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Endurance International Group Holdings, Inc. (NASDAQ:EIGI)

Q2 2014 Results Earnings Conference Call

August 07, 2014, 08:00 AM ET

Executives

Angela White – Director, IR

Hari Ravichandran - CEO and Founder

Tivanka Ellawala - CFO

Analysts

Brian Essex - Morgan Stanley

Gregg Moskowitz - Cowen & Company

Mitchell Bartlett - Craig-Hallum

Operator

Good day, ladies and gentlemen. And welcome to the Endurance International Group's 2014 Second Quarter Results Conference Call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to introduce your host, Ms. Angela White, Director of Investor Relations. Ms. White, please begin.

Angela White

Hi everyone, good morning. On behalf of Endurance International Group it's my pleasure to welcome you to our second quarter earnings call. We'll first just go through some prepared remarks after which we'll turn to Q&A. A presentation to accompany our comments is available at the investor relations section of our website at ir.endurance.com. While not necessary to follow along, we do recommend referencing the presentation slides alongside our prepared remarks.

As is customary, I’ll now read the Safe Harbor statement. Statements made on today's call will include forward‐looking statements about Endurance’s future expectations, plans and prospects. All such forward‐looking statements are subject to risks and uncertainties. Please refer to the cautionary language in today's earnings release and to our Form 10‐K filed with the SEC on February 28, 2014 for discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward‐looking statements. Endurance does not assume any obligation to update any forward‐looking statements.

During this call we will present several non‐GAAP financial measures, including adjusted EBITDA, unlevered free cash flow, free cash flow, adjusted revenue and average revenue per subscriber. A reconciliation of these non‐GAAP financial measures to the most recently comparable GAAP measures is available in the presentation located at the investor relations section of our website.

Hari Ravichandran

Thanks Angela. Hello everyone and welcome to our second quarter earnings call. For those of you new to Endurance, please refer to the front section of our presentation, available on the IR website, which provides a brief overview of our company. We are very pleased to report another quarter for the company where solid growth in our core operating metrics drove better than expected financial performance. For the second quarter, adjusted revenue was $159 million, exceeding the high end of the guidance range of $154 million to $156 million by $3 million. This represented an adjusted revenue growth rate of 22% over Q2, 2013, including the impact of Directi, which we acquired in the first quarter of 2014.

Adjusted EBITDA and unlevered free cash flow, UFCF, also came in ahead of the high end of the guidance range at $56.5 million and $43.6 million, respectively. Free cash flow was also strong, growing 50% to $29.5 million from $19.7 million in the same period last year. As we have noted we continue to invest excess cash flows into accretive revenue‐generating opportunities, which has served to drive revenue growth ahead of expectations.

As in prior quarters our two key organic growth drivers of adding high quality subscribers and selling them more products and services provides the foundation for what we do. During Q2, we added approximately 93,000 net paying subscribers, bringing our total subscribers on platform to over 3.7 million. Subscriber growth was driven by two factors, word of mouth customer advocacy and our growing network of online referral partners.

By focusing on the customer experience, we seek to drive strong Net Promoter Scores or NPS, which in turn, creates advocacy amongst our subscriber base. Second, our growing network of over 500,000 referral partners sends us a diverse and relevant stream of SMB traffic to our sites, many of which ultimately convert into paying subscribers. In addition, during the quarter we also strengthened the on‐boarding funnel by renewing and extending our Google partnership under the Get American Business Online program. Over the next few quarters, we expect to broaden our relationship with Google to include additional geographies as well as products and services from Google’s portfolio aimed at SMBs.

Finally we made an equity investment in Automattic, which manages the business operations of Wordpress.com. WordPress is widely recognized as one of the most popular publishing platforms on the web, powering over 22% of the world’s top 10 million websites. Our investment reflects our continued commitment to WordPress and to the open source community.

Beyond growing our subscriber base, increases in ARPS also fueled revenue growth. In Q2, average revenue per subs or ARPS grew to $14.33, an increase of $1.32 over Q2 2013 ARPS of $13.01. New product introductions, an increase in the take rate of products and an increase in the number of high‐ARPS subscribers all contributed to increases in ARPS. These factors, combined with the Directi subscriber base helped deliver our highest quarter of ARPS on record. Overall, we are pleased with our performance and continue to be very excited about the opportunity ahead of us.

Now I’d like to turn the call over to Tiv Ellawala, our CFO, who will review the financial and operating metrics in more detail, as well as provide color on expectations for the second half of the year. Tiv?

Tivanka Ellawala

Thank you, Hari. As Hari noted, strong performance in our two main operating levers for growth, adding paying subscribers and increasing our average revenue per subscriber once again drove financial performance ahead of guidance.

In Q2, we added approximately 93,000 net paying subscribers in the quarter versus 55,000 in Q2 of 2013. Excluding Directi, we added approximately 92,000 net paying subscribers in the quarter. Our total paying subscriber base is now approximately 3.7 million. During the first half of the year, we added approximately 193,000 net paying subscribers, excluding the contribution from Directi. Strong yields from our direct marketing programs, expansion of our funnel to include product lead‐ins, growth in our referral partner network and favorable trends in free to pay conversions helped fuel the growth.

We are also seeing strong secular tailwinds in our markets as online penetration grows, the number of businesses going online increases, and the demand for online products and services increases as a result of changes in purchasing behavior and patterns. The U.S. still remains our largest market with growing contribution from Brazil, India and China.

Our average revenue per subscriber grew to $14.33 during the quarter which reflected an increase of $1.32 from $13.01 in the second quarter of 2013. Excluding Directi, our average revenue per subscriber grew to $13.35 which was a $0.34 increase from the second quarter of 2013. Average revenue per subscriber and net subscriber adds reflect typical seasonality in the business, as billings tend to be highest in Q1.

In addition, product attach rates increased growing to an average of 4.5 products per subscriber in the quarter from 3.7 products per subscriber in the second quarter of 2013. The number of subscribers who spend more than $500 per year on our products and services also increased to 114,000, an increase of 8,000 over the last quarter and a 14,000 increase over the end of last year. Some of our most popular products driving our attach rates include security, back‐up and storage, SEO and SEM and additional domains. In addition, rollout of services such as managed WordPress, VPS hosting and dedicated hosting are contributing to higher values and the increase in subscribers spending at least $500 per year. Our monthly recurring revenue retention rate was stable at 99%. Finally, our subscriber acquisition costs remained consistent with prior quarters.

Moving on to financials, adjusted revenue was $159.0 million for the quarter, an increase of 22% over the second quarter of 2013 and $3 million higher than the top end of our guidance range of $154 million to $156 million. Adjusted revenue, excluding Directi was $146.2 million, representing an increase of over 12% versus the second quarter of 2013. Better than expected net paying subscriber additions and average revenue per subscriber growth drove our exceeding revenue expectations.

Adjusted EBITDA was $56.5 million for the quarter, representing an increase of 5% versus the $53.7 million in the second quarter of 2013 and $0.5 million higher than the top end of our guidance range of $54 million to $56 million. We exceeded our expectations on adjusted EBITDA as we managed our costs while re‐investing in higher marketing spend. As we noted in our Q1 call, we are increasing marketing investments this year to add subscribers and drive revenue as we complete integration of past acquisitions. As previously noted, we expect these marketing investments to contribute positively to cash flow in 2015. Our adjusted EBITDA was also impacted by the increase in G&A costs as a result of public company costs.

During second quarter we also booked integration and restructuring charges associated with the reorganization of our data centers, support locations and staff. Given the rapid growth in our business over the last three years, including the expansion of our international footprint, we have undertaken a project to rationalize our data center footprint, drive better yields, and consolidate our support call centers. We expect additional integration and restructuring charges in the second half until this consolidation is complete at the end of this fiscal year.

Unlevered free cash flow was $43.6 million for the quarter, representing an increase of 7% versus $40.8 million in the second of 2013 and $0.6 million higher than the top end of our guidance range of $41 million to $43 million. Our CapEx spend for the quarter was $7.6 million or 4.8% of adjusted revenue which contributed to favorability on UFCF. Our free cash flow was $29.5 million for the quarter, an increase of 50% versus $19.7 million in the second quarter of 2013. Our free cash flow benefited from increasing scale and reduced financing costs over the year prior.

Looking at financial performance during the first half of fiscal 2014, adjusted revenue grew 21% year-over-year to $311.8 million. Excluding the impact of Directi, adjusted revenue grew 13% year-over-year. Adjusted EBITDA was $115.6 million, reflecting year-over-year growth of 3%, and unlevered free cash flow was $92.6 million, reflecting 8% year-over-year growth. Our FCF was $65.0 million, reflecting year-over-year growth of 48%.

Moving on to our capital structure, our net debt increased by $12 million over the first quarter 2014 to $1,077 million as total bank debt increased due to borrowings of $33 million on our $125 million revolving credit facility. During the quarter, we paid out approximately $65 million of Directi obligations and made an equity investment of $15 million in Automattic, which as Hari mentioned, is the company that manages the business operations of WordPress.com.

In addition, in the second half of 2014, we expect to pay approximately $13 million of remaining deferred consideration, to be funded from operating cash flow. Any excess cash flows after investing in opportunities we believe will drive future adjusted EBITDA will be used to pay down the draw against our revolving credit facility. Over the medium term, we expect to manage our debt levels to less than four times adjusted EBITDA through a combination of growing our adjusted EBITDA and opportunistically paying down our bank debt.

Moving on to guidance, we come out of the first half of the year with stronger than expected topline results and are consequently raising our full year adjusted revenue guidance. Full year 2014 adjusted revenue of $639 million to $643 million, which represents year over year growth of 21% to 22% percent compared to our prior guidance of $637 million to $642 million. Adjusted EBITDA expectations remain at $230 million to $235 million and our unlevered free cash flow expectations remain at $180 million to $190 million.

Our adjusted revenue guidance assumes we continue to invest in marketing programs to drive revenue provided that we can do so at reasonable subscriber acquisition costs and favorable ROIs. Our guidance also assumes that Directi contributes approximately $40 million to adjusted revenue and year-over-year adjusted revenue growth excluding Directi to be approximately 13% to 14%.

Directi has performed above expectations in terms of both its core organic growth as well as revenue synergies realized by leveraging the Directi platform to take our other Endurance brands to new geographies. Our integration of Directi is running ahead of initial expectations.

Our fiscal year adjusted EBITDA and UFCF guidance also incorporates the higher level of investment in marketing this year. We expect to see a positive contribution to cash flow from these marketing investments starting in fiscal 2015 as subscribers remain on platform, renew their subscription at higher prices and buy additional products. Finally, we expect to continue to re‐invest any upside back into the business so long as accretive opportunities to add subscribers and drive ARPS are available.

For the period ending September 30, 2014, we expect adjusted revenues of $161 million to $164 million, which represents year over year growth of 20% to 22%; adjusted EBITDA of $55 million to $57 million and unlevered free cash flow of $42 million to $44 million. We believe our outlook reflects our focus on the importance of balancing growth and investment in order to build a foundation that will support many years of future growth.

With that, I will turn you back to Hari for additional comments before we start Q&A. Hari?

Hari Ravichandran

Thanks Tiv. The solid financial and operating performance we just discussed is a result of our focus on the five foundations that support growth in subscriber base and ARPS. We believe that over the long term, continued focus on these foundations will benefit the experience we offer to our subscribers and further enhance scale in the business.

I’d like to take a moment to provide a brief update on the growth priorities we highlighted last quarter. First, our technology platform lays the groundwork for everything we do, and allows us to quickly identify the subscribers around the world best suited to take advantage of our products, and then cost effectively deliver applications and services to those subscribers at scale. We continue to invest here in order to deliver reliable, scalable and robust cloud‐based solutions across our family of brands. The three distinct and differentiated advantages of our platform include, one, an integration layer which allows our brands, our partners and our subscribers to share common cloud services and more quickly achieve scale; two, a solution suite featuring an ever‐expanding catalog of best‐in‐class web enablement and management cloud applications; and three, delivery systems used to attract, engage and grow our 3.7 million subscriber relationships.

This quarter, we are particularly excited about the expanded roll out of compelling technology across our largest brands directed at improving our ability to track and personalize each subscriber interaction. Given the diversity of our subscriber base, this flexibility creates a very interesting opportunity to better address subscriber pain points. Since Q1, we’ve captured approximately 50 million incremental subscriber events across nearly 2,500 designated user actions, and are actively testing various engagement programs designed to further accelerate the purchase of additional products.

We are encouraged by the strong improvements in conversion rates, support call drivers, and overall subscriber engagement that we are already seeing as a result of these efforts. Second, as noted last quarter the launch of hundreds of new top‐level domains, combined with our investment in the Directi business, positions us well for future growth in the domain market. In Q2, we began offering over 130 of these recently released nTLDs across our various brands. These new extensions allow our small business owners to enhance their online brand identities and differentiate themselves in the market while unlocking an attractive incremental product revenue stream for us.

In the months ahead, we plan to continue to accelerate our release of new domain extensions, improve our targeted marketing programs and to better promote the value of these products, and streamline the fulfillment and management process by standardizing on Directi's world‐class domain management platform across our existing brands. Third, the intensity of mobile usage across our base of subscribers continues to grow, affirming our strategy to invest in both engaging and empowering our subscribers to manage their web presence and business operations anytime and anywhere.

Presently, we offer mobile solutions that allow small businesses to create or augment their desktop web presence with a mobile presence. We believe the mobile opportunity is still nascent and we are seeing strong demand for our mobile related offerings. For example, 95% of the website themes sold through our Mojo Marketplace feature responsive designs that automatically adjust to the visitor’s screen size. In our international markets, where more small business owners are mobile first, our BigRock brand is experimenting with new, mobile friendly subscriber acquisition and onboarding experiences.

As we mentioned last quarter, we are also very excited about the upcoming release of our next mobile application for small business owners to tap into a cross‐brand community of like‐minded small businesses for learning, advice and inspiration, and is scheduled to roll out in test mode in second half of 2014.

Fourth, we are expanding our geographic footprint by introducing our portfolio of brands to international markets. The Directi acquisition and its world class technology platform have enabled us to do this in a scalable and cost effective way. Bluehost is now launched in Brazil, Russia, China and Turkey and Hostgator is now available in Brazil, Russia, India, China and Turkey. Accomplishing these market launches so quickly is a testament to the progress we are making in integrating Directi into our business. We expect that Spanish speaking countries such as Spain and Mexico will follow next, giving our flagship brands native language support for the world’s top three spoken languages. As we gain traction in these exciting new markets, we plan to continue to strengthen our beachhead position by expanding local operations.

Finally, we continue to refine our product distribution methods. The efficacy of our distribution platform regularly improves as our investments in automation, behavioral targeting and personalization across our brands begin to pay dividends. As planned, we launched Mojo Marketplace to the iPage brand and are beginning to see the benefits. Additionally in Q2 we extended our subscriber reach as our brands increasingly take advantage of our new campaign management solutions.

Demand for higher value professional services such as marketing and design assistance, and website management solutions, continue to increase as well. As we improve optimization of our communications across our various subscriber touch points we expect to see not only higher conversion rates and growth in average revenue per transaction, but also more follow‐on opportunities as overall subscriber engagement increases.

Moving beyond our core organic investments, as we think about how to provide the best returns to shareholders, we also continue to evaluate M&A and equity investment opportunities. Given the feedback we received during the IPO process, we consciously took a step back from M&A for a brief period in order to clarify the organic growth in the business. As we approach a full year of operating as a public company, we are also mindful of not wanting to forego opportunities that may contribute to growing the business, and create additional shareholder value over time.

Overall, we are very excited about the opportunity ahead of us. Our success to‐date in addressing the market and sustaining healthy double‐digit top line growth give us confidence that we are making the right decisions and allocating our investments appropriately for the long‐term. Thank you all for listening today and for your interest in the company, and I’ll now turn the call over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from [Steven Jupp] with Credit Suisse. Please go ahead.

Unidentified Analyst

Right thanks guys. So Hari, last quarter you mentioned a bit of a departure from the traditional model of bringing in subscribers at the lowest tier to walk them up the ARPS curve to one where you're targeting SMBs with more specific higher value add services. So it might be early days but any initial feedback on how this new initiative is going, thanks.

Hari Ravichandran

Sure, happy to. So I think the last quarter we've launched one sort of higher end product which is the Wordpress hosting product in our Bluehost brand that start at the higher pricing. We've been experimenting with our SEO gears product as well which starts at higher end pricing. To-date the cash and cash economics on these subscribers coming in from the platform look very good and we're very encouraged by it. I would say one of the big set of puzzle pieces that still remains is for some of these folks that have longer term plans to come up for renewals. So we can measure the renewal rate and make sure that churn is sort of in line. And once that data is available given that it’s still early days that data is pretty sparse, we feel that this is a program that we can start to accelerate a bit more as we get into 2015 but early returns are very positive Steven.

Operator

Our next question is from [Keith Purdie] with Goldman Sachs. Please proceed.

Unidentified Analyst

Great thanks. I guess maybe to follow up a little bit on Steven's question, the increase that we saw in ARPS, is that being driven either specific services that you're seeing more adoption of maybe the mobile application side or is it higher prices on existing offerings that you're seeing there? And then also if you could give us an update on your relationship with Google, how much they contributed to growth in the quarter and what their entry into domains could mean for the company? And then finally just at the rate that you're generating cash you should be below your four times goal relatively soon. As that happens how will you think about allocating that incremental cash flow.

Hari Ravichandran

Sure be happy to do. So on the product side, for your first question Keith. I would say basically a lot of the benefits still coming for us, I would say still from product adoption. Pricing we are playing around with a little bit and trying to figure out what the right price points for different products are. So I would say probably a bit more skewed towards more product adoption versus the high price product plan. But I do think that as you look at certain vintage cohorts more recently, as some of these higher priced products that become available. We certainly see good adoption there as well. But for the second quarter I would say it's much more skewed towards additional product adoption versus sort of the mid to lower end pricing versus a lot of higher end product adoption, even though has been pretty robust. As Tiv said in his remarks we grew that $500 plus subscriber base by 8,000ish subscribers which was the strongest kind of quarter-over-quarter growth since we've started reporting. So that's been a positive.

And we continue to kind to keep pushing both levers and we feel that they both have a lot of benefit, product adoption, pricing and higher price products, all of them. From the Google piece of it, I think the Google revenue contribution is extraordinarily de minimis. I don't have the numbers right in front of me, but I will guess it's a million maybe even less than that for the quarter ,somewhere in that ballpark. So our sort of revenue -- sort of our revenue relationship with Google is fairly de minimis.

However they are quite an important partner for us from multiple different perspectives, one is obviously in the journey to try to educate more SMBs to get them to come online, Google and us are very aligned to make sure that more SMBs come online which obviously starts with the web presence and overtime can grow into more of that, where its AdSense part of the ecosystem which is what is exciting for the Google folks. So the Google relationship continues to go very strong. We're working on perhaps rolling out some additional products from Google into our suite as well and expanding the partnership base with Google.

So our relationships stays quite strong, still very minimal revenue sort of time with Google, but overtime as some of these new products come on, hopefully that part of the puzzle will sort of expand as well for us and them.

In terms of the Google domain launch I think there was a lot of market reaction to that. I think we spoke with a lot of investors on that day as we've been sort of mentioning to people both in one on ones and during the IPO process, domain is a very, very small part of our business from a bottom line perspective. It's maybe 2% to 3% of our bottom line. We have historically never lead with domains as an entry point to get customers on to our platforms. All of our customers as folks are aware of have a web presence subscription with us.

Most web presence bundles that we sell include a free domain inside it. So both from a revenue and bottom line standpoint, the Google domain launch we thought of as a positive event for this reason which is that the customer today goes and buys the domain through a competitor and that competitor is offering the web presence and suite of solutions that come behind it we would have a limited opportunity to take a look at that customer and work with them to get them onto our solution suite. Now Google, who has been fairly explicit about stating that they're interested in the domain onboarding journey of the customer but not necessarily the hosting or the add on products except for some of the add on products that they actually care about, like Google Apps for example or Gmail.

Some of those elements having been pre-integrated is spending time on that market to onboard SMBs. We think that will help us. If we are a close partner with Google for all of the elements that we provide, that’s somewhat mutually exclusive to what Google wants to provide to these customers. So we think of that as a positive lever for our business.

And your third question was around kind of cash flow and leverage levels, you're exactly right. As we kind of look forward, as EBITDA increases or as we deploy capital towards doing acquisitions or accretively increasing EBITDA, leverage levels should start to drop fairly quickly. We are also being prudent because there is no dearth of opportunity. We are going to keep looking at a lot of opportunities out there to kind of increase both the scale of the business and the size of the cash flows in the business as well.

So which is why Tiv sort of alludes to the fact that we will see it less than 4X. But if you just mathematically run it out and sort of believe long term growth guidance we've given you folks it de-levers pretty rapidly.

Unidentified Analyst

Great thanks Hari.

Operator

The next questioner is Brian Essex with Morgan Stanley. Please go ahead.

Brian Essex - Morgan Stanley

Good morning and thank you for taking the question. I was wondering if you can dig in a little bit and maybe provide some color around operating expense and any seasonality that there might be in that number. How do you think about that, particularly kind of post Directi? And where might we feel to understand what inflection points might be, where operating expense might grow lower than revenues?

Hari Ravichandran

Sure, I'm happy to take that Brian. As you probably noted on the operating expense side, marketing for this quarter was of the year ago period was higher and that's a result of us onboarding more customers as the platforms got integrated post acquisitions. And we're feeling pretty good about how that process worked out. We're also investing more in product marketing and using products as lead-ins to onboard subscribers. So I would expect kind of the marketing, which as a percentage of sales to be at or slightly lower going forward.

From a G&A perspective we’d hold steady or perhaps have 0.5% betterment over the course of the next 12 months or so. Engineering and development, already quite low and so we expect that to hold steady going into the next several quarters. On the gross margin side with the additional Directi the gross margin slightly affected, because that is a more [positive] business given there’s more domains in that type of business.

Brian Essex - Morgan Stanley

And as you think about particularly the sales and marketing spend as you noted onboarding subscribers, is that a leading type of spend or does that lag the subs that you bring on. And how do we think about the growth there.

Hari Ravichandran

It's a great question, it's definitely a very leading part of spend right because if you think about the onboarding of those customers, customers that comes in through SEM network comes in pays us the cash upfront and 45 days later we pay -- that pay that online partner. That gets booked as a period expense and in the first year, you're somewhat breakeven for the subscriber and when the subscriber comes back for the second year, typically renews at a higher price and also buys additional products along the journey. That's where you sort enter the zone of real sort of in the subscriber economics. So spend is always sort of the leading indicator of additional potential cash flows downstream if that answers your questions.

Brian Essex - Morgan Stanley

Yeah I guess what I'm trying to get around is, so is this reactionary to what comes on to your platform or are these strategic initiatives that you kind proactively spend in to get those subscribers on board?

Hari Ravichandran

No, I think the traffic levels for the site, again the way that our kind of traffic flows is going to work are pretty consistent with how we strategically deploy dollars across the channel and different areas to bring that traffic on site. So it's much less sort of reactionary to somebody that's already coming online and now just basically spending a bit more to kind of convert them, it’s much more around putting programs in place to get new kinds of visitors and new traffic come on to our site.

Brian Essex - Morgan Stanley

Got it, thank you.

Hari Ravichandran

No problem.

Operator

And the next questioner is Bryan Fitzgerald with Jefferies. Please proceed.

Brian Fitzgerald - Jefferies & Co.

Thanks guys. Maybe another question on ARPS drivers, to what extent your pricing escalators factor in there? And then among your upsells, how much historically has been from in-house products, marketing or development solutions maybe versus partner upsells. Thanks.

Hari Ravichandran

Great, no problem, great question. So on the pricing escalation side, I mean the generally the way you can kind think about it is when people come onboard if you think about our $14 plus ARPS, about $6 to $7 is sort of the basic subscription when people come on to our site. That's where it kind of ends up initially. And typically when ends up happening at the end of the first year is on the basic subscription side and this is public info that's available on the site pricing ends up closer to $9.95 a month for a one year plans and $8.95 a month so for two year plans. So you usually see a little bit of an uptick from the renewal pricing. You probably pickup say a buck or so, maybe a little bit more for domains per sub per month. And the rest of it is all additional products that people are buying on that 2014.

So you can kind a think of it is as that having been consistent in the past continues to kind of go at the same route, we've had kind of 10 plus years of history on this is pretty kind of predictable for us at this point. And then on the product upsells versus in-house product, we've always been very disciplined about this. We want to always make sure while over 90% of the revenues that we're generate are from products that we own or operate, because again we've seen mistakes with competitors and other folks in the past where, as the product mix changes margin profile starts to erode a bit.

So typically what we've always done is if there is a good amount of momentum around a particular product, we will first partner, will make sure the product actually works, maybe then do a tighter integration if economics are right. If not, try to either build in-house or acquire a similar product and put that into our platform when we know for sure that's a product that our customers want. But really the ratio we measure internally is 90% plus of our revenues coming from products that are owned and operated.

Brian Fitzgerald - Jefferies & Co.

Great, thanks Hari.

Hari Ravichandran

Thanks Brian.

Operator

And the next question is from Gregg Moskowitz with Cowen and Company. Please go ahead.

Gregg Moskowitz - Cowen & Company

Thank you very much and good morning. Directi share was a significant improvement quarter-over-quarter. And as you noted earlier it's tracking ahead of plan. Can you elaborate on what you're doing to drive better returns from that business, relative to that company's historical run-rate?

Hari Ravichandran

Yeah, I’d be happy to do, great question Gregg. So the key thing for that one again it was an entrepreneurial run business before. And if you thought about sort of investment profile for another price versus from an entrepreneur every kind of piece of investment you make in a current year back into the business is either a decision to either take that money home or basically put it back into the business. And so as the structure of that is changed we're certainly investing a lot more in marketing in that business this year compared to prior year. So that's been helping drive a lot of the organic growth.

The second thing that's also there is that things like our localization project where we're launching a bunch of additional brands through the Directi platform. That's been driving a lot of good growth there as well. And then general introduction of new products into the mix as well, which again was always a part of the culture there but we've kind of accelerated a little bit to get additional products into the mix, which has been helping drive growth as well.

While we are on that subject the one thing I might also mention very quickly is as time keeps moving on the lines between organic growth rate driven by decisions we're making versus what is the historical organic growth rate in the business start to blur little bit more because operations are getting much more consolidated. Everything is on, starting to look on one platform and we start to look at capital deployment decisions for wherever there is best ROI. But that, for this quarter we still were able to slip that up and give you guys a perspective on with and without Directi businesses.

Gregg Moskowitz - Cowen & Company

Okay that's great. And then Tiv as part of your data center rationalization and cost center consolidation, about how much in integration and restructuring charges do you anticipate in the second half?

Tivanka Ellawala

It will be a little bit less than what we've seen in the first half of the year but kind of similar ball park I would say, best we can see right now.

Gregg Moskowitz - Cowen & Company

Okay, thank you.

Operator

The next question is from [Gray Paul] with Wells Fargo Securities. Please go ahead.

Unidentified Analyst

Great thanks a lot. Just a couple of questions. So can you just talk about the visibility you have on revenue for any given quarter? I mean obviously you have a highly recurring subscription business to report one month into the quarter. So I guess my question is just how much of that 3% sequential growth in the quarter do you actually have to go out and win and versus what's already booked and coming off the balance sheet.

Hari Ravichandran

Yes, it's a great question. Couple of the metrics that we can kind of show, sort of the guide post there, obviously change in deferred revenue is always a nice indicator of what's coming downstream, because as folks are aware, our average term across our platform is just north of about a year. So you can see that, some of that cash is already, a chunk of that cash is already in the bag, but you just ratably book as you go along. So that gives you a good amount of visibility. Our forecasting is quite precise.

We have got the good benefit of -- I’ve been doing this 17 years but there is 10 to 12 plus years of good data that we can look out for how customers behave, how the cohorts sort of renew et cetera and the way we build up our forecasting is on a sub-by-sub basis with unique churn rates on a per subscriber basis. We try to then figure out what the revenue retention rate is going to be. So sort of a long winded way of saying it’s very visible for us kind of both looking at 2014 and then looking out into 2015.

Obviously we like to push ourselves to make sure that we're delivering kind of the best quarter possible. So a lot of the times as I tell our executive team here we're always fighting for that last 1% of revenues or 2%. We're always sort of working on it because a lot of it whether we actually have to work or not is gone show up in a good way, which is the beauty for our business model.

Unidentified Analyst

Got it, got it. Okay and then maybe just more like a refresher type question, if I may. Just a lot of the investors that we talked with pretty closely associate your business with that web.com and GoDaddy. Just what would you say are like the key differentiating factors of your business and then how sustainable do you think your competitive advantages are versus peers.

Hari Ravichandran

Sure we'll be happy to again, the thing to note to as we've all coexisted in this market for a long time. GoDaddy has been around since the late 90s, web.com is been around since the 90s. We've been around and we've all been able to accomplish scale. So the one nice thing we have going for all of us is that it’s a really big market. Our go-to-market strategies are very different, Godaddy obviously has been out there building a great and fantastic brand. They've historically always used offline marketing as their go-to-market strategy to build-up a one single brand. And their go-to-market product historically has always been domains where they lead with domains build-up a big funnel, bring a lot of customers onboard and then work with them to move them up the journey to get them to buy web presence and then a whole bunch of additional services.

Web.com on the other hand has historically focused more on the ARPU growth side of the equation. They seem to be kind of doing a little bit more offline branding now it's well around the PGA tours et cetera. And seems like part of their onboarding strategy also revolves around feet on the street and bringing higher price products in the mix through sales folks. Our model is very, very different than both. We go-to-market -- we start with web presence and now we're experimenting with other higher price products.

Domains has never been a bit part of our go-to-market strategy. We just have always found that to be a very transactional relationship with customers where people buy a domain and then to stimulate them to engage to buy at a higher value product. We find that to be a bit more challenging with the way our sort of data systems and our organization is setup. So that’s one key differential.

The second big one is that our growth is still two thirds indexed towards subscriber growth and about a third indexed towards ARPS growth. And all of our subscriber growth comes through program marketing, purely online 98% of our marketing, program marketing dollars are spent online and it's purely success based through our very large long tailed defused network of a 0.5 million plus SEM partners and word of mouth referrals from customers, and some of the free signups again coming with partnerships with people like Google.

So the models are very different, everybody has had good success I would say with their different go-to-market strategies and really on a day-to-day basis even though we get this question from investors a lot, we don't -- I would suspect we certainly don't come in to work every day thinking, it's gone be a bad day today because Godaddy is winning or Web.com is winning and I suspect that, that will be same answer you get from folks of those companies as well.

Unidentified Analyst

Got it, that's very helpful. Thank you very much.

Hari Ravichandran

No problem.

Operator

The next questioner is Mitch Bartlett with Craig-Hallum. Please go ahead.

Mitchell Bartlett - Craig-Hallum

Sure, Hari. I think earlier you talked about at the very low end of basic hosting web presence customers. That's where business is the easiest or if there is a good tailwind to the subscriber growth. If that’s the case and I would imagine that’s a huge percentage of your base of subscribers. How do you get such leverage in the number of products per subscriber? I mean that number keeps going up quarter-after-quarter.

Hari Ravichandran

Yeah, I think -- that's a great question, Mitch. I think there is that insatiable appetite for a lot of these businesses as they come online to try different products and services at low entry rates again. When you look at the two metrics we put out there, one is the number of products that customer buy. The second is the one over $500. Both talk to two different elements of the SMB need set. One is that as there has been a lot of sea change I would say in this in the way that SMBs think about the web as a tool to help them grow their business, they seem much more open and flexible to investing time, and some amount of dollars to see if they can leverage marketing tools, your M tools, PMS solutions to help them drive more traffic to their site which translates to revenues. So there is a lot of opportunity there.

The second lever again is also that a lever of the number of people out of that that's kind of self-qualify or we’re able to identify with lead generation programs to get them to buy products that are more expensive. Again the universe of that shrinks inside our base as you get into $1,000, $2,000 plus products on a monthly basis. It's not quite as many but that’s the landscape of the SMB universe out there. So I think that we are beneficiaries of even folks like Yelp for example, their [Jose Peters] shop. And there is a bunch of reviews on Yelp.

One of the ways you think about how to kind a respond to your customers and interface with them is to put up a website. And now it's kind of worth your time to actually go build that. And now you've got it maybe you can drive more traffic by leveraging some marketing programs or ad words et cetera. So that's kind where we've been getting the leverage and that's been steadily increasing, I would say since prior 2007 - 2008 timeframe as the macro climate gets more favorable for us.

Mitchell Bartlett - Craig-Hallum

That's great. Second question would be, maybe this was asked and I apologize if I didn't hear it, but just the channels from which the subscribers are coming to you, any major changes, how is the referral network?

Hari Ravichandran

Yeah, there is not really any change. I think it’s still kind of mid-40s for word of mouth referrals as we've had historically, still continues to be a chunk of that 55% coming from our SEM network. Still international continues to kind of ramp up slowly. Some of the conversions in the Google free programs that are paid still contribute. So no major mix shift between the last quarter to this, Mitch.

Mitchell Bartlett - Craig-Hallum

Perfect. And then at the end of the -- your formal remarks you talked about international, I think expanding a local operations. What is that, is that over the next year or two or what were you referring there?

Hari Ravichandran

Sure yeah I mean. As you guys probably are aware, we're relatively cheap and have a pretty high bar in terms of making investments in terms of things that we consider to be not that well proven yet. So this year as we put out a bunch of these local language sites, except for China most of the rest of the operations for a lot of the international brands actually happen out of our Mumbai office. For example if you're a customer that goes to Russia and you sign up for our product on Hostgator from our Russia brand and you pick-up the phone and you call it actually rings in Mumbai and there is some folks we recruited out of Russia that sit in our Mumbai office that provides the service.

So that works well to a degree but then as you start to invest in local marketing programs where you have good SACs and you got good cash and cash yields, you do need to expand that operations a little bit with local footprints. So a lot of this year has been experimenting and trying which market seem to convert well, where we seem to have a little bit of an edge. And next year is small investments in local setups in some of those markets to see if we can expand and kind of keep the same [CLTBC, PAC] ratios basically.

Mitchell Bartlett - Craig-Hallum

Got it, including Spanish language countries.

Hari Ravichandran

Exactly. If I think that one we feel that there could be some good opportunity there, but that one will still need to go through a test phase first and make sure we are able to convert and we have the right product mix. And that’s a program we want to invest behind and then perhaps look at more of a Spanish based operation in a labor efficient market.

Mitchell Bartlett - Craig-Hallum

Great thanks. Good quarter.

Hari Ravichandran

Thank you.

Operator

I am showing no further questions in the queue. And I would like to turn the conference back for any further remark.

Hari Ravichandran

Thank you everyone for attending and thank you for your interest in Endurance. We continue to stay excited about the opportunity in front of us and look forward to talking with you all again in a few months. Thank you.

Angela White

Thanks Janine.

Operator

You're welcome. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.

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Source: Endurance International's (EIGI) CEO Hari Ravichandran on Q2 2014 Results - Earnings Call Transcript

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