Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Endurance International Group Holdings Inc (NASDAQ:EIGI)
Q2 2020 Earnings Call
Jul 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Endurance International Group 2020 Second Quarter Financial Results Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Angela White VP of IR. Thank you, please go ahead ma'am.

Angela White -- Vice President of Investor Relations

Thank you, Tanya. Good morning. It's my pleasure to welcome you to our second quarter 2020 earnings call. First, we'll go through some prepared remarks after which we will turn to Q&A. We've 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 given.

Statements made on today's call will include -- 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 and Form 10-Q filed with -- filed on May 6, 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 our forward-looking statements.

During this call, we'll 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.

Jeffrey H. Fox -- President and Chief Executive Officer

Thank you, Angela, and good morning. Despite the disruption and uncertainty brought about by the COVID-19 pandemic, I'm encouraged by the resilience and ingenuity we are seeing from individuals and businesses as they navigate this complex environment. Obviously the environment remains highly complex as we end the summer and enter the traditional school year and fall cycle. At a macro level we remain focused on investing in solutions that are critical for the success of all businesses, including our SMB target market.

Turning to results, second quarter revenue was $274 million and adjusted EBITDA was $84 million. We continued our trend of positive net subscriber additions with over 97,000 net adds in the quarter. Excluding the impact of the SinglePlatform sale in December '19, GAAP revenue grew 1% year-over-year and cash bookings grew 5% year-over-year.

I'm extremely proud of the way our team members continue to collaborate and deliver solutions that are critical to the success of our customers. For the last several months, our team has executed against the backdrop of COVID-related disruptions to their work environment, as well as to their personal lives.

Turning to Slide 6. We operate two scale business segments; digital marketing and web presence. As the needs for web presence, digital marketing, e-commerce, and other services converge in this growing market, customers are increasingly looking for solutions that are easy to use, priced reasonably, and drive the value necessary to help them succeed.

Over the last two years, we have increased investment to address these opportunities in the market, scaling our business and delivering value to an increasing number of customers. With focused investment in our strategic brands, we are expanding our total addressable market as we move beyond our original primary solutions; such as a domain name registrar, website hosting and email marketing. In addition to our product and engineering investments, we are also adding valuable capabilities through bolt-on acquisitions; such as Retention Science and Ecomdash.

Our strategic investment efforts are delivering results, while we remain disciplined with our operating and capital spend. We have made great progress scaling and integrating our teams in Asia-Pac, Latin America and Holland, as we all work to support a core set of strategic brands and drive growth.

Turning now to Slide 7 and starting with our digital marketing segment. We are transforming Constant Contact from an email marketing point solution provider to a digital marketing platform. We are pleased with the operational progress we made in the first half of the year and our results reflect excellent progress toward our goal to accelerate growth.

Turning now to Slide 8. Constant Contact is a well-known direct to small business brand with a long history of delivering high-touch support combined with customer return on investment. Our SaaS email marketing business is highly profitable and we are investing to enhance our core platform, while expanding our solution set to address an increasing number of customer use cases. Our Constant Contact brand is a valuable asset and the core of our digital marketing segment. We recently launched a redesign of the brand with messaging that we believe asserts our position as a digital marketing services provider, not only in email marketing, but also in strategic adjacencies.

For example, our message incorporates our expansion into e-commerce, websites, and social marketing. The rebrand was completed by Constant Contact's in-house agency team, which brought a fresh and modern feel to the brand. Listening to customers and employees, the result is an identity that honors where we've been while portraying our vision for what comes next.

As we look to opportunities to serve customers with advanced marketing needs, we are leveraging our existing solution set and integrating acquired solutions. Last fall we added Ecomdash, an e-commerce platform that enables inventory management, distribution and multi-channel marketplace listings for e-commerce retailers, and this morning we announced the acquisition of Retention Science which is highlighted on Slide 9.

Turning to Slide 9. We are excited to add the very entrepreneurial Retention Science team that has scaled their business to annualized revenue of approximately $8 million. The company serves mid-market and enterprise customers that are focused on direct-to-consumer and e-commerce selling. The addition of this team and technology platform will allow us to accelerate our efforts to support and retain our existing e-commerce customers, while capturing a larger share of the growing e-commerce solutions market. We welcome the new team to Endurance.

Turning now to our web presence segment on Slide 10. We are pleased with the year-over-year growth of cash bookings, GAAP revenue and net subscribers. We are also pleased with the team's execution across the globe, delivering very strong adjusted EBITDA of approximately $42 million, which does include some benefit from lower healthcare, travel, and facilities expenses.

Turning now to Slide 11. Our results year-to-date confirm that our investment in strategic brands is working. Our US teams, combined with our Asia-Pac, Latin and Holland teams, are delivering positive results in support of our web presence growth strategy. Our focus for the remainder of the year is on our brand level solution roadmaps, which deliver continuous user experience improvement and customer success through product packaging and solution integration.

Turning to Slide 12. Across our two scale businesses, we are positioned to participate in the secular growth in the market for SMB digital services. Our plan for the second half of the year reflects continued investment to drive growth and we will remain focused on strengthening our company, while we navigate this complex economic and healthcare environment.

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 14, I'm pleased to review our second quarter 2020 results. On a reported basis, GAAP revenue was $274 million, adjusted EBITDA was $84 million, free cash flow, defined as cash flow from operations, less capital expenditures and financed equipment, was $55.9 million.

Please note that in the same period a year ago, revenue and adjusted EBITDA contribution from SinglePlatform was $6.8 million and $1.1 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 $271.4 million and adjusted EBITDA $75.3 million.

Our year-over-year increase in adjusted EBITDA was due to higher revenue, non-recurring reductions in employee healthcare costs, lower consulting and contractor costs, lower travel and facility related spend. This was offset by increased level of investment in marketing and engineering. Lower employee healthcare costs were due mostly to delayed doctors' visits and elective healthcare procedures during the second quarter. In addition, we dramatically reduced our business travel in the second quarter 2020 and almost all of our employees have been working remotely since mid-March.

We expect that eventually our healthcare costs will return to more normal level. We expect that a portion of the COVID-related reductions in travel and facilities-related costs we have seen will be sustainable over the longer term, as we reengineer our business. This will give us the flexibility to invest these savings in other areas or to flow them to the bottom line.

GAAP cash flow from operations in the second quarter was $67.8 million. Capex was $11.8 million, and free cash flow was $55.9 million. The year-over-year increases in cash flow from operations and free cash flow were mostly impacted by higher cash billing, lower expenses, lower interest rates and the delay of a tax payment.

Slide 15. We finished the second quarter of 2020 with 4.877 million subscribers. Net subscriber addition for the first quarter were approximately 97,300. Net additions were driven mostly by strong gross additions in the web presence segment. In the second quarter of 2020, combined average revenue per subscriber ARPS was $18.92. In web presence it was $13.49 and $69 digital marketing.

Slide 16. First half revenue was $546.2 million, adjusted EBITDA was $156.5 million and free cash flow was $79.7 million. In the same period a year ago, revenue and adjusted EBITDA contribution from SinglePlatform was $13.9 million and $2.6 million, respectively. Normalizing for these numbers, revenue in the same period a year ago would have been $545 million and adjusted EBITDA of $152.2 million.

Slide 17. We ended the second with $1.696 billion in total senior debt. Including other deferred purchase obligations and capital leases of $5 million, total cash on the balance sheet of $151 million, the total net debt at the end of the period was $1.550 billion. Our LTM bank adjusted EBITDA for the period ending June 30, was $326.1 million. Our senior debt leverage ratio was 3.72 times and remains well below our maximum allowed ratio of 6.0 times.

Slide 18. We ended the quarter with $151 million of cash on the balance sheet. We'll continue to manage our balance sheet prudently this year. With the first half of the year behind us, we feel comfortable with our liquidity position. During the second quarter, we purchased $9.3 million of our high yield bonds at an average discount of 3%. Combined with our first quarter activity, total year-to-date bond repurchases were $12.2 million.

Turning to our term loan, during the quarter we paid $7.9 million in scheduled amortization. Year-to-date, we have paid down $15.8 million of our term loan. Year-to-date, we repurchased approximately 8.7 shares for $14.4 million at an average price per share of $1.66. The bulk of these purchases occurred in the first quarter.

Finally, we signed a contract to acquire Retention Science for a total purchase price of $35 million, with $17.5 million to be paid upon close. The remaining $17.5 million will be paid in earn-outs and deferred consideration over the next three years. We expect this transaction to close by mid-August 2020.

Slide 19. When we released preliminary results a few weeks ago, we introduced guidance for 2020. Our updated guidance incorporates the benefit we are seeing in our business as a result of our investment in delivering value to our customers and current business conditions. This guidance also incorporates the revenue contribution for the remainder of the year and the small dilutive impact to adjusted EBITDA that we expect from the Retention Science acquisition.

Thank you for joining us today. I will now turn the call back over to Jeff.

Angela White -- Vice President of Investor Relations

Thank you, Marc. [Indecipherable]

Jeffrey H. Fox -- President and Chief Executive Officer

Hello, thanks Marc. We are very pleased with our first half performance. Since I joined the business in late 2017, we have been executing a very disciplined integration program to operate at scale, while building out our critical teams in engineering, marketing, customer service and operations. We are focused on delivering increased value to our customers, and believe our first half results confirm our strategy to focus our investment on selected strategic brands as we build our scale SMB digital marketing platform. Thank you for joining us this morning, and we look forward to our next update.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question is from Naved Khan with SunTrust.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Yes. Thanks a lot. Just a few questions and maybe a clarification. So just on the reintroduction of guidance, can you just give us a sense of what gave you confidence to reintroduce it since it was just withdrawn at start of the crisis? Are you just seeing better trends? And maybe can you give us some more color on retention trends you might be seeing there? There is often some speculation about maybe SMB closures, if the government aid runs out, things like that. How are you thinking about that? And then I have two follow-ups actually. Thank you.

Jeffrey H. Fox -- President and Chief Executive Officer

So Marc, do you want to handle those?

Marc Montagner -- Chief Financial Officer

Yes, Naved, I think given the investment we've made in our product, our solution and the conversion we are seeing plus, I think, probably -- I don't know if it's secular or cyclical, higher demand for product, given the daily trends and the monthly trend we have seen in the second quarter and what we have seen so far in early July. I think we are comfortable. We introduced this guidance at $1.1 billion in revenue and $300 million of EBITDA. And then we're going to benefit from lower taxes, due to the CARES Act that allows us to raise our free cash flow guidance versus what we issued this year. But I think the business is performing very well. The teams are very focused and really delivering.

Jeffrey H. Fox -- President and Chief Executive Officer

And I'll -- just adding a little color. As I tried to -- alluded to in the prepared remarks, we're executing road maps that we put into motion that definitely give us a belief that finishing our roadmaps continue to make the improvements on the key brands and in the geographies, we're investing to grow. We feel like we're in a position to drive through some challenges with COVID and because people need these solutions. And so that's our objective, and that's why we've reintroduced guidance.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Understood. And then it seems like based on what Marc said that the monthly trends continue to be strong, it not that you are seeing any kind of ebb in demand. Is that fair?

Jeffrey H. Fox -- President and Chief Executive Officer

Yes, I don't think we're commenting on anything beyond what we've produced so far.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Got it. Okay and then another question I had was just on this -- on the Constant Contact and the opportunity there, in transforming it beyond a point solution to address the broader opportunity in digital. Can you share any stats on the success you might have seen so far? Or any data points that would be very helpful. Also, are you seeing a bigger opportunity in upselling to decent subs? Or is there a sizable opportunity in bringing a new subscribers into the fold? How should we think about it?

Jeffrey H. Fox -- President and Chief Executive Officer

Yes, I would say, the retention science addition to our capability set is a good indicator that are first focus at Constant Contact is making sure that the customers that have already bought from us, get increasing success. And in conjunction with that, we do feel like we have the ability to attract customers that we have not previously been bringing in the door and helping succeed. So we have a combination of improvements to early life cycle and lifetime success and front door velocity that is our strategy at Constant Contact.

And of course as you intimated earlier, we do worry that there will be COVID churn in the marketplace, but we feel like we are investing to grow through those challenges, because the brand Constant Contact in the support levels and the quality of our platform for the price people pay, we really feel like fit the long-term environment where digital services are secularly in demand.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Understood. Maybe the last question from me, if I may. So on the debt side, I understand there is a prepayment penalty. But what are the opportunities that you think are available to maybe potentially refinance debt at a low rate given the environment?

Jeffrey H. Fox -- President and Chief Executive Officer

Yes, the high...

Marc Montagner -- Chief Financial Officer

Go ahead.

Jeffrey H. Fox -- President and Chief Executive Officer

Yes. The high-yield debt is callable at a premium. The debt that we bought this quarter, we bought below par. We've been opportunistic on that front. Obviously and I think that as we continue to invest to grow our business, I think our balance sheet structure is continuously something to be reviewed.

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Your next question is from Brent Thill with Jefferies.

Sang-Jin Byun -- Jefferies -- Analyst

Hi, this is Sang Byun for Brent Thill. I just had a couple more questions regarding the Retention Science acquisitions. Could you talk a little bit more about their business model, revenue model? I mean, what are the products and how do they generate revenues from those?

Jeffrey H. Fox -- President and Chief Executive Officer

Yes, so Retention Science it has a highly capable customer analytics core platform, and their primary service offering today is email marketing for e-commerce related retailers, and their e-commerce on of some large global brands. So it is fundamentally a profit and revenue stream driven by e-commerce, email marketing. And it's very complementary to some customers that we have not traditionally competed for at Constant Contact. And it's not price -- the pricing structure and the size of the relationships are different than Constant Contact more -- larger contact databases and typically larger customers. But we feel like the technology and the team bring a lot to our overall strategy at Constant Contact as we bring the capabilities together.

Sang-Jin Byun -- Jefferies -- Analyst

Okay, that's helpful. And then in terms of...

Jeffrey H. Fox -- President and Chief Executive Officer

And just to add, it is a higher ARPS business, because it is more advanced marketing demands and larger customers typical.

Sang-Jin Byun -- Jefferies -- Analyst

So on that last point, in terms of the customer segments, how can we think about I guess the mix currently that you have, let's say, small business versus mid to large enterprise? Does that kind of take you into maybe kind of a new segment?

Jeffrey H. Fox -- President and Chief Executive Officer

So we feel like the -- no, Retention Science will bring us the ability to extend the range of customers we can serve under the Constant Contact brand, but our goal is to take all the capabilities and deliver them into the segment that we've traditionally been qualified to compete with Constant Contact. So think small and medium business and obviously not for profit. So we're -- we will invest to continue to grow Retention Science, we're very pleased with the way they're growing today, but our -- the real value or the largest value to this acquisition will be the ability for the expertise and capabilities of that platform and team to be delivered to some customers that right now are less demanding by nature than the ones they target specifically.

Sang-Jin Byun -- Jefferies -- Analyst

Okay. So help them move upward as they grow. One more question, anything you can share in terms of what we're seeing in terms of small business closures that are permanent? Any color you could share would be helpful. Thank you.

Jeffrey H. Fox -- President and Chief Executive Officer

We're seeing the same thing everybody else is seeing, which is, at least thus far, there has been pretty good resilience. Obviously, certain sectors like restaurants and local retail, there have been more frontline closures, but we're not a heavily restaurant focused business, and so our -- we've seen, I would say ingenuity, resilience and demand have been the first wave, which is why we're investing and finishing our roadmaps, so that we can participate in the new demand, and our goal is to try to help our customers through this. People -- all of our customers, if they're going to compete and survive, I say all, we feel very strongly that the capabilities we are investing in are necessary versus optional in the go-forward world.

Sang-Jin Byun -- Jefferies -- Analyst

Okay, that's very helpful. Thanks very much.

Jeffrey H. Fox -- President and Chief Executive Officer

Yes. Thank you.

Operator

At this time there are no further questions.

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Angela White -- Vice President of Investor Relations

Jeffrey H. Fox -- President and Chief Executive Officer

Marc Montagner -- Chief Financial Officer

Naved Khan -- SunTrust Robinson Humphrey -- Analyst

Sang-Jin Byun -- Jefferies -- Analyst

More EIGI analysis

All earnings call transcripts

AlphaStreet Logo