filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. 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 this Quarterly Report as well as our audited financial statements and related notes and the discussion in the "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of our 2022 Form 10-K. 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.
(Throughout the tables and this discussion and analysis, dollars are in millions, excluding average revenue per user (ARPU), and shares are in thousands.)
Overview
We are a global leader in serving a large market of everyday entrepreneurs, delivering simple, easy-to-use products, and outcome-driven, personalized guidance to small businesses, individuals, organizations, developers, designers and domain investors. We manage and report our business in the following two segments:
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Applications and Commerce (A&C)**, which primarily consists of sales of products containing proprietary software, commerce products and third-party email and productivity solutions as well as sales of certain products when they are included in bundled offerings of our proprietary software products.
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Core Platform (Core)**, which primarily consists of sales of domain registrations and renewals, aftermarket domain sales, website hosting products and website security products when not included in bundled offerings of our proprietary software products as well as sales of products not containing a software component.
Consolidated Second Quarter Financial Highlights
Below are our key consolidated financial highlights for the three months ended June 30, 2023, with comparisons to the three months ended June 30, 2022.
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Total revenue of $1,048.1 million, an increase of 3.2%, or approximately 4.1% on a constant currency basis(1).
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International revenue of $341.1 million, an increase of 3.1%, or approximately 5.7% on a constant currency basis(1).
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Total bookings of $1,141.1 million, an increase of 2.0%, or approximately 2.6% on a constant currency basis(1).
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Operating income of $119.6 million, a decrease of 4.0%(2).
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Net income of $83.1 million, a decrease of 8.2%(2).
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Normalized EBITDA(3) of $264.6 million, an increase of 2.4%.
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Net cash provided by operating activities of $198.0 million, a decrease of 21.1%.
(1) Discussion of constant currency is set forth in "Quantitative and Qualitative Disclosures about Market Risk."
(2) Our operating results for the three months ended June 30, 2023 included $17.5 million in restructuring and other charges, as further discussed in Note 13 to our financial statements.
(3) A reconciliation of Normalized EBITDA to net income, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of NEBITDA" below.
Consolidated Results of Operations
The following table sets forth our consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ | % of Total Revenue | $ | % of Total Revenue | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Applications & commerce | $ | 351.7 | 33.6 | % | $ | 317.2 | 31.2 | % | $ | 689.7 | 33.1 | % | $ | 620.3 | 30.7 | % | |||||||||||||||||||||||||||||||
| Core platform | 696.4 | 66.4 | % | 698.3 | 68.8 | % | 1,394.4 | 66.9 | % | 1,397.9 | 69.3 | % | |||||||||||||||||||||||||||||||||||
| Total revenue | 1,048.1 | 100.0 | % | 1,015.5 | 100.0 | % | 2,084.1 | 100.0 | % | 2,018.2 | 100.0 | % | |||||||||||||||||||||||||||||||||||
| Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | 388.4 | 37.1 | % | 360.5 | 35.5 | % | 774.5 | 37.2 | % | 730.7 | 36.2 | % | |||||||||||||||||||||||||||||||||||
| Technology and development | 219.2 | 20.9 | % | 198.1 | 19.5 | % | 434.2 | 20.8 | % | 388.2 | 19.2 | % | |||||||||||||||||||||||||||||||||||
| Marketing and advertising | 89.5 | 8.5 | % | 100.7 | 9.9 | % | 181.9 | 8.7 | % | 217.0 | 10.7 | % | |||||||||||||||||||||||||||||||||||
| Customer care | 77.7 | 7.4 | % | 78.9 | 7.8 | % | 154.5 | 7.4 | % | 156.6 | 7.8 | % | |||||||||||||||||||||||||||||||||||
| General and administrative | 92.7 | 8.8 | % | 94.7 | 9.4 | % | 186.8 | 9.0 | % | 185.3 | 9.2 | % | |||||||||||||||||||||||||||||||||||
| Restructuring and other | 17.5 | 1.7 | % | 9.6 | 0.9 | % | 69.8 | 3.4 | % | 9.6 | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 43.5 | 4.2 | % | 48.4 | 4.8 | % | 92.0 | 4.4 | % | 96.6 | 4.8 | % | |||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 928.5 | 88.6 | % | 890.9 | 87.8 | % | 1,893.7 | 90.9 | % | 1,784.0 | 88.4 | % | |||||||||||||||||||||||||||||||||||
| Operating income | 119.6 | 11.4 | % | 124.6 | 12.2 | % | 190.4 | 9.1 | % | 234.2 | 11.6 | % | |||||||||||||||||||||||||||||||||||
| Interest expense | (45.6) | (4.4) | % | (34.9) | (3.4) | % | (91.4) | (4.3) | % | (68.5) | (3.4) | % | |||||||||||||||||||||||||||||||||||
| Other income (expense), net | 6.8 | 0.7 | % | (1.2) | (0.1) | % | 29.4 | 1.4 | % | (2.3) | (0.1) | % | |||||||||||||||||||||||||||||||||||
| Income before income taxes | 80.8 | 7.7 | % | 88.5 | 8.7 | % | 128.4 | 6.2 | % | 163.4 | 8.1 | % | |||||||||||||||||||||||||||||||||||
| Benefit (provision) for income taxes | 2.3 | 0.2 | % | 2.0 | 0.2 | % | 2.1 | 0.1 | % | (4.3) | (0.2) | % | |||||||||||||||||||||||||||||||||||
| Net income | 83.1 | 7.9 | % | 90.5 | 8.9 | % | 130.5 | 6.3 | % | 159.1 | 7.9 | % | |||||||||||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interests | 0.2 | — | % | 0.1 | — | % | 0.3 | 0.1 | % | 0.3 | — | % | |||||||||||||||||||||||||||||||||||
| Net income attributable to GoDaddy Inc. | $ | 82.9 | 7.9 | % | $ | 90.4 | 8.9 | % | $ | 130.2 | 6.2 | % | $ | 158.8 | 7.9 | % |
Non-GAAP Financial Measure and Other Operating Metrics
In addition to our results determined in accordance with GAAP, we believe that Normalized EBITDA, a non-GAAP measure, and the following other operating metrics are useful as supplements in evaluating our ongoing operational performance and help provide an enhanced understanding of our business:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Normalized EBITDA | $ | 264.6 | $ | 258.4 | $ | 514.3 | $ | 484.3 | |||||||||||||||
| Annualized recurring revenue | $ | 3,619.6 | $ | 3,489.3 | $ | 3,619.6 | $ | 3,489.3 | |||||||||||||||
| Total bookings | $ | 1,141.1 | $ | 1,118.9 | $ | 2,340.3 | $ | 2,275.2 | |||||||||||||||
| Total customers at period end (in thousands) | 20,985 | 20,876 | 20,985 | 20,876 | |||||||||||||||||||
| Average revenue per user | $ | 199 | $ | 193 | $ | 199 | $ | 193 |
Normalized EBITDA (NEBITDA). NEBITDA is a supplemental measure of our operating performance used by management and investors to evaluate our business. We calculate NEBITDA as net income excluding depreciation and amortization, interest expense (net), provision or benefit for income taxes, equity-based compensation expense, acquisition-related costs, restructuring-related expenses and certain other items. We believe that the inclusion or exclusion of certain recurring and non-recurring items provides a supplementary measure of our core operating results and permits useful alternative period-over-period comparisons of our operations but should not be viewed as a substitute for comparable GAAP measures.
Annualized recurring revenue (ARR). ARR is an operating metric defined as quarterly recurring revenue (QRR) multiplied by four. QRR represents the quarterly recurring GAAP revenue, net of refunds, from new and renewed subscription-based services. ARR is exclusive of any revenue that is non-recurring, including, without limitation, domain aftermarket, domain transfers, one-time set-up or migration fees and non-recurring professional website services fees. We believe ARR helps illustrate the scale of certain of our products and facilitates comparisons to other companies in our industry.
Total bookings. Total bookings is an operating metric representing the total value of customer contracts entered into during the period, excluding refunds. We believe total bookings provides additional insight into the performance of our business and the effectiveness of our marketing efforts since we typically collect payment at the inception of a customer contract but recognize revenue ratably over the term of the contract.
Total customers. We define a customer as an individual or entity with paid transactions in the trailing twelve months or with paid subscriptions as of the end of the period. A single user may be counted as a customer more than once if they maintain paid subscriptions or transactions 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 NEBITDA
The following table reconciles NEBITDA to net income, its most directly comparable GAAP financial measure:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 83.1 | $ | 90.5 | $ | 130.5 | $ | 159.1 | |||||||||||||||
| Depreciation and amortization | 43.5 | 48.4 | 92.0 | 96.6 | |||||||||||||||||||
| Equity-based compensation(1) | 77.5 | 66.7 | 149.1 | 127.9 | |||||||||||||||||||
| Interest expense, net | 37.4 | 33.6 | 75.4 | 66.8 | |||||||||||||||||||
| Acquisition-related expenses | 4.7 | 10.6 | 9.7 | 18.3 | |||||||||||||||||||
| Restructuring and other (2) | 20.7 | 10.6 | 59.7 | 11.3 | |||||||||||||||||||
| Provision (benefit) for income taxes | (2.3) | (2.0) | (2.1) | 4.3 | |||||||||||||||||||
| NEBITDA | $ | 264.6 | $ | 258.4 | $ | 514.3 | $ | 484.3 |
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(1)The six months ended June 30, 2023 excludes $2.3 million of equity-based compensation expense associated with our restructuring plan, which is included within restructuring and other.
(2)In addition to the restructuring and other in our statements of operations, other charges included are primarily composed of lease-related expenses associated with closed facilities, charges related to certain legal matters and adjustments to the fair value of our equity investments.
Revenue
We generate the majority of our revenue from sales of product subscriptions, as described in our 2022 Form 10-K. Our subscriptions can range from monthly terms to multi-annual terms of up to ten years, depending on the product. Revenue is presented net of refunds, and we maintain a reserve to provide for refunds granted to customers.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Applications & commerce | $ | 351.7 | $ | 317.2 | $ | 34.5 | 11 | % | $ | 689.7 | $ | 620.3 | $ | 69.4 | 11 | % | |||||||||||||||||||||||||||||||
| Core platform | 696.4 | 698.3 | $ | (1.9) | — | % | 1,394.4 | 1,397.9 | $ | (3.5) | — | % | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | 1,048.1 | $ | 1,015.5 | $ | 32.6 | 3 | % | $ | 2,084.1 | $ | 2,018.2 | $ | 65.9 | 3 | % |
The 3.2% and 3.3% increases in total revenue for the three and six months ended June 30, 2023, respectively, were due to the changes in our A&C and Core revenues, as described below:
A&C
For the three months ended June 30, 2023, the 10.9% increase in A&C revenue was primarily driven by: (i) 10.5% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.4% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing, and (iii) 39.6% growth in commerce-related revenue.
For the six months ended June 30, 2023, the 11.2% increase in A&C revenue was primarily driven by: (i) 10.3% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.2% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing, and (iii) 63.4% growth in commerce-related revenue.
Core
For the three months ended June 30, 2023, the 0.3% decrease in Core revenue was primarily driven by a 5.0% decrease in aftermarket revenues and a 4.1% decrease in hosting revenues due to end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 3.4% increase in domain registration and domain add-on revenue. Domains under management was 84.2 million as of June 30, 2023.
For the six months ended June 30, 2023, the 0.3% decrease in Core revenue was primarily driven by a 6.6% decrease in aftermarket revenues and a 4.4% decrease in hosting revenues due to end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 4.1% increase in domain registration and domain add-on revenue.
Bookings
The following table presents our total bookings for the periods indicated:
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Total bookings | $ | 1,141.1 | $ | 1,118.9 | $ | 22.2 | 2 | % | $ | 2,340.3 | $ | 2,275.2 | $ | 65.1 | 3 | % |
The 2.0% and 2.9% increases in total bookings for the three and six months ended June 30, 2023, respectively, were primarily driven by broadened customer adoption of our productivity solutions and our Websites + Marketing product, partially offset by softness in aftermarket demand as well as approximately 60 and 110 basis points, respectively, due to adverse movements in foreign currency exchange rates as a result of the strength of the U.S. dollar relative to certain currencies. In addition to the currency headwinds, our bookings growth rate was also impacted by uneven demand patterns related to inflation and continued economic uncertainty.
Costs and Operating Expenses
Cost of revenue
Costs of revenue are primarily 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 for domain costs are established by agreements between registries and registrars and can vary significantly depending on the top-level domain (TLD). We expect cost of revenue to increase in absolute dollars in future periods due to increased sales of domains and third-party productivity applications as well as continued 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.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | $ | 388.4 | $ | 360.5 | $ | 27.9 | 8 | % | $ | 774.5 | $ | 730.7 | $ | 43.8 | 6 | % |
The 7.7% and 6.0% increases in cost of revenue for the three and six months ended June 30, 2023, respectively, were primarily attributable to (i) increased software licensing fees resulting from higher sales of productivity solutions; (ii) higher domain costs, which were primarily driven by cost increases implemented by various TLD registries; and (iii) increased costs associated with the growth of our payment processing business. These increases were partially offset by a decrease in cost of revenue related to our hosting business, which is consistent with the decline in revenue for this business due to end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment.
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.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Technology and development | $ | 219.2 | $ | 198.1 | $ | 21.1 | 11 | % | $ | 434.2 | $ | 388.2 | $ | 46.0 | 12 | % |
The 10.7% and 11.8% increases in technology and development expenses for the three and six months ended June 30, 2023, respectively, were primarily due to (i) increased personnel costs driven by higher engineering headcount associated with our continued investment in product development as well as the increased use of third party contractors and (ii) increased technology costs associated with the growth of our business, advancement of our commerce and innovation strategies 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.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Marketing and advertising | $ | 89.5 | $ | 100.7 | $ | (11.2) | (11) | % | $ | 181.9 | $ | 217.0 | $ | (35.1) | (16) | % |
The 11.1% and 16.2% decreases in marketing and advertising expenses for the three and six months ended June 30, 2023, respectively, were primarily attributable to a lower level of discretionary spending and headcount reductions resulting from our restructuring plan as discussed in Note 13 to our financial statements.
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 methods of customer interaction utilized as well as the level of personnel required to support our business.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Customer care | $ | 77.7 | $ | 78.9 | $ | (1.2) | (2) | % | $ | 154.5 | $ | 156.6 | $ | (2.1) | (1) | % |
There were no material changes in customer care expenses.
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.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 92.7 | $ | 94.7 | $ | (2.0) | (2) | % | $ | 186.8 | $ | 185.3 | $ | 1.5 | 1 | % | |||||||||||||||||||||||||||||||
The 2.1% decrease in general and administrative expenses for the three months ended June 30, 2023 was primarily driven by decreased acquisition-related expenses, partially offset by an increase in equity-based compensation expense. The 0.8% increase for the six months ended June 30, 2023 was primarily driven by increased indirect tax-related reserves and equity-based compensation expense, partially offset by decreases in acquisition-related expenses.
Restructuring and other
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Restructuring and other | $ | 17.5 | $ | 9.6 | $ | 7.9 | 82 | % | $ | 69.8 | $ | 9.6 | $ | 60.2 | 627 | % | |||||||||||||||||||||||||||||||
Restructuring and other was $17.5 million and $69.8 million for the three and six months ended June 30, 2023, respectively. These costs were primarily incurred pursuant to a restructuring plan implemented in February 2023, as further discussed in Note 13 to our financial statements. For the three and six months ended June 30, 2023, we recorded $4.4 million and
$33.8 million, respectively, in severance, employee benefits and equity-based compensation. For the six months ended June 30, 2023, we recognized a $16.8 million loss on disposal in connection with the sale of certain assets and liabilities of our hosting business within our Core segment. The $4.2 million reduction to the $21.0 million charge initially recognized during the first quarter of 2023 for this disposition was primarily driven by changes to the assets and liabilities included within the disposal group as the negotiations were finalized prior to sale. In addition, during the three and six months ended June 30, 2023, we recorded a charge of $17.0 million related to the termination of a revenue sharing agreement.
During the three and six months ended June 30, 2022, restructuring and other was $9.6 million, which primarily represented charges recorded in connection with the impairment of assets.
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.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 43.5 | $ | 48.4 | $ | (4.9) | (10) | % | $ | 92.0 | $ | 96.6 | $ | (4.6) | (5) | % |
The 10.1% and 4.8% decreases for the three and six months ended June 30, 2023, respectively, were primarily driven by certain acquired intangibles reaching the end of their useful lives.
Interest expense
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 45.6 | $ | 34.9 | $ | 10.7 | 31 | % | $ | 91.4 | $ | 68.5 | $ | 22.9 | 33 | % |
The 30.7% and 33.4% increases in interest expense for the three and six months ended June 30, 2023, respectively, were driven by higher effective interest rates on our variable-rate debt.
Other income (expense), net
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 6.8 | (1.2) | $ | 8.0 | 667 | % | 29.4 | (2.3) | $ | 31.7 | (1,378) | % |
The increase in other income (expense) for the three months ended June 30, 2023 was primarily driven by increased interest income, partially offset by a $2.3 million impairment charge on one of our equity investments. The increase for the six months ended June 30, 2023 included a $14.4 million increase to the carrying value of one of our equity investments. See Note 2 to our financial statements for additional information regarding our equity investments.
Segment Results of Operations
Our two operating segments, A&C and Core, reflect the way we manage and evaluate the performance of our business. Our CODM evaluates segment performance based upon several factors, of which the primary financial measures are revenue and Segment EBITDA, our segment measure of profitability.
Applications & Commerce
The following table presents the results for our A&C segment for the periods indicated:
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 351.7 | $ | 317.2 | $ | 34.5 | 11 | % | $ | 689.7 | $ | 620.3 | $ | 69.4 | 11 | % | |||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 142.7 | $ | 131.8 | $ | 10.9 | 8 | % | $ | 275.1 | $ | 251.6 | $ | 23.5 | 9 | % |
Revenue
The 10.9% increase in A&C revenue for the three months ended June 30, 2023 was primarily driven by: (i) 10.5% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.4% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing, and (iii) 39.6% growth in commerce-related revenue.
The 11.2% increase in A&C revenue for the six months ended June 30, 2023 was primarily driven by: (i) 10.3% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.2% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing, and (iii) 63.4% growth in commerce-related revenue.
Segment EBITDA
The 8.3% and 9.3% increases in A&C Segment EBITDA for the three and six months ended June 30, 2023 primarily resulted from the revenue increases noted above, in conjunction with lower discretionary marketing spend. These increases were partially offset by higher personnel costs resulting from headcount additions and the increased use of third party contractors to support the continued development of our A&C products.
Core Platform
The following table presents the results for our Core segment for the periods indicated:
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 696.4 | $ | 698.3 | $ | (1.9) | — | % | 1,394.4 | 1,397.9 | $ | (3.5) | — | % | |||||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 191.0 | $ | 198.4 | $ | (7.4) | (4) | % | 380.0 | $ | 376.8 | $ | 3.2 | 1 | % |
Revenue
The 0.3% decrease in Core revenue for the three months ended June 30, 2023 was primarily driven by a 5.0% decrease in aftermarket revenues and a 4.1% decrease in hosting revenues due to end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 3.4% increase in domain registration and domain add-on revenue.
The 0.3% decrease in Core revenue for the six months ended June 30, 2023 was primarily driven by a 6.6% decrease in aftermarket revenues and a 4.4% decrease in hosting revenues due to end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 4.1% increase in domain registration and domain add-on revenue.
Segment EBITDA
The 3.7% decrease in Core Segment EBITDA for the three months ended June 30, 2023 primarily resulted from the revenue decreases noted above and higher cost of revenue due to domain cost increases implemented by various TLD registries.
The 0.8% increase in Core Segment EBITDA for the six months ended June 30, 2023 primarily resulted from lower discretionary marketing spend, partially offset by the revenue decreases noted above and domain cost increases implemented by various TLD registries.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity have been cash flow generated from operations and long-term debt borrowings. 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 stockholder returns. Our strategy is to deploy capital, 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, primarily to fund acquisitions, share repurchases and the settlement of our prior tax receivable agreements. 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 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. 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 consists of the Credit Facility, which includes our secured credit agreement and a revolving credit facility, and the senior notes. In May 2023, we entered into an amendment to the Credit Facility to replace LIBOR on our 2027 Term Loans with the Secured Overnight Financing Rate (SOFR), effective with the first interest period commencing on or after July 1, 2023. See Note 9 to our financial statements for additional information regarding our long-term debt. In July 2023, we entered into an amendment to the Credit Facility to refinance the 2029 Term Loans, as discussed in Note 18.
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 June 30, 2023, we were in compliance with all such covenants and had no amounts drawn on our Revolver.
As 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.
Share Repurchases
As discussed in Note 4 to our financial statements, we are authorized to repurchase up to $3,000.0 million of our Class A common stock. During the six months ended June 30, 2023, we repurchased a total of 8,572 shares of our Class A common stock
in the open market for an aggregate purchase price of $621.6 million. As of June 30, 2023, we had $1,078.3 million of remaining authorization available for repurchases.
In August 2023, our board of directors approved the repurchase of up to an additional $1,000.0 million of our Class A common stock. Such approval was in addition to the amount remaining available for repurchases under prior approvals of our board of directors, such that our total approved authority under the program is $4,000.0 million of shares of our Class A common stock through 2025.
Restructuring and Other
As further discussed in Note 13 to our financial statements, we implemented a restructuring plan in February 2023 to reduce future operating expenses and improve cash flows through a combination of a reduction in force and a commitment to sell certain assets and liabilities of our hosting business within our Core segment. Cash payments of $25.5 million related to the restructuring were made during the six months ended June 30, 2023, with approximately $6.0 million remaining to be paid as of June 30, 2023. We expect to make substantially all remaining restructuring payments pursuant to this plan in the third quarter of 2023. In addition, during the three months ended June 30, 2023, we made a cash payment of $17.0 million related to the termination of a revenue sharing agreement.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Six Months Ended June 30, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 468.3 | $ | 501.8 | ||||||||||||||||
| Net cash used in investing activities | (52.0) | (30.5) | ||||||||||||||||||
| Net cash used in financing activities | (608.3) | (953.7) | ||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 0.6 | (2.9) | ||||||||||||||||||
| Net decrease in cash and cash equivalents | $ | (191.4) | $ | (485.3) |
Operating Activities
Our primary source of cash from operating activities has been cash collections from our customers. Our primary uses of cash from operating activities have been for domain registration costs paid to registries, software licensing fees related to third-party 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 as well as increases in personnel and other operating costs as we continue to grow our business.
Net cash provided by operating activities decreased $33.5 million from $501.8 million during the six months ended June 30, 2022 to $468.3 million during the six months ended June 30, 2023, primarily driven by payments made pursuant to our restructuring plan, as discussed in Note 13, as well as increased personnel costs driven by higher engineering headcount to support our growth, higher software licensing fees related to increased sales of third-party productivity solutions, increased costs associated with the growth of our payment processing business and increased cash interest payments. These decreases were partially offset by the growth in total bookings as well as lower discretionary marketing spending.
Investing Activities
Our investing activities generally 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, strategic acquisitions or other growth opportunities we decide to pursue.
Net cash used in investing activities increased $21.5 million from $30.5 million during the six months ended June 30, 2022 to $52.0 million during the six months ended June 30, 2023, primarily due to purchases of intangible assets of $35.4 million in 2023, partially offset by net cash proceeds of $12.4 million received from the sale of certain businesses and related assets in 2023, as discussed in Note 13.
Financing Activities
Our financing activities generally consist of long-term debt borrowings, the repayment of principal on long-term debt, stock option exercise proceeds and share repurchases.
Net cash used in financing activities decreased $345.4 million from $953.7 million during the six months ended June 30, 2022 to $608.3 million during the six months ended June 30, 2023, primarily due to a $355.4 million decrease in share repurchases.
Deferred Revenue
See Note 7 to our financial statements for details regarding the expected future recognition of deferred revenue.
Off-Balance Sheet Arrangements
As of June 30, 2023 and December 31, 2022, we had no off-balance sheet arrangements that had, or which are reasonably likely to have, a material effect on our financial statements.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with GAAP, and in doing so, we make estimates, assumptions and judgments affecting the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances, and we evaluate these estimates, assumptions and judgments on an ongoing basis. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change our results from those reported. We refer to estimates, assumptions and judgments of this type as our critical accounting policies and estimates, which we discussed in our 2022 Form 10-K. We review our critical accounting policies and estimates with the audit and finance committee of our board of directors on an annual basis.
There have been no material changes in our critical accounting policies from those disclosed in our 2022 Form 10-K.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 to our financial statements.
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