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GoDaddy, Inc. (NYSE:GDDY)
Q4 2017 Earnings Conference Call
Feb. 22, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Q4 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press * then the number 1 on your keypad. If you'd like to withdraw your question, please press the # key. Thank you. Christie Masoner, Senior Manager of Investor Relations, you may begin the conference.

Christie Masoner -- Senior Manager of Investor Relations

Good afternoon and thank you for joining us for GoDaddy's Fourth Quarter and Full Year 2017 Earnings Call. With me today are Scott Wagner, Chief Executive Officer; and Ray Winborne, Chief Financial officer.

We'll share some prepared remarks and then we'll open up the call for your questions. 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, net debt, and ARPU. 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 on 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, our ability to integrate recent or potential future acquisitions and achieve desired synergies, including our recent acquisition of HEG and our proposed acquisition of Main Street Hub. 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 forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, February 22nd, 2018, and we undertake no obligation to update these statements as a result of new information or future events. Unless otherwise stated, when we refer to organic measures, we're referring to those measures excluding the impact of HEG and Main Street Hub.

I'll now turn the call over to Scott.

Scott Wagner -- President and Chief Operating Officer

Thanks, Christie, and thanks to all of you for joining us today. We feel great about how we closed 2017 with another year of consistently good growth in the books. At year-end 2017, we'd grown to serve 17.3 million customers, an increase of 18% versus a year ago, driven by both strong organic growth and the addition of HEG in April of last year. Our average revenue per user, or ARPU, also rose over 7% to $139. We finished 2017 with revenue of $2.2 billion and bookings of $2.6 billion, both up 21%, and unlevered free cash flow of $196 million, up 39% year-over-year, demonstrating our ability to deliver growth at scale in both our top and bottom lines.

2018's off to a strong start, as well, which you'll see in our increased guidance for the year that Ray's going to discuss a bit later. We want GoDaddy to be known as the place where ideas start, grow, and thrive online all around the world and, today, we're a global leader in helping individuals and businesses create an online presence with particular strength in naming websites and branded email.

We have a distinctive value proposition that combines our products, technical platform, and customer care to unique serve customers and grow with their ideas over time. In the coming year, we'll look to build on our solid foundation and invest in several ways to continue driving multi-year sustainable growth. Our priorities are to deepen engagement with existing customers, continue to expand our product portfolio, grow our international footprint, build and evolve on our exceptional brand awareness and enhance speed, reliability, and performance of our global infrastructure.

Today, I'd like to discuss two topics in a bit more detail to demonstrate our commitment to these priorities: first, our expanding view of what it means for us to provide a truly differentiated online presence and, second, the continuing evolution of our global go-to-market strategy.

First, I'll start with our view on providing a great online presence. Whether you're a business, non-profit, sports team, or politician, a dynamic, great-looking, reliable and effective online presence is a must-have. Our customers tell us that how they show up online is the most important and effective marketing they can do. The definition of what it means to have a great online presence continues to expand.

Domain names and websites are, in many ways, the foundation of the internet and their functionality and importance is evolving in a couple of meaningful ways. First, given the proliferation of social media platforms, online content needs to exist and to be managed across many more places and, second, product applications -- which used to be stand-alone point solutions such as booking engines, SEO services, blogs, and email marketing -- are not increasingly being integrated into a singular online presence. At GoDaddy, we've made great progress innovating against both of these trends. First, to help us further extend and sync our customer's website content to different social media platforms, we've recently launched new integrations to Facebook small business pages and Google MyBusiness, where customers can update and manage their content to both platforms directly from the GoCentral Editor.

We've also recently announced we're acquiring Main Street Hub, which manages branding and social media engagement for our customers and will ultimately allow GoDaddy to offer customers a complete suite of do-it-for-me capabilities to build a power for all online presence across website design and maintenance, SEO, and social media. Main Street Hub combines dedicated teams of branding experts with proprietary workflow technology to help their customers manage activities on popular social media platforms.

Turning to the second trend I mentioned, the industry shifting from point solutions to fully integrated applications, on that front, GoCentral's evolving rapidly, particularly as we do more to make vertical experiences come alive. Today, over 80% of our customers now have a tailored theme and application experience specifically to relevant for their industry or vertical and we continue to add richness to this vertical capability. Over the last several months, we've added powerful features like online appointment scheduling, including automated SMS and email notifications, payment integration with Square, and two-way calendar sync.

Now, again, this isn't about a website in the traditional sense, but about bringing a full range of capabilities to customers where they might previously have had to seek separate point solutions. We've done all this with GoCentral while achieving high customer satisfaction scores, increasing numbers of published sites in the hundreds of thousands, and continuing to drive free-to-paid conversion up in the mid-single digits. We believe we're well-positioned to drive the industry forward in delivering what a venture or an idea needs to start, grow, and thrive. Our long-term vision is to provide a true platform where anyone in need of an online presence has everything they need in one place with applications working together seamlessly.

So, that's our view of the evolution of online presence. I'd also like to touch on the ongoing evolution of our go-to-market strategy. Over the last five years, as we've expanded into dozens of international markets, we've proven our business -- and, particularly, our go-to-market model -- translates well globally. Going forward, we intend to build on this strong foundation in several ways. First, continuing our international expansion, bringing more localized versions of our products and services to customers around the world. Second, evolving our brand story. We intend to maintain our light-hearted edginess, while also expanding and solidifying our position as the place to make your idea real online.

For example, we have a number of local campaigns running around the world, showcasing how GoDaddy easily powers an online presence, including our reunion with Danica Patrick in the U.S., highlighting her life after racing as she begins to turn what were her side hustles into full-time passions. You'll see several of these geo-specific campaigns in our earnings slides and they all tie to a common thread -- GoDaddy makes creating a complete and successful presence really easy.

Third, we're also increasing our ability to do direct customer marketing, including introducing our ever-broader product portfolio to our existing base of 17+ million customers through targeted and contextual marketing campaigns focused on deepening our customers' engagement with us.

Throughout our history, we've focused almost all of our marketing spend on new customer acquisition, which is logical given our attractive unit economics where GoDaddy customers generate a lifetime value of roughly 10 times our cost to acquire those customers. However, with our expanded product portfolio, there's far more we can do with and for our existing customers, so we're ramping up our efforts there. Now, this is still small on a relative scale, but as we leverage data and our constantly improving global platform, we're discovering that we can deploy additional spend into many micro campaigns at good incremental returns.

One more quick point before I wrap. In November, we first talked with everyone about our opportunity to leverage the public cloud. We've run a detailed process looking at several partners, certainly on their cloud capabilities, but also addressing other products and go-to-market opportunities. We hope to announce a partnership soon that will allow us to embark on a multi-year transition to the cloud.

And, as we reflect on all these things -- whether it be our products, our go-to-market, or our evolving technical platform -- we hope that you can see that they all work and ladder into delivering truly great customer experiences all around the globe. Strategically, our biggest asset is our 17+ million paying customer base and our growth priorities remain focused on continuing to both expand that base and to do more with existing customers over time.

With that, I'll turn the call over to Ray.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Thanks, Scott. As Scott mentioned, we finished the year strong and carried that momentum into the new year, driving an increase in our 2018 guidance. We're executing well, driving consistent growth in customers and ARPU combining to deliver a solid top line. Both revenue and cash flow for Q4 came in ahead of our expectations with strength across the board. For the full year, we posted exceptional bookings and revenue growth, with both up 21%. But, just as important, we delivered better than expected organic growth, north of 12%. HEG contributed $56 million in the fourth quarter revenue.

Let me touch briefly on our three product revenue lines. First, domains revenue grew 60% year-over-year in Q4, fueled by international growth, strong renewals, after market domain sales, and the addition of HEG. We've continually invested in our platform to make domains easy to find, buy, and use. As a result, our domains undermanagement of 75 million has grown by 20 million names over the last five years, clearly demonstrating that domains matter and owning your brand online matters. Domains is now over $1 billion annual business for us and we expect solid growth to continue through 2018. Longer-term, we continue to expect domains to grow in-line with our customer growth.

Our hosting and presence revenue increased 29% in the quarter, with the majority of the incremental revenue, again, coming from HEG. Exiting 2017 with nearly $850 in revenue, we still see plenty of room to grow in this category, targeting 1 to 2 times our customer growth rate over the long-term.

Business applications revenue rose 38%, driven by continued strong growth in both productivity and email marketing, as well as a growing product suite and the addition of HEG. At over $325 million of revenue in 2017, we continue to believe we have ample opportunity to grow this revenue stream at 3 to 4 times our customer growth rate longer term.

Turning to international, Q4 revenue came in at $207 million. That's 53% year-over-year growth. Beyond the addition of HEG, GoDaddy's organic international business grew a double-digit clip as we continue to push localization and extend our go-to-market playbook and customer care globally. Finally, after a couple years of a headwind, currency is now providing a slight tailwind to our international growth.

Looking at cash flow, the combination of solid bookings growth and strong operating leverage continues to generate terrific growth. Unlevered free cash flow jumped 43% in Q4 to $109 million and 39% for the full-year to $496 million, resulting in a nearly 300 basis point year-over-year expansion in our cash margin to 22%. Margin expansion is being driven both by our continued organic operating leverage and by HEG's contribution. On that topic, we're executing well against our HEG integration plan and we're on track to deliver $20 million synergy target by the end of this year.

Let me touch on a few housekeeping items with respect to the P&L this quarter. First, the implementation of ASC 606, the revenue recognition accounting standard, will not result in any changes to our current method of revenue recognition or reporting. Second, as you know, the recent tax reform act resulted in significant changes to the corporate tax code. While we have a somewhat unique tax structure, many of the provisions impact us in similar ways to a traditional C-CORP, lower corporate tax rate being the most meaningful.

In the fourth quarter, we recorded a non-cash benefit of $86 million to reflect the impact of the lower corporate rate on our existing TIA liability. Based on our assessment, we don't currently expect other provisions of the act to have a material impact on our financials, but we'll continue to monitor interpretive guidance as of this year. And, third, G&A expense this quarter includes a couple of items worth noting: $6 million in acquisition and integration costs associated with HEG and Main Street Hub and a $12 million reserve for exposure related to our obligation to collect and remit pass-through taxes on behalf of government entities. We've provided a table near the end of the earnings release highlighting these and other items which may be helpful to those of you building models.

On the balance sheet, we finished the year with $595 million in cash and short-term investments and net debt of $1.9 billion. This put our leverage at 3.1 times on a pro forma Trailing Twelve basis, right in the middle of our targeted range of 2 to 4 times. During the quarter, we took advantage of market conditions and refinanced our term loans, lowering our interest rate to LIBOR plus 2.25%. This new rate implies cash interest payments in 2018 of $90 to $95 million.

Turning to the rest of our outlook for 2018, in the first quarter, we expect revenue of $620 to $625 million, including a $65 to $70 million contribution from HEG, implying year-on-year organic growth of about 13% at the mid-point. For the full-year 2018, we expect revenue of $2.58 to $2.61 billion, representing approximately 16% growth at the mid-point versus 2017.

This includes one incremental quarter from HEG and the anticipated contribution of roughly $10 million per quarter in the back half of the year from our planned acquisition of Main Street Hub.

Cutting through the math, here's your takeaway: the full-year guide includes 11% to 13% year-on-year organic growth, on par with what we delivered with 2017 on a much bigger base of revenue. Moving to cash flow, we expect 2018 unlevered free cash flow of $605 to $625 million, implying 24% year-over-year growth at mid-point and continued margin expansion.

Three quick notes on that cash flow guidance: first, it includes total cash tax-related payments in the $25 to $30 million range, comparable to 2017. Second, it also includes any cost related to our expected public cloud transition in 2018. And, third, it excludes an anticipated one-time tax payment associated with the gain on the plus server sale last year. For quarterly modeling purposes, we suggest you assume that our unlevered free cash flow will be evenly split across the four quarters of 2018.

Stepping back, we continue to create franchise distinction and competitive advantage with a business capable of delivering double-digit top line and high teens growth and unlevered free cash flow. As our cash flow and balance sheet capacity expands, you will continue to see us be thoughtful stewards of capital with the ultimate goal of prudently driving attractive growth unlevered free cash flow per share for our shareholders.

With that, I'll turn the call back over to Scott.

Scott Wagner -- President and Chief Operating Officer

Thanks, Ray. We look forward to continue delivering against our strategy with differentiated customer experiences. We're excited for 2018 and see a big opportunity to continue to grow the GoDaddy business both this year and for the long-term. We hope to share more details with you, demo some products, and hear your questions at our Investor Day in the afternoon of March 28th in Tempe, Arizona. Thanks, everyone for your time, and we're ready to open up the call to questions. Operator?

Questions and Answers:

Operator

At this time, I would like to remind everyone, in order to ask a question, press * and the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question is from Sam Kemp at Piper Jaffrey. Your line is now open.

Samuel Kemp -- Piper Jaffray -- Internet Research Analyst

Great. Thanks for the quick questions. First one on Main Street Hub -- so this is a higher touch model than you've historically gone after. Can you just talk about how you're planning on incorporating it into the product adoption funnel for users and is there any level of automation that you plan on bringing to Main Street Hub that potentially wasn't there before? And then the second is just on SmartLine. You didn't provide an update during the quarter -- I don't know if that was intentional or not -- but could you just talk about your evolved thoughts on go-to-market strategy there and adoption?

Scott Wagner -- President and Chief Operating Officer

Yeah, thanks, Sam. It's Scott. So, on Main Street Hub, Main Street Hub's model, it is higher touch and it's helping customers fully set up and, particularly, manage the communication process through all the different touch points of social media. And, as of right now, yeah, our focus is going to be on introducing this proposition to what we think is about 2 million high-potential customers within our base. During diligence, we screened their value proposition for their highest and best performing customers and found we had about a $2 million overall TAM within our base.

And so, our first focus is setting ourselves up to introduce the service as it exists today into the GoDaddy base. Second is -- and this is where it really gets interesting -- is taking workflow technology to manage content and actually helping to syndicate that through everybody's different points of presence, whether it be a website or social media, or even email and communication plans that customers would have with their own customers. That's going to be down the road, but that's really where we're headed with Main Street Hub.

To your second question on SmartLine, SmartLine today has tens of thousands of customers. We're continuing to evolve the feature set nicely. Over the last quarter or two, we've added things like texting, call forwarding, some toll-free number capabilities, and, particularly, texting is having really great customer resonance. We're happy with the produce and with that feature evolution and we're just continuing to build it up. The big focus now is, boy, just continue to build a use case around tens of thousands of bases of customers that they're going to work with. I think the point for people listening and thinking about 2018 is, obviously, it's at a scale where it's not going to affect our financials this year, but it's a product and a value proposition that we're continuing to work on and are attracted by.

Samuel Kemp -- Piper Jaffray -- Internet Research Analyst

Great. Thanks for taking the questions and nice quarter.

Operator

Your next question comes from Sterling Auty with JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Managing Director

Yeah, thanks. Hi, guys. So, the domain revenue was really strong in the quarter and, based on the commentary for 2018, it sounds like the trend line of that growth going down to the customer growth is not quite happening as fast as we originally thought. It sounds like it's going to stay above that rate through 2018 before it starts to trail. I'm just curious -- what are the main drivers behind domain revenue growth being better for longer than maybe we first expected?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Sterling, it's Ray. Obviously, when we gave you guys that guideline last year, it was a longer-term look so we are seeing continued solid growth in there. A lot of that's coming from continued improvements in our domain purchase path -- just how you come on the site and how you acquire domain, how are we packaging it with other products? And then the other impact you saw this quarter -- a little lighter than that -- was just the diminishing impact of purchase accounting on the HEG component of domains.

Sterling Auty -- JP Morgan -- Managing Director

Got it. Thank you.

Operator

Your next question comes from Lloyd Walmsey with Deutsche Bank. Your line is open.

Lloyd Walmsey -- Deutsche Bank -- Wall Street Analyst

Thanks for taking the question. Two, if I can. First, on HEG, can you give us a sense if there are any other big upcoming milestones you guys are looking to hit in terms of operationally to unlock more synergy on the revenue side? And then, related second one, you mentioned a focus on a more localized marketing effort going forward. Can you just talk about how close you are in some of your international markets in terms of the go-to market there relative to your best-in-class U.S. localized go-to-market and how you see the time frame in which you can really localize in those markets like you do in the U.S.?

Scott Wagner -- President and Chief Operating Officer

Hey, Lloyd, it's Scott. So, on the synergy, we're feeling really good about reaching and exceeding our $20 million target that we've communicated to everybody, which is a combination of both revenue and cost. And so, operationally, you can think about what we're working on on two fronts: the first is product and platform and the second is just our go-to-market effort. On product and platform, we're putting our products together into a single global product portfolio. So, for example, SSL, all of the aftermarket services, we're very close on domains to having those all basically running in the same place, productivity is shorty to follow and, hosting, a little further beyond that. And so, there's no one single milestone, but those are tracking really nicely.

On the second operational category, which is merchandising and go-to-market, we're building a single care organization in Europe that's ticking along nicely and we're continuing to put marketing dollars into the countries in Europe based on our footprint and our relative opportunity. And I think that's probably the relevant takeaway for you, which is we're running EMEA together, both HEG and the GoDaddy brands, and our sale and heft there is allowing us to continue to message and expand our position and our, certainly, markets where we have a big footprint like the U.K., but also to invest more into some of the continental markets where we have a smaller presence but think we can ramp. And the tactics really aren't different -- it's the same marketing playbook of brand awareness combined with some super sharp performance marketing underneath it that's got really nice return. The overall focus on messaging is around who we are, who we stand for, and what we do, which is get ideas a great online presence and help them grow over time.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Lloyd, he's right. The only think I'd tack onto that is that the integration roadmap, we're well along that path and feel good about the promised $20 million in synergies by the end of the year.

Lloyd Walmsey -- Deutsche Bank -- Wall Street Analyst

Great. And then any just broader color on increased localization beyond HEG and how to think about that going forward?

Scott Wagner -- President and Chief Operating Officer

I think, Lloyd, you can think about it on two fronts: localization is our global product portfolio which, again, it's the hallmark of what we do and we continue to localize products whether they're naming or certainly are present so, for example, GoCentral, the localization capabilities continues to evolve. And then, on the go-to-market side, I think on the IR slides, we flashed a couple of campaigns that are running around the world and what you see is an overall brand position of GoDaddy being a place for ideas to become real and to thrive online, but with local execution. And so, if people want to have fun, go check out what both what we're running in the U.K., what we're doing in Australia, to maybe what's coming in Germany and you're going to see locally relevant campaign execution but with the same overall message.

Lloyd Walmsey -- Deutsche Bank -- Wall Street Analyst

Got it. Thanks a lot.

Operator

Your next question comes from William Pfau with William Blair. Your line is open.

Matthew Pfau -- William Blair & Co. -- Equity Research Analyst

Hey, guys. Thanks for taking my questions. Scott, wanted to dig into a comment you made relative to the Main Street Hub acquisition -- and maybe I'm reading too much into it -- but it sounds like there was potentially opportunity to start offering more do-it-for-me services down the road. So, is this true? Is this an area that you're potentially evaluating additional do-it-for-me services to offer to your customer base? And then, relative to that, you do have relationships with a lot of web pros that, in a way, offer do-it-for-me services, themselves, so how do you toe that line in terms of not stepping on some of the web pros that you have relationships with?

Scott Wagner -- President and Chief Operating Officer

Yeah, thanks, Matt. That's a great question. I think two things -- they're complementary, not contradictory and that's the most important point. And, if you follow customers around, the line between DIY and DIFM is also not a hard one and there's a real spectrum between those different activities, so that's a super important point to communicate and understand.

With Main Street Hub, also, when you think about activities that our customers are doing online, their website, both design, maintenance, updating, social media presence, some marketing and communications campaigns, SEO optimization -- five years ago, those were all discrete activities and we're trying to bring those together, both productizing them and, for those customers who want a little bit of a boost or help, create the capability to help them to do that. And, look, that's part of the core value proposition that we're able to offer at GoDaddy, which is combining truly distinctive products at a global level, wrapped with a personal interaction.

Now, when it comes to pros, pros are a big part of that and pros are these largely independent or small groups of designers that might be doing these services also for people. This is complementary and we can help pros both get customers and, for those who have maintenance requirements, maybe do some of the same stuff on behalf of pros. But we see this as complementary, not contradictory.

Matthew Pfau -- William Blair & Co. -- Equity Research Analyst

Great. That's it for me, guys. Thanks a lot.

Operator

Your next question comes from Ron Josey with James Securities. Your line is open.

Ron Josey -- JMP Securities -- Equity Research Analysts

Great, thanks for taking the question. I want to ask, maybe, about total bookings. They came in, on our numbers at least, maybe 3% or so above our projections and that's despite ending customers being relatively in-line. And so, I'm wondering, Scott, if we're starting to see, maybe, the beginning of the benefits around improved merchandising and bundling as a new customer care team rolls out and, if so, can you talk about just the timeline as we see this customer care team and the benefits of merchandising/bundling throughout the year? Thank you.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Ron. Yeah, I wouldn't attribute it -- meaning, good bookings performance, relative ARPU -- to any one specific thing, but I would say it's a combination of our marketing message and footprint, which is what we say and how we reach customers, both new and existing. As you said, our merchandising flows and how we're bringing our products together in a clean way and how our care team is helping to steward that process and it really is a combination of all those things that's, I think, helping propel the business.

Ron Josey -- JMP Securities -- Equity Research Analysts

Got it. And, maybe if I could just follow up on GoCentral, I think you said, also, hundreds of thousands of sites have been created with single digit conversion rates which have been maintained. Can you talk about how many of your, call it, 17 million users have been exposed to GoCentral and is that an opportunity as you go on? Thank you.

Scott Wagner -- President and Chief Operating Officer

Thanks, Ron. I think it's interesting where a lot of our base of customers, 17 million, they have an idea that's in some form of development and, by that development an idea that's connected to some form of an active presence. And, when we look at not only our base but, frankly, the base of sites and ideas in the world, this meta opportunity of taking a site and actually expanding it into a mobile social world is a big opportunity. And it's taking, in some ways, sites that have largely stayed the same for the last 8 to 10 years and really bring in new capability.

And I think your specific question then, which was exposure, hits on that possibility and theme and the answer is we're trying to both figure out how to not only just create exposure, but also the right mechanism by which you can grab somebody who may have a Version 1 site and actually connect it into the mobile/social world. We think it's a big opportunity. We think we're, in some ways, uniquely positioned to be able to do it, but we got some work to do to actually turn that into a major system at the level that we could actually go talk to you guys about and put hard numbers behind it.

Ron Josey -- JMP Securities -- Equity Research Analysts

Got it. Thanks a lot. Great quarter.

Operator

Your next question comes from Sameet Sinha with B. Riley FBR. Your line is open.

Sameet Sinha -- B. Riley FBR -- Technology and Finance Specialist

Yes, thank you very much. A couple of questions regarding your acquisitions. So, starting with HEG, you've indicated Q1, $65 to $70 million versus the $56 million that was there in the fourth quarter, so it seems like, when you acquired the company, you indicated, "It's currently growing at low single-digits; we aim to get it to high single-digits," so are we at that inflection point with HEG because the growth seems to be fairly significant from fourth to first quarter. And, secondly, as far as picking up on your comments on Main Street Hub, as you indicate 2 million potential customers for this product, if you look at media reports, they indicate about a $300 monthly ARPU, so are we talking about an opportunity that goes into billions of dollars or...? I'm going to leave it there so you can answer.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Sameet, it's Ray. On the HEG, that business is growing nicely. We've gotten some uptick in the top line growth there but, as you look at that guide -- that sequential stuff up in the revenue -- some of that, it's a mix, right, of Q1 seasonality -- a little bit of lift there -- and then the other piece of it is diminishing impact of purchase accounting as that revenue normalizes to reflect the run-rate of net booking. So, I would say, if you want to look at it that way, it's probably a third where we're getting some inflection on growth on the top line -- the other two-thirds is seasonal and purchase accounting.

Scott Wagner -- President and Chief Operating Officer

And on Main Street Hub, Sameet, yeah, again, I said the 2 million TAM -- so total addressable market -- and, boy, you did the simple math and your eyes can get big on that, but here's what that 2 million correlates to. When you take Main Street Hub's customers, who have been with them not only through a renewal cycle, but also their highest NPS customers, we took that customer base and did a screen in industry vertical, website position, and their social media development and matched those customers to our customers and said, "Oh, there's about 2 million customers in our base that have similar characteristics."

Alright, now what's our ability to actually deliver the service, build it up to them? It realistically is smaller than that. I think the takeaway is to say that there's certainly a customer need. When we think about this meta proposition of taking site content, connecting it to social media, and providing some product ties to assist, that we're excited about and that's the fundamental logic behind Main Street Hub. Obviously, there's work to do to grow from where they are to capture that kind of opportunity.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah, Sameet, it's Ray. I'd tack onto that. When you look at that 2 million customers, it is a smaller subset because of that ARPU -- that's a dramatically ARPU than our average customer.

Sameet Sinha -- B. Riley FBR -- Technology and Finance Specialist

So, it's about a $300 monthly ARPU business?

Scott Wagner -- President and Chief Operating Officer

That's correct. Again, and Ray's comments -- Ray said $10 million per quarter -- it's a $40 million top line business today.

Sameet Sinha -- B. Riley FBR -- Technology and Finance Specialist

Thank you very much.

Operator

Your next question comes from Naved Khan with Suntrust. Your line is open.

Naved Khan -- Suntrust -- Equity Research Analyst

Yeah, thanks very much. So, pretty nice subscriber growth and I guess, if I look at the comment Ray talked about also improving in the renewals. Just wanted some color on how much of the growth has really been driven by improving retention versus just higher growth additions?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Neved, it's Ray. I would tag more of that improvement to retention. Scott's alluded to, in the last couple of calls, with the customer experience -- that is part of it, right, is how our customers are experiencing the product, the flows through the site, the interactions with the customer care center. All of those things are helping with improving retention, particularly, with our longer-life customers.

Naved Khan -- Suntrust -- Equity Research Analyst

Okay. And then a little bit of the housekeeping: so, CapEx was some kind of a spike in the fourth quarter. How should we think about it for 2018?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah, I think as you look forward, Naved, the timing from a quarter-to-quarter spikes at time, but continue to look at 3% to 4% of our GAAP revenue of your target for modeling purposes.

Naved Khan -- Suntrust -- Equity Research Analyst

Perfect. Thank you.

Operator

Your next question comes from Deepak Mathivanan with Barclays. Your line is open.

Deepak Mathivanan -- Barclays Capital, Inc. -- Equity Analyst

Hey, guys. Thanks for taking the questions. Two questions. Sorry if you discussed this in detail before -- we've just been jumping between multiple calls here -- the new tax reform creates some constraints on tax-deductibility from interest expense at certain scale. Does that in any way change how you think about capital allocation with respect to leverage levels and potential M&As? And then the second question is, with the scale of the domains business you have already and given that domains is an important on-ramp channel for you, do you think there's still a lot of runway left to drive customer growth in mid-single digits over the next few years or should we expect to see customer growth driven by other products increasingly? Thanks.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Deepak, it's Ray. I'll take the first one on the new tax reform. From an interest of expense deductibility, longer term, it could affect our capital allocation but it's certainly, for the short and medium, just not a big impact on us, given both our structure and our tax position. Rate was really the biggest impact on us.

Scott Wagner -- President and Chief Operating Officer

And, relative to your question on customer adds and the role of domains, Deepak, I think the first point is domains is still a strong on-ramp and we continue to bring in millions of customers -- new customers -- every year into the franchise with domains as a foundation. And, as we add product capability, hopefully, its other onramps are also starting to contribute. In some ways, GoCentral and domains are inextricably linked in a lot of ways and so that's certainly helping. And, as you point out, other product categories certainly offer potential and that's part of the strategy over time is to add a couple of complementary product categories that might be able to bring in new customers into the franchise as well.

Deepak Mathivanan -- Barclays Capital, Inc. -- Equity Analyst

Great. That makes sense. Thanks, guys.

Operator

Your next question comes from Jason Helfstein with Oppenheimer. Your line is open.

Jason Helfstein-Oppenheimer & Co. -- Head of Internet Research

Thanks. Again, I apologize if you covered this, jumping around, but is there any impact for full-year free cash flow for Main Street Hub? I saw you gave the revenue impact, but is there any free cash flow impact?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hey, Jason, it's Ray. Yeah, the $40 million in annual run-rate on the revenue. They were a negative cash flow business -- that's a combination of scale and customer acquisition costs -- that dilution is built into the guide on unlevered free cash flow that we gave.

Jason Helfstein-Oppenheimer & Co. -- Head of Internet Research

Can you help us understand what that drag is? So, excluding that, would you have actually taken up free cash flow guidance for the year?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah, absent that, absolutely, it would have been a higher guide, but I'm not going to get into the specifics because we haven't closed the acquisition yet. It will be the back half of the year.

Jason Helfstein-Oppenheimer & Co. -- Head of Internet Research

Right. And then, just if I look at the operating segment, it was a very consistent quarter -- very consistent with last quarter, albeit the slight acceleration in domains. Is there anything you'd call out as driving that in domains?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah. No, Jason, as I mentioned in the call comments, it was a pretty broad strength across the board. With domains, specifically, there was a small step-up there, but that was the diminishing impact to purchase accounting that I mentioned to an earlier question.

Jason Helfstein-Oppenheimer & Co. -- Head of Internet Research

And then, just last from me, do you have any impact from the ASC rule change?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah. So, no impact on us for neither our recognition or our reporting. The two big potential impacts for us would have been domains. We defer currently and will defer under the new standard, as well, and then our relationship with Microsoft on O365, we are a principle to that customer relationship today and we will be under the new standard, as well, so zero changes expected with the new standard.

Jason Helfstein-Oppenheimer & Co. -- Head of Internet Research

Okay. Thanks.

Operator

Your next question comes from Brent Thill with Jefferies. Your line is open.

Brent Thill -- Jefferies, LLC -- Managing Director

Good afternoon. I had a question just relating to the organic versus international growth and I want to make sure these numbers are correct. I think the implied organic was 12% in the fourth quarter and I believe you said, at HEG, that the international business was growing low double-digits. And I'm just curious why the international business may not be growing faster? You would think, given the base, that that could grow at a much quicker rate than the overall organic so I just wanted to make sure I heard that correct.

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah, Brent, you heard it correct. And that's the second quarter in a row we've seen a little slower growth there on a cost and currency basis in the organic business but, again, when you look under the covers, it was a tougher comp against 2016. We've moved through that now so, as you look out into '18, you're going to see that growth bounce back to what we were at prior to the last couple of quarters. So, underlying, nothing to be concerned about there. If you look at the overall results, we're ahead of our expectations so some of the revenue coming in across the business, it will ebb and flow on geos and we expect that to bounce back in this year.

Brent Thill -- Jefferies, LLC -- Managing Director

Okay. And a question for Scott: when you look at the business apps, you have a long list of strong portfolio of solutions, but I think the one thing that many have noted is just the absence of bundling similar to what Microsoft did with Office or others. Is there a planned initiative that you feel like you can take in 2018 around a stronger bundling solution that can potentially ease the adoption for many of these businesses?

Scott Wagner -- President and Chief Operating Officer

Hey, Brent. Well, so, on BizApps, I think the priority, if you're thinking about productivity, is to make sure that, in a really clean and easy way, we can introduce branded email and productivity solutions to our customers and, if you're new, you can see that in our purchase flow and the linkage between a name and getting branded email. And, honestly, we've done, I think, a pretty good job of that. It's actually putting attachment in a pretty elegant way now. Now, bundling is a merchandising offer, but if we move toward subscription, then it gets pretty interesting where, today, these are still discrete products, but for certain segments of customers, you can absolutely see a world where you have site email and a domain name tied together for a certain price point. Now, we're working on that and there's some underlying platform technology to do it, but that's the focus. And you could take what I just described on those big three and extend it to a whole bunch of other products, as well. That is a 2018 effort, to be able to not just merchandise them together but, if you're a customer, activate, manage, and have all of those three products really operate as one and that's what's coming next.

Brent Thill -- Jefferies, LLC -- Managing Director

Great. Thank you.

Operator

Your next question comes from Brian Essex with Morgan Stanley. Your line is open.

Brian Essex -- Morgan Stanley -- Executive Director

Hi. Good afternoon. Thanks for taking my question. Maybe, Ray, I had a question: I think you may have talked about the impact on revenue, but as we look at bookings, understanding we're about to lap annualize the HEG acquisition, how to think about sequential growth in bookings through the year as current bookings may include, obviously, some renewals of bookings that were written off at the acquisition?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Hi, Brian, it's Ray. I'm not sure where you're coming from from bookings being written off -- that was more associated with revenue. Your bookings are what stayed relatively steady so, again, if you were looking at the business from an organic standpoint, even with HEG, that bookings number is more pure.

Brian Essex -- Morgan Stanley -- Executive Director

Yeah, I was getting the deferred -- that they may look a little bit skewed when you had deferred revenue written off in the prior year and now you're renewing that so I guess that may look new. And then, on the migration to the cloud -- obviously, you haven't inked an agreement yet -- but how do you anticipate that might impact your margins near-term and long-term as you enter into that agreement, integration expenses not withstanding?

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Yeah, so take the one-time aside for a second, Brian, which we're accounting for in that guide we gave you. From a margin perspective, obviously, you'll see a degradation there because it's going to come from capital in terms operating expense, but you should see an offsetting reduction in our capital. It's over a longer period of time -- we'd expect this to be accretive to margins as we move there.

Scott Wagner -- President and Chief Operating Officer

Yeah, so, Brian, the punchline, remember, it's UFCF -- that mix just works itself out through UFCF -- and our guidance this year includes all of our planned work already going to the cloud. So, we're talking about it, but for modeling purposes, our guide includes everything that we think we're going to be doing this year related to our infrastructure.

Brian Essex -- Morgan Stanley -- Executive Director

Understood. Thank you very much.

Operator

Your next question comes from James Kaplan with [inaudible]. Your line is open.

James Kaplan -- Analyst

Hi, thanks. Just one high-level question. When you guys frame yourselves as the one-stop shop solutions for businesses -- now you added the social marketing component to it -- I guess where are you guys going to draw the line on what is too much beyond being a one-stop shop? And, I guess, where's the line on what services you wouldn't enter and, just thinking about it in terms of deals and additional services that you could add? And where's the line -- just wanted to understand that. Thanks a lot.

Scott Wagner -- President and Chief Operating Officer

I think the relevant, James, maybe let me answer with a different cut, which is, if you look at what our customers are trying to do and the variety of products or services that they're paying other people thousands of dollars to provide, our product roadmap is about logical extension from our strengths. And our strength is, right now, online presence -- that's why 17 million plus customers around the world work with us -- we have the honor of serving them -- today, focused on presence, which is your name, your site, and branded email. And you can think about a category like security, for example, or email marketing, or what we're doing in social media as natural adjacencies from those three points in the online presence triangle. And our strategy has been super purposeful around being great in what we do today -- which is online presence -- and then continue to expand from there in ways that are distinctive and meaningful for our customers. And that has been the way we've been thinking about it and it certainly will be for the future.

James Kaplan -- Analyst

Okay. I guess, a nicer way of putting it was more around where do you know you're not diluting the focus of it. That's helpful. Thank you.

Operator

Your next question comes from Mark Maroney with RBC Capital Markets. Your line is open.

Mark Maroney -- RBC Capital Markets -- Head of Municipals Capital Markets

I guess, two questions. First, when you think about HEG and the potential revenues synergies, just draw out where do you think you are in terms of generating those? Is it whiteboard, beyond whiteboard, already in numbers, multi-year, multi-quarter -- just help us think about that going both ways? And then, just a little bit more color on international -- I know you talked about the growth there, it all seems relatively positive -- but are there particular international markets you would call out? In the past, I think you've talked about seeing really nice momentum in Asia. Could you just update us on that?

Scott Wagner -- President and Chief Operating Officer

Hey, Mark. On HEG, revenue synergy, I would characterize the revenue synergies in two different buckets. The first is product and merchandising, where we're building a global product portfolio and then we're merchandising it together and I would say that those are far along. If this is a scale of 1 to 10, we're a 7.5 right now and it's driving that confidence in saying we're at or going to exceed our revenue synergy or the targeted synergies we put out. More broadly, EMEA, in general, Europe's an attractive market. We've got a pretty big business there, overall, but when you get into individual countries, there's still room to grow. And the fundamental premise behind the HEG combination was to get us more heft and scale in a couple other geographies and allow us to maybe up our presence in a few more markets. And, really, I'd say, on the 1 to 10 scale there, we're at a 2, maybe a 2.5, which is drawing on the strengths where HEG and we're going to work it in the same manner that we've worked global expansion and, hopefully, continue to evolve from there. And, on your second question on Asia, could I just ask you to give me a quick repeat? I'm not sure I totally got the full context of it?

Mark Maroney -- RBC Capital Markets -- Head of Municipals Capital Markets

Sorry, Scott. It was a real simple question: just an update on traction in Asian markets? I know you spent a lot of time a year ago localizing for those markets -- a lot of effort into that -- so just an update on how you're faring? Thank you.

Scott Wagner -- President and Chief Operating Officer

Thanks. Yes, well. So, same -- we localized everything in 2016 and, 2017, we then started to spend some amount of dollars into the market and I think we had said Asia was low single-digit percentage of our revenue. And a couple of the markets in southeast Asia where we've started to put our shoulder against, we're seeing nice growth that looks like India in the very early days, which is great, but we're big enough now that that level of growth isn't necessarily showing up in the P&L, per se, but it's just about continuing to grow our footprint. So, anyway, punchline is we're happy with where and how Asia's evolving.

Mark Maroney -- RBC Capital Markets -- Head of Municipals Capital Markets

Okay. Thank you, Scott.

Operator

At this time, this concludes the Q&A session for the conference. I'd now like to turn it back to Scott Wagner.

Scott Wagner -- President and Chief Operating Officer

Hey, everybody. Thanks a lot. Thanks for your questions and being with us. And, for those of you who are coming to our investor day in late March, we'll see you then.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 55 minutes

Call participants:

Christie Masoner -- Senior Manager of Investor Relations

Scott Wagner -- President and Chief Operating Officer

Raymond Winborne -- Chief Financial Officer and Principal Accounting Officer

Samuel Kemp -- Piper Jaffray -- Internet Research Analyst

Sterling Auty -- JP Morgan -- Managing Director

Lloyd Walmsey -- Deutsche Bank -- Wall Street Analyst

Matthew Pfau -- William Blair & Co. -- Equity Research Analyst

Ron Josey -- JMP Securities -- Equity Research Analysts

Sameet Sinha -- B. Riley FBR -- Technology and Finance Specialist

Naved Khan -- Suntrust -- Equity Research Analyst

Deepak Mathivanan -- Barclays Capital, Inc. -- Equity Analyst

Jason Helfstein -- Oppenheimer & Co. -- Head of Internet Research

Brent Thill -- Jefferies, LLC -- Managing Director

Brian Essex -- Morgan Stanley -- Executive Director

James Kaplan -- Analyst

Mark Maroney -- RBC Capital Markets -- Head of Municipals Capital Markets

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