Good afternoon, and thank you for joining us for GoDaddy's Third Quarter 2020 Earnings Call. I'm Mark Grant, Vice President of Investor Relations. With me today are Aman Bhutani, Chief Executive Officer; and Ray Winborne, Chief Financial Officer. Following prepared remarks, we will open up the call for your question. If you'd like to ask a question on today's call, please use the raise hand feature in the webinar to be added to the queue.

On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics such as total bookings, unlevered free cash flow, normalized EBITDA, net debt, gross merchandise volume and annualized recurring revenue. A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations website at investors.godaddy.net or on our Form 8-K filed with the SEC with today's earnings release.

The matters we'll be discussing today include forward-looking statements, which include those related to our future financial results, new product introductions and innovations, partner integrations, our ability to integrate acquisitions and achieve desired synergies, as well as the impact of the COVID-19 pandemic on our business, customer and employees. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, November 4, 2020, and we undertake no obligation to update these statements as a result of new information or future event, unless required by law.

With that, here's Aman.

Aman Bhutani - Chief Executive Officer

Thank you, Mark, and thank you all for joining us. Today, I'm excited to share the details on a record quarter for GoDaddy. Before we get started, though, I want to announce a change to our leadership team. Andrew Low Ah Kee, our Chief Operating Officer, is leaving GoDaddy effective November 13 after nearly a decade with the Company. As a colleague and friend, I'm grateful for his significant contributions over the years. He was a key part of building the great company we have today. And I wish him all the best in his new adventure, which will be announced over the next few days.

We stand today with a deep leadership bench, including both tenured and new leaders, organized to deliver on the needs of our customers and our strategic priorities. With this full complement of leaders in place, we will make a few adjustments but we will not backfill the COO role. This will allow for a seamless transition so we can stay focused on executing against our strategy. And every day, our passion for that strategy grows as more entrepreneurs trust and partner with GoDaddy to start with a dream and then create and grow that dream.

We are pleased with our progress. And today, I would like to highlight three key areas: first, our strong execution against our strategy with a few notable milestones; second, our continued progress in online presence solutions, including leaning into commerce capability; and third, our continued investment in marketing to capture demand.

Q3 was another record quarter of customer growth, and we are seeing sustained momentum into October. In Q3, we once again added over 400,000 net new customers while also seeing improved customer retention. We continue to see increased demand for online solutions due to the pandemic, and coupled with higher marketing spend, our website traffic has increased by an average of 20% year-over-year since April. We have seen increased adoption of our website creation platform, Websites + Marketing and Managed WordPress, as well as our content and commerce tools, Over and SellBrite. As an additional insight into this part of the business, we are excited to share that together, these solutions reached an annualized recurring revenue of nearly $350 million in Q3, growing at approximately 40% year-over-year. This group of products now account for more than 2.2 million subscriptions, growing over 20% year-over-year. Additionally, this quarter, we saw an acceleration of SellBrite's GMV growth. Between Websites + Marketing and SellBrite, GoDaddy now has more than $4.5 billion annualized GMV transacting through our platforms, growing at nearly 80% year-over-year. These proof points reinforce our strategy of driving scale in the growth phase for customers by focusing on commerce.

Business applications as the product line continued to accelerate in the third quarter, surpassing the milestone of 3 million customers with nearly 9 million seats of email. Best of all, these numbers continue to grow at a healthy pace. While we're pleased with the growth in these key areas, we're not resting on our laurels. We're driving product enhancements and increasing our marketing efforts to facilitate profitable long-term growth. We continue to charge toward the massive opportunities of content creation and commerce. This quarter, we accomplished this with deep partnership integrations, internally developed software releases and an important commerce acquisition.

In partnerships, we recently announced a deeper integration with Facebook's Business Extension. GoDaddy Websites + Marketing customers can now create shoppable posts, as well as set up shops on both Instagram and Facebook with automatic synching between both platforms, offering yet another channel for our customers to easily sell their products. Additionally, our new partnership with Vimeo allows customers to upload, preview and insert videos, including using a video as a header to their website.

We've also continued to accelerate our velocity internally, delivering a busy product launch schedule in the quarter. We released a full integration of our Over app within Websites + Marketing a short few months into the acquisition, making it even easier for customers to market their businesses with creative content. The seamlessly-intuitive experience has driven over 50% growth in posts. We've also extended the Over app across 12 new languages, giving more customers access to this powerful set of tools. Additionally, GoDaddy released a powerful Social Composer dashboard in Websites + Marketing, giving customers a single place to rapidly create polished social content and view and schedule their social posts across connected social media platforms. What's more, users can track the performance metrics of each post by platform.

We also introduced a simple and intuitive one-page e-commerce template in Websites + Marketing, which has quickly become our most popular template, and it has reduced time to publish for our customers by 40%. Continuing on the theme of commerce, we launched our online store capabilities in Argentina, Peru, Colombia and Chile, positioning GoDaddy to serve customers in these markets.

We also continue to innovate for our domains customers. In Q3, we introduced revamped box search and file upload tools for domain investors and rolled out three global WHOIS masking and a new paid security service with greater domain protection. And we are super excited to welcome the SkyVerge team. With nearly 60 WooCommerce extensions, spanning payments, email marketing and membership, SkyVerge is a leading WooCommerce product developer. This acquisition furthers our commitment in WordPress to help entrepreneurs and web professional succeed online with high performance stores that are feature-rich and quick to build.

Lastly, in Q2, we talked about our plan to delever marketing as long as we continue to see return on our investment. While the investment increased, we also delivered another record quarter for both customer adds and total cohort size. Obviously, it's something we're quite pleased to see, particularly as we've coupled these strong marketing gains alongside the great product enhancements we've talked about today.

In closing, our focus is to build simple and easy to use tools with a focus on helping everyday entrepreneurs succeed. Online commerce and marketing our areas where this need has become significantly more pronounced in 2020. We are seeing rapid adoption of these new tools, giving us the opportunity to help more customers succeed. Solid execution in an elevated demand environment powered a strong third quarter. We are poised for sustainable, profitable, long-term growth, and we continue to be confident in our ability to hit our 4-1-1 target in 2022.

With that, here's Ray.

Ray Winborne - Chief Financial Officer

Thanks Aman. I'll touch on the financial results for what was a great quarter for GoDaddy and then provide our outlook for Q4. Q3 reflected a strong performance across the board with another record quarter of customer growth, an acceleration in top line growth and margin expansion. And new customer bookings continue to hit records. While small relative to total bookings, they're an important contributor to future growth. We've also continued to experience low customer churn rates and resiliency in subscription renewal rates, proof points to the durability of the business model.

Total revenue came in at $844 million, growing 11% year-over-year, while currency impacts were negligible. Growth rates accelerated across all three product categories and reaccelerated in our international business. Business applications was our fastest growing product line, increasing 19% year-over-year on continued strength in branded email and productivity solutions. We delivered 12% growth in domains across new registrations, strong renewals and aftermarket sales. And finally, Hosting and presence grew 6%. Inside that, Aman highlighted the tremendous growth in products comprising our website creation platforms. In contrast, it also reflects a headwind from the GoDaddy social product due to the elimination of the outbound sales force in June.

Total bookings grew to $945 million, rising 11% year-over-year, while currency impacts were negligible. Strength in bookings was broad based across products and geographies as our brand and product offerings positioned us well to capture demand as businesses continue their digital transformation. For many small businesses, establishing an online presence was once seen as a competitive advantage. It's now table stakes.

Gross margin came in at 66% in the quarter, a 40 basis point expansion year-over-year. We also delivered operating leverage as the June restructuring actions reduced cost incurred, while GA continued to benefit from both scale and lower discretionary expenses. As we highlighted in the second quarter call, we stepped up our investment in marketing to capture market demand, resulting in a $36 million year-over-year increase in marketing expense. We've been able to elevate our investment while remaining within our target months to breakeven and customer acquisition costs, even as we saw increased competition in performance advertising channels. And we'll continue to invest in marketing as long as we're meeting our return metrics. The net sum resulted in normalized EBITDA of $199 million in Q3, or approximately 2 points of margin expansion over last year.

Moving to cash flow, unlevered free cash flow for the quarter was $224 million, growing 7% year-over-year, with margin expansion of over 1 point. Trailing 12-month unlevered free cash flow was over $800 million and margin topped 25%, illustrating both the size and scale of this business.

Now, on to the balance sheet. We finished Q3 with $622 million in cash and total liquidity of over $1.2 billion. We were able to capitalize on favorable market conditions issuing a new $750 million seven-year term loan with an all-in yield of 2.7%, a record for a BB-rated company. With this issuance, net debt stands at $2.5 billion, or about 3 times net leverage on a trailing 12-month basis. That's the middle of our targeted range of 2 times to 4 times. And we have no significant debt maturities until 2024. In view of our ability to deleverage, this leaves more than ample liquidity to fund the business, execute the strategy and pursue our stated capital allocation priorities.

Now, I want to take a moment to reiterate that any potential increases to the corporate tax rate will not have an immediate impact on GoDaddy's cash flow. As a reminder, given our net operating loss position, we don't expect to pay US cash taxes before 2027. A higher corporate tax rate would, however, enhance the value of the recent settlement of the TRA. For example, a 28% rate increases the future tax savings associated with the TRA attributes by over $700 million, further enhancing the already strong returns on the settlement.

The strength and resilience of our recurring business model has fueled a strong balance sheet and has enabled us to execute across our capital allocation priorities in 2020, including completing four acquisitions, repurchasing nearly 6% of our outstanding equity and settling the TRA. We have the flexibility to take advantage of opportunities that arises. And we will continue to be prudent allocators of capital in pursuit of long-term growth and leverage-free cash flow per share.

With that, let's turn to our Q4 outlook. We expect total revenue of approximately $865 million, or a 11% growth year-over-year. You should expect double-digit growth in domains, mid-single digit growth in hosting and presence and high-teens growth in business applications. Remember, those products that relied on the outbound calling motion like GoDaddy Social disproportionately impact the hosting and presence line. On unlevered free cash flow, we expect 2020 to land at approximately $820 million, the midpoint of our previous guidance range. As a reminder, Q4 has a highly anomalous 27 pay periods this year, without which our unlevered free cash flow guide would have been approximately $18 million higher.

In closing, digital migration is definitely an accelerating trend and here to stay. Our business is well positioned to meet the needs of entrepreneurs around the globe as they bring their ideas to life online. GoDaddy has long been known as an industry leader with profitable growth and scale. Now, with a set of subscription software tools enabling websites, content creation and commerce that's approaching $350 million in annual recurring revenue, we're as confident as we've ever been that we can continue to grow, take share and generate significant cash flow.

With that, we'll have Christie Masoner from our Investor Relations team open up the call for questions.

Question & Answers

Questions and Answers:

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Christie Masoner - Senior Manager, Investor Relations

Thanks Ray. As a reminder, if you would like to ask a question please use the raise hand feature at the bottom of the webinar stream to be added to the queue and unmute your line. Our first question comes from the line of Jason Helfstein at Oppenheimer & Co. Please go ahead.

Jason Helfstein - Oppenheimer & Co. - Analyst

Thank you. So you noted 400,000 net adds in the - or over 400,000 net adds in the third quarter. Can you comment how the second quarter compared to this? And then, when we think about versus a year ago, can you just comment on customer churn? Are you seeing higher or the same churn? And then secondly, appreciate the $350 million ARR gross bookings. If we - or the $350 million ARR related to e-commerce. If we divide that into gross bookings, it's about 9%. Is that a reasonable way to think about kind of sizing the e-commerce business today relative to gross bookings? Thanks.

Aman Bhutani - Chief Executive Officer

Hey, Jason, thanks for that question. This is Aman. When we look at the third quarter, it represents record organic net sub growth for GoDaddy. We're really happy with the progress here. And as we look at Q2, like we said in some of our prepared remarks, October continued to be in line with September and did really well year-over-year as well. And in terms of churn rates, they continue to be stable, slightly better. Just going back to the idea that our customers truly are the everyday entrepreneurs, and if they hit roadblocks, they create, they innovate and they start something else and get on with it.

And then, I'll turn it to Ray for maybe a little bit more color and to your second question on the $350 million.

Ray Winborne - Chief Financial Officer

Hey, Jason, it's Ray. ARR is not apples-to-apples, obviously, with bookings, so it's cash versus revenue. But really happy with what we're seeing there from those products from a bookings perspective, while growing at relatively similar levels.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Nick Jones from Citibank. Please go ahead.

Nicholas Jones - Citi - Analyst

Great, thanks. Could you touch on some of the integrations you talked about in the press release or in the deck today? What kind of users are you seeing or by subs with these integrations, whether it's over Instagram, Facebook? And then, I guess, a follow-up on that is, as you integrate all of these great products for subs like Vimeo, SkyVerge, things like that, how does that impact kind of the funnel for subscribers? Is it - I guess, how do you prevent them from getting confused by, I guess, all the options you're introducing? Thanks.

Aman Bhutani - Chief Executive Officer

Yeah. Let's take the specific examples from previous quarters, and then I'll briefly touch on SkyVerge and how we look at the funnel. Our goal bringing in Over, bringing in the experience from Uniregistry was that we wanted to bring to the GoDaddy family companies, teams that were building amazing experiences for customers, sort of best-in-class experiences. And then, we want to take those experiences and bring them into our mainstream products like Websites + Marketing. So when we talk about Over, the integration, it's all very new right now. So it's less about what subscriptions it's driving, and it's more about what level of engagement we're getting from the functionality we're putting out there. For example, with the Over integration, there was a 50% increase in posts, sort of content creation and people posting that content on social media, which shows immediate customer value. And that's our core formula, right? We want to introduce these pieces, whether it's Vimeo or others, into the core experience at the right place. It's not early in the funnel. It's - as these customers are using these products, it shows up in a simple way at the right place, and it's just intuitive for the customer to use it. And as we continue to create customer value, over time, we can turn it into shareholder value by sort of moving people through the tiers by taking pricing action and such. But the first step is really creating customer value.

And in terms of SkyVerge, it's the same formula. SkyVerge team is fantastic in the WooCommerce space. They have 60 plugins. They just are completely focused on building the best experience for customers. And it's super new right now, but you can expect the same thing from us that it would become part of our Managed WordPress experience and it would just be simple for customers in terms of their commerce experience with WooCommerce as well.

To touch on the funnel just slightly, keep in mind that as we add these capabilities, they are coming in at the right place where the customer is using the product. These things don't sort of in a sense clutter the buying experience or the freemium experience in anyway. In fact, if anything, as we layer on more and more capability and provide it as part of the freemium package, we feel it encourages people to use the product because they have got more functionality that they can use as part of the product.

Nicholas Jones - Citi - Analyst

Great, thank you.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Ron Josey from JMP Securities. Ron, please go ahead.

Ron Josey - JMP Securities - Analyst

Great. I think I'm unmuted. Hope you can hear me. Great quarter guys. And Aman, thank you for the additional details on the business metrics. I wanted to talk about commerce specifically, the $4.5 billion in GMV and also integrations with Facebook and Instagram, which you just talked about, but can you just talk about what tools you think are still needed to fully take advantage of this commerce opportunity that you're seeing with the 80% growth in GMV? Or do you have - do you think you have a fully integrated approach now to fully take advantage? And then as a follow-up to that, can you talk about sort of - we're two quarters into the freemium approach with websites and marketing, a quarter in with SellBrite. Just talk how freemium has maybe changed the complexion of these new subs and these record new subs that are growing to the - growing on the platform? Thank you.

Aman Bhutani - Chief Executive Officer

Yeah, happy to do that, Ron. Thanks for the question. On the first piece about the $350 million and just the color, we're super excited about that part of the business and how quickly it's growing. I think I'm blanking on the exact word you said, but just on the second part of your question, when I look at the subs growth, what I'm really focused on is, are we providing the customers the product that they can try out? And as an example, you mentioned SellBrite. SellBrite is doing really, really well. The GMV growth that we're seeing, it's fantastic, but it's because we're getting the product in the hands of customers and more and more merchants are quickly using SellBrite. By the way, we're seeing the same with Websites + Marketing. Freemium means that more customers are using it. And yes, we're a couple of quarters in. And what that's done is, it's given us enough confidence that we are rolling the freemium piece out sort of 10% to 20% at a time. It's not 100% in the US yet. As we get into every part of our website and our sales path, that's the place we're going.

Ray Winborne - Chief Financial Officer

It's Ray. I want to clarify one point on that. Within our customer count number, it does not include freemium. Those are paid-only subscriptions. So, that record organic growth is for paid subscriptions, not freemium.

Aman Bhutani - Chief Executive Officer

Yeah. And I'll also clarify, the numbers that we gave for subscriptions, the 2.2 million, doesn't include subscriptions for Over or SellBrite. Those are core Websites + Marketing and Managed WordPress. And what we say - what we believe is that Over and SellBrite, sort of customers use that as part of our core platform.

And then you asked a question, fixed to hit back to me around gaps in our offering. The commerce offering is driving a ton of that growth in those suite of products, right? So that's really fantastic. And we serve the needs of a certain set of customers really well already. The way I think about it is that as we grow to sort of cover more and more customers, we are going to have to add feature set. But that's sort of an order of operations there. What's the next thing that we need to go after, and let's build that capability or buy that capability, put it in place and then offer it to customers in as simple a way as possible.

Ron Josey - JMP Securities - Analyst

Great. Thank you.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Ygal Arounian from Wedbush Securities. Ygal, please go ahead. Ygal, please unmute your line.

Ygal Arounian - Wedbush Securities - Analyst

Okay. Can you hear me now?

Christie Masoner - Senior Manager, Investor Relations

We can.

Ygal Arounian - Wedbush Securities - Analyst

Great, thanks. So I want to ask a couple of big picture questions. One related to commerce and what you're doing there. And obviously, you're doing a lot. It's a feature that, within your space, is kind of growing pretty competitive across the space. You guys have always viewed yourselves as focused on micro businesses. Does what you're doing here - when we think about SkyVerge and SellBrite, integration into Facebook and Instagram. How do you guys see yourselves playing in that market, in the e-commerce specifically? Is it still kind of focused towards that micro SMB? And just did that change any of your philosophy in terms of go-to-market and who your target customer is? And then, related to that, I think a lot of investors think of GoDaddy still very exposed to SMBs, which you are. And I think that's something maybe some people have a hard time getting over in terms of the risk from COVID and businesses shutting down and the overall health. We saw in 3Q new business applications for SMBs, but really businesses in general were up over 50%. So there's a lot happening in that space too. Is there anything you're seeing that gives you extra confidence? Aman, you touched on entrepreneurs shutting down and reopening. What are you seeing within business closing and opening and that overall environment that gives you maybe more or less confidence than typical environments? Thanks.

Aman Bhutani - Chief Executive Officer

Yeah, thanks, Ygal. Let me address sort of the target customer, micro SMB, e-commerce part of the question, and then take some of the pieces on turn and what exposure we see in the SMB space, and then Ray can touch on it too. If we take a step back, Ygal, what we're seeing in the numbers is that customers - our customers, people that have great relationships with GoDaddy, are coming to us and saying, I want a commerce offering from you. We shared with you a quarter or two ago that 25% of customers signing up for Websites + Marketing are signing up for the commerce tier. These are people by themselves going there and saying I want this product from GoDaddy. So what we're focused on is, when we see those early signals and we see people starting to click, we are like, this is an offering that we have the right to serve. This is a target segment of customers that have the best relationship with us. Let's meet their needs. And my view on the competitive space and such is that there is so much opportunity still in the micro businesses and the everyday entrepreneur space that we define, that there is really a lot to do there. And my view is that as we look into the future, there's no difference between a micro business and an online micro business. Every micro business is going to be online. That's just how people are going to find things. That's just how people are going to want to transact because it's going to be simpler for them and it will allow them to scale in a way that previously they couldn't.

In terms of the exposure, and I'll just point again to the steady churn rates at GoDaddy and just the creativity of the customer. And maybe for one click deeper, I'll turn it to Ray. And Ray, do you want to talk a little bit more about that?

Ray Winborne - Chief Financial Officer

Yeah, Ygal, I mentioned this maybe on the last call, but a lot of our confidence is coming from the recurring nature of the business model. A couple of things I'd point out. To your very point, our core customer is an solopreneur, right. I'ts one to five employees in a lot of cases. And when they get knocked down, they get back up. We are providing them all the tools they need for $20, $25 a month. It's an incredibly valuable service to them and it's one of the primary reasons our customer retention rate has been so strong for, gosh, 20-plus years now. I think folks have consistently gotten it wrong about what's perceived to be as exposure to volatile small businesses. These are entrepreneurs, not necessarily small businesses. So when one fails, they pick up the next idea. Aman hit on the renewal rates. They have been very stable. The natural flow of renewal events is roughly evenly spread over the year for us. We're 10 months into 2020, 7.5 months into the pandemic, and renewal rates are holding. So it's instilling confidence in us despite the uncertainty in the market.

Ygal Arounian - Wedbush Securities - Analyst

Great. Thanks so much. Very helpful.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Brent Thill from Jefferies. Brent, please go ahead.

Brent Thill - Jefferies - Analyst

Thanks. Ray, 11% bookings, I know you had a tougher 15% comp. I guess with all the talk of e-com and business apps and more attach, I think maybe some thought you would see a little more acceleration than that. I'm curious if you can just comment on the puts and takes and kind of what you're seeing. I know it's all not going to flow in, in one quarter. But it seems like directionally, you're heading in the right direction.

Ray Winborne - Chief Financial Officer

Yeah, Brent, obviously, you recall, last year was a really tough comp. There was over 1 point of lift in bookings related to credit card abuse. So I think, Brent, I would look at net bookings as a cleaner view of the growth, which is closer to 13% year-over-year. Beyond that noise, Aman hammered it in the opening comments, we are seeing historic growth in new customer adds. But remember, the new bookings are small relative to the base. It's roughly 10%. So you're not going to see that inflection immediately, but they're super critical for future growth. And there is strong demand for our offerings in the market. We're investing to maintain that while maintaining our threshold. So you saw us score [Phonetic] on the marketing. We're seeing the results of that, and new is growing very, very strong.

Brent Thill - Jefferies - Analyst

And you've been fairly colorful in past calls, just looking at what's been happening inside the quarter and linearity. Was there any color just as it relates to was it a fairly steady improvement throughout the quarter? Or was it evenly based? How would you describe the linearity of the quarter into the start of this current quarter? Thanks again.

Ray Winborne - Chief Financial Officer

Yeah. I think what I would say is, we hit the peak mid-summer. The growth rates are still spectacular. These are record growth rates, but we're starting to see some seasonality, some waning of demand in the market. But I would still tell you, these are historic growth rates that we're looking at right now.

Brent Thill - Jefferies - Analyst

Great. Thanks.

Ray Winborne - Chief Financial Officer

Bottom line: the guide that we put out reflects what we see from a trajectory standpoint for Q4.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Matt Pfau from William Blair. Matt, please go ahead.

Matthew Pfau - William Blair - Analyst

Hey, thanks for taking my question, guys, and great quarter. Just wanted to ask on the guidance, so full year revenue expectation up a bit from your previous expectation and free cash flow expected to be in the sort of middle of the prior range. So is this related to you liking what you're seeing from the increased marketing spend and continuing to lean into that? Or is there something else going on? And then on gross margins, as websites and e-commerce continue to be a faster growing component of your business, how do we think about that impact on the gross margins?

Ray Winborne - Chief Financial Officer

Yeah, Matt, on the revenue growth, glad you're noticing, we're happy with what we're seeing there from an acceleration perspective. And what we've messaged in the past remains true. Any upside we see in cash flow, we're putting back into the business. We invested a lot in marketing this quarter. We'll invest again in the fourth quarter. And we're going to continue to lean in there as long as we're seeing the returns.

On gross margins, don't forget, Q2 was weighed down by the COVID impacts to the top line with honestly no relief in costs as we maintained salaries across the board. Q3 does include a benefit now consolidating GoDaddy Registry. We talked about that acquisition and the benefits there of eliminating the domain costs that we formally paid out to an external party. My final thought on gross margins, though, we've consistently messaged that for modeling, keep us both safe by staying in that mid-60s. Yes, you're right, as we move more into these software-centric offerings, those are higher margin, but we're continuing to put more into that bundle and we want to maintain the flexibility on pricing. So I think still mid-60s is a good place for your models.

Matthew Pfau - William Blair - Analyst

Great. Thanks guys. Appreciate it.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Mark Mahaney from RBC Capital Markets. Mark, please go ahead.

Mark Mahaney - RBC Capital Markets - Analyst

Okay. Two questions. One, any more color on the marketing that you're talking about? And are there other channels that are working better for you than those in the past? I think in the middle of the year, there were probably some very good ROI out there to be had, those with kind of a pullback in marketing from a lot of different verticals. I assume that the ROICs become come a little bit more back to pre-COVID norms. So just talk about what you're seeing in terms of ROI and in channels. And then, one other question related to marketing. And as the lapsed customers, customers that were on the GoDaddy platform in the past, have you had much success during this kind of time of what must be really elevated demand for digital presence solutions? Have you had success being able to go back to some of those lapsed customers and getting them to re-engage with GoDaddy? Thank you.

Aman Bhutani - Chief Executive Officer

Thank you, Mark. Regarding the first part of your question on the marketing costs and the return we're seeing, we continue to see strength on the brand side as we have historically core metrics like [Indecipherable] brand awareness consideration, something we measure just for people like me. We continue to see sort of good performance and numbers I think in the right direction. Our performance marketing continues to show strength as well. You're right, there were some differences in the quarter, and cost per impression has gone up a bit, but we're still seeing your cost per impression for the business as a whole. And the overall result, as we mentioned, has been amazing. We've had a super valuable cohort. It's the biggest cohort in the Company's history, which is the third quarter cohort. And it's not just because we are growing every quarter or every year. This cohort is 30% sort of more valuable than other cohorts. It's really, really a big increase in what we're seeing.

In terms of the lapsed customers, as we talked about, a lot of our customers stay with us even after they're ventures go away. So we - some of that happens within our system already. It's not new, but I'm not aware of anything special in terms of that changing during COVID. But I'll turn to Ray to see if there's something he wants to mention about that.

Ray Winborne - Chief Financial Officer

Yeah, Mark, let me put a finer point on that. The growth in new purchases from the existing base is up year-over-year relative to the trend before COVID, not as high as we're seeing certainly in the new customers, but still solid growth year-over-year. So definitely, demand spiked as well in the existing base.

Mark Mahaney - RBC Capital Markets - Analyst

Okay, thank you very much.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Mark Zgutowicz from Rosenblatt Securities. Mark, please go ahead. Mark, please unmute your line.

Mark Zgutowicz - Rosenblatt Securities - Analyst

Sorry about that. A couple of questions on W + M. And I got on the call just a little late, so I apologize if this question was also already asked. But just on the freemium side of things, I was curious what the read is initially on conversion and what sort of the dynamics that you're seeing. I know it's been, I guess, a couple of quarters now. Just sort of your thoughts on how that model has played out in the future. And then, second one is, just in terms of trajectory, revenue trajectory of W + M over the next 12 months, is there a greater pricing component in the, I guess, pricing unit mix equation? And is that sort of required as you think about your comps that you obviously will be heading up against the summer comps, if you will? Is there a necessarily a greater pricing mix necessary? Appreciate that. Thanks.

Aman Bhutani - Chief Executive Officer

Thanks Mark. On the freemium piece, yes, we're a couple of quarters in, and it's given us the confidence - or the experiment has given us the confidence to continue to roll out freemium. It's still early to talk about specific metrics on those cohorts. But generally, we're happy with the experiment. This is the path forward for us, and we want more and more and more customers to be using our freemium products, and we will get better and better and better at converting them over time. The more feature set that we're including in the freemium product, sort of the more usage we see. And we'll be able to optimize the number of things over time.

In terms of pricing, I don't think we can comment much in terms of what pricing actions might be there in the - going into next year or what we need to do. But I'll turn it Ray to see if there's some commentary that he wants include here.

Ray Winborne - Chief Financial Officer

Yeah, Mark, I think if you look at the disclosures we made this quarter around those products, there is a mix of both volume, unit growth, as well as positive mix. The percentage of customers coming in at the higher tiers has been favorable since COVID hit. So that's helping as well. But yeah, no comments - specific comments around what that will look like in the next 12 months.

Mark Zgutowicz - Rosenblatt Securities - Analyst

Okay, great, thanks guys.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Deepak Mathivanan from Barclays. Deepak, please go ahead.

Deepak Mathivanan - Barclays - Analyst

Hey, guys. Can you hear me?

Christie Masoner - Senior Manager, Investor Relations

Yes.

Deepak Mathivanan - Barclays - Analyst

Great. Two questions. So first on the e-commerce side, you've obviously improved the product pretty nicely, added a lot of feature set and also have done a lot of integrations. When should we expect monetization initiatives, particularly in areas like payment, shipping, potentially partnerships on fulfillment, and sourcing and a lot of other areas where some of your peers generate nice revenues? And then, the second question is a little bit related to the customer cohorts. Given the big renewal base, it's somewhat harder for us to parse out. But can you provide some color on the quality of our customers that you have seen over the last three, four months in the more recent cohorts? How much is the ARPU [Phonetic] higher compared to your typical customer? What's the term like and what are the additional products that they are buying? Thanks.

Aman Bhutani - Chief Executive Officer

Yeah. Maybe I'll take the first and Ray can take the second. On the e-commerce side, in Websites + Marketing is growing amazingly well by itself and the commerce tier is growing much faster than Websites + Marketing overall. So, yes, we've improved the product. We continue to invest in it, and we're seeing good results there, good demand from customers there. In terms of monetization options, Deepak, the focus for us right now is to get the scale. We have a great offering. By making it easier for customers to use, by getting them freemium tiers, by inserting more and more capabilities for them, by increasing usage like now, increasing the use of certain features, we are creating that surplus for the customer. And definitely, the areas that you talked about continue to be future opportunities for us. But it's an order of operations. First, we want to get the scale, and we shared the GMV numbers with you. And then, we want to look at the future options of monetization. And then, I will turn it Ray for the second question.

Ray Winborne - Chief Financial Officer

Yeah, obviously, we talked about the size of the cohorts we've seen over the last couple of quarters being historically largest we've seen. As far as performance, still really early to be able to tell how we're going to perform over the longer period. We flashed up a cohort we picked up in the Great Recession in 2008, and you can see the long-term performance on that turned out to be right in line with other cohorts. So I have no reason to suspect these cohorts are going to perform any differently. But we'll see over time. One thing I would point out is, in these cohorts post-COVID, we are seeing a heavier mix of attachment for Websites + Marketing and Managed WordPress.

Deepak Mathivanan - Barclays - Analyst

Great. Thanks Ray. Thanks Aman.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Brent Bracelin from Piper Sandler. Brent, please go ahead.

Brent Bracelin - Piper Sandler & Co. - Analyst

Good afternoon, and thanks for taking the question here. I had two, if you could. Certainly appreciate the record customer growth you're seeing. But if I look at international in particular, it's the highest growth rate we've seen in the year. Two quarters of accelerating international growth. Could you just provide a little more color on, as you think about this record, really strong customer growth, how much of it is coming from international and maybe what countries you're seeing adoption drive this acceleration?

Ray Winborne - Chief Financial Officer

Yeah, Brent, it's broad based. We started increasing the spend on marketing when we saw demand spike back in May-June timeframe. And that was pretty evenly split domestic and international. So the incremental spend is going towards both of those, and obviously seeing some nice improvement in trajectory there. Nothing specific to any one geo. It's strong around the world.

Brent Bracelin - Piper Sandler & Co. - Analyst

Okay. That's super helpful. And then, just one quick follow-up. As we think about kind of ARR, I think you talked about that $350 million ARR business growing 40% year-over-year. How should we think about that growth profile on an organic basis? I assume there's some acquisition kind of revenue in there. So as you just think about ARR kind of organic growth potential, how should we kind of think about that going forward?

Ray Winborne - Chief Financial Officer

Yeah, vast majority of that is organic. Those acquisitions were both small on an ARR basis, Less than 5%.

Brent Bracelin - Piper Sandler & Co. - Analyst

Okay, great. Super encouraging. Thank you.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Naved Khan from Truist. Naved, please go ahead. I think, Naved, we're going to have to skip you for a second. Our next question comes from the line of Chris Kuntarich. Chris, please go ahead with your question - from Deutsche Bank, apologies.

Chris Kuntarich - Deutsche Bank - Analyst

Hi, can you hear me?

Christie Masoner - Senior Manager, Investor Relations

Yes, we can.

Chris Kuntarich - Deutsche Bank - Analyst

Great. Maybe just on one of your milestones. You guys talked about business apps customers now over 3 million. So that's roughly, give or take, mid-teens percentage of your total customers. I think back in 2015, you had talked about roughly a third of your customers were buying hosting. So, maybe two questions around that, first being, is a third of the customers purchasing hosting from you guys still the right way to think about it? And then second, on business apps, how would you think about the opportunity to kind of close that penetration of your customers to more maybe in line with where hosting penetration is with your customers? Thanks.

Aman Bhutani - Chief Executive Officer

Yeah, I think Chris, we continue to see great growth with business apps. And we are able to attach that product along with domains. We're able to have customers reach us, and we're offering sort of best-in-class service for them - offering for them, both in terms of tool set and in terms of support. It's hard for me to talk about how the percentages may line up over the next few years. But generally speaking, we feel we have a great product. We feel that customers are very appreciative to have it. We see really good responses in terms of NPS from customers on this product set. So we - our intention is to continue to invest into it and make it easier and easier for customers to use. We've had a couple of sort of innovative ways of being able to support customers so that customers can get themselves set up with the email in really, really simple way.

And then, I don't know, Ray, if there is anything else. Some of the other comparisons, I don't know, Chris, that you can sort of - they're kind of apples and oranges in my mind. But Ray, I don't know what you would add.

Ray Winborne - Chief Financial Officer

Yeah, Chris, the only thing I might put on top of that is that our focus both from a product perspective and go-to-market right now is on the software products, Websites + Marketing and Managed WordPress and then all of the marketing tools that go in with that, marketing commerce tools. So less focused on hosting where - we may have quoted that years ago. We now have more prominent software products that we're pushing on the go-to-market.

Chris Kuntarich - Deutsche Bank - Analyst

Got it. Appreciate the color.

Ray Winborne - Chief Financial Officer

You bet.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Drew Glaeser [Phonetic] from J.P. Morgan. Drew, please go ahead.

Drew Glaeser - J.P. Morgan - Analyst

Hey, this is Drew on for Sterling. So, another question on the hosting area. So, given the positive results in hosting and presence, do you think that you guys have hit the bottom in that segment? And could we see improved growth in that segment going forward?

Ray Winborne - Chief Financial Officer

Yeah, Drew, it's Ray. Obviously, we saw nice improvement, a lot of that being driven off the back of the growth in our software products there. Still seeing headwinds and will until we lap the restructuring actions we took in June. But I think all clear as far as the pressure we're seeing there.

Drew Glaeser - J.P. Morgan - Analyst

Okay, got it. And then secondly, so we are seeing a surge in new business applications according to some government data. Are you guys seeing that benefit your business at all? Or could that start benefiting in coming quarters?

Ray Winborne - Chief Financial Officer

Yeah, I think the fact that we had a record organic net customer adds this quarter in the Company's history tells you a lot. So, we are seeing that demand.

Drew Glaeser - J.P. Morgan - Analyst

Got it. Thank you.

Christie Masoner - Senior Manager, Investor Relations

Our next question comes from the line of Naved Khan from Truist. Naved, please go ahead. I think we don't have audio from Naved, so apologies. Everyone, thank you so much for joining our call today. And I'll turn it back over to Aman.

Aman Bhutani - Chief Executive Officer

Thank you, Christie. I'll just say a huge thank you to all GoDaddy employees all over the world for a strong quarter, and we're looking forward to the next quarter. Thank you very much.

Christie Masoner - Senior Manager, Investor Relations

Goodbye.

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GODADDY INC

Q3 2020

Earnings Transcript

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