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Endurance International Group Holdings Inc (EIGI) Q4 2019 Earnings Call Transcript

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EIGI earnings call for the period ending December 31, 2019.

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Endurance International Group Holdings Inc (EIGI)
Q4 2019 Earnings Call
Feb 6, 2020, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by and welcome to the Endurance International Group 2019 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session.

[Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Angela White. Thank you. Please go ahead ma'am.

Angela White -- Investor Relations

[Technical Issues]

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 the 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 Investor Relations section of our website.

With that, I will turn the call over to Jeff Fox, our president and CEO.

Jeffrey H. Fox -- President and Chief Executive Officer

Thank you Angela and good morning.

Our 2019 financial and operational performance reflects the progress we made by increasing investment in our core strategic brands. During the fourth quarter, we continued our strategic simplification effort with the sale of SinglePlatform for $51 million dollars. When adjusting for the impact of the sale, we delivered our second straight quarter of positive net subscriber adds, our revenue increased sequentially compared to the third quarter, and our GAAP revenue continued to progress toward growth inflection. In 2019, we generated substantial free cash flow and reduced our net debt by over $160 million, while also adding Ecomdash to our solution set in the third quarter.

Operationally our two COO structure is allowing us to simplify and execute with increasing effectiveness. As we enter 2020, we are positioned to benefit from our enhanced solution investment and brand focus, which we will review in more detail later in our discussion.

Turning now to Slide 6. Before we dive into segment results, it's important to look at the valuable platform we are building at Endurance. Two years ago, we made the decision to increase investment in selected platforms and strategic brands. Our simple guiding principle for our focus brands is to deliver increasing customer value to create increasing customer success. Our two-segment operating structure is designed to leverage our increased engineering investment to deliver continuously enhanced solution options to our customers at scale. As a scale player acquiring over a million new customers a year, we are now positioned to participate more effectively in growth opportunities that are addressable by our strategic brands.

Turning now to Slide 7. As we close out 2019 and look to 2020, we are focused on converting our 2019 progress into growth. Marc will discuss guidance in his section, but at a high level, with customer success as our central tenet, we will continue to invest in product, engineering, and sales and marketing, to participate in the growing total addressable market we serve. Starting in 2020, in order to better align our reporting with operations, we will move from three reporting segments back to two reporting segments, which Marc will discuss in more detail.

Turning now to Slide 8. Starting with our email marketing segment, we made substantial progress expanding the capability of our platform in 2019. We have a strong brand in Constant Contact and we expanded the pathway to bringing customers online with the launch of our site builder, domain, logo and e-commerce functionality. We also invested in our Marketing Advisor program which is designed to guide customers through their journey to grow their business, no matter the stage. In addition, we continued to add core small business marketing capabilities by integrating our market-leading email platform with social media and advertising services. In 2020, as we focus on customer success, we will offer solutions targeted at more specific segments. Whether a customer is seeking to establish an identity with a logo and website, or is ready to start sending larger list email campaigns, we are reshaping Constant Contact to be a business that helps customers succeed in growing their relationships and business. Our investment in engineering is expected to drive improved experiences such as a guided journey for customers that includes customized in-product offers and in-product assistance. We will also be working to leverage our Ecomdash capabilities with offers to customers of Constant Contact and selected web presence brands.

Turning now to our web presence segment. In 2019 we substantially completed the shift of our marketing spend to the Bluehost and HostGator brands, including our teams in Latin America and Asia-PAC. We saw progress operationally as we created focus and scale, and our efforts continued to move us closer to inflection on both a unit and revenue basis. In addition, we continued to increase investment in our strategic web presence product delivery platform. In the fourth quarter, we relaunched the Bluehost brand in India on this enhanced core platform, and made progress delivering an enhanced set of solutions such as Office 365 and small business advertising tools in 2019. In 2020, we plan to increase our marketing investment on our Bluehost and HostGator brands. Our team is focused on growing net subscribers and increasing penetration of solutions on these strategic brands as we leverage the increasing investment we are making in our core product delivery platform. Our simplification efforts will also continue across our highly cash-generative non-strategic brands.

Turning to our domain business. In 2019 we focused on expanding our overall market position with early life cycle customers. We added products such as email and office productivity tools and integrated our express site builder in the fourth quarter. We are pleased with the net unit growth we saw in this segment in 2019. In 2020, we will continue to refine and integrate our site builder, e-commerce, and email offers across our domain business as we focus on delivering value to our customers and growing our revenue.

Turning now to Slide 11. We are pleased with the progress we are making in our strategic brands. We will continue to invest in a return to growth by delivering increased value to our customers and providing the tools they need to drive success. Our teams have worked hard to reach this year of inflection and we are looking forward to executing our plan and growing the business in 2020.

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. On Slide 13, I'm pleased to review our fourth quarter and fiscal 2019 results.

For 2019, on a reported basis, GAAP revenue was $1.113 billion, adjusted EBITDA was $313.6 million, free cash flow, defined as cash flow from operations, less capital expenditures and financed equipment, was $114.7 million. Full-year 2019 revenue and adjusted EBITDA contribution from SinglePlatform was $25.4 million and $4 million, respectively.

In 2018, SinglePlatform contributed $28.4 million in revenue and $6.2 million in EBITDA. The sale of SinglePlatform was effective December 5, 2019. Our year-over-year decline in adjusted EBITDA was due mostly to lower revenue, increased levels of investment in engineering and development, analytics, IT, privacy and cyber security. This was partially offset by benefits from lower data center costs and lower sales and marketing spend. In the fourth quarter of '19, we also received a D&O insurance reimbursement of approximately $4 million, related to past legal expenses. This positively impacted adjusted EBITDA for the fourth quarter and the full year.

This quarter, we booked an impairment of $19.6 million. Approximately $7 million was recorded in the cost of good line sold, relating to domain intangible and the remainder in operating expenses related to a reduction in goodwill. GAAP cash flow from operations in 2019 was $162 million. Capex was $47.3 million and free cash flow was $114.7 million. Year-over-year cash flow from operations and free cash flow were mostly impacted by higher operating expenses in 2019 versus 2018. These were offset mostly by higher change in deferred revenue, lower cash interest payments and lower capex.

On Slide 14, in the fourth quarter 2019, on a reported basis, revenue was $277.2 million and adjusted EBITDA was $78.2 million. Free cash flow in Q4 was $32.1 million. Year-over-year free cash flow was positively impacted by higher changes in deferred revenue, legal D&O insurance reimbursements, lower interest payment and lower capex, which offset higher taxes.

Fourth quarter revenue on an adjusted basis, excluding SinglePlatform, was $272.4 million and adjusted EBITDA was $77.8 million. Excluding SinglePlatform revenue of $6.8 million in the third quarter 2019 and revenue of $4.8 million in the fourth quarter 2019, we saw an increase in revenue of $2 million quarter-over-quarter from the third quarter to the fourth quarter.

Slide 15, for the full-year 2019, ending subscriber count was 4.766 million subscribers. Ending subscriber count was reduced by approximately 23,000 subscribers, due to the sales of SinglePlatform in December 2019. Net subscriber losses for the year totaled 36,800. And if adjusting for the divestiture of SinglePlatform, net subscriber losses would have been approximately 12,000. Average revenue per subscriber, ARPS, for the year was $19.35.

Slide 16, we finished the fourth quarter with 4.766 million subscribers. As noted, the SinglePlatform sale reduced total subscriber count at the end of quarter by approximately 23,000. Excluding this impact, net subscriber addition for the fourth quarter would have been positive 8,900 compared to the reported subscriber loss of 14,400. We are very pleased to see another quarter of positive subscriber addition.In the fourth quarter of '19, combined ARPS was $19.34. ARPS in web presence was $13.37; in email marketing, $70.70; and in domain, $14.42.

Slide 17, we are introducing our guidance for 2020, and as of the date of this call, our guidance for 2020 is the following. GAAP revenue of approximately $1.085 billion to $1.110 billion; adjusted EBITDA of approximately $300 million; and free cash flow of approximately $110 million. For an apple-to-apple comparison, excluding the impact of SinglePlatform in 2019, revenue guidance for the full year implies nominal growth at the midpoint. Our adjusted EBITDA guidance implies an increase in investment, primarily in marketing, engineering and development. We expect capital expenditure of approximately $50 million in 2020.

Please note also that in order to better align with how we now run our businesses under two co-COO, in 2020, we will move from three reporting segment to two reporting segments. Our email marketing segment will be renamed digital marketing and will include Constant Contact and Ecomdash. Our web presence segment will include our strategic brands across hosting and domain, as well as our non-strategic brands. As a result, our domain segment will be consolidated into the overall web presence segment.

Revenue attributable to our legacy site builder brands will continue to be reported in our web presence segment. Revenue attributable to the Constant Contact digital marketing suite will be reported in the digital marketing segment. The main adjustment, going forward, will be a cost allocation of site builder engineering and development costs to our digital marketing segment for the use of the website builder product and other solutions sold under the Constant Contact brand. Previously, substantially all of the site builder E&D costs were allocated to our web presence segment.

Slide 18, we ended the fourth quarter with $1.724 billion in total senior debt. Including other deferred purchase obligation and capital leases of $3 million, and total cash on the balance sheet of $113 million, total net debt at the end of the period was $1.614 billion. During the fourth quarter, we paid down approximately $56 million of the principal of our term loan, using approximately $48 million in net proceeds from the SinglePlatform sale. For the full year, we paid down $131 million in principal on our term loan debt.

Our LTM bank adjusted EBITDA for the period ending December 31, 2019, was $311.2 million. Our senior debt leverage ratio was 4.06 times, remains well below our maximum senior secured leverage ratio of 6 times.

Thank you for joining us today, and now I'll turn the call back over to Jeff.

Jeffrey H. Fox -- President and Chief Executive Officer

Thanks, Marc.

We are pleased with the progress we made in 2019 and look forward to executing our 2020 plan. Our teams are focused on continuing to position the business for growth. Thank you for joining us this morning.

Now, I'll turn the call back to the operator to begin Q&A.

Questions and Answers:


Thank you.

[Operator Instructions]

Our first question comes from Naved Khan with SunTrust. Your line is now open.

Naved Khan -- SunTrust -- Analyst

Yeah. Thanks a lot and congrats on the revenue inflection.

Just, maybe a few clarifying questions here. Jeff, on the last call for Q3, you had talked about how you are little bit disappointed with the amount of cross-selling and cash rate that you were seeing that then. And can you just talk about maybe the kind of progress you've made so far?

And then, you also, I think, talked about testing out new channels for marketing, and maybe give us some more color on that. And then, for 2020 guidance, if we are to think about growth for the two segments, how should we be thinking about them individually, should we expect both of them to grow equally or is it going to be more weighted to one of them? Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

Well, I'll take the last one first because that's the easiest. I mean, when you adjust for the sale of the SinglePlatform, our Constant Contact business, we believe it grew slightly this year. And so, we feel like that, that segment, the digital marketing segment, including the asset with Ecomdash is positioned to grow. We feel like we have a growth opportunity. Obviously, we're not going to give specific segment guidance, but we feel like we can't grow both segments. It's obviously harder on the aggregated web presence side, just because that's where we still have the drag effect of Harvest brands that we are just letting it attrit profitably. So that's the sort of rough outline for how we're thinking about striking the balance.

As it relates to the channels in cross-sell, without getting into specifics, the way we're thinking about 2020 enterprisewide is that we moved the money to the brands and the platforms, we're investing in. And in 2020, each brand has top of funnel conversion improvement tactics that they're working on. And then, within the customers that convert, we feel like we have the ability to be more targeted, and deliver better experience and more value, which we translate into either accomplishing what they came for or using more capabilities. Example, we have customers starting to use our LogoMaker that are coming on board with our site builder. So, we look at it as two levers were improving this year within our commitment to grow and make more customers succeed. We're not really talking about it as up-sell and cross-sell, we're really trying to just look at the customers very specifically and make sure they're getting the journey there on, to be successful, because we know there is more they will do with us along that journey as long as they're being successful, now that we've positioned our business this way.

Naved Khan -- SunTrust -- Analyst

Understood. That's helpful. And then, maybe one final question. Can you just maybe offer some kind of color or commentary on the -- as it regards to the macro versus demand from the small business customers, whether you're seeing -- has anything changed in the last several months?

Jeffrey H. Fox -- President and Chief Executive Officer

So. we see, I mean, we look at a lot of things. But, in general, we see the digital marketing market, dynamic complex, loud with new solutions and competitors, but growing double-digits. And we are trying to move our entire digital marketing strategy more and more toward that opportunity. On the web presence side, I think I've seen numbers that are mid-single digits in terms of global domain, new domain adoption. And at a macro level, that is an indicator that we are continuing to watch. Obviously, with a multiple brand, primarily hosting-led business that we're now evolving with an increased focus, we don't participate holistically in that growth. And that's why, we keep talking about customer success on key platforms and filling out the opportunity for them to succeed on their journey. So, it makes sense. So, we think both markets are growing and we're just underpositioned for our potential share over that, which is what we're working on hard for not just this year, but for the long term.

Naved Khan -- SunTrust -- Analyst

And that's very helpful. Thank you.


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

John Byun -- Jefferies -- Analyst

Okay, thank you. This is John Byun for Brent Thill. So, good progress on EBITDA in Q4. In the 2020 guidance, mentioned that free cash flow and EBITDA will be done a little bit and you alluded to some investments. But could you provide a little bit more color, I mean, is it all R&D in sales and marketing or any other items you're stepping up a little bit into investments?

Jeffrey H. Fox -- President and Chief Executive Officer

No. And we're continuing to run the same. I mean, again, this will be my third full operating year, and that was me knocking on wood. If this will be my third full operating year, I think we're in the execute phase. We feel like we have a highly cash-generative business. We're paying off debt. We're increasing our focus on customer success. And the balance between engineering, sales, marketing, creating customer success and growing business is a balance that we're getting better at on each of our four key brands every day. And so, that's why we are, -- we're really focused on continuing our inflection, but still being very disciplined about profit and free cash flow. Inflection with discipline is the mindset that we have as a team.

John Byun -- Jefferies -- Analyst

Thank you. And then, are there any geographic color that was notable in the quarter?

Jeffrey H. Fox -- President and Chief Executive Officer

No, I would call out the way our team in Asia Pac has really become part of our overall scale strategy on the web presence side, and then, frankly supporting some of our centralized functions on the IT op side was fantastic. As we mentioned, we launched our Bluehost brand on our global platform in the quarter. We still got a lot of work to do, but I just really like our Asia Pac team and the U.S. teams coming together. As it relates to Latin America, we continue to like how that team is very entrepreneurial, and really does a great job, representing our company in the HostGator brand in market.

And so, those are our two biggest geographic teams. And then finally, I don't know if they're listening, but our team in Holland, which was part of an acquisition we did several years ago has become a really high quality leveraged innovation driving team. And so some of what we're bringing to our different platforms and brands is very much energized by the team that we have in Holland. And so for me it's been really -- last year was the year where we saw these teams come together with our scale and I don't want to wax poetic because at the end of the day, we got to deliver top-line growth with real discipline around EBITDA and free cash flow.

John Byun -- Jefferies -- Analyst

That's very helpful. Thank you.


And our next question comes from Arun Seshadri with Credit Suisse. Your line is now open.

Arun Seshadri -- Credit Suisse -- Analyst

Hi guys, thanks for taking my questions. Just a couple from me. First just wanted to get a sense for thinking about 2020, do you feel like you're very close to inflection in subscribers in just the web presence portion and just a sense for web presence versus domain, if you could give us some sense for how you see subscriber inflection during the year?

Jeffrey H. Fox -- President and Chief Executive Officer

So, so. So we obviously a domain, a customer comes in for domain. The economics in the journey they are on are very different than someone that comes in and just actually signs up for hosting package, right. And so what we're looking at is, we're looking at as an aggregate business the way we think our competition is. And so we believe that that business has to get to positive subscribers, positive revenue. And it obviously is carrying some frankly brands that we just didn't feel like the scale of those brands and what we could do with customers on those brands was as valuable as really focus the brands we're focusing on, including our domain front door. And so at the end of the day we're trying to keep this very simple. We have two scale businesses, digital marketing and web presence. And we think those businesses have to grow units and subscribers and continue to generate very substantial profit and free cash flow and they're on a different cadence because they started at a different place. We're not going to give specific unit guidance for either business at this point. But you should -- everybody has heard from me since day one, we are a scale player spending scale dollars on a simplified set of platforms and brands in growing markets. We are going to find growth, that is what we, we are responsible for at this scale.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. That's helpful. And then as far as. And then just in terms of cost and in your discussion around OpEx, maybe for Mark here, just wanted to get a sense for, is there any way you could give us quantitative sort of increase in how much, how much an expense increase are you budgeting for 2020 as you focus on these targeted investments?

Marc Montagner -- Chief Financial Officer

Hi, Arun. We're not going to go into that level of granularity at this stage. But I think investing in engineering and development, I think you've seen that it was about 5.6% of revenue in 2017. Last year was above 9% and it's -- we are almost at where we need to be.

Arun Seshadri -- Credit Suisse -- Analyst

Got it. That's helpful. And last thing for me is broadly forecasting for the year, do you feel like you've taken a reasonably conservative look for the broad year and sort of what in your minds are sort of X-factors that could take you higher than sort of your, the ranges you've laid up? Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

So we're not going to opine on conservative or aggressive. The teams are working really hard on the customers we're attracting, having more of them convert and to be successful as an integrated thought because we know if they convert and are successful we are setting our platforms up to be on a journey with them where we can help them get additional things that they need to be successful. And again, the bulk of who we serve are small businesses and they are time strapped, and they're not professional marketers, most of them, and we are in the simplify, integrate and health business on our core platforms. So what could go right? We have given a forecast that we have to execute to. And I think at this stage of the year, we just, we have teams that we're pleased with how focused they are on the details of what we need to do next.

Arun Seshadri -- Credit Suisse -- Analyst

Fair enough. Thank you.


[Operator Instructions]

Our next question comes from Todd Morgan with Jefferies. Your line is now open.

Todd Morgan -- Jefferies -- Analyst

Thank you and thanks for all the detail. I was actually hoping we could step back a little bit and talk a little bit about the 2020 guidance on the revenue side, you look -- business looks like it's inflecting with the operating metrics sort of trending in the right way. The ARPU numbers are certainly sort of stable to growing slightly and yet you're talking about sort of flat top line. I'm just trying to understand how to reconcile those two thoughts, especially given some of the comments you made earlier? Thanks.

Jeffrey H. Fox -- President and Chief Executive Officer

Just as a reminder, right, we -- this was a multi-brand strategy. And we absolutely have brands that over the last two years, we took, new customer acquisition money away from brands. So these are net growth numbers and we've made clear to everybody, we are very pleased with the way the team is managing the cash flow and the movement of expenses and they execute to get to our growth. And I just -- we're in year three of a journey to where we need to drive more market level growth on our good assets. And then on the brands that are still good assets because they are profitable, but that we're not investing in a new customers, there is a natural SMB attrition that we are experiencing on a diminishing amount of our total revenue. And so it's -- it's a -- I think the team is doing a great job on getting us to where -- the end of 2020, 2021 as we go forward, what we've let go of and put into attrition mode is going to be a smaller and smaller part of our business. And this is the year where that inflexion is occurring based on our forecast.

Todd Morgan -- Jefferies -- Analyst

Okay, all right. I think that makes sense then. Thank you.


[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Angela White -- Investor Relations

Jeffrey H. Fox -- President and Chief Executive Officer

Marc Montagner -- Chief Financial Officer

Naved Khan -- SunTrust -- Analyst

John Byun -- Jefferies -- Analyst

Arun Seshadri -- Credit Suisse -- Analyst

Todd Morgan -- Jefferies -- Analyst

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