Domain-name registrar and cloud-computing expert GoDaddy (NYSE:GDDY) reported third-quarter results this week. The company added more than 1.1 million new customers over the last year, while also collecting more revenues per account. Looking ahead, the company is about to boost its marketing efforts.

GoDaddy's third-quarter results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$680 million

$582 million

17%

Net income from continuing operations

$13.2 million

$7.1 million

60%

GAAP earnings per share (diluted)

$0.08

$0.05

86%

Unlevered free cash flow

$176 million

$137 million

28%

Data source: GoDaddy. GAAP = generally accepted accounting principles.

What happened with GoDaddy this quarter?

  • Three months ago, GoDaddy set its third-quarter revenue guidance at approximately $673 million. The actual result exceeded the top end of the guidance range by $5 million.
  • The revenue surprise was based on strong sales across all of GoDaddy's operations, with a particularly solid contribution from business applications. In other words, tools such as email hosting, payment services, and online telephony solutions are pulling their weight as GoDaddy's smallest but fastest-growing division.
  • The earnings release also announced a fresh stock-buyback program under which GoDaddy plans to repurchase and retire up to $500 million's worth of the company's common stock. This may look like an odd move, considering the $788 million stock sale GoDaddy ran in August, but the company did not pocket any significant proceeds from that offering. Instead, the underwriters of GoDaddy's IPO monetized some of their holdings in the company after watching the stock price nearly triple in a three-year span. The move also reduced the difference between GoDaddy's basic and diluted share counts from 18% to 12%.
  • The average revenue per user (ARPU) increased by 8.6% year over year, stopping at $145. Serving mostly small- and medium-sized businesses, GoDaddy grew its customer list by 6.7%, to 18.3 million names.
A GoDaddy logo on the wall of the company's office lobby in Cambridge, Massachusetts.

Image source: GoDaddy.

What management had to say

On the earnings call, CEO Scott Wagner explained how and why GoDaddy's operating margins might get slimmer in the near future:

We'd like to grow marketing, and we'd like to grow marketing faster than revenue as we head into next year. Our aggregate return on our marketing spend is fantastic. And we're looking at two places on how and where we can continue to grow that marketing spend.

First, Wagner wants to expand his customer base by appealing to new market segments. Then he wants to keep growing that ARPU metric by upselling additional services to current customers. These are always considerations in the operation of any business, but Wagner and his team feel that the time is right to push the marketing messages a little harder right now, even if that comes at the expense of lower profit margins.

That being said, GoDaddy isn't about to go absolutely crazy with its marketing budget. Wagner said:

The idea, boy, can we lean in to go-to-market spend a little harder? Yes, we're looking for it. But again, we're economic enough that we're not going to get over our skis. We'll test, learn. And when we find things that work, we're going to pick it up.

For those not too familiar with skiing concepts, Wagner doesn't want his company to go too far, too fast. Leaning out too far over your skis can lead to a nasty tumble, after all.

Looking ahead

Baking the third-quarter's revenue surprise into its longer-term financial models, GoDaddy raised its revenue guidance for the full year by $5 million. The new target of roughly $2.66 billion implies fourth-quarter sales in the neighborhood of $696 million.

Management held its full-year target for unlevered free cash flows steady at $620 million. Reaching that goal would require a fourth-quarter reading of at least $127 million, some 17% above the same period in 2017.

Beyond that, CFO Ray Winborne said that the growth rates in revenues and unlevered free cash flows should hold fairly steady in 2019, as well.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.