Positioning

GoDaddy is one of the dominant providers of internet domain services for consumers and small businesses. They are famous thanks to their splashy TV commercials, and have built a $1.4B business on the foundation of registering domain names and offering some basic website tools and services. Demand for these core services continues to expand with the internet, and GoDaddy has introduced additional products to support e-commerce and social media with an eye to increasing ARPU.

This isn’t a nice clean IPO. In 2011, GoDaddy did a financing with private equity firms (KKR, Silver Lake and TCV) which drastically concentrated ownership of the company. GoDaddy is leveraged with $1.5B in debt.

Investors will easily appreciate the current position of GoDaddy in the market today for core internet services, but will be looking for more clues as to how the company will grow their value-added service business. Our bet is that M&A will be ramped up sharply post-IPO.

Not including the debt, we’d expect the company to trade at $2.8B to $4.0B in terms of market capitalization. We’ll have more to say on it once the roadshow is available.

Market & Competition

GoDaddy competes in three major markets – domains, hosting, and applications. 2013 revenues for these three were $672M, $381M, and $79M respectively. Domains and basic hosting continue to dominate the business today.

The GoDaddy brand has enabled the company to remain the go-to company for registering domains even though superior options exist. This has enabled them to excel in what is a fairly commoditized market. The same is mostly true for basic web hosting.

The domain market is highly fragmented and very confusing for most consumers and small businesses. This gives GoDaddy a sustainable, moderate growth core business with solid margins. We see United Internet (DB: UTDI) as one of the best direct competitors. This isn’t a market in which we expect to see a high degree of rivalry because there is not a lot of juice in it.

Hosting is a much more competitive market, especially in terms of price. This is thanks in no small part to the massive investments and innovation brought to the market by Amazon.com (AMZN). Hosting is also a highly fragmented market. However, software and service providers have been more aggressive here. WordPress (owned by Automattic) has carved out a major position in the free segment with others, including recently-public Wix (WIX), providing very easy-to-use paid services. Some more tech-savvy users can use companies like Rackspace (RAX) or any one of a myriad of smaller services.

The value-added or “business application” segment of the cloud market is much more open and less commoditized. Even without doing the math, this is where GoDaddy is likely to get their highest returns on new investments if they can achieve scale. So far, their progress has been very limited. For most SMB owners, things like email marketing, social media, payments, and promotions are all fairly central to their business. These are all places we should expect to see GoDaddy expand, probably via acquisition, post-IPO.

Strategy & Management

A big part of what GoDaddy provides is a 3,100-strong customer care operation. (Detractors might say that a large number of these are needed simply because the GoDaddy platform is so hard to use.) The strategy depends on adding new customers to the existing base and selling additional services as part of their “support” process.

Management of GoDaddy is now heavily “professional” and driven by the private equity firms which will continue to control the company. The CFO/COO, Scott Wagner, is a KKR guy. The CEO, Blake Irving, was brought in at the beginning of 2013 and has a range of experience, but largely as a high-level custodian at organizations like Microsoft and Yahoo. Other executives are from organizations like AT&T, NTT, Microsoft, and Yahoo. Bob Parsons, the colorful founder and prior CEO, remains on the board of directors.

Management base compensation is reasonable for a $1B+ revenues company and is indexed to performance of “Cash EBITDA” and “New Customers.” What’s not clear at all is how those figures would be adjusted or counted if new products are acquired via acquisition.

Interesting Footnotes

The organizational structure of this offering with KKR, Silver Lane, TCV, and Bob Parsons is by far the most important aspect to consider. A good portion of the S1 deals with this, and should be weighed carefully as part of the investment case. Since we don’t yet have valuation information, it’s too early to have a position here.

Generally speaking, all the controlling entities of GoDaddy have been keen to take money out of the company, not in a bad way so far, but in the form of interest and distributions. They have put incentives in place for existing management, which are also self-serving. It remains to be seen how external equity investors will be treated.

For example, the private equity group is getting $2M per year plus expenses for “transaction and monitoring fees” which will terminate with the IPO. However, a final $25M payment due under this agreement will be made as part of the “use of proceeds.” Ouch.

Potentially more troubling is the selection of First Data Merchant Services for reselling as a commerce and payment platform. KKR owns 40% of First Data Corporation. Selections like this are done favoring PE portfolios and will undermine the ability for GoDaddy to provide competitive solutions in a rapidly evolving and very innovative market.

Open Questions

If domain and hosting services got further commoditized by companies like Google, Amazon, and Microsoft, how will GoDaddy grow their still-small value-added services business to prevent growth from going away?

What is the exit strategy of the PE groups which will still own the majority of the company? How can that plan be implemented *and* still provide attractive returns to common equity shareholders who come in with the IPO?

Why have new value-added services not grown more over the past few years? It’s not like email marketing and services like Shopify are radically new.

What criteria will be applied making acquisitions?

Conclusion

Since we don’t yet have the basics on filing range and shares outstanding, it’s impossible to have a feel for valuation versus prospects on this one.

However, there are certainly some yellow flags given the structure and interested parties that will remain part of GoDaddy as a public company post-IPO. As a reference point, we see the average of 3.4x sales to be the top-end of a likely 2-3x sales trading range.

Investors should consider the $1.4B in debt when considering TEV, but they may not. If they ignore it, the company could trade at a $2.8B to $4B market capitalization.

Bullets and Tickers

• An early read of the partial S1 suggests a market cap of $2.8B to $4B post IPO.

• Ownership by private equity firms complicates the structure and story a bit – could impact valuation.

• Company strategy to increase ARPU using value-added services has had limited success so far.

• Investors should expect an active M&A program post-IPO.