Web.com Gives Business Customers The Tools To Succeed

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Any business owner will tell you there are three basic ways to grow sales: increase your number of customers, increase the amount of money your customers spend and buy other businesses.

Web.com Group ( WWWW ) has used a mix of all three to more than triple its annual sales over the past couple of years.

The company provides Internet services for small to midsize businesses, or SMBs, in North America, South America and the United Kingdom.

It provides .com, .net, .co, .org, and .info domains as well as services such as domain name registration, domain name transfers, domain name renewal, domain expiration protection and domain privacy services. In addition, it offers social media marketing and other services to subscribers.

Web.com has grown its business in part by adding new subscribers. Last year, the company added enough new ones to pass the 3 million subscriber milestone for the first time.

Once subscribers have been signed on, the next step is to sell them added-value products so Web.com can increase its average revenue per user, or APRU.

Revenue Per User

The company's success in this area is reflected in the fact that its APRU during the fourth quarter rose to $13.79 from $12.86 the prior year. Analysts expect that figure to keep rising in coming quarters.

"The pace the company is currently on could put ARPU at approximately $14.70 by the end of 2013," analyst Hamed Khorsand of BWS Financial noted in a report. "Web.com has added different solutions to enhance the online experience for a small business, which provides a lift to margins and the amount of revenue per user."

Web.com grows its ARPU by cross-selling higher-priced products like its eWorks Do It For Me subscription offering. EWorks services include everything from registering domain names and designing websites to providing technical support and social media marketing.

"They say, 'We will do it for you, and do it at a really affordable price.' This is a key to their success," said Sameet Sinha, analyst at B. Riley & Co. "A company like GoDaddy.com says, 'We will give you the tools, but you do it yourself.' (EWorks) is different in that it does the work."

While Web.com has focused much of its recent attention on growing organically, the company has also used acquisitions to build its business.

The most notable buyout came in 2011, when Web.com acquired Network Solutions, a marketing and domain company, for about $560 million. That deal brought aboard about 2 million small businesses registered with Network Solutions.

Thanks to the Network Solutions deal, Web.com's sales in 2012 more than doubled from the previous year to $408 million. As recently as 2010, the company had $120 million in annual sales.

"They have been able to grow their number of customers both through acquisitions and organically," Sinha said. "They have also been able to upsell customers more services. Web.com has a pretty wide area of products it can market to these companies. And because the Internet grows more complex everyday, they can develop even more products to sell."

The company plans to accelerate its growth pace this year by spending more money on marketing. Its goal is to expand its subscriber base by 15,000 to 20,000 each quarter with the majority of new subscriptions focused on domain names and lower ARPU products.

"This will continue to serve as a feeder system for future ARPU growth with our online marketing, e-commerce web services and social media solutions," Chief Executive David Brown said on a fourth-quarter conference call with analysts last month.

On the social media front, Web.com has aFacebook ( FB ) product designed to help customers improve their visibility on the site.

JPMorgan analyst Sterling Auty notes that when Web.com launched its Facebook product, it was adding 4,000 to 6,000 customers per quarter.

"But management has revamped the solution, bringing better value to the customer at a higher price point," Auty said. "We expect the impact to be fewer customer additions, but the same amount of revenue contribution because of the higher price and similar margins."

Financially, Web.com has been on a strong roll the last couple of years.

Earnings Growth

The company has grown earnings at least 33% in nine of the last 10 quarters. The only exception was when it grew EPS by 17% during the December 2011 quarter. Sales have risen at least 25% over the same time frame.

Fourth-quarter earnings came in at 45 cents a share, up 61% from a year earlier and 3 cents above consensus views. Non-GAAP revenue, which adds back the impact of the fair value adjustment to acquired deferred revenue, was $126.2 million for the quarter. That also topped estimates.

Web.com reported its results after the close on Feb. 7. The next day, its stock price rose 13% to 18.19. Shares currently trade near 17.

The company entered the fourth quarter saying it wanted to accelerate ARPU and not just increase its number of subscribers, analyst Auty noted.

"The fourth-quarter results reflect the success in that strategy as ARPU came in higher than expected, but subscriber growth did not suffer with the base finishing the year over 3 million," he said.

The strategy should lead to accelerating organic revenue growth that will drive free cash flow in 2013, he added. The extra cash will likely be used to pay down debt and accelerate earnings growth.

"It is a virtuous cycle that we believe leads to estimate increases and multiple expansion," said Auty.

Analysts polled by Thomson Reuters expect Web.com to grow EPS 25% this year and 17% in 2014.



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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