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