GoDaddy's Dark Secret: Risqué Ads Don't Bring Profitability

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Super Bowl Commercial: GoDaddy

GoDaddy got itself into another boatload of trouble over a Super Bowl ad last week, when it had to pull its lost puppy ad after angering animal rights groups. Heartwarming footage of a brave puppy finding its way home only to be told on arrival that the happy owner had just sold it online is not the stuff of charm or nostalgia.

Instead, the company ran a straightforward spot about small business owners. Variety raised the question of whether the entire string of events was another ploy to gain attention. The company had used risqué spots and pushed the boundaries of normal taste in the past as a way to gain mindshare and expand the business.

In one sense, it worked. GoDaddy is the largest registrar of Internet domains in the world. But a brief look at the company's SEC S-1 document, filed last year in anticipation of an eventual initial public offering that will likely happen this year, shows that a basic high-tech industry tenet doesn't always hold true. As GoDaddy has proven, increased bulk doesn't necessarily bring profitability.

Ready for an IPO?

Filing IPOs for high-tech companies that never once were profitable isn't new. The practice ran rampant during the dot-com boom and subsequent bust. The collapse largely scared off the practice for years, but it has seen resurgence of late. Box (BOX), for example, had put off its IPO last year. To do so, it had to bring in another large round of investment for enough cash to maintain operations. In January, Box finally had its public debut, with prices on its first day going from $14 to a $23.23 close, according to Fox Business.

In the red, these companies promise investors a bright future because of expected growth. Not only will increasing numbers drive up share prices, but eventually they will enable the business to invert the relative sizes of expenses and revenues to create profit. It worked for Amazon (AMZN) and Google (GOOG), right?

But GoDaddy is showing the limit of the theory. As the S-1 declares, "We operate the world's largest domain marketplace, where our customers can find that unique piece of digital real estate that perfectly matches their idea." Forget future scale. GoDaddy has already topped its industry and yet remains in the red.

It Started as Jomax in 1997

According to the most recent updated S-1, the company started as Jomax Technologies in 1997 and two years later changed the name to GoDaddy. It achieved positive cash flow by 2001, but not profitability. With Super Bowl ads going back to 2005, growth has been strong. Between 2009 and 2013, GoDaddy hit a bookings compound annual growth rate of 17 percent.

A shift in ownership and change in accounting happened in 2011, so the details of operations before then are unavailable. But in 2011, the company post more than $324 million on revenue of $894 million. In 2012, the net loss was $279 million on $910 million in revenue. The loss contracted sharply to roughly $200 million on $1.1 billion in revenue in 2013. The first nine months of 2014 showed $1 billion in revenue and $117 million net loss, compared to $825 million revenue and $134 million net loss in the same period of 2013.

The gap is closing, but that's after 17 years of business and, literally, becoming the largest company of its type in its industry. If that's not enough scale to see at least a few drops of black ink, what would be? Eventually a company needs to make more money than it spends. If that's not possible through growth, then one of two conditions is true. The business should control costs, rather than drive expansion, or management and investors should recognize that the company is not viable.

The old assumption that tech investors should take the growth view may be wrong. Perhaps what the industry and those who put money into it should consider is whether a company can build a solid business that can last. But that doesn't get the large jumps in stock price and an income means the old blue chip strategy of relying on dividends. It's a concept that remains foreign to the tech set.
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