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Edited Transcript of EIGI earnings conference call or presentation 30-Apr-20 12:00pm GMT

·19 min read

Q1 2020 Endurance International Group Holdings Inc Earnings Call Burlington Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Endurance International Group Holdings Inc earnings conference call or presentation Thursday, April 30, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Naved Ahmad Khan SunTrust Robinson Humphrey, Inc., Research Division - Analyst * Sang-Jin Byun Jefferies LLC, Research Division - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Endurance International Group 2020 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Angela White, VP of Investor Relations. -------------------------------------------------------------------------------- Angela White, Endurance International Group Holdings, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thanks, Ashley. Good morning, everyone. It's my pleasure to welcome you to our first quarter 2020 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 14, 2020, for a discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward-looking statements. Endurance does not assume any obligation to update 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 IR section of our website. With that, I'll turn the call over to Jeff Fox, our President and CEO. -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Angela, and good morning. I am pleased with the results we delivered and the continued progress we made in the first quarter. Obviously, no one anticipated the impact COVID-19 is having globally on all aspects of people's lives, livelihoods and business operations. Since the pandemic accelerated in early March, we have operated with 3 guiding principles to help our organization remain focused and productive in this complex business environment. The first principle is to focus on the safety of our employees and their family members as our top priority. By the third week of March, we had all of our teams in a work-from-home model, and I could not be more proud of the way the team executed this unplanned move with minimal disruption to our business and our customers. Second, we are fortunate to hold a position as a scale provider of digital marketing and web presence solutions in a large and growing market. We continue to see secular demand for our services, and we'll continue to invest in delivering competitively priced solutions that help our customers achieve their objectives. Finally, we have a valuable set of assets and provide services to approximately 5 million customers. We have made considerable progress executing our strategy to invest in our market-leading strategic brands, to simplify our operational complexity and to integrate our teams as we drive scale. We remain focused on investing to grow both of our scale business segments. Through April, our execution has remained consistent with our 2020 growth plan. However, we know that it is too early to predict the extent of the pandemic's effect on our business for the remainder of the year. As such, we believe it's prudent to suspend our previously provided guidance for 2020 as we focus on delivering value to our customers and executing our plan. Marc will discuss this in more detail in his section. Turning now to Slide 6. Our GAAP revenue in the first quarter was $272.2 million. Revenue in our digital marketing segment reflected year-over-year growth when adjusting for the December 2019 sale of SinglePlatform. Our web presence segment continued to make progress toward revenue inflection by delivering another quarter of net unit growth. We ended the quarter with 4.78 million subscribers on platform, which marks our third consecutive quarter of net subscriber growth when adjusting for the sale of SinglePlatform, adding 14,000 net new subs. Adjusted EBITDA was $72.5 million, which is down from $76.9 million in Q1 of 2019, adjusted for the sale of SinglePlatform. Year-over-year, we increased investment in our product, engineering and development teams, resulting in a $3 million cost increase. And we are pleased with the progress we made on our strategic brands. Year-to-date, we repurchased approximately 8.7 million shares of our stock for a total of $14.4 million at an average price per share of $1.66. Our Board authorization remains in place with remaining capacity of $25.5 million. Turning now to Slide 7. Before we go into our segment details, it's important to note the progress we have made, operationalizing our 2 scale strategic platforms. As a reminder, we changed our reporting to reflect our simplified organization and the teams in both businesses executed their plans in the first quarter. Turning now to Slide 8. In our digital marketing segment, we continue to make progress transforming constant contact from an e-mail marketing point solution into a digital marketing brand with significantly expanded solutions. During the quarter, we increased revenue year-over-year by $2.2 million and are pleased with the net subscriber growth we delivered. Operationally, our sales, support, marketing and engineering teams executed very effectively with increasing focus on customer success. During the quarter, we made progress enhancing our core e-mail platform, integrating our recently acquired Ecomdash business and enhancing our website builder, logo and e-commerce capabilities under the Constant Contact brand. In addition, in response to COVID-19, we launched the Constant Contact Small Business Support Kit, which provides action plans and guidance by industry to SMB customers looking for helpful resources as they navigate this crisis. We are pleased with the team's effort in launching this dedicated site, which is part of our long-term strategy to deliver capabilities that complement our high-value e-mail marketing solution. Turning now to our web presence segment. Our results reflect continued revenue stabilization in our third consecutive quarter of positive net unit growth. The team delivered these results by successfully executing our growth plan on our strategic brands, complemented by excellent work by our teams in Latin America, India and Holland. As a scale web presence solution provider, we add over 1 million new customers on an annual basis. Our 2020 plan remains unchanged and is focused on expanding our addressable market to investment in solutions that complement our core hosting and domain products. In Q1, our web presence teams did an excellent job pivoting quickly to address the COVID-related challenges. Our global support centers continue to serve customers 24/7 despite the complexities of moving agents to work-from-home status. From a marketing perspective, we also launched portals across key brands aimed at providing toolkits to help customers navigate through this disruptive period. Turning now to Slide 10. In Q1, we continue to make progress positioning our strategic brands for long-term growth as we navigated challenges introduced by the COVID-19 pandemic. We are pleased with the execution by our brand and platform teams and are investing to grow our business by delivering increased value to customers. With that, I'll turn the call over to Marc Montagner to discuss our financial results in more detail. -------------------------------------------------------------------------------- Marc Montagner, Endurance International Group Holdings, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Jeff. On Slide 12, I am pleased to review our first quarter 2020 results. On a reported basis, GAAP revenue was $272.2 million; adjusted EBITDA was $72.5 million; free cash flow, defined as cash flow from operation, less capital expenditure and finance equipment, was $23.7 million. Please note that in the same period a year ago, revenue and adjusted EBITDA contribution from SinglePlatform was $7 million and $1.6 million, respectively. The sale of SinglePlatform occurred in December 2019. Normalizing for these numbers, revenue in the same period a year ago would have been $273.7 million and adjusted EBITDA $76.9 million. Our year-over-year decline in adjusted EBITDA was due mostly to increased level in investment in engineering and increased sales and marketing expenses. This was primarily offset by benefits from lower support costs. GAAP cash flow from operation in the first quarter was $34.9 million. CapEx was $11.2 million and free cash flow was $23.7 million. The year-over-year increases in cash flow from operations and free cash flow were mostly impacted by the timing of payroll in the first quarter of '19, a onetime funding of a security class action settlement in the first quarter of '19 and no bonus payment in the first quarter of 2020. Additionally, in the first quarter of 2020, change in deferred revenue increased year-over-year by $2.6 million due to higher cash collections. Slide 13. We finished the first quarter of 2020 with 4.780 million subscribers approximately. Net subscriber additions for the first quarter were approximately 14,000 positive. We are very pleased to see another quarter of positive subscriber addition. In the first quarter of 2020, combined avenue -- average revenue per subscriber or ARPS, was $19.01. In web presence, it was $13.50; and digital marketing, $69.50. Slide 14. We ended the first quarter with $1.713 billion in total senior debt. Including other deferred purchase obligation and capital leases of $9 million and total cash on the balance sheet of $114 million, total net debt at the end of the period was $1.608 billion. During the first quarter, we paid down approximately $8 million of the principal on our term-loan debt. Our LTM bank adjusted EBITDA for the period ended March 31, was $310.9 million. Our senior debt leverage ratio was 4.06x and remains well below our maximum senior secured leverage ratio of 6x. On Slide 15, as Jeff noted in his section, we are suspending our guidance for 2020. We will still focus on executing our original plan, but given the nature of our business, it's still too early to assess impact of this pandemic on a customer base of approximately 5 million subscribers. As of today, demand for our product and services is consistent with our 2020 growth plan, but we're closely monitoring the effectiveness of program marketing spend and watching our churn rate. We're also taking a prudent financial approach and are paying very close attention to our expenses. The new CARES Act will have a positive impact on our free cash flow in 2020. We will be able to defer to 2021 and 2022 approximately $10 million FICA taxes. In addition, we will benefit from a temporary increase in federal tax deduction from our cash interest payment in 2019 and 2020. This will reduce our federal taxes by approximately $5 million in 2020 and also increase our NOL balance at the end of 2019 by approximately $50 million. Year-to-date, we repurchased approximately 8.7 million shares for a total of $14.4 million at an average price per share of $1.66. The bulk of these purchases occurred in the first quarter. We also repurchased $3 million of high note at an average discount of approximately 5% in the first quarter. We ended the quarter with $114 million of cash on the balance sheet and are managing our use of cash prudently given the end nodes. We also have access to $165 million revolving credit facility which is undrawn. We do not face any significant debt maturity in the near term. We feel very comfortable with our liquidity position at this time. Thank you for joining us today. Let me turn the call back to Jeff. -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Marc. I'm proud of the work the team is doing, and we are pleased with our year-to-date results. The team is operating at scale with focus on customer value and enhancing our ability to serve more customers more effectively on a daily basis. Despite the global uncertainty, we will continue to execute our plan to grow our business by investing in sales, marketing, product and engineering on our valuable strategic brands. We look forward to our next update. And in the meantime, stay healthy. Thank you for joining us this morning. Now I'll turn the call back to the operator to begin Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Naved Khan with SunTrust. -------------------------------------------------------------------------------- Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- Just a couple of questions on my end. So of the 11,000 subscribers you guys added in presence, can you give us some more color on, are these customers are coming for domains? Or what kind of attach rate you might be seeing to other offerings there? And then some of your peers came out talking about trends and giving us an update about what they're seeing. And it seems like there might be some kind of a pickup in new customer demand from people kind of trying to set up businesses from home and also some incremental pickup in cancellations. So just curious to know what you might be seeing on your end? -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- So we don't really go into the details on the first question. I think we've tried, Naved, to be real clear that we see an expanded solution opportunity on the front door brands that we're driving, Domain.com, Bluehost, HostGator and Constant Contact as the primary, and so we're not going to separate out and start reporting on specific attach rates. We feel like that would be just too much granularity. And we would never be able to do that from an SEC or reporting perspective. Our general plan, which I was speaking about is we see the opportunity to take the units we're bringing in and through the year continue to improve that user experience and the specificity of solutions that these users need to accomplish their objectives and whether it's domains or hosting or e-mail marketing, our plan for the rest of the year is to keep investing to deliver additional solutions. On your second question, we're seeing the same thing. I mean the Google Search trends would tell you that short term there's secular demand. I've tried to keep it simple for us because we look at it, and we believe that we have a secular demand tailwind that should help us. But I think we're in an unprecedented scenario where no one really knows how this health care situation plays out. And therefore, how society gets to functioning again and how things have or have not changed in terms of what's -- of who's going to go back in the business or how they're going to do business. So we're not in disagreement with anything that our peers have said. I feel like we see the same trends. And what -- I think Marc referenced, how closely we're watching our cash, our expenses and our -- the value of the units we're acquiring, and what's happening within our subscriber base. And so we're watching it very carefully. And staying focused on the investments we think are right for the long-term opportunity to grow. -------------------------------------------------------------------------------- Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4] -------------------------------------------------------------------------------- That's helpful. And maybe a quick follow-up. On the Constant Contact side of things, I understand it's a slightly higher ARPS. Are you seeing greater usage for this product as businesses try to stay in touch with their customers? Or are you seeing more pickup in cancellations? How -- what -- any kind of trends to call out on that side? -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. So we definitely have seen our platform used more, which we're encouraged by, right? So just a reminder, right, for those who really don't follow the industry, e-mail marketing is a very high return on investment marketing solution. And it's -- we've been doing it for 20 years. We were actually -- one could argue, we were actually the first really big player training people on e-mail marketing. And so, Naved, it's a great question. It's a great call out. We did see the customers we have using our platform more. I mean, obviously, not all of them, but we saw very much increased usage, which is logical, given the complexity of the pandemic and how it came on and how much people needed to communicate and will need to communicate. So we're very pleased with that. We're glad we've been investing in that platform. As it relates to customers, we're trying to keep it really simple, right, which is we need to grow our net customers, and we need to grow the value those customers get over time. And those are -- I -- we're not -- we don't report on the difference between gross and net in any of our businesses, just to avoid the complexity of micro-disclosure for us. So we're very pleased with the quarter we had in our e-mail marketing segment and feel like there's a lot more we can do over time with some of the investments we're making and intend to make. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Brent Thill with Jefferies. -------------------------------------------------------------------------------- Sang-Jin Byun, Jefferies LLC, Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- This is John Byun for Brent Thill. Just want to follow-up on the previous question. Is there any other color maybe you could share on what's going on since late March through April in terms of customer behavior, products that seem to be more in demand or we're seeing more interest? Anything that's kind of different than what you had seen previously? And then I have a follow-up. -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- So I'll defer to secular demand, right, which we think some folks are -- I mean we think folks are using tools and have time to use these tools. And so we think this has been a net benefit for anybody that supplies anything we do, whether it's just buying a domain, buying a domain and hooking up G Suite or Office 365 or just a lower priced e-mail-only solution, right? We see people figuring out you really need to do these things. We've definitely seen the mainstream folks have to get very creative with marketing, inventory management, potentially listing on multiple marketplaces. So we're seeing a pull-forward because of the crisis, of the exploration and utilization of tools and capabilities that we provide, along with a lot of other folks, right? So when I say secular demand, that's what we're describing. The specificity of it, we definitely think there's been more demand for some things that we're not as exposed to but it's -- what you would hear from us is that we're working really hard to increase our exposure to things we can attach to a domain customer, a web hosting customer or an e-mail marketing customer. Those are our 3 primary exposures, but our whole investment strategy on our strategic brands has been to be able to take people that join us with their first purchase being one of those brands and make sure that they can do more things like e-commerce, build a website, post on Facebook or a list you integrate on Facebook, pull down their Shopify data and manage multi-marketplace listings or Ecomdash solutions. So I'm elaborating a little bit to just make sure you know that we know where we make our money. We feel like secular demand is a good thing. We feel like we're trying to increase, in 2020, our exposure to things beyond just our core capabilities. And that's our holistic strategy that we're executing. -------------------------------------------------------------------------------- Sang-Jin Byun, Jefferies LLC, Research Division - Equity Analyst [9] -------------------------------------------------------------------------------- Appreciate the color there. And then just a quick follow-up on the ARPS for the web presence side that is down again. Is there any dynamic behind it? Is it just more introductory promotional offer or anything to explain the trends in ARPS for web presence? -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- No. It's the accumulated effect of some high and low value customers that are trading on legacy brands versus this or that. But we're not managing to an ARPS number on either side of our business. We're managing to customer success and a good return on our cost to acquire and a building lifetime revenue strategy. So we're -- it's a result, it's not the number we're managing to. We intend to grow our units -- our strategy is to grow our units, grow our revenue and grow our profitability because we feel like we have an aggregate scale, profitable exposure to growing markets. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- [Operator Instructions) At this time, I'm showing no further questions. That does conclude today's conference. We thank you for your participating, and you may now disconnect. -------------------------------------------------------------------------------- Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Thank you.