Marta Nichols - VP, IR Blake Irving - CEO & Director Raymond Winborne - CFO & Principal Accounting Officer Scott Wagner - President & COO.

Samuel Kemp - Piper Jaffray Shweta Khajuria - JMP Securities Deepak Mathivanan - Barclays Jason Helfstein - Oppenheimer Brian Essex - Morgan Stanley Ugam Kamat - JPMorgan Jonathan Kees - Summit Redstone James Cakmak - Monness, Crespi, Hardt Matthew Diamond - Deutsche Bank Lee Krowl - B. Riley.

Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the GoDaddy Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Marta Nichols, VP of Investor Relations. You may begin your conference..

Good afternoon, and thank you for joining us for GoDaddy's Second Quarter 2017 Earnings Call. With me today are Blake Irving, CEO; Scott Wagner, President and COO; and Ray Winborne, CFO. We'll share some prepared remarks, and then we'll open up the call for questions.

On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics such as total bookings, unlevered free cash flow, net debt and ARPU.

A discussion of why we use non-GAAP financial measures and reconciliations of our non-GAAP financial measures to their GAAP equivalents may be found in the presentation posted to our Investor Relations website at investors.godaddy.net, or on our Form 8-K filed with the SEC with today's earnings release.

The matters we'll be discussing include forward-looking statements, which include those related to our future financial results; new product introductions; our ability to integrate recent or potential future acquisitions and achieve desired synergies, including our recent acquisition of HEG and the possible divestiture of HEG's PlusServer business.

These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Actual results may differ materially from those contained in the forward-looking statements.

And any forward-looking statements that we make on this call are based on assumptions as of today, August 8, 2017, and we undertake no obligation to update these statements as a result of new information or future events. Unless otherwise stated, when we refer to organic measures, we're referring to those measures excluding the impact of HEG.

I'll now turn the call over to Blake..

one, growing penetration of GoCentral, our entirely new mobile-optimized website builder; two, bringing new security offerings to market on the heels of the Sucuri acquisition; three, launching our new telephony offering, SmartLine; and four, as I just discussed, our HEG integration.

I'll spend a little time on our product progress including GoCentral Security and SmartLine. And then, I'm going to turn the call over to Scott to discuss HEG, and Ray for our financials.

On GoCentral, we're very pleased with the progress across many measures, including website publish rates, international sign-ups, paid conversion, a rapid pace of iteration on product and marketing and, most importantly, on customer reviews. Let me hit each one of those briefly. First, on publish rates.

Since our late 2016 launch, the number of websites published using GoCentral continues to march steadily upwards, with hundreds of thousands of websites now published. Every one of these sites can be edited and managed entirely from a mobile device or a PC and is mobile-optimized on both performance and conversion for customers.

And well over half of those new sites are being published within one hour of when the customer signs up, one hour. Now that's just wicked fast. Second, on GoCentral usage. Since we launched dozens of international markets at the end of March, customer sign-ups in markets outside of the U.S. now account for half of all new GoCentral sign-ups.

Our thesis about having an entirely end-to-end mobile website builder is really proving out in international markets. Third, on paid conversion. We've been thrilled to see conversion from free trials to paid subscriptions moving up quickly. Around the world, we've seen a mid-single-digit conversion rate from free trials to paid subscriptions.

The improvements we've been driving in publishing conversion rates since launch are coming from a wide range of factors that we're working on in parallel, from feature improvements in the product, to better merchandising on our sites and purchase flows, to increasing sophistication in our marketing and communication with customers.

Which brings me to my fourth point on our product and merchandising work. We're continuing to improve the customer experience with everything from new GoCentral features to purchase path improvements.

Just in the last few months, GoCentral customers can now sync content with Facebook; easily integrate with Google AdSense; add audio or video features; choose from hundreds of new themes, fonts, photos and layout options; and better merchandise their e-commerce inventory. We're also engaging customers at more points along the purchase path.

We're now successfully funneling domain purchasers to GoCentral free trials, and we're directing customers who publish sites to our new domain suggestion engine, which is actually making Domains an attached product. And we're now offering more choice on payment plan terms from annual to monthly.

And fifth, the reviews of GoCentral thus far have been outstanding, with nearly 80% of the ratings at 4 or 5 stars. The two big wins are in ease of use and the exceptional support we provide.

Many people assume that a DIY website builder leaves them entirely on their own, and when they discover they can get knowledgeable and consultative support from GoDaddy, they absolutely love it. We provided a couple of direct customer quotes in the earnings slides that reflect customer sentiment.

Now while we love to hear positive feedback of how we're helping customers succeed, we consider the negative feedback even more important. It tells us precisely where we need to improve. Where GoCentral isn't 5 stars, the feedback is largely about wanting GoCentral to do more, more features, functionality and flexibility.

And this is exactly what we expected and planned for. And the modularity we built into the platform is allowing us to run really fast at product improvement.

We have dozens of feature enhancements on the near-term roadmap, from expanded and deepened verticals to better UI, to much more social sharing, language translation, integration with Google Analytics and OpenTable and more, and while maintaining our exceptional ease of use.

Zooming out, I think, the meta point here is that our roadmap will move GoCentral from where it is today, an exceedingly easy website creation product for our customers to something that can auto-render across thousands of verticals from photographers to homebuilders, allow flexibility around design and features, and put content everywhere it needs to be, in social, search and more, without sacrificing ease of use.

Look, it's still early, but the velocity in the results are positive and we're gaining momentum. So beyond GoCentral, we're also now offering security products from our recent Sucuri acquisition to our customers. In fact, speaking of velocity, we had our new security offerings in the market within 60 days of the acquisition.

That's a testament to the quality of the product and the quality of the product teams. We're now providing website owners with tools to scan their sites, respond to hacks when they occur, patch vulnerabilities and more. And Sucuri is a leader in security management of WordPress websites, which is an important growth area in our hosting business.

Turning to SmartLine, we've seen thousands of sign-ups for our soft launch, which is available at godaddy.com/smartline. SmartLine is built on the technology from our FreedomVoice acquisition and allows our customers to add a second and completely separate phone line to an existing iOS or Android phone for as little as $4 a month.

We'll add SMS and MMS texting in the next couple of weeks, with 800 numbers, customized Daddy numbers and more coming next. We'll begin to ramp up our marketing spend behind SmartLine this fall as we hone our messaging and our tactics. So we're making great strides on our product roadmap this year with GoCentral, security and SmartLine.

And we feel very good about our goals for 2017 and beyond. And with that, I'm going to turn the call over to Scott to talk a bit more about our international footprint, particularly the integration of HEG.

Scott?.

Thanks Blake. As Blake mentioned, our HEG integration continues to go really well. Our combined company now manages 72 million domains globally and serves nearly 17 million customers around the world. Those are big numbers.

When we told everyone when we announced the acquisition that we expected $20 million in annualized revenue and cost synergies by the end of next year, and we're making really good progress towards our targets.

We hit the ground running immediately after we closed HEG in early Q2, integrating GoDaddy's SSL certificates and domain aftermarket experiences into the company's heritage brand such as 123 Reg and DomainFactory. Going forward, we have a number of integration efforts running in parallel, and I'll touch on just a couple.

First, we're focused on the merchandising experience across HEG's heritage brands. For example, we're testing the results of product and purchase flows on HEG's sites, comparing them to GoDaddy's and implementing what performs best for customers and for us.

We're also taking our industry-leading domain search capabilities and implementing them throughout HEG's brands. As a result, we expect to match more domain name searches, providing value to our customers and better business for us.

Second, we're in the process of building an integrated European customer care operation with A+ support and consultative sales. We've already deployed a number of our care leaders to the heritage HEG teams in Europe and are seeing good results.

Recall that GoDaddy today generates nearly 1/4 of our bookings from customer care, while HEG's percentage is lower. Helping their care teams learn how to engage empathetically with customers, identify specific needs and match those needs to our offering holds a lot of opportunity for our new European customers and also for GoDaddy.

And third, we're preparing to introduce more GoDaddy products to HEG customers, including our Managed WordPress offerings, GoCentral, Office 365 and more, which we'll roll out to European markets over the next several quarters.

There's also background work being done to optimize pricing and returns on our marketing spend, align procurement and contracts, rationalize facilities and more. I have to say that with everything that we're doing, we're particularly pleased with the alignment across our teams, with several leaders from GoDaddy U.S.

and the former HEG, now GoDaddy EMEA, working in really seamless collaboration towards the goal of establishing a single European business. So that's a quick update on HEG. I'm going to hand it over to Ray now to cover the financial picture, including our Q2 results and our full year outlook.

Ray?.

Thanks, Scott. In Q2, we continued to execute well on all fronts, with a strong product roadmap, solid financial results and new opportunities to leverage the business model with HEG. On a consolidated basis, revenue grew 22% to $558 million, and bookings grew 24% to $668 million.

On an organic basis, GoDaddy grew 12%, in line with our expectations, while HEG contributed $46 million in the quarter, a bit higher than our guidance, driven by the completion of the preliminary purchase price allocation. Customers grew nearly 18% with the addition of 1.6 million customers from HEG.

Organically, GoDaddy's customer growth was about 7%, in line with our recent trends. Consolidated ARPU came in at $129, up roughly 3% year-over-year. As we highlighted last quarter, that growth rate is a little lower than recent trends due to the inclusion of only one quarter of revenue from HEG in what is an annual calculation.

GoDaddy's organic ARPU growth was approximately 6% following a similar mid-single-digit growth trajectory in the recent quarters. Briefly on our three product revenue lines. Domains revenue grew approximately 15% year-over-year in Q2.

The majority of the growth was organic, driven by international, strong renewals and aftermarket domain sales, with the remainder attributable to the addition of HEG. We continue to look for organic revenue growth in our Domains business to move towards our customer growth rate over the medium to long-term.

Hosting and Presence revenue increased over 28% versus Q2 a year ago, with the majority of the incremental revenue coming from HEG. Organic growth was in the low double digits, similar to Q1, and also in line with our expected longer-term growth of roughly 1x to 2x our customer growth rate.

Business applications revenue grew 35% in Q2, driven by our growing product suite and customer base, along with a small contribution from the addition of HEG. International revenue grew 57% year-over-year or 61% on a constant currency basis. Beyond the addition of HEG, GoDaddy's organic business continued to grow nicely in the high teens.

International is now at roughly a $750 million revenue run rate with significant scale on its own. We continue to believe international expansion will be a key growth driver in years to come, given our global footprint, horizontal need of our products, the strength of the GoDaddy brand and value proposition and the contribution from HEG.

Turning to cash generation. Unlevered free cash flow grew 61% in Q2 to $135 million. Unlevered free cash flow growth was boosted both by the HEG acquisition and the favorable impact of a shift in pay periods versus last year, which we mentioned on our last call.

GoDaddy's organic year-over-year growth in unlevered free cash flow for the first half of 2017 was over 20%, continuing our recent trajectory. Looking at expenses, other than higher amortization related to the purchase accounting, the inclusion of HEG didn't have a perceptible impact on expense as a percentage of revenue for the combined company.

Gross margin ticked up sequentially. And for modeling purposes, we'd recommend holding it more or less in line with Q2 going forward. I'll point out, G&A this quarter includes nearly $14 million in costs associated with closing the HEG transaction and the incremental costs incurred as we integrate operations.

The takeaway is that we're getting operating leverage and we're seeing continued margin expansion year-over-year. One other item of note for the quarter is the TRA benefit below the operating line. This liability moves every quarter based off several factors.

However, you'll note that the adjustment is larger than usual, due both to the secondary offering that occurred in May, and a recent favorable tax ruling. As a reminder, adjustments to the TRA liability are noncash items. Turning to the balance sheet.

We finished Q2 with approximately $591 million in cash and short-term investments, and net debt of $2.5 billion.

We bought back $275 million in stock in early May, alongside a secondary offering by our four large holders, which we viewed as a cost-effective mechanism to accretively reduce our share count by approximately 7.3 million, without reducing our public float.

And finally, we reached an agreement to divest PlusServer at an enterprise value of EUR 397 million. After transaction fees and taxes, we'll net approximately EUR 350 million. The transaction is expected to close in the next month or so, and we'll use the net proceeds and cash on hand to pay off the EUR 500 million bridge loan.

You'll see a pro forma net debt calculation in the back of the press release, reflecting the anticipated sale of PlusServer and paydown of the bridge loan.

The divestiture of PlusServer, combined with expected cash flow growth this year, is expected to bring our leverage ratio down to near the midpoint of our target range of 2x to 4x by the end of 2017. Our long-term focus remains on driving strong and consistent cash flow.

As our cash flow and balance sheet capacity expands, and consistent with our stock repurchase earlier this year, you will continue to see us be thoughtful stewards of capital, with the ultimate goal of prudently driving attractive growth in levered free cash flow per share for our owners. So let's discuss our outlook for Q3 and the full year.

Note that this outlook includes no contribution for PlusServer. For both revenue and unlevered free cash flow, we're tightening our full year ranges and raising the midpoints. For Q3, we expect revenue in the range of $577 million to $582 million. For the full year 2017, our revenue range is $2.215 billion to $2.225 billion.

As I mentioned earlier, we completed the preliminary purchase price allocation for HEG and now expect its full year 2017 revenue contribution to be approximately $150 million. This number reflects purchase accounting adjustment and leaves $104 million to be recognized over the back half of the year.

For the full year, we expect unlevered free cash flow for the combined company of $475 million to $485 million, implying 35% year-over-year growth at the midpoint. Consistent with past practice, our cash flow outlook excludes expected acquisition and integration costs.

Taking a step back, our first half results and our full year outlook should paint a familiar picture for you. We've included HEG for the first time, but the takeaway is that nothing in our story has fundamentally changed. We feel good about the progress of GoCentral, security, SmartLine and other product initiatives.

We feel good about the trajectory of the HEG integration and we feel good about our operational and financial execution. And we're focused on leveraging our brand and scale to extend our global competitive advantages, growing our customers' ARPU and top line and delivering strong unlevered free cash flow in margin expansion over time.

Finally, we remain confident the business can generate unlevered free cash flow of $600 million next year. So with that, I'll turn the call back to Blake.

Blake?.

Thanks Ray. As Ray said, we're continuing to deliver on our strategy and financial expectations and we see a very big global opportunity to keep growing the business for many years to come. We thank you, as always, for your time. And we're ready to open the call to your questions.

Operator?.

[Operator Instructions] And your first question comes from Sam Kemp with Piper Jaffray..

Ray, thanks for all the disclosures around HEG. Maybe I can eke out a couple more. Can you talk about how much HEG contributed to bookings and unlevered free cash flow during the quarter? And then, Blake, you talked a lot about GoCentral.

Can you talk about where those customers are coming from? Are those customers that have previously been part of the GoDaddy customer base that are now upselling themselves into GoCentral? Or are you finding that you're actually acquiring customers at a substantial rate using GoCentral as the actual on-ramp?.

I will let Ray take the first question, then I'll follow up, Sam..

Sam, it's Ray. Effective with the close of the transaction, we're running these businesses together now under the GoDaddy EMEA banner. And so the decisions we're making are to get the best out of both of these businesses, so it's blurring the lines of separation.

So you'll see we provided you with some of the key metrics, but we're not going to get down into the details of every revenue and expense line item because, frankly, it's just an exercise in precision without accuracy.

But to give you a little insight into bookings, when we closed the transaction last year, we highlighted that their annualized bookings in '16 were 240 million. So if you look at the growth in that context, you'll see that the GoDaddy range is in that 12% to 13%. And GoDaddy did about 12% in the first quarter as well.

And same commentary around unlevered free cash flow, not breaking up the specifics between the two businesses because of the intermingled operations. But bigger picture and stepping back there, we've guided unlevered free cash flow to $480 million at the midpoint 2017 and growing that to $600 million in 2018.

So that 20% growth algorithm that we've been discussing on past calls continues to be our target. Hopefully, that helps you out a little bit with looking underneath the covers there..

So we actually are really pleased with the hypothesis, which was if we added a new on-ramp for folks that were not GoDaddy customers, that they would start coming into the franchise. So we're using GoCentral as this new on-ramp, and it's working.

You heard me mention in the comments that we actually are seeing Domains become an attach product for GoCentral customers, which is something we're doing with some really nice algorithmic suggestions on what a customer should do based on what they've actually entered into their website.

We're not going to split between how many are new versus GoDaddy customers, but we're absolutely attracting new customers with GoCentral who have not been in the GoDaddy franchise before, and we're quite pleased about that..

Your next question comes from Ron Josey with JMP Securities..

This is Shweta for Ron. Could you talk a little bit about SmartLine, a little more detail on your marketing plans and early traction on the product? You've mentioned you will be introducing texts and MMS and 800 numbers as well. So really, anything that you could add on that, that would be great..

Sure. So this is Blake. So SmartLine, you'll start seeing us start actually marketing at top of funnel in the fall. We have certainly thousands of them in the hands of users, have just introduced texting actually to the users that have the SmartLine capability today. You'll see that rollout in the next couple of weeks more broadly.

And I think that the two features that I mentioned, one was 800 numbers that will come out in the remaining of the year, calendar year, and vanity numbers that are numbers that feel like they are the same name as your website, and we intend to do some pretty interesting bundling between, frankly, GoCentral Mail and SmartLine, so you can have a full business package between having a website, a professional e-mail and a professional phone number that will be - that will make you feel like you are in business and have all the advantages of a large business.

We're pretty darn happy with it, and the installation and the usage is steadily climbing..

And when you talk about marketing spend, the promise of SmartLine is a broad one when you think about being able to get full functionality of a phone for a couple bucks a month and a second line.

And so from a go-to-market standpoint, as these features come online, we're going to start to test marketing spend all around the LTV to CAC economics and see what kind of spend, what channels in messaging works, and we'll go from there..

Your next question comes from Deepak Mathivanan with Barclays..

First question on GoCentral, the mid-single-digit conversion you noted from free to pay is pretty strong.

Can you talk about a bit on the trajectory of the product that you've seen over the last few months? Has it been consistent? And when should we overall expect GoCentral to become a material contributor to revenues or revenue growth on the hosting segment? And then, Ray, it seems like purchase accounting impact was lower in 2Q.

So does that mean it's going to slightly be higher than your expectations in 3Q and 4Q? What sounded like the contribution on - from Host Europe in the 3Q guidance, I know you raised the full year expectation to $150 million..

Deepak, this is Blake. So on GoCentral, we're seeing, I'll call it, mid-single-digit conversion, and I'd say, over the last couple of quarters when we introduced the product, we've seen a steadily increasing conversion rate.

As we've dialed in sort of the purchase path flows and actually letting people get access to the product and making it just frankly easier and easier to build a website. So we're seeing folks quite pleased with the tool, with the results the tool creates. And then, they start converting.

You got to think of this business though, I think, in terms of contribution. Remember, this is a lot of our revenues, as you know, are already in the franchise because we're a renewal business.

And so until we start rounding, I think, some of these new GoCentral users into renewals, we're not going to see I think a substantial contribution to the hosting line.

Certainly, it's going to grow, but if you think about hundreds of thousands of customers at 5% - hundreds of thousands of publishes at 5% conversion, you can kind of just do the math from there. And I think that we'll continue to see that grow and start lapping itself in terms of subscription services..

Deepak, just to tack on, this is Ray, to tack on to Blake's point, if you look at that Hosting and Presence line now, it's an $800 million-plus annualized revenue line item. So it's going to take a decent number to start moving the meter there. On your question around purchase accounting, obviously completed the preliminary allocation.

The numbers came in a little better than what we had guided to the Street last quarter. And I wanted, because of the confusion around that haircut in the deferred revenue, we wanted to give you guys a point estimate for the year. So it's $150 million, up from $140 million last quarter. We've recognized $46 million.

So as you look at the third quarter guide and then the implied fourth quarter as we give the full year guidance, you'll see that tick up. Now one thing to note if you look back at historical GoDaddy, the haircut and the purchase accounting impact is not as extreme. It happens mostly upfront in HEG getting their shorter term on their customers.

So hopefully, that helps you out..

Your next question comes from Jason Helfstein with Oppenheimer..

A few questions. So just I want to understand the logic of putting Presence with Hosting as the way you report it.

Why not put Presence in business application? The second question, the 28% growth in Hosting and Presence, if you back out HEG, would it have had an impact on that? So kind of perhaps you can give us like a pro forma growth for that? And then, lastly, when you're thinking about the conversion opportunity in presence, how are you thinking about that? Because Scott, to your point - or I guess, the point on when the renewals come in, that's really when you have the opportunity to try to kind of then sell that feature, upsell that feature.

And just how are you thinking about it longer term? Is there any kind of numbers you want to share?.

Jason, this is Blake. I'll cover one, let Ray cover 2, and then, Scott will cover 3. Look, the logic of putting Hosting and Presence together is they're both websites.

When somebody wants to put a presence on the Web with a URL, they want to be found, right? You're either going to do a DIY website builder, you're going to hire a professional to build a website for you, or you have advanced skills and you're going to build it yourself.

And remember that more than 50% of websites today are built by a professional, not built by a business owner themselves.

So we look at that hosting business, whether it's being built by a professional or an advanced user or somebody using a DIY website builder as being, frankly, elastic, they're going to make a choice on whether they're going to use a simple DIY website builder, have somebody build it, or advanced enough to go use a more advanced hosting product, and that's why we put those things together..

Jason, it's Ray. On your HEG question specifically around Hosting and Presence, give you a little context on HEG's impacts on the different product lines. Very rough split. HEG is about 30% Domains, 60% Hosting and Presence, and 10% biz apps.

If you apply those ratios to the $46 million in revenue that we put in this quarter, that will give you a good sense of what it contributed. But the GoDaddy Hosting and Presence is still growing at double digits, very similar to first quarter rates..

Jason, help me out on the last question, just around conversion on GoCentral or SmartLine. I just want to make sure that I'm able to answer your - answer it accurately..

Sure. So I guess, the point is as customers go to renew their plan, their hosting subscription, that will be your opportunity to try to effectively offer them GoCentral to existing customers.

I mean, is that kind of the idea? And just any anecdotal on where you think conversion rates could go with that business over time?.

So part of the renewal, Blake's renewal comment is this is just - it's a renewal business. And so right now, we're getting new builds from both - new builds from existing customers and attracting new customers to the franchise. But new by itself on top of a big renewal base, it's just tough to move sort of a P&L needle.

And so the focus is get new builds, again, new customers and even with their existing customers, and as those new builds flow into renewal cycle, add, frankly, the conversion rates and the resonance that we're seeing with customers, that should produce a positive lift to renewals and you're getting the flywheel going of more new coming into a renewal base.

So the focus on the product is still get a new idea, and whether it's to a new customer or an existing - or a new idea from an existing customer or a new one. Now over time, there are interesting ways that we can think about and play with conversion of old sites into the new content platform, but that's maybe down the road..

Your next question comes from Brian Essex with Morgan Stanley..

Blake, I just want to maybe comment that we met with a company in your space that's trying to hit you as a benchmark for their customer care, and they noted how difficult performing up to your standards are.

Given that backdrop, how much progress have you made at HEG? And what are the barriers that you see towards getting their customer care business up to your standards? How quickly might we expect that to have an impact on their platform?.

Brian, I'm going to hand that question over to Scott because he's been intimately involved in the HEG integration.

Scott, you want to handle that one?.

Yes, please. We're really pleased with the progress we, and it's now the collective EMEA team that made creating a single care operation. I'll tell you, one of the things that we were excited about the HEG business was the commitment to care, particularly as a support mode.

So the business in the European operations of HEG had a similar ethos around support and had been trying and experimenting with, again, intelligent next product additions, all, again, support turning into sales, which is really the method that we've been operating in and perfected over 20 years.

And so what's nice is it's actually been pretty easy to describe the model that we're trying to get to and then build it up in Europe. And obviously, when you're dealing with hundreds of agents and reps in different calls, if that's not a snap your fingers business practice and then it rolls out.

But we feel really good about the practice of A+ quality support and being able to translate that into a revenue event and being able to have an operation that's going to operate at that way very well in early 2018 in Europe..

Maybe I can follow-up with a question on Office 365, I know penetration was pretty light in HEG.

Now that you've been in there for a couple of months, any traction there? And can we infer anything from that traction onto the growth of that business for the rest of the year?.

You want to cover that, Scott, or do you want me?.

Sorry, I figured I'd just - it's O365, I'll take it. The reinforcement of productivity and branded e-mail as a value proposition that certainly extends into Europe is strong.

I'm not sure there's any immediate thing that we'd call out in the results relative to O365, other than the confidence that when we add a fantastic simple onboarding experience, plus the ability to migrate from an older e-mail system, whatever it might look like, into a branded both e-mail and productivity suite, that the value proposition is just a superstrong one..

Yes, just to pile on to Scott's comment, Brian, one of the things we did with Office 365 when we introduced it into our own GoDaddy customers a few years ago was we've modified the installation process to go from 22 individual screens down to 1, with a lot of deep programmatic capability on the back end that made it super simple for somebody to get exactly the name they wanted on one of the domains that they owned.

And we will absolutely do the exact same thing at HEG to make it just a wonderful product experience.

So you'll see the same kind of traction that we've had in our franchise at HEG, but we're going to make sure that we offer the exact same quality level from an experience and customer delight perspective that we've done at GoDaddy, which has given us that nice lift that we've had in that business..

Your next question comes from Sterling Auty with JPMorgan..

This is Ugam Kamat on for Sterling Auty. Firstly, I just wanted to look at the pro forma income statement.

And I was wondering how much did the PlusServer business contribute to the revenue and the EPS? And secondly, on the international front, can you break it down by geographies? How are you seeing the demand, particularly in Asia Pacific?.

Sorry, I missed the first part.

How much did PlusServer contribute? Or did you say HEG?.

PlusServer. Because you told the business….

Yes, so the PlusServer, when you see it in the P&L, it's being treated as a discontinued operation. So it won't show up in the revenue or the expense. It's on its own line item. And it's a very - relatively small contribution this quarter. So....

And on the international front, how are you seeing the demand with respect to Europe versus Asia? And what do you feel can be the demand drivers moving ahead?.

As we've talked about in past calls, we have a global business. We have operations in Asia and in Europe. Obviously, now, combined with HEG, we're getting to be a pretty big size in Europe. In Asia, our markets - India, which we've talked about in the past, is a very big and growing market.

And then, an effort over the last year has been to pick up our investment effort in several of the countries, both around China and outside in Chinese Mandarin language. And that's going well. Obviously, we're starting from a smaller base.

And I think, we had quantified that in past calls on the size of the Asia base, but we continue to see nice growth as we build up our businesses there.

I think the important point is, again, the need state that we serve is a pretty horizontal one around the world, which is customers getting an idea, not only up and running online, but having it grow and thrive, both with front office and back office solutions.

And what we're building is a global platform to be able to serve that need state around the world..

Your next question comes from Jonathan Kees with Summit Redstone..

I wanted to ask about two things. One, the marketing and advertising for the quarter, it grew less than I had modeled - what I would expect. So interested in you've talked about marketing and advertising kind of growing with revenue there.

I would think that with rebranding from HEG to GoDaddy EMEA and other marketing efforts that you're launching there, they would have been a lot higher, just a little color there.

And then, second thing I wanted to ask is you've done a good job in terms of talking about the conversion from the customer care perspective, turning that into a sales experience and how that's higher than HEG.

Just curious, from the customer retention perspective, how you compare it to HEG and if that's improved with HEG?.

Yes, Jonathan, it's Scott. So first on the marketing and advertising and marketing side, we've always - we've talked about it growing in line with revenue. And if you go backwards over time with us, you'll see in some quarters, it's a little lower in revenue and sometimes it's a little more.

And I'd tell you to not hone in on any particular quarter, but that trending roughly in line with revenue is still the right long-term trajectory. Remember, when we think about our advertising and our marketing lines, we're really using these on an LTV to CAC basis.

And going into either geographies or particularly product lines, looking for ways and continuing to grow around the world while maintaining what are pretty nice lifetime value to CAC returns on economics.

And so when we think about our marketing spend, it's really around those metrics and not necessarily sort of what it looks like in any particular quarter. In terms of your second question on care and retention, remember, at the acquisition, we shared that HEG's retention was actually really, really strong.

Now on a customer level, remember, customer, GoDaddy is at about 85% customer retention on an annual core level. HEG was actually at about 88%. Again, those brands underneath HEG offer a great experience and higher retention. It was a big part of that business model and why we felt really good about bringing those businesses in..

Your next question comes from Mark May with Citigroup..

This is [Kinder Alan] for Mark. Just 2, one on customers. I believe you guys disclosed that you had over 1.7 million customers for HEG at the start of the second quarter, and then reported this quarter that it was 1.6 million.

Can you discuss what caused that decline in HEG customers throughout the quarter? And then, one on GoCentral conversion, you talked about it being in the mid-single digits.

Can you compare how that compares with free trials run for other products that you have?.

Ken, it's Ray. I'll take your first question. It wasn't necessarily a decline in the quarter. Obviously, as we closed the acquisition, we brought all the receipt-level detail, all their key metrics into GoDaddy and aligned those metrics to our definitions. So that changed the number that we had said before to where it landed.

It's really removing the duplicates across the brands. So that's just a definitional alignment..

Yes, it's Scott. In terms of the conversion from free trial, solid. Again, if you look not only at our products but others using that sort of model, mid-single digit conversion tends to be a pretty good number. So we feel good about where it is now. And obviously, we're going to keep trying to work that as we go in the quarters ahead..

Your next question comes from James Cakmak with Monness, Crespi, Hardt..

Ray, you had mentioned kind of the outlook on the gross margin line to kind of think about it in terms of 2Q, and previously, that's been deleveraging some, I think, more attributable to the growth in Domains.

So I guess, as we look forward, given the higher concentration of Hosting and Presence at HEG and some of these newer products, is that something that we can see aligning that we can start to see leverage from when we look forward? And then, I have a follow-up..

Yes. So as you look at the leverage we got this quarter, we're fairly small year-over-year. HEG is helping with that a little bit with just given the size of their hosting business and how much more they're levered there.

But I think, I'm going to stick to the same script that we guys have been telling - we've been telling you guys over the past 6, 8 quarters. You're going to see that number move over time. As we hit more of the higher growth products with higher margins, you should see that increase. But for modeling purposes, I want you to keep it steady.

Because as we add more products in, we want the flexibility to put them either buy, build or partner. And depending on that decision, that's going to drive a different P&L perspective. So we're, like we always have, we're managing to the adjusted EBITDA margin. So where it lines in the P&L is based off of those decisions..

Steady it is. And then, Blake, I think, you had mentioned that Domains are starting to become an attached product with GoCentral. Just before, Domains were the hook.

Obviously, these new products are going to be the newest drivers for you, but how should we just think about Domains in general? I mean, is this just going to become a secondary attach component? Or do you still expect that to be kind of an engine for you guys because you still had all the gTLDs and whatnot..

Yes, James, Domains is still going to be a very big - our biggest by far engine of attach. So folks, generally, the pattern is, I have an idea, I'm going to name it. That is still largely the way most people get online today.

There's other paths and on-ramp that's happened over the last few years where, I'm going to go play with the tools, see if I can stand up and get a website and name it, is something that is happening not at the same volume, but it's certainly happening across the industry.

And what we have seen is because we have as much expertise as we do in Domains to use our algorithms to help somebody find exactly what they want, once they have built a website and we can actually look at all the text that they've entered in that website, what category of business they've chosen, what they've named their business, we can actually just suggest domains from the information they've already provided us without them ever having to search for a domain.

So we can put up four or five suggestions that are very close to what they had in their mind when they started creating their website. And it's become a pretty powerful attach mechanism for us.

We still think that Domains will be the giant hook that people use mentally when they say, "I've got an idea and I want to name it." But we know that this is going to be an important on-ramp for us going forward..

Your next question comes from Lloyd Walmsley with Deutsche Bank..

This is actually Matt Diamond on Lloyd's behalf. It sounds like everything with GoCentral is going pretty well to start off.

But I'm curious, have you seen any particular verticals where it's ramping notably higher than the corporate average and where your optimism is especially strong?.

This is Blake, Matt. We're actually seeing verticals that are sort of what you'd expect, restaurants, real estate, photography, and I won't go through the list. We've got 16 that we think are the big hitters. And what we're seeing is that we're seeing behavior of those individuals and knowing exactly what they are doing.

And then, we can take the product and start tailoring it to what we're seeing user behavior when - in the creation process. So adding capability that we know that these folks are interested in. We're scanning any kind of feedback where we're missing something that they think would be perfect for their site and then addressing those.

And you'll start seeing us start lifting features and start lifting those broad categories, plus subcategories underneath those broad categories. If I use restaurants as an example, there are many categories underneath restaurants by type of restaurant that are also important.

And imagery, and menu items, et cetera, start to change as well as whether it becomes a takeout business or not. So there are some really interesting things that we're getting signal on from folks that are using the product today and who are using that signal to tailor the product going forward..

And with the modularity that you're adding to GoCentral, I'm curious, is there any ramifications for OpEx in the second half? Or is there still some leverage to be seen there?.

No, it's all leverage. Like the really - let me just explain the framework. So the way that we've built the product is incredibly programmatic. So if you think about if you play with GoCentral, you have right rail editing tools that allow you to make changes to the site.

If I use a wedding site as an example, all we have to do is - to make that a wedding-specific product is make sure that we have the editing tools named in a way that somebody building a wedding site would think of it.

So if they had a guest list or they had an invite list and they wanted to have a registry gift area, we just change the names in a file that is super simple and programmable. That makes it very easy for us. So we've got a ton of leverage out of the product without having to spend a lot more into it to produce a vertical.

So that was the premise and the hypothesis of going super simple and horizontal to start with, and then building vertical depth on top of that capability..

Makes a ton of sense.

Last one for me, how should we think about customers on Website Builder 7 in GoCentral? Is the idea to eventually migrate them over to the latter? Or will the Website Builder and GoCentral be run as two separate assets?.

Well, I mean, ultimately, we would like folks that are on Website Builder 7 to migrate to GoCentral. We're not going to force a migration for people because it's an unpleasant experience when that happens.

But picking up all the features, and one of the things I'll say is GoCentral had a deeper - sorry, Website Builder 7 had a deeper feature set that was not modular and was not - we would not gain operational capability with that product.

So as we add more and more critical capability, we'll start seeing people migrate across from Website Builder 7 over to GoCentral. But again, we're not going to force that migration..

[Operator Instructions] And your next question comes from Sameet Sinha with B. Riley..

This is actually Lee Krowl filling in for Sameet. Just two relatively simple ones, first on GoCentral. Kind of curious as to kind of the user base as they adopt.

Are they first-time users to kind of domains and websites? Or do you feel like you're having a competitive displacement from some of your peers? And then, secondly, just on the full year for HEG, what's baked into that in terms of cross-sell of existing GoDaddy products?.

Yes. Lee, this is Blake. I'll answer the first one, and then I'll hand it over to Ray. So we are seeing folks that are showing up that are new to our franchise that are considering building a website first. They can do that with us. They can do that with other competitors.

And what we've got a pretty interesting set of on-ramps for somebody who's going to build a website. We have a WordPress on-ramp that is much more complex, that allows unbelievable extensibility and flexibility and, frankly, has more development capability for folks that are pros and developers.

And then, this new cohort that we're seeing show up in our customer base are folks that are saying, "I really don't know anything technically. I just want to build something super simple.

Please make it easier than PowerPoint." And these are folks new to the franchise that are showing up, that are playing with the tool, trying it out, publishing sites and then activating them against a domain name. And that is a new cohort for us.

And frankly, we've even seen folks that are displaced, and this actually happens quite often, where somebody will have a website developer build the site for them, the website developer gets a full-time job because they were a freelancer, and they kind of disappear, and now, they're left in the lurch.

And so what we've seen happen are folks that are actually rebuilding websites that they've had before with a developer who's no longer there and being happier with the results of this new website. And this is somebody who may not have been a customer of ours.

And then, coming in and building one from scratch and being happier with the results than they were with a Web pro site that was built for them. So there's actually a dog rescue business. It's highlighted on one of our earnings slides that you can go check out to get a flavor for that. And I'll pass it over to Ray on HEG..

Yes. Lee, as far as what's baked into that full year guide on $150 million in revenue, it's the current product set that we've got to put in place, as Scott mentioned, SSL certificates and domain aftermarket experiences as well as the pipeline that we've got coming along of WordPress offerings, GoCentral, eventually O365.

A lot of that is moving into next year though. So you won't see a lot of uplift this year from that product integration because it's being done over time..

Well, it looks like that's the last question, everybody. So I'd like to thank all of you for spending time with us on our second quarter earnings call. And yes, Marta, I was just told, tell everybody it's your birthday. There's no better way to spend a birthday than doing an earnings call. So thanks, everybody.

And we look forward to talking to you in the third quarter. Bye now..

This concludes today's conference call. You may now disconnect..