GoDaddy Inc

NYSE:GDDY

Good afternoon, and thank you for joining us for GoDaddy's Fourth Quarter and Annual 2023 Earnings Call. I'm Christie Masoner, VP of Investor Relations. And with me today are Aman Bhutani, Chief Executive Officer; and Mark McCaffrey, Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. [Operator Instructions] On today's call, we'll be referencing both GAAP and non-GAAP financial measures and other operating and business metrics. 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 site at investors.godaddy.net or in today's earnings release on our Form 8-K furnished at the SEC. Growth rates presented represent year-over-year comparisons unless otherwise noted.

The matters we'll be discussing today include forward-looking statements such as those related to future financial results and our strategies or objectives with respect to future operations. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our periodic SEC filings. Actual results may differ materially from those contained in forward-looking statements. Any forward-looking statements that we make on this call are based on assumptions as of today, February 13, 2024, and except to the extent required by law, we undertake no obligation to update these statements because of new information or future events.

With that, I'm pleased to introduce Aman.

Good afternoon, and thank you all for joining us today. At GoDaddy, our mission is to empower entrepreneurs and make opportunity more inclusive for all. Our strategy centers on creating customer value, driving profitable growth, resulting in compounding free cash flow per share and long-term shareholder value. Our focus remains on margin expansion and growth in our Applications & Commerce segment.

2023 was a pivotal year for us, and I am pleased with our financial and operational results. Innovation accelerated as we brought together our technology capabilities into a unified technology stack, enabling us to launch our compelling GoDaddy Airo experience. We also drove 2023 normalized EBITDA margin ahead of our guidance as we balanced investment in growth and cost structure management. Full year normalized EBITDA margin increased approximately 200 basis points, resulting in a 12% increase in free cash flow and a 21% increase in free cash flow per share.

In Q4, we drove 16% bookings growth in our high-margin Applications & Commerce segment, and this momentum continued into January. Our focus on the combination of optimizing costs and driving growth in Applications & Commerce has positioned our business well to exit 2024 with a normalized EBITDA margin of approximately 31%.

At the investor dinner in November, we showcased how GoDaddy Airo delivers a seamless experience for identity and presence, and our teams have launched even more capabilities since then. At our upcoming Investor Day on March 6, we will showcase these new capabilities as well as provide a sneak peek into what's coming soon. Airo enablement of Commerce features will also be showcased, which now expands the Airo experience across the entire Entrepreneur's Wheel, fully unlocking the power of GoDaddy's software platform for our customers in a seamless and intuitive manner.

Over the last few quarters, we covered our continued efforts to optimize our marketing spend and G&A expenses. We have had similar efforts in technology and development and care as well. In technology and development, the simplification and unification of our technology stack led to a material reduction in our server footprint and multiple areas of costs associated with it. We also expanded our access to talent globally. And together, these items benefited both our capital and operating expenses. In care, we are harvesting the benefits of our investments in technology and global scale as customer preferences shifted towards asynchronous chat and with continued room for leverage through the automation of tasks and the rollout of GoDaddy Airo for our care guides.

Additionally, the power of data from our GoDaddy software platform bolsters our ability to drive faster decision-making and is expected to benefit both our margin and revenue opportunities. We are excited to share more about our continued leverage opportunities driven by innovation in technology and care at our Investor Day in Tempe.

As always, I would like to cover our high-priority initiatives, but I will keep my comments here brief since we plan to share an expanded set of demos in March. To start, bundling has been a key focus for us as part of our innovation in domains and productivity to drive attach. This initiative primarily benefits our high-margin Application & Commerce segment, and we expect our Airo experience to drive this higher over time. Airo has also created new engagement surfaces, allowing us to deliver automated customer experiences that we will continue to improve over time.

On GoDaddy Airo, I have an update on its performance since launch. I'm happy to share that in a controlled experiment, customers that were part of the first test cohort for the Airo experience monetized at rates higher than those customers in the control group that were not exposed to the Airo experience. The increased monetization was due to attach and shifting the mix towards higher-priced and higher-margin products. This is particularly encouraging because significant customer experience changes like Airo typically take many months of iterative improvement to outperform the control group.

With this initial promising result, we have rolled out GoDaddy Airo to more customers in the U.S. We have also launched tests in international markets a few days ago. Our goal for Airo is to help more customers discover more products and engage them at higher rates, leading to even greater monetization opportunities. As a result, we are closely monitoring cohort performance across discovery, engagement and monetization. Components of the GoDaddy Airo experience are also currently being tested in our Managed WordPress and Hub experiences, creating opportunities to save our designers and developers time and effort. We are also testing the Airo experience in care, so guides can support our customers better and faster. Our platform approach to GoDaddy Airo means that new capabilities are quickly coming to market. For example, we will test Airo Commerce functionality in the first half of this year, and these capabilities will extend to our partnerships as well. On Commerce, over the last year, we proved that we can sell our payment solution into our customer base. And it was the largest driver of GPV growth last year. In fact, annualized GPV for 2023 exceeded our expectations and grew 125% year-over-year. As we enter 2024, we are looking forward to surfacing our Commerce capability more seamlessly with our Airo experience and doubling down on selling the full omni-commerce solution, driving higher-margin subscription revenue. This is the last of a series of proof points that set up the Commerce business for the long term, which is aligned with our overall strategy of creating customer value that ultimately drives profitable growth. As Commerce subscription revenue takes center stage and GPV growth takes lower priority, we still expect to continue to scale our base of Commerce customers by growing GPV at healthy double digits.

In closing, as I look ahead at the rest of 2024, I am excited by our ability to drive margin improvement and growth in Applications & Commerce, which we expect together will result in impressive improvements in free cash flow per share. Behind these improving metrics is a talented workforce that is committed to ongoing innovation. For example, every week, we launch new tests, methodically track results and share results broadly across the organization, making us better every day. The operational discipline of compounding improvements and doubling down on proof points continues to crystallize our path forward and raise our confidence to achieve our targets.

With that, here's Mark.

Thanks, Aman. Hello, everyone, and thank you all for joining us. In 2023, we made significant strides in our ability to deliver a unified GoDaddy software platform for our customers. These efforts are reflected in our results that drove sustained double-digit growth for our Applications & Commerce revenue of 13% in the quarter, expansion of our Q4 normalized EBITDA margin above our target, delivering 29.5% margin and free cash flow per share also above our target delivering $7.50 for the full year.

Beginning with Q4 results. Our high-margin Applications & Commerce revenue grew 13% to $377 million. And we delivered an expanded segment EBITDA margin of 44%, increasing 100 basis points since last quarter and 300 basis points since last year. ARR for Applications & Commerce grew 10% to $1.4 billion, and our Create + Grow ARR was up 8% to $481 million. In Commerce, we drove significant growth in annualized GPV to $1.7 billion, more than doubling last year's performance as conversion of our existing customers to the GoDaddy software platform remains strong.

Core platform revenue grew 2% to $723 million in the fourth quarter, and segment EBITDA margin grew to 32%, increasing 200 basis points since last quarter and 250 basis points since last year. ARR for core platform was $2.3 billion, consistent with the prior year. Growth in core platform during the fourth quarter was supported by Domains growth of 4% on continued strong demand and price increases. Bookings growth in Domains was 7%, providing a positive leading indicator for future Domain revenue.

In addition, aftermarket grew 14% to $118 million on increasing volume and easier comps. As a reminder, while aftermarket is stable on an annual basis, it is more difficult to predict quarter-to-quarter compared to our other businesses due to its transactional nature and the fact that it relies on third-party sellers and buyers to determine a mutually acceptable valuation.

Our gains in core platform were partially offset by an 11% decrease in hosting as we continue our efforts to unify GoDaddy's software platform. Bifurcating the hosting business, the continuing GoDaddy hosting revenue remains a stable, strong cash generator with high retention. The remainder of the portfolio decreased over the past several years, and we have taken deliberate steps throughout 2023 to rationalize the business. We will continue to evaluate the components of this business, integrating platforms that are strategic and rationalizing platforms that are not accretive to our long-term financial model.

Total revenue in Q4 topped $1.1 billion, growing 6% on a reported and constant currency basis. International revenue grew 4% on a reported and constant currency basis to $354 million. As a reminder, our migrations and our divestitures are primarily impacting international regions.

Q4 bookings grew to $1.1 billion, up 7% or 6% on a constant currency basis. Applications & Commerce bookings grew 16% on a strong attach of productivity solutions and continued strength in our Create + Grow products. Core platform bookings increased 3% due to the strong fourth quarter performance in Domains, offset by migration and divestiture headwinds in hosting. Subscription bookings grew over 200 basis points ahead of subscription revenue. Normalized EBITDA in Q4 grew 22% to $324 million, representing a 29.5% margin and an expansion of nearly 400 basis points compared to Q4 2022. The continued margin expansion was driven by the leverage gains we achieved in the second half of 2023 across all spend categories. As we shared last quarter, we continue to expect Q4 2024 normalized EBITDA margin of approximately 31% with continued margin expansion in the out years while also driving innovation, like you saw with our GoDaddy Airo experience.

As we think about this seamless experience for our customers, Airo is possible thanks to the work we have done to unify our technology stack into one software platform that includes ownership of the data from domain through to transactions. And this serves as an accelerant to our model as we bundle and bring more products to the market faster on the platform.

With that, during the fourth quarter, we reduced our combined technology and development and capital spending by 7% from our migrations, divestitures and restructuring efforts throughout 2023 as well as from the reduced data center capital expenditures. We expect that our technology and development spend will continue to decline in absolute dollars in 2024 compared to 2023, as most of this work was completed in 2023.

Moving on to cash generation. Unlevered free cash flow grew 46% to $347 million, while free cash flow grew 51% to $305 million despite a 13% increase in cash interest expense year-over-year. Free cash flow per share increased 21% to $7.50 per share, driven by growth in Applications & Commerce, operating leverage improvements and share repurchases throughout 2023, which is partially offset by an increase in cash interest expense.

Turning to the balance sheet. We exited the year with $0.5 billion in cash and short-term investments and total liquidity of $1.5 billion. Net debt landed at $3.4 billion, below 3x net leverage on a trailing 12-month basis and near the midpoint of our targeted range of 2 to 4x.

In January 2024, we repriced $1.8 billion of outstanding principal to secure a 50 basis point interest rate reduction. This strategic adjustment, along with the repricing completed in July 2023, are together expected to reduce annualized cash interest expense by approximately $22 million.

Additionally, the cumulative shares repurchased under our current authorization totaled $2.6 billion, representing 34.2 million shares retired. This reduced our fully diluted shares outstanding since the inception of these authorizations by over 20%, achieving our 3-year targeted reduction ahead of schedule. Our buybacks over the last 2 years have driven impressive ROI for this capital outlay, demonstrating our disciplined capital allocation framework and dedication to driving long-term shareholder value. Moving on to our annual financial results. Total revenue grew 4% or 5% on a constant currency basis to $4.3 billion. ARPU grew 3% to $203 as we added 100,000 net new customers despite the elevated churn from our ongoing platform migrations and divestitures. Customer retention remains 85% as we drove improvements in 2-plus product attach with greater than 50% of our customers paying for at least 2 products. These high-quality customers are stickier and give us greater pricing flexibility.

Applications & Commerce revenue grew 12% to $1.4 billion. And core platform revenue was flat, totaling $2.8 billion. International revenue grew 4% to $1.4 billion. Total bookings grew 4% or 5% on a constant currency basis to $4.6 billion.

Full year normalized EBITDA grew 12% to $1.1 billion, representing a 27% margin for the year, an expansion of nearly 200 basis points over the prior year. Lastly, full year unlevered free cash flow grew 14% to $1.3 billion, and free cash flow grew 12% to $1.1 billion, both exceeding our guide for the year and showing impressive normalized EBITDA to cash conversion of nearly 1:1.

Moving on to our outlook. For the full year, we expect total revenue to be within the range of $4.48 billion to $4.56 billion, representing growth of over 6% at the midpoint of the range. When excluding the approximate 100 basis point impact of divestitures and migrations that we will lap in the year, our growth would be 7% at the midpoint of the range. In Applications & Commerce, we are projecting revenue growth of low to mid-teens for Q1 and the full year. In core platform, we are projecting revenue growth of low single digits for Q1 and the full year.

As we have shared previously, the entire GoDaddy team is committed to maintaining operational discipline and deploying opportunities to gain further leverage within our model. We delivered on this commitment in 2023 and expect to continue this trend in 2024, resulting in expected normalized EBITDA margin of approximately 29% for the full year.

We are targeting unlevered free cash flow of at least $1.4 billion, free cash flow of at least $1.2 billion and free cash flow per share of approximately $9, representing a growth rate of 20% for the full year of 2024. In 2024, we expect capital expenditures of $35 million and cash interest payments of $155 million, representing reduced spend of 11% over 2023. In addition, we expect income tax payments of approximately $30 million.

On share repurchases, we expect to buy back shares under our remaining $1.4 billion authorization using our disciplined capital allocation framework that we've applied in past quarters. Capital return has been and will continue to be a priority for GoDaddy, along with prudently managing our balance sheet as we look to drive compounding returns for our shareholders.

For Q1 2024, we are targeting total revenue of $1.085 billion to $1.105 billion, representing nearly 6% growth at the midpoint of the range.

As a reminder, because of the timing of certain marketing spend, such as the spend that supports our heavy renewal cycle in Q1, and the spend related to our launch of GoDaddy Airo, our normalized EBITDA margin will build over the course of 2024. As a result, we expect Q1 normalized EBITDA to be 27%, representing a nearly 300 basis point expansion over Q1 2023. Over the course of the year, normalized EBITDA margin is expected to increase to approximately 31% as we exit the year, which averages to approximately 29% for the full year. We are proud of our record of accomplishment of increasing margins on an absolute basis and compared to our own initial guidance over the last 3 years. Investors should continue to see this discipline moving forward.

In summary, we remain dedicated to actively managing our business through a combination of durable top line growth and improving profitability. We are focused on balancing the 2 to drive our strong free cash flow, which, when coupled with our disciplined capital allocation framework, creates significant value for our shareholders. We see an exciting path and have strong confidence in our ability to execute against our strategic priorities.

At our Investor Day on March 6, we will demo the expanded capabilities of the GoDaddy Airo experience and Commerce. We will also discuss long-term growth and profitability expectations and levers, and we will provide a clear view of our opportunities. We will share our capital allocation framework and the shareholder value it will create. We are committed to providing the information you need to understand our long-term strategy and initiatives, model the business confidently, value the business effectively and hold us accountable for executing against our stated objectives. We'll end the day with Q&A hosted by our management team.

With that, I'll hand the call over to Christie Masoner, VP of Investor Relations, to open the call for Q&A.

Thanks, Mark. [Operator Instructions] Our first question comes from the line of Naved Khan from B. Riley.

Can you hear me?

We can.

We can.

Okay. Great. So 2 questions from me. One, maybe just on the big picture macro environment. Just your views on where we are currently in terms of demand. And then in relation to that, where do you see -- or what would cause you to come in at the high end of the range that you just gave versus the low end? So just kind of encapsulate that for us.

And then the other question I had is around the $1 billion in valuation allowance. I think you had sort of a release in the valuation allowance. So you already have a tax shield, which I think kind of protects you from paying taxes or meaningful amount of taxes until 2030 or '31. Is this in addition to that? How should I think about the release?

Thanks, Naved. Why don't I kick that off with a quick comment on the macro, and I'll turn it to Mark for sort of the range and the valuation allowance. On the big picture, our customers continue to be the micro businesses, and they're a resilient group. And definitely, we see strong demand continuing to come in through the front door. Of course, we continue to optimize our spend, marketing spend, and be very, very judicious about finding new customers and bringing them to the site. But gross adds continue to be strong. And generally, I would say our customers feel a little bit better about their prospects. Mark, I'll turn it to you.

Yes, absolutely. And thanks, Naved. On the high end of the range, I mean, you're really looking at the market around aftermarket. We've looked at it as a flat business to slightly growing single digits, but it's totally subject to larger transactions. Easier comps in Q4 of this year, but it seems to be a flat business but can vary in the range. Also, we have to look at the bundling efforts we're making. Airo is early stage. We're seeing customers come in the funnel. Aman talked about the demand, but they're coming in and attaching that second plus product. Seeing a lot of momentum there. Obviously, continued momentum would be helpful.

Commerce, we're seeing continued conversion of our existing customer base to our payment platform. There's always upside from pricing as we get into more value delivering in there. So there's many different things that can put us to the high end of the range. We like the momentum. Obviously, we call things as we see them today, and we feel really good about where we are and how that momentum is carrying forward.

On the price -- sorry, on the tax, on the tax. As a reminder, we paid a onetime $850 million fee in 2020 to buy the tax savings that -- from our shareholders back in that time, right? And that was the NOLs and the credits that had built up over a period of time. For accounting reasons, that was reserved on our books, and what you're seeing now because of our increased profitability and our ability to utilize that asset over, what I would say, a foreseeable period of time coming forward, accounting rules require you release that when it's more likely than not you're going to get the benefit.

So you saw that there. It's not cash, doesn't affect cash, doesn't affect normalized EBITDA or anything along those lines. But it is a benefit the company will receive from taxes in the foreseeable future. So hopefully, that answers your question there.

Our next question comes from the line of Zach Morrissey at Wolfe Research.

Great. I guess just starting with Airo. Obviously, it seems early results are pretty encouraging, expanding the rollout. I guess how do we think about like what are the gating factors to a more broad rollout, at least in the U.S., just based on the early results that you're seeing today? And kind of how is this embedded in the kind of 2024 outlook in terms of any kind of growth on the Application & Commerce side of things?

And then on the legacy hosting, obviously, that came in a little bit weaker just based on some of the strategic decisions you guys are making. How do we think about the trajectory kind of embedded in the 2024 growth outlook for the core platforms? I think comps get easier as we kind of progress through the year, but any kind of color and context would be helpful there.

Thanks, Zach. On Airo, we're super excited about the Airo launch. It's not often you launch a completely new experience and customers who are used to a certain experience adopted and it actually does better in the first test. So super encouraging results. We are actually rolling out Airo very, very quickly to more and more of our customers. That starts with new customers.

For example, when we first started in November, we were doing it for customers that bought a domain. Very quickly after that, we enabled it for customers that bought a domain and a website. And so more and more Airo capabilities are showing up for more customers. We've launched it in international, too.

Of course, the full swing is getting into all of our new customers across the globe and then starting to penetrate the base as well, which -- where a ton of opportunity lies for us to be able to go to our base of customers and offer them these capabilities. So I would say every week, more customers are seeing Airo. We're actually moving as quickly as we can. I'm super happy with the team's progress. And in terms of the guidance, I'll turn it to Mark.

Yes. As Aman mentioned, you can hear the excitement. We're very encouraged about the momentum and the engagement metrics, but it is still early days. When we consolidated the core software platform for GoDaddy, we saw bundling and customers moving to 2-plus products a lot faster. And obviously, Airo, we look at as an enabler of that down the road. And we think it will allow for greater bundling, greater attach, better retention. But right now, it's early days and we're calling everything we see in front of us based on the momentum we see coming into the year.

On the -- move on to the legacy hosting. A couple of things there, right? We have about 100 basis points of headwind coming into the year related to our divestitures and migrations that we've done. So that's built into the guide that we've given.

In addition, we've seen aftermarket. We think it's going to be a flat to single-digit grower. It's a $400 million-plus business. We're really encouraged by the volume that's coming through the platform and the fact that it allows people to get names in the secondary market they couldn't get in the primary market. But we think it's going to be -- it's, how do you say, moderated in its growth and it's leveled out. So we've built that into the forecast.

And we've talked about Domains openly. We saw 4% revenue growth coming into the quarter with 7% bookings growth. So we think there's a lot of momentum in the Domains, and a lot of that has to do with the core GoDaddy platform now that we've launched and getting people, the demand in, getting them to attach quicker, getting them to those retention rates we talk about in our model.

Our next question comes from the line of Vikram Kesavabhotla from Baird.

Can you hear me?

Yes, we can.

Yes, Vikram.

I just wanted to follow up first on the Applications & Commerce segment. I appreciate the color, Mark, that you just provided on Airo. But I guess outside of that, curious if you could talk about what the primary drivers of growth in that segment are going to support the low to mid-teens range in fiscal '24.

And then separately, I also wanted to ask about the share repurchases. You mentioned the plan around the remaining $1.4 billion. I guess any color you could offer in terms of the cadence of repurchases going forward? And maybe if you could also just remind us of your broader capital allocation priorities and framework going forward. And I'll leave it there.

Yes. Thanks, Vikram. On A&C, the growth drivers, and we talk about this a lot, is we're seeing the demand move to that second product much faster than we had ever seen. And then now we're seeing it to the third product much faster than we've ever seen. So that shows up in our A&C growth. That's our higher profitability segment as well. So it's driving a lot of our increased profitability and leverage within our model. But those are the drivers.

Outside of Airo, it is the bundling. It's the customers, customers coming in with intent, customers moving to that second product. We've talked about once we get to the second product, our average retention is 85%, but it goes up from there. If we get customers to a third product, that goes up significantly. It's almost a customer for life. So those are the things that are driving the momentum in A&C right now, and we're seeing that compounding. So I would say between price, demand, attach, everything is driving that nice growth in there.

On the share repurchases, there's been no change. We'll talk about it a little more at Investor Day, a little more broadly. But we -- it's still a big part of our portfolio to return capital to our shareholders. We have $1.4 billion left on our authorization. We'll look at it in our disciplined framework quarter-to-quarter based on what we see out there, and we'll make decisions as we go. We will talk about it a little bit more when we get to the Investor Day in March.

And then maybe, Vikram, just looking at it from a different lens. You asked about A&C. If you look at it as the components of the products that we sell in A&C, every part of A&C or every significant part of A&C is growing bookings double digits right now, right? So that's really propelling that business and getting to that 16% bookings growth we talked about.

Our next question comes from the line of Matt Pfau from William Blair.

I wanted to start off asking on payments. And perhaps you could just give us an idea about where you are at in terms of penetrating your existing customer base or at least the addressable customer base. As we go into '24, do you expect existing -- or converting existing customers to be the biggest driver of growth again?

Yes. Thanks, Matt. We are still in very, very early stages of penetrating our customer base. We feel very comfortable that we have access to a lot of Commerce intent customers within the base already. We do expect it to continue to be the largest driver of our growth in payments next -- in 2024 as well.

So we expect very healthy growth. And as I said in my prepared comments, we are going to expand what we're selling to these customers. We're going to go after more of the omni-commerce solution. We're ready. We've got some great products, some great offerings. You'll see much of it in March as well. So we're going to go broader with our offering to these customers. But the core payment functionality, we feel really good that will keep growing well.

Great. And just to follow up on the guidance for A&C, the bookings growth of 16% in Q4, and then you're guiding for low to mid-teens in Q1. What's the discrepancy there? Is there payments or something else that drives that difference?

Thanks, Matt. I would look at the overall business and the momentum we have going in. Remember, it's not a subscription business. We have transactional, and we have hardware shipments as well. So we take that into account, and we take into account the timing of those orders and when we think they're going out. So there will always be a little bit of a discrepancy between bookings and revenue related to that.

Yes. Just to make sure, it's -- what we talked about is 16% is bookings, right? Revenue is always going to lag a little bit, like Mark said, and you'll see it show up, of course.

Our next question comes from the line of Mark Mahaney from Evercore ISI.

This is Jian Li for Mark Mahaney. Just first, a question on Airo again. Can you just give us more color on which international markets are you testing right now? And maybe also like apart from driving product attach, what are the other potential like monetization opportunities that you may be exploring for Airo?

And then the second question is you kind of mentioned greater attach gives you greater pricing flexibility. So can you talk about like ARPU? How should we think about ARPU growth drivers this year between just growing attach versus potentially taking up pricing? Like is price action baked into your full year outlook?

Yes. On the international markets, our typical rollout plan is always English, large English markets first. So that's -- those are the markets we're testing now. But our absolute view is that Airo is a capability that should go across to all our markets, and there's a long tail of great tickets for us to approach there. So super excited about that.

In terms of product attach and other monetization means, of course, product attach is the first lever we're looking for. But as we'll share a little bit at our Investor Day, we're also looking for new monetization methods. And I'll just give you an example. One of the things that we want to test is a premium offering for logo building where, as you see in Airo, you buy a domain and Airo builds your logo and it builds you or it gives you the ability to be able to edit that logo. But there are more services that we can offer around it. And we're going to test a new paywall for it and new monetization method that GoDaddy has never done before. So that's one example of one of the types of things our teams are testing. And then I think in terms of the second part, I'll turn it to Mark.

Yes. So anything we plan on doing pricing-wise, just so you know, is built into our guidance as we sit here today. We're excited about the bundling and the attach that's happening within Airo, within our software platform altogether. And with 21 million customers, 14 million interactions with them, we get a lot of data about how they're getting value out of our products, which creates a lot of opportunity going forward around pricing bundles, elasticity around that and seeing the value they're driving.

So we think there's a lot of opportunity out there as we go forward. But right now, we've built in pricing actions as we usually do within our guide for the rest of the year, and we'll continue to evaluate and update as we go forward.

Our next question comes from the line of Clarke Jefferies at Piper Sandler.

Two questions for Mark. One is you mentioned 100 basis point revenue headwind from some of those divestitures. Based off of the 7% or 8% Domains bookings, it seems like there's strength there. I just wanted to ask a clarification on when we'll see the revenue headwind sort of peak or trough during calendar 2024. It's 100 bps for the full year, but just any more color on intra-quarter trends, and then a follow-up.

Yes. Clarke, I would say it will be primarily in the first half with some in the second half, but primarily in the first half.

All right. Perfect. And then for that 200 bps of EBITDA margin expansion for next year, reflecting on what happened in 2023, marketing and advertising dollars did fall, but we've had a good discussion around the intent to reduce tech and dev spend. So when you think about the driver of that 200 bps, any way you could frame mix shift of A&C, reduction in tech and dev and anything incremental around marketing advertising dollar growth or percent of revenue for calendar '24 would be great.

Yes. Thanks, Clarke. And the way I look at it is if you take where we're exiting at Q4 of 2023 and where we're going for Q4 of 2024, the things that you have to look at are reduced T&D spend, all right? We're leveraging more of the AWS cloud. We're reducing dependency on data centers. There will be a natural leverage we'll get in our P&L related to that. We're getting leverage in our care organization through the use of AI and automation, also access to global workforces that will help us as we go forward. And then some of it is just the natural growing A&C picture, right? It's a more profitable segment. It's software based. Therefore, as that grows and becomes a bigger part of the picture, it helps expand our margins just naturally again. That leverage we get from the 2-plus products starts to kick in, the bigger A&C gets all together. So those are kind of the levers I'm looking at. Hopefully, that's helpful.

Our next question comes from the line of Ygal Arounian from Citigroup.

I want to focus maybe on customer growth for a second. Is there any way to help us understand the impact to customers from the hosting divestitures? And I guess even if we normalize for that, we look at what customer growth has been historically versus what it's been over the past couple of years. You talked about a continued strong top line -- or top of the funnel, sorry. The customer growth at around 1%, let's call it, historically, it's been anywhere from 2% to 4%.

How are you guys thinking about customer growth right now? Are you focused on a smaller subset of customers that might convert more easily? And when you're looking to ARPU to fill in the gap, do you think it can get back to that lower single digit versus single digit or flattish customer growth number in the next year or 2?

Yes. So I'll give some color for you, Ygal. When we look at our customers, we've always said we are targeting customers within a higher intent to do something when they come into the funnel, add that second product, so that business generate value for themselves and therefore generate value for us. What we've seen coming out of '23 and continuing into 2024 at the gross adds level is that consistent strong demand that we've talked about all year and that continuing.

And to put it in perspective, '23 gross customer adds was higher than 2022, right? And so not only are we seeing an increase there. We're seeing it more consistent from quarter-to-quarter and more stable. With that, we're seeing also that intentful customer come in with those gross adds, which is the momentum we're seeing in the bundling, the growth you see materialize in A&C. And we're seeing through the divestitures, we are losing customers, but they are generally customers that were low intent customers. So they were on a single product, maybe weren't doing things, haven't done things for years.

So that trade-off is in there and continues to be something that we are working through on a net customer add basis. Obviously, as we continue our divestitures and look at our portfolios, we've done a lot of that work in '23. So that will begin to abate for the work we've done in '23, and we'll continue to review our portfolio going forward. But it is bringing in the demand that has that higher intent customer and that stable demand we're seeing in the front of the funnel now.

Okay. Great. That's really helpful. And then on -- I understand the driver of GPV and bring more customers onto your payment platform. GMV also continues to be really strong. Is there any way to qualify the growth drivers of GMV, whether it's by, I don't know, segment or business type or product? Just help to give a little bit more color around that.

Yes, Ygal. A lot of what we talk about is GMV is often through our partnerships that we have, right? And they tend to sell in the big categories, in the big verticals that you know about. Nothing significant to call out there, right? It follows, to some extent, the macro and sort of how customers are doing, right? Our focus very much is to provide them with a very competitive product so that they've got a system that works really well for them, and it shows up in the results.

And I'll just add, the GPV is what we focus on because that's what we monetize within our customer base, and that's what we're targeting to help grow payments.

Our next question comes from the line of Ken Wong from Oppenheimer.

Perfect. I just want to maybe kind of circle up on that 31% exit margin. You mentioned heavier spend in Q1 for renewals and launch costs. As we track to 31%, would you expect that to be fairly linear or more back-end loaded just given that there are some product investments upfront?

Yes. So giving you color around, I'll say, how we expect it to roll out. We talked about 27% in Q1 because of the spend related to our renewals and certain other timing and expenses. And then 31% is our exit strategy with 29% being the average. So we do think -- we do, like we saw last year, believe it will ladder up. We haven't gotten to the exact numbers yet. We'll provide more color on that as we get further into the year. But I think you can put a trajectory around there.

Now there might be some timing of marketing expenses that we'll talk you through if that were to happen. But other than that, I would expect it to be similar to what we saw this year and laddering up through the year.

Got it. And then just a quick follow-up on the optimization side. Obviously, those are efforts that you guys will continue to push forward on and perhaps some new ones that you guys will talk about at Investor Day. As we look at the outlook, I guess, how much incremental optimization is already baked in there? Or are those plans yet to launch post Investor Day?

Yes. When we think about optimization and guiding to it, everything we have line of sight to is in the guidance already. But the fact is we are constantly evaluating new opportunities. Our teams have a very disciplined approach to looking at those opportunities, and they bring forward proof points and what they need to do to be able to achieve those targets. And every quarter, we're evaluating them and moving forward with new ideas.

And if anything were to evolve, we would absolutely tell you more. We have a great track record of doing that over the last couple of years. And our goal is to just continue that momentum, continue that discipline. And it just compounds, and that's a great thing.

Our next question comes from the line of Elizabeth Porter from Morgan Stanley.

I was hoping to get a little bit more clarity on just the walk for the fiscal '24 guide of 6% versus the exit rate in Q4, around 6%. I appreciate the disclosure on about 1 point from divestitures and migrations. But it feels like there's a couple of benefits as well, whether it's the aftermarket easing of pricing. And so I'd love to just get a better sense on the view that you're taking on the underlying growth of the business and how that changes relative to Q4 just given some of the momentum -- bookings -- momentum that we've seen in bookings exiting the year.

Yes. Thanks, Elizabeth. Just a little further color. We're seeing the momentum in A&C, and we've talked about the bookings. We talked about the headwinds related to some of the divestiture activity. There are other things we built in there for the acquired or nonstrategic hosting assets that still exist that haven't been integrated. We're assuming they're flat to down for the year as we continue to evaluate their long-term prospects.

Things like aftermarket, we're assuming will be flat for the year, maybe slightly up. But again, no momentum being grown there -- coming there from continued growth in that market. That could change. There is some volatility in that market quarter-to-quarter, but we think on a long-term basis, that will be the way to measure it.

Still good growth in Domains. It's still something that we're big and growing at percentage point-wise. It is always difficult on a big base, but we think it will be a steady increase as we see that demand coming in. So when you put that all up and you put the headwinds into there at the first part of the year, we think 6% is a good point for the middle of the range. And we know there's opportunities for the high end of the range, and we'll continue to monitor this.

Great. And then just as a follow-up. When we think more holistically, like about a business, when you tend to have revenue upside, is that more likely to flow through on the margin side just given you guys have already made a lot of improvements on the margin thus far? Or would you look to take any of that upside and potentially address kind of more aggressively into the business just given the opportunities ahead?

I think it's hard to project sort of multiple scenarios there, Elizabeth. It also kind of depends on the product mix in terms of which products exceed targets. But generally, we're looking to, on a regular basis, balance growth and profitability. Again, our teams have a pretty disciplined process of bringing proof points in on where we invest and how we double down on investments. If something changes, our goal is to be very transparent with you guys on the call as well. So you'll be able to be on that journey with us.

And I think Aman put it perfect. We balance the growth and the profitability. Our goal is to drive free cash flow and ultimately free cash flow per share. We're constantly looking at the ways to do that and the ways to be accretive to the long-term model. And we'll constantly evaluate what creates that opportunity for us that we can go into the future.

Our next question comes from the line of John Byun on for Brent Thill at Jefferies.

I just had 2 questions. One, going back to Airo. I wonder if there's a way for you to quantify how broadly it might be rolled out in the U.S. I mean is it -- is like 5% of your users using it? Or if there's any way to quantify and where you might think it might be by the end of the year or sort of phase. And then the second question. Kind of going back to the guidance and some of the headwinds, I think you had about 100 basis points in '23, guiding for about 100 in '24 with, I guess, abating in the second half. But wondering, will it be pretty much done at this point? Or do you still have maybe, I guess, more to reorganize given some of the, I guess, still legacy hosting still left?

Yes. Let me start with Airo, John. We don't have sort of a number to disclose today, but we are looking forward to talking about this at our Investor Day. It's one of the things we are going to share with you. But just to give you order of magnitude, in the first 6, 8 weeks, hundreds of thousands of customers had already seen the Airo experience. So this was not a small rollout by any stretch of the imagination, and that's just new customers, purchasing customers that I'm talking about.

And you talked about sort of where we expect to get by the end of the year. Our time lines for Airo are much more aggressive than that. We expect a very large percentage of our new customers to be seeing Airo within the next few months. And by the end of the year, looking much more at how our existing customers are starting to engage with Airo and how can we make a real difference there. And I'll turn it to Mark for the headwind, 100 bps.

Yes. So we did a lot of work in 2023, and that caused 100 basis points headwind to both '23 and '24. We're still continuing to evaluate our portfolio, and we'll take any actions that we need to related to things that may not be strategic or things that aren't going to be accretive long term to our model. So I wouldn't say we're done. I would say we'll continue to optimize, evaluate and make the decisions for the long-term business best we can.

Our next question comes from the line of Chris Kuntarich from UBS.

Maybe the first one would just be a clarification. When you're talking about the current Airo flow versus the Commerce Airo flow that we're going to be learning more about at the Analyst Day, can you just talk about maybe what products are not being included today as we're thinking about the existing flow? Is it really just payments? Or is there something else, kind of key products that we should be thinking about existing flow versus an Airo Commerce flow?

Yes. What you saw us launch in November was Airo capabilities mostly on our identity and presence products. And if you look at the Entrepreneur's Wheel, right, we lay out identity and presence in Commerce and the customer needs that's around them.

What we're going to show you at Investor Day is a sneak peek into all of the Commerce capability with -- layered with Airo, which includes not just payments capability but core Commerce functionality like inventory management and catalogs and how Airo will work on hardware, for example, versus on the web where today, when we talk about identity and presence, you're seeing Airo capabilities mostly on the web, but how does that translate to a piece of hardware that a customer is holding and taking a transaction on.

Got it. Very helpful. And just one follow-up on the divestitures. Any color to help us think about the margin benefit that they deliver from divestiture versus the full year guide?

Yes. I haven't quantified it out to the exact numbers. But keep in mind, it benefits us in 2 areas. One, obviously helps on normalized EBITDA on a go-forward basis, but also reduces our CapEx spend because a lot of these divestiture is related to also data centers that we no longer need and will go with the acquiring entity. So there are 2 benefits we see. Both triangulate around helping our free cash flow and generating our free cash flow growth going forward.

Our next question comes from the line of Ella Smith on for Alexei Gogolev at JPMorgan.

It seems like price had the most to do with the margin expansion in the A&C segment. Is the spread of margin profiles of A&C products wide? If so, can you remind us what has the highest margin -- what are the highest-margin A&C products that drove the expansion?

Yes. I don't know, Ella, if we've gotten into that detail before, so I'll give you some high level. And then hopefully, that's helpful for you. We -- A&C in and of itself is a higher-margin business for us. There are certain areas that are, from a gross margin perspective, a little lower. For example, payments where we have the transaction fee, but they are coupled with software and subscriptions that drive it up. So when we look at it from a bundling perspective, they are very accretive to the margin as well as the normalized EBITDA line. I would say when I look at what's driving the growth in A&C, you have to look at it from -- there is a pricing aspect of it, no doubt, as we increased prices across certain products. But there also is a demand element of it, which, when we see that customer go to that second product, we get the increase on that as well. So I would say it's a good mix. We haven't gotten into breaking down X times Y. But all of that's contributing to the growth in A&C right now.

And maybe to add some of the data we have shared. Our website products, website plus marketing, Managed WordPress, our highest-margin products, and they're growing double digits. So obviously, that's driving goodness in the A&C segment.

Great. And for my second question, can you please speak about GoDaddy Payments and your latest strategies there? Also, how would you describe the customer profile of those who are adopting GoDaddy Payments?

The customer profile for GoDaddy Payments is very much sort of squarely within the overall GoDaddy customer. We started with the micro seller people selling $50,000, $100,000 a year. And we've built up $1 million, a customer who sells $1 million a year and now over $1 million. That's the target market. That's what the product is targeted towards.

So we're very happy with the product suite growing. We're adding more capabilities in 2024. We're just going to keep broadening the omni-commerce solution and tuning our go-to-market. And that's what we're most excited about. It's just selling that broader view to our customers, like Mark said, getting to that -- really that third product that locks in retention for the long term.

[Operator Instructions] It doesn't look like we have any more questions. We're at the top of the hour, so I'm going to hand it back over to Aman.

Thank you, Christie, and thank you all for joining us. We're looking forward to seeing you at our Investor Day. We're excited about it. We have a lot of cool stuff to show, and hopefully, you're able to make it. Thank you.