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Edited Transcript of EIGI earnings conference call or presentation 1-Aug-19 12:00pm GMT

Q2 2019 Endurance International Group Holdings Inc Earnings Call

Burlington Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Endurance International Group Holdings Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angela White

Endurance International Group Holdings, Inc. - VP of IR

* Jeffrey H. Fox

Endurance International Group Holdings, Inc. - President, CEO & Director

* Marc Montagner

Endurance International Group Holdings, Inc. - CFO

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Conference Call Participants

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* Arun A. Seshadri

Crédit Suisse AG, Research Division - Analyst

* Naved Ahmad Khan

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* John Byun

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Endurance International Group's Second Quarter 2019 Earnings Call. (Operator Instructions) I would now like to turn the call over to Angela White, Vice President of Investor Relations. Ma'am, you may begin.

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Angela White, Endurance International Group Holdings, Inc. - VP of IR [2]

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Thanks, Victor. Good morning, everyone. It's my pleasure to welcome you to our second quarter earnings call.

First, we'll go through some prepared remarks, after which we'll turn to Q&A. We prepared a presentation to accompany our comments, which is available on the Investor Relations section of our website at ir.endurance.com. While not necessary to follow along, we recommend referencing the presentation slides alongside our prepared remarks.

As is customary, let me now read the safe harbor statement. Statements made on today's call will include forward-looking statements about Endurance's future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release and to our Form 10-K filed with the SEC on February 21, 2019, for a discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward-looking statements. Endurance does not assume any obligation to update any forward-looking statements.

During the call, we'll reference several non-GAAP financial measures, including adjusted EBITDA, free cash flow, net debt and bank adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is available on the presentation located in the Investor Relations section of our website.

With that, I'll turn the call over to Jeff Fox, our President and CEO.

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [3]

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Thanks, Angela, and good morning. I'm pleased to report our results today. Second quarter revenue was $278.2 million and adjusted EBITDA was $76.3 million. We ended the quarter with approximately 4.8 million subscribers on platform, reflecting a net loss from last quarter of approximately 13,000 subscribers. Our subscriber attrition trends continue to reflect our progress as we focus our sales, marketing and engineering investment on our strategic brands.

Over the last 12 months, we reduced our debt by over $100 million while making significant progress transforming our company. With our increased investment in engineering, we are now testing an expanded set of solutions on our strategic platforms, and the team continues to do an excellent job managing expenses as we position our combination of businesses for long-term growth.

Turning to Slide 6. Strategically, we operate 2 high-margin scale platforms: email marketing and web presence. Our increased engineering investment positions us to expand our total addressable market by transforming our businesses from profitable point solutions to solution platforms that help SMBs grow.

During the quarter, we appointed chief operating officers for each of these scale strategic platforms. We expect that our simplified and increasingly dedicated organization, combined with our focus on our strategic brands, will strengthen our growth potential in the large and dynamic SMB services marketplace.

As we look to the second half of 2019, we remain focused on delivering increased value through our -- through additional solution offers to customers joining us on our strategic brands. We believe our progress over the last year has positioned us to effectively deploy additional marketing spend. In the second half, we expect incremental investment in brand and other channels as we continue to test our ability to increase the value we deliver to customers.

Turning now to our current segment performance. In email marketing, we are investing to expand Constant Contact from an email marketing business into a digital marketing platform. Beginning in Q2 and through the end of the year, we are testing our Start Your Business solution set under the Constant Contact brand which targets the start of the SMB journey with products such as free site builder and domains. We also continue to test, enhance and evolve our Marketing Advisor program, which offers guidance and services customized to the needs of our customers.

In the second quarter, we also enhanced our core email marketing platform, including integration with a third-party e-commerce solution and with a tool to help customers manage online search advertising. Our financial results in the quarter reflect our disciplined approach to strategically positioning our Constant Contact brand to continue generating free cash flow as we grow in the broader digital marketing category.

Turning now to our web presence segment where we continue to make progress integrating our assets and transforming our team to operate as a scale competitor. With our increased investment over last year, we have made progress in our evolution from a hosting provider to a scale solution platform. At Bluehost, we launched digital marketing and e-commerce solutions in the quarter adding to our introduction of Microsoft Office 365 in the first quarter. In the second half of the year, our focus is on integrating our Asia Pac platform and teams to expand the scale and reach of our Bluehost business.

At HostGator, we continue to invest in the brand and are driving growth in our Lat Am region. We also continue to manage our highly profitable declining brands, which continue to negatively impact our overall revenue but also provide funding to support growth initiatives in our strategic brands.

In our domain business, we continue to see good net unit productivity. And for the remainder of the year, our focus is on increasing the value customers get on our enhanced domain platform. We are pleased with the improvements in the site experience and the enhanced integration of additional products such as hosting, site builder, Office 365 and G Suite for customers seeking to build a full online presence.

In our premium domains business, we have experienced weaker trends which are reflected in our guidance and in a reduction in the value of the portfolio. Overall, our domain team is focused on converting our increased investment in sales and engineering to top line growth.

Overall, I'm pleased with the progress we have made across our 2 strategic business platforms. For the second half of the year, we are focused on delivering more value to customers, simplifying operations and executing our plan to effectively manage our combination of brands to produce revenue growth. Each quarter, we are making progress and our disciplined use of free cash flow, combined with our operational focus, is important as we transform our 2 strategic platforms and expand our total addressable market.

With that, I'll turn the call over to Marc Montagner to discuss our financial results in more detail.

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Marc Montagner, Endurance International Group Holdings, Inc. - CFO [4]

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Thank you, Jeff. Slide 12. I am pleased to review our fiscal 2019 second quarter results. GAAP revenue was $278.2 million. Adjusted EBITDA, $76.3 million. Free cash flow, defined as cash flow from operation less capital expenditure and financed equipment, was $47.6 million.

The year-over-year decline in adjusted EBITDA was due mostly to lower revenue and increased level in investment in engineering, development and analytics. This was partially offset by benefit from lower data center costs and lower domain registration fees. Adjusted EBITDA excluded the impact from a reduction of approximately $18 million in the value of our premium domain portfolio.

GAAP cash flow from operation in the second quarter was $59.7 million. CapEx was $12 million. Year-over-year cash from operation and free cash flow were positively impacted by cash flow -- cash outflow in the second quarter of '18 related to the payment of our SEC settlement, the refinancing of our term loan in June 2018 and the purchase of interest rate cap protection in the same period.

Slide 13. We finished the second quarter with 4.769 million subscribers. Total subscribers decreased by approximately 13,000 in the second quarter of '19 compared with a decrease of 20,000 in the first quarter of this year and 93,000 in the same period a year ago. We are pleased by the overall result in our strategic brands. In addition, our year-over-year subscriber trend confirmed the progress we're making in improving our business.

In the second quarter of 2019, combined average revenue per subscriber, or ARPS, was $19.42; in web presence, it was $13.35; in email marketing, $69.28; and in domain, $15.39.

Slide 14. In the first half of '19, revenue was $558.9 million. Adjusted EBITDA was $154.8 million and free cash flow was $54.7 million. The lower adjusted EBITDA year-over-year is a result of combination of lower revenues and increased investment in engineering, development, analytics and IT privacy and security. Cost savings in data centers and lower domain registration fees partially offset the impact.

Slide 15. We are maintaining our guidance for 2019. As of the date of this call, our guidance for '19 is the following: GAAP revenue of $1.120 billion to $1.140 billion, adjusted EBITDA of $300 million to $320 million and free cash flow of $110 million to $120 million. We expect capital expenditure of approximately $50 million to $55 million in 2019. We continue to expect to use our excess free cash flow to pay down approximately $100 million of debt in 2019.

Slide 16. We ended the second quarter with $1.805 billion in total senior debt. Including other deferred purchase obligation and capital leases of $6 million and total cash on the balance sheet of $93 million, total net debt at the end of the period was $1.718 billion. During the second quarter, we paid down approximately $25 million of the principal of our term loan debt. Our LTM bank adjusted EBITDA for the period ending June 30 was $319.5 million. Our senior debt leverage ratio was 4.28 turns and remains well below our maximum senior secured leverage ratio of 6 turn.

Thank you for joining today. Let me turn the call back to Jeff.

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [5]

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Thanks, Marc. We're focused on executing our second half of the year plan. Quarter by quarter, the teams continue to make progress transforming our 2 strategic platforms into growing businesses.

Thank you for joining us this morning. Now I'll turn the call back to the operator to begin Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Arun Seshadri from Crédit Suisse.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [2]

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Yes. Just wanted to get a sense for subscriber sort of trends. It looks like it continued to be an improvement this quarter. Obviously, you've had some headwinds on the domain side. I don't know if you could give us some more color there. And then talk a little bit about your confidence about -- and what gives you the confidence that subscribers will turn in the second half?

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [3]

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So I'll take that, but I'll ask Marc to chime in. The -- I'll take the domains first. I mean we bought a business several years ago that's in the -- that has a secondary market business and a premium domain business all in one place. It's called BuyDomains. It's a good team, a well-run business. And -- but the secondary market, in particular, against the size of our portfolio and what was on the books from the original transaction, ended up causing an accounting adjustment.

We definitely -- that team, and I hope they're listening, they're doing a great job. But the secondary market, they're softened up. And it's definitely been a little bit of a hit to this year's plan, but it's still a profitable business. The team is running it tightly, and we feel good about it. It's an accounting adjustment from a past transaction.

On the subscribers, I think I led off the call by saying I -- we feel the progress on our strategic brands, and I think that's the key for us. Not all subscribers on all platforms are the same value. But we have really made a lot of progress over the last 12 months in terms of bringing well over 90%, it's probably closer to 95%, of the customers that now join us are on a strategic platform and brand that we're investing in for the long term.

And so that shift gives us confidence that we're in a position to provide an experience, additional solutions and ultimately serve those customers more effectively than when we were putting subscribers on a more fragmented set of brands and platforms. So our subscriber trend is a positive thing, and we intend to be subscriber-positive, but we're not predicting an exact quarter.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [4]

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Got it. That was helpful. And then just wanted to talk a little bit on the capital structure, possibly for Marc. The -- so obviously, your bonds become -- the cost steps down in early 2020. Just wanted to get a sense for -- should we broadly be thinking that you will consider strongly refinancing the bonds and sort of releasing some more cash flow when the time comes?

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Marc Montagner, Endurance International Group Holdings, Inc. - CFO [5]

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Arun, you raise a good point. Our bonds are callable in February of 2020 at $105 million. That's $17 million call premium, and we'll be looking at alternatives to raise capital to potentially refinance them.

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Operator [6]

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And our next question comes from the line of Naved Khan from SunTrust.

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Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [7]

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A few questions. So on the Constant Contact side, it looks like you're out with some new products. How do you plan to increase awareness for these products in the existing base of the customers? I understand the ones coming in new to the -- into the funnel are exposed to it, but how do you plan to drive awareness for the -- in the existing base? And then I have a follow-up.

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [8]

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So you will see us shifting how we spend our money very carefully on Constant Contact, subject to results. And I think I'm intimating that we're -- we've made big moves over the last, I would say, 18 months in terms of positioning Constant Contact.

It's really a -- it's -- I think it's a good business. You can tell by the profit margins that we do good work for customers. And so I think we're going to be very careful about making sure everything we do from an awareness perspective has a good return in terms of bringing us customers and customer value and long-term value. So it's -- we're very -- we're going to be very calibrated over the next 6 months to a year on how we get that business positioned for long-term growth.

And so I know that's not a specific answer, but it is a specific answer. We're -- we spend money less effectively today than we will progressively as these solutions start to add value to customers. And we're going to do that math very carefully and test a lot of things in the next 6 months.

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Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [9]

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Great. And then the second question I had was more of -- marketing related. So as you increase your spend in the back half and perhaps into 2020, how should we be thinking about the efficiency or the return on that spending? And how would you be measuring that in order to stay basically disciplined in your approach?

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [10]

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Yes. So I think Marc and I have been very much on the same page for 2 years now -- almost 2 years. If you look at what we've done, we've actually repositioned our solutions and our brand focus and our operations first. And actually, if you go back quarter by quarter, we have moved money, but we have not increased spend on sales and marketing. We've added some capabilities and we focused our stuff. So even this quarter, I believe -- Marc, correct me if I'm wrong -- but our year-over-year comparison is flattish.

So I think you should take some comfort that we've been positioning the same dollars with an intent to get increasing effectiveness on our core long-term platforms and brands, and that's what we're going to continue to do. If we decide to start to move that number up, it will be in conjunction with the results we're seeing in terms of some of the additional solutions, additional channels and brand focus.

And so it will be a very calibrated process where we drive efficiency and effectiveness with long-term return as the core standard. We still think we have some room to move that money around at its current run rate and -- but that's what we're testing through over the next couple of quarters.

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Operator [11]

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(Operator Instructions) Our next question comes from the line of Brent Thill from Jefferies.

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John Byun, Jefferies LLC, Research Division - Equity Analyst [12]

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This is John Byun for Brent Thill. I just had two questions. On the domain side, could you maybe provide a little bit more color on why the secondary domain business softened? Do you think -- is that a broader market trend? Or was that maybe a deemphasis on your side?

And then second question. You mentioned the appointment of the -- some segment COOs. Were there any other reorganizational changes in conjunction with that?

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Operator [13]

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I'm sorry, ladies and gentlemen, your conference will begin momentarily.

(technical difficulty)

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Angela White, Endurance International Group Holdings, Inc. - VP of IR [14]

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Victor, can you hear us?

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [15]

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Hello?

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Operator [16]

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Brent, can you ask your question one more time?

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John Byun, Jefferies LLC, Research Division - Equity Analyst [17]

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This is John Byun for Brent Thill. Were you able to hear my question?

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Angela White, Endurance International Group Holdings, Inc. - VP of IR [18]

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No.

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John Byun, Jefferies LLC, Research Division - Equity Analyst [19]

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Or I can reask it. So I had two questions. One on the secondary domain side that you mentioned had softened a bit. If you could give us maybe a little bit more color. Is that, do you think, more of a broader market trend? Or was there maybe a deemphasis on your side for that side of the business?

And then second question. You mentioned the appointment of segment COOs. Were there any other changes or reorg related to those appointments?

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [20]

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So on the -- our BuyDomains business carries over -- slightly over 1 million name portfolio. It's a business that has a daily flow of premium domain sales. So think somebody really that has a business and they really have a name they want and it's a name that has already been used or reowned in our portfolio. Those -- there are names that go for more than whatever the discounted retail prices are. Obviously, we do free all the way to $9, $12, whatever it is and whichever plan.

So that premium domain business, also with that size portfolio, will engage in bulk sales in the secondary market, which for years has been fairly active. And an example, last Q2, we made some sales into the secondary market. This year, so far, the secondary market, at least as it relates to the domains we have, has not really been at a value where we felt like we were getting paid properly.

And so we did a reevaluation of the whole value of our portfolio to be conservative, and that's why there's an accounting adjustment from the original recorded value. But as I said, it's definitely some revenue we -- on the margin that we were -- had in our plan. But the business itself is still running nicely. We've got a good team there, and it's a profitable business.

On the -- any more questions? Marc is intimately involved with that business because it's a smaller but return on capital oriented business.

If nothing else on that, the 2 COO structure's really just meant to simplify some of the -- some of our execution of the testing, learning and growing processes. And it's really just meant to put us in a position where we're coordinating leveraged functions with direct functions more effectively and really tracking the end-to-end value we're delivering and ROIs we're making on each of the things we're now doing to grow our respective web presence and email marketing strategic platforms. So no other major or -- I mean a lot under the hood, but no senior officer announceable or announcement-required changes of substance.

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Operator [21]

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And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.