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Edited Transcript of EIGI earnings conference call or presentation 30-Apr-19 12:00pm GMT

Q1 2019 Endurance International Group Holdings Inc Earnings Call

Burlington May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Endurance International Group Holdings Inc earnings conference call or presentation Tuesday, April 30, 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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* Jason Stuart Helfstein

Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst

* Naved Ahmad Khan

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Endurance International Group 2019 First Quarter Financial Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Angela White, VP of Investor Relations. You may begin.

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

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Thanks, Sonia.

Good morning, everyone. It's my pleasure to welcome you to our first quarter earnings call. First, we'll go through some prepared remarks, after which we'll turn to Q&A. We've 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, I'll 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 IR section of our website.

With that call -- 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 first quarter results. Revenue was $280.7 million and adjusted EBITDA was $78.5 million. We ended the quarter with approximately 4.8 million subscribers on platform, reflecting a net loss from last quarter of approximately 20,000 subscribers. Our results reflect our increased investment across our key strategic brands in areas such as engineering and development and year-over-year progress in subscriber attrition trends.

Turning to Slide 6. We continue to make progress across the business as we position our scale, multi-brand platform for growth. Our teams are driving business decisions with an owner-operator mindset, continuing to find cost savings. Across our business, we are reallocating these savings to key strategic investments that we believe will drive value and improvements to the customer experience.

With 4 months of operations behind us, our 2019 plan remains largely in place. However, to better reflect the timing of our progress, we have reduced the midpoint of our revenue guidance by $20 million and the midpoint of our adjusted EBITDA and free cash flow guidance by $10 million and $5 million, respectively. Our view incorporates updates to the plan related to timing of advancements in one of our hosting brands and delayed monetization related to certain initiatives in our email marketing and domain segments.

We continue to focus on our transition back to growth as we deliver improvements to the customer experience and access to increasingly valuable solutions. Our plan reflects revenue growth in the second half of 2019, and our adjusted EBITDA and free cash flow guidance reflect a balance of investment choices and disciplined cost control.

Slide 7. Turning to our segment performance. Starting with our email marketing segment, our plan is to continue to build on our position as a small business solutions provider under the Constant Contact brand. In addition to improvements to our core email product, we are investing in adjacent product offers, both natively and by integrating with third-party solutions such as social and event tools. We remain focused on expanding the potential market opportunity for the Constant Contact brand by adding new strategic on-ramps, which we will begin testing this quarter.

Turning now to our web presence segment. In our Bluehost brand, we remain focused on improving the value we provide to customers along their journey. We will continue to add solutions and improvements to our onboarding paths such as our improved domain purchase experience and Office 365 solution. We are also simplifying and guiding the customer journey through service offers and user experience improvements.

At HostGator, we're working to strengthen our core capabilities and to improve the user experience while we continue to increase investment in our Latin America markets.

In addition to our larger strategic brands within this segment, we continue to take a focused management approach to our declining but cash-generative, nonstrategic assets. Over time, we expect a diminishing negative impact to our overall revenue and units as our strategic brand performance improves with increased investment and focus on customer value.

Slide 9. In our domain segment, we continue to invest to improve and grow our Domain.com brand. Last year, we refreshed our site experience, which has allowed the brand to absorb additional growth investment in marketing this year. We are seeing strong performance in our domain-led experience as a result. This year, we will continue improvements along the upsell path for additional products such as Office 365, hosting and SiteBuilder.

Overall, we have a lot to execute in our 2019 plan. We're making progress simplifying the business with focus on our key strategic brands and expect to see this reflected in subscriber and revenue trends.

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. I am pleased to review our fiscal 2019 first quarter results on Slide 12. GAAP revenue was $280.7 million; adjusted EBITDA was $78.5 million; and free cash flow, defined as cash flow from operation less CapEx and financed equipment, was $7.1 million. Our year-over-year decline in adjusted EBITDA was due mostly to lower revenue and increased level of investment in engineering and development, fixed marketing and analytics. This was offset mostly by benefits from lower data center costs and lower domain registration fees.

GAAP cash flow from operation in the first quarter was $15 million. CapEx was $8 million. Year-over-year cash from operation and free cash flow were negatively impacted by the timing of vendor payment and increased investment. We also saw an inflow from an escrow payment of approximately $6 million related to a previously disclosed and already expensed settlement of one of our 2 shareholder class action lawsuits.

Slide 13. We finished the quarter with approximately 4.783 million subscriber. Total subscriber decreased by approximately 20,000 from the fourth quarter of 2018. We are pleased by the overall result in our strategic brands, but we continue to see decline in subscriber numbers in our nonstrategic brands.

In the first quarter, combined average revenue per subscriber, or ARPS, was $19.52. In web presence, it was $13.42; in email marketing, $69.11; and in domain, $15.88.

Slide 14. We have updated our guidance for 2019 to reflect the new timing of our progress, which Jeff noted earlier in the call. As of the date of this call, our guidance for 2019 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.

Free cash flow guidance for the year includes the first quarter's $6 million impact related to the previously noted escrow payment for litigation.

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 15. We ended the first quarter with a $1.830 billion in total senior debt. Including other deferred purchase obligation and capital leases of $11 million, total cash on the balance sheet of $72 million, the total debt at the end of the period -- the total net debt at the end of the period was $1.769 billion. During the first quarter, we paid down approximately $25 million of the principal of our term loan debt.

Our LTM bank adjusted EBITDA for the period ended March 31, 2019, was $329.1 million. Our senior debt leverage ratio was 4.30, and we remain well below our maximum senior secured leverage ratio of 6 turns.

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.

This year, we're continuing to invest with increasing focus on our strategic brands and balancing decisions regarding monetization and the value our customers receive when doing business on our strategic platforms. Our plan is to balance the opportunity ahead of us as we focus on executing our 2019 plan.

Before opening for questions, I want to thank the Endurance team for the progress we've made. As a team, we're grinding our way through simplification with focus on our strategic brands, and we've made a lot of progress over the last 6 quarters.

Thank you for joining us this morning. And 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) Our first question comes from Jason Helfstein of Oppenheimer.

And our next question comes from Naved Khan of SunTrust.

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Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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I had a couple of questions. Maybe just on the revised outlook. What gives you the confidence of returning to positive growth in the back half? And then maybe a related question. I think last -- on the last call, I think, Jeff, you had talked about expanding the brand and channel. Can you share any early results from that initiative? And maybe on a related note, you also mentioned on your -- in your prepared remarks that you're seeing some delayed monetization in email and domains. What kind of confidence do you have in sort of ultimately getting that to work?

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

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Well, so I'll work backward because I can only remember short-term stuff.

Delayed monetization for us, particularly the -- on the things I referenced, are us making purposeful choices on making sure we don't try to charge customers or go get revenue before we know we're delivering value and the right customer experience. And so there's just -- we've slowed down some of that in both domains and email marketing just because we feel like to build the long-term value, that revenue is out there. We just want to make sure we don't have a misstart in terms of trying to monetize too quick to make a short-term plan. So those are choices where we know there's revenue sitting out there within our base and within our new acquisition funnel, and we're just -- we're going to grind through this year and make sure we're really setting the stage for long-term value creation on these brands. So that -- I -- that's that one.

As it relates to the channels, we -- under the hood, if you actually look at our sequential sales and marketing spend, you're going to see there's some seasonal volatility, which is normal for the small business marketing business, but that the numbers are not varying materially. We're in the $250 million to $265 million range in total. But under the hood, part of what we -- the team has done and continues to do is move it to the right brands in increasingly focused channel choices because just as a reminder, we're still a large user of affiliates, we've reduced our usage of directories. We're positioning our best assets to grow in a way that's more consistent over time with the way we see the SMB competitors spending their money. And so really, kudos to the team for allowing us to move money progressively and frankly improve our unit production and give us the ability to continue to forecast an inflection in revenue in the back half of this year.

And so I think I've answered all of your questions. I'm not going to give you a confidence rating number, but if you really think about where we are, we are moving a lot of things under the hood, and I feel good about the financial and strategic discipline the team is using to find growth on the right brands with the right customer value through the right channels. We certainly have a long way to go, but we've definitely made a lot of progress. And that's where we are, okay?

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Operator [4]

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(Operator Instructions) Our next question comes from Jason Helfstein of Oppenheimer.

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Jason Stuart Helfstein, Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst [5]

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Just any updated thoughts on product focus. I know a lot of this has been lately making decisions about what's efficient and not efficient. But any...

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [6]

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You're cutting out, Jason.

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Jason Stuart Helfstein, Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst [7]

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Products we might be thinking about in the back half of the year? Or kind of still the same focus on efficiency?

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

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Well, so we are very focused, Jason. I'm not sure if efficiency is the word we're using. I mean, when we say customer value and customer experience, as the company was put together pretty rapidly with M&A in the '16 -- '15, '16 time frame, maybe -- is it -- there were -- our -- as an example, our Domain.com, even our email marketing solution were not progressing through being able to allow customers to efficiently get value once they joined us. And so across our brands that we're investing in heavily, we're bringing additional solutions like social, reputation management, social integration, landing pages. We're -- so we're bringing additional solution value that's easy to get progressively through the year on our focus brands. And we're modernizing the user experience progressively at the same time. Bluehost, Constant Contact and Domain.com, in particular, have made a lot of progress, and we're testing a lot of value delivery to each of those sets of customers in 2019.

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Jason Stuart Helfstein, Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst [9]

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And would you consider -- I think most investors probably don't kind of appreciate some of the product nuances and the changes you've made or are making. I mean, have you thought about kind of how you might want to better communicate that to investors either, I don't know, with a webinar, or -- I don't think -- or something to help people understand kind of the nuances and the changes and the changes underway?

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

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Yes. It's a -- that's a great question/suggestion, and we will do that at some point this year. What we're trying to do is not talk about things that we're not monetizing and seeing unit value out of as well. I'm a little old school in that regard, but your suggestion is right on point. And we will make sure that we under or un-nuance some of this as we're really doing things with customers progressively through the year that we know they're excited about and paying us for. I'm pretty much a stickler on they and we have to both be exchanging value as well.

Good suggestion.

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Operator [11]

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And our next question comes from Brent Thill of Jefferies.

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Unidentified Analyst, [12]

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This is [John] (inaudible) for Brent Thill. Wondering if you might be able to give a little bit more color in terms of the delayed timing and monetization. Is that related to progress on the product enhancement side or maybe in terms of the way you're approaching the offerings and marketings around there? If you can just give us a little more color, it would be appreciated.

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [13]

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Yes, it's both. And it's -- there's different opportunities and progress on our -- what we call our big 4 brands. And -- but it's a combination. So as an example, we tested -- on our Constant Contact brand, we actually tested a solution or service offering that complements the platform. We found that we -- that it has value. We're off working on now making sure that for the pricing and the value, we get it right when we actually go for monetization. That's an easy example.

Same thing on Domain.com. We're testing some things. I think we've got a very robust plan this year on Bluehost for a set of solutions, including some ability for folks to more efficiently manage their PPC spend with a very user-friendly interface.

So we -- I'm very pleased on our brands with the progress we're making, putting our customers that onboard on any of those brands in a position to not just buy hosting but to get additional value or to not just buy a domain but get value for email marketing. And so the strategic context is the same, which is we're going to be more than just the entry service offering progressively through this year and frankly for the long term on our best assets, which is where the market went and we were a little behind picking that up and investing in it. And that's what we're doing. Okay?

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Unidentified Analyst, [14]

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Okay. That's helpful. One more question. On Microsoft 365, that initiative, any early trend or feedback that you could share?

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

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We're getting adoption. It's going according to plan rapidly. The Microsoft folks would prefer us to be moving more faster, but we're essentially on our plan for the year. And it's -- we were late with that. And so it's not something that we should proudly tell the market, oh my gosh, we're offering it. We were late with it. But we're now doing it the right way on our core brands.

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Operator [16]

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And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Jeff Fox for any closing remarks.

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Jeffrey H. Fox, Endurance International Group Holdings, Inc. - President, CEO & Director [17]

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Thanks, Sonia, and thanks, everyone, for joining our call. As I said, we've got a lot to get done this year and we're focused on executing. So we appreciate your questions. And I know Angela's got a lot of [follow-on points]. Thank you.

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Operator [18]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.