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GoDaddy's (NYSE:GDDY) Q3 Earnings Results: Revenue In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / November 03, 2022
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Domain registrar and web services company, GoDaddy (NYSE:GDDY) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 7.17% year on year to $1.03 billion. Guidance for the next quarter slightly missed analyst expectations with revenues guided to $1.04 billion at the midpoint, or 2.25% below analyst estimates. GoDaddy made a GAAP profit of $99.8 million, improving on its profit of $97.7 million, in the same quarter last year.

GoDaddy (GDDY) Q3 FY2022 Highlights:

  • Revenue: $1.03 billion vs analyst estimates of $1.03 billion (small miss)
  • EPS: $0.63 vs analyst estimates of $0.60 (5.21% beat)
  • Revenue guidance for Q4 2022 is $1.04 billion at the midpoint, below analyst estimates of $1.06 billion
  • Free cash flow of $257 thousand, down 99.8% from previous quarter
  • Gross Margin (GAAP): 63.7%, in line with same quarter last year

Founded by Bob Parsons after selling his first company to Intuit, GoDaddy (NYSE:GDDY) provides small and mid-sized businesses with the ability to buy a web domain and tools to create and manage a website.

Successfully setting up an online store is difficult for most small business owners. GoDaddy offers most of the e-commerce functionalities to simplify the entire process of starting and maintaining an online business.

By making it easy for even non-technical users to set up a fully functioning website within a short period, GoDaddy helps its customers to focus their time on their primary business function.

For example, you don’t need computers to make food, however, restaurants rely on computers and websites to sell and deliver food to customers. For a small restaurant business, GoDaddy starts by providing a fitting domain name. It then provides all the tools to host, build, and manage a website. It also integrates with third-party applications to provide payment, marketing, and other e-commerce features.

GoDaddy was founded when the sale and management of domain names were popular and lucrative. As more companies moved into the domain name business, GoDaddy expanded into the e-commerce space by offering more robust website services to stay competitive.

While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.

GoDaddy faces competition from Automattic, Shopify (NYSE: SHOP), Squarespace (NYSE: SQSP), and Wix (NASDAQ: WIX).

Sales Growth

As you can see below, GoDaddy's revenue growth has been unremarkable over the last two years, growing from quarterly revenue of $844.4 million in Q3 FY2020, to $1.03 billion.

GoDaddy Total Revenue

GoDaddy's quarterly revenue was only up 7.17% year on year, which might disappoint some shareholders. We can see that the company increased revenue by $17.7 million quarter on quarter re-accelerating up on $12.8 million in Q2 2022.

Guidance for the next quarter indicates GoDaddy is expecting revenue to grow 2.03% year on year to $1.04 billion, slowing down from the 16.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.74% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. GoDaddy's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 63.7% in Q3.

GoDaddy Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.63 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. GoDaddy's free cash flow came in at $257 thousand in Q3, down 99.8% year on year.

GoDaddy Free Cash Flow

GoDaddy has generated $675 million in free cash flow over the last twelve months, a solid 16.5% of revenues. This strong FCF margin is a result of GoDaddy asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from GoDaddy's Q3 Results

With a market capitalization of $11.5 billion, more than $826.2 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see strong cash flow but on the other hand, it was unfortunate that revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a mixed quarter for GoDaddy. The company is flat on the results and currently trades at $72.65 per share.

Is Now The Time?

When considering GoDaddy, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of GoDaddy we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, unfortunately gross margins show its business model is much less lucrative than the best software businesses.

GoDaddy's price to sales ratio based on the next twelve months is 2.6x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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