Endurance Puts A Growing World Of Biz Clients On Web


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Endurance International Group, which hosts websites and offers cloud-based services to the sprawling world of small and midsize businesses, went public in October with hopes of continuing rapid growth as that customer base gets increasingly active online.

Wall Street, so far, likes what it sees. All six analysts who cover the Burlington, Mass.-based company have "buy" or "strong buy" ratings onEndurance ( EIGI ), and the stock trades more than 12% above its IPO offering price of $12 per share.

The company in December reported a third-quarter loss of $27 million or 28 cents per diluted share, a little better than a year earlier. But revenue swelled 59% to $132.9 million. Endurance added some 70,000 new subscribers during the third quarter, its total exceeding 3.4 million.

Speaking with analysts during the company's first earnings call last month, Chief Financial Officer Tiv Ellawala said Endurance anticipated revenue of $525 million for all of 2013. And analysts polled by Thomson Reuters on average expect revenue will grow to nearly $598 million this year.

Hot In Hosting

Endurance provides website hosting and myriad other services on top of that, from online marketing to storage to security. It operates several Web-hosting brands including Bluehost, very popular among website operators using the open-source WordPress content-management platform for their blogs or whole sites.

Bluehost is the first of three hosts mentioned at wordpress.org/hosting as "some of the best and brightest of the hosting world." And that's no small pronouncement, as WordPress accounts for more than 74 million sites around the world.

Other Endurance brands in hosting, domain registration or site setup tools are HostGator, iPage, FatCow, Domain.com, iPower, A Small Orange and Homestead.

Banking On Value Added

The Endurance business model is similar to that of banks.

Banks attract customers with basic services such as checking accounts and then drive up revenue per customer by selling everything from credit cards to car loans. Endurance brings in customers with basic Web design and hosting services, then sells them more services and products to maximize revenue.

"We are continuously adding to our portfolio of over 150 products and services and are now focusing on the availability of additional mobile solutions for our subscribers and additional higher-priced products," Hari Ravichandran, Endurance's founder and CEO, said during the debut earnings call. "In addition to expanding the choice of products, we're also expanding the distribution of products and making it very easy for our subscribers to access our applications."

Excluding the impact of 2012 acquisitions, average revenue per subscriber grew by 9% from a year earlier to $13.14 in the third quarter, Ravichandran noted.

"As we look forward," he said, "we expect growth to continue to come from our two primary levers: adding more subscribers to our platform and growing our average revenue per subscriber."

Referring to the more than 75 million small and midsize businesses globally, of which well over half do not have a basic website, Endurance has estimated its share of the market stands at about 5%.

Ravichandran said there is immense room for growth, from the U.S. to Asia and beyond. He pointed to emerging markets such as Brazil and India as major expansion opportunities. He estimated that Endurance will grow revenue in Brazil this year by more than 50% and in India by more than 60%.

"The market for these guys is quite vibrant," Peter Goldmacher, an analyst at Cowen and Co., said in an interview.

He says growth in new customers and average revenue per subscriber are both "very important metrics" for Endurance. If the latter grew to $14 this year, which he thinks is realistic, "that would be huge because it is very high margin revenue," he said. It's because the cost per customer is small once a business relationship is established.

Data Crunching For Dollars

Goldmacher says Endurance has a solid history of mining its user base for product preferences and customer behavior in order to best create and sell new products. Continuing to leverage that ability is key.

"They have a ton of data to crunch," he said.

Endurance, a competitor to companies such as IBD 50 stockWeb.com Group ( WWWW ), is the 16th largest company by market cap in IBD's Computer-Tech Services industry group. Dominated by names such asIBM ( IBM ),Accenture ( ACN ) andInfosys ( INFY ), the group is currently ranked No. 9 of 197 that IBD tracks.

Goldmacher's price target on Endurance stock is 18 per share. It has recently traded around 14.

When Jefferies & Co. analyst Brian Fitzgerald initiated coverage in November, he did so with an 18 price target and said in a note that Endurance is "in a space where there is ample room to expand."

Credit Suisse analyst Stephen Ju initiated coverage the same month with an even more bullish target of 23, noting that the market in the U.S. consists of about 26 million potential customers, with another 50 million internationally.

"As the majority of these (potential customers) are yet to be online, this represents an underserved group awaiting Web- and cloud-based solutions," he said.

As The Economy Goes

One important reason that many small businesses have yet to develop strong presences online is the general economic sluggishness of recent years. That curbed appetites for investments of all kinds, analysts say. As such, Endurance's growth prospects are linked closely to the likelihood of improving economic conditions that would bolster confidence and encourage more businesses to spend.

Fortunately, economic growth appears on the horizon.

U.S. gross domestic product grew at a 4.1% annual rate in the third quarter, lifted by healthy consumer spending. At the same time, unemployment levels declined -- though still lofty -- and both homebuilders and manufacturers increased production, Raymond James chief economist Scott Brown said in an interview.

"A lot of the recent data have been strong," Brown said. "It's all suggesting a lot more momentum in 2014."

He said that several economies within Europe could remain soft, but emerging economies are poised for growth and, overall, a stronger U.S. recovery would lift the global economy.

"I think we're at the point that we're seeing positive feedback loops," Brown said. "The good news feeds on itself .. . You always have to wonder what negative shocks may come along, but right now most everything looks pretty good."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: ACN , EIGI , IBM , INFY , WWWW

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