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Endurance International Group Holdings Inc (NASDAQ:EIGI)
Q1 2020 Earnings Call
Apr 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Endurance International Group 2020 First Quarter Financial Results Conference Call. [Operator Instructions].

I would now like to turn the conference over to your host, Ms. Angela White, VP of Investor Relations.

Angela White -- Vice President of Investor Relations

Thanks Ashley. Good morning. It is my pleasure to welcome you to our first quarter 2020 earnings call. First, we will go through some prepared remarks after which we will turn to Q&A. We have 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, let me 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 14, 2020, 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 will turn the call over to Jeff Fox, our President and CEO.

Jeff Fox -- President and Chief Executive Officer

Thank you Angela and good morning. I am pleased with the results we delivered and the continued progress we made in the first quarter. Obviously, no one anticipated the impact COVID-19 is having globally on all aspects of people's lives, livelihoods, and business operations. Since the pandemic accelerated in early March, we have operated with three guiding principles to help our organization remain focused and productive in this complex business environment. The first principle is to focus on the safety of our employees, and their family members as our top priority. By the third week of March, we had all of our teams in a work-from-home model, and I could not be more proud of the way the team executed this unplanned move, with minimal disruption to our business and our customers.

Second, we are fortunate to hold a position as a scale provider of digital marketing and web presence solutions in a large and growing market. We continue to see secular demand for our services and will continue to invest in delivering competitively priced solutions that help our customers achieve their objectives.

Finally, we have a valuable set of assets and provide services to approximately 5 million customers. We have made considerable progress executing our strategy to invest in our market-leading strategic brands, to simplify our operational complexity and to integrate our teams, as we drive scale. We remain focused on investing to grow both of our scale business segments.

Through April, our execution has remained consistent with our 2020 growth plan. However, we know that it is too early to predict the extent of the pandemic's effect on our business for the remainder of the year. As such, we believe it's prudent to suspend our previously provided guidance for 2020, as we focus on delivering value to our customers and executing our plan. Marc will discuss this in more detail in his section.

Turning now to slide 6; our GAAP revenue in the first quarter was $272.2 million. Revenue in our digital marketing segment reflected year-over-year growth when adjusting for the December 2019 sale of SinglePlatform. Our web presence segment continued to make progress toward revenue inflection. by delivering another quarter of net unit growth. We ended the quarter with 4.78 million subscribers on platform, which marks our third consecutive quarter of net subscriber growth, when adjusting for the sale of SinglePlatform, adding 14,000 net new subs.

Adjusted EBITDA was $72.5 million, which is down from $76.9 million in Q1 of 2019, adjusted for the sale of SinglePlatform. Year-over-year we increased investment in our product, engineering and development teams resulting in a $3 million cost increase, and we are pleased with the progress we made on our strategic brands. Year-to-date, we repurchased approximately 8.7 million shares of our stock, for a total of $14.4 million, at an average price per share of $1.66. Our Board authorization remains in place, with remaining capacity of $25.5 million.

Turning now to slide 7; before we go into our segment details, it's important to note the progress we have made operationalizing our two scale strategic platforms. As a reminder, we changed our reporting to reflect our simplified organization and the teams in both businesses executed their plans in the first quarter.

Turning now to slide 8; in our digital marketing segment, we continue to make progress transforming Constant Contact from an email marketing point solution into a digital marketing brand with significantly expanded solutions. During the quarter, we increased revenue year over year by $2.2 million, and are pleased with the net subscriber growth we delivered. Operationally, our sales, support, marketing and engineering teams executed very effectively with increasing focus on customer success.During the quarter, we made progress enhancing our core email platform, integrating our recently acquired Ecomdash business, and enhancing our website builder, logo, and e-commerce capabilities under the Constant Contact brand.

In addition, in response to COVID-19 we launched the Constant Contact Small Business Support Kit, which provides action plans and guidance by industry to SMB customers looking for helpful resources, as they navigate this crisis. We are pleased with the team's effort in launching this dedicated site, which is part of our long-term strategy to deliver capabilities that complement our high value email marketing solution.

Turning now to our web presence segment; our results reflect continued revenue stabilization in our third consecutive quarter of positive net unit growth. The team delivered these results by successfully executing our growth plan on our strategic brands, complemented by excellent work by our teams in Latin America, India and Holland. As a scale web presence solution provider, we added over a million new customers on an annual basis. Our 2020 plan remains unchanged and is focused on expanding our addressable market through investment in solutions, that complement our core hosting and domain products.

In Q1, our web presence teams did an excellent job pivoting quickly to address the COVID-related challenges. Our global support centers continue to serve customers 24/7, despite the complexities of moving agents to work from home status. From a marketing perspective, we also launched portals across key brands aimed at providing toolkits to help customers navigate through this disruptive period.

Turning now to slide 10; in Q1 we continued to make progress positioning our strategic brands for long-term growth, as we navigated challenges introduced by the COVID-19 pandemic. We are pleased with the execution by our brand and platform teams, and are investing to grow our business by delivering increased value to customers.

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 12, I am pleased to review our first quarter 2020 results. On a reported basis, GAAP revenue was $272.2 million, adjusted EBITDA was $72.5 million; free cash flow, defined as cash flow from operation less capital expenditures and finance equipment was $23.7 million. Please note that in the same period a year ago, revenue and adjusted EBITDA contribution from SinglePlatform was $7 million and $1.6 million, respectively. The sale of SinglePlatform occurred in December 2019. Normalizing for these numbers, revenue in the same period a year ago would have been $273.7 million and adjusted EBITDA $76.9 million. Our year over year decline in adjusted EBITDA was due mostly to increased levels of investment in engineering and increased sales and marketing expenses. This was primarily offset by benefits from lower support costs.

GAAP cash flow from operations in the first quarter was $34.9 million. Capex was $11.2 million, and free cash flow was $23.7 million. The year over year increases in cash flow from operations and free cash flow were mostly impacted by timing of payroll in the first quarter of 2019, a one-time funding of a securities class action settlement in the first quarter of 2019 and lower bonus payments in the first quarter of 2020.

Additionally, in the first quarter of 2020, change in deferred revenue increased year over year by $2.6 million due to higher cash collections. Slide 13, we finished the first quarter of 2020 with 4.780 million subscribers, approximately. Net subscriber additions for the first quarter were approximately 14,000 positive. We are very pleased to see another quarter of positive subscriber additions.

In the first quarter of 2020, combined average revenue per subscriber, ARPS was $19.01, in web presence segment it was $13.50 and digital marketing $69.50. Slide 14, we ended the first quarter with $1.713 billion in total senior debt. Including other deferred purchase obligations and capital leases of $9 million, and total cash on the balance sheet of $114 million, total net debt at the end of the period was $1.608 billion. During the first quarter we paid down approximately $8 million of the principal on our term loan debt.

Our LTM bank adjusted EBITDA for the period ended March 31st, 2020 was $310.9 million. Our senior debt leverage ratio was 4.06 turn and remains well below our maximum senior secured leverage ratio of 6 turns.

On Slide 15, as Jeff noted in his section, we are suspending our guidance for 2020. We are still focused on executing our original plan, but given the nature of our business, it is still too early to assess the impact of this pandemic on our customer base of approximately 5 million subscribers. As of today, demand for our products and services is consistent with our 2020 growth plan, but we are closely monitoring the effectiveness of program marketing spend and watching our churn rates.

We are also taking a prudent financial approach and are paying very close attention to our expenses. The new CARES Act will have a positive impact on our free cash flow in 2020. We will be able to defer to 2021 and 2022 approximately $10 million of FICA taxes. In addition, we will benefit from a temporary increase in federal tax deductions from our cash interest payments in 2019 and 2020. This will reduce our federal taxes by approximately $5 million in 2020, and also increase our NOL balance at the end of 2019 by approximately $50 million.

Year to date, we repurchased approximately 8.7 million shares for a total of $14.4 million, at an average price per share of $1.66. The bulk of these purchases occurred in the first quarter. We also repurchased $3 million of our high yield notes at an average discount of approximately 5% in the first quarter. We ended the quarter with $114 million of cash on the balance sheet and are managing our use of cash prudently given the unknowns. We also have access to a $165 million revolving credit facility which is undrawn.

We do not face any significant debt maturity in the near-term. We feel very comfortable with our liquidity position at this time. Thank you for joining us today, and let me turn the call back to Jeff.

Jeff Fox -- President and Chief Executive Officer

Thanks Marc. I am proud of the work the team is doing and we are pleased with our year to date results. The team is operating at scale with focus on customer value and enhancing our ability to serve more customers more effectively on a daily basis. Despite the global uncertainty, we will continue to execute our plan to grow our business by investing in sales, marketing, product and engineering on our valuable strategic brands.

We look forward to our next update, and in the meantime, stay healthy. Thank you for joining us this morning. Now I'll turn the call back to the operator to begin Q&A.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Naved Khan with SunTrust.

Naved Khan -- SunTrust Robinson -- Analyst

Yeah. Thanks a lot. Hope you all are safe. Just a couple of questions on my end. So of the 11,000 subscribers you guys added in presence, can you give us some more color on these customers that come in for domains or what kind of a tax rate you might be seeing to other offerings there?

And then some of your peers came out talking about trends giving us an update about what they're seeing, and it seems like there might be some kind of a pickup in new customer demand from people kind of in set up businesses from home. And also some incremental pickup in cancellations as curious to know what you might be seeing on your end.

Jeff Fox -- President and Chief Executive Officer

So, so we don't really go into the details on the first question. I think we tried Naved to be real clear that we see an expanded solution opportunity on the front door brands that we're driving, domain.com, Bluehost, HostGator and Constant Contact as the primary.

And so we're not going to separate out and start reporting on specific attach rates. We feel like that would be just too much granularity. And we would never be able to, to do that from an SEC or reporting perspective. Our general plan, which I was speaking about is, we see the opportunity to take the units we're bringing in and through the year continue to improve the user experience and the specificity of solutions that these users need to accomplish their objectives and whether it's domains or hosting or marketing, our plan for the rest of the year is to keep investing to deliver business solutions.

On your second question, we're seeing the same thing, I mean the Google search terms would tell you that short term there is secular demand. I've tried to keep it simple for us because we look at it and we believe that we have a secular demand tailwind that should help us.

But I think we're in an unprecedented scenario where no one really knows how this healthcare situation plays out and therefore help society just the functioning again and how things have or have not changed in terms of what's -- of who's going to go back in the business or how they're going to do business.

So we're not in disagreement with anything that our peers have said. I feel like we see the same trends. And what -- I think Marc referenced, how closely we're watching our cash, our expenses and our -- the value of the units we're acquiring, and what's happening within our subscriber base.

And so, we're watching it very carefully and staying focused on the investments we think are right for the long-term opportunity to grow.

Naved Khan -- SunTrust Robinson -- Analyst

That's helpful. And maybe a quick follow-up on the Constant Contact side of things, I understand it's a slightly higher ARPS. Are you seeing greater usage for this product as businesses try to stay in touch with their customers, or are you seeing more pick up in cancellations, any kind of trends to call out on that side?

Jeff Fox -- President and Chief Executive Officer

Yeah. So we definitely have seen our platform used more which we're encouraged by, right. So just a reminder, right, for those that really don't follow the industry. Email marketing is a very high return on investment marketing solution, and we've been doing it for 20 years. We were actually one could argue, we were actually the first really big player training people on email marketing.

And so Naved, it's a great question, it's a great call out. We did see the customers we have using our platform more. I mean obviously not all of them, but we saw very much increased usage, which is logical, given the complexity of the pandemic, and how it came on and how much people needed to communicate and will need to communicate. So we're very pleased with that. We're glad we have been investing in that platform.

As it relates to customers, we are trying to keep it really simple, right, which is, we need to grow our net customers and we need to grow the value those customers get over time and those are -- we are not -- we don't report on the difference between gross and net in any of our businesses, just to avoid the complexity of micro disclosure for us. So we're very pleased with the quarter we had, in our email marketing segment, and feel like there is a lot more we can do over time, with some of the investments we're making and intend to make.

Naved Khan -- SunTrust Robinson -- Analyst

Great. Thank you, Jeff.

Jeff Fox -- President and Chief Executive Officer

No, thank you.

Operator

[Operator Instructions]. And your next question comes from Brent with Jefferies.

John Byun -- Jefferies -- Analyst

Hi everyone, this is John Byun for Brent Thill. Hope you're doing well. Just wanted to follow up on the previous question, is there any other color maybe you could share on what's going on since late March through April, in terms of customer behavior, products that seem to be more in demand, or you are seeing more interest?Anything that's kind of different than what you had seen previously? And then I have a follow-up. Thank you.

Jeff Fox -- President and Chief Executive Officer

So I'll defer to secular demand, right, which we think we think some folks have -- we think folks are using tools and have time to use these tools, and so we think this has been a net benefit for anybody that supplies anything we do. Whether it's just buying a domain, and hooking up G Suite or Office 365 or just a lower price email online solution, right? We see people figuring out, you really need to do these things. We've definitely seen the Main Street folks have to get very creative with marketing, inventory management, potentially listing on multiple marketplaces. So we're seeing a pull-forward, because of the crisis of the exploration and utilization of tools and capabilities that we provide, along with a lot of other folks, right? So when I say secular demand, that's what we're describing.

The specificity of it, we definitely think there has been more demand for some things that were not as exposed to. But it is -- what you would hear from us is, is that we're working really hard to increase our exposure to things we can attach to, a domain customer, a web hosting customer or an email marketing customer. Those are our three primary exposures, but our whole investment strategy on our strategic brands has been, to be able to take people to join us with their first purchasing on one of those brands, and make sure that they can do more things, like e-commerce, build a web site, post on Facebook or integrate to Facebook, pull down their Shopify data and manage multi-marketplace listings or Ecomdash our solution.

So, I'm elaborating a little bit to just make sure you know that we know where we make our money. We feel like secular demand is a good thing. We feel like we're trying to increase in 2020 our exposure to things beyond just our core capabilities. And that's our holistic strategy that we're executing.

John Byun -- Jefferies -- Analyst

Great. Appreciate the color there. And then just a quick follow-up on the ARPS for the web presence side that is done again, is there any dynamic behind it? Is it just more introductory promotional offer or anything to explain the trends in ARPS for web presence?

Jeff Fox -- President and Chief Executive Officer

No, it's the accumulated effect of some high and low value customers that are trading on legacy brands versus this or that, but we're not managing to an ARPS number on either side of our business. We're managing the customer success and a good return on our cost to acquire, for in a building lifetime revenue strategy.

So we're -- it's a result. It's not the number we're managing to. We intend to grow our units. Our strategy is to grow our units, grow our revenue, and grow our profitability, because we feel like we have an aggregate scale profitable exposure to growing markets.

John Byun -- Jefferies -- Analyst

Thank you. That's helpful.

Jeff Fox -- President and Chief Executive Officer

Okay.

Operator

[Operator Closing Remarks].

Duration: 25 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 -- Analyst

John Byun -- Jefferies -- Analyst

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