GoDaddy - Q2 2023
August 3, 2023
Transcript
Christie Masoner (Head of Investor Relations)
Good afternoon. Thank you for joining us for GoDaddy's second quarter 2023 earnings call. I'm Christie Masoner, Head of Investor Relations, and with me today are Aman Bhutani, Chief Executive Officer, and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. If you'd like to ask a question on today's call, please use the Raise Hand feature in the webinar to be added to the queue. On today's call, we will be referencing both GAAP and non-GAAP financial measures and other operating and business metrics. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our investor relations site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished with the SEC.
Growth rates presented represent year-over-year comparisons, unless otherwise noted. The matters we will be discussing today include forward-looking statements, such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statement that we make on this call are based on assumptions as of today, August third, 2023, and except to the extent required by law, we undertake no obligations to update these statements because of new information or future events. With that, I'm pleased to introduce Aman.
Aman Bhutani (CEO)
Good afternoon, thank you for joining us today. At GoDaddy, our mission is to empower everyday entrepreneurs and make opportunity more inclusive for all. In Q2, we continued to make good progress on our mission, providing a breadth of solutions to a growing number of customers globally. The fundamental health of our business remains strong, with new high-quality customers, robust retention rates, and improved attach. We continue to be on track for stronger growth and profitability in our business, exiting the year at approximately 7% revenue growth and 28% normalized EBITDA margin. For Q2, in our highly competitive Applications and Commerce segment, our revenue of $352 million outperformed our guide with 11% growth. We remain the leader in domains, with 3% growth in private registrations as domains under management grew in the quarter, offset by underperformance in the domain aftermarket.
Hosting continues to stabilize from product improvements and the previously announced integration and divestitures of non-core hosting assets. Gross ads remain strong on efficient marketing while maintaining our customer retention for GoDaddy at 85%. Customers are now bundling new solutions at a faster rate than we have ever seen before. Innovation, resulting in higher monetization through attach and pricing with strong retention, underpins our confidence in the positive trajectory of our business and our ability to drive shareholder value for years to come. At GoDaddy, we are focused on creating value for customers through innovation, strengthening product market fit, and driving towards a one-stop shop. We moved quickly to understand and take advantage of the step function changes generative AI offers to our industry.
In just a few months, we have already launched multiple new generative AI-based features that our customers are actively using to reduce their workload, and there is more to come. As you know, our care organization has guided customers to success for over 25 years, and now, for the first time, we can bundle each GoDaddy domain purchase with an AI-powered GoDaddy Digital Guide. The Digital Guide will automatically build a free, personalized, basic website, including a checkout path to take payments. It proposes brand colors, creates a free logo, and embeds it in the basic website. It also creates marketing messages with our customer's logo and posts to social media to generate traffic to their sites.
The GoDaddy Digital Guide, built on years of our experience, knows the journey of our customers from identity, to presence, to commerce, and can automatically present solutions in a unique way so they can experience a new product in context. For example, the GoDaddy Digital Guide can configure email or a new phone number and bring messages from SMS and social sites to our GoDaddy Conversations, giving our customers one simple inbox that aggregates their customers' messages. At the same time, the GoDaddy Digital Guide writes proposed responses, practically removing the effort and time taken to respond to inbound messages. Bundling this with the domain purchase is different from anything else available across the industry. GoDaddy is in a unique position to pursue this disruptive approach at scale.
These new capabilities can improve loyalty and retention and bring differentiated offerings to our existing base of 21 million customers, driving an increase in lifetime value. We are excited about bringing these new features to our customers. Our teams have been energized to build new experiences powered by generative AI. In November, at our investor dinner in Tempe, we look forward to showing you demos of these new capabilities. As always, I also wanted to briefly touch on our three priorities: driving commerce through presence, delivering for pros, and innovating in domains. On Commerce, we continue to drive strong growth in our OmniCommerce solution. Customers in our base continue to convert to GoDaddy Payments at an impressive rate. Attaching to our base was again the strongest component of our year-over-year GPV growth, which is on pace to more than double our last year's exit rate.
We'll add to this momentum through our anticipated Q3 launch of GoDaddy Payments in Canada as we deploy our successful U.S. playbook. Websites + Marketing continues to perform well, and we are driving greater engagement with customers with new product launches. We know that higher engagement is correlated with higher retention rates, and we expect engagement to be a driver of website and commerce performance metrics. On delivering for pros, improvements in our Managed WordPress solution have reached an important milestone, driving improvement in retention rates as customers begin to recognize an enhanced solution. We now offer one of the industry's fastest, most secure, and easiest Managed WordPress platforms. In a recent third-party performance benchmarking study, sites hosted on GoDaddy's WordPress loaded an impressive 2x faster, which results in improved search engine rankings for our customers. Domain customers are not the only ones with a Digital Guide.
We have launched similar capabilities in the Pro Hub and are measuring the time saved for pros, including generating site content and client communications. On innovation in domains, while bundling the GoDaddy Digital Guide and its enhanced offerings is the most exciting change we are bringing to domains, I wanted to quickly share an update on billable domains as well. billable domains made a meaningful contribution to GPV growth this quarter with healthy double-digit month-over-month growth. This is a unique product that only GoDaddy offers, and with GoDaddy's Digital Guide, we expect to continue to make it simpler for customers to understand and adopt it. In closing, we feel good about our continued progress this quarter and how our organization is positioned to take us into the next phase of our growth with strong Applications and Commerce momentum.
We have also continued to be efficient with our marketing spend, especially with the improvements we have made in search engine marketing. We are eager to duplicate those results in other channels. We expect growth to accelerate as we exit the year and remain committed to our growth algorithm with increasing margins and expanding free cash flow per share. We remain eager to continue to deliver value for all GoDaddy stakeholders. With that, here's Mark.
Mark McCaffrey (CFO)
Thanks, Aman. In just the last few years, GoDaddy successfully built a growing, competitive, and robust set of tools and services, including our Websites + Marketing product and OmniCommerce solution, and a one-stop shop, empowering entrepreneurs to build and manage their ventures and accept payments with a dedicated partner by their side. The product innovation and targeted investment over this period has led to a better suite of products. With our soon-to-be-launched GoDaddy Digital Guide, we will provide an even further differentiated experience for our customers, propelling long-term growth for GoDaddy through faster product attachment and stronger retention. As we consider the many headwinds we faced in the first half of the year, we are thrilled with the continued momentum of our Applications and Commerce revenue and the acceleration in our Create & Grow Solutions.
Our durable model continues to generate free cash flow, and we expect to reaccelerate our growth and improve our profitability as we exit the year while delivering on our cash flow targets. Moving to our financial results, our Applications and Commerce revenue grew to $352 million, up 11%, surpassing our guide of 8%-10% and delivering a segment EBITDA margin of 41%. The strength in our Applications and Commerce segment is fueled by our Create & Grow Solutions, which accelerated to $465 billion in ARR, up 11%. Additionally, we drove rapid growth in GPV comparable to last quarter, and we are on pace to more than double the 2022 exit rate by the end of the year as we continue to attract and convert customers within our 21 million base to GoDaddy Payments.
ARR for Applications and Commerce grew 10% to more than $1.3 billion, with a 20% growth in annualized GMV to over $33 billion. Core Platform revenue totaled $696 million, flat year-over-year, with a segment EBITDA margin of 27%. ARR for our Core Platform segment was $2.3 billion. Core Platform revenue was supported by 3% growth in domains on stronger customer additions from higher demand and price increases. This was primarily offset by greater than expected declines in our aftermarket. On aftermarket, revenue decreased 5% to $101 million on a tough compare from last year. Over the last five years, we've built upwards of a $400 million revenue, two-sided marketplace.
As a reminder, this business allows a buyer and seller to transact on our platform at their agreed-upon valuation. This business rapidly grew as we scaled the operations, participants, and partnerships. What we see now is a post-COVID normalization of this business, as valuations on larger transactions have decreased and volume growth has slowed. With that, we expect steady, low to mid-single-digit top-line growth for the business on a go-forward basis. On our Core Platform restructuring initiative, we completed the migration of Media Temple and Main Street Hub customers to the GoDaddy technology stack. The 123 Reg migration is planned to be completed by the end of the year. As expected, these migrations produce a slightly elevated churn on these brands this quarter, will deliver further cost efficiencies in the future. The retention rate of customers for the GoDaddy branded products remains above 85%.
Total revenue grew to $1.05 billion, up 3% on a reported basis and 4% excluding aftermarket. Constant currency revenue increased 4%. Within total revenue, international revenue grew 3% on a reported basis and 6% on a constant currency basis. Our ARPU grew 3% to $199 from $193 last year, and we added 100,000 net new high-quality customers, despite the headwinds from our migration efforts. Normalized EBITDA grew 2% to $265 million, while delivering a margin of 25%. Bookings totaled $1.1 billion, growing 2% on a reported basis and 4% excluding aftermarket and the impact of the integration of non-core assets. Bookings grew 3% on a constant currency basis.
Excluding the impact of aftermarket, the drivers of growth in bookings were strong customer additions and price increases in domains, as well as strong attach in Applications and Commerce. We expect these factors to contribute to accelerated revenue growth next year. Unlevered free cash flow for the quarter totaled $284 million, growing 3%, while free cash flow was relatively flat at $240 million, despite increased interest-related payments. Free cash flow per share rose to $6.44 on a trailing 12-month basis, versus the prior year's cash flow per share of $5.67, a 14% increase driven by execution, operating leverage, and share repurchases.
Through July 31st, we repurchased 10.2 million shares year-to-date, totaling $746 million, of which $632 million was repurchased since the end of Q1. This brings the cumulative share repurchase under the current authorization to $2 billion and 27.1 million shares, reducing shares outstanding since the inception of this authorization by 16%. We remain on target for our commitment to reduce our fully diluted shares outstanding by 15%-20% over the three-year period. Additionally, today, we announced an incremental $1 billion share buyback authorization to bring the total authorization to $4 billion and extending the program out to 2025. On the balance sheet, we finished Q2 with $583 million in cash and total liquidity of $1.6 billion.
Net debt stands at $3.3 billion, with a 2.9x net leverage within our targeted range of 2x-4x. Lastly, we secured a 75 basis point interest rate reduction on $1.8 billion of outstanding principal through a refinance issued at par. This refinance is expected to save $13 million annually in interest payments for each of the next seven years. Moving on to our outlook. We are targeting Q3 total revenue in the range of $1.055 billion-$1.075 billion, representing growth of 3% at the midpoint. With the current momentum, we expect to exit the year at approximately 7% top-line growth with a normalized EBITDA of 28%, an increase of 300 basis points from our 2021 exit rate of 25%.
We are increasing our growth expectations for Applications and Commerce to be between 9% and 11% for Q3 and the full year. In our Core Platform segment, we expect revenue to be flat in Q3 and reaccelerate in the fourth quarter to deliver 1% growth for the full year. Q3 normalized EBITDA margin is expected to improve to approximately 26%, with continued acceleration over the fourth quarter, resulting in a full year normalized EBITDA margin of approximately 26%. This is a 300 basis point increase from our 2021 rate of 23% on better operating leverage from improved marketing performance, restructuring efforts, benefits from our continued move of workloads to the cloud, and the incorporation of AI into our operating model.
On the growth bridge we spoke about last quarter, we remain confident in the path to accelerated revenue growth while expanding margins and improving cash flows. As a reminder, this year's revenue growth rate includes approximately 2 points of FX pressure from last year's bookings.
Difficult compares in our aftermarket business and the migration and divestiture of certain non-core assets. We expect momentum in bookings in the second half of the year to drive the re-acceleration of revenue growth as we exit the year, while we remain committed to delivering our margin expansion and free cash flow targets. We will be hosting our annual investor dinner with product demonstrations in November, and are planning an investor day in Q1, 2024. We consider both a great opportunity to share more about our exciting initiatives in AI and our outlook for the next three years. In closing, we remain confident in our ability to execute in the areas of our business within our control and deliver the full-year targets.
As always, we remain focused on executing against our strategic priorities, committed to being responsible stewards of capital, and strive every day to provide a one-stop shop to micro-businesses along their entrepreneurial journey, with an eye towards balanced, long-term growth and profitability. With that, we will have Christie Masoner from our investor relations team open the call for questions.
Christie Masoner (Head of Investor Relations)
Thanks, Mark. As a reminder, if you'd like to ask a question, please use the Raise Hand feature at the bottom center of the webinar screen to be added to the queue. Our first question comes from the line of Matt Pfau from William Blair. Matt, please go ahead.
Matt Pfau (Equity Research Analyst)
Hey, great. Thanks for taking my questions. Two of them. First, wanted to ask on the acceleration of the core business in the fourth quarter, it implies a healthy sequential increase. Maybe you can just discuss what are the factors that are driving that increase?
Mark McCaffrey (CFO)
Yeah, thanks, Matt. You know, when we look at Q2 and bookings and kind of trade out for the second half of the year, a couple of things to consider. One, you know, we have FX that'll be abating. We have pricing increases that we did towards the end of the quarter, which should help both our bookings and somewhat revenue into this year. Obviously, the aftermarket compares get better going into Q4, and now that we've completed some of our migrations to the core into GoDaddy stack, we should see some of those start to abate as we get through the half of the year. That gives us the confidence that we will have that accelerating growth rate as we get through the remainder of this year.
That, coupled with some of the demand we're seeing at the front of the funnel, with customers coming in, attaching new products faster, you know, our retention rates remaining strong and the momentum we have in Applications and Commerce, we feel good about that momentum coming out of Q4 and going into 2024.
Matt Pfau (Equity Research Analyst)
Great. And on the Digital Guide, maybe you can just help us understand what that rollout is going to look like. Is it just gonna be for new customers, or do you plan to roll that out to, to your existing base as, as well?
Aman Bhutani (CEO)
Thanks, Matt. Yes, we plan to roll it out to the existing base as well. The Digital Guide is about literally a guide that works for a customer, even when the customer is sleeping. Even with the base, the guide will be able to offer or create new offerings for them. It'll start with new, just like a lot of other products do, but you'll see us quickly take it to the base as well.
Matt Pfau (Equity Research Analyst)
Great. Thanks for taking my questions.
Mark McCaffrey (CFO)
Thanks, Matt.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Vikram Kesavabhotla from Baird. Vikram, please go ahead.
Mark McCaffrey (CFO)
Vikram?
Christie Masoner (Head of Investor Relations)
Hey, Vikram, are you there?
Vikram Kesavabhotla (Senior Research Analyst)
Hey, sorry about that. Can you hear me now?
Mark McCaffrey (CFO)
Yes.
Christie Masoner (Head of Investor Relations)
We can.
Mark McCaffrey (CFO)
Yes.
Vikram Kesavabhotla (Senior Research Analyst)
Okay, great. Hey, I wanted to ask about the Applications and Commerce segment. It looks like you raised the expectation there for fiscal 2023. Maybe if you could talk some more about the primary drivers behind that revision. Separately, I also wanted to ask about the EBITDA margins. It looks like you posted about 25% in the second quarter. You're guiding to 26% in 3Q and exiting the year at 28%. Could you just talk through some of the main drivers of the expansion there throughout the balance of the year? Thanks.
Mark McCaffrey (CFO)
I'll start with the Applications and Commerce. Thanks, Vikram. We continue to, sorry. We continue to see strong momentum, momentum in the front of the tunnel and customer bundling payments and choosing payments as they're coming through with Websites + Marketing. We're really happy and excited about that attach and that bundling that's happening at the front of the funnel, funnel. Again, I alluded to, we have really strong net cust- gross customer ads coming in, and they're getting to that bundled product quicker. With that, that gets us to higher retention rates. That coupled with some pricing increases we're doing at the back half of Q2, or we did at the back half of Q2, should start to show up in Applications and Commerce as we go. Also, seeing great momentum on the conversion.
We've talked about it previously, but our existing customers converting over to, to the GoDaddy Payments, that, that motion seems well in work, and we're seeing that GPV grow as we go out throughout the year. On the margin expansion, you know, we, we had about 25%. We're forecasting to get up to 28%. We have a couple things going on there. We're seeing greater marketing efficiency, which is helping us. We are really starting to see the benefits of moving into the cloud. We're seeing the cost efficiencies that are coming with more workloads, and those are really starting to take hold as we hit certain milestones throughout the year.
We also had the restructuring in Q2, and some of that will gain steam as we go into the back half of the year and grow momentum as we go through there. We have a lot of, I would say, moving parts that are all pointing in the same direction, that make us feel good about expanding our margins while, you know, expanding our growth rate as well through Applications and Commerce.
Vikram Kesavabhotla (Senior Research Analyst)
Great. Thank you.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Trevor Young from Barclays. Trevor, please go ahead.
Trevor Young (Director and Equity Research Analyst for U.S. Internet)
Great, thanks. first on Core Platform, now expecting around 1% growth for the full year. Within the main lines there, aftermarket, domains, X aftermarket, and security and hosting, which line or lines are kind of underperforming relative to your prior expectations? Second one, on that AI-powered Digital Guide, do you view that as kind of complementary to the higher touch customer care organization, or do you see that functionality eventually kind of helping alleviate some of the cost or headcount within, within the care organization?
Mark McCaffrey (CFO)
Thanks, Trevor. I'll start with the aftermarket and the Core Platform. You know, we really saw the aftermarket, you know, underperform this quarter. You know, we've grown a $400 million business there over a number of years. We saw a lot of growth back half of 2021 coming into 2022. No doubt we have compares, but as we've talked previously, the larger transactions and evaluations on them have abated. We're seeing the volumes slow in growth as well, coming out of Q2. To put it in perspective, we're seeing great demand and gross adds within our funnel, but it seems the valuations on the aftermarket still aren't connecting with the buyers, so we're seeing them lean towards the domain growth.
You know, we think this is a, a normalization for now, and I think we've taken it out of our back half of the year expectations, and we think this is going to be a low to mid-single digit growth business going forward. I would really point to the aftermarket on this as being the part.
Aman Bhutani (CEO)
Trevor, on the Digital Guide, we couldn't be more excited about pairing a guide with every domain purchase and letting that Digital Guide guide the customer, just like we do in care. You know, we've done a phenomenal job in care over the last few years by sort of creating leverage on the care line item. As revenue grew, we kept costs pretty flat. It's a little early to be talking about the impacts of AI, but overall, you know, we do see AI leading to efficiencies in our business overall, and frankly, we've already showed that in marketing, where by implementing machine learning, we're able to make our spend more and more efficient, and you've been seeing the results of that over the last year already.
Trevor Young (Director and Equity Research Analyst for U.S. Internet)
Great. Thank you both.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Naved Khan from B. Riley. Naved, please go ahead.
Naved Khan (Managing Director and Equity Research)
Yeah, hi, thanks. Just a question on the outlook. 28% EBITDA margin by Q4. If I have to think about next year, 2024, you're not... I know you're not guiding to that, but is there any reason why 28% shouldn't be the base to start with? I mean, the cost savings will still be layering in, because this is not a full year for cost savings, right? Am I thinking about it the right way? Just any, any comments there would be helpful. Then I have a follow-up.
Mark McCaffrey (CFO)
Yeah, Naved, and thanks. You know, on the Q, you know, we're, we're excited on our investor day, coming up in the first quarter, and we'll get more into the details of, of what we'll look like. We're really excited about our margin expansion, going into Q4 over 28%. You know, if we look back to the Q 4 in 2021, we've increased our margins by 300 basis points. Even year-over-year, we get to the same 300 basis points. It's something we continue to work on. We continue to find efficiencies in our operation, and we'll continue to push, you know, margin growth going into 2024. At the same time, we're accelerating revenue and hitting our cash flow objectives as well.
So I don't want to give you too much of a leading, you know, what 2024 is gonna look like, but we're really excited about our progress, the work we've done in the first half of the year, and how that's gonna benefit us in the back half of the year and then ultimately into 2024.
Naved Khan (Managing Director and Equity Research)
Got it. Then, you know, the, the, you kind of alluded to the, the bridge to sort of resumption of growth into or healthy growth, right? The one that you shared last call was, I think, getting you back into the double digits. If I have to think about when you start to see, like, the full, the effects of full anniversarying and, you know, kind of getting to that, how should I think about timing? Is it, is it Q1? Is it early next year? At what point would, would be kind of this, this would be in the rearview mirror for you?
Mark McCaffrey (CFO)
Yeah. Thanks, and, and try not to peg a, a specific timetable here. As, as we're getting into the back half of the year, we'll talk more about it later. When we look at the full year guide this year, and we kind of look at the impact of FX, you know, the difficult aftermarket comparers and migrations and divestitures we're doing, they will, they will start to abate into the fourth quarter and continue to abate and turn into tailwinds as we go through 2024. Not, not trying to pick a quarter on anything right now. We'll, we'll talk more about that later in the year, but the momentum has us accelerating revenue as we go throughout the periods.
Aman Bhutani (CEO)
If I could just add, you know, long term, we're excited about the path to accelerating growth because it's based on the simple idea that great products that can lead the customer through the entrepreneur's wheel, which, if you remember, is about leading them through identity, to presence, to commerce, really creates a flywheel for the company. You know, our technology has improved in a very significant way. That leads to greater attach, not just for new customers, for our base as well. That involves identifying a customer, that involves connecting and reaching out and engaging the customer and then closing the customer. Of course, you've seen us do it successfully with email over the last three, four years, where that business has.
Productive business has performed very well for us. Now you're seeing us do it with the OmniCommerce solution as well, where GPV has grown nicely. You know, we can clearly see that we have a ton of customers in our base that would love that product from us. At the core, you know, our path to long-term path to accelerating growth is about innovation in the product. It's about creating value for the customer that leads to monetization opportunities like attach, like pricing, and strong retention that come together to sort of give us the confidence we're sharing with you about the positive momentum in our business. That's what we believe will drive long-term shareholder value for years and years to come.
Mark McCaffrey (CFO)
If, if I could just add to that, and to clarify, we, while we look out in 2024, we are reaffirming our guidance for 2023 in the range for revenue, just FYI.
Naved Khan (Managing Director and Equity Research)
Yep, that's clear. Thank you, guys.
Aman Bhutani (CEO)
Thank you.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Brent Thill from Jefferies. Brent, Brent, please go ahead.
John Colatuoni (Equity Research Analyst in Internet)
Hi, thank you. This is John on behalf of Brent Thill. First question is, GMV had pretty good growth, you know, accelerated 20% year-over-year and also up 18% sequentially. Just wondering, you know, what might have been some of the drivers. I mean, are you seeing any sort of improvement in, in macro and, GMV per customer, or is it just better attached? If you could parse that, that'd be great.
Aman Bhutani (CEO)
Yeah, you know, GMV growing is a function of sort of the macro to start with. You know, we are seeing more of our existing customers, you know, transact more with the, with the solutions they have. To remind you, you know, a lot of our GMV is a function of the relationship we have through the bank, so it's, it's a different financial model for us, but it gives us a great barometer. It gets, you know, our product out there. We get to see sort of what's happening in the world. We're very happy with the growth, and it, it basically signifies more and more people using the GoDaddy solutions for their businesses, both offline and in store.
John Colatuoni (Equity Research Analyst in Internet)
Great, thank you. Maybe, is there any update on the FIS Worldpay partnership?
Aman Bhutani (CEO)
The FIS partnership is doing great. We've launched the product with them. We have a set of customers that are, you know, using our new solutions. Still very early, since we're only about a month in, I think, from the launch. It's still pretty early, but very happy with the progress. I, you know, I dare say that our partners are pretty excited about the progress, too, and I, I think they can't wait to get out there and sell it more, and we can't wait to see those customers.
Mark McCaffrey (CFO)
Yeah, you know, we've always said the impact on 2024 was Sorry, 2023, was gonna be minimal, and we would start to see the momentum of that going into 2024, which again, adds to our excitement about that momentum.
John Colatuoni (Equity Research Analyst in Internet)
Thank you.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Mark Zgutowicz from Benchmark. Mark, please go ahead.
Alex Lavigne (Equity Research Associate)
Hi, guys. This is Alex on for Mark. Thanks for taking the question.
Aman Bhutani (CEO)
You're welcome.
Alex Lavigne (Equity Research Associate)
Just a question on billable domains. Last quarter, you, you characterized contribution as modest, and it sounds like there was meaningful performance in 2Q from billable domains. Just curious if you could perhaps, you know, discuss what was the most meaningful driver, you know, for that, for the outperformance in Applications and Commerce, or whether or not billable domains was a material driver of that?
Aman Bhutani (CEO)
Yeah, I'll maybe let Mark talk to Apps and Commerce and sort of, you know, billable domains. I'd probably say it's still very early, and Apps and Commerce is pretty big. But let me sort of step back and answer your question around what's driving the growth of billable domains. Obviously, you know, you're very aware we have 21 million customers, we have 84 million domains under management. We have a ton of opportunity to attach this new and unique product. That's why you hear the excitement from me on it on a continuous basis, and of course, the math adds up very quickly, the more customers we can get on it. The biggest drivers over the last quarter for billable domains is we started to really surface billable domain in the journey and engagement that customers have with us.
It's still a new concept for people, our customers don't automatically understand that they've got the domain, and with a couple of clicks, they can start taking payments. We found better ways to guide the customers through that path, get them live with the capability, and what we find is once we get them live with that capability, sure enough, they start to transact, right? You know our overall math in terms of retention, right? We have If we have one product with a customer, they tend to retain at, you know, sort of mid-80s. You know, if we have two, it jumps. If we have three products with a customer, we pretty much have a customer for life, and the LTV also goes to 80x-83x once they have commerce with us.
All of that math is working, but it's dependent on us getting more people to adopt this product. That's what you started to see in Q2. When more people saw the product, they were like, "Oh, I didn't know this was there. Let me add it. Let me start using it." That's what's, you know, sort of created the quick, if you will, double-digit month-over-month growth in the, in the GPV. Hopefully, that makes sense.
Mark McCaffrey (CFO)
Yeah. And, and I'll add on Applications and Commerce in general, where, where we're really excited is strong gross customer adds are coming in the funnel, stronger than we've seen in a long time. Not only are they coming into the, the funnel, they are getting to that second product quicker. And whether it's billable domains, whether it's, you know, payments, whether it's commerce, whether it's Websites + Marketing, they're, they're bundling those together at the initial stages. We think the Digital Guide will also accelerate that as that starts to engage at a faster rate. But when that happens, you know, when we Like Aman said, when we get to that second product, that, that third product, when we get to a third product attached, generally we find we have a customer for life, and that really drives the LTV.
All this because the decisions around it are being made faster on, on the top of the funnel, help us get there faster and drive that LTV equation. Obviously, it helps to with our cash flow, it helps us be more efficient because we're getting greater revenue prices or getting better revenue at a better efficient operating margin as well. We feel really good about, you know, all that happening in the Applications and Commerce. It's really driving a lot of momentum. We have that on top of the hardware sales that we were seeing that are driving that momentum as well. A lot of positivity coming there, right? It all starts with the domain and innovating in the domain.
Alex Lavigne (Equity Research Associate)
Got it. Thank you, guys. Appreciate it.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Ygal Arounian from Citi. Ygal, please go ahead.
Ygal Arounian (Director of Internet Equity Research)
Hey, good afternoon, guys. Sorry, I'm not reasking this, but I wanna start on domains. You know, we continue to kind of see some, let's say, challenging growth from VeriSign data on .com, .net. I know you guys are involved in other TLDs, too, which, if there's interesting things to point out about that, would love to hear. You know, just maybe some of what you're seeing around that, expectations for when that can start to normalize, how that's impacting the aftermarket. VeriSign may have made a really interesting comment about its channel partners who are pushing more on ARPU than they were on new users.
I, I don't know if there's something to comment around that. Do you think that that's having an impact? You guys have a, you know, big hand in, in both sides, so would love to hear your, your view on that.
Aman Bhutani (CEO)
Yeah. Happy to give a bit of color on domains. Obviously, I think you probably saw already that domains under management for GoDaddy grew. Definitely we're doing well on units as well. To sort of explain a little bit, we're, as Mark said, we're seeing better traffic and demand coming to our site. You know, as I mentioned in my prepared remarks, you know, some of that is because of our focus in search engine marketing and us significantly improving our abilities to, you know, spend money in search and convert those customers. We're, we're very happy with that as well. One other maybe dimension to mention to you is that, you know, we've continued to grow well internationally. You know, as, as Mark shared, we grew 6% internationally, 3, on a reporting basis, 3%, constant currency, 6%.
The product we lead with internationally is domains, right? Domains is the number one thing we sell in small markets around the world, you know, you know, when, you know, we have customers in over 100 markets. You know, it's the combination of those things that I would say that, that are leading to the best results for us. Our domains business is broader than any other one particular registry business. You mentioned that yourself, and that's absolutely true. You know, we're the market leader. We have a diverse set of assets within the domains business.
We've continued to innovate in, in many of those areas, and the key pieces where we see good returns is, you know, be very efficient in marketing and search, you know, grow the DOMs, grow the customers, get, get customers to the site, convert them well, attach products to them, which obviously isn't what you're asking about, but attach great products to them and, and do it around the world really well. Hopefully, that's a bit helpful.
Ygal Arounian (Director of Internet Equity Research)
Yeah. Oh, thanks, Aman, that, that's really helpful. So maybe to, to segue, I think it's similar. I, I don't know, a lot of the answer might, might actually be an, an overlap, but if, if there's anything incremental to add. Just on, on the, on the gross, top of funnel, gross ads commentary, which, which feels really strong, and I know you have some noise in your, in your new customer number, I believe, still, ongoing with, some of the sunsetting of the brands. Is there any way to parse out that? Then, you know, what is it, to, to your point, where you talked about with the, with the SEM work that you're doing, that's, you know, driving that strength in the top of funnel.
You know, with, with domains, even if your domains under management grew, with domains kind of like, let's say, collectively, still soft, your commentary around really strong top of funnel, I think, stands out. Wanted to maybe understand that a little bit better. Thank you.
Aman Bhutani (CEO)
Yes. Gross ads were strong for us, and it was on efficient marketing spend. I did highlight in the prepared remarks, and I, I think you, you repeated that, which is that search was a strong contributor to that. What I added to that is that it's not just search in the U.S., it's search globally that did a really good job sort of delivering for us. It's not search alone. You know, we have been focused on improving our marketing, the targeting of our marketing, the measurement of our marketing over the last couple of years. I think we've talked about it multiple different times as being an important priority for us. What we're seeing as a result is more people show up to the website, right? More people going through the funnel better.
I think one of the things I've talked about. You know, I don't know if this is what you're asking about. You know, one of the things in the past that I've talked about is that we have shifted as a company. We are very much an experimentation-based culture now. You know, teams go out. They try different things. Then measure closely whether there's a conversion improvement or not. That, of course, helps as well, right? Where when we land better traffic and conversion is up on the site, that delivers better for us. Whereas, you know, in the past, maybe years ago, we may have relied on a combination of the site and care more.
What we find now is that the site performs really well, and that's a great way for us to attract gross ads, and we're pretty happy with that result.
Mark McCaffrey (CFO)
Yeah, and, and I'll, I'll just add to that. What, what we really like about the gross ads coming in is they are customers that have a higher propensity to want to do business and, and therefore, are attaching a lot faster. On the churn, on the other hand, we are losing customers with the migration and the lifing of some of these products, but they're generally what we refer to as low-calorie customers that weren't growing the business or necessarily using the functionality, and, and therefore, we're trading in a good direction as we get to those net ads.
Ygal Arounian (Director of Internet Equity Research)
Okay. I have a follow-up, but I don't wanna. I'll jump back in the queue, and then there's time.
Aman Bhutani (CEO)
Well, it's okay, go ahead.
Ygal Arounian (Director of Internet Equity Research)
Yeah. Okay. This is all super, super helpful. I love this color. You and your peers on the, you know, kind of closed-end platforms seem to be all driving, you know, efficient marketing spend that's bringing more share, where really across the board. You know, going back and tying that back into the, you know, kind of, let's just say, flattish domains globally, right? It feels like then your, your space is taking a lot of the share of the web building ecosystem. Is that a fair characterization, and where do you see the share coming from? I think we've talked about WordPress in the past that, you know, maybe you could just help on that. Thanks, guys.
Aman Bhutani (CEO)
Yeah, we'll provide more color on this at the investor day for sure, to talk about how website share is shifting. You know, overall, I think there was... If, if we look at the last few quarters, there's more pressure on WordPress, at least from what we saw, than if you go back many years. You know, taking a longer-term view, share is still coming from custom HTML sites. That, that is what is reducing, and there is sort of growing demand, and obviously, the new demand goes more towards the, the newer tools that exist, right? You find that it's easier and easier for customers to build sites themselves and get started, like, you know, our tool, Websites + Marketing, does a fantastic job of that. You see us at GoDaddy with the Digital Guide, taking the next step.
You know, we're, we're telling you today, and we'll show it to you live, you know, we're, we're testing with customers, we'll show you live in November, in Tempe, how when a customer buys a domain, you know, how they behave differently if instead of just a domain, you give them a website and get them started. Because the friction for a customer to make another decision and then create, not create content and then do another thing is, is pretty difficult. But of course, technology has made this easier and easier over time, and now generative AI allows our industry to take the next step in terms of reducing the effort that customers have to do to get started. So I think you're going to continue to see the momentum.
You know, of course, there's secular trends underneath of entrepreneurship, population, you know, people coming to the Internet, but how quickly they're able to adopt the tools on the Internet and get a presence up and running, I think you'll continue to see good momentum in that because technology and generative AI now are going to make a real difference.
Ygal Arounian (Director of Internet Equity Research)
Thank you so much. That's really helpful.
Christie Masoner (Head of Investor Relations)
Our next question comes from Chris Quintero from Morgan Stanley. Chris, please go ahead.
Aman Bhutani (CEO)
Hey, Chris.
Chris Quintero (VP in Software Equity Research)
Hey, this is Chris Quintero on for Elizabeth Porter. I wanted to ask around the macro and kind of how it's changed Q2 versus Q1. Then second question would be around the GoDaddy Digital Guide. Are these capabilities kind of like table stakes for the industry, or how do you think about your ability to drive your differentiation in AI against your web building competitors? Thank you.
Aman Bhutani (CEO)
God, I can't believe you said table stakes for a Digital Guide, but let, let me take your first question first. You surprised me with that. Let's start with, you know, the macro. There are a few items that, you know, sort of we look at on our dashboard or the leaders in our organization look at when we look at macro, and I'll try to touch on a couple of them to give you a bit of color. One of them that we look at is sort of non-brand demand that's coming to Google as a representation of, of demand. You know, are people going out and searching for, for things? You know, they're not searching for a particular company, they're just searching for a website, they're just searching for a domain name, and how is that trending?
What we saw in that data is that there are a few markets in the world, actually the English-speaking markets, where we are strong, the U.K. being one of them, we see good lift in non-brand demand for the terms that we track. That's a positive sign for those markets. That means, you know, we expect better demand, we expect to spend more money there. Generally, the customer, the everyday entrepreneur, is feeling better and wants to engage and, you know, start, buy a domain, start a business, or build their business or so on. The second group, geographically, I'll talk about is the markets that are not big English-speaking markets, but what we call the rest of the world. There, what we see is sort of more timid or flattish behavior in terms of non-brand searches.
You know, as you can see, the international market does really well for us, so you know, that's been phenomenal, and GoDaddy has done a lot to take share globally on those. In terms of raw demand or macro, what we see is much, much more timid sort of behavior. The U.S. are somewhere a little bit in the middle, and I, I won't comment sort of broad macro on the U.S. I think all of you understand it better than me, probably. Broad, if I talk about demand on the terms that we track to, you know, there's some goodness, but not as good as some couple of the other markets. The second data point to look at is customer or consumer confidence, and we track that for all of our main markets.
What we see there, again, is sort of, you know, an expectation from many that that confidence would go down, and it was probably turning down in some of those markets, but over the last two, three months, a little bit of a reversal. You know, maybe instead of going downwards, we see more flat, but in some markets, and again, I'll mention the U.K., you actually see it coming up, which I think you didn't expect, if, if you're just sort of a macro person. There are other markets that are sort of showing different behavior as well, but hopefully, that gives you a little bit of color on a couple of the core metrics that we look at and, you know, a couple of sort of, a little bit of a geographic lens on it.
In terms of the Digital Guide, which I think was the second question, I just want to reiterate, the Digital Guide is a technology built using AI, that uses generative AI to generate content, but uses AI for a lot of other purposes. Our goal is to couple that with every domain purchase. When you buy a domain, a Digital Guide is automatically enabled for that customer, and what it's trying to do is find that best experience and path for that particular customer and get them through that path, whether it's adding new products, whether it's posting something, whether it's reminding them of something. It's not trying to do it in a way that says, "Hey, come, come buy this from me." What it's doing is it's actually doing the work for the customer in advance and then saying, "Take a look.
If you like this, we can keep it." Right? I, I don't think of that as table stakes at all. You know, if I look at... I'm not even talking about our industry, if I look at sort of across the technology landscape, of course, there are, you know, technologies out there, and a lot of people wanna do similar things, but I don't see anyone starting at the point of a domain name. We have AI or generative AI-ready capabilities. We're already testing many of these things, and I, I think in the past I've talked about them, or last quarter I mentioned one or two of them.
We have capabilities that are live today that are being tested with customers, and there isn't anyone else that's going to bring it to millions of domain names and start people off the way we want to start them off, right? That's, that's the big thing. I guess, for folks that may have joined just a minute or two late, there was a great little video that we started with today, and I assume we'll post it somewhere. I'm pointing to my team now. You know, I assume we'll post it, but it's a... That two-minute video is a great way for you to understand what our what we want our customers to experience, and how much effort we are taking away from the customer that normally a customer would have to do, and letting the Digital Guide do that.
Believe it or not, that happens today in Care to right now. Customers call us, and what they want is that they want, you know, us to give them confidence, and they want us to encourage them, and at the same time, they want us to solve their problems and give them access to more tools. We do all of that. We're trying to take the learning that we have in care and enable every customer with it so that we can scale to literally every customer that buys with us.
Mark McCaffrey (CFO)
Yeah, I'll add, you know, one of the distinctions we have is from identity to presence to commerce. We have the entire technology stack. When we use generative AI, we could take it across their entire journey, we start with the domain, that makes that journey faster, gets us to bundling faster, gets us to customers, you know, for life, for us, and driving LTV into, into our financials. We're really excited about it. But one of the great distinctions is we have the entire technology stack around it to use and to use the AI around.
Aman Bhutani (CEO)
Maybe one other quick thing I'll add is that I think we learned last year that having people see and demoing working functionality to them, the customers can see is very powerful. I would invite all of you, and I know many of you joined, I would invite all of you to Tempe in November so you can do it yourself with us, demoing it, with us, showing you, you know, what that experience is for a customer. I think it, I think it'll sort of illuminate the idea in a much better way.
Mark McCaffrey (CFO)
The temperature is much cooler in Tempe.
Christie Masoner (Head of Investor Relations)
Our next question comes from the line of Naved Khan from B. Riley. Naved, please go ahead.
Mark McCaffrey (CFO)
Welcome back, Naved. You there?
Aman Bhutani (CEO)
Might be.
Christie Masoner (Head of Investor Relations)
There he is.
Naved Khan (Managing Director and Equity Research)
Yeah. Can you hear me?
Mark McCaffrey (CFO)
Yeah, we can hear you.
Naved Khan (Managing Director and Equity Research)
Okay, great. Yeah, I had, quick follow-ups. One is, you know, we saw a transaction, Google Domains being sold, to Squarespace, and wanted to get your thoughts on what it means for, for the Other participants, such as yourself, in terms of competition. Then the other question I had was on the price increase on the A&C segment. What was the magnitude of the, the increase?
Aman Bhutani (CEO)
Yeah, let me take the domain space first, and then, Mark, if you want, touch on the pricing, or I, I can touch on that, too, if needed. On the Google domain space, you know, The way we look at it, Naved, is that, you know, anytime there's a transition like this, there's disruption in the customer experience or flow. Customers tend to put their head up, and they look at what other options might exist for them.
You know, given our brand awareness and leadership position in, in the world of domains, given the care we provide, given our high transactional NPS and just sort of broad understanding from a very large number of people of what GoDaddy brings to the table, and the more we attach to that bundle with that domain, I think we're positioned very well to see, you know, if some disruption happens, that we're there and, and it's advantageous to us, right? In terms of beyond that, I think our goal is to just do a fantastic job, you know, delivering, providing customers great products. We think, you know, we're doing a good job attracting customers. We're growing DOMs.
I mean, maybe the way to say it is, we were the leader in domains, you know, when Google came into the business, and we're the leader in domains when Google's leaving the business, we're okay with that. Then on the A&C pricing, I assume the question is to Websites + Marketing pricing?
Mark McCaffrey (CFO)
Yeah.
Naved Khan (Managing Director and Equity Research)
Yeah.
Mark McCaffrey (CFO)
Yeah. I, I don't think we've gotten into the magnitude, you know, breaking out pricing by each of the different components of it. I, I'll give a little directional color. I think last year we focused mostly on pricing increases around renewals. This year we're doing it on new as well as renewals, so I would say it's bigger than we did last year. Obviously, our priority is always retention rates and, you know, sticking with the 85. We, we, we took those pricing increases at the end of the Q2, and we should start to see them materialize as we go throughout the year.
Naved Khan (Managing Director and Equity Research)
Thank you.
Mark McCaffrey (CFO)
Thanks, Naved.
Christie Masoner (Head of Investor Relations)
I will now turn the call over to Aman for some closing remarks.
Aman Bhutani (CEO)
Thank you, Christie, and I'll just end by thanking all the GoDaddy employees for another good quarter. Just remind all of our analysts and shareholders, we're, we're super excited about the products we're bringing to market. We're super excited about attaching into our base that we've demonstrated with email and are demonstrating with commerce now. We're super excited about the trajectory we have going into Q3 and Q4, ending the year at accelerating growth and strong margin. Setting up next year really well. I look forward to the next call. Thank you very much.