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Edited Transcript of EIGI earnings conference call or presentation 2-May-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Endurance International Group Holdings Inc Earnings Call

Burlington May 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Endurance International Group Holdings Inc earnings conference call or presentation Tuesday, May 2, 2017 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. - Director of IR

* Hari K. Ravichandran

Endurance International Group Holdings, Inc. - Founder, CEO and Director

* Marc Montagner

Endurance International Group Holdings, Inc. - CFO

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Conference Call Participants

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* Arun A. Seshadri

Credit Suisse AG, Research Division - Analyst

* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Brian Patrick Fitzgerald

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Christopher Ford

Credit Suisse - Analyst

* Gray Powell

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst

* Heath P. Terry

Goldman Sachs Group Inc., Research Division - MD

* Jason Stuart Helfstein

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

* Naved Khan

Cantor Fitzgerald & Co., Research Division - VP and Research 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 2017 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host, Ms. Angela White. Ma'am, you may begin.

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

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Thanks, Brian. Good morning, everyone. It's my pleasure to welcome you to our first quarter 2017 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 in 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 24, 2017, 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 this call, we'll reference several non-GAAP financial measures, including adjusted EBITDA, free cash flow and bank adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is available in the presentation located in the IR section of our website.

Finally, year-over-year pro forma growth rates mentioned on this call are calculated as if we had owned Constant Contact for all of 2016. Please note that these growth rates only reflect the 2016 pro forma results for Constant Contact and are not adjusted for the pre-acquisition periods of any of our smaller acquisitions made during 2016.

With that, I'll turn the call over to Hari Ravichandran, our Founder and CEO.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [3]

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Thanks, Angela. Good morning, everyone, and welcome to the first quarter 2017 earnings call. Before I discuss the quarter's results, I would like to briefly address the announcement we made on April 17. As noted in that release, I will be transitioning from my role as CEO of the company. Our business has grown substantially over the 20 years since I founded the company, and I'm very proud of what the company has become and all our accomplishments along this journey. Last fiscal year, we exceeded $1 billion in GAAP revenue, and the business continues its steady performance, as is reflected in our results this quarter.

Endurance, like many companies, continues to evolve as it seeks to capture opportunities in the global marketplace. As Endurance becomes an increasingly large and complex organization, we believe that this is the best time to work together to find a CEO who can shepherd the company to the next level, one who can further support the goals of the business and manage the expanding operations in the context of a public company. I will -- I look forward to this next stage of Endurance's exciting journey.

Until this search is complete, I plan to maintain my role as CEO and as a member of the board and will continue to focus on building on the foundation that was started 2 decades ago. On behalf of the entire leadership team, I'm confident in our ability to execute through this transition period and remain focused on our goals. Now turning to the quarter's results.

For folks following along, I'm on Slide 6. We are pleased with our Q1 performance. GAAP revenue was $295.1 million. GAAP net loss was $31.6 million, and GAAP cash flow from operations was $33.7 million. Adjusted EBITDA was $80.1 million, and free cash flow was $22.4 million. We ended the quarter with approximately 5.3 million subscribers on platform at an average revenue per subscriber, or ARPS, of $18.43. Our performance this quarter reflects our continued commitment to driving profitable growth and strong free cash flow.

Slide 7. We continued our focus on key hosting brands, which include Bluehost, HostGator and iPage. During the quarter, we increased net subscribers in these key brands in aggregate. We plan to continue to spend marketing dollars primarily on these key hosting brands given the attractive returns. Also this quarter, we began the consolidation of support centers from Orem, Utah and Austin, Texas, to our Tempe, Arizona and Houston, Texas locations. We expect the transition to provide more centralized, scalable and lower-cost support over the long term. We also increased marketing spend relative to the last quarter for our key hosting brands, addressing seasonal pickup in SMB activity during the first quarter of the year.

Turning now to our Email Marketing segment. The Constant Contact business continues to perform well, showing stable and consistent revenue growth. In March, we launched the Constant Contact e-mail product in India with a localized site. We continue to push the goals of the business forward, with additional expansion to Latin America planned for late 2017.

Turning briefly to our website builder product. We believe that our website builder product will help fortify our market position in the web presence space over the long term. We expect to spend the remainder of H1 of fiscal 2017 repackaging our website builder product for relaunch in the second half of the year. This relaunch is expected to include product updates, such as improvements in usability, interface aesthetics and studio experience on the front end, as well as standardization of control panels and transfer of billing systems from the U.K. to a U.S.-based platform on the back end.

Internationally, we're seeing growth opportunities. In certain markets, such as India, we continue to go to market via domain-led packages, with the goal of cross-selling hosting and email marketing solutions to customers who purchase domain names.

For the brands that we do not market actively, we're planning on price increases and operational streamlining across a number of brands in order to improve cash flows.

Finally, as expected, we continue to see higher-than-normal levels of churn associated with most of the nonstrategic and gateway products launched in the last 18 months.

We continue to concentrate primarily on the opportunities in our key brands. We're placing emphasis on fewer, more focused initiatives this year, and laying important foundations as we seek to capture opportunities in the market while building scale and increasing cash flows. We're excited about our plans, and we appreciate your continued support.

With that, I'll turn the call over to Marc Montagner, our Chief Financial Officer.

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

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Thank you, Hari. On Slide 9, our results reflect the continued commitment to healthy growth in EBITDA and free cash flow. I am pleased to read our first quarter 2017 results now.

GAAP revenue was $295.1 million. Adjusted EBITDA was $80.1 million. Free cash flow, as defined as cash flow from operations less CapEx and capitalized leases, was $22.4 million.

On a segment basis, Web Presence revenue totaled $197.3 million, flat with the same period a year ago. Revenue growth in our key web presence brands was positive, while our non-key brands continued to drag down the top line.

Email Marketing revenue totaled $97.8 million. Compared to the same period a year ago, the Email Marketing segment grew approximately 4% year-over-year after adjusting for the pre-acquisition period and impact of the Constant Contact-related purchase accounting adjustment in the first quarter of '16. The Web Presence segment contributed $42.4 million, and the Email Marketing segment contributed $37.7 million to adjusted EBITDA in the first quarter of '17.

GAAP cash flow from operation was $33.7 million. CapEx in the first quarter was $11.3 million or 3.8% of GAAP revenue. Free cash flow of $22.4 million was significantly higher from a year ago.

As a reminder, last year, in the first quarter of '16, cash flow from operation and free cash flow were negatively impacted by higher transaction and restructuring expenses of approximately $35 million. During the first quarter of '17, we had approximately $5.6 million in restructuring expenses related to the consolidation of our support centers and Constant Contact-related restructuring. The related impact to free cash flow from this restructuring was over $3 million in the first quarter.

Also, during the quarter, the company made a semi-annual interest payment of approximately $19 million on its high-yield debt. And finally, interest payment on the company incremental term loan was approximately $11 million in the first quarter of '17 versus $1.4 million in the first quarter of 2016.

Slide 10. Looking on the reported pro forma results, which represent a full quarter of Constant Contact contribution in the first quarter of '16, revenue grew 6% year-over-year. During the same period, adjusted EBITDA grew 70% year-over-year. Note that the first quarter '16 pro forma results reflect the negative impact of a purchase accounting adjustment of approximately $13.7 million on revenue and adjusted EBITDA related to the Constant Contact acquisition. Year-over-year growth rate would have been lower if factoring in the purchase accounting adjustment.

Slide 11. Turning now to operating metrics. We ended the first quarter of '17 with approximately 5.3 million subscribers. Total subscribers decreased by approximately 67,000 from the end of the last quarter. Combined average revenue per subscriber, or ARPS, was $18.43 in the first quarter. ARPS for the Web Presence segment was $13.71 and for the Email Marketing segment was $60.31. ARPS for both segments was slightly higher sequentially.

As noted before, given the reallocation of marketing spend to our key brands, we expect to continue to see subscribers churn out from our nonstrategic and discontinued brands. As a result, we expect a net subscriber loss for 2017. We also expect to see pressure on ARPS from certain domain-led offers that became more significant in 2016. In these offers, domain names are bundled with lower-priced service, such as domain privacy, e-mail or basic hosting. We believe that expanding our funnel is very important, but we have seen subscriber profile from these offers differ from our traditional hosting subscribers.

A breakdown of our revenue mix during the first quarter of '17 is as follows. Hosting services and add-ons, such as security, mobile optimization and e-commerce integration, represented approximately 49% of our revenues. Email marketing was approximately 32%. Domain registration, approximately 12%. And the remainder of the business, such as domain monetization and co-marketing funds, accounted for approximately 5%.

Slide 12. For the full year of 2017, we are confirming our previous guidance of GAAP revenue growth of 4% to 5%, adjusted EBITDA growth of 12% to 14%, free cash flow growth of approximately 35%. We expect free cash flow will be negatively impacted by approximately $11 million of restructuring and integration charges during 2017.

Separately, we continue to expect that the full year of 2017, our key uses of cash will be: CapEx, including capital leases, of between $50 million and $55 million; principal term loan debt pay-down of at least $100 million; deferred consideration and related payment of approximately $30 million.

Slide 13. We ended the first quarter of '17 with $2.047 billion in total senior debt. Including other deferred obligation and capital leases, total net debt at the end of the period was $2.064 billion. We ended the quarter with approximately $69 million of cash on the balance sheet. Our revolving credit facility remains at a 0 balance, and we maintain an available credit balance of $165 million.

Our senior debt covenants are based on last 12-months bank adjusted EBITDA, as defined in our credit agreement. This number was $362.8 million in the first quarter of '17. Our senior debt leverage ratio was 4.50x bank adjusted EBITDA at the end of the first quarter. We remain well below our maximum senior secured leverage of 6.25x. We're still committed to reducing our secured debt to bank adjusted EBITDA leverage ratio to less than 4x in the medium term.

In conclusion, we remain focused on investment that will allow us to serve the SMB market for years to come. We believe that we are very well-positioned to do so while generating strong free cash flow. This will give us the flexibility to focus on delevering our balance sheet and maintaining a balanced investment approach.

Thank you for joining us today, and I'll turn the call back to Brian 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 the line of Stephen Ju from Credit Suisse.

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Christopher Ford, Credit Suisse - Analyst [2]

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It's Chris Ford on for Stephen. I have 2 questions. First, the Web Presence, ARPS picked up sequentially. So Hari, is this the cross-sell and up-sell strategy starting to work? And any color on the underlying dynamics there would be great. And then you mentioned taking Constant Contact to India in March and Latin America in the second half of the year. So curious to get your take on what the blocking and tackling items are to localize the product for the new market and how that differs by geography.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [3]

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Sure, Chris. On the first question, the ARPS pickup between -- in the web hosting segment or the Web Presence segment, I think we mentioned that in the first quarter earnings call as well, where as we sort of roll off some of the lower ARPS customers and as we focus on the key brands, where the net subscriber number is less of a focus and more of the high lifetime value and high lifetime revenue customers are much more of a focus for the business, the ARPS starts to pick up. Additionally, we've consolidated our sales floors across multiple facilities under the leadership of our CMO and his team underneath them. So that's starting to pay off some very early dividends, and we hope that, that accelerates over the course of the year as well. So we're pretty pleased with the progress there. We feel that there's still work to be done to try to get the engine working completely on the ARPS piece, but some pretty early positive returns.

On the second question, Constant Contact international, to launch in India, there has been significant amount of work done leveraging the product on the back end. We're using APIs. We've been able to connect into the Constant Contact product directly, but everything else around it has had to be localized. So payment gateways, for example, language support, even the go-to-market model in India is different than the market in the U.S., which is more trial to paid in the U.S. In India, it's much more free to paid with paywalls. So we're testing with that, and we've been pretty happy with the feedback we're getting from customers. In Latin America, similarly, while the core product will remain the same, there's still -- within the product, there's localization of language. And certainly, around the product, around paywalls, payment gateways, the go-to-market strategy, the marketing, the advertising will be much more specific to the Latin American market.

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Operator [4]

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And our next question comes from the line of Jason Helfstein from Oppenheimer.

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

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So do you still -- do you think core subs could get to flat by the fourth quarter this year? Second question, on pricing for the rest of the year, ARPS for Constant Contact, just maybe give some color about kind of what's baked in for the guidance? And then third, Marc, I think working capital usually is positive in the first quarter. It was negative this quarter. Just any color around that as we're thinking about how to get to the $150 million, $152 million of free cash flow guidance.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [6]

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Sure. On the first question, the core subs, by the end of the year, yes, that's still our expectation that by Q4, as we're kind of rolling off a lot of the sort of the harvest and the gateway products that we invested in last year, we anticipate that to be flat as we get towards Q4. Certainly, kind of going into the cycle from there on a run-rate basis, assuming that the strategy around the high LTR customers in the core brand continues to keep working, we anticipate that trend to continue going into the next year.

In terms of Constant Contact pricing baked into the forecast, there is not a significant amount of that currently in the current forecast. There's the standard sort of increases in average revenue per sub that comes in as a result of people's e-mail lists getting bigger and bigger and bigger as they stay in the market for a period of time. So there is not a significant amount baked in there in the current forecast anyway. On the working capital question, I'll have Marc respond to that.

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Marc Montagner, Endurance International Group Holdings, Inc. - CFO [7]

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Yes. I think, Jason, what you have in the first quarter was very high interest payment. It's $9 million of amortization, plus interest on $1.7 billion of term loan and another $19 million of semiannual payment on the high-yield debt. So there's no interest payment on the high-yield debt in the second quarter and another one in August of this year. So it's a little bit lumpy, but it was due to the interest payment.

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Operator [8]

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And our next question comes from the line of Heath Terry from Goldman Sachs.

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Heath P. Terry, Goldman Sachs Group Inc., Research Division - MD [9]

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I was just hoping you could give us a sense, with the growth in EBITDA that we saw on the quarter and the decline in free cash flow, at what point do you expect free cash flow growth to start to match up more closely with EBITDA? If you could just sort of walk us through the reconciliation there, that would be helpful. And then as you think about the international opportunities for Constant Contact beyond the markets that you've announced, do you expect to accelerate that rollout? Or have you reached sort of the important markets that you want to be in, the ones that sort of match your footprint in hosting?

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Marc Montagner, Endurance International Group Holdings, Inc. - CFO [10]

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Okay. I'll take the first question, and I'll leave the second one for Hari. But basically, if you look at it sequentially from the fourth quarter of last year, where we had $87 million of GAAP EBITDA going down to $80.1 million this quarter, revenue was up $3.1 million. But then we're currently running 2 support clouds. We're still running Tempe, and we just ramped up in Arizona. So for 2 quarters, we are going to have additional support costs. So that support costs were up significantly in the first quarter. And then we spend more on marketing. And we had additional provision for sales taxes. So G&A went up as well. So that's the bridge from the $87 million to the $80 million. But if you normalize it, remove the tax provision and the extra marketing that we spent in the first quarter and the doubled support cost that we have for the 2 quarters, you get to a normalized EBITDA that is greater than the $80.1 million you've got in the first quarter.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [11]

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And just to add to Marc's point there, on the free cash flow bridge, again, the big differential year-over-year is the first quarter of last year, interest payments versus this year on the semi-annual payment, which hits the free cash flow line. So I think if you normalize for that and look at unlevered free cash flow, you'll already see the trend that you're referring to, Heath, which is the conversions of unlevered free cash flow towards EBITDA. It's just that when you have lumpy semi-annual payments in any given quarter, it looks like there is a little bit of a differential. But adjusting for the timing of payments, you should see that convergence of growth and free cash flow year-over-year as well.

As far as the second question is concerned, which is around the international opportunities for Constant Contact, I think what we see with some of the competitors in that marketplace, especially folks like MailChimp, we noticed that there is a lot of growth outside of the U.S. And that significant share of market coming from outside of the U.S., some of those key markets are Europe, India, Latin America. We're starting initially with India and Latin America. We do think that within those markets, there's a lot of opportunity to service the local businesses that have a pretty good appetite for email marketing products. Europe is another market we're looking at. There's potential there as well, but we don't quite have a fully sort of defined marketing plan around that for this year. But India and Latin America will be the key areas of focus this year for Email Marketing.

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Operator [12]

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And our next question comes from the line of Brian Essex from Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [13]

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Marc, I was wondering if you could address the impact or the leverage we should expect to see in the model as we progress through the year. As you spend on engineering and development, I think we're assuming that sales and marketing should be relatively consistent through the year, but you're consolidating customer care centers this year. Maybe just linearity of margin expansion or leverage in the model, and what the key points of origin of that might be?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [14]

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Brian, this is Hari. I'll just take a crack at it and then have Marc opine as well. Again, as you guys remember, we're sort of -- we're a business where basically in the first half -- first quarter of the year, people typically pay for 1-year terms. So as people pay for 1-year terms, over the course of the year, you ratably recognize the revenue based on the term's splits. So sequentially, what you see every quarter is an increase in GAAP revenues. And even if the costs stay the same, right there, you start to see margin expansion and operating leverage. Because again, with the change in how EBITDA is calculated based on the memo from SEC last year, the change in deferred revenue does not get added back to EBITDA definition anymore. So the older trends where when you looked at the cash EBITDA in the business, the ratable sort of recognition of revenue didn't have quite as much of a seasonal impact versus now, saying if somebody pays for a year's worth of term on the first day of the year, as you go into the last quarter, you recognize a lot more revenue from that customer given that they pay for their services upfront. So even without significant changes to the expense structure, purely, the revenue recognition profile of the business will allow for that ratable increase in EBITDA without deferred revenue, our current definition of adjusted EBITDA, which should bridge you to the guidance we've provided for the year this year, if that makes sense, Brian.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [15]

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Yes, it does. And then maybe if we could just maybe address the churn, both in core Web Presence as well as Email Marketing. And I know you've been pretty transparent about your expectations with churn, but any opportunity to recapture those customers? Or is there a way to address the customer service level with regard to the customers that are churning? Or if we can get some color in terms of the primary reasons why they would churn, as they kind of churn off of the products that are not your core products?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [16]

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Sure, happy to. So in terms of the churn profile of the customers, it still consistently is very much around people leaving our services because they are going out of business. The churn again is very much indexed towards newer customers. When customers are less than 12 to 24 months old on platform, they typically may have a viable business, they may not. So the churn tends to be a lot higher in the first year or 2. As we focus more and more towards higher LTR customers and the gateway products come off our platform -- or the customers in the gateway products come off our platform, we do expect the churn levels to start declining.

There is also significant effort around simplification of operations where we've moved our support center from Austin to Houston. We've consolidated out of Orem into Tempe. The higher quality of customer care over the course of the year, we believe, will pay off some dividends in the churn side for the controllable part of churn in the last quarter of this year, then going into next year as well. And as we noted in the earlier question, we did say that by Q4, we anticipate subscriber profile or net subscriber profile to be flat, meaning no negative decline in subscriber profile. Those are results of focusing on higher-value customers churning off with some of the gateway products. And some very minor betterment in the controllable part of churn, which is maybe 20%, 25% of our churn is controllable and everything else tends to be much more focused on businesses just going out of business, which is a macro element of the market in general.

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Operator [17]

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And our next question comes from the line of Brian Fitzgerald from Jefferies.

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Brian Patrick Fitzgerald, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [18]

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On the SiteBuilder relaunch, I want to maybe drill down a bit on lessons learned from last time and the different tack this time, maybe related. You've started doing more traditional advertising, TV, radio, how has those results played out thus far in the key hosting brands? And how do you feel about the affiliate channel going forward?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [19]

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Sure, happy to answer that. So that's kind of a 2-part question, taking the second part first, which is the affiliate channel and how well that's been performing and that the newer expansion of channels into radio and TV. Certainly, for our core brands, we have HostGator on radio now. Our BigRock brand, internationally, has been starting campaigns around TV. Constant Contact continues to be on TV and radio as well. We've been very pleased with both the direct impact of that in terms of the directly trackable subscriber acquisition costs on all 3 of these. The halo effect takes longer, but we hear very positive feedback and momentum around the very minor amount of dollars as compared to our bigger budget around these offline channels. The affiliate channel, which is still where we're spending a majority of our dollars in online, is where we're spending a majority of our dollars, that continues to stay very steady. We don't see any deterioration of that channel. That continues to be as it has performed. We just think that with additional halo from some of the offline channels, that channel could get even more efficient to perhaps expanding the size of that channel a bit more as well. So early returns are good there.

We don't have our SiteBuilder product in any of those channels yet, as we mentioned in the last call. We've been taking the first half of the year to completely revamp the product, and the product updates have been pretty fantastic. We've launched an analytics package into the existing base of customers with centralized analytics. The e-commerce bundles have gotten pretty significantly revamped. The user interfaces and the ease-of-use of the product is significantly better. As we get into the second half of the year, assuming that the product trends and the user feedback is good, we feel that leveraging initially the affiliate channel and, over time, some of the other offline brand-building channels for the builder channel -- for the builder product, will drive some really good marketing yields and returns. So we're pretty excited about the launch of this new product that's coming out of the second half of the year and then ramping up marketing behind the builder product.

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Operator [20]

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And our next question comes from the line of Arun Seshadri from Credit Suisse.

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Arun A. Seshadri, Credit Suisse AG, Research Division - Analyst [21]

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I just wanted to understand, as far as the gateway product line, has the churn there, has that been generally in line with your expectations?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [22]

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Sure, Arun. So I think over the course of 2016, in the first and second quarter of last -- first and second quarter of '16, we were experimenting pretty heavily with alternative gateways to bring subscribers on board. As we had tallied those up, while the subscriber acquisition costs were in line, our general belief was when we looked at the lifetime revenue from those customers as compared to the subscriber acquisition cost, we thought that we had better returns inside the core brands. So we made a shift, as we mentioned in the last couple of quarter calls, towards much more of our core hosting brands, Constant Contact and the ones -- the brands that are giving us very high LTR to SAC ratios.

And as we embark on that strategy, part of that follow-on impact of that is much, much more reduced to almost de minimis spending inside the gateway brands and letting those run off while we focus on the higher-value core brands, which again is very clearly seen in the subscriber profile for the course of 2017 that we talked about in the remarks. So the churn there is higher than in the core gateway brands. And we think that the ratios of marketing spend to LTRs, while they were good on the gateway brands, we can do better with the core brands and with our email marketing brands as well. So that's kind of a conscious shift in marketing strategy. We're right in the middle of that, which has been showing good results so far. And by Q4, we expect a reversal of that trend in terms of net subscribers.

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Arun A. Seshadri, Credit Suisse AG, Research Division - Analyst [23]

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Got it. Helpful. And then as far as the overall revenue growth, obviously, you outperformed your revenue growth guidance this quarter. You've kept the guidance the same. Generally speaking, is that just conservatism? Has there anything that's gone better than expected? Obviously, on the ARPS side, it looks like the performance has been significantly better in terms of bringing in the newer subscribers. But just some broad thoughts on guidance versus revenue performance this quarter.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [24]

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Sure. I think in general, there are a lot of moving parts in our business in the last couple of quarters. We're shifting this marketing strategy that we just talked about. Early returns the last 2 or 3 quarters have been really good, and we've been very excited about sort of the progress we've made so far. But given that it's still pretty early in our process, we thought it was prudent to make sure that we're tempering and managing expectations. So in general, there is conservatism baked into that. But there's also a lot of moving parts as the strategy is shifting. But early returns, like I said, have been quite fantastic, and we've been happy with that.

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Arun A. Seshadri, Credit Suisse AG, Research Division - Analyst [25]

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Great. Appreciate that. Last question from me. Any update on the SEC situation and time frame for a potential settlement there?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [26]

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I think, again, there's not much change there. We had an SEC investigation that started December of last year, as we've disclosed in the past, and it's an ongoing process. We continue to keep cooperating with the SEC, giving them the materials that they look for. Again, kind of out of our hands in terms of the timing of it. And as we've also prior disclosed in the past, the focus of the probe has been around non-GAAP metrics, and that continues to still be the case as time moves on.

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Operator [27]

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And our next question comes from the line of Gray Powell from Wells Fargo.

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [28]

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I just had a couple of, I guess, modeling questions. So can you help us think through the drivers of EBITDA growth longer term? And then specifically, if I look at 2017 guidance, it calls for EBITDA growth of 13% as mainly because you had the full contribution of Constant Contact, plus a full year synergies this year versus a partial last year. So once we lap those comparisons, what should we think of as levers to hit 10% EBITDA growth longer term?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [29]

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Sure. I think if you thought about the crux of our business today, there are obviously 2 key levers there: one is the average revenue per sub and one is the subscriber profile as we get them on board. As we kind of continue to keep focusing on high LTR customers, the amount of revenue and the value we're able to generate on a per-sub basis with this shift in strategy compounds longer term. Because, again, if you're getting a gateway customer with a lifetime revenue of $600 versus, say, a Bluehost customer with a lifetime revenue of $1,200, that adds some compounding effect as the years go on.

Additionally, as we've mentioned on the cross-sell/up-sell, we have a very concerted effort around streamlining those operations, centralizing those operations to be able to drive better cross-sell/up-sell within the base of customers that we have today. So I think that there is some good operating leverage available from just the scale of both of those strategies working in concert. International, we feel that there's some good opportunity there, which we're just ramping up more. As we mentioned, we brought in a new Head of International late last year, and he continues to keep driving the strategy inside emerging growth markets that have started to pay off some pretty nice early dividends.

And then on the operating leverage side, there is still some amount of streamlining opportunity that's available to our business today, call center consolidation that we talked about, on the harvest brands and the brands that we are not actively spending dollars on. There's pricing levers that's available over the next few years. We also believe that simplifying down the cost structure in some of those areas of the business has some good operating leverage available to us as well. And in the long run, I think the combination of higher lifetime revenue customers, better cross-sell/up-sell into the base and simplification of the business to fewer call centers, fewer locations and driving some operating leverage from that, we feel pretty comfortable with the long-term guidance we've provided in the past.

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [30]

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Understood. That's very helpful. And then in the context of churn, I know we've talked about it a lot relative to the subscriber base. Have you guys quantified the revenue or the impact of revenue growth of the churn for this year?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [31]

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In terms of reduced churn and how much additional revenue that's driving, is that the question, Gray?

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Gray Powell, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Analyst [32]

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Well, there's higher churn in 2017. That's going to, I guess, trail off by the end of the year. So I'm just curious, like, how is that impacting revenue growth this year? So once we lap that, how we should think about it longer term?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [33]

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Yes. I mean, I think if you look at the subscriber declines quarter-over-quarter -- for Q1 versus Q1, about 60,000 subscriber decline. Again, not every subscriber has the same exact profile. Some have higher lifetime revenue, some have lower lifetime revenue, depending on the gateway that they come in from. But if you think about sort of just simple math there, you could just look at the ratio of end-of-period subscribers and the decline year-over-year to see how much of the growth is being tempered by subscriber declines. Some of that is being offset by higher-value customers on the ARPS side, but there's certainly sort of a drag impact as these subs are coming off our platform.

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Operator [34]

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Our next question comes from the line of Naved Khan from Cantor Fitzgerald.

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Naved Khan, Cantor Fitzgerald & Co., Research Division - VP and Research Analyst [35]

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Just a question on the SiteBuilder. Hari, once you guys have it ready for, I guess, a broader launch, are you planning to put some marketing dollars behind it? What's your strategy going to be in the second half of this year? And then on the CoCA side, on the cost of customer acquisition, are you seeing any kind of meaningful shift there in terms of the costs have gone up or down? Or are they pretty much in line with where they used to be historically?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [36]

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Sure. On the SiteBuilder side, we're testing our way into that market again, because I think the last time we were spending significant dollars on it was first quarter and second quarter of last year. And then we've kind of tempered that down as we've been watching those customers and the profile of those customers and revamping our product suite. We've been slowly ramping up marketing spend, even through the first quarter and second quarter, and seeing pretty decent returns there. So assuming that, that trend continues, we expect to ramp up certainly the online marketing spend on the builder second half of the year, but we're going to test our way into that. And in terms of any off-line branding around the builder brands, we don't anticipate that until 2018. So that's the current plan behind that product.

In terms of the cost of customer acquisition, or SAC as we call it, if you look at it channel by channel, what we see is not a change or degradation on a channel basis. So if you look at affiliate channel spend for the same number of customers, the subscriber acquisition costs are very in line with historical numbers. But the thing that we are doing is adding additional channels where we are doing now, for example, for some of the core brands, radio. We're doing television. We ramped up television spend for our BigRock brand in India. When you look at Constant Contact, we ramped up our television spend around that as well. So when you look at it on a channel-by-channel basis, those trends all seem to hold. When you look at it on the aggregate, some channels just don't deliver quite as much as other channels do. So there might be a change in the subscriber acquisition cost going up. But some channels also pay off dividends in the longer run where, for example, if you spend dollars on TV and unaided awareness and aided awareness go up, you have a follow-on impact by spending dollars inside even the affiliate channel where the yields start to get better. So you have to go into a little bit of an investment cycle in some of those channels. And for some of our brands, we're in the middle of that right now. But overall, we don't see a degradation on any individual channel in terms of subscriber acquisition economics.

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Naved Khan, Cantor Fitzgerald & Co., Research Division - VP and Research Analyst [37]

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Okay. And then one quick question, if I may. So given the announcement to accelerate the CEO transition, what should we be expecting in terms of a time frame? Should we expect something near term? Or do you think it's more like 3 to 6 months? Can you provide us any thoughts there?

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [38]

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I mean, we're just working with the board now to start that process. And again, it's going to depend on fit, profile and how long it takes us to find someone. But I certainly think that, that 3- to 6-month window is not unreasonable from our viewpoint.

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Operator [39]

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And this concludes our Q&A session. And now I'd like to turn the call back to Hari Ravichandran for any further remarks.

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Hari K. Ravichandran, Endurance International Group Holdings, Inc. - Founder, CEO and Director [40]

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Great. Thank you, everyone, for joining today's call. We continue to work hard to reach our goals for the year, and we believe that this quarter was a reflection of that work. Thank you for your time, and we look forward to the next update or seeing some of you on the road.

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Operator [41]

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