Web.com Group Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Web.com Group, (WEB)

Web.com Group (WWWW) Q2 2013 Earnings Call August 1, 2013 5:00 PM ET

Executives

Jenny R. Kobin - Vice President of Investor Relations

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

Lloyd Walmsley - Deutsche Bank AG, Research Division

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

Walter H. Pritchard - Citigroup Inc, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Sameet Sinha - B. Riley Caris, Research Division

Brian Peak - RBC Capital Markets, LLC, Research Division

Tim Klasell - Northland Capital Markets, Research Division

Samuel Kemp

Operator

Greetings, and welcome to the Web.com Second 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 R. Kobin

Good afternoon, and thank you for joining us today to review Web.com's Second Quarter 2013 Financial Results. With me on the call today 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.

In the Investor Relations section of our website, we have provided our financial summary slide presentation, which is intended to follow our prepared remarks and provide a reconciliation of differences between GAAP and non-GAAP financial measures. 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 quarterly report on Form 10-Q for the quarter ended March 31, 2013, 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.

With that, I would like to turn the call over to our Chairman and CEO, David Brown. David?

David L. Brown

Thank you, Jenny, and thank you all for joining us on the call. I'm pleased to share that Web.com reported strong second quarter results that were highlighted by both revenue and profitability that were above the high end of our guidance. In our prepared remarks this afternoon, I will discuss second quarter business highlights, the macro environment, summarize our financial performance and provide operating highlights. Then Kevin will provide a detailed review of the second quarter and our guidance for Q3 and full year 2013.

Web.com again performed at a high level during the second quarter. We are consistently executing our plans and outperforming the goals we outlined at the beginning of this year. We successfully expanded ARPU through cross-selling and upselling our higher value-added services. We continue to add net new subscribers to our 3 million-plus subscriber base at a growing pace, and we generated substantial profitability in cash flow that enabled the company to continue the process of rapidly deleveraging our balance sheet. Our business strategy is working, and we are optimistic about our ability to accelerate revenue growth as we exit 2013, making progress toward our longer-term target of low-teens revenue growth. When combined with continued strong profitability and cash flow generation, we believe we have the opportunity to continue driving significant shareholder value.

In terms of the macro environment, the economic challenges facing small businesses remained largely the same as what we have discussed on recent calls. The NFIB Index has continued to bounce around slightly, with June ticking down modestly after small increases the prior 2 months. The more salient point is that while the index is not changing dramatically, it has remained well below pre-recessionary levels for 6 years running, and there is little expectation that the macro environment is poised to showed meaningful improvement in the near future.

However, the upside for Web.com is that these economic pressures make our solutions valuable for small businesses as they need to be more efficient and effective in their marketing spending to increase business. Small businesses are beginning to recognize that leveraging the power of the Internet and utilizing new technology tools can help them engage with a broader audience of potential customers and create stickier relationships with existing customers, which is even more important in a tepid economic environment. However, most small business owners are consumed with the day-to-day running of their businesses and do not have the time to figure out on their own the most effective way to harness these new tools. Our combination of a broad suite of Internet services, online marketing solutions and world-class customer service has positioned Web.com as the go-to vendor of choice for small businesses.

Turning to our summary results for the second quarter. Non-GAAP revenue was $131.4 million, which was above our guidance range of $130 million to $131 million and represented year-over-year growth of 8%, which is up from 7% in Q1. In terms of profitability, we again delivered a strong quarter of earnings. Non-GAAP net income was $26.4 million, a 39% increase from last year. This led to non-GAAP earnings per diluted share of $0.51, which was $0.02 above the high end of our guidance and a 34% increase on a year-over-year basis.

We generated adjusted EBITDA of $37.5 million, yielding a 29% margin, even as we invested a significant portion of the interest savings we realized from our 2 recent debt refinancings in the sales and marketing programs. We are confident in our ability to maintain our margins around current levels, even as we continue to make significant investments to drive future growth, and we believe this balanced approach will help maximize shareholder value.

Importantly, as we have guided, our non-GAAP net income and cash flow are converging. We were able to generate nearly $30 million of free cash flow in the quarter. The strength of our profitability and related cash flow generation has enabled us to continue the rapid deleveraging of our balance sheet. In the second quarter, we paid $31.5 million of our debt balance, reducing our debt to approximately $668 million.

In the 7 quarters since we closed the acquisition of Network Solutions, we've repaid more than $100 million of the debt we incurred to finance that transaction. The combination of revenue synergies and $40 million of annual cost savings from the acquisition have been positive contributors to our earnings and cash flow growth. As we look ahead, we will continue to use our strong cash flow to deleverage our balance sheet in addition to taking advantage of any opportunities to further reduce our interest expense, as we've already done a few times.

Now I'd like to spend a few moments giving you some color around our performance in the second quarter that demonstrates how our growth strategy is working, why it makes us confident in our ability to continue our track record of increasing growth and how we're doing this while also generating strong profitability and improving our balance sheet. A key focus for us to drive long-term revenue growth is to generate increased ARPU. During the second quarter, ARPU grew $0.20 to $14.09, which was consistent with our expectations for the quarter. We've developed a first-class suite of Internet services, including our online marketing, eCommerce, Do-It-For-Me and Do-It-Yourself Web services and additional higher-ARPU products like eWorks, Gorilla Marketing, Leads by Web and Web.com's Facebook Boost.

We're playing a leading role on Facebook's beta program that connects small businesses with professional marketing assistants. As part of this program, Facebook is providing training and guidance to us on the development of Web.com's suite of Facebook marketing solutions, and we believe it will add further momentum to one of our higher-priced value-added service offerings. Our recently redesigned Web.com Facebook Boost product continues to see strong customer demand. When we began offering the revised product with more value-added service at an increased price, we expected a volume decline to be offset by a higher price point, yielding roughly neutral revenue impact. Instead, we are pleased that our volume of sales has been affected less than expected, yielding a modestly positive result on revenue.

We are realizing good traction selling our overall suite of product offerings into our installed subscriber base and believe we are only in the very early innings of cross-selling and upselling into the space. We are less than 2 years removed from tripling our installed base to the Network Solutions acquisition, and many of our customers are still only utilizing a small fraction of our product portfolio. Our suite of value-added solutions carry price points that, in most cases, are multiples of our overall corporate ARPU, and we believe increasing a customer use of these solutions has the added benefit of increasing the stickiness of our customers. This combination ultimately leads to higher customer lifetime values.

We see the potential for ARPU to be significantly greater than it is today as we increase our penetration rate with our higher-ARPU products, which, when applied across our 3 million-plus subscriber base, would create a substantially larger revenue base than we have today.

An important part of our success in our cross-sell and upsell effort is driving greater awareness of the full breadth and depth of our product offerings. One of the ways we are achieving this has been through the investments we are making in our direct response TV advertisements. As we talked about last quarter, we have been expanding our marketing program in 2013 to a broader cross-section of channels, time slots and mediums. Also during the quarter, we increased our direct response radio advertisements, which we began testing in the first quarter. We've been pleased with the results of these efforts to date and our ability to reach a broader pool of potential customers while maintaining attractive conversion rates and customer economics.

Another terrific way to drive increased customer awareness of our higher ARPU products is through old-fashioned person-to-person contact, which we deliver in part through our Feet on the Street program. We have made this a more significant element of our marketing strategy in the past 18 months, and we have been getting positive results to date.

As a reminder, we opened 8 of these offices in 2011 to 2012 time period and another 8 in 2013 based on the success of the program. In order to maximize their impact this year, we made the decision to open all 8 offices during the first quarter, and they have been maturing as we expected thus far.

The second quarter was still an investment quarter as it generally takes 90 to 120 days for new Feet on the Street offices to become productive and out of the training period. We expect our new offices will have a more pronounced impact and contribute further to ARPU growth in the latter part of the year.

Another critical element of our long-term growth strategy is increasing our brand awareness, which we are driving through our umbrella sponsorship of the Web.com Tour, the PGA Tour's development tour. During the second quarter, the tour season kicked into high gear with 10 tournaments held in 7 different states, as well as Latin America. We are using many creative approaches to leverage our relationships, such as featuring the Web.com tournament winners each week on NASDAQ's big screen in Times Square. In addition, we have been interacting with small businesses in their communities throughout the country as we have now held 12 small business forums in PGA tournament locations. We're still in the early phases of this community outreach, but we've been encouraged by the interest and interaction we're having at these events. Overall, we are excited by the early improvement we have seen in our brand recognition and expect that will continue to improve over the course of our sponsorship agreement.

Another key driver in our ability to deliver revenue growth is increasing our subscriber base. We had a very strong second quarter as we added approximately 25,700 net new subscribers, bringing our total subscriber base to 3,056,000. We've now added over 45,000 net new subscribers in the first half of 2013, which is a dramatic improvement when compared to nearly 30,000 net subscriber losses in the same period 2 years ago. This was the second consecutive quarter we've exceeded the 15,000 to 20,000 net new subscriber per quarter target that we had set at the end of 2012 as we, again, benefited from conversion rates on our marketing programs that were higher than our historical averages. It's important to note that we did not make any changes during the quarter on how we allocate our sales and marketing spend between generating subscriber growth and driving greater adoption of our higher-ARPU offerings. It is still too soon to tell if these higher conversion rates are a sustainable trend, but we do feel comfortable increasing our target for net new subscribers to the upper end of our 15,000 to 20,000 target range as we look ahead to the second half of the year.

While we spend a lot of time focused on ways to grow our subscriber base and ARPU, the other critical element of our growth strategy is continuing to maintain our best-in-class monthly retention rates. In the second quarter, our retention rate remained at 99%, and we feel confident our focus on providing outstanding customer support will enable us to stay at these levels. Low churn rates are essential to our growth strategy as it minimizes the amount of revenue we need to replace in any given quarter before we can begin growing.

On the product front, there has been recent progress related to the introduction of new top-level domains, or TLDs. We expect the governing body, ICANN, to begin awarding some new TLDs in the fall and that it would take approximately 12 weeks from award to customer availability. Our team is working diligently on plans and infrastructure to support the rollout of the TLDs as they become available. Given the lengthy rollout process and the likely limited demand for the uncontested names to be released initially, we expect minimal revenue impact in 2013.

To summarize, Web.com continue to execute at a very high level in the second quarter, and we are delivering above the plan we laid out for investors at the start of the year. Our growth strategy is driving positive results, and we are seeing good returns on investments we are making to accelerate revenue growth. We feel very good about our ability to realize our long-term growth and profitability objectives in addition to our leadership position in the small business online marketing space.

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

Kevin M. Carney

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

Beginning with the second quarter P&L, non-GAAP revenue was $131.4 million, excluding the $10.9 million impact of the purchase accounting fair value adjustment to defer revenue in the quarter. As David mentioned earlier, our non-GAAP revenue was just above the high end of our $130 million to $131 million guidance range. Revenue growth for the quarter was 8% on a year-over-year basis. On a consolidated basis, ARPU was $14.09, a $0.20 sequential increase from the first quarter. We were pleased with our ARPU performance during the quarter and expect ARPU to show continued sequential growth in the third and fourth quarters of 2013 as the incremental marketing investments we made in the first half of the year begin to fully impact the business.

We ended the quarter with approximately 3,056,000 subscribers, which was an increase of approximately 25,700 from the first quarter of 2013. As David mentioned, our net subscriber additions were above the 15,000 to 20,000 range that we've been targeting. Our strategy of focusing our incremental marketing spend towards driving increased adoption of our higher-ARPU products remains the same. We are pleased that we now believe we can deliver net subscriber adds at the high end of our regional range as we benefit from improved conversion rates through our traditional marketing channels. Our monthly customer retention rate remained at approximately 99%, and we are confident in our ability to maintain this level of customer retention.

Turning to profitability, we generated $89.4 million in non-GAAP gross profit for the second quarter, representing a gross margin of 68% compared to 67% last quarter and 68% in the same period last year. There's always a level of quarter-to-quarter variability in our gross margins, depending upon the investments we are making, especially in online marketing initiatives for products which have lower margins initially but ramp up over time.

Our second quarter non-GAAP income from operations was $34.4 million, representing a 26% non-GAAP operating margin. We generated non-GAAP net income of $26.4 million or $0.51 per diluted share. This represented 39% year-over-year growth coming in above the high end of our guidance range of $24.5 million to $25 million and $0.48 to $0.49 per share despite the approximately 800,000 share increase in our diluted share count as compared to our guidance. This increase was the result of the rise in our stock price over the past quarter.

Moving on, our adjusted EBITDA was $37.5 million for the second quarter, representing an adjusted EBITDA margin of 29%, comparable to the adjusted EBITDA margin in the second quarter of 2012. We are pleased with our margin performance in the quarter, which was flat with the year-ago period, even as we've significantly expanded our marketing activities. We believe this reflects the inherent scalability of our business model.

Turning to our GAAP results, revenue was $120.4 million, gross profit was $77.6 million, income from operations was $1.9 million, net loss was $9.7 million, and net loss per share was $0.20.

Moving to the balance sheet. Unrestricted cash and investments were $16.8 million at the end of the second quarter, which compares to $13.6 million at the end of the first quarter. We generated $33.4 million of operating cash flow in the second quarter, which was up over 100% from $16.4 million in the same period a year ago. Capital expenditures in the quarter were $3.7 million, which led to $29.7 million of free cash flow. Unlevered free cash flow, which adds back interest expense to free cash flow, was $37.5 million in the second quarter. We paid down $31.5 million of our outstanding debt and ended the quarter with total debt of $668.3 million, net of the original issue discount. We intend to continue using our growing cash generation capabilities to rapidly delever our balance sheet.

With that, let me turn to our near-term guidance and long-term growth targets. For the third quarter of 2013, we are currently targeting non-GAAP revenue in the range of $133.5 million to $134.5 million. We expect our non-GAAP net income to be in the range of $27.3 million to $27.8 million or $0.51 to $0.52 per diluted share for the third quarter, which assumes 53.2 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 of 2013. We are raising our revenue guidance to a range of $531 million to $534 million, an increase from our prior guidance 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 $105.8 million to $108.4 million or $2.02 to $2.07 per diluted share, an increase from our prior guidance of $102 million to $104.6 million or $2 to $2.05. This assumes a share count of 52.3 million and cash taxes for 2013 continuing to be in the low-single-digit range. We are pleased to be raising our EPS guidance for the year, especially given the approximately $0.05 per share impact in the second half of the year due to a significantly increased diluted share count related to our stock price.

In terms of cash flow, we are reiterating our pro forma free cash flow guidance of approximately $100 million and our pro forma unlevered free cash flow guidance of $135 million to $140 million. As a reminder, this guidance excludes the $7.2 million prepayment penalty we incurred in the first quarter as part of our debt refinancing transaction. We still anticipate our cash flow will largely converge with our non-GAAP net income in 2013, and we are well on track having delivered $44 million in pro forma cash flow in the first half. For the remainder of the year, we expect the usual seasonality, with the fourth quarter typically the strongest in terms of cash flow.

In summary, we are pleased with our second quarter results, which exceeded our guidance from both a revenue and profitability perspective. We are generating attractive returns on the increased marketing investments we are making, and we are confident we are on the right track to deliver accelerating revenue and ARPU growth in the second half of 2013 and beyond. We believe Web.com is well positioned to deliver on our longer-term low-teens revenue growth target while scaling cash flow generation and delivering best-in-class profitability of mid-teens to 20% earnings growth.

With that, we'd 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 from FBR.

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

David, this is the second quarter in a row of exceeding your net sub target. I know you commented that you're having better conversion rates. I wanted to dig into that. Are those better conversion rates -- on which marketing program? Is it more kind of the region around domain registration, or is it more in the value-added services, please?

David L. Brown

It's really coming to us in 2 areas, one in the Do-It-Yourself host websites and hosting areas where we've expanded some of our spend into those areas. It allows us to spend more money without seeing any deterioration in our cost of acquisition. And in fact, we're actually getting some gains there. And then in some of our online marketing products as well. So it's in 2 different areas.

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

All right. And then let me ask you on Feet on the Street. I know the most recent 8 aren't really online yet, but the first 8 that came on prior to this year, I know it's still a small percent of your business, but there's clearly hope that it can drive to be a larger part over time. Can you share with us how that first 8 has ramped, what you've seen in terms of maybe contribution per city, what maybe like the ARPUs typically are for the Feet on the Street program?

David L. Brown

Sure. So first off, we're very pleased with our original 8 offices. They've matured nicely there. They're fully staffed, and they really led the way for us, improving the process for the new 8 offices that we opened. But a typical mature office will have in the range of 5 to 7 salespeople. Each sales person will sell somewhere in the range of 1 to 2 sales per month, and you'll see an average ARPU in the $750 to $1,000 per month range, so that -- and there's also a fee, a startup fee that goes with each of those accounts. So that would be a sense of what we would look for in a mature office, and these newer offices are obviously ramping their way up to those levels.

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

Okay. And then finally for me, I just wanted you to touch on local search. I mean, this is something that -- at different times, there's been a pretty big potential for you guys. I haven't heard you talk much about it lately. I'm sure it's embedded a little bit in some of your marketing programs, but how has local search done for you? And if you could share any maybe quantitative anecdotes, that would be helpful.

David L. Brown

Well, I think it's -- I'm glad you brought it up because all of our online marketing products are all about local search. Our customers are typically focused on prospects that are within, literally, in some cases, blocks, if it's New York City, or miles, if it's a much smaller town. And much of our focus is on making sure that customers that are searching for something in their local area or a brick-and-mortar store finds our customer. And we do that in a variety of ways. We make sure that our customers are in all the relevant local and online directories. We also make sure that they're in some of the newer product areas like Yelp and Angie's List, where people might be looking for local shopping for information purposes. We also look at things like mobile. We were one of the pioneers with Google with their call product, their online call product, 'click to call' product, for mobile phones' use. And of course, we've made sure that all of our websites are mobile-enabled so that when people are searching on their local phones, when they're looking for the pizza shop, they can find it on their mobile phones. So we're not only a pioneer, but we're very, very focused in that area. We probably don't to use the buzzwords enough, but that's really the name of the game for small business today, is being found in local search, and most of it's happening online, and that's what we provide to the marketplace.

Operator

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

Lloyd Walmsley - Deutsche Bank AG, Research Division

Just following up on the last question, can you just give us a sense for how far you expect to take Feet on the Street this year and next year? And then when we think about the margin profile of this product, should it carry gross margins, taking aside, I guess, the selling costs, should it carry gross margins in otherwise similar margin profile to the rest of the business given that you are fulfilling a lot of this out of the same back-end infrastructure on the site development, et cetera?

David L. Brown

So Lloyd, in terms of our vision for this program, we think there are as many as 50 markets today that can support one of our offices that have enough large or small businesses that will pay $1,000 or thousands of dollars per month. So you likely will see us in future years continue to expand our program through those markets. We're still evaluating which markets to go to based on the learnings we have from our first 16. But as the year progresses, we'll update the marketplace on what our plans are for 2014 in terms of expansion. But I would tell you that based on the success to date, you will likely see us continue expand into 2014 and the years beyond. And then in terms of margins, what we've said in the past and what we're continuing to see here is that customers enter, and our new markets begin at lower than our average margin range, and sometimes, in the 40% to 50% range, a customer will begin with us. But if you remember what our product is, it's a bundle of a website that has been heavily optimized for organic search. And then there is a Pay-Per-Click advertising campaign. So the Pay-Per-Click advertising campaign drives the initial traffic, and we pay for that. But as the search engine optimization begins to take hold in a number of months, we can then take our foot off the accelerator, off the spending accelerator, and our margins begin to increase. And we've seen margins go from that 40% to 50% range to as high as 80%, and we believe these customers typically are moving quickly into our average margin range and maybe, in some cases, even higher. So we're very optimistic that this program, as it grows, obviously, there's always an early light dilution of margin as we bring them on. But we've been very successful in growing ARPU with these customers and also growing margin with the customers as the search engine optimization takes hold.

Operator

Our next question comes from the line of Sterling Audi from JPMorgan.

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

So I didn't catch the second area of the improved conversion. I caught the online marketing. What was the second one? And did you talk about what is the ARPU look like from those areas where you're seeing the improved conversion?

David L. Brown

Most of the improved conversion is still occurring in the lower-priced products, and they're -- and it really focuses around DIY websites, DIY hosting and some other online marketing products that are lower-priced products. So we've made a concerted effort to begin to expand the number of products that we advertise in Pay-Per-Click advertising, and that's principally the channel we're using. And we're just getting -- as we introduce new products, we're getting the benefit of there being very little competition for these products. Another one that isn't yet -- hasn't ramped up and is beginning to ramp up is in the area of eCommerce, eCommerce products. We're one of the few companies that can help a small business get online to sell their products because we own our own technology, and that has been a new initiative for us. We're beginning to spend money in the online channel to drive those products.

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

Okay. And you mentioned kind of the -- that there's still vast upsell opportunity within the base that you've already got. Is there any way to quantify kind of the number of solutions per customer or some way to quantify the penetration as it stands now?

David L. Brown

I think the best way to think about it, at least the way we think about it, is that our vast array of products that we're really actively selling in cross-sell and upsell carry price points that are, in most cases, $75, $100 or greater than $100. And we just reported an average ARPU of $14.09. So there's a lot of room for us to continue the dialogue with customers and sell them things that will make their online experience more successful. And then the way we look at it is, frankly, every day is a new day to talk to a customer about how to drive more traffic, either organically or on a paid basis, or how to get them into social media or how to get them into mobile. And so it's an evolving process for us. So there is not a static pool of products and customers that we're shooting at. It's an evolving group of customers as we add more and the product mix is changing. So there's really, I think, a long, long, road ahead of us of growing ARPU.

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

And last question. You talked about the Feet on the Street and how it takes to ramp a new market. If you go to one of your more mature, successful markets, what kind of contributions are achieved? You talked about ARPU, but is there a way for us to quantify what those 50 possible markets could ultimately look like to the business?

Kevin M. Carney

Well, this is Kevin. I think, Sterling, we haven't given any specific numbers on a market-by-market basis in terms of what the portfolio of customers looks like in the revenue and the market. But I think some of the things David said, I think, are helpful in that -- he's saying 5 to 7 salespeople per market, they're selling 1, 2, in some cases, more, but let's say, 2 on average, 1 or 2 on average. And at a current ARPU level of, say, $1,000 a month, I think you can quickly get to the math in terms of what an individual market and what 16 markets and then 50, ultimately, 50 could contribute in terms of new revenue contribution that's being added every month. And I think the other data point that we've talked about in the past is the other piece of the equation there would be churn. And our churn, although we haven't given a specific metric, we said is amazingly low in this product group, not that much higher than our average churn of 1%. So I think with those pieces, I think you could kind of begin to build out a model in terms of what the opportunity is.

Operator

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

Walter H. Pritchard - Citigroup Inc, Research Division

I'm wondering if you could just talk about your goals for growth in the double digits. You're currently sitting sort of at high single digits. How do you think about between units ARPU and churn? How do you think about those contributing incrementally to get you to where your revenue goal sits at long term?

David L. Brown

Sure. I think the best way to think about it is we are confident that we can continue to manage churn in this 1% range. So that, frankly, that stability gives us the ability to invest in sales and marketing, and we're investing quite heavily in growing ARPU. We think ARPU will be the principal driver of revenue growth, and it has historically in the last few years, and we think that will continue to be the case because of our emphasis. So the lion's share of our revenue growth, our low-teens revenue growth will come from ARPU growth. And a much lesser piece of it will come from subscriber growth. But fortunately, both things are contributing. And low churn is giving us that very strong margin that we have, which, again, it's a virtuous circle for us. That strong margin allows us to have confidence to continue investing and taking advantage of this mass adoption.

Walter H. Pritchard - Citigroup Inc, Research Division

And then just a question for Kevin on the free cash flow. Should we expect that you continue to use the substantial part -- I heard your language on the aggressively pay down debt, but should we equate that to roughly using substantially all of your free cash flow to pay down debt here for the foreseeable future?

Kevin M. Carney

Yes, you should.

Operator

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

Peter Stabler - Wells Fargo Securities, LLC, Research Division

So David, I wanted to go back to your comments in the previous question about the source of opportunity going forward. We hear you loud and clear on the ARPU opportunity and all the different drivers there. A couple of questions around domains. So first of all, one, any surprises for you coming out of the Durban meetings on ICANN timing? It sounds like there are a couple hiccups here and there on some of the issues, but largely, things remain on track. And so I'm wondering if there were any surprises there? And then secondly, as you talk about the business going forward and emphasize ARPU, I may be reading too much into this, but I guess one of our initial reactions is that you don't see that much opportunity in driving, as the #2 seller the U.S., in driving a lot of incremental domain sales, which some folks think could result in 2014 as a result of the domain dereg. So any thought is appreciated there.

David L. Brown

Sure. So to the Durban meeting. I would say absolutely no surprises. This is playing out just the way that we've described to our investors throughout the last 1.5 years. It's been a slow process. There are many hurdles to jump over, but it is happening. And you can see the first international extensions beginning to be approved now, and you'll see the first generics, which are the ones that we focus on, being approved here in just a couple of more months. Now they will be the uncontested ones, and it will be a limited population of them. And they'll be the very first ones to come out. So we don't expect there to be much traction in 2013 because by the time they get out and given the relatively, we think, low demand, we doubt that there's much financial impact in 2013. The real opportunity begins as some of the contested and more valuable, we believe, more valuable top-level domains begin to come out in the fourth quarter and into the first quarter and they run through their 90-day to 120-day cycle. And that's where we think the opportunity exists in 2014 for potential positive financial impact for companies like ourselves. So we really just -- it's not that we believe that there's little impact for us. It's just that in 2013, we've always believed this would be a nonevent just because of the hurdles that had to be jumped over. And the way ICANN would sort the opportunities, they're going from easy to hard, and in some respects, that means from low demand to high demand. And we're going to be prepared, however, to take advantage of any demand that occurs. From an infrastructure perspective, our team is going to be ready day 1. When the first generics are available, we'll already be ready to go and already be connected to all the providers out there.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Great. One follow-up, if I may, on this topic. So I hear you loud and clear on it being much more in 2014. In terms of the infrastructure preparation you need to do, however, that has to be well ahead of, really, any anticipated demand. And any significant costs associated with that, incremental costs you'd expect, or is that much more of a kind of just need to be prepared and organized and that kind of thing?

David L. Brown

Well, there are costs, but for a company of our size and our scale, we easily absorb those costs in our operational plan for this year. We anticipated those costs. It's part of being the second largest direct player that we're able to absorb them without them having any impact on our financial plans. So these were all well planned, well thought out, and we're right on track to be ready to go. And you won't see a blip in our numbers from a negative perspective as a result of them.

Operator

Our next question comes from the line of Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. So Kevin, based on this Feet on the Street, if you do a quick math on the kind of numbers you are giving out, I'm getting to, like, a $40 million annualized revenue number for 2014. Is that generally in the ballpark? And the second thing was, how should we think about funding them? It seems like your goal is to get the market to at least breakeven by the end of the year 1. So in that case, we could probably have this business self-funding in 2013, or do you think any incremental profits would be reinvested to kind of grow into the 50 markets? Second thing, the Facebook product. David, you spoke about it a little more clearly than you have earlier. Is there a relationship here that you can talk about? Are you going to be part of their preferred marketing developer program? And my final question is, last year, you spent a lot of time and energy in getting Domain Name customers in at low promotional prices. Those should be coming up for renewal this year. Can you talk about the opportunity there? I mean, what sort of price increases are you putting through, and what sort of benefit does it have to gross margin?

Kevin M. Carney

Okay. So I think on the Feet on the Street, I mean, I think that -- I can't comment, really, on terms of sort of breaking down the revenue contribution for the year. But I think the other things that you commented on are accurate. We said that our goal is for them to breakeven within a year. That remains our goal. And as we said, we're performing against our metrics well, which is why we're continuing to invest in this initiative. And I think David's commented in the past that we've learned as we've rolled out that our most recent markets, our newer markets performed better sooner than the older ones. And I think as they continue to perform, if they continue to perform as they have been, it's an area that we'll continue to invest in into next year.

David L. Brown

In terms of the Facebook product, just as I commented in my remarks, we are one of the leading players with Facebook right now in their beta program to reach small businesses and help them utilize the Facebook product. And so we're very pleased to be working with them in this partnership, where they train, educate and collaborate with us. We've commented in the past, in past calls, that we've worked very closely with them, and we continue to work very closely with them. And the benefit of that is what I reflected in my comments. We've been able to create a much more valuable product that's much more valuable for our clients. And the good news is where we thought we might see a trade-off of price and volume, we actually didn't see that full trade-off, and it's been beneficial to us in terms of the revenue that we generate. It's not a home run. But most of our business is about making small positive steps forward, and so we've made another one of those with our Facebook product. And then in domain pricing, you're correct. After the initial year, where we use promotional pricing, we do reprice customers. And we typically -- it's typically a significant price increase, and we've done -- followed this practice for a number of years. We've seen no change in churn as a result of repricing them because customers -- because domains are very sticky. And once a customer is acquired here and we attach other products to the customer, then you can tell from our churn rate that we own that customer relationship. So you'll see this repricing benefit in our growing revenue growth. And frankly, it's one of the strengths of our business model that we can acquire customers very economically and then make them more profitable over time. And so it's embedded in our numbers for this year, and you'll continue to see that benefit flowing into next year.

Operator

Our next question comes from the line of Andre Sequin from RBC Capital Markets.

Brian Peak - RBC Capital Markets, LLC, Research Division

This is actually Brian Peak on for Andre. Piggybacking on this Facebook update, can you provide any color in terms of adoption rates and possibly, ROI that your customers are seeing to date? And possibly, do you have a sense of how these customers are measuring ROI?

David L. Brown

Sure. So one of the big changes that we made when we came out with the Web.com Facebook Boost is that we wanted to make sure that customers generated more fans quickly and they also had interaction with those fans because I think Facebook had learned that that was one of the key to value creation for business customers. And so we focused on that. We make sure that our customer, we actually helped them grow their fan base, and we also helped manage the interaction with that fan base by helping draft copy and have technology that triggers the development release of that copy. And that's really how customers measure the value creation, is who's following them and who's interacting with them. And ultimately, we give our customers a report of that, frankly, on a real-time basis. And then we talk with them frequently to make sure that the content we have for interacting with customers is fresh and relevant, and so that's how we're driving the process.

Brian Peak - RBC Capital Markets, LLC, Research Division

Do you have a sense of whether or not they're seeing a quantifiable lift in sales?

David L. Brown

It's not something that we -- the only time we have a sense of that, Brian, is in some cases, we've actually activated our Facebook customers with eCommerce capability. We can see some signs of it there. The best sign is that the customer hangs around, and we're making progress in that area. And again, there's a great deal of demand for this product. So those are the 2 best indicators we have today.

Operator

Our next question comes from the line of Tim Klasell from Northland.

Tim Klasell - Northland Capital Markets, Research Division

My question has to do with the new subscriber growth. Have you had a chance to take a look into where the strength is coming from as far as maybe by vertical? Is it customers from the builders, is it individuals? What type of businesses are subscribing more than maybe what you were seeing this time last year?

David L. Brown

Well, I think that's -- the way you phrased it there at the end is very helpful because certainly, last year, the economy has improved in certain sectors, and we're seeing more strength in certain sectors. The home construction sector has strengthened, and we're seeing, in the lead generation areas, good traction in that area, and I would say that's the key when obviously, anything involved in real estate has strengthened, and we've seen good traction in those areas as well. But principally, our growth in subscribers is still focused on -- there are subscribers coming in across the entire price profile, but most of them are coming in at lower price. And we don't really have -- it's a very, very big mix of vertical markets. It's, frankly, people who look, on a DIY basis, to buy a hosting account or a DIY website or a domain. It's across the board. But in our targeted activities, we're seeing good growth and good rebound in areas, in the real estate areas, especially.

Tim Klasell - Northland Capital Markets, Research Division

Okay, good. And then just another one on the Feet on the Street. You sort of mentioned that you compare sort of a baseline with last year's group of 8 with this year's. Did you set that baseline to get productive a bit faster because you had more experience about the same or maybe slower because maybe those weren't as less attractive territories?

David L. Brown

The answer is that we've improved. Through our learning process, it allowed us to improve. And so our newer offices are performing better and faster. They're leaping tall buildings. It's much better than our original offices were. And that just comes from having had now 1.5 years of experience. We recruit better. We have better measurement tools. We have better training programs. So across the board, I'd say we're improved over previous periods.

Operator

Our next question comes from the line of Sam Kemp from Piper Jaffray.

Samuel Kemp

Just real quick. Apologies, I missed it. But can you give us a quick competitive update, specifically on the higher-ARPU products?

David L. Brown

Yes, there's really not a lot to give you there. There's been very little activity in the higher-ARPU range. Most of the -- most of our competitors are -- kind of play in what I call the DIY space, and so they're in the single-digit dollar to low-double-digit dollar ARPU. And we compete very successfully with those, but there's very few folks that have the online marketing, mobile, social products that we have, and so there's very little to report there other than -- in terms of change. There are players in the marketplace, but to our knowledge, we're growing rapidly in some of these value-added areas, and we don't see a lot of competition to date that's growing rapidly.

Operator

Our next question is a follow-up question from the line of Sterling Auty.

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

So I wanted to try to -- see if you could give us a sense of how much of the ARPU uplift is from upsell of newer customers versus older customers. I mean, if you really can detail kind of the idea of a cohort analysis, how much upsell do you get kind of year 1 versus year 2 versus some of those that's been around for a while?

David L. Brown

We can't. I can't give you that analysis, but what I can tell you is that it's very beneficial to be adding net new subscribers because new customers buy products more easily and faster than older customers. It's not to say older customers don't buy them, but we have better conversion with brand-new customers. And so that's a key part of our growth strategy is adding more subscribers, and that's why we're very pleased to be doing it. But again, we're getting very good traction with existing customers as well. So that's probably the only truism that I can give you is that all things being equal, a brand-new customer buys quicker than an existing one. But they both buy, as evidenced by the growth in our ARPU.

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

And can you just kind of characterize the customer acquisition costs by your various channels? Not to go through, in detail, the actual numbers, but any changes or change to trends in the customer acquisition cost?

David L. Brown

There haven't really been any changes other than -- I've kind of referenced that our conversion rates have been better, which should tell you that in some cases, our cost of acquisition is actually better than it has been historically. And that's -- we're not -- we're really focused on growing ARPU and selling some of our higher value-added products. That's the emphasis of the business. But we're picking up steam with subscribers because we're getting better conversion rates, i.e. lower cost of acquisition, as we spread in the new product areas.

Operator

Our last question comes from the line of Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

David, the way we look at your products, it kind of provides the unsophisticated small and medium business to get an on-ramp to the Web. But you made an announcement a couple of weeks back where it was more of a lead generation transaction kind of product, which would have closed the loop in terms of service transaction. Can you talk about that more at a high level about what you're thinking there? I mean, is that something we can expect from you going forward, more of these closed loop products? Is that a strategic imperative for the company?

David L. Brown

Sure, I'm happy to talk about it. So the announcement we made regarding our renovation experts product group here really focuses on the home construction and home remodeling business. And it's something we touched on in an earlier question. As we saw more strength in that area and a rebound in that area, if we begin to put ourselves in, really, the shoes of a home contractor, what are they looking for when they do business with an Internet company? Well, the answer is they're looking for something to grow their business. They're not trying to be an Internet operator. There's just trying to be a home contractor. So what we've done is made it incredibly simple for them to engage with the Internet. We literally deliver a qualified lead, and some of what we were talking about here was not only do we qualify the lead, we actually talk to the consumer that's interested and make sure they really do want to talk to someone. But we also set up the appointment so that everybody shows up. So the idea is put yourself in the business's shoes, what is the highest value that you could deliver short of selling everything for them or you could deliver up a qualified lead and make sure that they are absolutely connected. And we believe in this. We do elements of this throughout our business. Our leads by Web product is basically taking a website, optimizing it, marketing it and then delivering a qualified phone call, fax or email to a small business. Again, another much higher value-oriented. That's what we believe small businesses are looking for. They don't show up to their story each day trying to figure out how to get their DNS changed or how to maximize their hosting account. They're trying to figure out how to get people to visit their website and then come walk in the door. And we'll -- frankly, if we have to, we'll try to figure out how to get them to walk in the door.

Operator

I'd like to turn the call back over to Mr. Brown for closing comments.

David L. Brown

Well, thank you all for joining us today to talk about our successful second quarter and the outlook for our business. We appreciate your interest and look forward to speaking with you about our progress. We'll be presenting at Citibank's Global Technology Conference in New York City in the first week of September and the Deutsche Bank Access Technology Conference in Las Vegas during the second week of September. As always, feel free to contact us here at Web.com if you have additional questions. Thank you, and good night.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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