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Endurance International Group Holdings Inc  (NASDAQ:EIGI)
Q1 2019 Earnings Call
April 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Endurance International Group 2019 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Angela White, VP of Investor Relations. You may begin.

Angela White -- Vice President of Investor Relations

Thanks, Sonia. Good morning, everyone. It's my pleasure to welcome you to our First Quarter Earnings Call. First, we'll go through some prepared remarks, after which we'll turn to Q&A. We prepared a presentation to accompany our comments, which is available in the Investor Relations section of our website at ir.endurance.com. While not necessary to follow along, we recommend referencing the presentation slides alongside our prepared remarks. As is customary, I'll now read the safe harbor statement.

Statements made on today's call will include forward-looking statements about Endurance's future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release and to our Form 10-K filed with the SEC on February 21, 2019 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 statements. Endurance does not assume any obligation to update any forward-looking statements.

During this call, we will reference several non-GAAP financial measures, including adjusted EBITDA, free cash flow, net debt, and bank adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the presentation located in the IR section of our website.

With that, I'll turn the call over to Jeff Fox, our President and CEO.

Jeff Fox -- President and Chief Executive Officer

Thanks, Angela, and good morning. I'm pleased to report our first quarter results. Revenue was $280.7 million, and adjusted EBITDA was $78.5 million. We ended the quarter with approximately 4.8 million subscribers on platform, reflecting a net loss from last quarter of approximately 20,000 subscribers. Our results reflect our increased investment across our key strategic brands in areas such as engineering and development and year-over-year progress in subscriber attrition trends.

Turn to Slide 6. We continue to make progress across the business as we position our scale multi-brand platform for growth. Our teams are driving business decisions with an owner-operator mindset, continuing to find cost savings. Across our business, we are reallocating these savings to key strategic investments that we believe will drive value and improvements to the customer experience.

With four months of operations behind us, our 2019 plan remains largely in place. However, to better reflect the timing of our progress, we have reduced the midpoint of our revenue guidance by $20 million and the midpoint of our adjusted EBITDA and free cash flow guidance by $10 million and $5 million, respectively. Our view incorporates updates to the plan related to timing of advancements in one of our hosting brands and delayed monetization related to certain initiatives in our email marketing and domain segments.

We continue to focus on our transition back to growth as we deliver improvements to the customer experience and access to increasingly valuable solutions. Our plan reflects revenue growth in the second half of 2019 and our adjusted EBITDA and free cash flow guidance reflect a balance of investment choices and disciplined cost control.

Slide 7. Turning to our segment performance. Starting with our email marketing segment, our plan is to continue to build on our position as a small business solutions provider under the Constant Contact brand. In addition to improvements to our core email product, we are investing in adjacent product offers both natively and by integrating with third party solutions, such as social and event tools. We remain focused on expanding the potential market opportunity for the Constant Contact brand by adding new strategic on-ramps, which we will begin testing this quarter.

Turning now to our web presence segment. In our Bluehost brand, we remain focused on improving the value we provide to customers along their journey. We will continue to add solutions and improvements to our onboarding paths, such as our improved domain purchase experience and Office 365 solution. We are also simplifying and guiding the customer journey through services offers and user experience improvements. At HostGator, we are working to strengthen our core capabilities and to improve the user experience while we continue to increase investment in our Latin America markets.

In addition to our larger strategic brands within this segment, we continue to take a focused management approach to our declining but cash-generative non-strategic assets. Over time we expect a diminishing negative impact to our overall revenue and units as our strategic brand performance improves with increased investment and focus on customer value.

Slide 9. In our domain segment, we continue to invest to improve and grow our Domain.com brand. Last year we refreshed our site experience, which has allowed the brand to absorb additional growth investment in marketing this year. We are seeing strong performance in our domain-led experience as a result. This year we will continue improvements along the upsell path for additional products such as Office 365, hosting, and site builder.

Overall, we have a lot to execute in our 2019 plan. We are making progress simplifying the business with focus on our key strategic brands, and expect to see this reflected in subscriber and revenue trends.

With that, I'll turn the call over to Marc Montagner to discuss our financial results in more detail.

Marc Montagner -- Chief Financial Officer

Thank you, Jeff. I am pleased to review our fiscal 2019 first quarter results on Slide 12. GAAP revenue was $280.7 million. Adjusted EBITDA was $78.5 million. And free cash flow, defined as cash flow from operations, less capex and financed equipment, was $7.1 million.

Our year-over-year decline in adjusted EBITDA was due mostly to lower revenue and increased level of investment in Engineering and development, fixed marketing, and analytics. This was offset mostly by benefits from lower data center costs and lower domain registration fees.

GAAP cash flow from operation in first quarter was $15 million. Capex was $8 million. Year-over-year cash from operations and free cash flow were negatively impacted by the timing of vendor payments and increased investments. We also saw an inflow (ph) for an escrow payment of approximately $6 million related to our previously disclosed and already expensed settlement of one of our two shareholder class action lawsuits.

Slide 13. We finished the quarter with approximately 4.783 million subscribers. Total subscribers decreased by approximately 20,000 from the fourth quarter of 2018. We are pleased by the overall results in our strategic brands but we continue to see declines in subscriber numbers in our non-strategic brands.

In the first quarter, combined average revenue per subscriber or ARPS was $19.52. In the web presence it was $13.42. In email marketing $69.11, and in domains $15.88.

Slide 14, we have updated our guidance for 2019 to reflect the new timing of our progress, which Jeff noted earlier in the call. As of the date of this call, our guidance for 2019 is the following: GAAP revenue of $1.120 billion to $1.140 billion; Adjusted EBITDA of $300 million to $320 million; and free cash flow of $110 million to $120 million.

Free cash flow guidance for the year includes the first quarter $6 million impact related to the previously noted escrow payment for litigation. We expect capital expenditures of approximately $50 million to $55 million in 2019. We continue to expect to use our excess free cash flow to pay down approximately $100 million of debt in 2019.

Slide 15. We ended the first quarter with $1.830 billion in total senior debt. Including other deferred purchase obligations and capital leases of $11 million, total cash on the balance sheet of $72 million to total debt at the end of the period -- total net debt at the end of the period was $1.769 billion. During the first quarter we paid down approximately $25 million of the principal of our term loan debt.

Our LTM bank adjusted EBITDA for the period ending March 31, 2019 was $329.1 million. Our senior debt leverage ratio was 4.30 times and remains well below our maximum senior secured leverage ratio of 6 times. Thank you for joining today. Let me turn the call back to Jeff.

Jeff Fox -- President and Chief Executive Officer

Thanks, Marc. This year we are continuing to invest with increase in focus on our strategic brands and balancing decisions regarding monetization and the value our customers receive when doing business on our strategic platforms. Our plan is to balance the opportunity ahead of us as we focus on executing our 2019 plan.

Before opening for questions, I want to thank the Endurance team for the progress we've made. As a team, we're grinding our way through simplification with focus on our strategic brands and we've made a lot of progress over the last six quarters. Thank you for joining us this morning. And now I'll turn the call back to the operator to begin Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions). Our first question comes from Jason Helfstein of Oppenheimer. Your line is now open. And Jason, as your phone is on mute, please unmute. And our question comes from Jason Helfstein of Oppenheimer. And our next question comes from Naved Khan of SunTrust. Your line is now open.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thanks a lot. I have a couple of questions, so maybe just on the revised outlook, what gives you the confidence of returning to positive growth in the back half. And then maybe a related question, I think, last -- on the last call I think, Jeff, you've talked about expanding brand in Channel. Can you share any early result from that initiative. And maybe on a related note you also mentioned on your prepared remarks that you're seeing some delayed monetization and email and domains. What kind of confidence you have in sort of ultimately getting back to work?

Jeff Fox -- President and Chief Executive Officer

Well, so I'll work backwards, because I can only remember short-term stuff. Delayed modernization for us particularly on the things I referenced are us making purposeful choices on making sure we don't try to charge customers or go get revenue before we know we're delivering value and the right customer experience and so there's just we -- we slowed down some of that in both domains and email marketing to adjust because we feel like to build the long-term value that revenue is out there. We just want to make sure we don't have a miss start in terms of trying to monetize too quick to make a short-term plan. So those are choices where we know there's revenue sitting out there within our base and within our -- our new acquisition funnel, and we're just -- we are going to grind through this year and make sure we're really setting the stage for long-term value creation on these brands.

So that's that one. As it relates to the channels we -- under the hood, if you actually look at our sequential sales and marketing spend, you're going to see there's some seasonal volatility which is normal for the small business, marketing business. But that the numbers are not varying materially, we're in the $250 million to $265 million (ph) range in total. But under the hood, part of what the team has done and continues to do is move it to the right brands in increasingly focused channel choices. Because just as a reminder, we're still a large user of affiliates. We've reduced our usage of directories, we're positioning our best assets to grow in a way that's more consistent over time with the way we see the SMB competitors spending their money.

And so really kudos to the team for allowing us to move money progressively and frankly improve our unit production and give us the ability to continue to forecast and inflection in revenue in the back half of this year. And so, I think I've answered all of your questions. I'm not going to give you a confidence rating number. But if you really think about where we are, we are moving a lot of things under the hood and I feel good about the financial and strategic discipline the team is using to find growth on the right brands with the right customer value through the right channels. We certainly have a long way to go, but we've definitely made a lot of (technical difficulty) and that's where we are. Okay?

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you.

Jeff Fox -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Jason Helfstein of Oppenheimer. Your line is now open.

Jason Helfstein -- Oppenheimer & Co -- Analyst

Thanks. Just any updated thoughts on products focused. I know a lot of this have been lately making decisions about what's efficient, not efficient. But any --

Jeff Fox -- President and Chief Executive Officer

(inaudible) Jason.

Jason Helfstein -- Oppenheimer & Co -- Analyst

Products we might be thinking about in the back half of the year. Work has still the same focused on efficiency.

Jeff Fox -- President and Chief Executive Officer

So we are very focused, Jason. I'm not sure if efficiency is the word we're using, I mean, when we say customer value and customer experience. As the company was put together or pretty rapidly with him in the '15, '16 (ph) timeframe, maybe there were -- as an example our domain.com even our email marketing solution, we're not -- we're not progressing through being able to allow customers to efficiently get value once they joined us. And so, across our brands that we're investing in heavily, we're bringing additional solutions like social reputation management, social integration, landing pages. So we're bringing additional solution value that's easy to get progressively through the year on our focused brands. And we're modernizing the user experience progressively at the same time.

Bluehost, Constant Contact and Domain.com in particular have made a lot of progress in. We're testing a lot of value delivery to each of those sets of customers in 2019.

Jason Helfstein -- Oppenheimer & Co -- Analyst

And would you consider, I think most investors probably don't kind of appreciate some of the product nuances and here the changes you've made or are making. Have you known about kind of how you might want better communicate that to investors either. I don't know with a webinar. And I don't think there's something now people understand kind of the nuances and the changes under way. Thanks.

Jeff Fox -- President and Chief Executive Officer

Yes, it's -- that's a great question/suggestion. And we will do that at some point this year. What we're trying to do is not talk about things that we're not monetizing and seeing unit value out of this well, I am a little old school in that regard, but your suggestion is right on point and we will make sure that we under or unnuanced (ph) some of this as we're really doing things with customers progressively through the year that we know we're very excited about and paying us school. I'm pretty much a stickler on -- they and we have to both be exchanging value as well.

Jason Helfstein -- Oppenheimer & Co -- Analyst

Thank you.

Operator

Thank you.

Jeff Fox -- President and Chief Executive Officer

Good suggestion.

Operator

Thank you. And our next question comes from Brent Thill of Jefferies. Your line is now open.

Chand -- Jefferies -- Analyst

Hi. Thank you. This is a Chand (ph) for Brent Thill. I'm wondering if you might get to give a little bit more color in terms of the late timing in monetization. Is that related to progress on a product enhancement site or maybe in terms of the way you're approaching the offerings and marketings around there. If you can just give a little more color we appreciate it. Thank you.

Jeff Fox -- President and Chief Executive Officer

Yeah it's both and it's -- there's different opportunities in progress on our -- what we call our big four brands. But it's a combination. So as an example, we tested on our Constant Contact brand we actually tested a solution or a service offering that complements the platform. We found that we -- that has value. We're all working on now making sure that for the pricing and the value we get it right when we actually go for monetization, that's an easy example. Same thing on Domain.com we're testing some things. I think we've got a very robust plan this year on Bluehost for set of solutions including some ability for folks more efficiently manage their PPC spend with a very user friendly interface.

So I'm very pleased on our brands with the progress we're making, putting our customers that on-board on any of those brands in a position to not just by hosting but to get additional value or to not just buy a domain by get value through email marketing. And so the strategic context is the same which is we're going to be more than just the entry service offering progressively through this year and frankly for the long-term on our best assets, which is where the market went and we were a little behind picking that up and investing in it. And that's what we're doing. Okay?

Chand -- Jefferies -- Analyst

Okay. That's helpful. One more question. On Microsoft 365, that initiative, any early trends or feedback that you could share?

Jeff Fox -- President and Chief Executive Officer

We're getting adoption. It's going according to plan. Laughingly the Microsoft folks would prefer us to be moving more faster, but we're essentially on our plan for the year. And it's -- we relate with that and so it's not something that we should proudly tell the market, Oh my gosh, we're offering it. We relate with that, but we're now doing it the right way on our core brands.

Chand -- Jefferies -- Analyst

Thanks very much.

Operator

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Jeff Fox for any closing remarks.

Jeff Fox -- President and Chief Executive Officer

Thanks, Sonia, and thanks to everyone for joining our call. As I said, we've got a lot to get done this year and we are focused on executing. So we appreciate your questions. And I know Angela has got a lot of follow on points (ph). Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 23 minutes

Call participants:

Angela White -- Vice President of Investor Relations

Jeff Fox -- President and Chief Executive Officer

Marc Montagner -- Chief Financial Officer

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Jason Helfstein -- Oppenheimer & Co -- Analyst

Chand -- Jefferies -- Analyst

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