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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 19, 2020

Endurance International Group Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
001-36131
46-3044956
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
 
 
10 Corporate Drive
Suite 300
Burlington
MA
01803
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (781) 852-3200

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
EIGI
The Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o





Item 8.01 Other Events.
As disclosed in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, effective January 1, 2020, Endurance International Group Holdings, Inc. (the “Company”) has modified its internal reporting structure and is filing this Current Report on Form 8-K (including Exhibit 99.1 hereto, this “Form 8-K”) to recast certain segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on February 14, 2020 (the “2019 10-K”), in order to reflect this change in reportable segments.
The Company previously reported its financial results in three reportable segments: web presence, email marketing and domain. In conjunction with the process of simplifying the organization, the Company modified its internal reporting structure to reflect certain changes in its structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of its domain segment into the web presence segment. Starting with the quarter ended March 31, 2020, the Company reports its financial results in two segments - web presence (including the former domain segment) and digital marketing. The products and services included in each of these two reportable segments are as follows:
Web Presence. The web presence segment consists primarily of the Company's web hosting brands, including Bluehost and HostGator, as well as its domain-focused brands such as Domain.com, ResellerClub and LogicBoxes. This segment includes web hosting, website security, website design tools and services, e-commerce products, domain names and domain privacy. It also includes the sale of domain management services to resellers and end users, as well as premium domain names, and generates advertising revenue from domain name parking.
Digital Marketing. The digital marketing segment consists of Constant Contact email marketing tools and related products. This segment also generates revenue from sales of the Company's Constant Contact-branded website builder tool and Ecomdash inventory management and marketplace listing solution which was acquired in the third quarter of 2019. For most of 2019, the digital marketing segment also included the SinglePlatform digital storefront business, which was sold on December 5, 2019.
The Company has recast the following portions of the 2019 10-K to reflect this change in reportable segments:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (up to and not including the subsection entitled “Liquidity and Capital Resources”)
Item 8: Financial Statements and Supplementary Data
Item 9A: Controls and Procedures
The recast items included in Exhibit 99.1 of this Form 8-K have been updated solely to reflect the change in the Company’s segment reporting described above, as well as to add Note 24 -- Subsequent Events in Item 8 of Exhibit 99.1. There are no changes to other disclosures presented in the 2019 10-K, including the Company’s previously reported consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows included in the 2019 10-K. The Company has not otherwise updated for activities or events occurring after the date the Company filed the 2019 10-K and the items included in Exhibit 99.1 of this Form 8-K do not modify or update any other disclosures therein in any way. Without limitation of the foregoing, this filing does not purport to update the Special Note Regarding Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations or the Risk Factors sections of the 2019 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2019 10-K. Therefore, this Form 8-K should be read in conjunction with the 2019 10-K. For more updated information please refer to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 and the Company’s subsequent current reports on Form 8-K and other filings with the SEC.







Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
23.1
 
99.1
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
 
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ENDURANCE INTERNATIONAL GROUP HOLDINGS, INC.
 
 
 
Date: May 19, 2020
 
By:
 
/s/ Marc Montagner
 
 
 
 
Name: Marc Montagner
 
 
 
 
Title: Chief Financial Officer



Exhibit
Exhibit 23.1


Consent of Independent Registered Public Accounting Firm

Endurance International Group Holdings, Inc.
Burlington, Massachusetts
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-214689) and Form S-8 (Nos. 333-191894, 333-209680 and 333-213095) of Endurance International Group Holdings, Inc. of our reports dated February 14, 2020 (except for matters discussed in Notes 2, 8, 14, 21 and 24 as to which the date is May 19, 2020), relating to the consolidated financial statements, and the effectiveness of Endurance International Group Holdings, Inc.’s internal control over financial reporting, which appear in this Current Report on Form 8-K.
/s/ BDO USA, LLP

Boston, Massachusetts
May 19, 2020
 



Exhibit

Exhibit 99.1
EXPLANATORY NOTE
Endurance International Group Holdings, Inc. (“Endurance,” the “Company,” “we,” “us” or “our”) is filing this Exhibit 99.1 to its Current Report on Form 8-K (including this Exhibit 99.1, the “Form 8-K”) to recast certain segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission on February 14, 2020 (the “2019 10-K”).
The Company previously reported its financial results in three reportable segments: web presence, email marketing and domain. In conjunction with the process of simplifying the organization, the Company modified its internal reporting structure to reflect certain changes in its structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of its domain segment into the web presence segment. Starting with the quarter ended March 31, 2020, the Company reports its financial results in two segments - web presence (including the former domain segment) and digital marketing.
This Exhibit 99.1 updates the information in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations (up to and not including the subsection entitled “Liquidity and Capital Resources”)), Part II, Item 8 (Financial Statements and Supplementary Data), and Part II, Item 9A ("Controls and Procedures") of the 2019 10-K as initially filed solely to reflect the subsequent changes in segment reporting discussed above, as well as to add Note 24 -- Subsequent Events in Part II, Item 8.
The recast items included in this Exhibit 99.1 do not otherwise reflect activities or events occurring after the Company filed the 2019 10-K and do not modify or update the disclosures therein in any way. Without limitation of the foregoing, the Form 8-K does not purport to update the Special Note Regarding Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations, or the Risk Factors sections of the 2019 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2019 10-K. Therefore, the Form 8-K should be read in conjunction with the 2019 10-K. For more updated information, please refer the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 and the Company’s subsequent current reports on Form 8-K and other filings with the SEC.

TABLE OF CONTENTS


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Part II
 
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in Item 8 below. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A, Risk Factors of our 2019 Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. Please also refer to the Special Note Regarding Forward-Looking Statements in our 2019 Annual Report on Form 10-K.
Overview
We are a leading provider of cloud-based platform solutions designed to help small- and medium-sized businesses, or SMBs, succeed online. We serve approximately 4.8 million subscribers globally with a range of products and services that help SMBs get online, get found and grow their businesses. In addition to for-profit businesses, our subscribers include non-profit organizations, community groups, bloggers, and hobbyists. Although we provide our solutions through a number of brands, we are focusing our marketing, engineering and product development efforts on a small number of strategic assets, including our Constant Contact, Bluehost, HostGator, and Domain.com brands.
We previously reported our financial results in three reportable segments: web presence, email marketing, and domain. In conjunction with the process of simplifying our organization, we modified our internal reporting structure to reflect certain changes in our structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of our domain segment into our web presence segment. Beginning with the three months ended March 31, 2020, we report our financial results in two segments - web presence (including the former domain segment) and digital marketing, as follows:
Web Presence. Our web presence segment consists primarily of our web hosting brands, including Bluehost and HostGator, as well as our domain-focused brands such as Domain.com, ResellerClub and LogicBoxes. This segment includes web hosting, website security, website design tools and services, e-commerce products, domain names, and domain privacy. It also includes the sale of domain management services to resellers and end users, as well as premium domain names, and generates advertising revenue from domain name parking.
Digital Marketing. Our digital marketing segment consists of Constant Contact email marketing tools and related products. This segment also generates revenue from sales of our Constant Contact-branded website builder tool and our Ecomdash inventory management and marketplace listing solution, or Ecomdash, which we acquired in the third quarter of 2019. For most of 2019, the digital marketing segment also included the SinglePlatform digital storefront business, which we sold on December 5, 2019.
During 2018 and 2019, we focused on investing to improve the customer experience and expand product offerings in our strategic brands, including Constant Contact, Bluehost, HostGator and Domain.com, and on simplifying our business. Although our revenue, net income, operating cash flows and total subscriber base decreased in 2019 relative to 2018, we believe the second half of 2019 began to show positive results from our continuing investment and simplification efforts. Our fourth quarter 2019 revenue was flat as compared to third quarter 2019 revenue, and when third and fourth quarter 2019 revenue are both adjusted to exclude the revenue contribution of our SinglePlatform business, which we sold on December 5, 2019, fourth quarter revenue increased relative to third quarter revenue. SinglePlatform contributed $6.8 million and $4.8 million in revenue in the third and fourth quarters of 2019, respectively, and $28.4 million and $25.4 million in revenue in 2018 and 2019, respectively.
Changes in our revenue, net income (loss) and net cash provided by operating activities from 2018 to 2019 are summarized below:
 
Year Ended December 31, 2018
 
Year Ended December 31, 2019
 
(in thousands)
Revenue
$
1,145,291

 
$
1,113,278

Net income (loss)
$
4,534

 
$
(12,347
)
Net cash provided by operating activities
$
182,552

 
$
161,973

Revenue decreased by 3% from 2018 due to revenue declines in the web presence segment. This decline was partially offset by an increase in digital marketing segment revenue.

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We had a net loss in 2019 as compared to net income in 2018, due primarily to impairment charges, decreases in revenue, increases in income taxes and increases in stock-based compensation expense. This change was partially offset by a gain from the disposition of SinglePlatform, and decreases in amortization, depreciation and interest expenses.
Net cash provided by operating activities decreased by 11% from 2018. This decrease was primarily due to lower revenue and subscriber billings, timing of vendor payments, and higher income tax payments. These factors were partially offset by lower restructuring and interest payments in 2019. Our 2019 cash flows allowed us to make voluntary debt principal payments of $51.3 million in 2019, which were in addition to required debt principal payments of $31.6 million made during the year. In addition, our proceeds from the disposition of SinglePlatform triggered an additional mandatory repayment of $48.1 million.
With respect to total subscribers, we recorded net subscriber additions for the third quarter of 2019. Fourth quarter 2019 net subscriber additions would also have been positive but for the impact of the sale of SinglePlatform, which resulted in a decrease of approximately 23,000 subscribers. Our non-strategic brands continue to lose subscribers, but the rate of attrition slowed during 2019, and for the third and fourth quarters, net subscriber additions from our strategic brands (in the aggregate and excluding the impact of the SinglePlatform sale) outpaced losses in the non-strategic brands. Our non-strategic brands are principally web hosting brands, but also include our cloud backup brands and certain other products that we launched in late 2015 and early 2016, and that we have either discontinued or no longer actively market. Subscriber counts are decreasing in these brands, and we are managing them to optimize cash flow rather than to acquire new subscribers.
Our operating plan for 2020 continues to focus on delivering increased value to customers of our key strategic brands, and on further simplifying our operations. We expect to continue our investments in engineering and development in 2020 in order to further improve the customer experience and expand product offerings in our strategic brands. We also intend to invest more heavily in marketing efforts for our strategic brands as compared to 2018 and 2019. We expect that these investments will adversely impact our net income (loss), adjusted EBITDA, cash flows from operations and free cash flow during 2020.
Key Metrics
We use a number of metrics, including the following key metrics, to evaluate the operating and financial performance of our business, identify trends affecting our business, develop projections and make strategic business decisions:
 
total subscribers
average revenue per subscriber, or ARPS
adjusted EBITDA, and
free cash flow
Adjusted EBITDA and free cash flow are non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently. In addition, there are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. For example, adjusted EBITDA excludes interest expense, which has been and will continue to be for the foreseeable future a significant recurring expense in our business. The presentation of non-GAAP financial information is not meant to be considered in isolation from, or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the additional information about adjusted EBITDA and free cash flow shown below, including the reconciliations of these non-GAAP financial measures to their comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
The following table summarizes our key metrics (except for free cash flow, which is discussed in Liquidity and Capital Resources below) by segment for the periods presented:

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Year Ended December 31,
 
2017
 
2018
 
2019
 
(in thousands, except ARPS)
Consolidated metrics:
 
 
 
 
 
Total subscribers
5,051

 
4,802

 
4,766

Average subscribers
5,211

 
4,927

 
4,793

Average revenue per subscriber
$
18.82

 
$
19.37

 
$
19.35

Adjusted EBITDA
$
350,814

 
$
338,058

 
$
313,644

 
 
 
 
 
 
Web presence segment metrics:
 
 
 
 
 
Total subscribers
4,532

 
4,305

 
4,298

Average subscribers
4,680

 
4,419

 
4,301

Average revenue per subscriber
$
13.81

 
$
13.87

 
$
13.61

Adjusted EBITDA
$
164,945

 
$
154,674

 
$
139,089

 
 
 
 
 
 
Digital marketing segment metrics:
 
 
 
 
 
Total subscribers(1)
519

 
497

 
468

Average subscribers
531

 
508

 
492

Average revenue per subscriber
$
62.92

 
$
67.28

 
$
69.58

Adjusted EBITDA
$
185,869

 
$
183,384

 
$
174,555

(1) The total digital marketing subscriber count as of December 31, 2019 includes approximately 1,300 subscribers added as part of the September 2019 acquisition of Ecomdash and reflects a decrease of approximately 23,000 subscribers due to the December 2019 sale of our SinglePlatform business.
Total Subscribers
We define total subscribers as the approximate number of subscribers that, as of the end of a period, are identified as subscribing directly to our products on a paid basis, excluding accounts that access our solutions via resellers or that purchase only domain names from us. Subscribers of more than one brand, and subscribers with more than one distinct billing relationship or subscription with us, are counted as separate subscribers. Total subscribers for a period reflects adjustments to add or subtract subscribers as we integrate acquisitions and/or are otherwise able to identify subscribers that meet, or do not meet, this definition of total subscribers.
Most of our web presence segment subscribers have hosting subscriptions, but web presence subscribers also include customers who do not have a hosting subscription but subscribe to other non-hosting services, such as email or office productivity software tools. These non-hosting subscribers generally have lower-priced subscriptions than hosting subscribers. Subscribers to our domain-focused offerings (which were previously included in our former domain segment) mostly consist of customers who have a domain name subscription as well as a subscription to another product, such as domain privacy, or a basic hosting, email or domain privacy service that is bundled with their domain name subscription. These subscribers also typically have lower-priced subscriptions than hosting subscribers.
Digital marketing segment subscribers mostly consist of subscribers to Constant Contact's email marketing service, but also include paying subscribers to our Constant Contact-branded website builder tool and our Ecomdash inventory management and marketplace listing solution, which we acquired in the quarter ended September 30, 2019. Until the sale of our SinglePlatform business on December 5, 2019, digital marketing subscribers also included SinglePlatform subscribers. Our digital marketing and total subscriber counts as of December 31, 2019 include approximately 1,300 subscribers added as part of the Ecomdash acquisition and reflect a decrease of approximately 23,000 subscribers due to the sale of SinglePlatform.

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The table below shows the approximate sources of changes in our total subscriber count by segment during 2018 and 2019. Adjustments below are shown on a full year basis.
 
Web Presence
Digital Marketing
Total
 
(in thousands)
Total Subscribers - December 31, 2017
4,532

519

5,051

Acquisitions



Adjustments
(4
)

(4
)
Net subscriber decrease
(223
)
(22
)
(245
)
Total Subscribers - December 31, 2018
4,305

497

4,802

Acquisitions

1

1

Dispositions

(23
)
(23
)
Adjustments
(2
)
1

(1
)
Net subscriber (decrease) increase
(5
)
(8
)
(13
)
Total Subscribers - December 31, 2019
4,298

468

4,766

The decrease in total subscribers from 4.802 million at December 31, 2018 to 4.766 million at December 31, 2019 was driven by subscriber losses in our digital marketing segment (including a decrease of approximately 23,000 subscribers due to the SinglePlatform sale) and in our web presence segment. Subscriber losses in our web presence segment were due to subscriber attrition in our non-strategic brands, partially offset by subscriber additions in our domain-focused brands.
The decrease in total subscribers from 5.051 million at December 31, 2017 to 4.802 million at December 31, 2018 was driven primarily by subscriber losses in our web presence segment, a majority of which were due to subscriber attrition in our non-strategic brands, and, to a lesser extent, by subscriber losses in our digital marketing segment.
Average Revenue per Subscriber
We calculate ARPS as the amount of revenue we recognize in a period, including marketing development funds and other revenue not received from subscribers, divided by the average of the number of total subscribers at the beginning of the period and at the end of the period, which we refer to as average subscribers for the period, divided by the number of months in the period. We believe ARPS is an indicator of our ability to optimize our mix of products, services and pricing and sell products and services to both new and existing subscribers.
The following table reflects the calculation of ARPS by segment:
 
Year Ended December 31,
 
2017
 
2018
 
2019
 
(in thousands, except ARPS)
Consolidated revenue
$
1,176,867

 
$
1,145,291

 
$
1,113,278

Consolidated total subscribers
5,051

 
4,802

 
4,766

Consolidated average subscribers for the period
5,211

 
4,927

 
4,793

Consolidated ARPS
$
18.82

 
$
19.37

 
$
19.35

 
 
 
 
 
 
Web presence revenue
$
775,617

 
$
735,239

 
$
702,606

Web presence subscribers
4,532

 
4,305

 
4,298

Web presence average subscribers
4,680

 
4,419

 
4,301

Web presence ARPS
$
13.81

 
$
13.87

 
$
13.61

 
 
 
 
 
 
Digital marketing revenue
$
401,250

 
$
410,052

 
$
410,672

Digital marketing subscribers(1)
519

 
497

 
468

Digital marketing average subscribers
531

 
508

 
492

Digital marketing ARPS
$
62.92

 
$
67.28

 
$
69.58

(1) The total digital marketing subscriber count as of December 31, 2019 includes approximately 1,300 subscribers added as part of the September 2019 acquisition of Ecomdash and reflects a decrease of approximately 23,000 subscribers due to the December 2019 sale of our SinglePlatform business.

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ARPS does not represent an exact measure of the average amount a subscriber spends with us each month, because our calculation of ARPS includes all of our revenue, including revenue generated by non-subscribers, in the numerator. We have three principal sources of non-subscription-based revenue:
Revenue from domain-only customers. Our web presence segment earns revenue from domain-only customers. Approximately 1.0% of our fiscal year 2019 revenue was earned from domain-only customers.
Domain monetization revenue. This consists principally of revenue from our BuyDomains brand, which provides premium domain name products and services, and, to a lesser extent, revenue from advertisements placed on unused domains (often referred to as “parked” pages) owned by us or our customers. All of this revenue is associated with our web presence segment.
Revenue from marketing development funds. Marketing development funds are the amounts that certain of our partners pay us to assist in and incentivize our marketing of their products.
A portion of our revenue is generated from customers that resell our services. We refer to these customers as “resellers.” We consider these resellers (rather than the end user customers of these resellers) to be subscribers under our total subscribers definition, because we do not have a billing relationship with the end users and cannot determine the number of end users acquiring our services through a reseller. A majority of our reseller revenue is for the purchase of domains and is primarily related to our web presence segment. Reseller revenue earned by our web presence segment and our digital marketing segment was less than 10% and less than 1%, respectively, for all periods presented, and fluctuations in reseller revenue have not materially impacted ARPS for those segments.
ARPS may be impacted by changes in the amount of non-subscription-based revenue and reseller activity from period to period. These changes primarily affect our domain-focused offerings, which were previously included in our former domain segment.
Comparison of Year Ended December 31, 2018 and 2019: ARPS
For the years ended December 31, 2018 and 2019, consolidated ARPS decreased from $19.37 to $19.35, respectively. This decrease in ARPS was driven primarily by lower ARPS in our web presence segment. These decreases were partially offset by higher ARPS in our digital marketing segment.
Web presence ARPS decreased from 13.87 for the year ended December 31, 2018 to 13.61 for the year ended December 31, 2019, primarily due to the impact of more subscribers joining our platform at introductory pricing, which is typically lower than renewal pricing, as well as to a decrease in non-subscription revenue.
Digital marketing ARPS increased from $67.28 for the year ended December 31, 2018 to $69.58 for the year ended December 31, 2019, primarily due to additional purchases by existing subscribers and price increases.
Comparison of Year Ended December 31, 2017 and 2018: ARPS
For the years ended December 31, 2017 and 2018, consolidated ARPS increased from $18.82 to $19.37, respectively. This increase in ARPS was driven primarily by our digital marketing segment, and to a lesser extent, a focus on higher lifetime revenue subscribers in our web presence segment.
Web presence ARPS increased from 13.81 for the year ended December 31, 2017 to 13.87 for the year ended December 31, 2018, primarily due to a shift in our marketing programs away from targeting subscribers for our lower priced products, and towards targeting subscribers who have higher lifetime revenue potential. This shift in focus resulted in a loss of subscribers of lower priced products, resulting in an overall increase in ARPS. This increase in ARPS was partially offset by a decrease in non-subscription-based revenue.
Digital marketing ARPS increased from $62.92 for the year ended December 31, 2017 to $67.28 for the year ended December 31, 2018, primarily due to price increases and additional purchases by existing subscribers.
  Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), excluding the impact of
interest expense (net), income tax expense (benefit), depreciation, amortization of other intangible assets, stock-based compensation, restructuring expenses, transaction expenses and charges, gain on sale of business, (gain) loss of unconsolidated entities, impairment of goodwill and other long-lived assets, SEC investigations reserve, and shareholder litigation reserve. We view adjusted EBITDA as a performance measure and believe it helps investors evaluate and compare our core operating performance from period to period.
SEC investigations reserve refers to a reserve we recorded in the third quarter of 2017 in connection with the Securities and Exchange Commission investigations initiated against Endurance and Constant Contact in December 2015, which we

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settled in June 2018. Shareholder litigation reserve refers to a reserve we first recorded in the first quarter of 2018 in connection with shareholder class action lawsuits filed against each of Endurance and Constant Contact in 2015. As described in Note 18, Commitments and Contingencies, to the consolidated financial statements in Item 8 below, we settled the Endurance lawsuit during 2019, and we expect the final settlement hearing for the Constant Contact lawsuit to take place in 2020.
The following table reflects the reconciliation of adjusted EBITDA to net (loss) income calculated in accordance with GAAP for the periods presented.
 
Year Ended December 31,
 
2017
 
2018
 
2019
Consolidated
(in thousands)
Net (loss) income
$
(99,784
)
 
$
4,534

 
$
(12,347
)
Interest expense, net(1)
156,406

 
148,391

 
143,454

Income tax (benefit) expense
(17,281
)
 
(6,246
)
 
17,879

Depreciation
55,185

 
48,207

 
44,951

Amortization of other intangible assets
140,354

 
103,148

 
85,183

Stock-based compensation
60,001

 
29,064

 
35,692

Restructuring expenses
15,810

 
3,368

 
1,992

Transaction expenses and charges
773

 

 

Gain on sale of business

 

 
(40,700
)
(Gain) loss of unconsolidated entities(2)
(110
)
 
267

 

Impairment of goodwill and other long-lived assets
31,460

 

 
37,540

SEC investigations reserve
8,000

 

 

Shareholder litigation reserve

 
7,325

 

Adjusted EBITDA
$
350,814

 
$
338,058

 
$
313,644

 
Year Ended December 31,
 
2017
 
2018
 
2019
Web presence
(in thousands)
Net loss
$
(89,169
)
 
$
(34,094
)
 
$
(79,759
)
Interest expense, net(1)
69,492

 
80,074

 
70,628

Income tax (benefit) expense
(22,433
)
 
(6,361
)
 
11,279

Depreciation
41,273

 
36,710

 
35,924

Amortization of other intangible assets
65,887

 
50,048

 
39,307

Stock-based compensation
53,067

 
19,426

 
23,385

Restructuring expenses
10,229

 
2,779

 
785

Transaction expenses and charges

 

 

Gain on sale of business

 

 

(Gain) loss of unconsolidated entities(2)
(110
)
 
267

 

Impairment of goodwill and other long-lived assets
31,460

 

 
37,540

SEC investigations reserve
5,249

 

 

Shareholder litigation reserve

 
5,825

 

Adjusted EBITDA
$
164,945

 
$
154,674

 
$
139,089


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Year Ended December 31,
 
2017
 
2018
 
2019
Digital marketing
(in thousands)
Net (loss) income
$
(10,615
)
 
$
38,628

 
$
67,412

Interest expense, net(1)
86,914

 
68,317

 
72,826

Income tax expense
5,152

 
115

 
6,600

Depreciation
13,912

 
11,497

 
9,027

Amortization of other intangible assets
74,467

 
53,100

 
45,876

Stock-based compensation
6,934

 
9,638

 
12,307

Restructuring expenses
5,581

 
589

 
1,207

Transaction expenses and charges
773

 

 

Gain on sale of business

 

 
(40,700
)
(Gain) loss of unconsolidated entities(2)

 

 

Impairment of goodwill and other long-lived assets

 

 

SEC investigations reserve
2,751

 

 

Shareholder litigation reserve

 
1,500

 

Adjusted EBITDA
$
185,869

 
$
183,384

 
$
174,555

(1)
Interest expense includes impact of amortization of deferred financing costs, original issuance discounts and interest income. For the years ended December 31, 2017 and 2018, it also includes $6.5 million and $1.2 million, respectively, of deferred financing costs and original issuance discounts (OID) immediately expensed upon the refinancing of our term loan in 2017 and 2018.
(2)
For all years presented, (gain) loss of unconsolidated entities is reported on a net basis, which includes our proportionate share of net (income) losses from unconsolidated entities, any (gain) loss recorded when we acquired our controlling interest in these entities and any impairments related to these entities.
Comparison of the Years Ended December 31, 2018 and 2019: Net (Loss) Income and Adjusted EBITDA
Net income (loss) on a consolidated basis decreased from net income of $4.5 million for the year ended December 31, 2018 to a net loss of $12.3 million for the year ended December 31, 2019. This change was primarily due to higher net losses in our web presence segment, partially offset by higher net income in our digital marketing segment. These changes in segment net income (loss) were significantly impacted by impairment charges and by the gain from the disposition of our SinglePlatform business, as well as by changes in revenue, income taxes, amortization, stock-based compensation and depreciation expenses, as discussed below.
Net loss for our web presence segment increased from $34.1 million for the year ended December 31, 2018 to $79.8 million for the year ended December 31, 2019. The increase in net loss was primarily related to higher impairment charges of $37.5 million relating to goodwill for two of our non-strategic reporting units and other long-lived intangible assets, lower revenue of $32.6 million, higher income tax expense allocated to this segment of $17.6 million, higher costs impacting engineering and development of $11.5 million, and higher stock-based compensation of $4.0 million. These increases in net loss were partially offset by lower costs impacting cost of revenue of $16.5 million, lower costs impacting sales and marketing of $11.9 million, lower amortization expense of $10.7 million, lower interest expense allocated to this segment of $9.5 million, the impact of the shareholder litigation reserve of $5.8 million allocated to this segment during the year ended December 31, 2018, lower restructuring expense of $2.0 million, lower depreciation expense of $0.8 million, and lower costs impacting general and administrative expense of $0.2 million (net of a $2.6 million insurance reimbursement of legal fees).
Net income for our digital marketing segment increased from $38.6 million for the year ended December 31, 2018 to $67.4 million for the year ended December 31, 2019. This improvement was primarily related to gain from the disposition of SinglePlatform of $40.7 million, reduced amortization expense of $7.2 million, reduced depreciation expense of $2.5 million, the impact of the shareholder litigation reserve of $1.5 million recorded during the year ended December 31, 2018, reduced costs impacting general and administrative expense of $1.5 million (net of a $1.6 million insurance reimbursement of legal fees), and higher revenue of $0.6 million. These factors were partially offset by an increase in income tax expense allocated to this segment of $6.5 million, higher interest expense allocated to this segment of $4.5 million, higher costs impacting engineering and development of $6.5 million, higher costs impacting sales and marketing of $3.3 million, higher stock-based compensation expense of $2.7 million, higher costs impacting cost of revenue of $1.1 million, and higher restructuring costs of $0.6 million.
Adjusted EBITDA on a consolidated basis decreased from $338.1 million for the year ended December 31, 2018 to $313.6 million for the year ended December 31, 2019. This decrease was attributable to both our web presence and digital

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marketing segments, as described below. We also expect a decrease in adjusted EBITDA from fiscal year 2019 to fiscal year 2020, as we continue to invest in engineering and development and sales and marketing.
Adjusted EBITDA for our web presence segment decreased from $154.7 million for the year ended December 31, 2018 to $139.1 million for the year ended December 31, 2019. This decrease was primarily due to a $32.6 million decline in revenue and increased engineering and development expense of $11.5 million, primarily due to higher labor costs. This decrease in adjusted EBITDA was partially offset by lower cost of revenue of $16.5 million, primarily due to lower support costs, data center costs and domain registration costs; and lower sales and marketing costs of $11.9 million, which primarily consisted of reduced expenditures on non-strategic brands.
Adjusted EBITDA for our digital marketing segment decreased from $183.4 million for the year ended December 31, 2018 to $174.6 million for the year ended December 31, 2019. This decrease was primarily attributable to increased engineering and development costs of $6.5 million, primarily due to increased labor costs; higher sales and marketing costs of $3.3 million, primarily due to higher labor costs; and higher costs impacting cost of revenue of $1.1 million, primarily due to higher support costs. These factors were partially offset by $0.6 million of revenue growth and lower general and administrative expense of $1.5 million.
Comparison of the Years Ended December 31, 2017 and 2018: Net Income (Loss) and Adjusted EBITDA
Net income (loss) on a consolidated basis improved from a net loss of $99.8 million for the year ended December 31, 2017 to net income of $4.5 million for the year ended December 31, 2018. This change was primarily due to improved net income (loss) from our web presence and digital marketing segments of $55.1 million and $49.2 million, respectively. These improvements in segment net loss were significantly impacted by changes in stock-based compensation, amortization expense, impairment charges, restructuring charges and cost of revenue, among other factors, as described more fully below.
Net loss for our web presence segment decreased from $89.2 million for the year ended December 31, 2017 to $34.1 million for the year ended December 31, 2018. The decrease in net loss was primarily related to lower stock-based compensation of $33.6 million, a reduction of $31.5 million in impairment charges related to both goodwill and long-lived intangible assets which was incurred in the year ended December 31, 2017 and did not reoccur in the year ended December 31, 2018, lower amortization expense of $15.8 million, lower costs impacting cost of revenue of $15.9 million, lower operating expenses of $14.3 million, lower restructuring charges of $7.5 million, and lower depreciation expense of $4.6 million. These factors were partially offset by a $40.4 million decrease in revenue, a $16.1 million decrease in income tax benefit, and higher interest expense of $10.6 million.
Net income (loss) for our digital marketing segment improved from a net loss of $10.6 million for the year ended December 31, 2017 to net income of $38.6 million for the year ended December 31, 2018. This improvement was primarily related to reduced amortization expense of $21.4 million, reduced interest expense allocated to our digital marketing segment of $18.6 million, increased revenue of $8.8 million, and other cost reductions, consisting mainly of lower restructuring costs and lower income tax expense totaling $14.1 million. These increases in net income were partially offset by increased engineering and development expense.
Adjusted EBITDA on a consolidated basis decreased from $350.8 million for the year ended December 31, 2017 to $338.1 million for the year ended December 31, 2018. This decrease is attributable to both our web presence and digital marketing segments, as described below.
Adjusted EBITDA for our web presence segment decreased from $164.9 million for the year ended December 31, 2017 to $154.7 million for the year ended December 31, 2018. This decrease was primarily due to a $40.4 million decline in revenue and to increased engineering and development expense of $5.0 million. This decrease was partially offset by lower cost of revenue of $15.9 million, primarily due to lower support costs, data center costs and domain registration costs; and lower general and administrative expense of $10.8 million, primarily due to lower labor costs; and an $8.4 million decrease in sales and marketing expense, which primarily consisted of reduced expenditures on non-strategic brands.
Adjusted EBITDA for our digital marketing segment decreased from $185.9 million for the year ended December 31, 2017 to $183.4 million for the year ended December 31, 2018. This decrease was primarily attributable to increased engineering and development costs of $9.7 million, primarily due to increased labor costs, and higher sales and marketing costs of $3.9 million, primarily due to higher marketing program spend. This decrease was partially offset by $8.8 million of revenue growth (which includes the impact of price increases); lower general and administrative expense of $1.6 million; and lower cost of revenue of $0.8 million, primarily due to lower data center costs.
Free Cash Flow
For a discussion of free cash flow, see "Liquidity and Capital Resources."

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Components of Operating Results
Revenue
We generate revenue primarily from selling subscriptions for our cloud-based products and services. The subscriptions we offer are similar across all of our brands and are provided under contracts pursuant to which we have ongoing obligations to support the subscriber. These contracts are generally for service periods of up to 36 months and typically require payment in advance at the time of initiating the subscription for the entire subscription period. Typically, we also have arrangements in place to automatically renew a subscription at the end of the subscription period. Due to factors such as discounted introductory pricing, our renewal fees may be higher than our initial subscription. A majority of our web presence segment subscriptions have terms of 24 months or less, while our digital marketing segment sells subscriptions that are mostly one-month terms. We also earn revenue from the sale of domain name registrations, premium domains and non-term based products and services, such as certain online security products and professional technical services as well as through referral fees and commissions.
Cost of Revenue
Cost of revenue includes costs of operating our customer support organization, fees we pay to register domain names for our customers, costs of operating our data center infrastructure, such as technical personnel costs associated with monitoring and maintaining our network operations, fees we pay to third-party product and service providers, and merchant fees we pay as part of our billing processes. We also allocate to cost of revenue the depreciation and amortization related to these activities and the intangible assets we have acquired, as well as a portion of our overhead costs attributable to our employees engaged in customer support activities. In addition, cost of revenue includes stock-based compensation expense for employees engaged in support and network operations. Excluding potential impacts of future changes in operations, we generally expect cost of revenue to decrease on an absolute dollar basis due to an anticipated decrease in amortization expense on our existing intangible assets.
Gross Profit
Gross profit is the difference between revenue and cost of revenue. Gross profit has fluctuated from period to period in large part as a result of revenue and cost of revenue adjustments from purchase accounting impacts related to acquisitions, as well as revenue and cost of revenue impacts related to developments in our business. With respect to revenue, the application of purchase accounting requires us to record purchase accounting adjustments for acquired deferred revenue, which reduces the revenue recorded from acquisitions for a period of time after the acquisition. The impact generally normalizes within a year following the acquisition. With respect to cost of revenue, the application of purchase accounting requires us to defer domain registration costs, which reduces cost of revenue, and record long-lived assets at fair value, which increases cost of revenue through an increase in amortization expense over the estimated useful life of the long-lived assets. For a new customer that we bring on to our platform, we typically recognize revenue over the term of the subscription, even though we collect the subscription fee at the initial billing. As a result, our gross profit may be affected by the prices we charge for our subscriptions, as well as by the number of new subscribers and the terms of their subscriptions. We expect our gross profit to increase in absolute dollars in future periods, and that our gross profit margin will also increase as amortization expense related to our intangible assets declines.
Operating Expense
We classify our operating expense into three categories: sales and marketing, engineering and development, and general and administrative. In 2016, we started breaking out transaction expense due to the significance of the costs incurred to acquire Constant Contact. In 2017, we started breaking out impairment of goodwill due to the significance of the charge incurred in our web presence segment. In 2019, we started breaking out gain on sale of business due to the significance of the gain associated with the disposition of our SinglePlatform business.
Sales and Marketing
Sales and marketing expense primarily consists of costs associated with bounty payments to our network of online partners, search engine marketing, or SEM, and search engine optimization, or SEO, general awareness and brand building activities, as well as the cost of employees engaged in sales and marketing activities. Sales and marketing expense also includes costs associated with sales of products as well as stock-based compensation expense for employees engaged in sales and marketing activities. Sales and marketing expense as a percentage of revenue may increase or decrease in a given period, depending on the cost of attracting new customers to our solutions, changes in how we invest in different customer acquisition channels, changes in how we approach SEM and SEO and the extent of general awareness and brand building activities we may undertake, as well as the efficiency of our sales and support personnel and our ability to sell more products and services to our subscribers and drive favorable returns on invested marketing dollars.
Engineering and Development

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Engineering and development expense includes the cost of employees engaged in enhancing our technology platform and our systems, developing and expanding product and service offerings, and integrating technology capabilities from our acquisitions. Engineering and development expense includes stock-based compensation expense for employees engaged in engineering and development activities. Our engineering and development expense does not include costs of leasing and operating our data center infrastructure, such as technical personnel costs associated with monitoring and maintaining our network operations and fees we pay to third-party product and service providers, which are included in cost of revenue.
General and Administrative
General and administrative expense includes the cost of employees engaged in corporate functions, such as finance and accounting, information technology, human resources, legal and executive management. General and administrative expense also includes insurance premiums, professional service fees, and cost incurred related to regulatory and litigation matters. General and administrative expense includes stock-based compensation expense for employees engaged in general and administrative activities.
Other Income (Expense)
Other income (expense) consists primarily of costs related to, and interest paid on, our indebtedness. We include in our calculation of interest expense the cash cost of interest payments and loan financing fees, the amortization of deferred financing costs and original issue discounts and the amortization of the net present value adjustment which we may apply to some deferred consideration payments related to our acquisitions in our calculation of interest expense. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.
Income Tax Expense (Benefit)
We estimate our income taxes in accordance with the asset and liability method. Under this method we determine deferred tax assets and liabilities based on differences between the financial reporting and tax bases of our assets and liabilities. We measure deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider relevant evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and an evaluation of currently available information about future years.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reported periods. We base our estimates, judgments and assumptions on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from the estimates, judgments and assumptions made by our management. To the extent that there are differences between our estimates, judgments and assumptions and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.
See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 below for a discussion of recently issued accounting pronouncements.
We believe that the following significant accounting policies, which are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. We believe that our critical accounting policies and estimates are the assumptions and estimates associated with the following:
 
revenue recognition
goodwill
long-lived assets
business combinations
derivative instruments
depreciation and amortization
income taxes
stock-based compensation arrangements

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segment information
Revenue Recognition
We generate revenue primarily from selling subscriptions to our cloud-based products and services. The subscriptions we offer are similar across all of our brands and are provided under contracts pursuant to which we have ongoing obligations to support the subscriber. These contracts are generally for service periods of up to 36 months and typically require payment in advance. We recognize the associated revenue ratably over the service period, whether the associated revenue is derived from a direct subscriber or through a reseller. Deferred revenue represents the liability to subscribers for advance billings for services not yet provided and the fair value of the assumed liability outstanding for subscriber relationships purchased in an acquisition.
We sell domain name registrations that provide a subscriber with the exclusive use of a domain name. These domains are obtained either by one of our registrars on the subscriber’s behalf, or by us from third-party registrars on the subscriber’s behalf. Domain registration fees are non-refundable.
Revenue from the sale of a domain name registration by one of our registrars is recognized ratably over the subscriber’s service period as we have the obligation to provide support over the domain term. Revenue from the sale of a domain name registration purchased by us from a third-party registrar is recognized when the subscriber is billed on a gross basis as we have no remaining obligations once the sale to the subscriber occurs, and we have full discretion on the sales price and bear all credit risk.
Revenue from the sale of premium domains is recognized when persuasive evidence of an arrangement to sell such domains exists and delivery of an authorization key to access the domain name has occurred. Premium domain names are paid for in advance prior to the delivery of the domain name.
We also earn revenue from the sale of non-term based products and services, such as online security products and professional technical services, referral fees and commissions. We recognize such revenue when the product is purchased, the service is provided or the referral fee or commission is earned.
Contracts with Multiple Performance Obligations
A considerable amount of our revenue is generated from transactions that are contracts with customers that may include hosting plans, domain name registrations, and other cloud-based products and services. In these cases, we determine whether the products and services are distinct performance obligations that should be accounted for separately versus together. We allocate revenue to each performance obligation based on its relative standalone selling price, generally based on the price charged to customers. Hosting services, domain name registrations, and other cloud-based products and services have distinct performance obligations and are often sold separately. If the promise is not distinct and there is not a performance obligation, then the total transaction amount is allocated to the identified performance obligation based on a relative selling price hierarchy. When multiple performance obligations are included in a contract, the total transaction amount for the contract is allocated to the performance obligations based on a relative selling price hierarchy. We determine the relative selling price for a performance obligation based on a standalone selling price, or SSP. We determine SSP by considering our observed standalone selling prices, competitive prices in the marketplace and management judgment; these standalone selling prices may vary depending upon the particular facts and circumstances related to each performance obligation. We analyze the standalone selling prices used in our allocation of transaction amount, at a minimum, on a quarterly basis.
We maintain a reserve for refunds and chargebacks related to revenue that has been recognized and is expected to be refunded. We had a refund and chargeback reserve of $0.4 million and $0.3 million as of December 31, 2018 and 2019, respectively. The portion of deferred revenue that is expected to be refunded at December 31, 2018 and 2019 was $2.2 million and $1.9 million, respectively. Based on refund history, approximately 84% of all refunds happen in the same fiscal month that the customer contract starts or renews, and approximately 95% of all refunds happen within 45 days of the contract start or renewal date.
Goodwill
Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.
In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, or ASU 2011-08, we are required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. A reporting unit is either the equivalent of, or one level below, an operating segment. We

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early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, our goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit is impaired.
The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value. Certain assets and liabilities are shared by multiple reporting units, and were allocated to each reporting unit based on the relative size of a reporting unit, primarily based on revenue.
Our goodwill impairment test as of October 31, 2017 resulted in a $12.1 million impairment of goodwill to our domain monetization reporting unit within the web presence segment. The impairment was a direct result of a more rapid decline in domain parking revenue than originally expected, and to a lesser extent, reduced sales of premium domain names. Goodwill for this reporting unit was completely impaired. Goodwill allocated to the other six reporting units to which goodwill has been allocated was not impaired.
As of the test date of October 31, 2018, the fair value for all reporting units was higher than their respective carrying values, and no impairment was recorded. No triggering events were identified between the October 31, 2018 test and December 31, 2018.
For the annual impairment test as of October 31, 2019, we had a total of seven reporting units to which goodwill has been allocated. Additionally, we have three smaller reporting units to which no goodwill has been allocated, as they had been determined to have no material fair value, and one reporting unit which has no remaining goodwill allocated to it.
We determine the fair value of each reporting unit by utilizing the income approach and the market approach. For the income approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk adjusted rate. We derive our discount rates by using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the weighted-average cost of capital. We use discount rates that are commensurate with the risks and uncertainty inherent in our business and in our internally developed forecasts. For fiscal years 2017 and 2018, we used a discount rate of 10.0% for all but one of our reporting units. For fiscal year 2019, we used a discount rate of 10.5% for all but three of our reporting units. For two of our reporting units, which are experiencing declining cash flows, we used a discount rate of 13.0% and 13.5%, respectively, to adjust for the risk in the projected cash flows. For the remaining reporting unit, which had just been acquired in September 2019, we used a discount rate of 15.5%, to adjust for the risk in the projected cash flows. We also performed sensitivity analysis on our discount rates. We use internal forecasts to estimate future after-tax cash flows, which include an estimate of long-term future growth rates based on our view of the long-term outlook for each reporting unit. Actual results may differ from those assumed in our forecasts.
For the market approach, we use a valuation technique in which values are derived based on valuation multiples from comparable public companies, and a valuation multiple from sales of comparable companies.
For the fiscal 2017 goodwill impairment analysis, we compared the fair value from the income approach to the market approach based on multiples of comparable public companies and noted no material variances in the valuation techniques.
For the fiscal 2018 goodwill impairment analysis, we compared the fair value from the income approach to two market approaches, which included a valuation multiple of comparable public companies and a valuation multiple from sales of comparable companies. For three of our reporting units, which represented approximately 95% of our goodwill at the time of the 2018 goodwill impairment analysis, the fair value derived from the income approach was consistent with the fair value derived from the two market approaches. We established the fair value for these reporting units based on the average fair value from all three valuation approaches.
For the fiscal 2018 goodwill impairment analysis, for two of our reporting units, which represented approximately 3% of our goodwill, we based their fair value entirely upon the income approach, as these two reporting units were experiencing declining cash flows and were expected to continue to experience declines over time. The fair values from the income approach for these two reporting units were materially below the fair values derived from both market approaches. The goodwill allocated to these two reporting units was approximately $64.2 million as of December 31, 2018. For one of our reporting units, which represented approximately 2% of our goodwill, the fair values derived from the market approaches were much lower than the income approach using a discount rate of 10%. We determined that more risk was present in the projected future cash flows of this reporting unit as compared to our other reporting units and determined that a discount rate of 17% was appropriate. The fair value of this reporting unit under the income approach at a discount rate of 17% was consistent with the fair values determined under the two market approaches. We established fair value for this reporting unit based on the average fair value from all three valuation approaches.
For the fiscal 2019 goodwill impairment analysis, we compared the fair value from the income approach to two market approaches, which included a valuation multiple of comparable public companies and a valuation multiple from sales of

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comparable companies. For three of the reporting units, which represent approximately 97% of our goodwill as of December 31, 2019, we established the fair value based on the average fair value from all three valuation approaches. For two of the remaining reporting units, which represent approximately 3% of our goodwill as of December 31, 2019, we established fair value based on the income approach only, because these reporting units are experiencing declining cash flows. We calculated and recognized a partial impairment of $10.0 million for one of these reporting units and a full impairment of $2.3 million for the second of these reporting units. For the other two reporting units for which the income approach was used, we had just acquired one reporting unit in the three months ended September 30, 2019, and we were in the process of disposing of the other reporting unit through a sale in December 2019.
Goodwill as of December 31, 2019 was $1,835.3 million. The carrying value of goodwill that was allocated to the web presence and digital marketing segments was $1,231.9 million and $603.4 million, respectively. The fair value of all but three of the reporting units with goodwill at December 31, 2019 exceeds each reporting unit's carrying value by at least 20%.
Of the other three reporting units with less than 20% excess of fair value over carrying value, one reporting unit is forecast to experience continuing negative growth in both revenue and cash flows. Given this fact pattern, we relied upon the income approach in order to quantify the impact of persistent negative growth expectations and to develop a fair value for this reporting unit. The goodwill allocated to this reporting unit as of December 31, 2019 was $52.0 million. We expect that cash flows will continue to decline, which could result in goodwill impairment charges for this reporting unit at some point in the future.
The second reporting unit with less than a 20% excess of fair value over carrying value was acquired in September 2019. Based on the short duration between the acquisition date and the testing date, and lacking indications of specific events that either positively or negatively impacted the carrying value, fair value on this reporting unit approximated the allocated goodwill. Goodwill for this reporting unit as of December 31, 2019 was approximately $7.0 million.
The third reporting unit represents a combination of different hosting brands, which we will continue to monitor in the future. Though near term cash flows are projected to decline, growth in the cash flows is expected to return after further investments in engineering and development and sales and marketing are made. This reporting unit's fair value was established using three valuation methods, equally weighted. As the reporting unit passed the goodwill impairment test with equal weight given to the three approaches, we did not adjust the weight given to the three valuation approaches. As of December 31, 2019, the fair value of this reporting unit, as estimated based upon the Company's future projections, exceeded its carrying value by less than 4%. In the event our investments in engineering and development and sales and marketing do not generate the anticipated improvement in future operating performance, then future impairments may be recognized for this reporting unit. Goodwill for this reporting unit as of December 31, 2019 was approximately $1.2 billion.
Long-Lived Assets
Our long-lived assets consist primarily of intangible assets, including acquired subscriber relationships, trade names, intellectual property, developed technology, and domain names available for sale. We also have long-lived tangible assets, primarily consisting of property and equipment. The majority of our intangible assets have been recorded in connection with our acquisitions, including the acquisition of a controlling interest in our company by investment funds and entities affiliated with Warburg Pincus and Goldman, Sachs & Co. We record intangible assets at fair value at the time of their acquisition. We amortize intangible assets over their estimated useful lives.
Our determination of the estimated useful lives of the individual categories of intangible assets is based on the nature of the applicable intangible asset and the expected future cash flow to be derived from the intangible asset. We amortize intangible assets with finite lives in accordance with their estimated projected cash flows.
We evaluate long-lived intangible and tangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present and undiscounted future cash flows are less than the carrying amount, then we determine the fair value of the assets and compare it to the carrying value. If the fair value is less than the carrying value, then we reduce the carrying value to the estimated fair value and record an impairment loss in the period it is identified.
Indefinite life intangibles include domain names that are available for sale which are recorded at cost to acquire. These assets are not being amortized and are being tested for impairment annually and whenever events or changes in circumstance indicate that their carrying value may not be recoverable. When a domain name is sold, we record the cost of the domain in cost of revenue.
During the year ended December 31, 2017, we recognized an impairment charge of $13.8 million relating to certain domain name intangible assets acquired in 2014, as the intangible assets were producing diminished cash flows. In addition, we recognized an impairment charge of $4.9 million primarily relating to developed technology and customer relationships associated with our acquisition of the Directi web presence business in 2014. This impairment also resulted from diminished cash flows associated with these intangible assets.

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We did not recognize any impairments of long-lived intangible and tangible assets in the year ended December 31, 2018.
During the year ended December 31, 2019, we recognized impairment charges totaling $25.2 million relating primarily to premium domain name intangible assets acquired in 2014, which was recorded in cost of revenue in the consolidated statements of operations and comprehensive income (loss). The impairment resulted from recent market conditions that have adversely impacted cash flows from these assets, and these market conditions are expected to continue.
Derivative Instruments
Accounting Standards Codification 815, or ASC 815, Derivatives and Hedging, provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain our objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in Accounting Standards Update No. 2011-04, or ASU 2011-04, Fair Value Measurement (Topic 820), we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Business Combinations
We account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as our current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within our operating results.
Changes in the fair value of a contingent consideration resulting from a change in the underlying inputs are recognized in results of operations until the arrangement is settled.
Depreciation and Amortization
We purchase or build the servers we place in our data centers, one of which we own and the remainder of which we occupy pursuant to various lease or co-location arrangements. We also purchase the computer equipment that is used by our support and sales teams and employees in our offices. We capitalize the build-out of our facilities as leasehold improvements. Cost of revenue includes depreciation on data center equipment and support infrastructure. We include depreciation in general and administrative expense, which includes depreciation on office equipment and leasehold improvements.
Amortization expense consists of expense related to the amortization of intangible long-lived assets. In connection with our acquisitions, we allocate fair value to acquired long-lived intangible assets, which include subscriber relationships, trade

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names and developed technology. We use estimates and valuation techniques to determine the estimated useful lives of our intangible assets and amortize them to cost of revenue.
Income Taxes
We provide for income taxes in accordance with Accounting Standards Codification 740, or ASC 740, Accounting for Income Taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize the effect of changes in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. We measure recognized income tax positions at the largest amount that is more likely than not to be realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs. We had unrecognized tax benefits for uncertain tax positions of $4.4 million and $4.7 million as of December 31, 2018 and 2019, respectively.
We record interest related to unrecognized tax benefits in interest expense and penalties in operating expense. We recognized $0.1 million, $0.4 million, and $0.5 million of interest and penalties related to unrecognized tax benefits during the years ended December 31, 2017, 2018 and 2019, respectively.
We describe our accounting treatment of taxes more fully in Note 16, Income Taxes, to the consolidated financial statements included in Item 8 below.
Stock-Based Compensation Arrangements
Accounting Standards Codification 718, or ASC 718, Compensation—Stock Compensation, requires employee stock-based payments to be accounted for under the fair value method. Under this method, we are required to record compensation cost based on the estimated fair value for stock-based awards granted over the requisite service periods for the individual awards, which generally equals the vesting periods. We use the straight-line amortization method for recognizing stock-based compensation expense. In addition, for stock-based awards where vesting is dependent upon achieving certain performance goals, we estimate the likelihood of achieving the performance goals against established performance targets.
We estimate the fair value of employee stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. For restricted stock awards granted by us we estimate the fair value of each restricted stock award based on the closing trading price of our common stock as reported on the Nasdaq Global Select Market on the date of grant. There was no public market for our common stock prior to October 25, 2013, the date our common stock began trading on the Nasdaq Global Select Market, and as a result, the trading history of our common stock was limited through December 31, 2019. Therefore, we determined the volatility for options granted by us based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted by us has been determined using a blended average of the historical volatility measures of this peer group of companies and of the historical volatility measures of our stock. The expected life assumption is based on the “simplified method” for estimating expected term as we do not have sufficient historical option exercises to support a reasonable estimate of the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We use an expected dividend rate of zero as we currently have no history or expectation of paying dividends on our common stock.
Segment Information
We previously reported our financial results in three reportable segments: web presence, email marketing, and domain. In conjunction with the process of simplifying our organization, we modified our internal reporting structure to reflect certain changes in our structure and leadership, and also changed the name of the email marketing segment to the "digital marketing" segment. This resulted in consolidation of our domain segment into our web presence segment. Beginning with the three months ended March 31, 2020, we report our financial results in two segments - web presence (including the former domain segment) and digital marketing, as follows:
Web Presence. Our web presence segment consists primarily of our web hosting brands, including Bluehost and HostGator, as well as our domain-focused brands such as Domain.com, ResellerClub and LogicBoxes. This segment includes web hosting, website security, website design tools and services, e-commerce products, domain names, and domain privacy. It also includes the sale of domain management services to resellers and end users, as well as premium domain names, and generates advertising revenue from domain name parking.

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Digital Marketing. Our digital marketing segment consists of Constant Contact email marketing tools and related products. This segment also generates revenue from sales of our Constant Contact-branded website builder tool and our Ecomdash inventory management and marketplace listing solution, or Ecomdash, which we acquired in the third quarter of 2019. For most of 2019, the digital marketing segment also included the SinglePlatform digital storefront business, which we sold on December 5, 2019.
Our segments share certain resources, primarily related to sales and marketing, engineering and development, and general and administrative functions. We allocate these costs to each respective segment based on a consistently applied methodology.
Results of Operations
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
 
Year Ended December 31,
 
2017
 
2018
 
2019
 
(in thousands)
Revenue
$
1,176,867

 
$
1,145,291

 
$
1,113,278

Cost of revenue(1)
603,930

 
520,737

 
510,296

Gross profit
572,937

 
624,554

 
602,982

Operating expense:
 
 
 
 
 
Sales and marketing
277,460

 
265,424

 
258,019

Engineering and development
78,772

 
87,980

 
106,377

General and administrative
163,972

 
124,204

 
117,967

Gain on sale of business

 

 
(40,700
)
Transaction expenses
773

 

 

Impairment of goodwill
12,129

 

 
12,333

Total operating expense
533,106

 
477,608

 
453,996

Income from operations
39,831

 
146,946

 
148,986

Other income (expense)
(157,006
)
 
(148,391
)
 
(143,454
)
(Loss) income before income taxes and equity earnings of unconsolidated entities
(117,175
)
 
(1,445
)
 
5,532

Income tax (benefit) expense
(17,281
)
 
(6,246
)
 
17,879

(Loss) income before equity earnings of unconsolidated entities
(99,894
)
 
4,801

 
(12,347
)
Equity (income) loss of unconsolidated entities, net of tax
(110
)
 
267

 

Net (loss) income
$
(99,784
)
 
$
4,534

 
$
(12,347
)
Net loss attributable to non-controlling interest
7,524

 

 

Net (loss) income attributable to Endurance International Group Holdings, Inc.
$
(107,308
)
 
$
4,534

 
$
(12,347
)
(1) Includes impairment of intangible assets of $18.7 million for the year ended December 31, 2017 and $25.2 million for the year ended December 31, 2019.
Comparison of the Years Ended December 31, 2018 and 2019
Revenue
 
Year Ended December 31,
 
Change
 
2018
 
2019
 
Amount
 
%
 
(dollars in thousands)
Revenue
$
1,145,291

 
$
1,113,278

 
$
(32,013
)
 
(3
)%
Revenue decreased by $32.0 million, or 3%, from $1,145.3 million for the year ended December 31, 2018 to $1,113.3 million for the year ended December 31, 2019. This decrease was attributable to a $32.6 million decrease in revenue from our web presence segment, partially offset by increased revenue of $0.6 million from our digital marketing segment.
Our revenue is generated primarily from products and services delivered on a subscription basis, which include web hosting, domains, website builders, search engine marketing, email marketing and other similar services. We also generate non-subscription-based revenue through domain monetization and marketing development funds. Non-subscription revenue

17


decreased from $35.1 million, or 3% of revenue for the year ended December 31, 2018 to $31.5 million, or 3% of total revenue for the year ended December 31, 2019. Substantially all of our non-subscription revenue is included in our web presence segment.
Our web presence segment revenue decreased by $32.6 million, or 4%, from $735.2 million for the year ended December 31, 2018 to $702.6 million for the year ended December 31, 2019. This decrease was primarily attributable to a decline in revenue from non-strategic brands, as well as a reduction in non-subscription-based revenues.
Our digital marketing segment revenue increased by $0.6 million, or 0%, from $410.1 million for the year ended December 31, 2018 to $410.7 million for the year ended December 31, 2019. This increase was mostly attributable to growth in services delivered to existing customers, and to a lesser extent, to price increases.
Gross Profit
 
Year Ended December 31,
 
 
 
 
 
2018
 
2019
 
Change
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
 
(dollars in thousands)
Gross profit
$
624,554

 
55
%
 
$
602,982

 
54
%
 
$
(21,572
)
 
(3
)%
Gross profit decreased by $21.6 million, or 3%, from $624.6 million for the year ended December 31, 2018 to $603.0 million for the year ended December 31, 2019. This decrease was primarily due to a $28.6 million decrease in the gross profit contribution from our web presence segment, which recorded impairments during fiscal year 2019. This was partially offset by a $7.0 million increase in the gross profit contribution from our digital marketing segment. Our gross profit as a percentage of revenue decreased by 1 percentage point from 55% for the year ended December 31, 2018 to 54% for the year ended December 31, 2019.
Our web presence segment gross profit decreased by $28.6 million, or 9%, from $336.5 million for the year ended December 31, 2018 to $307.9 million for the year ended December 31, 2019. The decrease was primarily due to the reduction in revenue of $32.6 million discussed above, which was partially offset by lower cost of revenue, primarily due to lower amortization expense of $10.7 million, lower data center and third party costs of $7.2 million, lower domain registration costs of $6.8 million, and lower labor related costs of $2.3 million. Our web presence segment gross profit as a percentage of revenue was 44% for the year ended December 31, 2019 as compared to 46% in the prior year.
Our digital marketing segment gross profit increased by $7.0 million, or 2%, from $288.0 million for the year ended December 31, 2018 to $295.1 million for the year ended December 31, 2019. This increase was primarily due to reduced cost of revenue of $6.4 million, primarily due to lower amortization expense of $7.2 million, and increased revenue of $0.6 million. Our digital marketing segment gross profit as a percentage of revenue was 72% for the year ended December 31, 2019 as compared to 70% in the prior year.
Operating Expense
 
Year Ended December 31,
 
 
 
 
 
2018
 
2019
 
Change
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
 
(dollars in thousands)
Sales and marketing
$
265,424

 
23
%
 
$
258,019

 
23
 %
 
$
(7,405
)
 
(3
)%
Engineering and development
87,980

 
8
%
 
106,377

 
10
 %
 
18,397

 
21
 %
General and administrative
124,204

 
11
%
 
117,967

 
11
 %
 
(6,237
)
 
(5
)%
Gain on sale of business

 
%
 
(40,700
)
 
(4
)%
 
(40,700
)
 
100
 %
Impairment of goodwill

 
%
 
12,333

 
1
 %
 
12,333

 
100
 %
Total
$
477,608

 
42
%
 
$
453,996

 
41
 %
 
$
(23,612
)
 
(5
)%
Sales and Marketing. Sales and marketing expense decreased by $7.4 million, or 3%, from $265.4 million for the year ended December 31, 2018 to $258.0 million for the year ended December 31, 2019. Of this decrease, $11.0 million was due to lower marketing expense in our web presence segment, primarily due to decreased marketing investments in non-strategic brands, partially offset by an increase of $3.6 million in our digital marketing segment. In fiscal year 2020, we expect to make additional investments in sales and marketing in order to promote and strengthen our brands.

18


Sales and marketing expense for our web presence segment decreased by $11.0 million, or 7%, from $167.6 million for the year ended December 31, 2018 to $156.6 million for the year ended December 31, 2019. This decrease was primarily attributable to reduced expense on non-strategic brands, which was partially offset by increased investments in key hosting brands.
Sales and marketing expense for our digital marketing segment increased by $3.6 million, or 4%, from $97.8 million for the year ended December 31, 2018 to $101.4 million for the year ended December 31, 2019. The increase was primarily due to higher labor costs.
Engineering and Development. Engineering and development expense increased by $18.4 million, or 21%, from $88.0 million for the year ended December 31, 2018 to $106.4 million for the year ended December 31, 2019. Of this increase, $11.7 million and $6.7 million were due to increased engineering and development expense for our web presence and digital marketing segments, respectively. For fiscal year 2020, we expect to continue to make investments in our engineering and development organization in order to further enhance our products.
Engineering and development expense for our web presence segment increased by $11.7 million, or 25%, from $46.7 million for the year ended December 31, 2018 to $58.4 million for the year ended December 31, 2019. This increase was primarily attributable to growth in engineering resources aimed at enhancing our products and higher product spend.
Engineering and development expense for our digital marketing segment increased by $6.7 million, or 16%, from $41.3 million for the year ended December 31, 2018 to $48.0 million for the year ended December 31, 2019. This increase was primarily attributable to growth in engineering resources aimed at enhancing our products of $6.2 million and higher stock-based compensation expense of $0.5 million. These increases were partially offset by lower depreciation expense of $0.6 million.
General and Administrative. General and administrative expense decreased by $6.2 million, or 5%, from $124.2 million for the year ended December 31, 2018 to $118.0 million for the year ended December 31, 2019. Our general and administrative expenses primarily consist of consolidated corporate wide support functions, and the costs of these functions are allocated between our two segments primarily based on relative revenues. The decrease in consolidated general and administrative expense was primarily attributable to the impact of the shareholder litigation reserve of $7.3 million recorded during the year ended December 31, 2018, a $4.2 million insurance reimbursement of legal fees, and lower labor costs. These factors were partially offset by higher stock-based compensation expense of $5.0 million.
General and administrative expense for our web presence segment decreased by $3.9 million, or 5%, from $82.3 million for the year ended December 31, 2018 to $78.4 million for the year ended December 31, 2019. General and administrative expense for our digital marketing segment decreased by $2.3 million, or 5%, from $41.9 million for the period ended December 31, 2018 to $39.6 million for the year ended December 31, 2019.
Gain on Sale of Business. We recorded a $40.7 million gain on sale of our SinglePlatform business in fiscal year 2019. No such sales were recorded in fiscal 2018.
Impairment of Goodwill. We recorded goodwill impairment charges totaling $12.3 million during the year ended December 31, 2019, which were attributable to two non-strategic reporting units within our web presence segment. The impairments were primarily the result of a continued decline in the cash flows associated with these non-strategic brands. No such impairment charges were incurred in fiscal 2018.
Other Expense, Net 
 
Year Ended
December 31,
 
Change
 
2018
 
2019
 
Amount
 
%
 
(dollars in thousands)
Other expense, net
$
148,391

 
$
143,454

 
$
(4,937
)
 
(3
)%
Other expense, net decreased by $4.9 million, or 3%, from $148.4 million for the year ended December 31, 2018 to $143.5 million for the year ended December 31, 2019. The decrease consists primarily of lower interest expense relative to 2018, when we incurred $1.5 million in interest expense due to our 2018 term loan refinancing, most of it relating to immediately expensed financing costs. The balance of the decrease was mainly due to lower average debt balances during 2019.
Income Tax (Benefit) Expense 

19


 
Year Ended
December 31,
 
Change
 
2018
 
2019
 
Amount
 
%
 
(dollars in thousands)
Income tax (benefit) expense
$
(6,246
)
 
$
17,879

 
$
24,125

 
(386
)%
For the years ended December 31, 2018 and 2019, we recognized an income tax benefit of $6.2 million and an income tax expense of $17.9 million, respectively, in the consolidated statements of operations and comprehensive income (loss).
The income tax benefit for the year ended December 31, 2018 was primarily attributable to a federal and state deferred tax benefit of $9.6 million, a foreign deferred tax benefit of $0.8 million, and a federal and state current income tax benefit of $1.3 million, partially offset by foreign current tax expense of $5.4 million. This aggregate tax benefit of $6.2 million includes $2.2 million of reserves provided for unrecognized tax benefits.
The income tax expense for the year ended December 31, 2019 was primarily attributable to a federal and state deferred tax expense of $10.6 million, a foreign deferred tax expense of $0.1 million, a federal and state current income tax expense of $4.2 million, and foreign current tax expense of $3.0 million. This aggregate tax expense of $17.9 million includes $1.4 million of reserves provided for unrecognized tax benefits.
Comparison of the Years Ended December 31, 2017 and 2018
Revenue
 
Year Ended December 31,
 
Change
 
2017
 
2018
 
Amount
 
%
 
(dollars in thousands)
Revenue
$
1,176,867

 
$
1,145,291

 
$
(31,576
)
 
(3
)%
Revenue decreased by $31.6 million, or 3%, from $1,176.9 million for the year ended December 31, 2017 to $1,145.3 million for the year ended December 31, 2018. This decrease is attributable to a $40.4 million decrease in revenue from our web presence segment, partially offset by increased revenue of $8.8 million from our digital marketing segment.
Our revenue is generated primarily from our products and services delivered on a subscription basis, which include web hosting, domains, website builders, search engine marketing and other similar services. We also generate non-subscription revenue through premium domain sales and domain parking (which we refer to as domain monetization) and marketing development funds. Non-subscription revenue decreased from $39.4 million for the year ended December 31, 2017 to $35.1 million for the year ended December 31, 2018, and represented 3% of total revenue for the year ended December 31, 2017, and 3% of total revenue for the year ended December 31, 2018. Substantially all of our non-subscription revenue is included in our web presence segment.
Our web presence segment revenue decreased by $40.4 million, or 5%, from $775.6 million for the year ended December 31, 2017 to $735.2 million for the year ended December 31, 2018. This decrease was primarily attributable to a decline in revenue from non-strategic brands, and to a lesser extent, to a reduction in non-subscription revenue.
Our digital marketing segment revenue increased by $8.8 million, or 2%, from $401.3 million for the year ended December 31, 2017 to $410.1 million for the year ended December 31, 2018. This increase was mostly attributable to price increases, and to a lesser extent, growth in services delivered to existing customers.
Gross Profit
 
Year Ended December 31,
 
 
 
 
 
2017
 
2018
 
Change
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
 
(dollars in thousands)
Gross profit
$
572,937

 
49
%
 
$
624,554

 
55
%
 
$
51,617

 
9
%
Gross profit increased by $51.6 million, or 9%, from $572.9 million for the year ended December 31, 2017 to $624.6 million for the year ended December 31, 2018. This increase was primarily due to a $33.1 million increase in the gross profit contribution from our digital marketing segment, and an $18.5 million increase in the gross profit contribution from our web presence segment. Our gross profit as a percentage of revenue increased by 6 percentage points from 49% for the year ended December 31, 2017 to 55% for the year ended December 31, 2018, mainly due to the performance of our digital marketing segment.

20


Our web presence segment gross profit increased by $18.5 million, or 6%, from $318.0 million for the year ended December 31, 2017 to $336.5 million for the year ended December 31, 2018. The increase was primarily due to lower cost of revenue of $58.9 million, primarily due to an impairment charge of $18.7 million recorded in fiscal year 2017, which was related primarily to domain monetization intangible assets, lower amortization expense of $15.8 million, lower domain registration costs of $4.9 million, and lower stock-based compensation expense of $2.8 million, with the balance of the decrease being mostly related to lower support and data center costs as we further consolidated our operations in these areas. These factors were partially offset by the reduction in revenue of $40.4 million discussed above. Our web presence segment gross profit as a percentage of revenue was 46% for the year ended December 31, 2018 as compared to 41% in the prior year.
Our digital marketing segment gross profit increased by $33.1 million, or 13%, from $254.9 million for the year ended December 31, 2017 to $288.0 million for the year ended December 31, 2018. This increase was primarily due to reduced cost of revenue of $24.3 million, primarily due to lower amortization of $21.4 million, and increased revenue of $8.8 million. Our digital marketing segment gross profit as a percentage of revenue was 70% for the year ended December 31, 2018 as compared to 64% in the prior year.
Operating Expense
 
Year Ended December 31,
 
 
 
 
 
2017
 
2018
 
Change
 
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
 
Amount
 
%
 
(dollars in thousands)
Sales and marketing
$
277,460

 
24
%
 
$
265,424

 
23
%
 
$
(12,036
)
 
(4
)%
Engineering and development
78,772

 
7
%
 
87,980

 
8
%
 
9,208

 
12
 %
General and administrative
163,972

 
14
%
 
124,204

 
11
%
 
(39,768
)
 
(24
)%
Impairment of goodwill
12,129

 
1
%
 

 
%
 
(12,129
)
 
(100
)%
Transaction expenses
773

 
%
 

 
%
 
(773
)
 
(100
)%
Total
$
533,106

 
45
%
 
$
477,608

 
42
%
 
$
(55,498
)
 
(10
)%
Sales and Marketing. Sales and marketing expense decreased by $12.0 million, or 4%, from $277.5 million for the year ended December 31, 2017 to $265.4 million for the year ended December 31, 2018. This decrease was due to $13.1 million in lower marketing expense in our web presence segment, primarily due to decreased marketing investments in non-strategic brands, partially offset by an increase of $1.1 million in our digital marketing segment.
Sales and marketing expense for our web presence segment decreased by $13.1 million, or 7%, from $180.7 million for the year ended December 31, 2017 to $167.6 million for the year ended December 31, 2018. This decrease was primarily attributable to reduced expense on non-strategic brands, which was partially offset by increased investments in key hosting brands.
Sales and marketing expense for our digital marketing segment increased by $1.1 million, or 1%, from $96.8 million for the year ended December 31, 2017 to $97.8 million for the year ended December 31, 2018. The increase, which is net of a $1.9 million decrease in restructuring charges, was primarily due to investments in brand building activities.
Engineering and Development. Engineering and development expense increased by $9.2 million, or 12%, from $78.8 million for the year ended December 31, 2017 to $88.0 million for the year ended December 31, 2018. Of this increase, $7.9 million and $1.4 million were due to increased engineering and development expense for our digital marketing and web presence segments, respectively.
Engineering and development expense for our web presence segment increased by $1.4 million, or 3%, from $45.3 million for the year ended December 31, 2017 to $46.7 million for the year ended December 31, 2018. This increase was primarily attributable to growth in engineering resources aimed at enhancing our products, partially offset by lower depreciation and stock-based compensation expense.
Engineering and development expense for our digital marketing segment increased by $7.9 million, or 23%, from $33.4 million for the period ended December 31, 2017 to $41.3 million for the year ended December 31, 2018. This increase was primarily attributable to increases in engineering resources aimed at enhancing our products.
General and Administrative. General and administrative expense decreased by $39.8 million, or 24%, from $164.0 million for the year ended December 31, 2017 to $124.2 million for the year ended December 31, 2018. Our general and administrative expenses primarily consist of consolidated corporate wide support functions, and the costs of these functions are allocated between our two segments primarily based on relative revenues. The decrease in consolidated general and administrative expense was primarily attributable to reductions in stock-based compensation, labor, and restructuring costs of

21


$23.8 million, $12.6 million, and $4.4 million, respectively, and changes in our shareholder litigation reserve charges of $0.7 million.
General and administrative expense for our web presence segment decreased by $39.1 million, or 32%, from $121.4 million for the year ended December 31, 2017 to $82.3 million for the year ended December 31, 2018. General and administrative expense for our digital marketing segment decreased by $0.7 million, or 2%, from $42.5 million for the period ended December 31, 2017 to $41.9 million for the year ended December 31, 2018.
Transaction Expenses. Transaction expense decreased by $0.8 million, or 100%, from $0.8 million for the year ended December 31, 2017 to $0.0 million for the year ended December 31, 2018. The year-over-year decrease was primarily attributable to the lack of merger and acquisitions-related activity in 2018.
Impairment of Goodwill. We recorded an impairment of goodwill of $12.1 million during the year ended December 31, 2017, which was entirely attributable to the domain monetization reporting unit within our web presence segment. The impairment was the result of a more rapid decline in domain parking revenue than originally anticipated, and to a lesser extent, a decrease in premium domain name sales. No such impairment recurred in fiscal 2018.
Other Expense, Net 
 
Year Ended
December 31,
 
Change
 
2017
 
2018
 
Amount
 
%
 
(dollars in thousands)
Other expense, net
$
157,006

 
$
148,391

 
$
(8,615
)
 
(5
)%
Other expense, net decreased by $8.6 million, or 5%, from $157.0 million for the year ended December 31, 2017 to $148.4 million for the year ended December 31, 2018. The decrease primarily consists of a lower amount of immediately expensed deferred financing costs of $4.3 million and a lower loss on extinguishment of debt of $0.7 million for our 2018 term loan refinancing when compared to our 2017 term loan refinancing, with the balance of the decrease mainly due to lower average debt balances.
Income Tax Benefit
 
Year Ended
December 31,
 
Change
 
2017
 
2018
 
Amount
 
%
 
(dollars in thousands)
Income tax benefit
$
(17,281
)
 
$
(6,246
)
 
$
(11,035
)
 
(64
)%
For the years ended December 31, 2017 and 2018, we recognized an income tax benefit of $17.3 million and $6.2 million, respectively, in the consolidated statements of operations and comprehensive income (loss).
The income tax benefit for the year ended December 31, 2017 was primarily attributable to $21.8 million in federal and state deferred tax benefit (which includes a $16.9 million tax benefit pertaining to the federal tax rate change as a result of the Tax Cut and Jobs Act of 2017 and the identification and recognition of $1.2 million of U.S. federal and state tax credits) and a foreign deferred tax benefit of $1.0 million, offset by a provision for federal and state current income taxes of $2.9 million, and foreign current tax expense of $2.6 million. This aggregate tax benefit of $17.3 million is inclusive of $1.1 million of reserves provided for unrecognized tax benefits.
The income tax benefit for the year ended December 31, 2018 was primarily attributable to $9.6 million of a federal and state deferred tax benefit, a foreign deferred tax benefit of $0.8 million, and a federal and state current income tax benefit of $1.3 million, partially offset by foreign current tax expense of $5.4 million. This aggregate tax benefit of $6.2 million is inclusive of $2.2 million of reserves provided for unrecognized tax benefits.

22


ITEM 8.
Financial Statements and Supplementary Data
ENDURANCE INTERNATIONAL GROUP HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

23



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Endurance International Group Holdings, Inc.
Burlington, Massachusetts

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Endurance International Group Holdings, Inc. (the “Company”) as of December 31, 2018 and 2019, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as "the consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 14, 2020 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, on January 1, 2019, the Company changed its method of accounting for leases due to the adoption of ASU 2016-02, Leases (ASC 842).

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 

/s/    BDO USA, LLP


We have served as the Company's auditor since 2008.
Boston, Massachusetts
February 14, 2020 (except for the matters discussed in Notes 2, 8, 14, 21, and 24 as to which the date is May 19, 2020)

24


Endurance International Group Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<
 
December 31, 2018
 
December 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
88,644

 
$
111,265

Restricted cash
1,932

 
1,732

Accounts receivable
12,205

 
10,224

Prepaid domain name registry fees
56,779

 
55,237

Prepaid commissions
41,458

 
38,435

Prepaid and refundable taxes
7,235

 
6,810

Prepaid expenses and other current assets
27,855

 
23,883

Total current assets
236,108

 
247,586

Property and equipment—net
92,275

 
85,925

Operating lease right-of-use assets

 
90,519

Goodwill
1,849,065

 
1,835,310

Other intangible assets—net
352,516

 
245,002

Deferred financing costs
2,656

 
1,778

Investments
15,000

 
15,000

Prepaid domain name registry fees, net of current portion
11,207

 
11,107

Prepaid commissions, net of current portion
42,472

 
48,780

Deferred tax asset

 
64

Other assets
5,208

 
3,015

Total assets
$
2,606,507

 
$
2,584,086

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,449

 
$
10,054

Accrued expenses
79,279

 
64,560

Accrued taxes
2,498

 
251

Accrued interest
25,259

 
23,434

Deferred revenue
371,758

 
369,475

Operating lease liabilities—short term

 
21,193

Current portion of notes payable
31,606

 
31,606

Current portion of financed equipment
8,379

 
790

Deferred consideration—short term
2,425

 
2,201

Other current liabilities
3,147

 
2,165

Total current liabilities
536,800

 
525,729