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Web.com Group (NASDAQ:WWWW)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

Executives

Jenny Kobin

David L. Brown - Chairman, Chief Executive Officer and President

Kevin M. Carney - Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Analysts

David M. Hilal - FBR Capital Markets & Co., Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Kenneth Wong

Sameet Sinha - B. Riley Caris, Research Division

Lloyd Walmsley - Deutsche Bank AG, Research Division

Jeff Martin - Roth Capital Partners, LLC, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Hamed Khorsand - BWS Financial Inc.

Operator

Greetings, and welcome to the Web.com First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jenny Kobin, Vice President of Investor Relations. Thank you. Ms. Kobin, you may begin.

Jenny Kobin

Good afternoon, and thank you for joining us today to review Web.com's first quarter 2013 financial results. With me on the call are David Brown, Chairman and CEO; and Kevin Carney, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session.

Please note that our remarks today contain forward-looking statements. The words expect, believe, will, going, begin, see, plan, continue and similar expressions are intended to identify forward-looking statements. These statements are based solely on our current expectations, and there are risks and uncertainties that can cause actual results and the timing of such results to differ materially from those projected in the forward-looking statements.

Please refer to our filings with the SEC and the risk factors contained therein, including our annual report on Form 10-K for the year ended December 31, 2012, for more information on these risks and uncertainties and our limitations that apply to our forward-looking statements. Web.com expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation to the nearest GAAP measure is available at our website, web.com, under the Investor Relations tab. Also, please note that our webcast and today's call will be available on our website in the Investor Relations section. With that, I would like to turn the call over to our CEO and Chairman, David Brown. David?

David L. Brown

Thank you, Jenny, and thank you all for joining us on the call. Before I begin, I'd like to welcome Jenny Kobin, Web.com's new Vice President of Investor Relations. Jenny has 2 decades of Investor Relations experience, including broad expertise in both the technology and financial services industries. We are excited to have Jenny on board and look forward to having analysts and investors meet her in the quarters ahead.

I'm pleased to report that Web.com delivered a strong performance to start 2013 with revenue and profitability both exceeding the high end of our guidance range. We successfully expanded ARPU and grew our 3 million-plus subscriber base, which is improving the long-term growth profile of Web.com. At the same time, we are focused on maintaining our strong margins and capitalizing on opportunities to enhance our profitability, such as our 2 recent debt refinancings that are expected to result in a total of $18 million in annualized interest savings.

We continue to invest in increased sales and marketing initiatives focused on providing our small business customers with higher value-added products and services. During 2013, we've already entered 8 new geographic markets with our Feet on the Street program, bringing us to a total of 16 markets, and we kicked off our series of Small Business Forums in conjunction with our PGA sponsorship of the Web.Com Tour. The returns we are generating on these investments remain favorable. And as we continue to execute our strategy, we believe that Web.com is well positioned to accelerate future revenue and cash flow growth.

In my prepared remarks this afternoon, I will touch on the macro environment, summarize our financial performance and provide updates on the 3 key legs of our revenue growth strategy, including some product highlights. From a macro perspective, the NFIB Small Business Optimism Index declined in March for the first time in 4 months, and it remains well below pre-recessionary levels. Despite this challenging environment, we continue to add subscribers, expand our ARPU and grow revenues, which we believe is an indication of the value we deliver for small businesses.

As the mass adoption of the Internet by small businesses continues, they need a trusted adviser that can help them navigate a continually changing technology landscape in order to improve their business performance. Web.com is uniquely positioned to serve this role based on our combination of a broad suite of Internet services, online marketing solutions and world-class customer service.

Taking a look at our summary and results for the first quarter. Non-GAAP revenue was $128.1 million, which exceeded our guidance range of $126.5 million to $128 million and represented year-over-year growth of 7.3%. From a profitability perspective, we delivered adjusted EBITDA of $36.9 million or an adjusted EBITDA margin of 29%. This led to non-GAAP earnings per diluted share of $0.48, which was $0.02 above the high end of our guidance and a 37% increase on a year-over-year basis. Our profitability outperformance was driven primarily by our strong revenue growth, combined with lower interest expense due to the debt refinancings.

Now I'd like to drill down into some of our key accomplishments during the first quarter that highlight the success of our strategy and balancing strong profitability and cash flow with increasing investments to drive an acceleration in revenue growth. The first leg of our strategy is driving increased ARPU. We continue to successfully scale our investments in established marketing channels to drive greater adoption of our suite of higher value-added services like online marketing, eCommerce, Do-It-For-Me and Do-It-Yourself web services. A key component of the success of our long-term growth strategy is to increase the penetration of these higher value-added services, which carry price points that are higher than our overall ARPU. We are in the early stages of this process and still have very significant cross sell opportunities within our existing customer base.

During the first quarter, ARPU grew $0.12 to $13.89, which was consistent with the directional commentary that we provided last quarter. As a reminder, the sequential growth in our first quarter ARPU reflects the impact of our seasonally strong fourth quarter. Going forward, we expect our sequential ARPU growth to improve based on the success of our significantly expanded marketing activities, which I'll discuss in greater detail in a moment.

We saw continued positive results with our increased Direct Response TV advertisements, which we expanded to additional channels and time slots. This broader TV footprint exposes Web.com to a significantly larger cross-section of potential customers, and our conversion rates and customer acquisition economics continue to outperform our targets. We believe there is a significant opportunity to scale our DRTV presence in an efficient manner, and we will continue to make additional investments in this marketing channel as long as the customer acquisition economics continue to provide attractive returns.

As I noted earlier, we also significantly expanded our investment in the successful Feet on the Street program. This initiative puts dedicated sales resources in specific markets to help proactively target small business prospects with services, such as our Leads by Web offering, that creates real value for customers by generating qualified sales leads. We believe this is an effective way to increase adoption of our higher ARPU products, which can require higher levels of customer education than a standard domain registration.

We began the year serving 8 markets with our Feet on the Street program, and in 2013, we have entered 8 new geographic markets, including Columbus, Ohio; Pittsburgh; Charlotte; Dallas; Boston; Norfolk; Minneapolis and Nashville. We are very pleased with this expanded geographic coverage and the speed at which we were able to get these new offices opened. We will now spend the remainder of the year ramping up the programs in these markets to reach full productivity in the second half of the year. This is one of the areas that has been contributing to ARPU growth, and we expect that contribution to be more meaningful with this added scale.

Another exciting part of our marketing strategy is increasing brand awareness through our marketing relationship with the PGA Tour, including our umbrella sponsorship of the Web.com Tour.

During the first quarter, we kicked off our series of 27 small business forums for 2013 in conjunction with the Web.com PGA and Champions Tours. These forums focus on the specific challenges and opportunities that small businesses face when moving from more traditional media to having a successful online presence. There are topics, such as: the elements of a great website, how to determine if your website is working for you, increasing traffic to your website and your business, and demystifying how to efficiently market on Google, Facebook and Twitter. The critical long-term opportunity from our PGA sponsorship is the establishment of Web.com as a nationally recognized brand, which will serve to expose the Web.com name to a materially larger audience and, ultimately, help to lower our customer acquisition cost over time.

While our increased marketing spend is being primarily directed at increasing our penetration rates of our higher value-added services, we are also focused on the second leg of our growth strategy, continuing to expand our subscriber base, which ended the quarter at approximately 3,030,000. During the first quarter, we added approximately 21,000 net new subscribers, which is modestly above our stated target range of 15,000 to 20,000 per quarter. The strength in net adds in the quarter was a function of slightly better than average conversion rates in our domain name and Do-It-Yourself website product areas. It's important to note that we're not changing our marketing strategy. We continue to target net subscriber growth of 15,000 to 20,000 per quarter, while we invest resources beyond this required level in programs focused on driving adoption of our higher-priced offerings.

The third leg of our growth strategy is maintaining a best-in-class monthly customer retention rate, which was once again at approximately 99% during the first quarter. Our strong retention rates reflect our improved performance in lowering churn across our customer base. We are confident in our ability to maintain retention rates at these current levels. This enables us to scale our marketing investments because we have confidence that our customers' lifetime value will allow us to achieve attractive return on investment economics.

On the product front, our breadth of value-added offerings, including E-Works, Gorilla Marketing, eCommerce, and the SmartCalls mobile solution are continuing to gain traction. In addition, we are committed to rolling out enhanced products and services that have the potential to drive increased wallet share at -- amongst our small business customers.

During the quarter, we launched the latest version of our Facebook Boost solution, which includes customized updates from our team of social media analysts to build interest and increase likes for our customers. The increased functionality we have introduced enabled us to increase the list price of Facebook Boost, which more adequately reflects the value we generate per subscribers, and is many times above our overall ARPU.

In the first quarter, we also launched a new full-service search engine optimization offering, which includes our SEO experts working directly with customers to ensure their web presence is optimized to generate favorable SEO rankings with Google, Yahoo! and Bing. Being found by potential customers is a major ping point for small businesses, and our enhanced SEO offering is a great way to drive organic traffic to their websites.

While we continue to be encouraged by the consistent success we are seeing with our increased marketing investments, we are equally pleased to be delivering strong levels of profitability at the same time. In the first quarter, we delivered an adjusted EBITDA margin of 29%, which is consistent with our full year 2013 target. Our margins are benefiting from our increased economies of scale as a much larger company, including the significant cost synergy we have realized from the Network Solutions acquisition.

As our first quarter results support and our guidance will reaffirm, we continue to expect Web.com to generate an adjusted EBITDA margin at the 29% level that we achieved during 2012. At the same time, exiting 2013 with a higher revenue growth rate due to our increased investments in sales and marketing.

To summarize, the first quarter was an excellent start to 2013. We are executing at a high level and according to our plan. Our strategy of balancing strong profitability and cash flow against increased investments to drive an exhilaration in revenue growth is working, and we are optimistic about Web.com's outlook for the remainder of the year. Our expanding portfolio of products and services that deliver quantifiable value for customers further differentiates us from the competition and is helping to position Web.com as the vendor of choice in the $19 billion small business online marketing space.

With that, let me turn the call over to Kevin.

Kevin M. Carney

Great. Thank you, David. Let me provide a review of our financial results for the first quarter, and I'll finish with our guidance for the second quarter and an update to our full year 2013 guidance.

Beginning with the first quarter P&L, non-GAAP revenue was $128.1 million, excluding the $12.5 million impact of purchase accounting fair value adjustment to deferred revenue in the quarter. As David mentioned earlier, our non-GAAP revenue is just above the high-end of our $126.5 million to $128 million guidance range. Revenue growth for the quarter was 7.3% on a year-over-year basis. And as a reminder, now that we have anniversary-ed the Network Solutions acquisition, our reported revenue growth is fully organic.

There is one minor P&L formatting change that I want to mention. We are consolidating the revenue and cost of sale line items on our income statement and are moving the revenue breakout between subscription and professional services to a reconciliation of GAAP to non-GAAP results in the back of the release. This change will eliminate the effort of allocating costs associated with professional services given its relative immateriality.

Our subscription revenue was $125.8 million for the first quarter, up 8% on a year-over-year basis, while our professional services and other revenue was $2.3 million, down 15% on a year-over-year basis. On a consolidated basis, ARPU was $13.89, a $0.12 sequential increase from the fourth quarter. As David mentioned, this was in line with our expectations for the quarter and was consistent with the directional commentary we provided on last quarter's call. We expect that the increased marketing investments we began making in the first quarter, which take time to impact sales, will begin to positively impact ARPU in the second quarter, and that we will show accelerating ARPU growth as we move through 2013. Specifically, we continue to target quarterly ARPU expansion into the guidance range.

We ended the quarter with approximately 3,030,000 subscribers, which was an increase of approximately 21,000 from the fourth quarter of 2012. Our net subscriber additions were modestly above the quarterly target of 15,000 to 20,000 that we established in the third quarter of last year and primarily reflect some yield improvements in our domain registration and DIY website product areas. Our strategy of focusing incremental marketing spend towards our higher ARPU products remains unchanged, and we believe we can manage our marketing spend to generate consistent net adds in our targeted range going forward.

Our monthly customer retention rate remained at approximately 99%. We are confident we can maintain this level of customer retention at this approximate level moving forward.

Turning to profitability. We generated $86.4 million in non-GAAP gross profit for the first quarter, representing a gross margin of 67%, comparable to last quarter and compared to 68% in the same period last year. There is always a level of quarter-to-quarter variability on our gross margins depending on the investments we are making, especially in online marketing initiatives, which have lower margins initially but ramp up over time.

Our first quarter non-GAAP income from operations was $34.2 million, representing a 27% non-GAAP operating margin. We generated non-GAAP net income of $24.5 million or $0.48 per diluted share, representing 37% year-over-year growth and coming in above the high-end of our guidance range of $22.6 million to $23.4 million or $0.44 to $0.46 per share. We realized the benefit of approximately $0.01 in the quarter from lower interest expense related to our second debt refinancing transaction in March that was not factored in at the time we issued our first quarter guidance.

Adjusted EBITDA was $36.9 million for the first quarter, representing an adjusted EBITDA margin of 28.8%, up slightly from a 28.5% adjusted EBITDA margin in the first quarter of 2012. We are pleased with our ability to expand profitability levels even as we meaningfully increase our marketing investments to drive greater top line growth. We believe this is strong validation of the inherent leverage of our business model.

Turning to our GAAP results. Revenue was $115.5 million, gross profit was $72.9 million, loss from operations was $2.5 million, net loss was $46.5 million, and net loss per share was $0.97. Our GAAP results reflect the loss from debt extinguishment related to our recent debt refinancing transaction of $19.5 million. Of this amount, $12.3 million was a noncash charge associated with deferred financing fees and original issue discount.

Moving to the balance sheet. Unrestricted cash and investments were $13.6 million at the end of the first quarter, which compares to $15.2 million at the end of 2012. We generated $11 million of operating cash flow in the first quarter, which reflects expected working capital seasonality, as well as $7.2 million of one-time cash penalties associated with our March debt refinancing.

After adding back this one-time item, we generated $18.2 million of pro forma operating cash flow. Capital expenditures in the quarter were $4.5 million, which led to $13.7 million of pro forma free cash flow. Unlevered pro forma free cash flow, which adds back interest expense to free cash flow was $23.1 million in the first quarter. We intend to continue using our growing cash-generation capabilities to rapidly delever our balance sheet.

As we previously mentioned, during the first quarter, we improved our balance sheet by repaying in full our second lien debt and reducing our effective interest rate by another 150 basis points. In the 18 months since we completed the Network Solutions acquisition, we have reduced our debt by $70 million and lowered our effective interest rate 42% from 7.6% to 4.4%, driving annualized interest savings of more than $18 million. The significant interest savings are enabling us to make increased sales and marketing investments, which we expect to fuel future revenue growth, while at the same time, maintaining our strong profitability profile.

Our total debt balance, net of original issue discount, was $699.7 million at the end of the first quarter and consisted of $652.7 million first lien debt and $47 million outstanding on a revolving credit facility.

During the quarter, we drew down $10 million from our revolver to cover the one-time fees related to the debt refinancing. However, that was mostly offset when later in the quarter we paid down a total of $9.7 million on a first lien and revolver.

With that, let me turn to our guidance, starting with the second quarter of 2013. We are currently targeting non-GAAP revenue in the range of $130 million to $131 million. We anticipate an accelerated level of ARPU growth in the second quarter as compared to the first quarter. We currently expect our non-GAAP net income to be in the range of $24.5 million to $25 million, or $0.48 to $0.49 per diluted share for the second quarter, which assumes 51 million diluted shares outstanding and a non-GAAP tax rate in the low single-digit percentage range.

I'd like to finish by updating our guidance for the full year 2013. From a revenue perspective, we are raising the low end of our guidance by $2 million, leading to an updated revenue guidance range of $526 million to $533 million. From a profitability perspective, we are continuing to target an adjusted EBITDA margin of approximately 29%. We now expect the combined company to generate non-GAAP net income in the approximate range of $102 million to $104.6 million or $2 to $2.05 per diluted share, an increase from our prior guidance of $99.5 million to $102.5 million or $1.95 to $2.01. This assumes a share count of 51 million and cash taxes for 2013 continuing to be in the low single-digit range. In terms of cash flow, we are reiterating our pro forma free cash flow of approximately $100 million and our pro forma unlevered free cash flow guidance of $135 million to $140 million. To be clear, these estimates exclude the $7.2 million prepayment penalty described earlier that we consider a one-time nonoperational event that otherwise distorts the underlying cash-generating capability of the company. We still anticipate our cash flow will largely converge with our non-GAAP net income in 2013.

In summary, we are pleased with our first quarter results, which exceeded our guidance and demonstrated our ability to increase the level of investment in the business, while maintaining our high level of profitability. We are encouraged by the continuing positive results we are generating on our increased marketing investments, and we are confident these programs will lead to accelerating revenue and ARPU growth as we move through the course of 2013. We are confident in our ability to grow Web.com into an even more successful company characterized by attractive growth, significant revenue visibility, best-in-class profitability and substantial cash flow generation.

With that, we would now like to take questions. Operator, if you could please begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Hilal with FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

I've got a few. I guess, first to clarify, Kevin, on the cash flow. So the guidance of $100 million for the year pro forma, it excludes a $7 million prepayment penalty. As you see it today, are there any other things that would be excluded from that guidance, any other one-time cash payments? Or as you see it today, that's the only one?

Kevin M. Carney

Okay. But I think as you say, that would be the only one. And just to remind you, when we gave our guidance for the $100 million, we had not considered the refinancing, although, we were working on it. We hadn't incorporated it to our guidance, so we would have been -- would not have included it. But at this point, that's the only item that we would see.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay, great. And then, David, on the Feet on the Street, so you guys talked about front-end loading some of these investments this year, which we'll see some more fruits in the back half. So you're in 16 markets today. Obviously, the goal here is to go after some really high ARPU customers. And so how are you guys measuring that? I know it's probably not too material to numbers today, but how should we -- are there ways we can measure it? Or can you share this with us anecdotally, traction you might be seeing with that program, and how much it's moving the needle?

David L. Brown

Sure. I think, first, it's been a relatively small program. We worked our way through 2012 all the way up to 8 offices by the end of the year, actually, opened the eighth office in the last month of 2012. And then as we noted on the call, we opened 8 more offices. So we doubled the size of our network, and we'll have that double benefit for the remainder of this year. It takes a small amount of time to ramp up an office. But during the second quarter and certainly through the remainder of the year, you'll see the benefits. And the way to think about this is that each office has between 5 and 7 salespeople, and each salesperson focuses on making a small number of sales of new customers each month that have an average ARPU in the range of $750 to $1,000 a month. And these customers have very long lives, we've seen very low churn in this customer base because they're getting really strong value from this program. So we expect by doubling this office -- number of offices early in the year that you'll see an acceleration of the revenue that this program has been adding. And this is just one of the areas where we've increased our sales and marketing.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. And then let me also ask about the new gTLDs, both from a registrar perspective, if you think you'll start to benefit in that capacity this year. And then as a register as it relates specifically to the .WEB extension?

David L. Brown

Sure. So I would say that our principal focus is on our role as a registrar because there we benefit against all of the new gTLDs that are approved. And we expect to see the beginning progress in this area late this year. Probably in the fourth quarter, we'll begin to see some of the first approvals from ICANN. Admittedly some of those approvals are very noncontroversial, so they also may be very non-valuable. And so I would expect the beginning benefits in the fourth quarter, but they'll be very limited, and then moving into next year, you'll begin to see our registrar benefits. The fact that we're the second-largest retail registrar, I believe, you'll see that benefit occurring in 2014. And then from a registry perspective, .WEB is a hotly contested, one of the strongest contested extensions. And so there is no assurance that we'll get that. However, we're still very pleased that it has strong interest, because whoever gets it, because of our name and because of our position in the marketplace, we think we'll benefit very significantly. But I wouldn't be surprised to see that one take a considerable amount of time to be resolved because there are a lot of people that are interested in obtaining it.

Operator

Our next question comes from the line of Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So from a high level, obviously, we're seeing the naming business for VeriSign continue to struggle whether that's macro or other, yet you continue to see good response in light of a tough small business economy. Is it just the approach that you're taking in the advertising? Or what else do you think is driving the success that you've had so far?

David L. Brown

Well, it's a great question. I think it speaks to one of our really differentiating strengths of our business. We don't just sell one product, we sell many products, and they're all the way up the value chain. So as customers begin to adopt the Internet, they may already have a domain name, but they need a website. They may already have a website, but they need marketing or SEOs. They may have all of the above, but now they want Facebook. And we can help the entire spectrum of small business customers. So where VeriSign is limited to domains, we have the entire portfolio of products across this market. And it is a mass-adopting marketplace right now, so we think that's helping us significantly.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Then when you talk about the accelerating ARPU, especially in the second quarter, you kind of referred to marketing spend helping. What exactly is it just because of additional direct TV -- direct response TV advertising customers coming in at higher ARPU or is there other things that will help accelerate the ARPU?

David L. Brown

Well, there are a number of areas that we're working on ARPU, both our E-Works product, our Facebook product, our new SEO products that we alluded to. Those are all sold through our outbound and inbound channels, and in some cases, driven by advertising, our direct response TV advertising. In other cases, they're driven by online marketing. In other cases we're actually seeing organic traffic, people coming to us inbound. So all of those things drive ARPU, and then you have our Feet on the Street program. During 2012, we were adding offices. So we were beginning to see the rolling benefit of adding offices through the course of the year. Of course, you'll see the full benefit of our 2012 offices in 2013, plus you'll see benefit as we go through the year of those additional Feet on the Street offices. So the combination of a broad portfolio of products being driven through multiple channels including -- by the way, if you haven't heard of our radio ads, they're pretty -- they're getting very good traction now as well. So we added radio during the first quarter, and that is beginning to be very economically advantageous for us. So that's another area where we can spend dollars, get a good return, and help drive ARPU in the business.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Last question. When you look at the Feet on the Street program that you've got, can you give us a sense of maybe one of the markets that's more successful? And is there characteristics that you've been able to determine why that particular market is successful and be able to apply to the other markets?

David L. Brown

Well, the reality of it is, we've gone very slowly at this program. And so the answer -- the true answer to your question is, the most recent offices are performing better than the ones before that because we're getting better and better at doing this. And that's one of the benefits of moving slowly and learning from your wins and your losses is that you refine and improve. And so I would tell you that the most recent offices we've opened have gotten off to the best start compared to the earlier offices. And then of course, we have the benefit of time to go back to those offices and improve them. That's the biggest differentiator at this point, Sterling. It really -- it's not really geographic specific. It has more to do with our learnings and our ability to manage this process, kind of, relentlessly as we move forward.

Operator

Our next question comes from the line of Gene Munster with Piper Jaffray.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

You guys seem to make it look pretty easy over time. I was just thinking of steady -- if you typically under-promise and certainly over-perform. But when you talk about this increase in ARPU, is there -- we obviously -- we'll give you the benefit of the doubt that this is going to play through. But have you done testing or is there -- what gives you, I guess, the confidence that you can kind of pinpoint that it's this quarter? You talk about it takes time for that marketing. But any sort of detail around any sort of testing you've done around marketing to make you feel confident that this ARPU lift will actually happen?

David L. Brown

Sure. Gene, really, we're relying on the fact that we've been -- we're in really known territory. We've been running DRTV ads. We've been increasing our online marketing spend. We've been working at our Feet on the Street program now for a year and a couple of quarters. So we have a good base of experience to build on, and we can see the momentum that we've been building in the business. So we're not really trying to throw money up on the wall and see if it sticks. We're really just investing in things that we've already been doing, and we're using the, basically, the performance that we've been seeing to guide us. And in some cases, our performance is improving, and you see our slight beats. Those are the result of our continuing improvement in performance, really, in many of our areas.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And just a couple of housekeeping. Can you repeat what your monthly retention rate was?

Kevin M. Carney

99%.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And then the Feet on the Street, there's an average ARPU that you're getting from some of those?

David L. Brown

Yes, we get about $750 to $1,000 per new customer per month.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And then my final question is, you're taking the savings from the refinancing of the paydown of a debt and plowing that back into sales and marketing. For 2013, how much incremental savings is that going to be? In other words, how much incremental investment in marketing?

Kevin M. Carney

Yes, this is Kevin. Let me address that one. I think -- I mean, you can quantify the savings. And from a reinvestment perspective, keep thinking, again, a ramp, you've seen a recent ramp that our sales and marketing investments moving into the territory kind of 25% and then up to 26% of revenue, that's how we think about it over the course of the year.

Operator

Our next question comes from the line of Walter Pritchard with Citigroup.

Kenneth Wong

It's Ken Wong for Walter. Just a quick question on macro. I mean, you guys highlighted NFIB as softening. Can you talk about within your business how did macro manifest itself?

David L. Brown

Yes, we really haven't seen a near-term change in our business from the macro environment. Our business is continuing to meet or exceed our expectations, and I think that really speaks more to kind of a counter to the -- a poor economy, which is mass adoption. There's really a secular change going on that's forcing small businesses to go online and to spend more money online to get effective online presence. And that's really, in our business, overpowering what is otherwise a very pessimistic small business community. So we don't see any other negative signs in our business at this point coming from the economy. And we are very thankful that we happen to be in the space that we're in.

Kenneth Wong

Got you. So it sounds like you feel like macro is kind of impacting maybe brick-and-mortars just a little more and then pushing those guys to look elsewhere in terms of across the web first?

David L. Brown

Exactly.

Kenneth Wong

Got it. And then you guys mentioned repaying down the debt as sort of a priority. But I can't help but notice you guys did buy back more stock in Q1 than you did all of last year. Should we expect that this is the trend that might continue? Or there was something specific about Q1 that kind of bucked the trend?

Kevin M. Carney

Yes, what you're actually seeing, what you're pointing out in the cash flow statement what appears to be a stock repurchase. But what that -- we're not out in the market repurchasing stock. This is a function of stock options and restricted stock vesting and shares being relinquished and then the company and effectively covering the tax. Does that make sense?

Kenneth Wong

Yes. And then lastly on cash flow, can you perhaps just state -- talk a little bit about how that should progress through the year in terms of the seasonality or the linearity of cash coming in?

Kevin M. Carney

Sure. I pointed out on the last call and it pretty much played out just as we anticipated that we do see seasonality in the other working capital, particularly in the first quarter, where we have accrued incentive comp payout in the first quarter like most companies. We have a lot of prepaid payments like contracts, maintenance agreements, things of that nature that occur in the first quarter that put a little pressure on operating cash flow, and we saw that. That will -- you'll see that kind of reverse over the course of the year, and so you'll see operating cash flow build as we see revenue growth, bookings increasing and that flip in other working capital that I was referring to. So that's what you should see. And again, as I said earlier, on an earlier call, that other working capital we expect to be neutral to cash flow over the course of the year, although you'll see the seasonality. And the other comment would be below -- down the CapEx area, we had commented that capital expenditures be kind of in the 3% of revenue range for the year, although you see it front-end loaded for the year. And so you saw somewhere between $4 million and $5 million in the first quarter, which was, again, within our expectations.

Kenneth Wong

Got it. And if I could squeeze in one more. So, David, now you guys are kind of almost 2 and 3 years into the Network Solution and Register.com acquisition, can you give us an idea of what inning you guys are in terms of upselling to each of those specific installed basis?

David L. Brown

Sure. I would -- I'd still continue to characterize it as really the very beginning of the game for us. We're learning quite a bit. We're very careful and deliberate in our cross-selling activities. We're not really in a big rush to sell to customers. We're in a big rush to help them, educate them, be prepared to sell them things when they're ready for it. And a lot of this involves money, data, analyzing data and improving conversion rates, so that we can be very, very profitable. So we've not gone as aggressive as some folks would like, and we think that ultimately leads to very low churn. When you're jamming products down customer's throats, sometimes you drive them away. Were trying to be very, very thoughtful right now. So we're in the very early innings for Network Solutions. We've clearly been marketing the Register.com for a longer period of time, but during that time, we've added a lot of new customers to that base, and they're all fresh new customers for us to market to. And then at the same time, we've also added several new products. And so those new products represent, frankly, new territory for us to go back to the customers and educate. So again, from our perspective, we consider this to be the very earliest innings, and we're learning a lot, improving our conversion rates, and we see a long future of selling just to the 3 million that we have, and then we're very excited to continue to add more subscribers to the mix.

Operator

Our next question comes from Sameet Sinha with B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. First, Kevin, if you could help me with the one-time charges. I remember, if you remember correctly, from your filed 10-K subsequent event section, you mentioned that you'd be incurring an additional $4.1 million of admin fees, like bank and legal fees as you reprice that debt. Is that included in the $7.2 million or is that something you incurred separately? My second question would be in terms of the gTLDs. David, obviously, .WEB is probably -- according to Demand Media, that's the most highly anticipated name or an extension that's out there among the new gTLD program. It's going to be contested. It's going to go into auction at some point. What is your threshold? How much -- I mean would you be willing to go and fight for that to be the registry for that name? Or would you rather just reap the benefits of being the registrar? And the final question is, if you could update us on how many domains under management you have currently?

Kevin M. Carney

Okay. So this is Kevin. On the first one, the $7.2 million is all-inclusive. So that's our total cash outlay in connection with the refinancing.

David L. Brown

So on .WEB, the way we've always thought about .WEB is that given that we have a trademark on the name Web.com, we really needed to apply for .WEB in order to protect our trademark. We're not in the registry business today. We are a registrar, and we are a big one, and it's a profitable business, and that's the business we like to be in. But in order to protect our trademark globally, we needed to basically defend ourselves by applying for .WEB, and we're certainly interested in getting it, but it's not our core business. And so -- and given the high degree of interest, we'll have to see how it plays out. But we'll be perfectly content if anyone gets .WEB because they're going to distribute it through us, and it's our name, and we're advertising and building a brand in the marketplace, and we're going to be a great deliverer of .WEB extensions, whoever gets it, whether it's us or someone else. I've also commented before that our strategy has always been to cooperate. And so we've looked at the people who have applied, and we certainly are talking to all of them about who would benefit from this and which team would be the best team to provide services, and so that would be our strategy. Whether it's a winning strategy or not, Sameet, I can't say, but that's how we're approaching it, which is another way of saying that we won't bear the full load of the economics of acquisition ourselves likely. It'll likely be shared. And then finally on domains under management, it's -- I believe, we've talked in the past about a number in the range of 10 million domains under management, and so that's what you should think about in today's world.

Sameet Sinha - B. Riley Caris, Research Division

If I can squeeze in one more. Stock comp expense seems to have gone up a little this quarter versus the last 4. Can you comment on that, please?

David L. Brown

Sure. So this year, during our first quarter, when we evaluated our long-term performance incentives, we chose to pay a small portion of that out in stocks that you saw a more elevated stock comp expense because we used both cash and stock to compensate some of our employees for their long-term performance.

Operator

Our next question comes from the line of Lloyd Walmsley with Deutsche Bank.

Lloyd Walmsley - Deutsche Bank AG, Research Division

I was wondering if you can give us an update on Facebook Boost and how the adds per quarter have tracked since you raised price? And then on a related note, do you get the sense that the spend you're deploying on behalf of your customers is getting them a good ROI? And are they happy with that program? That would be great.

David L. Brown

Sure. Well, I'm pleased to tell you that Facebook Boost is playing out exactly the way that we expected it to. We've seen -- obviously, we tripled the price of the product, and we're getting a volume that is giving us an equivalent amount of revenue that we were getting before. And the real benefit is it's a much superior product. So we are generating more likes for our customers and more interaction for our customers, and therefore, we're having happier customers. So -- and the thing I would take the most optimism from is that out of the gate, we hit these numbers. So we haven't had to build to them. We immediately started selling at a very strong level. So we're quite pleased with how the Facebook product is selling and the revenue we're getting. The margins are roughly equivalent to the margins that we had previously. The total revenue is in that same range, but it's a much superior product, which bodes very well for us on a long-term basis because we think you'll see long-term churn will be lower and people and our customers will buy more things from us because of that good experience. And as I already commented, we are having great success at generating both likes -- both friends and as well as interaction. Those are the 2 key things that we have really focused on, is realtime interaction, along with growth in likes, and both of those things are happening for our customers across the board.

Lloyd Walmsley - Deutsche Bank AG, Research Division

And just as a follow-up. I guess, if you look out to the kind of gTLD opportunity, how much of that, do you think, for you all is going to come from selling new domains versus just touching more customers who come back for more domains and upselling them other things? Like what -- how do you kind of think about those 2 in terms of importance?

David L. Brown

Yes, well, that's a great question, and again, speaks to what I think is very unique about our business. We're going to benefit from customers protecting themselves by buying additional extensions to protect their brand, just the domain itself. But we're also going to benefit because we're such a large registrar, and new customers will come to us. And once they come to us as a domain customer, we have the broadest portfolio of products and service to sell to them. So the beauty of our model is that the domain business is a wonderful business, but it's even a better business if you can do something with the domain. And we've got a very broad portfolio of products and services. So I think we've not really sized the benefit of deregulation of domain names, but we've always said, we view it as a nice positive, and we'll be able to size that nice positive, I think, beginning late this year and moving into next year. And I think it could be very, very positive for our company.

Operator

Our next question comes from the line of Jeff Martin with Roth Capital Partners.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Kevin, can you shed some perspective on the changes in deferred revenue? I'm just looking at -- I think, historically Q1 is one of your larger quarters of build of deferred revenue? And to put it in perspective of -- it's close to $40 million last year in the first quarter and was about $18 million this quarter. But that was -- the first quarter of last year was fairly close to when you closed Networks Solution so that may have had some impact there, and then the accounting treatment of the deferred revenue that you can't recognize. Can you help us get our arms around that?

Kevin M. Carney

Sure. I think you've hit on a couple -- I think the first though is that if you're just looking at the change in deferred revenue on our cash flow statement, obviously, that is impacted by the purchase accounting adjustment. So if you want to get to what is the sort of "real change" in deferred revenue that's indicative of the change in the bookings, velocity, you would look at the total change less the fair market value adjustment impact in the quarter. So to your point, that fair market value adjustment was much more significant just following the transaction. And as you know, its come down to -- what was it this quarter? Down in the $12 million, I think, range. So that has a bearing on what you see in the cash flow statement. And then you're right, I think the first -- there is some seasonality in domain name renewals. Some of the things that we've been doing within the business that may drive early renewals or all the renewals, things of those very tactical things, I would say probably creates a little -- has pulled forward or create a little bit of disruption in kind of the historical renewal pattern. And so seeing we had a very strong quarter in the fourth quarter from a bookings perspective and again in the first quarter, and that does reflect some of the seasonality in the business.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. And then can you -- follow-up to the stock compensation question. Shall we see that normalize in that $2.5 million to $3 million a quarter range?

Kevin M. Carney

Yes, the stock comp in the first quarter, as we said, was at elevated level due to the stock issued in the quarter. And then you'll see it come down. I think, it'll probably slightly just a little bit higher than it had been in the previous quarter, but much more consistent with previous quarters.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay. And then is that something we should expect each year in the first quarter as paying some of the bonus comp and stuff?

David L. Brown

No, not necessarily. That was a -- each year, the board looks at the performance of the company, and they determine what mix of cash and stock they're going to use for long-term incentives. And this was an unusual year, so I wouldn't necessarily expect it to be a trend, but they do have that discretion.

Operator

Our next question comes from the line of Peter Stabler with Wells Fargo.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

So if we could go back to gTLD, let's fast-forward a year from now. According to our math of this -- this 1,900 number is not a good number, right? So maybe there are 600, according to our math, generic TLDs that have been applied for as open. In other words could potentially be available to the public. A great many of them seem to us too esoteric to go anywhere, but we're in uncharted terrain here. So our question is around ancillary revenue streams. So when we think about the world a year from now, and let's say that number is even 100 new TLDs that are competing for consumer attention. There's -- as far as we can tell, consumers are almost clueless about this today. Could you potentially, as the leading registrar, be in a position where you could be the recipient of marketing dollars? The owners of registries looking for ways to promote their TLD through the registrar platforms. Today, the competition is almost nonexistent or very low compared to what they could potentially be. That's question number one. And then question number two.

In an unregulated pricing environment, could the relationship between pricing on a registrar and registry basis change? Or I guess put another way, could we see a situation where certain domains could become kind of fundamentally more profitable for you to sell? Or would it be every bit as competitive, do you think, as it is today between you, Go Daddy and the other registrars? I hope this all makes sense.

David L. Brown

Yes, it does make sense. And I can tell you, Peter, that, historically, there have been marketing incentives paid to registrars like ourselves. And .co was a good example of that, launched a few years ago in an increasingly competitive marketplace for consumers, who are buying domain names. Registries tend to go to the broadest distribution networks where they have good relationships, already have operational capability, and then they push hard to make sure that their domain product wins out over someone else's. And so I wouldn't be surprised -- we certainly can't predict the future. But if you look at the past, I think you would see that, that was a prevalent practice, and I wouldn't -- and they've already -- I can tell you that there are discussions going on in the industry that would lead you to believe that there will be those kinds of marketing incentives for large registrars like ourselves. And then to the question of variable -- of different pricing and different economics, absolutely. We will see different economics for different of the new TLDs. And when we already have seen that in recent history, .co had a different set of economics than .com had. And heaven forbid, .xxx even had a different set of economics than the others. So we will see a variety of economics, and I would expect that in the early days, you will actually see some significantly better economics because this will be brand-new territory, and its a supply and demand situation where in the early days, you'll have high price while people -- why you have a limited -- really, it's a limited quantity of people competing for that limited quantity. So I believe that you'll see some varying economics and very attractive economics. And then over time, the real winners will likely become tighter economics because it'll be a land grab. It'll be, how many of these can you get out to the market to begin that annuity process? And so I think the lesser valuable ones will be higher priced, the more valuable ones will be lower priced, and that's what we're expecting. But we're just like you, kind of waiting to see what the future will bring in this area.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Great, very helpful. One quick follow-up, David. So is there anything that you guys can do through Net Sol or Register position yourself during the land-rush period. So if we consider a handful of these TLDs might have very active land rush 30-day, 45-day windows, is there anything you can do to put yourselves in a more advantageous position for the early selling?

David L. Brown

There are things we can do, and we're certainly attempting to do them, as well as other players. One of the things we can do, as you know, we have a joint venture with Demand Media, where we sell domain names and we have a platform to work in this early period of land rush. And so we're -- that has been enabled, and we're marketing it broadly across the Internet spectrum to all of the registries and applicants to make sure they know that we have a platform that's very efficient, that is, frankly, one of the largest platforms for doing this.

Secondly, on a standalone basis, we've already had historical success, both Network Solutions and Register, in serving as conduits for registries in the early periods in the land-rush period. So we already have in place kind of a predicate for getting some of that business, and we also have a joint venture that is a large platform to help us in that area as well.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Last one would be, NameJet would roll -- those revenues would roll into subs?

David L. Brown

Those -- NameJet, at least, certainly the profitability does roll into us, and that's how we think about it, as additional profitability.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

But the revenue -- you guys don't recognize the revenue?

David L. Brown

No, we don't recognize that. It's a joint venture, and as a result, we don't recognize it.

Operator

Our final question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial Inc.

Just a couple of questions here. For the first one, and I guess the easier one, how many adds do you expect in the Q2? I didn't hear you say that.

David L. Brown

15,000 to 20,000 net adds in 2Q, very consistent with our recent quarter talk track.

Hamed Khorsand - BWS Financial Inc.

Okay. All right. And then the other question I had is, ARPU is up from new customers or is it existing customers upgrading too? And how much of the existing customers are taking up more services in the quarter?

Kevin M. Carney

Yes, I think it's a combination of both I think is the simple answer. As David said, I mean some of the -- just to reiterate, I mean some of the channels where we are acquiring new customers at the higher ARPU levels would be, obviously, Feet on the Street. So to the extent we're continuing to ramp up those efforts, we're acquiring those customers at $750 to $1,000 a month, so those are certainly contributing albeit in smaller numbers today but ramping. And the other would be in our direct response TV, the DRTV ad campaign, where we're driving customers to us. But again, there in the E-Works product, which is approximately $100 a month, and there'd be Facebook. So those are some of the initiatives where we have new customers contributing to ARPU growth. And then I would say, probably the preponderance of it today is being driven by the upsell, cross sell efforts to existing customers. And that would be across the gamut from new or domain name customers using our DIY products or they upsell into the different products or Facebook and other marketing products.

Hamed Khorsand - BWS Financial Inc.

So how much of the increase in ARPU do you think is coming from existing customers?

Kevin M. Carney

It's not something that we quantify and comment on. However, I think we have commented in the past that when we've looked at it, it was more like something a 60%, 40% at that time, 60% upsell cross sell and 40% kind of new customers. But I can't tell you that's what it is today.

David L. Brown

Yes, I think the key point here, Hamed, is that as we deploy more marketing dollars, we're changing that mix. Not by taking our foot off the accelerator on cross-sell and upsell, but by putting our foot on another accelerator, which is getting new customers in and selling higher ARPU products. But historically, we've been a cross-sell and upsell company. And in the last, oh, I don't know, many quarters here recently, we've also been adding subscribers, and we've talked about shifting our mix of products for those new subscribers to higher ARPU products, and the idea is add that, layer that on top of the ARPU growth that we're getting from upsell, cross-sell. So that, in fact, is why we're -- you're seeing -- you saw 8% year-over-year subscription revenue growth. Most of that is coming from ARPU growth.

Operator

Mr. Brown, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

David L. Brown

Well, thank you all for joining us today to talk about our successful first quarter and the outlook for our business. We appreciate your interest and look forward to speaking with you about our progress. During the quarter, we'll be presenting at the JPMorgan Conference in Boston on May 16; and at the B. Riley Conference in California on May 21. As always, feel free to contact us here at Web.com if you have any additional questions. Thank you and good night.

Operator

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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