Small Business Find Help Getting On The Internet

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In a good or bad economy, small-business owners have a place to turn to for their Web and marketing needs atWeb.com ( WWWW ) .

The Jacksonville, Fla.-based firm helps small businesses establish, maintain, promote and optimize their Web presence at an affordable price.

It does so by providing bundled "do-it-for-me" services, such as eWorks! XL and Gorilla Marketing, as well as stand-alone and "do-it-yourself" products.

It holds the small business owner's hand from its initial interview, through the design and creation of the website, and all the way to promoting the site and giving continued support on its performance.

"It's both a new business opportunity, and it's also a low-cost advertising solution," Web.com Chairman, President and CEO David Brown said.

"So in bad economic times, people either gravitate to it because of the lower-cost solution, or they gravitate to it because they may have been laid off, or they may be looking for ways to supplement their income. So we're benefiting in (all) of those areas," he noted.

Web.com has 3 million subscribers and 99% of its revenue comes from subscription services. It also counts 9 million domains under management.

Market Opportunities

The company is positioned to benefit from the mass-adoption of the Internet and from several fast-growing multibillion-dollar market opportunities.

Those include mobile advertising, social media, online advertising, hosting and domain registration with projected annual growth rates of 43%, 32%, 13%, 10% and 18%, respectively, according to various sources.

"We're at the very early stage of mass-adoption," said Brown. "What we see today is very low penetration of Internet products amongst small businesses, other than websites."

A little less than half of the small-business market has a website. Analysts estimate that the addressable target market includes 19 million businesses with fewer than 20 employees in the U.S., a sweet spot for Web.com.

"If you go beyond the website and you look at things like online marketing campaigns or search engine optimization or e-commerce orFacebook ( FB ) or mobile or video, those are all in the single-digit penetration levels and we're seeing very fast growth in those categories," Brown said.

Web.com has grown organically as well as via acquisitions. In 2010, it bought Register.com, which added a complementary business opportunity with 2.5 million domain names under management.

Last year, it acquired Network Solutions, adding 2 million subscribers to Web.com. While the average revenue per user, or ARPU, is lower in the companies acquired, it gives Web.com a tremendous opportunity to cross-sell its products and services through its deep purchase funnel.

"When they bought Network Solutions, they acquired 2 million subs," said David Hilal, director of research at FBR Capital Markets & Co. "So they now have this huge ocean to go fishing and to bring the fish into the net by selling them higher-ARPU services. So the opportunity now is as big as it's ever been because of that transformative acquisition they've made."

In addition, its annual average monthly churn, or the amount of subscribers dropping out, has dropped to 1.5% in 2011, from 2.2% in 2010 and 3.6% in 2009.

What does Web.com's competition look like and what are the challenges?

"There's competition for small businesses to build a website, but they (Web.com) stand out because they have a very affordable, turnkey solution for small businesses," said Hilal.

"Today, a small business, if they want to get online, they've got a few options," he added. "The biggest competition out there is a lot of the do-it-yourself tools.

"The complication out there, it's not enough nowadays just to create a website. You have to get found. You need to know how to do search-engine optimization. So DIY tools don't allow you to do it as robustly as their service does."

The other option for businesses is to go to agencies that can build and optimize a website. But that can be pretty costly, usually in the thousands of dollars.

Web.com's eWorks! XL bundle only costs $95 a month and includes everything from the website design to professional copywriting to domain name registration and hosting to marketing and search engine optimization (SEO).

Another differentiating factor is the breadth of the product offering at Web.com. This makes it a one-stop-shop for a customer instead of paying for separate services at different providers.

"We're the broadest product suite of anybody in the industry," said Brown.

Lost Subscribers

Prior to the acquisitions, Register.com and Network Solutions were losing 20,000 and 15,000 subscribers per quarter, respectively.

But the trends have reversed and in the first quarter, Web.com grew its subscriber base by 1,600 for all combined entities. It has also been experiencing continuous ARPU growth in the past year and a half.

"Our average price (per subscriber) today is in the midteens, but growing," said Brown. "Every quarter we've seen, for the last six or seven quarters, strong, sequential ARPU growth in the 2% to 4%. You will see our ARPU continue to grow as customers buy more products from us."

Web.com is also increasing its marketing efforts. It's expanding its branding program on major TV channels and recently became the official sponsor of the PGA Tour.

Its total debt stood at $650 million last quarter. This was primarily used for acquisitions. But the company already paid off $30 million thanks to the healthy cash flow it generates. It plans to continue with its deleveraging efforts.

The strong cash flow also gives it flexibility to make other opportunistic acquisitions.

"You should expect to see us do more mergers and acquisitions," said Brown. "I can't predict when, but I can tell you that it's in our corporate DNA."



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



This article appears in: Investing , Investing Ideas

Referenced Stocks: FB , WWWW

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