tax Receivable Agreements As ofMarch 31, 2020 , the liability under the TRAs was$175.3 million , as described in Note 14 to our financial statements. We currently do not expect to begin making payments related to the existing liability under the TRAs until 2023. We may record additional liabilities under the TRAs of up to$1,578.6 million as our estimates of the future utilization of the tax attributes, NOLs and other tax benefits change. See "Risk Factors-Risks Related to Our Company and Our Organization Structure" for additional information regarding our liability under the TRAs. Because we are a holding company with no operations, we rely onDesert Newco to provide us with funds necessary to meet any financial obligations. If we do not have sufficient funds to pay TRA, tax or other liabilities or to fund our operations (as a result ofDesert Newco's inability to make distributions to us due to various limitations and restrictions or as a result of the acceleration of our obligations under the TRAs), we may have to borrow funds and thus our liquidity and financial condition could be materially and adversely affected. Share Repurchase Programs During the three months endedMarch 31, 2020 , we repurchased a total of 7,341 shares of our Class A common stock in the open market under our share repurchase programs for an aggregate purchase price of$398.0 million , including commissions. InApril 2020 , we repurchased an additional 2,645 shares of our Class A common stock in the open market for an aggregate purchase price of$143.7 million , including commissions. Following the April repurchases, we have no amounts remaining available under our previously approved share repurchase programs. InMay 2020 , our board of directors approved the repurchase of up to an additional$500.0 million of our Class A common stock, as described in Note 5 to our financial statements. Acquisitions See Note 3 to our financial statements for a discussion of current period acquisitions. In addition, inApril 2020 , we executed an agreement to acquire the registry business ofNeustar Inc. for$218.0 million in cash, subject to a customary working capital adjustment. The acquisition is expected to close within the next few months, and is subject to regulatory approvals and the satisfaction of customary closing conditions. Cash Flows The following table summarizes our cash flows for the periods indicated:
Three Months Ended
2020 2019 Net cash provided by operating activities$ 233.3 $ 199.7 Net cash used in investing activities (135.9) (29.0) Net cash used in financing activities (307.3) (11.9) Effect of exchange rate changes on cash and cash equivalents (1.5) (0.9) Net increase (decrease) in cash and cash equivalents $
(211.4)
29 -------------------------------------------------------------------------------- Table of Contents Operating Activities Our primary source of cash from operating activities has been cash collections from our customers. Our primary uses of cash from operating activities have been for domain registration costs paid to registries, software licensing fees related to third-party email and productivity solutions, personnel costs, discretionary marketing and advertising costs, technology and development costs and interest payments. Net cash provided by operating activities increased$33.6 million from$199.7 million during the three months endedMarch 31, 2019 to$233.3 million during the three months endedMarch 31, 2020 , primarily driven by our bookings growth. Investing Activities Our investing activities primarily consist of strategic acquisitions and purchases of property and equipment to support the overall growth of our business and our increased international presence. Net cash used in investing activities increased$106.9 million from$29.0 million during the three months endedMarch 31, 2019 to$135.9 million during the three months endedMarch 31, 2020 , primarily due to$146.4 million of business acquisitions in 2020, partially offset by a$23.3 million increase in net inflows from short-term investments and a$15.9 million decrease in capital expenditures. Financing Activities Our financing activities primarily consist of long-term debt borrowings, the repayment of principal on long-term debt, stock option exercises and share repurchases. Net cash used in financing activities increased$295.4 million from$11.9 million during the three months endedMarch 31, 2019 to$307.3 million during the three months endedMarch 31, 2020 , primarily due to$315.7 million of share repurchases in 2020, partially offset by a$22.0 million decrease in acquisition contingent consideration payments. Deferred Revenue See Note 7 to our financial statements for details regarding the expected future recognition of deferred revenue. Off-Balance Sheet Arrangements As ofMarch 31, 2020 andDecember 31, 2019 , we had no off-balance sheet arrangements that had, or which are reasonably likely to have, a material effect on our financial statements. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with GAAP, and in doing so, we make estimates, assumptions and judgments affecting the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances, and we evaluate these estimates, assumptions and judgments on an ongoing basis. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change our results from those reported. We refer to estimates, assumptions and judgments of this type as our critical accounting policies and estimates, which we discussed in our 2019 Form 10-K. We review our critical accounting policies and estimates with the audit and finance committee of our board of directors on an annual basis. There have been no material changes in our critical accounting policies from those disclosed in our 2019 Form 10-K. Recent Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 2 to our financial statements. 30
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source