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 Third Quarter Financial Highlights
Below are our key consolidated financial highlights for the three months ended September 30, 2023, with comparisons to the three months ended September 30, 2022.
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Total revenue of $1,069.7 million, an increase of 3.5%, or approximately 3.8% on a constant currency basis(1).
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International revenue of $345.5 million, an increase of 3.9%, or approximately 4.5% on a constant currency basis(1).
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Total bookings of $1,138.9 million, an increase of 4.8%, or approximately 4.3% on a constant currency basis(1).
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Operating income of $167.1 million, an increase of 28.8%(2).
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Net income of $131.0 million, an increase of 31.0%(2).
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Normalized EBITDA(3) of $296.0 million, an increase of 12.7%.
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Net cash provided by operating activities of $281.6 million, an increase of 4.3%.
(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 September 30, 2023 included $9.8 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ | % of Total Revenue | $ | % of Total Revenue | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Applications & commerce | $ | 363.3 | 34.0 | % | $ | 326.0 | 31.6 | % | $ | 1,053.0 | 33.4 | % | $ | 946.3 | 31.0 | % | |||||||||||||||||||||||||||||||
| Core platform | 706.4 | 66.0 | % | 707.2 | 68.4 | % | 2,100.8 | 66.6 | % | 2,105.1 | 69.0 | % | |||||||||||||||||||||||||||||||||||
| Total revenue | 1,069.7 | 100.0 | % | 1,033.2 | 100.0 | % | 3,153.8 | 100.0 | % | 3,051.4 | 100.0 | % | |||||||||||||||||||||||||||||||||||
| Costs and operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | 396.9 | 37.1 | % | 374.3 | 36.2 | % | 1,171.4 | 37.1 | % | 1,105.0 | 36.2 | % | |||||||||||||||||||||||||||||||||||
| Technology and development | 201.6 | 18.8 | % | 199.5 | 19.3 | % | 635.8 | 20.2 | % | 587.7 | 19.3 | % | |||||||||||||||||||||||||||||||||||
| Marketing and advertising | 86.4 | 8.1 | % | 100.4 | 9.7 | % | 268.3 | 8.5 | % | 317.4 | 10.4 | % | |||||||||||||||||||||||||||||||||||
| Customer care | 75.7 | 7.1 | % | 74.0 | 7.2 | % | 230.2 | 7.3 | % | 230.6 | 7.6 | % | |||||||||||||||||||||||||||||||||||
| General and administrative | 91.6 | 8.6 | % | 101.6 | 9.9 | % | 278.4 | 8.8 | % | 286.9 | 9.4 | % | |||||||||||||||||||||||||||||||||||
| Restructuring and other | 9.8 | 0.9 | % | 5.2 | 0.5 | % | 79.6 | 2.6 | % | 14.8 | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 40.6 | 3.8 | % | 48.5 | 4.7 | % | 132.6 | 4.2 | % | 145.1 | 4.7 | % | |||||||||||||||||||||||||||||||||||
| Total costs and operating expenses | 902.6 | 84.4 | % | 903.5 | 87.5 | % | 2,796.3 | 88.7 | % | 2,687.5 | 88.1 | % | |||||||||||||||||||||||||||||||||||
| Operating income | 167.1 | 15.6 | % | 129.7 | 12.5 | % | 357.5 | 11.3 | % | 363.9 | 11.9 | % | |||||||||||||||||||||||||||||||||||
| Interest expense | (44.0) | (4.1) | % | (35.6) | (3.4) | % | (135.4) | (4.3) | % | (104.1) | (3.4) | % | |||||||||||||||||||||||||||||||||||
| Loss on debt extinguishment | (1.5) | (0.1) | % | — | — | % | (1.5) | — | % | — | — | % | |||||||||||||||||||||||||||||||||||
| Other income (expense), net | 6.3 | 0.5 | % | 3.1 | 0.3 | % | 35.7 | 1.1 | % | 0.8 | — | % | |||||||||||||||||||||||||||||||||||
| Income before income taxes | 127.9 | 11.9 | % | 97.2 | 9.4 | % | 256.3 | 8.1 | % | 260.6 | 8.5 | % | |||||||||||||||||||||||||||||||||||
| Benefit (provision) for income taxes | 3.1 | 0.3 | % | 2.8 | 0.2 | % | 5.2 | 0.2 | % | (1.5) | (0.1) | % | |||||||||||||||||||||||||||||||||||
| Net income | 131.0 | 12.2 | % | 100.0 | 9.6 | % | 261.5 | 8.3 | % | 259.1 | 8.4 | % | |||||||||||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interests | 0.3 | — | % | 0.2 | — | % | 0.6 | — | % | 0.5 | — | % | |||||||||||||||||||||||||||||||||||
| Net income attributable to GoDaddy Inc. | $ | 130.7 | 12.2 | % | $ | 99.8 | 9.6 | % | $ | 260.9 | 8.3 | % | $ | 258.6 | 8.4 | % |
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Normalized EBITDA | $ | 296.0 | $ | 262.7 | $ | 810.3 | $ | 747.0 | |||||||||||||||
| Annualized recurring revenue | $ | 3,675.1 | $ | 3,535.4 | $ | 3,675.1 | $ | 3,535.4 | |||||||||||||||
| Total bookings | $ | 1,138.9 | $ | 1,087.0 | $ | 3,479.2 | $ | 3,362.2 | |||||||||||||||
| Total customers at period end (in thousands) | 21,025 | 20,869 | 21,025 | 20,869 | |||||||||||||||||||
| Average revenue per user | $ | 200 | $ | 196 | $ | 200 | $ | 196 |
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 131.0 | $ | 100.0 | $ | 261.5 | $ | 259.1 | |||||||||||||||
| Depreciation and amortization | 40.6 | 48.5 | 132.6 | 145.1 | |||||||||||||||||||
| Equity-based compensation(1) | 76.2 | 65.4 | 225.3 | 193.3 | |||||||||||||||||||
| Interest expense, net | 39.8 | 32.1 | 115.2 | 98.9 | |||||||||||||||||||
| Acquisition-related expenses(2) | (1.0) | 8.9 | 8.7 | 27.2 | |||||||||||||||||||
| Restructuring and other (3) | 12.5 | 10.6 | 72.2 | 21.9 | |||||||||||||||||||
| Provision (benefit) for income taxes | (3.1) | (2.8) | (5.2) | 1.5 | |||||||||||||||||||
| NEBITDA | $ | 296.0 | $ | 262.7 | $ | 810.3 | $ | 747.0 |
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(1)The nine months ended September 30, 2023 excludes $2.3 million of equity-based compensation expense associated with our restructuring plan, which is included within restructuring and other.
(2)The three and nine months ended September 30, 2023 include an adjustment of $6.0 million to a previously-recognized acquisition milestone liability.
(3)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, adjustments to the fair value of our equity investments and expenses incurred in relation to the refinancing of our long-term debt.
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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Applications & commerce | $ | 363.3 | $ | 326.0 | $ | 37.3 | 11 | % | $ | 1,053.0 | $ | 946.3 | $ | 106.7 | 11 | % | |||||||||||||||||||||||||||||||
| Core platform | 706.4 | 707.2 | $ | (0.8) | — | % | 2,100.8 | 2,105.1 | $ | (4.3) | — | % | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | 1,069.7 | $ | 1,033.2 | $ | 36.5 | 4 | % | $ | 3,153.8 | $ | 3,051.4 | $ | 102.4 | 3 | % |
The 3.5% and 3.4% increases in total revenue for the three and nine months ended September 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 September 30, 2023, the 11.4% increase in A&C revenue was primarily driven by: (i) 12.1% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.5% growth in revenues due to continued customer adoption of our subscription-based products designed to establish and grow online presence, and (iii) 22.9% growth in commerce-related revenue.
For the nine months ended September 30, 2023, the 11.3% increase in A&C revenue was primarily driven by: (i) 10.9% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.3% growth in revenues due to continued customer adoption of our subscription-based products designed to establish and grow online presence, and (iii) 47.0% growth in commerce-related revenue.
Core
For the three months ended September 30, 2023, the 0.1% decrease in Core revenue was primarily driven by a 10.7% decrease in hosting revenues due to the divestiture of certain hosting assets during the second quarter, end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 4.2% increase in domain registration and domain add-on revenue. Domains under management was 84.0 million as of September 30, 2023.
For the nine months ended September 30, 2023, the 0.2% decrease in Core revenue was primarily driven by: (i) a 6.5% decrease in hosting revenues due to end of life migrations away from certain products, the divestiture of certain hosting assets during the second quarter and lower demand amid the uncertain macroeconomic environment; and (ii) a 5.0% decrease in aftermarket revenues. 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Total bookings | $ | 1,138.9 | $ | 1,087.0 | $ | 51.9 | 5 | % | $ | 3,479.2 | $ | 3,362.2 | $ | 117.0 | 3 | % |
The 4.8% and 3.5% increases in total bookings for the three and nine months ended September 30, 2023, respectively, were primarily driven by continued customer adoption of our productivity solutions and our Websites + Marketing product, partially offset by decreased hosting bookings following the divestiture of certain hosting assets during the second quarter. In addition, for the nine months ended September 30, 2023, bookings growth was adversely impacted by softness in aftermarket demand and uneven demand patterns due 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | $ | 396.9 | $ | 374.3 | $ | 22.6 | 6 | % | $ | 1,171.4 | $ | 1,105.0 | $ | 66.4 | 6 | % |
The 6.0% and 6.0% increases in cost of revenue for the three and nine months ended September 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 the increased domain registration revenue as well as 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, the divestiture of certain hosting assets during the second quarter 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 decrease as a percentage of revenue in future periods following a period of investment in product development and migration toward a unified infrastructure platform.
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Technology and development | $ | 201.6 | $ | 199.5 | $ | 2.1 | 1 | % | $ | 635.8 | $ | 587.7 | $ | 48.1 | 8 | % |
The 1.1% and 8.2% increases in technology and development expenses for the three and nine months ended September 30, 2023, respectively, were primarily due to (i) increased personnel costs 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 advancement of our commerce, presence and innovation strategies. These increases were partially offset by an adjustment recognized in the third quarter of 2023 to a previously-recognized acquisition milestone liability following reassessment of its achievement probability and decreases in professional fees and infrastructure migration costs.
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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Marketing and advertising | $ | 86.4 | $ | 100.4 | $ | (14.0) | (14) | % | $ | 268.3 | $ | 317.4 | $ | (49.1) | (15) | % |
The 13.9% and 15.5% decreases in marketing and advertising expenses for the three and nine months ended September 30, 2023, respectively, were primarily attributable to a lower level of discretionary spending and headcount reductions resulting from our restructuring activities 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Customer care | $ | 75.7 | $ | 74.0 | $ | 1.7 | 2 | % | $ | 230.2 | $ | 230.6 | $ | (0.4) | — | % |
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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 91.6 | $ | 101.6 | $ | (10.0) | (10) | % | $ | 278.4 | $ | 286.9 | $ | (8.5) | (3) | % | |||||||||||||||||||||||||||||||
The 9.8% and 3.0% decreases in general and administrative expenses for the three and nine months ended September 30, 2023 were primarily driven by decreased acquisition-related expenses, legal and professional fees and facilities expenses, partially offset by increases in indirect tax-related reserves and equity-based compensation expense.
Restructuring and other
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Restructuring and other | $ | 9.8 | $ | 5.2 | $ | 4.6 | 88 | % | $ | 79.6 | $ | 14.8 | $ | 64.8 | 438 | % | |||||||||||||||||||||||||||||||
Restructuring and other was $9.8 million and $79.6 million for the three and nine months ended September 30, 2023, respectively. These costs were primarily incurred pursuant to restructuring activities implemented in the first and third quarters of 2023, as further discussed in Note 13 to our financial statements. For the three and nine months ended September 30, 2023, we recorded $10.0 million and $43.8 million, respectively, in severance, employee benefits and equity-based compensation. Additionally, during the nine months ended September 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 as well as a charge of $17.0 million related to the termination of a revenue sharing agreement.
During the three and nine months ended September 30, 2022, restructuring and other was $5.2 million and $14.8 million, respectively, which primarily represented charges recorded in connection with the impairment and loss on disposition of certain 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 40.6 | $ | 48.5 | $ | (7.9) | (16) | % | $ | 132.6 | $ | 145.1 | $ | (12.5) | (9) | % |
The 16.3% and 8.6% decreases for the three and nine months ended September 30, 2023, respectively, were primarily driven by certain acquired intangibles reaching the end of their useful lives.
Interest expense
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 44.0 | $ | 35.6 | $ | 8.4 | 24 | % | $ | 135.4 | $ | 104.1 | $ | 31.3 | 30 | % |
The 23.6% and 30.1% increases in interest expense for the three and nine months ended September 30, 2023, respectively, were driven by higher effective interest rates on the unhedged portion of our variable-rate debt.
Other income (expense), net
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 6.3 | 3.1 | $ | 3.2 | 103 | % | 35.7 | 0.8 | $ | 34.9 | 4,363 | % |
The increase in other income (expense), net for the three months ended September 30, 2023 was not material.
The increase for the nine months ended September 30, 2023 was primarily driven by increased interest income and a $14.4 million increase to the carrying value of one of our equity investments, partially offset by a $2.3 million impairment charge related to 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 363.3 | $ | 326.0 | $ | 37.3 | 11 | % | $ | 1,053.0 | $ | 946.3 | $ | 106.7 | 11 | % | |||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 154.3 | $ | 135.6 | $ | 18.7 | 14 | % | $ | 429.4 | $ | 387.2 | $ | 42.2 | 11 | % |
Revenue
The 11.4% increase in A&C revenue for the three months ended September 30, 2023 was primarily driven by: (i) 12.1% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.5% growth in revenues due to continued customer adoption of our subscription-based products designed to establish and grow online presence, and (iii) 22.9% growth in commerce-related revenue.
The 11.3% increase in A&C revenue for the nine months ended September 30, 2023 was primarily driven by: (i) 10.9% growth in revenue related to our productivity applications, most notably our email solutions, (ii) 8.3% growth in revenues due to continued customer adoption of our subscription-based products designed to establish and grow online presence, and (iii) 47.0% growth in commerce-related revenue.
Segment EBITDA
The 13.8% and 10.9% increases in A&C Segment EBITDA for the three and nine months ended September 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 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 September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 706.4 | $ | 707.2 | $ | (0.8) | — | % | 2,100.8 | 2,105.1 | $ | (4.3) | — | % | |||||||||||||||||||||||||||||||||
| Segment EBITDA | $ | 208.6 | $ | 202.1 | $ | 6.5 | 3 | % | 588.6 | $ | 578.9 | $ | 9.7 | 2 | % |
Revenue
The 0.1% decrease in Core revenue for the three months ended September 30, 2023 was primarily driven by a 10.7% decrease in hosting revenues due to the divestiture of certain hosting assets during the second quarter, end of life migrations away from certain products and lower demand amid the uncertain macroeconomic environment. The decrease was partially offset by a 4.2% increase in domain registration and domain add-on revenue.
The 0.2% decrease in Core revenue for the nine months ended September 30, 2023 was primarily driven by: (i) a 6.5% decrease in hosting revenues due to end of life migrations away from certain products, the divestiture of certain hosting assets during the second quarter and lower demand amid the uncertain macroeconomic environment; and (ii) a 5.0% decrease in aftermarket revenues. The decrease was partially offset by a 4.1% increase in domain registration and domain add-on revenue.
Segment EBITDA
The 3.2% and 1.7% increases in Core Segment EBITDA for the three and nine months ended September 30, 2023 primarily resulted from lower discretionary marketing spend, partially offset by the revenue decreases noted above and higher cost of revenue due to 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 two tranches of term loans 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), beginning in July 2023. In July 2023, we entered into an amendment to the Credit Facility to refinance the 2029 Term Loans. 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 September 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 $4,000.0 million of our Class A common stock. During the nine months ended September 30, 2023, we repurchased a total of 15,738 shares of our Class A common stock in the open market for an aggregate purchase price of $1,145.3 million. As of September 30, 2023, we had $1,554.6 million of remaining authorization available for repurchases.
Restructuring and Other
As further discussed in Note 13 to our financial statements, we undertook restructuring activities in the first and third quarters of 2023 to reduce future operating expenses and improve cash flows through a combination of reductions in force and a commitment to sell certain assets and liabilities of our hosting business within our Core segment. Cash payments of $31.4 million related to the restructuring activities were made during the nine months ended September 30, 2023, with approximately $10.1 million remaining to be paid as of September 30, 2023. We expect to make substantially all remaining restructuring payments pursuant to these activities by the end of the first quarter of 2024. In addition, during the nine months ended September 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:
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Net cash provided by operating activities | $ | 749.9 | $ | 771.7 | ||||||||||||||||
| Net cash used in investing activities | (61.4) | (115.5) | ||||||||||||||||||
| Net cash used in financing activities | (1,133.3) | (1,081.0) | ||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | (4.7) | ||||||||||||||||||
| Net decrease in cash and cash equivalents | $ | (444.8) | $ | (429.5) |
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 $21.8 million from $771.7 million during the nine months ended September 30, 2022 to $749.9 million during the nine months ended September 30, 2023, primarily driven by payments made pursuant to our restructuring activities, as discussed in Note 13, 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 decreased $54.1 million from $115.5 million during the nine months ended September 30, 2022 to $61.4 million during the nine months ended September 30, 2023, primarily due to a $72.5 million decrease in cash paid for business acquisitions as well as net cash proceeds of $12.4 million received from the sale of certain businesses and related assets in 2023, as discussed in Note 13. This was partially offset by purchases of intangible assets of $35.0 million in 2023.
Financing Activities
Our financing activities generally consist of long-term debt borrowings, the repayment of principal on long-term debt, stock option exercise and ESPP proceeds and share repurchases.
Net cash used in financing activities increased $52.3 million from $1,081.0 million during the nine months ended September 30, 2022 to $1,133.3 million during the nine months ended September 30, 2023, primarily due to a $42.7 million increase 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 September 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 our 2022 Form 10-K.
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