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Edited Transcript of EIGI earnings conference call or presentation 6-Feb-20 1:00pm GMT

Q4 2019 Endurance International Group Holdings Inc Earnings Call

Burlington Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Endurance International Group Holdings Inc earnings conference call or presentation Thursday, February 6, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angela White

Endurance International Group Holdings, Inc. - VP of IR

* Jeffrey H. Fox

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

* Marc Montagner

Endurance International Group Holdings, Inc. - CFO

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Conference Call Participants

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* Arun A. Seshadri

Crédit Suisse AG, Research Division - Analyst

* Naved Ahmad Khan

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* John Byun

Jefferies LLC, Research Division - Equity Analyst

* Todd Cranston Morgan

Jefferies LLC, Fixed Income Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Endurance International Group 2019 Fourth Quarter and Full Year Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Angela White. Thank you. Please go ahead, ma'am.

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

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Skyler?

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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 measure is available in the presentation located in the Investor Relations section of our website.

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

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

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Thank you, Angela, and good morning. Our 2019 financial and operational performance reflects the progress we made by increasing investment in our core strategic brands. During the fourth quarter, we continued our strategic simplification effort with the sale of SinglePlatform for $51 million. When adjusting for the impact of the sale, we delivered our second straight quarter of positive net subscriber adds, our revenue increased sequentially compared to the third quarter and our GAAP revenue continued to progress toward growth inflection. In 2019, we generated substantial free cash flow and reduced our net debt by over $160 million while also adding Ecomdash to our solution set in the third quarter.

Operationally, our 2-COO structure is allowing us to simplify and execute with increasing effectiveness. As we enter 2020, we are positioned to benefit from our enhanced solution investment and brand focus, which we will review in more detail later in our discussion.

Turning now to Slide 6. Before we dive into segment results, it's important to look at the valuable platform we're building at Endurance. Two years ago, we made the decision to increase investment in selected platforms and strategic brands. Our simple guiding principle for our focus brands is to deliver increasing customer value to create increasing customer success. Our 2 segment operating structure is designed to leverage our increased engineering investment to deliver continuously enhanced solution options to our customers at scale. As a scale player, acquiring over 1 million new customers a year, we are now positioned to participate more effectively in growth opportunities that are addressable by our strategic brands.

Turning now to Slide 7. As we close out 2019 and look to 2020, we are focusing on converting our 2019 progress into growth. Marc will discuss guidance in his section, but at a high level, with customer success as our central tenet, we will continue to invest in product, engineering and sales and marketing to participate in the growing total addressable market we serve. Starting in 2020, in order to better align our reporting with operations, we will move from 3 reporting segments back to 2 reporting segments, which Marc will discuss in more detail.

Turning now to Slide 8. Starting with our email marketing segment, we made substantial progress expanding the capability of our platform in 2019. We have a strong brand in Constant Contact, and we expanded the pathway to bringing customers online with the launch of our site builder, domain, logo and e-commerce functionality. We also invested in our Marketing Advisor program, which is designed to guide customers through their journey to grow their business no matter the stage. In addition, we continued to add core small business marketing capabilities by integrating our market-leading e-mail platform with social media and advertising services.

In 2020, as we focus on customer success, we will offer solutions targeted at more specific segments, whether a customer is seeking to establish an identity with a logo and website or is ready to start sending larger-list e-mail campaigns, we are reshaping Constant Contact to be a business that helps customers succeed in growing their relationships and business.

Our investment in engineering is expected to drive improved experiences such as a guided journey for customers that includes customized end product offers and end product assistance. We will also be working to leverage our Ecomdash capabilities with offers to customers of Constant Contact and selected web presence brands.

Turning now to our web presence segment. In 2019, we've substantially completed the shift of our marketing spend to the Bluehost and HostGator brands, including our teams in Latin America and Asia Pac. We saw progress operationally as we created focus and scale, and our efforts continued to move us closer to inflection on both a unit and a revenue basis. In addition, we continued to increase investment in our strategic web presence product delivery platform.

In the fourth quarter, we relaunched the Bluehost brand in India on this enhanced core platform and made progress delivering an enhanced set of solutions, such as Office 365 and small business advertising tools in 2019.

In 2020, we plan to increase our marketing investment on our Bluehost and HostGator brands. Our team is focused on growing net subscribers and increasing penetration of solutions on these strategic brands as we leverage the increasing investment we are making in our core product delivery platform. Our simplification efforts will also continue across our highly cash-generative nonstrategic brands.

Turning to our domain business, in 2019, we focused on expanding our overall market position with early life cycle customers. We added products such as e-mail and office productivity tools and integrated our express site builder in the fourth quarter. We are pleased with the net unit growth we saw in this segment in 2019. In 2020, we will continue to refine and integrate our site builder, e-commerce and e-mail offers across our domain business as we focus on delivering value to our customers and growing our revenue.

Turning now to Slide 11. We are pleased with the progress we're making on our strategic brands. We will continue to invest in our return to growth by delivering increased value to our customers and providing the tools they need to drive success. Our teams have worked hard to reach this year of inflection, and we are looking forward to executing our plan and growing the business in 2020.

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. On Slide 13, I am pleased to review our fourth quarter and fiscal 2019 results. For 2019, on a reported basis, GAAP revenue was $1.113 billion; adjusted EBITDA was $313.6 million; free cash flow, defined as cash flow from operations less capital expenditures and finance equipment, was $114.7 million. Full year 2019 revenue and adjusted EBITDA contribution from SinglePlatform was $25.4 million and $4 million, respectively. In 2018, SinglePlatform contributed $28.4 million in revenue and $6.2 million in EBITDA. The sale of SinglePlatform was effective December 5, 2019. Our year-over-year decline in adjusted EBITDA was due mostly to lower revenue, increased levels of investment in engineering and development, analytics, IT, privacy and cybersecurity. This was partially offset by benefits from lower data center costs and lower sales and marketing spend.

In the fourth quarter of '19, we also received a D&O insurance reimbursement of approximately $4 million related to past legal expenses. This positively impacted adjusted EBITDA for the fourth quarter and the full year.

This quarter, we booked an impairment of $19.6 million. Approximately $7 million was recorded in the cost of good line sold (sic - cost of goods sold line) in relating to domain intangible and the remainder in operating expenses related to a reduction in goodwill.

GAAP cash flow from operation in 2019 was $162 million, CapEx was $47.3 million and free cash flow was $114.7 million. Year-over-year cash flow from operations and free cash flow were mostly impacted by higher operating expenses in 2019 versus 2018. These were offset mostly by higher change in deferred revenue, lower cash interest payment and lower CapEx.

On Slide 14, in the fourth quarter of 2019, on a reported basis, revenue was $277.2 million, and adjusted EBITDA was $78.2 million. Free cash flow in the fourth quarter was $32.1 million. Year-over-year free cash flow was positively impacted by higher changes in deferred revenue, legal D&O insurance reimbursement, [lower] interest payment and lower CapEx, which offset higher taxes. Fourth quarter revenue on an adjusted basis excluding SinglePlatform was $272.4 million, and adjusted EBITDA was $77.8 million. Excluded SinglePlatform revenue of $6.8 million in the third quarter of '19 and revenue of $4.8 million in fourth quarter of '19, we saw an increase in revenue of $2 million quarter-over-quarter from the third quarter to the fourth quarter.

Slide 15. For the full year 2019, ending subscriber count was 4.766 million subscribers. Ending subscriber count was reduced by approximately 23,000 subscribers due to the sales of SinglePlatform in December of 2019. Net subscriber losses for the year totaled 36,800. And if adjusting for the divestiture of SinglePlatform, net subscriber losses would have been approximately 12,000. Average revenue per subscriber, or ARPS, for the year was $19.35.

Slide 16. We finished the fourth quarter with 4.766 million subscribers. As noted, the SinglePlatform sale reduced total subscriber count at the end of the quarter by approximately 23,000. Excluding this impact, net subscriber addition for the fourth quarter would have been positive 8,900 compared to the reported loss of 14,400. We are very pleased to see another quarter of positive subscriber addition.

In the fourth quarter of '19, combined ARPS was $19.34. ARPS in web presence was $13.37; in email marketing, $70.70; and in domain, $14.42.

Slide 17. We're introducing our guidance for 2020, and as of the date of this call, our guidance for the year is the following: GAAP revenue of approximately $1.085 billion to $1.110 billion, adjusted EBITDA of approximately $300 million and free cash flow of approximately $110 million. For an apple-to-apple comparison, excluding the impact of SinglePlatform in 2019, revenue guidance for the full year implies nominal growth at the midpoint. Adjusted EBITDA guidance imply an increase in investment primarily in marketing, engineering and development. We expect capital expenditure of approximately $50 million in 2020.

Please note also that in order to better align with how we now run our businesses and the 2 Co-COO, in 2020, we will move from 3 reporting segments to 2 reporting segments. Our email marketing segment would be renamed digital marketing and will include Constant Contact and Ecomdash. Our web presence segment will include our strategic brands across hosting and domain as well as our nonstrategic brands. As a result, our domain segment would be consolidated into the overall web presence segment. Revenue attributable to our legacy site builder brands would continue to be reported in our web presence segment. Revenue attributable to the Constant Contact digital marketing suite will be reported in the digital marketing segment. Domain adjustment going forward would be a cost allocation of the site builder engineering and development cost to our digital marketing segment for the use of the website builder product and other solutions sold under the Constant Contact brand. Previously, substantially all of the site builder E&D costs were allocated to our web presence segment.

Slide 18, we ended the third -- we ended the fourth quarter with $1.724 billion in total senior debt. Including other deferred purchase obligation and capital leases of $3 million and total cash on the balance sheet of $113 million, total net debt at the end of the period was $1.614 billion. During the fourth quarter, we paid down approximately $56 million of principal of our term loan using approximately $48 million net proceeds from the SinglePlatform sale. For the full year, we paid down $131 million in principal on our term loan debt.

Our LTM bank-adjusted EBITDA for the period ended December 31, 2019, was $311.2 million. Our senior debt leverage ratio of 4.06 turns remains well below our maximum senior secured leverage ratio of 6 turns.

Thank you for joining us today. Now I'll turn the call back over to Jeff.

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

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Thanks, Marc. We are pleased with the progress we made in 2019 and look forward to executing our 2020 plan. Our teams are focused on continuing to position the business for growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Naved Khan with SunTrust.

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

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Congrats on the revenue inflection. Just, maybe a few clarifying questions here. Jeff, on the last call for Q3, you had talked about how you were a little bit disappointed with the amount of cross-sell and attach rate that you're seeing back then. Can you just talk about maybe the kind of progress you have made so far?

And then on -- you also, I think, talked about testing out new channels for marketing. Maybe give us some more color on that.

And then for 2020 guidance, if you had to think about growth for the 2 segments, how should we be thinking about them individually? Should we expect both of them to grow equally? Or is it going to be more weighted to one of them?

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

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I'll take the last one first because that's the easiest. I mean when you adjust for the sale of SinglePlatform, our Constant Contact business, we believe it grew slightly this year. And so we feel like that segment, the digital marketing segment, including the asset with Ecomdash, is positioned to grow. We feel like we have a growth opportunity. Obviously, we're not going to give specific segment guidance, but we feel like we can grow both segments. It's obviously harder on the aggregated web presence side just because that's where we still have the drag effect of harvest brands, that we're just letting attrit, profitably. So that's the sort of rough outline for how we're thinking about striking the balance.

As it relates to the channels and cross-sell, without getting into specifics, the way we're thinking about 2020 enterprise-wide is that we moved the money to the brands and the platforms we're investing in, and in 2020, each brand has top-of-funnel to conversion improvement tactics that they're working on. And then within the customers that convert, we feel like we have the ability to be more targeted and deliver better experience and more value, which we translate into either accomplishing what they came for or using more capabilities.

Example, we've had customers starting to use our logo maker that are coming onboard with our site builder. So we look at it as 2 levers we're improving this year within our commitment to grow and make more customers succeed. We're not really talking about it as upsell and cross-sell. We're really trying to just look at the customers very specifically and make sure they're getting the journey they're on to be successful because we know there's more they will do with us along that journey as long as they're being successful now that we've positioned our business this way.

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Naved Ahmad Khan, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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Understood. That's helpful. And then maybe one final question. Maybe -- can you just maybe offer some kind of color or commentary on the -- as it regards to the macro or this demand from the small business customers? What have you -- what are you seeing? Has anything changed in the last several months?

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

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So we see -- I mean we look at a lot of things, but in general we see the digital marketing market dynamic, complex, loud, with new solutions and competitors, but growing double digits. And we are trying to move our entire digital marketing strategy more and more towards that opportunity.

On the web presence side, I think I've seen numbers that are mid-single-digits in terms of global domain, new domain adoption. And at a macro level, that is an indicator that we're continuing to watch. Obviously, with a multiple brand, primarily hosting-led business that we're now evolving with increased focus, we don't participate holistically in that growth. And that's why we keep talking about customer success on key platforms and filling out the opportunity for them to succeed on their journey. Does that makes sense? So we think both markets are growing, and we're just under-positioned for our potential share over the -- which is what we're working on hard for, not just this year, but for the long term.

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Operator [6]

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And our next question comes from Brent Thill with Jefferies.

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John Byun, Jefferies LLC, Research Division - Equity Analyst [7]

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This is John Byun for Brent Thill. So good progress on EBITDA in Q4. And the 2020 guidance mentions that free cash flow and EBITDA will be down a little bit, and you alluded to some investments. But could you provide a little bit more color? I mean is it all R&D and sales and marketing or any other items? Looks like you're stepping up a little bit into investments?

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

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No and no. We're continuing to run the same. I mean, again, this is my -- this will be my third full operating year. That was me knocking on wood. If this will be my third full operating year, I think we're in the execute phase. We feel like we have a highly cash-generative business. We're paying off debt, we're increasing our focus on customer success. And the balance between engineering, sales, marketing, creating customer success and growing business is a balance that we're getting better at on each of our 4 key brands every day. And so that's why we're just -- we're really focused on continuing our inflection and but still being very disciplined about profit and free cash flow. Inflection with discipline is the mindset that we have as a team.

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John Byun, Jefferies LLC, Research Division - Equity Analyst [9]

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And then are there any geographic color that was notable in the quarter?

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

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No. I would call out the way our team in Asia Pac has really become part of our overall scale strategy on the web presence side. And then frankly, supporting some of our centralized functions on the IT ops side was fantastic. As we mentioned, we did a -- we launched our Bluehost brand on our global platform in the quarter. We still got a lot of work to do. But I just really like how the Asia Pac team and the U.S. team is coming together.

As it relates to Latin America, we continue to like how that team is very entrepreneurial. Really, really does a great job representing our company in the HostGator brand end market. And so those are our 2 biggest geographic teams.

And then finally, I don't know if they're listening, but our team in Holland, which was part of an acquisition we did several years ago, has become a really high-quality leveraged innovation driving team. And so some of what we're bringing to our different platforms and brands is very much energized by the team that we have in Holland. And so for me, it's been really -- last year was the year where we saw these teams come together with our scale. And I don't want to wax poetic because at the end of the day, we've got to deliver top line growth with real discipline around EBITDA and free cash flow.

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Operator [11]

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And our next question comes from Arun Seshadri with Crédit Suisse.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [12]

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Just a couple for me. First, just wanted to get a sense for thinking about 2020. Do you feel like you're very close to inflection in subscribers in just the web presence portion? And just a sense for what presence versus domain, if you could give us some sense for how you see subscriber inflection during the year.

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

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So, so we -- obviously, a domain -- a customer that comes in for a domain, the economics and the journey they're on are very different than someone that comes in and just actually signs up for a hosting package, right? And so what we're looking at is we're looking at as an aggregate business, the way we think our competition is. And so we believe that, that business has to get to positive subscribers, positive revenue. And it obviously is carrying some, frankly, brands that we just didn't feel like the scale of those brands and what we could do with customers on those brands was as valuable as really focused -- the brands we're focusing on, including our domain front door. And so at the end of the day, we're trying to keep this very simple. We have 2 scale businesses: digital marketing, web presence. And we think those businesses have to grow units and subscribers and continue to generate very substantial profit and free cash flow. And they're on a different cadence because they started at a different place. We're not going to give specific unit guidance for either business at this point, but you should -- everybody has heard from me since day 1, we are a scale player spending scale dollars on a simplified set of platforms and brands in growing markets. We are going to find growth. That is what we are responsible for at this scale.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [14]

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Got it. That's helpful. And then as far as -- and then just in terms of cost and your discussion around OpEx, maybe for Marc here. Just wanted to get a sense for -- is there any way you could give us a quantitative sort of increase? And how much an expense increase are you budgeting for 2020 as you focus on these targeted investments?

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Marc Montagner, Endurance International Group Holdings, Inc. - CFO [15]

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Arun, we're not going to go into that level of granularity at this stage. But I think investing in engineering and development, I think you've seen that it was about 5.6% of revenue in 2017. Last year, it was about 9%. And it's -- we are almost at where we need to be.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [16]

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Got it. That's helpful. And last thing for me is, broadly forecasting for the year, do you feel like you've taken a reasonably conservative look for the broad year? And sort of what in your minds are sort of x factors that could take you higher than sort of your -- the ranges you've laid out?

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

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So we're not going to opine on conservative or aggressive. The teams are working really hard on the customers we're attracting, having more of them convert and be successful as an integrated thought because we know if they're -- if they convert and are successful, we are setting our platforms up to be on a journey with them where we can help them get additional things that they need to be successful. And again, the bulk of who we serve are small businesses, and they're time-strapped, and they're not professional marketers, most of them. And we are in the simplify, integrate and help business on our core platforms. So, what could go right? We have given a forecast that we have to execute to. And I think at this stage of the year, we just -- we have teams that -- we're pleased with how focused they are on the details of what we need to do next.

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Operator [18]

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(Operator Instructions) Our next question comes from Todd Morgan with Jefferies.

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Todd Cranston Morgan, Jefferies LLC, Fixed Income Research - Analyst [19]

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I was actually hoping we could step back a little bit and talk a little bit about the 2020 guidance on the revenue side. You look -- business looks like it's inflecting with the operating metrics sort of trending the right way. The ARPU numbers are certainly sort of stable to growing slightly, and yet you're talking about a sort of a flat top line. I'm just trying to understand how to reconcile those two thoughts, especially given some of the comments you made earlier?

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

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Yes. Just as a reminder, right, we -- this was a multibrand strategy, and we absolutely have brands that, over the last 2 years, we took new customer acquisition money away from brands. And so these are net growth numbers. And we've made clear to everybody, we are very pleased with the way the team is managing the cash flow and the movement of expenses, and they execute to get to our growth. And I just -- we're in year 3 of a journey to where we need to drive more market level growth on our good assets. And then on the brands that are still good assets because they're profitable, but that we're not investing in new customers, there's a natural SMB attrition that we're experiencing on a diminishing amount of our total revenue. And so it's a -- I think the team is doing a great job on getting us to where the end of 2020, 2021, as we go forward, what we've let go of and put into attrition mode is going to be a smaller and smaller part of our business. This is the year where that inflection is occurring based on our forecasts.

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Operator [21]

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And I'm showing no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.