Q3 2019 Earnings Call
<unk> conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question done, especially when you to press Star 100 telephone.
Please be advised to today's conference is being recorded.
Require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Angela White VP Investor Relations. Please go ahead ma'am.
Thanks, Chris.
Good morning, everyone. It's my pleasure to welcome you to our third quarter earnings call first we'll go through some prepared remarks, after which we'll turn into an eight we prepared presentation to accompany our comments, which is available any investor relations section of our website at <unk> IR Dot endurance Dot com.
Well not necessary to follow along we recommend referencing the presentation slides along side our prepared remarks.
As is customary I'll now read the safe Harbor statement.
Team for a discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward looking statement.
Endurances I assume any obligation to update any forward looking statements.
During the call, we'll reference several non-GAAP financial measures, including adjusted EBITDA free cash flow Netapp and bank adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is available in the presentation located in the Investor Relations section of our website with that I'll turn the call over to Jeff Sox, our president and CEO .
Ill.
Thank you and enjoying good morning.
Our third quarter results reflect continued operational progress executing our strategy to focus on engineering sales and marketing investments on selected strategic brands revenue was 277.2 million an adjusted EBITDA was 80.6 million.
We ended the quarter with approximately 4.8 million subscribers on platform a net increase of approximately 10000 subscribers from last quarter, including approximately 1300 subscribers from our E Com Dash acquisition.
In the quarter, we purchased E com dash for approximately $9 million in cash.
Also reducing our net debt by approximately $19 million.
We're pleased with the net positive subscriber additions this quarter and indicator that our investment focused on core strategic brands is working we believe however, the completing a return to revenue growth will be the strongest signal that the day to day execution of our plan has been affected.
With a quarter of the your remaining we are seeing revenue progress Trail unit progress.
We expect a revenue trend to continue to improve but at this time, we're lowering our expectation for full year cap revenue to approximately one dot 115 billion, which does reflect continued progress toward topline inflection.
Turning to slide six.
We operate to scale business email marketing and web presence both of which serve a converging small business marketplace that is growing in the U.S. and internationally.
Increased investment in engineering and product development is positioning both businesses to expand our total addressable market over the next several years.
Typically we are investing to complement our traditional web hosting an email marketing core service offerings by leveraging selected software assets, including my builder newly acquired E com dash capabilities across our strategic programs.
Turning now to our current segment performance in email marketing our investments remain focused on expanding our solution sad to serve more customers.
Valving constant contact from an email marketing business into a digital marketing plan.
We believe we can expand the reach of the constant contact brand the only lifecycle customers during the third quarter, we officially launched or starker business solutions out under the constant contact brand with products, which is a free site builder and domains.
We also continue to invest in providing additional value to core email marketing customers through solution packaging improvements such as our recently launched marketing and social media functionality.
Along with seasonal pickup in marketing spend as we focus on 2020, we expect to increase investment in sales and marketing on the fourth quarter in order to trust or positioning in an expanded set of channels.
In addition, we will be working with our E com dashed team to leverage future capabilities and offers under the constant contact brand. Please note that E. Com dashed business was added to this segment in the third quarter 2019, with approximately 1300 subscribers.
Turning now to our web presence segment, our focus is on integrating assets to operate at scale. As a reminder, we have been investing to grow our team and does mask and Latin America and are pleased with the progress over last several quarters. We're also investing more in our valuable assets and team in India, which has historically.
The APEC market under multiple brands in 29 team, we are focused on integrating our India based marketing and engineering operations with our core web presence teams in the U.S. we.
We expect us to result in expansion of our reach overtime as we leverage a common technology platform.
Overall within the segment, we remain focused on improving the user experience in order to deliver solutions with increasing value to customers across our strategic brands.
Turning now to slide nine in our domain business, we are investing to expand our overall web presence multiples are show we have historically focused a website hosting offers well under indexed saying our effort to track the segment of the market that starts with early life products such as domains.
In 2019, we've made significant improvements to the customer experience, which combined with increased marketing spend is delivering net unit growth.
We see an opportunity to increase arps overtime PV integration of additional products, including our site builder E Commerce, Officethree hundred 60 pod and G suite email offers.
As noted as noted on our Q2 call. We've continued to experience weakness in the marketplace for portfolios or premium domain names, which did pressure our year over year comparison and this quarter.
We continue see progress as we focus our investments on our strategic brands and selected platforms. The team remains focused on the key drivers of returning to growth.
Delivering more value to customers simplifying operations and executing our plan.
With that I'll turn the call over to Mark continuing to discuss our financial results.
Thank you Jeff on Slide 12, I am pleased to review, our third quarter 2019 resort.
GAAP revenues to some $7.2 million adjusted EBITDA was 80.6 million dollar pre goes through the finest comes through from operations. This capital expenditure infinite Whitman with 27.8 million dollar.
Well you over your decline even just the EBITDA was due mostly to more revenues increased level of investment in engineering and development analytics, I'd privacy and cyber security.
This was partially offset by benefits from reward domain, we Sweden fees Lord data set the cost an all program marketing spend.
GAAP cash flow from operation in this third quarter was $41 billion Capex was 13.1 million you over you cash grew from operation as free cash who were mostly impacted by the refinancing of our terminal in June 2018.
Coming off the refinancing resorted to you know crushing tourist be menus third quarterly team.
In addition topics you over your was higher.
Slide 13, we finished the third quarter was 4.78 million subscribers.
Total subscribers increased by approximately 10007 I'd written in the third quarter 2019.
Excluding the addition of approximately 1300 scrubbers at join US as part of the become thus acquisition total subscriber increased by approximately 9400 in the period.
We're very pleased to see the trends net subscriber growing for negative 67000 in the same period a year ago, two positive 10007 number it in this third quarter.
This was the first them weapon net positive since the second quarter of 2016.
In the third quarter of 2019 combined.
Product revenue per subscriber ops was 19 doors in 35 cents.
What prisons was 13 32 email marketing 60, 979, new domain 14 equal.
Let's now turn to you the.
Year to date, we sort of on slide 14 revenue was $836.1 million adjusted EBITDA was 35.5 million door and free cash to 82.6 million.
<unk> adjusted EBITDA, you overuse always middle of combination will roll revenue decreasing thats been engineering and development.
She privacy cyber security and.
Cost savings in data center, and lower domain, which regions, partially offset the book.
15, we are revising our guidance for 2019.
As all the data on this call.
I just would 2019 is a forewing.
GAAP revenue of approximately 1.115 billion dollar adjusted even though because we agreed to suite 10 billion dollar free cash who have wanted to 120 million going.
Yeah, the delays in achieving an inflection point revenue growth, we are lowering our revenue guidance for 2019.
We also lowering the cup annual adjusted EBITDA guidance free cash flow guidance remains unchanged.
Please also note that we intend to increases in marketing spend in the fourth quarter of 2019 versus the third quarter of 2019.
We will result in lower adjusted EBITDA in the fourth quarter versus the third quarter.
Expect capital expenditure of approximately 50 million, though in 2019, we continue to expect to use excess free cash flow to be down approximately 900 million, though that in 2019.
Slide 16, we ended the third quarter was 1.78.
We knew going towards he knew that.
Including other deferred purchase obligation in capital leases of 5 million and total cash from the burn she's of 86 million dollar.
Our net debt at the end of the appeal in was 1.699 billion dollar.
During this third quarter, we pay down approximately 25 million door of the principal about tune on debt.
Oh LTM Ben can just you'd be dealt with the period ended September through used 2019 was we 17.9 billion dawn.
You did leverage we should all got 24, and we mean would it be to a maximum senior secured leverage wish you a six students.
Thank you for joining us today, and now I turn the call back over to Jeff.
Thanks, Mark just to reiterate we are focusing on returning to top line growth as a team continues to simplify operations and execute Q4. Thank you for joining US. This morning, I'll turn the call back to the operator to begin Q.
And as a reminder to ask a question you will need to press star one or telephone to withdraw your question. Please press the pound key please stand by will be compiled acuity roster.
And our first question comes on line of Nevada Khan with Suntrust. Your line is now open.
Yes.
A couple of questions.
Jeff It seems like.
On the subscriber friend, who have made progress obviously, it turn positive net positive.
Oh on the revenue front.
Probably not quite as it can you just sort of give a sense off that versus your own expectations, where it might be lagging.
But you guys might be lagging and put revenue growth and Oh do plan to sort of address that you said that you're getting launched attached from the new subscribers that are coming in our low across and or other things that you mentioned like market risk weaknesses and then just on the on the subscriber growth and maybe even share some monthly plans, how maybe the you know.
So what did you ended the quarter stronger, but it has a big encoded.
So I'll take the last one first we don't we're not going to just disclose that level of detail.
I'll take the first question and really just keep the simple.
You know if you really look at the result, we produced in Q3.
You know versus the play that we're running to try to try to focus on the brands.
I'm personally very pleased I think markets as well just in the discipline of the team on timing the spend for when we felt like the solutions and and the market will be ready to receive and let us terrestar way to really inflect our topline.
We're pleased with the operational simple simplification and the power of the focus we have on the brands that we are really investing in and the platforms where engineering against.
We are a little disappointed Justin the attach rates some of the unit production. It's it's a combination of factors but.
And so no no.
No no running from the fact that I'm a bit disappointed because obviously, we've had to lower the guidance on on our revenue inflection. However, when I step back and think about the progress of teams made I'm, just very pleased with the discipline and though there their execution. So far this year to get us him in a position.
Understand the dollars.
On the right solutions and platforms and brands. So I'm pleased with the progress from a little disappointed that we didn't get a little bit more revenue.
Got it that's helpful. And then maybe a quick follow up so that's given us himself.
The.
This affect other others coming from mentioned videos a is it across the board or something better than others, how should we think it audit.
In in the aggregate, it's our big poor right I mean, obviously can see you know in constant contact we're still net negative.
But but we're really focused on growing not only the subscribers, but the value that just the subscribers get on our big four brands. It's.
Giving that to all Ryan and work and grow as what we're focused on all day everyday.
And we think Hostgator blue host domain dot com and constant contact how they place in the marketplace to be net unit positive and.
Delivering more solution value overtime, we think that that's out there we see our competitors doing a great job running that play and we feel like we've we're just we're getting better every day at running that the right way for customers that will ultimately yield revenue.
Fair enough.
Oh from a from a geographical perspective is it that maybe U.S. is as big a leading or is it Latin America or how should we think about that.
Yes.
No.
I, we're not breaking out the details that way.
We're running an aggregator brand play on four brands and we're simplifying the tech stocks.
Got it thank you.
Thank you and our next question comes from them on a run Seshadri with credit Suisse honest now.
Yes, hi, thanks for taking my questions in terms of the overall economic environment.
Anything you can add in terms of formation new businesses, how renewals are doing.
That's right.
Awesome weakness in demand additions there are signs just wanted to get some broad thoughts and economic environment.
I just.
I don't I don't think were.
Position that give you additional insight into the global macro.
The what we're really focused on is making sure that we finished the thought on.
Competing and delivering competing for the right customers in the right channels and then deliver in them value.
So I'm, just I'm not going to do any global macro commentary.
Okay I just just in terms of so it so it sounds like the economic environment is not in any way impeding.
Impeding subscriber revenue trends.
I I don't.
With what we're focused on obviously, if the macro environment.
Gets more difficult it just.
Good work harder to achieve our objectives I think that position. We're in if you followed our history is that we were really selling website hosting.
Across multiple brands and email marketing.
And.
The ability for us at our scale with with the right investments and partnerships to expand our total addressable market is is that is what we're doing and so I'm I'm, you know whether or not the global macro is out there are changing around us doesn't really affect the play that we have to Ron.
To compete for and deliver value to customers.
We have to stay focused on that.
Got it makes sense and then last thing for me is just wanted to understand sort of if you could if you could quantify the marketing uptick in Q4 broadly what are your thoughts or is it too early in terms of.
Year over year 2020, what kind of.
Marketing you expect that sort of the general.
Trend line I would imagine will be upward and then if you could comment also on the balance of ARPU in subsidies anything in the promotional activities side that impacted the near term numbers. Thanks.
So so I'd love for Mark to answer a question right.
Because you know where our accents are very different.
[laughter].
Well, we're very focused if you really look at our Q3 I think the team did a great job.
Not spending a few marketing dollars so that we could do some more testing this quarter on some of the progress we've made in some channels that we've not historically spent quite as much money and so realistically. If you look at it we didnt lower our EBITDA.
We just took the top of the range out. So that's really I just want to make sure you guys know very pleased with the way the team is thinking and operating.
Increasing focus discipline.
So they're going to be testing this quarter, but we have you know we have a lot of respect for our EBITDA range.
And and so we actually Overperformed, a little bit in Q3, and we just don't want to surprise anybody that we're going to test some things in Q4 with some of the solution efforts. We've made in some of the some of the user experience progress.
So I don't think workforce, we're trying to cause anybody to have grave concern about us becoming.
Crazy Spenders without real ROI and progress in mind.
I'd like Mark to really chime in on.
Are we really this is a little bit of a promotional calendar. There is you know I know I've seen some of our content constant contact promotions you know, we do promotions, but we do that every year I don't think year over year, Mark why don't you weigh it no I think it's the same thing a rune I mean, obviously you're wrong.
Black Friday, cyber Monday, there would be promotion, but it's just what we do every year it's.
Nothing unusual in terms of we're very pleased with the way the gross adds came in in the quarter.
And as you know I mean different.
Players in this industry of different go to market strategy. So.
Until was a freemium model and we thought we saw a discounted plan for the first two used 24 months was a when you were at food price. So I think very pleased with the subs the team is third quarter.
In.
At some point that we knew.
What percentage of them what are we knew that a full price.
No we pick up more ops and more relevant way more GAAP revenue of this but the cash came in.
Because the PEO prone for 12 months 24 months 36 months, but you said it or foose period.
Discount.
And you recognize less GAAP revenue.
Should basically.
So when you at full price them.
In the future.
Got it that's helpful. Mark last thing free cash flow guidance, you've maintained just wanted to any any thoughts there where is that sort of upside coming from and then broadly for next year. You I assume you expect somewhat consistent free cash flow, but any commentary there would be helpful. Thanks.
So so easy to predict we're not going to talk about next year.
And I think the on the cash flow I think hopefully you guys.
Well will respect the quality of the effort the team is putting forth to manage opex capex across the enterprise side.
I can't say enough about the discipline the team showed and and what we're doing is where we feel like we are ready now to test some some more competitive effort.
Got it very helpful Bank does expect to get returns.
Thank you and our next question comes from the line of Stephen Ju with Credit Suisse. Your line is now open.
Okay. So thanks.
Jeff I.
Darren historically seemed like a collection of unconnected point solutions and it seems like you're now.
Endeavoring to deliver I get the more holistic offering and.
The process increased the size of your subscriber acquisition funnel. So do you think your portfolio of assets and services as far as you complete at this point between the partnership's that's Wallace.
And.
As you like yourself with your competitors and it sounds that way, because you're playing a little bit more offerings with the marketing dollars, but any color you can offer there.
Thanks.
So so great question Stephen.
I think you I think that we win when I used the phrase focus simplify execute we are in the finished the simplification. So we can execute phase of this journey.
And I can't say enough about the way the team is coming together and doing good.
We have picked our targeted engineering.
Teams and tech stacks, and we are bringing all the assets that that appropriately aligned to those tech stacks, together and but and so.
What that does is that does allow us to buy things like E com dash and know how to bring them to market without adding new brands to our platform.
And so as I said E comm dash will actually come to market over the next 12 months the capabilities of E Com dash will be delivered.
On a constant contact to potential constant contact users of capabilities and.
The other three brands will decide where and how that functionality fits adding value to their customer base or their funnel and so I used that as an example, because I think if people look at where we are now versus where we were two years ago.
There are a couple of traditional places, where if we find the right capabilities like he come dash.
We will consider.
Acquiring some additional capabilities that we know fit into the value proposition that customers on our big four brands will look to get from us on an integrated platform.
That is what we're doing and where I think.
We are.
In a position to do it efficiently and effectively.
It is about customer value and either through partnership.
Acquisition or engineering about engineering effort, there's a lot more customers need from us.
As they come through our four front doors, which has been our bend the play we're running.
Thank you.
Thank you and I was reminded you ask a question, ladies and gentlemen, you need to press the star one on your telephone.
And our next question comes from the line of John .
With Jefferies. Your line is now.
Hi. Thank you this is John Gunn for Brent fail.
On the Q4 sequential marketing spend could you give a little bit more color, maybe I don't know, maybe where you plan to focus meet the across brands or.
Or other aspects of it.
It's the same for brands, we've got we feel like Weve got some things we want to test.
Some new channels, a little bit of money and some channels little bit more money on some things. So it's it's not it's we're not talking about a radical.
Shift of money, we're just talking about we'd like what we're seeing and we want to.
We want to push a bit harder through the promotional part of a year and see what response, we get out and use our analytics to to really calibrate.
What we think we can do to grow in 2020.
It's a big four brands, we've got test to run on all four of them.
Okay. So there's no increase focus let's see on constant contact list at somebody other.
We're doing that imbalance it may show up.
Clearly constant contact.
Is the biggest of the four assets and so it will likely I mean without their given you the specifics under the hood it'll definitely be getting more more pro rata share of quarter to quarter includes.
And then the did you I.
I guess bundled offering for constant contact Im curious to see if you can share any feedback on what the response has been so far I mean I do see.
Atlantic page on the website.
Click a couple of times to get to it but just curious what you've seen so far since you have formed at launch.
So so so weve.
I mean not to be colloquial, but I've seen some so I'm really happy customers that have.
Were received the ability to do things other than male under the brand.
I've seen couple actual web sites at more than a couple and so that it is a natural thing for a customer that isn't that knows that may be was looking for email marketing to help decided hey, I you know I'll try the builder.
You know oral by domain or how you know actually refresh my logo or create a logo somewhere it's a natural additional place for us given that we have traditionally skewed towards small businesses in a look in some folks that ultimately want a good price point and do stuff themselves. So it's a pretty natural it's a very natural I would tell.
The teams working hard on taking the first integration and really grinding through really improving the user experience progressively over the next 12 to 24 months, we feel like it's good enough the customers or or.
Given us pretty good feedback that they're they're happy with what we're doing in the overall economics are are very competitive we're trying to be very competitive, but wise about delivering value and increasing user experience.
And so the feedback so far spin the brand will benefit from the extra capabilities customers will get balance.
That's what we're we're continuing to measured test, we will we have to improve.
Overall integration experience, the same where our competitors put stuff and the market and then continue to refine it it's just same framework.
Great. Thanks very much.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
Thank you for participating.