# GoDaddy Inc. (GDDY) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from GoDaddy Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1609711/000160971123000031/gddy-20221231.htm Accession: 0001609711-23-000031 Filing date: 2023-02-16 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/GDDY/ All MD&A years: /company/GDDY/mda/ Previous year: /company/GDDY/mda/fy2021/ (FY 2021) Next year: /company/GDDY/mda/fy2023/ (FY 2023) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included in "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis, including information with respect to our plans and strategies for our business, includes forward-looking statements involving significant risks and uncertainties. As a result of many factors, such as those set forth in "Risk Factors," actual results may differ materially from the results described in, or implied by, these forward-looking statements. This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of 2020 items and comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year ended December 31, 2021. (Throughout the tables and this discussion and analysis, dollars are in millions, excluding average revenue per user (ARPU), and shares are in thousands.) Overview We are a global leader in serving a large market of everyday entrepreneurs, delivering simple, easy-to-use products, and outcome-driven, personalized guidance to small businesses, individuals, organizations, developers, designers and domain investors. We manage and report our business in the following two segments: •Applications and Commerce (A&C), which primarily consists of sales of products containing proprietary software, commerce products and third-party email and productivity solutions as well as sales of certain products when they are included in bundled offerings of our proprietary software products. •Core Platform (Core), which primarily consists of sales of domain registrations and renewals, aftermarket domain sales, website hosting products and website security products when not included in bundled offerings of our proprietary software products as well as sales of products not containing a software component. 60 Table of Contents Financial Highlights Below are key consolidated financial highlights for 2022, with comparisons to 2021. •Total revenue of $4,091.3 million, an increase of 7.2%, or approximately 8.4% on a constant currency basis(1). •International revenue of $1,334 million, an increase of 5.0%, or approximately 8.4% on a constant currency basis(1). •Total bookings of $4,413.8 million, an increase of 4.3%, or approximately 6.0% on a constant currency basis(1). •Operating income of $498.8 million, an increase of 30.5%. •Net income of $352.9 million, an increase of 45.3%. •Normalized EBITDA(2) of $1,013.0 million, an increase of 16.1%. •Net cash provided by operating activities of $979.7 million, an increase of 18.1%. (1) Discussion of constant currency is set forth in "Quantitative and Qualitative Disclosures about Market Risk." (2) A reconciliation of Normalized EBITDA to net income, its most directly comparable GAAP financial measure, is set forth in "Reconciliation of Normalized EBITDA" below. COVID-19 Pandemic The extent to which the ongoing COVID-19 pandemic may impact our future results and operations will depend on future developments, including the duration of the pandemic and the parameters of global governmental measures put in place to control the spread of the virus as well as the continuing economic impact of the pandemic. We continue to monitor the pandemic and the potential impacts it may have on our future financial position, results of operations and cash flows. See "Risk Factors" for additional information. Our Financial Model We have developed a stable and predictable business model driven by efficient customer acquisition, high customer retention rates and increasing lifetime spend. We have broadened our business model over the past several years to encompass a meaningful set of transactional relationships with our customers in areas such as aftermarket, commerce and payments and reseller agreements where one account may give us access to many users. We have also observed an increase in users that have converted from owning paid to free subscriptions during this time, coinciding with our experimentation with freemium services as our customers engage in more varied types of business with us. This has changed the way in which we interact with and target our customers, and, as such, in 2022 we reevaluated our definition of a customer based on our current business model. Under this new definition, we include all customer accounts with paid transactions in the trailing twelve months or with paid subscriptions as of the end of a period, but exclude customer accounts that have active free versions of our products but have not paid us in the trailing twelve months or do not have any paid subscriptions as of the end of the period. As a result of this reevaluation, we revised both our customer and related ARPU disclosures to retrospectively present total customers and ARPU under our updated customer definition, as shown in the table below: [[GREPCENT_TABLE]] [["","","","Year Ended December 31,"],["","","","2021","","2020"],["Total customers at period end (in thousands):"],["Previous definition","","","21,233","","","20,646"],["New definition","","","20,704","","","20,148"],["Average revenue per user:"],["Previous definition","","","$","182","","","$","166"],["New definition","","","$","187","","","$","170"]] [[/GREPCENT_TABLE]] We grew our total customers from 18.8 million as of December 31, 2019 to 20.9 million as of December 31, 2022, through a combination of our industry leading products built on a cloud platform, brand advertising, direct marketing efforts, customer referrals, world-class customer care and acquisitions. In each of the five years ended December 31, 2022, our customer retention rate exceeded 85%, and in 2022, our retention rate for customers who had been with us for over three years was 61 Table of Contents approximately 93%. We believe the breadth and depth of our product offerings and the high quality and responsiveness of our customer care team build strong relationships with our customers and are key to our high level of customer retention. We generate bookings and revenue from sales of product subscriptions. We offer our subscriptions on a variety of terms, which average approximately one year, but can range from monthly to multi-annual terms of up to ten years depending on the product. We monitor total bookings as we typically collect payment at the time of sale and generally recognize revenue ratably over the term of our customer contracts. Accordingly, we believe total bookings is an indicator of the expected growth in our revenue and is a supplemental measure of the operating performance of our business. Applications and Commerce. We generated 31.3% of our 2022 total revenue from the sale of A&C products. A&C revenue primarily consists of revenue from sales of products containing proprietary software such as Websites + Marketing and Managed WordPress and commerce products such as payment processing fees and point-of-sale (POS) hardware as well as sales of third-party email and productivity solutions such as Microsoft Office 365. Total revenue from A&C products grew at a compound annual growth rate (CAGR) of 11.4% over the three years ended December 31, 2022. Core Platform. We generated 68.7% of our 2022 total revenue from our Core platform. Core revenue primarily consists of revenue from sales of domain registrations and renewals, aftermarket domain sales, website hosting products and website security products when not included in bundled offerings of our proprietary software products. Total revenue from Core Platform products grew at a compound annual growth rate (CAGR) of 5.6% over the three years ended December 31, 2022. Revenue derived from both of our product categories has increased in each of the last three years, with many of our non-domains products growing faster in recent periods. In each of the five years ended December 31, 2022, greater than 85% of our total revenue was generated by customers who were also customers in the prior year. To track our growth and the stability of our customer base, we monitor, among other things, revenue and retention rates generated by our annual customer cohorts over time, as well as corresponding marketing and advertising spend. We define an annual customer cohort to include each customer who first became a customer during a calendar year. For example, in 2016, we acquired approximately 3 million gross customers, who we collectively refer to as our 2016 cohort, and spent $229 million in marketing and advertising expenses. By the end of 2022, the 2016 cohort had generated an aggregate of approximately $1.6 billion of total bookings and we expect this cohort will continue to generate bookings and revenue in the future. For the five years ended December 31, 2022, the average annual revenue retention rate of the 2016 cohort was more than 98%, which is calculated by averaging the ratio of the cohort's annual revenue for each of the five years to its annual revenue for each respective preceding year. We selected the 2016 cohort as an example for this analysis, which we believe helps to illustrate the long-term value of our customers. 62 Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["","$","% of Total Revenue","","$","% of Total Revenue","","$","% of Total Revenue"],["Revenue:"],["A&C","$","1,279.7","","31.3","%","","$","1,128.3","","29.6","%","","$","926.1","","27.9","%"],["Core","2,811.6","","68.7","%","","2,687.4","","70.4","%","","2,390.6","","72.1","%"],["Total revenue","4,091.3","","100.0","%","","3,815.7","","100.0","%","","3,316.7","","100.0","%"],["Costs and operating expenses:"],["Cost of revenue (excluding depreciation and amortization)","1,484.5","","36.3","%","","1,372.2","","36.0","%","","1,158.6","","34.9","%"],["Technology and development","794.0","","19.4","%","","706.3","","18.5","%","","560.4","","16.9","%"],["Marketing and advertising","412.3","","10.1","%","","503.9","","13.2","%","","438.5","","13.2","%"],["Customer care","305.9","","7.5","%","","306.1","","8.0","%","","316.9","","9.6","%"],["General and administrative","385.5","","9.4","%","","345.8","","9.1","%","","323.8","","9.8","%"],["Restructuring and other","15.7","","0.4","%","","(0.3)","","\u2014","%","","43.6","","1.3","%"],["Depreciation and amortization","194.6","","4.7","%","","199.6","","5.2","%","","202.7","","6.1","%"],["Total costs and operating expenses","3,592.5","","87.8","%","","3,433.6","","90.0","%","","3,044.5","","91.8","%"],["Operating income","498.8","","12.2","%","","382.1","","10.0","%","","272.2","","8.2","%"],["Interest expense","(146.3)","","(3.6)","%","","(126.0)","","(3.3)","%","","(91.3)","","(2.8)","%"],["Loss on debt extinguishment","(3.6)","","(0.1)","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%"],["Tax receivable agreements liability adjustment","\u2014","","\u2014","%","","\u2014","","\u2014","%","","(674.7)","","(20.3)","%"],["Other income (expense), net","7.6","","0.2","%","","(2.5)","","(0.1)","%","","(1.6)","","\u2014","%"],["Income (loss) before income taxes","356.5","","8.7","%","","253.6","","6.6","%","","(495.4)","","(14.9)","%"],["Benefit (provision) for income taxes","(3.6)","","(0.1)","%","","(10.8)","","(0.3)","%","","1.3","","\u2014","%"],["Net income (loss)","352.9","","8.6","%","","242.8","","6.3","%","","(494.1)","","(14.9)","%"],["Less: net income attributable to non-controlling interests","0.7","","\u2014","%","","0.5","","\u2014","%","","1.0","","\u2014","%"],["Net income (loss) attributable to GoDaddy Inc.","$","352.2","","8.6","%","","$","242.3","","6.3","%","","$","(495.1)","","(14.9)","%"]] [[/GREPCENT_TABLE]] Non-GAAP Financial Measure and Other Operating Metrics In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measure and other operating metrics are useful as supplements in evaluating our ongoing operational performance and help provide an enhanced understanding of our business: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["Normalized EBITDA","$","1,013.0","","","$","872.2","","","$","722.2"],["Annualized recurring revenue","$","3,570.1","","","$","3,433.7","","","$","3,136.8"],["Total bookings","$","4,413.8","","","$","4,231.7","","","$","3,775.5"],["Total customers at period end (in thousands)","20,897","","","20,704","","","20,148"],["Average revenue per user","$","197","","","$","187","","","$","170"]] [[/GREPCENT_TABLE]] 63 Table of Contents Normalized EBITDA (NEBITDA). NEBITDA is a supplemental measure of our operating performance used by management and investors to evaluate our business. We calculate NEBITDA as net income excluding depreciation and amortization, interest expense (net), provision or benefit for income taxes, equity-based compensation expense, acquisition-related costs, restructuring-related expenses and certain other items. We believe that the inclusion or exclusion of certain recurring and non-recurring items provides a supplementary measure of our core operating results and permits useful alternative period-over-period comparisons of our operations but should not be viewed as a substitute for comparable GAAP measures. Annualized recurring revenue (ARR). ARR is an operating metric defined as quarterly recurring revenue (QRR) multiplied by four. QRR represents the quarterly recurring GAAP revenue, net of refunds, from new and renewed subscription-based services. ARR is exclusive of any revenue that is non-recurring, including, without limitation, domain aftermarket, domain transfers, one-time set-up or migration fees and non-recurring professional website services fees. We believe ARR helps illustrate the scale of certain of our products and facilitates comparisons to other companies in our industry. Total bookings. Total bookings is an operating metric representing the total value of customer contracts entered into during the period, excluding refunds. We believe total bookings provides additional insight into the performance of our business and the effectiveness of our marketing efforts since we typically collect payment at the inception of a customer contract but recognize revenue ratably over the term of the contract. Total customers. We define a customer as an individual or entity with paid transactions in the trailing twelve months or with paid subscriptions as of the end of the period. A single user may be counted as a customer more than once if they maintain paid subscriptions or transactions in multiple accounts. Total customers is one way we measure the scale of our business and is an important part of our ability to increase our revenue base. Average revenue per user. We calculate ARPU as total revenue during the preceding 12 month period divided by the average of the number of total customers at the beginning and end of the period. ARPU provides insight into our ability to sell additional products to customers, though the impact to date has been muted due to our continued growth in total customers. Reconciliation of NEBITDA The following table reconciles NEBITDA to net income, its most directly comparable GAAP financial measure: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net income (loss)","$","352.9","","","$","242.8","","","$","(494.1)"],["Depreciation and amortization","194.6","","","199.6","","","202.7"],["Equity-based compensation","264.4","","","207.9","","","191.5"],["Interest expense, net","135.0","","","124.9","","","86.9"],["Tax receivable agreements liability adjustment","\u2014","","","\u2014","","","674.7"],["Acquisition-related expenses","35.1","","","78.2","","","25.0"],["Restructuring and other(1)","27.4","","","8.0","","","36.8"],["Provision (benefit) for income taxes","3.6","","","10.8","","","(1.3)"],["NEBITDA","$","1,013.0","","","$","872.2","","","$","722.2"]] [[/GREPCENT_TABLE]] _________________________________ (1)Includes lease-related expenses associated with closed facilities, charges related to certain legal matters, and expenses incurred in relation to the refinancing of our long-term debt. Year-Over-Year Comparison Revenue We generate substantially all of our revenue from sales of product subscriptions, as described in Note 2 to our financial statements. Our subscriptions can range from monthly terms to multi-annual terms of up to ten years, depending on the product. Revenue is presented net of refunds, and we maintain a reserve to provide for refunds granted to customers. 64 Table of Contents Beginning in the first quarter of 2022, we revised the presentation of revenue, as described in Note 2 to our financial statements, and accordingly, have revised the prior period amounts in the table below to retrospectively present revenue in the new format. The following table presents our revenue for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Applications & commerce","$","1,279.7","","","$","1,128.3","","","$","926.1","","","$","151.4","","","13","%","","$","202.2","","","22","%"],["Core platform","$","2,811.6","","","$","2,687.4","","","$","2,390.6","","","$","124.2","","","5","%","","$","296.8","","","12","%"],["Total revenue","$","4,091.3","","","$","3,815.7","","","$","3,316.7","","","$","275.6","","","7","%","","$","499.0","","","15","%"]] [[/GREPCENT_TABLE]] 2022 compared to 2021 Total revenue increased 7.2%, due to the increases in our A&C and Core revenues, as described below: A&C. The 13.4% increase in A&C revenue was primarily driven by: (i) 13.1% growth in revenue related to our productivity applications, most notably our email solutions; (ii) 8.7% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing and Managed WordPress hosting; and (iii) 103.2% growth in commerce-related revenue primarily associated with our acquisition of Poynt Co. (now known as GoDaddy Payments). Core. The 4.6% increase in Core revenue was primarily driven by: (i) 8.5% growth in domain-related revenues as a result of our continued enhancement of online presence and offerings and the continued growth of our registry business; (ii) a 5.8% growth in aftermarket revenues due to our continued innovation in auction technologies as well as contributions from our Dan.com acquisition; and (iii) 4.0% growth in our security and SSL product offerings resulting from higher customer renewals year over year, specifically with respect to Website Security. Partially offsetting these increases was a 5.9% decrease in hosting revenues, which was primarily due to end-of-life migrations from certain products and lower demand for these products amid the uncertain macroeconomic environment. 2021 compared to 2020 Total revenue increased 15.0% due to the increases in our A&C and Core revenues, as described below: A&C. The 21.8% increase in A&C revenue was primarily driven by: (i) 15.5% growth in revenue related to our productivity applications, most notably our email solutions; (ii) 29.2% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence; and (iii) new commerce-related revenue primarily associated with our acquisition of Poynt Co in 2021. Core. The 12.4% increase in Core revenue was primarily driven by: (i) 9.8% growth in domain-related revenues as a result of a 1.7 million increase in domains under management and the continued growth of our registry business; (ii) 69.2% growth in aftermarket revenues due to continued innovation in our auction technologies; and (iii) 7.9% growth in our security and SSL product offerings resulting from increased customer adoption and higher customer renewals year over year. Partially offsetting these increases was a 33.6% decrease in certain higher-priced subscriptions, specifically GoDaddy Social, due to lower demand for such products. Bookings The following table presents our total bookings for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Total bookings","$","4,413.8","","","$","4,231.7","","","$","3,775.5","","","$","182.1","","","4","%","","$","456.2","","","12","%"]] [[/GREPCENT_TABLE]] The 4.3% increase in total bookings was primarily driven by increased aftermarket domain sales, broadened customer adoption of our productivity solutions and our Websites + Marketing and Managed WordPress products as well as an increase in ARPU due to a higher product attach rate and contributions from recent acquisitions, partially offset by approximately 170 basis 65 Table of Contents points due to adverse movements in foreign currency exchange rates due to the strength of the U.S. dollar. In addition to the currency headwinds, our bookings growth rate was also impacted by uneven demand patterns related to inflation and continued economic uncertainty. Costs and Operating Expenses Cost of revenue Costs of revenue are the direct costs incurred in connection with selling an incremental product to our customers. Substantially all cost of revenue relates to domain registration fees, payment processing fees, third-party commissions and licensing fees for third-party productivity applications. Similar to our billing practices, we pay domain costs at the time of purchase for the life of each subscription, but recognize the costs of service ratably over the term of our customer contracts. The terms of registry pricing are established by agreements between registries and registrars, and can vary significantly depending on the TLD. We expect cost of revenue to increase in absolute dollars in future periods related to the expansion of our domains business, higher sales of third-party productivity applications and growth in our customer base. However, cost of revenue may fluctuate as a percentage of total revenue, depending on the mix of products sold in a particular period. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Cost of revenue","$","1,484.5","","","$","1,372.2","","","$","1,158.6","","","$","112.3","","","8","%","","$","213.6","","","18","%"]] [[/GREPCENT_TABLE]] The 8.2% increase in cost of revenue was primarily attributable to (i) higher domain costs, which were driven by increased aftermarket domain sales, cost increases implemented by various TLD registries and costs associated with our growing registry business, (ii) increased software licensing fees resulting from higher sales of productivity solutions and (iii) increased costs associated with the growth of our payment processing business. Technology and development Technology and development expenses represent the costs associated with the creation, development and distribution of our products and websites. These expenses primarily consist of personnel costs associated with the design, development, deployment, testing, operation and enhancement of our products, as well as costs associated with the data centers and systems infrastructure supporting those products, excluding depreciation expense. We expect technology and development expense to increase in absolute dollars as we continue to invest in product development and migrate our infrastructure to a cloud-based third-party provider. Technology and development expenses may fluctuate as a percentage of total revenue depending on our level of investment in additional personnel and the pace of our infrastructure transition. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Technology and development","$","794.0","","","$","706.3","","","$","560.4","","","$","87.7","","","12","%","","$","145.9","","","26","%"]] [[/GREPCENT_TABLE]] The 12.4% increase in technology and development expenses was primarily due to (i) increased personnel costs driven by higher average headcount associated with our continued investment in product development and (ii) increased technology costs associated with the growth of our business, advancement of our commerce and innovation strategies and our migration to a cloud-based infrastructure. The increase was partially offset by a $27.0 million decrease in compensation expense related to prior acquisitions, primarily Poynt. 66 Table of Contents Marketing and advertising Marketing and advertising expenses represent the costs associated with attracting and acquiring customers, primarily consisting of fees paid to third parties for marketing and advertising campaigns across a variety of channels. These expenses also include personnel costs and affiliate program commissions. We expect marketing and advertising expenses to fluctuate depending on both the mix of internal and external marketing resources used, the size and scope of our future campaigns and the level of discretionary investments we make in marketing to drive future sales. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Marketing and advertising","$","412.3","","","$","503.9","","","$","438.5","","","$","(91.6)","","","(18)","%","","$","65.4","","","15","%"]] [[/GREPCENT_TABLE]] The 18.2% decrease in marketing and advertising expenses were primarily attributable to a lower level of discretionary spending in 2022 as compared to the significant additional marketing investments we made in 2021 to drive growth during a period of high demand. Customer care Customer care expenses represent the costs to guide and service our customers, primarily consisting of personnel costs. We expect customer care expenses to fluctuate depending on the level of personnel required to support our business. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Customer care","$","305.9","","","$","306.1","","","$","316.9","","","$","(0.2)","","","0","%","","$","(10.8)","","","(3)","%"]] [[/GREPCENT_TABLE]] There were no material changes in customer care expenses. General and administrative General and administrative expenses primarily consist of personnel costs for our administrative functions, professional service fees, office rent for all locations, all employee travel expenses, acquisition-related expenses and other general costs. We expect general and administrative expenses to fluctuate depending on the level of personnel and other administrative costs required to support our business as well as the significance of any strategic acquisitions we choose to pursue. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["General and administrative","$","385.5","","","$","345.8","","","$","323.8","","","$","39.7","","","11","%","","$","22.0","","","7","%"]] [[/GREPCENT_TABLE]] The 11.5% increase in general and administrative expenses was primarily due to (i) increased personnel costs driven by higher average headcount and the reversal of equity-based compensation expense in 2021 due to the forfeiture of unvested awards related to certain executive departures; (ii) increased legal and professional fees; and (iii) the reversal of an indirect tax reserve as a result of a settlement agreement in 2021. These increases were partially offset by lower acquisition related expenses and office rent expense. Restructuring and other [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Restructuring and other","$","15.7","","","$","(0.3)","","","$","43.6","","","$","16.0","","","(5333)","%","","$","(43.9)","","","(101)","%"]] [[/GREPCENT_TABLE]] Restructuring and other of $15.7 million during 2022 primarily includes the impairment and loss on disposition of certain assets. Restructuring and other during 2021 includes (i) the $15.4 million gain on sale of the land and buildings of our former corporate headquarters and (ii) a $15.1 million charge related to the impairment of certain operating lease assets and related leasehold improvements associated with the decision to close one of our leased offices. 67 Table of Contents Depreciation and amortization Depreciation and amortization expenses consist of charges relating to the depreciation of the property and equipment used in our operations and the amortization of acquired intangible assets. These expenses may increase or decrease in absolute dollars in future periods depending on our future level of capital investments in hardware and other equipment as well as the significance of any future acquisitions. [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Depreciation and amortization","$","194.6","","","$","199.6","","","$","202.7","","","$","(5.0)","","","(3)","%","","$","(3.1)","","","(2)","%"]] [[/GREPCENT_TABLE]] There were no material changes in depreciation and amortization. Interest expense [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Interest expense","$","146.3","","","$","126.0","","","$","91.3","","","$","20.3","","","16","%","","$","34.7","","","38","%"]] [[/GREPCENT_TABLE]] The 16.1% increase in interest expense was primarily driven by the higher effective interest rates on our variable-rate debt in 2022, as further discussed in Note 10 to our financial statements. Loss on debt extinguishment In 2022, we recognized a loss on debt extinguishment of $3.6 million, primarily related to the refinancing of the 2029 Term Loans. See Note 10 to our financial statements for additional discussion. Segment Results of Operations Our two operating segments, A&C and Core, reflect the way we manage and evaluate the performance of our business. Our chief operating decision maker evaluates segment performance based upon several factors, of which the primary financial measures are revenue and Segment EBITDA. See Note 18 to our financial statements for a reconciliation of Segment EBITDA to net income, its most directly comparable GAAP financial measure. Applications & Commerce The following table presents the results for our A&C segment for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Revenue","$","1,279.7","","","$","1,128.3","","","$","926.1","","","$","151.4","","","13","%","","$","202.2","","","22","%"],["Segment EBITDA","$","522.8","","","$","447.7","","","$","349.7","","","$","75.1","","","17","%","","$","98.0","","","28","%"]] [[/GREPCENT_TABLE]] 2022 compared to 2021 The 13.4% increase in A&C revenue was primarily driven by: (i) 13.1% growth in revenue related to our productivity applications, most notably our email solutions; (ii) 8.7% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence, such as Websites + Marketing and Managed WordPress hosting; and (iii) 103.2% growth in commerce-related revenue primarily associated with our acquisition of Poynt Co. (now known as GoDaddy Payments). The 16.8% increase in A&C Segment EBITDA for the year ended December 31, 2022 primarily resulted from the revenue increases noted above, in conjunction with lower discretionary marketing spend in 2022. These increases were partially offset by higher personnel costs resulting from headcount additions made to support the continued development of our A&C products. 68 Table of Contents 2021 compared to 2020 The 21.8% increase in A&C revenue was primarily driven by: (i) 15.5% growth in revenue related to our productivity applications, most notably our email solutions; and (ii) 29.2% growth in revenues due to increased customer adoption of our subscription-based products designed to establish and grow online presence; and (iii) new commerce-related revenue associated with our acquisition of Poynt Co in 2021. The 28.0% increase in A&C Segment EBITDA for the year ended December 31, 2021 primarily resulted from the revenue increases noted above, partially offset by higher personnel costs resulting from headcount additions made to support the continued development of our A&C products as well as increased discretionary marketing spending associated with investments made to drive additional growth. Core Platform The following table presents the results for our Core segment for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,","","2022 to 2021","","2021 to 2020"],["","2022","","2021","","2020","","$ change","","% change","","$ change","","% change"],["Revenue","$","2,811.6","","","$","2,687.4","","","$","2,390.6","","","$","124.2","","","5","%","","$","296.8","","","12","%"],["Segment EBITDA","$","783.7","","","$","679.7","","","$","628.2","","","$","104.0","","","15","%","","$","51.5","","","8","%"]] [[/GREPCENT_TABLE]] 2022 compared to 2021 The 4.6% increase in Core revenue was primarily driven by: (i) 8.5% growth in domain-related revenues as a result of our continued enhancement of online presence and offerings and the continued growth of our registry business; (ii) 5.8% growth in aftermarket revenues due to our continued innovation in auction technologies as well as contributions from our Dan.com acquisition; and (iii) 4.0% growth in our security and SSL product offerings resulting from higher customer renewals year over year, specifically with respect to Website Security. Partially offsetting these increases was a 5.9% decrease in hosting revenues, which was primarily due to end-of-life migrations from certain products and lower demand for these products amid the uncertain macroeconomic environment. The 15.3% increase in Core Segment EBITDA for the year ended December 31, 2022 primarily resulted from the revenue increases noted above, in conjunction with lower discretionary marketing spend in 2022. These increases were partially offset by higher third-party commissions associated with the increased aftermarket domain sales as well as cost increases implemented by various TLD registries. 2021 compared to 2020 The 12.4% increase in Core revenue was primarily driven by: (i) 9.8% growth in domain-related revenues as a result of a 1.7 million increase in domains under management and the continued growth of our registry business; (ii) 69.2% growth in aftermarket revenues due to continued innovation in our auction technologies; and (iii) 7.9% growth in our security and SSL product offerings resulting from increased customer adoption and higher customer renewals year over year. Partially offsetting these increases was a 33.6% decrease in certain higher-priced subscriptions, specifically GoDaddy Social, due to lower demand for such products. The 8.2% increase in Core Segment EBITDA for the year ended December 31, 2021 primarily resulted from the revenue increases noted above, partially offset by increased discretionary marketing spend in 2021 and higher third-party commissions associated with the increased aftermarket domain sales. 69 Table of Contents Liquidity and Capital Resources Overview Our principal sources of liquidity have been cash flow generated from operations, long-term debt borrowings and stock option exercises. Our principal uses of cash have been to fund operations, acquisitions and capital expenditures, as well as to make mandatory principal and interest payments on our long-term debt and to repurchase shares of our Class A common stock. In general, we seek to deploy our capital in a prioritized manner focusing first on requirements for our operations, then on growth investments, and finally on stockholder returns. Our strategy is to deploy capital, whether debt, equity or internally generated cash, depending on the adequacy and availability of the source of capital and which source may be used most efficiently and at the lowest cost at such time. Therefore, while cash from operations is our primary source of operating liquidity and we believe our internally-generated cash flows are sufficient to support our day-to-day operations, we may use a variety of capital sources to fund our needs for less predictable investment decisions such as strategic acquisitions and share repurchases. We have incurred significant long-term debt, primarily to fund acquisitions, share repurchases and the settlement of our prior tax receivable agreements. As a result, we are limited as to how we conduct our business and may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities, strategic acquisitions or share repurchases. However, the restrictions under our long-term debt agreements are subject to a number of qualifications and may be amended with the consent of the lenders and the holders of the senior notes, as applicable. We believe our existing cash and cash equivalents and cash generated by operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, our future capital requirements will depend on many factors, including our growth rate, macroeconomic activity, the timing and extent of spending to support domestic and international development efforts, continued brand development and advertising spend, the level of customer care and general and administrative activities, the introduction of new and enhanced product offerings, the costs to support new and replacement capital equipment, the completion of strategic acquisitions or share repurchases and other factors. Should we pursue additional strategic acquisitions or share repurchases, we may need to raise additional capital, which may be in the form of long-term debt or equity financings. Credit Facility and Senior Notes Our long-term debt obligations consist of our Credit Facility, which includes our secured credit agreement and a revolving credit facility (the Revolver), and the senior notes. In November 2022, we amended our Credit Facility to provide for a new $1.8 billion tranche of term loans maturing in 2029, the proceeds of which were used to refinance all of the outstanding previously-issued term loans maturing in 2024. In addition, we increased the borrowing capacity under our revolving credit facility from $600.0 million to $1.0 billion and extended its maturity to November 2027. Estimated future interest payments associated with our long-term debt totaled $1,455.3 million as of December 31, 2022, with $241.6 million payable within 12 months. See Note 10 to our financial statements for additional information regarding our long-term debt. Our long-term debt agreements contain covenants restricting, among other things, our ability, or the ability of our subsidiaries, to incur indebtedness, issue certain types of equity, incur liens, enter into fundamental changes including mergers and consolidations, sell assets, make restricted payments including dividends, distributions and investments, prepay junior indebtedness and engage in operations other than in connection with acting as a holding company, subject to customary exceptions. As of December 31, 2022, we were in compliance with all such covenants and had no amounts drawn on our Revolver. As further discussed in Note 11 to our financial statements, we have hedged a portion of our long-term debt through the use of cross-currency and interest rate swap derivative instruments. These instruments help us manage and mitigate our risk of exposure to changes in foreign currency exchange rates and interest rates. See "Quantitative and Qualitative Disclosures About Market Risk" for additional discussion of our hedging activities. Share Repurchases As discussed in Note 5 to our financial statements, in January 2022, our board of directors approved the repurchase of up to an additional $2,251.0 million of our Class A common stock. Such approval was in addition to the amount remaining available 70 Table of Contents for repurchases under prior approvals of our board of directors, such that we have authority to repurchase up to $3,000.0 million of shares of our Class A common stock. Under this authority, in February 2022, we entered into a ASRs to repurchase shares of our Class A common stock in exchange for an up-front aggregate payment of $750.0 million. We completed the ASRs in May 2022, repurchasing a total of 9,202 shares of our Class A common stock at an average price of $81.50 per share under these arrangements. In addition to the ASRs discussed above, during the year ended December 31, 2022, we also repurchased a total of 7,642 shares of our Class A common stock in the open market for an aggregate purchase price of $550.1 million. As of December 31, 2022, we had $1,699.9 million of remaining authorization available for repurchases. Acquisitions In July 2022, we completed an acquisition for $69.6 million in net cash consideration. See Note 3 to our financial statements for a discussion of this acquisition. Restructuring As discussed in Note 20 to our financial statements, on February 8, 2023, the audit and finance committee of our board of directors authorized a restructuring plan to reduce future operating expenses and improve cash flows through a combination of a reduction in force and a rationalization of our portfolio. As part of this plan, we announced a reduction in our current workforce of approximately 550 employees, representing approximately 8% of our total employees. We estimate we will incur approximately $55.0 million to $65.0 million of pre-tax restructuring and exit related charges, of which $30.0 million to $40.0 million represents future cash expenditures for the payment of severance and related benefit costs. Cash Flows The following table summarizes our cash flows for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net cash provided by operating activities","$","979.7","","","$","829.3","","","$","764.6"],["Net cash used in investing activities","(132.0)","","","(635.6)","","","(482.3)"],["Net cash provided by (used in) financing activities","(1,326.7)","","","298.1","","","(581.7)"],["Effect of exchange rate changes on cash and cash equivalents","(2.7)","","","(1.3)","","","1.8"],["Net increase (decrease) in cash and cash equivalents","$","(481.7)","","","$","490.5","","","$","(297.6)"]] [[/GREPCENT_TABLE]] Operating Activities Our primary source of cash from operating activities has been cash collections from our customers. Our primary uses of cash from operating activities have been for domain registration costs paid to registries, software licensing fees related to third-party productivity solutions, personnel costs, discretionary marketing and advertising costs, technology and development costs and interest payments. We expect cash outflows from operating activities to be affected by the timing of payments we make to registries as well as increases in personnel and other operating costs as we continue to grow our business. Net cash provided by operating activities increased $150.4 million from $829.3 million in 2021 to $979.7 million in 2022, primarily driven by the growth in total bookings as well as lower acquisition-related payments and discretionary marketing spending. These increases were partially offset by higher personnel costs to support our growth, increased domain costs and higher software licensing fees related to increased sales of third-party productivity solutions. 71 Table of Contents Investing Activities Our investing activities generally consist of strategic acquisitions and purchases of property and equipment to support the overall growth of our business. We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures, strategic acquisitions or other growth opportunities we decide to pursue. Net cash used in investing activities decreased $503.6 million from $635.6 million in 2021 to $132.0 million in 2022, primarily due to a $295.2 million decrease in spending for business acquisitions and a $201.7 million decrease in purchases of intangible assets. Financing Activities Our financing activities generally consist of long-term debt borrowings, the repayment of principal on long-term debt, stock option exercise proceeds and share repurchases. Net cash from financing activities decreased $1,624.8 million from $298.1 million provided in 2021 to $1,326.7 million used in 2022, primarily due to $800.0 million in proceeds received from the issuance of the 2029 Senior Notes in 2021 as well as a $768.6 million increase in share repurchases. Deferred Revenue See Note 8 to our financial statements for details regarding the expected future recognition of deferred revenue. Off-Balance Sheet Arrangements As of December 31, 2022 and 2021, we had no off-balance sheet arrangements that had, or which are reasonably likely to have, a material effect on our financial statements. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with GAAP, and in doing so, we make estimates, assumptions and judgments affecting the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. We base our estimates, assumptions and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances, and we evaluate these estimates, assumptions and judgments on an ongoing basis. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change our results from those reported. We refer to estimates, assumptions and judgments of this type as our critical accounting policies and estimates, which we discuss further below. We review our critical accounting policies and estimates with the audit and finance committee of our board of directors on an annual basis. See Note 2 to our financial statements for a summary of our significant accounting policies. Revenue Recognition We recognize revenue when control of the promised products is transferred to a customer, in an amount reflecting the consideration we expect to be entitled to in exchange for those products. Payments received in advance of our performance are recorded as deferred revenue. Revenue is recognized net of allowances for returns and transaction-based taxes collected. We generally sell our products with a right of return, which we account for as variable consideration when estimating the amount of revenue to recognize. Refunds are estimated at contract inception using the expected value method based on historical refund experience and updated each reporting period as additional information becomes available. Our annual refund rate has declined from 6.5% of total bookings in 2020 to 4.7% in 2022. We may sell multiple products to customers at the same time. For example, we may design a customer website and separately offer other products such as hosting and an SSL certificate, or a customer may combine a domain registration with other products such as Websites + Marketing or email. Judgment may be required in determining whether products contain multiple distinct performance obligations that should each be accounted for separately or as one combined performance 72 Table of Contents obligation. The majority of our revenue arrangements consist of multiple performance obligations, with revenue recognized over the period in which each performance obligation is satisfied, which is generally over the contract term. For arrangements with multiple performance obligations, we allocate revenue to each distinct performance obligation based on its relative stand-alone selling price (SSP). Our process for determining SSP requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each performance obligation. We determine SSP based on prices charged to customers for individual products, taking into consideration other factors, which may include (i) historical and expected discounting practices; (ii) the size, volume and term length of transactions; (iii) customer demographics; (iv) the geographic areas in which our products are sold; and (v) our overall go-to-market strategy. We sell our products directly to customers and also through a network of resellers. In certain cases, such as for aftermarket domain sales, we act as a reseller of products provided by others. The determination of gross or net revenue recognition is reviewed on a product-by-product basis and is dependent on whether we act as principal or agent in the transaction. See Notes 2 and 8 to our financial statements for additional information regarding revenue recognition and deferred revenue. Acquisitions We determine whether substantially all of the fair value of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is accounted for as an asset acquisition. If the threshold is not met, further assessment is undertaken to ascertain whether the acquisition meets the definition of a business. We include the results of operations of acquired businesses in our financial statements as of the respective dates of acquisition. Accounting for business acquisitions requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to tangible and intangible assets acquired, liabilities assumed and pre-acquisition contingencies. The purchase price, including estimates of the fair value of contingent consideration when applicable, is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values on the respective acquisition dates, with the excess recorded as goodwill. Critical estimates used in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows (primarily from customer relationships and developed technology) and discount rates. Contingent consideration liabilities, which relate to future earn-out payments associated with our acquisitions, are generally valued using discounted cash flow valuation methods. Critical estimates used in valuing these liabilities include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and discount rates. We use our best estimates and assumptions to determine acquisition-date fair values. These estimates are inherently uncertain and subject to refinement. We continue to collect information and reevaluate our preliminary estimates and assumptions and record any qualifying measurement period adjustments to goodwill. Contingent consideration is adjusted to fair value in subsequent periods as an increase or decrease in general and administrative expenses. See Notes 2 and 3 to our financial statements for additional information regarding business acquisitions. Goodwill and Indefinite-Lived Intangible Assets We make estimates, assumptions and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocations of business acquisitions, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. We assess our goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter. We will also perform an assessment at other times if and when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. We perform our impairment assessment based on qualitative analysis, which includes considering various factors including macroeconomic conditions, industry and market conditions and our historical and projected operating results. If, based on our qualitative analysis, we were to determine it is more-likely-than-not the fair value of either of our reporting units is less than its carrying amount, a quantitative impairment test would be performed to determine if an impairment loss should be recorded. 73 Table of Contents Our qualitative analyses during 2022, 2021 and 2020 did not indicate any impairment. As of December 31, 2022, we believe such assets are recoverable; however, there can be no assurance these assets will not be impaired in future periods. Any future impairment charges could adversely impact our results of operations. See Notes 2 and 4 to our financial statements for additional information regarding goodwill and indefinite-lived intangible assets. Income Taxes We are subject to U.S. federal, state and foreign income taxes with respect to our allocable share of any taxable income or loss of Desert Newco, as well as any stand-alone income or loss we generate. Significant judgment is required in determining our provision or benefit for income taxes and in evaluating uncertain tax positions. We account for income taxes under the asset and liability method, which requires the recognition of DTAs and DTLs for the expected future tax consequences of events included in our financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period in which the enactment date occurs. We recognize DTAs to the extent we believe these assets are more-likely-than-not to be realized. In evaluating our ability to realize our DTAs, in full or in part, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, prudent and feasible tax planning strategies and recent results of operations. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our business. Actual operating results in future years could differ from our current assumptions, judgments and estimates, which could have a material impact on the amount of DTAs we ultimately realize. We recognize tax benefits from uncertain tax positions only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized from such positions are measured based on the largest benefit having a greater than 50% likelihood of being realized. See Notes 2 and 16 to our financial statements for additional information regarding income taxes and the considerations that could lead to a release of substantially all of the valuation allowance against our DTAs. Loss Contingencies We are subject to the possibility of various loss contingencies arising from uncertain and unresolved matters in the ordinary course of business and from events or actions by others having the potential to result in a future loss. Such contingencies may include, but are not limited to, intellectual property claims, putative class actions, commercial and consumer protection claims, labor and employment claims, breach of contract claims, regulatory proceedings, product service level commitments and losses resulting from other events and developments. We consider the likelihood of loss, the impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, a liability is recorded based on the low-end of such range. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties impacting the ultimate resolution of the contingency. It is also not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure is provided. Disclosure is also provided when it is reasonably possible a loss will be incurred or when it is reasonably possible the amount of a loss will exceed the recorded amounts. We regularly review all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. Development of a meaningful estimate of loss, or a range of potential loss, is complex when the outcome is directly dependent on negotiations with, or decisions by, third parties such as regulatory 74 Table of Contents agencies, court systems in various jurisdictions and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates. Until the final resolution of such matters, there may be an exposure to loss in excess of the amounts recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business, operating results or financial condition. See Note 13 to our financial statements for additional information regarding loss contingencies. Recent Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 2 to our financial statements.