Web.com Goes Big In Putting Small Businesses Online

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There are around 28 million small businesses in the U.S. and Web.com Group would like to reach as many as possible. Lately it's been doing better than expected at that.

The company, which is on the IBD 50 list of top-rated growth stocks, offers website registration in the .com, .net, .co, .org and other domains, plus "Do-It-For-Me" hosting and Web design services. It provides tools for online and social media marketing, search engine optimization, lead generation and other e-commerce aspects.

Web.com ( WWWW ) typically targets firms with 15 or fewer employees, and many of its clients are "nonemployer" businesses in which a single person runs the whole show. Most of these folks have enough on their plates just doing their jobs without having to worry about setting up a website, marketing online or fussing over a social media platform.

That's where Web.com comes in. It gets the vast majority of its revenue selling subscription-based Web solutions. It boasts more than 3 million customers, and added 32,000 in the third quarter alone.

Web.com gets those customers via an aggressive, multipronged marketing strategy that combines everything from knocking on doors to sponsoring a pro golf tour.

"Their subscription growth rate has been higher than anticipated, which means their marketing efforts have really been working," said Hamed Khorsand, analyst at BWS Financial.

Getting The Customer

Web.com's subscriber growth has been so rapid, he says, that the company has had to adjust its own expectations over the last year or so.

"They used to be uncomfortable saying can they can hit 15,000 new subscriptions each quarter," Khorsand said. "Now they are comfortable saying they can get 20,000 to 25,000 per quarter."

Adding new customers is a key part of Web.com's growth story, in part because of the frequency with which small businesses close up shop. About half of them last less than five years, according to the U.S. Small Business Administration.

The picture is muddied further by an uncertain economy, analysts say.

"Macroeconomic weakness remains the primary concern, with business closures the biggest contributor to churn," noted Walter Pritchard, analyst at Citigroup. "Small-business spending has remained soft due to tight credit markets. Small-business owners are also reluctant to invest during times of economic uncertainty."

Web.com claims a monthly customer retention rate of 99%. Its customer acquisition strategy involves online marketing; telesales; direct-response TV and radio ads; and its "Feet on the Street" direct sales program, which launched last year.

On a third-quarter conference call with analysts, CEO David Brown said Web.com's average revenue per user (ARPU) growth has been driven by "cross-selling by our telesales teams and responses to our advertising campaigns." As the Feet on the Street program expands and matures, "we would expect that channel to have an increasing future impact on ARPU," he added.

In Q3, ARPU was $14.33, up from $14.09 in Q2. It was a third straight quarter of accelerated ARPU growth, analyst Pritchard says. He expects further acceleration for Q4.

"We believe this trend likely extends into 2014 with cross-sell and upsell trends improving," he noted.

Web.com has worked to better its brand. It hosts workshops in which its executives offer free, in-person sessions aimed at teaching small businesses about the Web, such as how to best useFacebook ( FB ),Twitter ( TWTR ) and other social networks.

Web.com sponsors the Web.com Tour, a sort of minor-league pro tour for golfers aiming to earn their way onto the bigger PGA Tour.

A Brand Battle

Such moves are seen necessary to help Web.com keep pace in name recognition with its main rival, registrar GoDaddy.com. GoDaddy runs high-profile Super Bowl ads.

It "needs to create more brand awareness because GoDaddy has such a following," Khorsand said.

Web.com has gotten some perhaps unwanted attention, facing questions from the Seeking Alpha investment website and others over its financial reporting methods and growth prospects.

On Oct. 30, Web.com's stock price fell 12% intraday when Copperfield Research said Web.com had misrepresented its growth. Copperfield, called in a Reuters article "a group of anonymous researchers and short sellers," later said it made an error when it claimed Web.com had changed past financial statements prior to a debt offering.

Web.com stock closed down 4.5% to 27.36 the day the news hit, Oct. 30, but has bounced back to near 33.

Analysts tend to downplay these concerns. They say Web.com's GAAP revenue growth is evidence enough that its gains are real.

GAAP stands for generally accepted accounting principles. Like many firms, Web.com also reports "non-GAAP" numbers, which can show -- for instance -- how a company's doing over time absent any big one-time financial events.

In Q3, Web.com logged GAAP revenue of $125.2 million, up 18% from a year earlier. On a non-GAAP basis, revenue rose 9% from a year earlier to $134.8 million. Earnings climbed 34% to 55 cents a share, topping consensus views for 53 cents.

"The increase in GAAP revenue is further evidence of the ARPU and subscriber numbers Web.com has been posting," Khorsand said.

Web.com executives told analysts on the Q3 conference call that non-GAAP measures add back the impact of fair value adjustments, and said these adjustments "artificially impact the quarterly balance sheet trends for both deferred revenue and deferred expenses."

Analysts polled by Thomson Reuters expect Q4 EPS to come in at 57 cents, up from 45 cents a year earlier. Full-year EPS is seen rising 33% for 2013 and 18% for 2014. Web.com reports Q4 on Feb. 6.

A rival,Endurance International Group ( EIGI ), was featured in The New America on Jan. 9.



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: EIGI , FB , TWTR , WWWW

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