filings.toolsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis, including information with respect to our plans and strategies for our business, includes forward-looking statements involving significant risks and uncertainties. As a result of many factors, such as those set forth in "Risk Factors," actual results may differ materially from the results described in, or implied by, these forward-looking statements.
This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussion of 2018 items and comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year ended December 31, 2019, and are incorporated by reference herein and considered part of this Form 10-K only to the extent referenced.
(Throughout this discussion and analysis, dollars are in millions, excluding ARPU, and shares are in thousands.)
COVID-19 Pandemic
As discussed in "Our Response to the COVID-19 Pandemic," we have implemented a variety of measures to attempt to minimize its impact on our business, including a restructuring announced in June 2020 to address the sustainability of our U.S. outbound sales and operations, which is further described in Note 13 to our financial statements. While the pandemic did not have a material impact on our 2020 results, the extent to which it may impact our future financial results and operations will depend on future developments. Such developments, which are highly uncertain and cannot be predicted, may include the emergence of new information 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 continues to evolve, we are currently unable to fully determine the extent of its impact on our business, but the impact could be material to any future period affected either directly or indirectly by this pandemic. We are actively monitoring the pandemic and the potential impacts it may have on our financial position, results of operations and cash flows in the future. See "Risk Factors" for additional information on the risks we may face associated with COVID-19.
Overview
We are the global market leader in domain registration. As of December 31, 2020, approximately 88% of our customers had purchased a domain from us and we had 82.7 million domains under management. Based on information reported in VeriSign's Domain Name Industry Brief, we had over 22% of the world's domains registered as of September 30, 2020.
We also offer hosting, presence and business applications products and services (products) enhancing our value proposition by enabling our customers to create, manage and syndicate their, or their customers', digital identities. These products are often purchased in conjunction with, or subsequent to, an initial domain registration. As we have grown, these products have become increasingly important parts of our business, constituting approximately 54% of total revenue in 2020.
Financial Highlights
Below are key financial highlights for 2020, with comparisons to 2019.
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Total revenue of $3,316.7 million, an increase of 11.0%, or approximately 11.4% on a constant currency basis(1).
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International revenue of $1,105.4 million, an increase of 9.6%, or approximately 10.9% on a constant currency basis(1).
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Total bookings(2) of $3,775.5 million, an increase of 11.0%, or approximately 11.6% on a constant currency basis(1).
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Net loss of $494.1 million, which includes a $674.7 million charge incurred in connection with the settlement of our obligations under the TRAs, as discussed in Note 16 to our financial statements.
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Net cash provided by operating activities of $764.6 million, an increase of 5.7%.
(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.
Our Financial Model
We have developed a stable and predictable business model driven by efficient customer acquisition, high customer retention rates and increasing lifetime spend. We grew our total customers from 17.3 million as of December 31, 2017 to 20.6 million as of December 31, 2020, through a combination of our industry leading products built on a single cloud platform, brand advertising, direct marketing efforts, customer referrals, world-class customer care and acquisitions. In each of the five years ended December 31, 2020, our customer retention rate exceeded 85%, and in 2020, our retention rate for customers who had been with us for over three years was more than 93%. We believe the breadth and depth of our product offerings and the high quality and responsiveness of our customer care team build strong relationships with our customers and are key to our high level of customer retention.
We generate bookings and revenue from sales of product subscriptions, including domain products, hosting and presence products and business applications products. We offer our subscriptions on a variety of terms, which average approximately one year, but can range from monthly to multi-annual terms of up to ten years depending on the product. We monitor total bookings as we typically collect payment at the time of sale and recognize revenue ratably over the term of our customer contracts. Accordingly, we believe total bookings is an indicator of the expected growth in our revenue and is a supplemental measure of the operating performance of our business. See "Reconciliation of Bookings" below for a reconciliation of total bookings to total revenue.
Domains. We generated 46% of our 2020 total revenue from the sale of domain products, primarily from domain registrations and renewals, aftermarket domain sales and domain add-ons such as domain protection. Total revenue from domain products grew at a CAGR of 12.7% over the three years ended December 31, 2020.
Hosting and Presence. We generated 36% of our 2020 total revenue from the sale of hosting and presence products, primarily from a variety of website hosting products, website security products and website building products, which generally have higher margins than conventional domain registrations. Total revenue from hosting and presence products grew at a CAGR of 12.3% over the three years ended December 31, 2020.
Business Applications. We generated 18% of our 2020 total revenue from the sale of business applications products, primarily from third-party productivity applications, which generally also have higher margins than conventional domain registrations. Total revenue from business applications products grew at a CAGR of 22.5% over the three years ended December 31, 2020.
Revenue derived from each of our product categories has increased in each of the last three years, with many of our non-domains products growing faster in recent periods.
In each of the five years ended December 31, 2020, greater than 85% of our total revenue, excluding the impact of purchase accounting, was generated by customers who were also customers in the prior year. To track our growth and the stability of our customer base, we monitor, among other things, revenue, retention rates and average revenue per user (ARPU) generated by our annual customer cohorts over time, as well as corresponding marketing and advertising spend. We define an annual customer cohort to include each customer who first became a customer during a calendar year. For example, in 2014, we acquired 2.9 million gross customers, who we collectively refer to as our 2014 cohort, and spent $165 million in marketing and advertising expenses. By the end of 2020, the 2014 cohort had generated an aggregate of $1,472 million of total bookings and we expect this cohort will continue to generate bookings and revenue in the future. For the five years ended December 31, 2020, the average annual bookings retention rate of the 2014 cohort was approximately 94%. To calculate a cohort's bookings retention rate, we compare the number of active customers within a specific cohort as of the end of the current year to the number of customers that were in the cohort in the year of acquisition. Over this period, ARPU, excluding the impact of purchase accounting, for the 2014 cohort grew from $79 in 2015 to $181 in 2020, representing a CAGR of 18%. We selected the 2014 cohort for this analysis because we believe it is representative of the spending patterns and revenue impact of our other cohorts. We believe our cohort analysis is important to illustrate the long-term value of our customers.
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.
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ | % of Total Revenue | |||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Domains | $ | 1,515.1 | 45.7 | % | $ | 1,351.6 | 45.2 | % | $ | 1,220.3 | 45.9 | % | ||||||||||||||
| Hosting and presence | 1,200.6 | 36.2 | % | 1,126.5 | 37.7 | % | 1,017.6 | 38.2 | % | |||||||||||||||||
| Business applications | 601.0 | 18.1 | % | 510.0 | 17.1 | % | 422.2 | 15.9 | % | |||||||||||||||||
| Total revenue | 3,316.7 | 100.0 | % | 2,988.1 | 100.0 | % | 2,660.1 | 100.0 | % | |||||||||||||||||
| Costs and operating expenses: | ||||||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | 1,158.6 | 34.9 | % | 1,026.8 | 34.3 | % | 893.9 | 33.6 | % | |||||||||||||||||
| Technology and development | 560.4 | 16.9 | % | 492.6 | 16.5 | % | 434.0 | 16.3 | % | |||||||||||||||||
| Marketing and advertising | 438.5 | 13.2 | % | 345.6 | 11.6 | % | 291.4 | 11.0 | % | |||||||||||||||||
| Customer care | 316.9 | 9.6 | % | 348.7 | 11.7 | % | 323.1 | 12.1 | % | |||||||||||||||||
| General and administrative | 323.8 | 9.8 | % | 362.1 | 12.1 | % | 334.0 | 12.6 | % | |||||||||||||||||
| Restructuring charges | 43.6 | 1.3 | % | — | — | % | — | — | % | |||||||||||||||||
| Depreciation and amortization | 202.7 | 6.1 | % | 209.7 | 7.0 | % | 234.1 | 8.8 | % | |||||||||||||||||
| Total costs and operating expenses | 3,044.5 | 91.8 | % | 2,785.5 | 93.2 | % | 2,510.5 | 94.4 | % | |||||||||||||||||
| Operating income | 272.2 | 8.2 | % | 202.6 | 6.8 | % | 149.6 | 5.6 | % | |||||||||||||||||
| Interest expense | (91.3) | (2.8) | % | (92.1) | (3.1) | % | (98.4) | (3.7) | % | |||||||||||||||||
| Loss on debt extinguishment | — | — | % | (14.8) | (0.5) | % | — | — | % | |||||||||||||||||
| Tax receivable agreements liability adjustment | (674.7) | (20.3) | % | 8.7 | 0.3 | % | 14.9 | 0.6 | % | |||||||||||||||||
| Other income (expense), net | (1.6) | — | % | 22.0 | 0.7 | % | 6.9 | 0.3 | % | |||||||||||||||||
| Income (loss) before income taxes | (495.4) | (14.9) | % | 126.4 | 4.2 | % | 73.0 | 2.8 | % | |||||||||||||||||
| Benefit for income taxes | 1.3 | — | % | 12.0 | 0.4 | % | 9.0 | 0.3 | % | |||||||||||||||||
| Net income (loss) | (494.1) | (14.9) | % | 138.4 | 4.6 | % | 82.0 | 3.1 | % | |||||||||||||||||
| Less: net income attributable to non-controlling interests | 1.0 | — | % | 1.4 | — | % | 4.9 | 0.2 | % | |||||||||||||||||
| Net income (loss) attributable to GoDaddy Inc. | $ | (495.1) | (14.9) | % | $ | 137.0 | 4.6 | % | $ | 77.1 | 2.9 | % | ||||||||||||||
Operating Metrics
In addition to our results determined in accordance with GAAP, we believe the following operating metrics are useful as supplements in evaluating our ongoing operational performance and help provide an enhanced understanding of our business:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
| Total bookings | $ | 3,775.5 | $ | 3,401.2 | $ | 3,011.5 | |||||||||||||||||||||||||||||||||||
| Total customers at period end (in thousands) | 20,646 | 19,274 | 18,518 | ||||||||||||||||||||||||||||||||||||||
| Average revenue per user | $ | 166 | $ | 158 | $ | 148 |
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.
Total customers. We define a customer as an individual or entity, as of the end of a period, having an account with one or more paid product subscriptions. A single user may be counted as a customer more than once if they maintain paid subscriptions in multiple accounts. Total customers is one way we measure the scale of our business and is an important part of our ability to increase our revenue base.
Average revenue per user. We calculate ARPU as total revenue during the preceding 12 month period divided by the average of the number of total customers at the beginning and end of the period. ARPU provides insight into our ability to sell additional products to customers, though the impact to date has been muted due to our continued growth in total customers.
Reconciliation of Bookings
The following table reconciles total bookings to total revenue, its most directly comparable GAAP financial measure:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Total revenue | $ | 3,316.7 | $ | 2,988.1 | $ | 2,660.1 | |||||||||||||||||||||||
| Change in deferred revenue(1) | 210.5 | 180.5 | 163.2 | ||||||||||||||||||||||||||
| Net refunds | 247.3 | 233.4 | 192.6 | ||||||||||||||||||||||||||
| Other | 1.0 | (0.8) | (4.4) | ||||||||||||||||||||||||||
| Total bookings | $ | 3,775.5 | $ | 3,401.2 | $ | 3,011.5 |
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(1) Change in deferred revenue also includes the impact of realized gains or losses from the hedging of bookings in foreign currencies.
Comparison of 2020 and 2019
Revenue
We generate substantially all of our revenue from sales of subscriptions, including domain registrations and renewals, hosting and presence products and business applications products. 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, aftermarket domain sales and domain add-ons such as domain protection. 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 website hosting, website security and website building 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.
The following table presents our revenue for the periods indicated:
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Domains | $ | 1,515.1 | $ | 1,351.6 | $ | 1,220.3 | $ | 163.5 | 12 | % | $ | 131.3 | 11 | % | |||||||||||||||||||||||||||
| Hosting and presence | 1,200.6 | 1,126.5 | 1,017.6 | 74.1 | 7 | % | 108.9 | 11 | % | ||||||||||||||||||||||||||||||||
| Business applications | 601.0 | 510.0 | 422.2 | 91.0 | 18 | % | 87.8 | 21 | % | ||||||||||||||||||||||||||||||||
| Total revenue | $ | 3,316.7 | $ | 2,988.1 | $ | 2,660.1 | $ | 328.6 | 11 | % | $ | 328.0 | 12 | % |
The 11.0% increase in total revenue was driven by the 7.1% growth in total customers, the 5.1% growth in ARPU as well as incremental revenue from acquisitions completed in 2020. The increase in customers impacted each of our revenue lines, as the additional customers purchased subscriptions across our product portfolio. These increases were partially offset by the impact of adverse movements in foreign currency exchange rates.
Domains. The 12.1% increase in domains revenue was primarily driven by the increase in domains under management from 79.6 million as of December 31, 2019 to 82.7 million as of December 31, 2020, incremental revenue from acquisitions completed in 2020 and increased aftermarket domain sales and international growth. Domains under management in 2020 was impacted by: (i) approximately 0.8 million domains added from an acquisition and (ii) 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 6.6% increase in hosting and presence revenue was primarily driven by increased demand for our website building and website security products, partially offset by the adverse impact of lower demand for certain higher-priced subscriptions, such as GoDaddy Social, as a result of the economic disruption resulting from the COVID-19 pandemic.
Business applications. The 17.8% increase in business applications revenue was primarily driven by increased customer adoption of our productivity solutions as well as an increase in customers purchasing higher product tiers.
Bookings
The following table presents our total bookings for the periods indicated:
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Total bookings(1) | $ | 3,775.5 | $ | 3,401.2 | $ | 3,011.5 | $ | 374.3 | 11 | % | $ | 389.7 | 13 | % |
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(1) A reconciliation of total bookings to total revenue, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of Bookings" above.
The 11.0% increase in total bookings was primarily driven by increases in total customers and domains under management, increased aftermarket domain sales, broadened customer adoption of non-domain products and acquisitions completed in 2020, partially offset by the negative impact the economic disruption resulting from the COVID-19 pandemic had on subscriptions for certain of our higher-priced services as well as the adverse impact of movements in foreign currency exchange rates.
Costs and Operating Expenses
Cost of revenue
Costs of revenue are the direct costs incurred in connection with selling an incremental product to our customers. Substantially all cost of revenue relates to domain registration fees, 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. We expect cost of revenue to increase in absolute dollars in future periods related to the expansion of our domains business, higher sales of third-party productivity applications and growth in our customer base. However, cost of revenue may fluctuate as a percentage of total revenue, depending on the mix of products sold in a particular period. Subsequent to our acquisition of the registry operations of Neustar in August 2020, we no longer incur domain registration fees on purchases of former Neustar TLDs.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 1,158.6 | $ | 1,026.8 | $ | 893.9 | $ | 131.8 | 13 | % | $ | 132.9 | 15 | % |
The 12.8% increase in cost of revenue was primarily attributable to higher domain costs driven by increases in domains under management and aftermarket domain sales, increased software licensing fees resulting from higher sales of 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. We expect technology and development expense to increase in absolute dollars as we continue to invest in product development and migrate our infrastructure to a cloud-based third-party provider. Technology and development expenses may fluctuate as a percentage of total revenue depending on our level of investment in additional personnel and the pace of our infrastructure transition.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Technology and development | $ | 560.4 | $ | 492.6 | $ | 434.0 | $ | 67.8 | 14 | % | $ | 58.6 | 14 | % |
As discussed in our 2019 Form 10-K, we recorded a $7.2 million reduction in equity-based compensation expense in 2019 to correct an error related to the accounting for certain PSUs in prior periods. Excluding this correction, technology and development expenses increased 12.1%, primarily as a result of increased personnel costs driven by higher average headcount associated with our continued investment in product development and increased technology costs associated with the growth of our business and our migration to a cloud-based infrastructure.
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. We expect marketing and advertising expenses to fluctuate depending on both the mix of internal and external marketing resources used, the size and scope of our future campaigns and the level of discretionary investments we make in marketing to drive future sales.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Marketing and advertising | $ | 438.5 | $ | 345.6 | $ | 291.4 | $ | 92.9 | 27 | % | $ | 54.2 | 19 | % |
The 26.9% increase in marketing and advertising expenses was primarily attributable to increased discretionary spending and personnel costs associated with additional marketing investments we made in 2020 to capture increased demand for certain of our products during the COVID-19 pandemic.
Customer care
Customer care expenses represent the costs to guide and service our customers, primarily consisting of personnel costs. We expect customer care expenses to fluctuate depending on the level of personnel required to support our business.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Customer care | $ | 316.9 | $ | 348.7 | $ | 323.1 | $ | (31.8) | (9) | % | $ | 25.6 | 8 | % |
The 9.1% decrease in customer care expenses was primarily due to the headcount reductions related to the restructuring plan implemented during the second quarter of 2020, as further discussed below, in conjunction with operating efficiencies gained as we scale our business and increase our use of alternative methods of customer interaction. We expect these expenses to remain lower in the short-term as a result of the headcount reductions associated with the restructuring.
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. We expect general and administrative expenses to fluctuate depending on the level of personnel and other administrative costs required to support our business as well as the significance of any strategic acquisitions we choose to pursue.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 323.8 | $ | 362.1 | $ | 334.0 | $ | (38.3) | (11) | % | $ | 28.1 | 8 | % | |||||||||||||||||||||||||||
| General and administrative, adjusted for certain items described below | $ | 333.8 | $ | 350.1 | $ | 334.0 | $ | (16.3) | (5) | % | $ | 16.1 | 5 | % |
The following items are included in general and administrative expenses in the periods indicated:
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As discussed in Note 12 to our financial statements, we recorded an $18.1 million legal settlement accrual in 2019. During 2020, we reduced the settlement accrual by an aggregate of $10.0 million.
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As discussed in our 2019 Form 10-K, we recorded a $6.1 million reduction in equity-based compensation expense in 2019 to correct an error related to the accounting for certain PSUs in prior periods.
Excluding the items described above, the 4.7% decrease in general and administrative expenses was primarily driven by lower travel and other general costs, partially offset by an increase in acquisition-related expenses.
Restructuring charges
The $43.6 million in restructuring charges in 2020 were incurred pursuant to a restructuring plan implemented in June 2020, as further discussed in Note 13 to our financial statements. We implemented the restructuring to address the sustainability of our U.S. outbound sales and operations, which faced challenges with respect to soft customer demand for certain higher-priced, do-it-for-you services such as GoDaddy Social. These challenges were exacerbated by the economic disruption resulting from the COVID-19 pandemic.
Restructuring charges included: (i) $14.6 million in severance and related benefits to be paid to, or on behalf of, the approximately 470 employees who were involuntarily terminated and the approximately 110 employees who voluntarily did not accept alternate roles with us, as well as professional fees incurred in connection with the restructuring; (ii) a $27.9 million impairment of operating lease assets associated with the closure of our leased offices in Austin, Texas; and (iii) $1.1 million of accelerated depreciation and operating lease assets amortization related to the office closures. We do not expect to incur any significant additional charges related to this restructuring.
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. These expenses may increase or decrease in absolute dollars in future periods depending on our future level of capital investments in hardware and other equipment as well as the significance of any future acquisitions.
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 202.7 | $ | 209.7 | $ | 234.1 | $ | (7.0) | (3) | % | $ | (24.4) | (10) | % |
The 3.3% decrease in depreciation and amortization expenses resulted from assets that became fully depreciated, partially offset by the impact of increased amortization expense related to acquisitions completed in 2020.
Interest expense
| Year Ended December 31, | 2020 to 2019 | 2019 to 2018 | |||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 91.3 | $ | 92.1 | $ | 98.4 | $ | (0.8) | (1) | % | $ | (6.3) | (6) | % |
The 0.9% decrease in interest expense was driven by more favorable effective interest rates on our variable rate borrowings, partially offset by the issuance of additional long-term debt in August 2020.
Loss on debt extinguishment
In 2019, we recognized a loss on debt extinguishment of $14.8 million, primarily related to the $600.0 million partial prepayment of term loan borrowings with the proceeds of the issuance of the Senior Notes. See Note 9 to our financial statements for additional discussion.
Tax receivable agreements liability adjustment
In 2020, we recorded a $674.7 million charge as a result of the settlement of our obligations under the TRAs, as further described below and in Note 16 to our financial statements.
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 prioritized manner focusing first on requirements for our 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 the settlement of the TRAs (as further discussed below) as well as 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 long-term 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 ongoing 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. However, we will continue to monitor our liquidity position. Should we pursue additional strategic acquisitions or share repurchases, we may need to raise additional capital, which may be in the form of long-term debt or equity financings.
Credit Facility and Senior Notes
Our long-term debt obligations consist of the Credit Facility and the Senior Notes. In August 2020, we increased our borrowings under the Credit Facility through the issuance of an additional $750.0 million in term loans, which were used to partially fund the payments associated with the settlement of our obligations under the TRAs, as discussed below. See Note 9 to our financial statements for additional information regarding our long-term debt.
Our long-term debt agreements 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 of December 31, 2020, we were in compliance with all such covenants and had no amounts drawn on our revolving credit loan. We currently have no reason to believe we will be unable to satisfy these covenants; however, the economic disruption resulting from the COVID-19 pandemic has made it more difficult to forecast our future results.
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 discussed in Note 16 to our financial statements, we entered into settlement and release agreements with respect to four of the TRAs and an amendment to the fifth TRA, pursuant to which settled all of our obligations under the TRAs in exchange for aggregate payments totaling $850.0 million, of which $849.8 million was paid during 2020. Upon payment, we were released from all obligations to the parties to the TRAs, including the holders of unexchanged LLC Units. The settlement payments were funded with a combination of cash and the proceeds from the issuance of the new term loans discussed above.
By entering into the TRA Settlement Agreements, we were able to achieve an attractive return by settling our obligations under the TRAs at a significant discount to the approximately $1.8 billion in estimated payments we would have potentially otherwise made under these agreements, assuming we are able to fully utilize the relevant acquired tax benefits.
Share Repurchase Programs
Our Board has authorized a $500.0 million share repurchase program, as described in Note 5 to our financial statements. During 2019 and 2020, we repurchased a total of 7,125 and 9,986 shares of our Class A common stock in the open market, respectively, pursuant to our previous share repurchase programs, for an aggregate purchase price of $458.6 million and $541.7 million, respectively, including commissions. As of December 31, 2020, we have $500.0 million remaining available under our current share repurchase program.
Acquisitions
See Note 3 to our financial statements for a discussion of cash payments made in connection with acquisitions completed in 2020.
In February 2021, we acquired Poynt Co. for $329.2 million in cash paid at closing and an additional $45.0 million in deferred cash payments subject to certain performance and employment conditions over the three years subsequent to the closing date. Poynt offers a suite of products allowing small businesses to sell and accept payments anywhere, including point-of-sale systems, payments, invoicing and transaction management.
Restructuring
As discussed in Note 13 to our financial statements, we implemented a restructuring plan in June 2020 to address the sustainability of our U.S. outbound sales and operations. Cash payments of $14.4 million related to the restructuring were made during 2020, and no material amounts remain as of December 31, 2020.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 764.6 | $ | 723.4 | $ | 559.8 | |||||||||||||||||||||||
| Net cash used in investing activities | (482.3) | (135.3) | (254.8) | ||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (581.7) | (456.9) | 47.0 | ||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1.8 | (0.8) | (2.3) | ||||||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (297.6) | $ | 130.4 | $ | 349.7 |
Operating Activities
Our primary source of cash from operating activities has been cash collections from our customers. We expect cash inflows from operating activities to be primarily affected by increases in total bookings. Our primary uses of cash from operating activities have been for domain registration costs paid to registries, licensing fees related to third-party productivity solutions, personnel costs, discretionary marketing and advertising costs, technology and development costs and interest payments. We expect cash outflows from operating activities to be affected by the timing of payments we make to registries and increases in personnel and other operating costs as we continue to grow our business and increase our international presence.
Net cash provided by operating activities increased $41.2 million from $723.4 million in 2019 to $764.6 million in 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. We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures and the strategic acquisition or other growth opportunities we decide to pursue.
Net cash used in investing activities increased $347.0 million from $135.3 million in 2019 to $482.3 million in 2020, primarily due to a $384.4 million increase in spending for business acquisitions, partially offset by a $21.1 million decrease in capital expenditures and a $27.9 million increase in net inflows from short-term investments.
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 $124.8 million from $456.9 million in 2019 to $581.7 million in 2020, primarily due to $849.8 million in TRA settlement payments in 2020 and an $83.1 million increase in share repurchases, partially offset by the receipt of $746.3 million in net proceeds from the issuance of new term loans and a $54.3 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.
Contractual Obligations
The following table summarizes our material contractual obligations and commitments as of December 31, 2020:
| Total Payments | Payments due by period | ||||||||||||||||||||||||||||
| 1 year | 2-3 years | 4-5 years | 5+ years | ||||||||||||||||||||||||||
| Long-term debt, including current maturities(1) | $ | 3,153.6 | $ | 32.5 | $ | 65.0 | $ | 1,747.5 | $ | 1,308.6 | |||||||||||||||||||
| Interest on long-term debt(2) | 455.1 | 86.0 | 169.9 | 105.8 | 93.4 | ||||||||||||||||||||||||
| Operating leases(3) | 253.6 | 50.8 | 63.2 | 50.2 | 89.4 | ||||||||||||||||||||||||
| Service agreements(4) | 208.2 | 83.3 | 112.5 | 12.3 | 0.1 | ||||||||||||||||||||||||
| Total material contractual obligations | $ | 4,070.5 | $ | 252.6 | $ | 410.6 | $ | 1,915.8 | $ | 1,491.5 | |||||||||||||||||||
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(1) See Note 9 to our financial statements for information regarding the terms of our long-term debt agreements.
(2) Interest on long-term debt excludes both the amortization of deferred debt issuance costs and original issue discount and the expected benefits associated with our interest rate swap arrangements. Interest on our variable rate debt is calculated using the rate in effect at December 31, 2020.
(3) See Note 11 to our financial statements for information regarding our operating lease commitments. The amounts include the imputed interest component of our operating lease liabilities.
(4) See Note 12 to our financial statements for information regarding our service agreement commitments.
Off-Balance Sheet Arrangements
As of December 31, 2020 and 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 discuss further below. We review our critical accounting policies and estimates with the audit and finance committee of our board of directors on an annual basis.
See Note 2 to our financial statements for a summary of our significant accounting policies.
Revenue Recognition
We recognize revenue when control of the promised products is transferred to a customer, in an amount reflecting the consideration we expect to be entitled to in exchange for those products. Payments received in advance of our performance are recorded as deferred revenue. Revenue is recognized net of allowances for returns and transaction-based taxes collected.
We generally sell our products with a right of return, which we account for as variable consideration when estimating the amount of revenue to recognize. Refunds are estimated at contract inception using the expected value method based on historical refund experience and updated each reporting period as additional information becomes available. Our annual refund rate has ranged from 6.4% to 6.9% of total bookings from 2018 to 2020.
We may sell multiple products to customers at the same time. For example, we may design a customer website and separately offer other products such as hosting and a SSL certificate, or a customer may combine a domain registration with other products such as Websites + Marketing or email. Judgment may be required in determining whether products are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation. The majority of our revenue arrangements consist of multiple performance obligations, with revenue recognized over the period in which each performance obligation is satisfied, which is generally over the contract term.
For arrangements with multiple performance obligations, we allocate revenue to each distinct performance obligation based on its relative stand-alone selling price (SSP). Our process for determining SSP requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each performance obligation. We determine SSP based on prices charged to customers for individual products, taking into consideration other factors, which may include (i) historical and expected discounting practices; (ii) the size, volume and term length of transactions; (iii) customer demographics; (iv) the geographic areas in which our products are sold; and (v) our overall go-to-market strategy.
We sell our products directly to customers and also through a network of resellers. In certain cases, we act as a reseller of products provided by others. The determination of gross or net revenue recognition is reviewed on a product-by-product basis and is dependent on whether we act as principal or agent in the transaction.
See Notes 2 and 7 to our financial statements for additional information regarding revenue recognition and deferred revenue.
Business Combinations
We include the results of operations of acquired businesses in our financial statements as of the respective dates of acquisition. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to tangible and intangible assets acquired, liabilities assumed and pre-acquisition contingencies. The purchase price, including estimates of the fair value of contingent consideration when applicable, is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on the respective acquisition dates, with the excess recorded as goodwill. Critical estimates used in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows (primarily from customer relationships and developed technology) and discount rates.
Contingent consideration liabilities, which relate to future earn-out payments associated with our acquisitions, are generally valued using discounted cash flow valuation methods. Critical estimates used in valuing these liabilities include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and discount rates.
We use our best estimates and assumptions to determine acquisition-date fair values. These estimates are inherently uncertain and subject to refinement. We continue to collect information and reevaluate our preliminary estimates and assumptions and record any qualifying measurement period adjustments to goodwill. Contingent consideration is adjusted to fair value in subsequent periods as an increase or decrease in general and administrative expenses.
See Notes 2 and 3 to our financial statements for additional information regarding business combinations.
Goodwill and Indefinite-Lived Intangible Assets
We make estimates, assumptions and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocations of business combinations, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. We assess our goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter. We will also perform an assessment at other times if and when events or changes in circumstances indicate the carrying value of these assets may not be recoverable.
We perform our impairment assessment based on qualitative analysis, which includes considering various factors including macroeconomic conditions, industry and market conditions and our historical and projected operating results. If, based on our qualitative analysis, we were to determine it is more-likely-than-not the fair value of our single reporting unit is less than its carrying amount, we would record an impairment loss for the amount equal to such excess.
Our qualitative analyses during 2020, 2019 and 2018 did not indicate any impairment. As of December 31, 2020, we believe such assets are recoverable; however, there can be no assurances these assets will not be impaired in future periods. Any future impairment charges could adversely impact our results of operations.
See Notes 2 and 4 to our financial statements for additional information regarding goodwill and indefinite-lived intangible assets.
Income Taxes
We are subject to U.S. federal, state and foreign income taxes with respect to our allocable share of any taxable income or loss of Desert Newco, as well as any stand-alone income or loss we generate. Significant judgment is required in determining our provision or benefit for income taxes and in evaluating uncertain tax positions.
We account for income taxes under the asset and liability method, which requires the recognition of DTAs and DTLs for the expected future tax consequences of events included in our financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period in which the enactment date occurs.
We recognize DTAs to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.
We recognize tax benefits from uncertain tax positions only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized from such positions are measured based on the largest benefit having a greater than 50% likelihood of being realized.
See Notes 2 and 15 to our financial statements for additional information regarding income taxes and the considerations that could lead to a release of substantially all of the valuation allowance against our DTAs.
Indirect Taxes
We are subject to indirect taxation in some, but not all, of the various states and foreign jurisdictions in which we and our subsidiaries conduct business. Laws and regulations attempting to subject communications and commerce conducted over the Internet to various indirect taxes are becoming more prevalent, both in the U.S. and internationally, and may impose additional burdens on us in the future. Increased regulation could negatively affect our business directly, as well as the businesses of our customers. Taxing authorities may impose indirect taxes on the Internet-related revenue we generate based on regulations currently being applied to similar, but not directly comparable, industries. There are many transactions and calculations where the ultimate indirect tax determination is uncertain. In addition, domestic and international indirect taxation laws, or interpretations thereof, are subject to change.
The calculation of our reserve for indirect taxes involves significant management estimates and is based on an ongoing analysis of our business activities, revenues subject to indirect taxes and applicable regulations. Although we believe our indirect tax estimates and associated liabilities are reasonable, the final determination of indirect tax audits, litigation or settlements could be materially different than the amounts established for indirect tax contingencies.
See Note 12 to our financial statements for additional information regarding indirect taxes.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising from uncertain and unresolved matters in the ordinary course of business and from events or actions by others having the potential to result in a future loss. Such contingencies may include, but are not limited to, intellectual property claims, putative class actions, commercial and consumer protection claims, labor and employment claims, breach of contract claims, regulatory proceedings, product service level commitments and losses resulting from other events and developments. We consider the likelihood of loss, the impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies.
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, a liability is recorded based on the low-end of such range. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties impacting the ultimate resolution of the contingency. It is also not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure is provided. Disclosure is also provided when it is reasonably possible a loss will be incurred or when it is reasonably possible the amount of a loss will exceed the recorded amounts.
We regularly review all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. Development of a meaningful estimate of loss, or a range of potential loss, is complex when the outcome is directly dependent on negotiations with, or decisions by, third parties such as regulatory agencies, court systems in various jurisdictions and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates. Until the final resolution of such matters, there may be an exposure to loss in excess of the amounts recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business, operating results or financial condition.
See Note 12 to our financial statements for additional information regarding loss contingencies.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 to our financial statements.
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