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Web.com, Inc. (NASDAQ:WWWW)

Q3 2009 Earnings Call

November 3, 2009 5:00 pm ET

Executives

Tim Dolan – ICR

David L. Brown – Chief Executive Officer & Director

Kevin M. Carney – Chief Financial Officer

Analysts

David Hilal – FBR Capital Markets & Co.

Jeff Martin – Roth Capital Partners, LLC.

Stephen Ju – RBC Capital Markets

James Cakmak – Sidoti & Company

Analyst for Sameet Sinha – JMP Securities

Vincent Colicchio – Noble Financial Capital Markets

Operator

Welcome to the Web.com third quarter 2009 earnings conference call. At this time all participant are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Tim Dolan with ICR.

Tim Dolan

Thank you for joining us today to review Web.com’s third quarter 2009 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. Please note that our remarks today contain forward-looking statements. The words expect, believe, will, going, begin, seek, 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 10K for the quarter ended June 30, 2009 for more information on these risks and uncertainties and our limitations that apply to forward-looking statements.

Web.com expressly disclaims any obligations or undertaking to release publically 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 financial measures is available on our website www.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’d like to turn the call over to our Chairman and CEO David Brown.

David L. Brown

To start, let me emphasize that we were pleased with the company’s execution during the third quarter which resulted in revenue and non-GAAP profitability that were consistent with our guidance. Even more importantly, we continued to expand our customer base, brought customer churn down to the lowest level in the history of the company and continued to make progress in our partner diversification strategy.

Throughout the most challenging part of the economic storm Web.com has continued to deliver strong non-GAAP profitability and cash flows from operations. At the same time we have been putting in place a foundation to drive enhanced revenue growth from a long term perspective. We are optimistic that our efforts will lead to positive sequential growth in the coming quarters and we continue to believe that Web.com is well positioned to accelerate revenue growth more meaningfully when the small business environment improves.

Taking a look at our summary results for the quarter, total revenue came in at $26.1 million which was consistent with our guidance and compared to $26.5 million last quarter. Importantly, our subscription revenue has increasingly stabilized over the course of 2009 improving from a 7% sequential decline in the first quarter to what was approximately a flat sequential performance in the third quarter.

From a profitability perspective we delivered an adjusted EBTIDA margin of 19% in the third quarter and non-GAAP diluted earnings per share of $0.15 which was also at the midpoint of our guidance. Taking a look at the macro environment our commentary on the current state of the market is similar to recent calls. While we do not see the market as getting more difficult it remains a challenging sales environment. As such, we continue to plan our business based on the assumption that the economy will remain challenging from a near term perspective.

Even so, there are a number of company specific factors that provide us with growing optimism. In particular, we are encouraged by the stability of and improvement in a number of our key customer metrics. For starters, during the third quarter we added approximately 5,600 net new subscribers ending the quarter with over 272,000 subscribers and representing the third consecutive quarter in which our net subscriber additions has improved on a sequential basis.

The drivers of this performance in the face of a difficult selling environment has been solid execution across a number of distribution channels including our private label brand, online marketing, partner generated leads as well subscriber migrations. During the third quarter, consistent with our multipronged customer acquisition strategy, we migrated approximately 6,000 relatively low ARPU but highly profitable customers on to Web.com’s platform from one of our partners that is diversifying away from this aspect of its business in order to focus on its core competencies.

As we have discussed on recent calls, programs such as this has contributed to Web.com’s strong profitability results over the past year while it has been more difficult to grow the top line and it provides us with a long term opportunity to up sell and cross sell. As we look ahead, we have wound down this particular migration program to the final stages. However, as our results for this quarter indicate, we have made solid progress ramping other partnerships including other do it yourself related partner programs that we believe have the potential to deliver higher volumes of similarly low price point highly profitable customers where we have the opportunity to up sell over time.

In addition, we continue to make progress towards our goal of growing and diversifying our overall partner channel. We believe that Web.com is increasingly viewed as a partner of choice for small business focused vendors. As a result of our strong financial profile, proven ability to manage the business in good and challenging times and expanding the suite of online marketing solutions. In recent quarters we have discussed a meaningful expansion of our long standing relationship with Discover which now includes the Discover Small Business Card customer base in addition to a new strategic relationship with Dunn & Bradstreet in which Web.com is powering D&B’s website and ecommerce services for their small business customers.

We have also recently announced a significant expansion to our partnership with MerchantCircle. They are one of the largest networks of local business owners with $20 million unique visitors per month. MerchantCircle’s 900,000 local business members will have access to Web.com powered marketing products and services designed to help them successfully market their businesses online. As part of the expansion, Web.com became MerchantCircle’s exclusive provider of search engine marketing services in addition to providing other value added web services. Web.com’s customers have direct access to MerchantCircle’s growing directory providing them with greater online visibility and access to perspective customers.

I’m pleased to share two additional partnerships that we have recently added starting with First Data. Web.com will provide web services, search engine marketing, search engine optimization tools and ecommerce solutions as part of this relationship while First Data will offer a suite of payment processing products and services to our customer base that give merchants the ability to transact payments securely both online and at the point of sale.

Lastly, we announced a relationship with Progressive Insurance during the third quarter. This represents and addition to our enterprise sales channel in which we target large franchises and other top down organizations that can influence distributed business units to use Web.com. In this case, Progressives’ 40,000 plus agents will have access to Web.com’s professional website design and online marketing packages which include a designed website with a unique domain address, listings on major search engines and directories, a real time score card to measure results and to access web analytics, an agent RSS news feed and customized real time agent quoting functionality.

With 73% of auto insurance companies shopping online and 67% eventually buying from an agent, it becomes all the more important for Progressive to provide customers and prospects with a high quality online experience and we’re excited to be their trusted web services and online marketing partner.

During the third quarter we also continued to grow our relationship with CCA Global, another one of our enterprise channel partners specifically around search engine marketing solutions to their members. CCA Global owns many fine brands including Carpet One and Flooring America. We continue to believe that our enterprise channel as meaningful potential from a long term perspective and specific examples such as Progressive Insurance and CCA Global underscore our belief.

In addition to our efforts to expand our distribution channels and reignite subscriber additions, we are also making solid progress in our efforts to lower customer churn. During the third quarter churn came in at a record low of 3.4% which was down from 3.7% in the second quarter and 3.9% in the first quarter. While we do not expect churn to move in a straight line fashion as it has over the past several quarters, it is gratifying to see our efforts paying off with respect to providing our customers with the technology and service required to make their online businesses successful.

Through organic means and acquisitions, Web.com has assembled a broad, powerful and easy to implement suite of solutions that are designed specifically for small businesses. These solutions include web services, search engine marketing, search engine optimization, ecommerce, logo and brand identity solutions as well as solutions tailored for specific vertical markets such as home building and construction.

Online marketing and ecommerce related solutions outside of our core web services exceeded 30% of our overall business during the third quarter and they continue to represent the fastest growing component of our overall business. In addition to using our strong balance sheet and cash flow to make strategic acquisitions and expand our customer base and product suite, we also continue to enhance shareholder value by executing our share repurchase program.

We repurchased approximately 371,000 shares and shares issuable upon the exercise of stock options during the third quarter of 2009 bringing the total number of shares and shares issuable upon the exercise of stock options repurchased to over 3.2 million and 225,000 respectively or approximately 12% of the total shares outstanding since we announced the $20 million share repurchase program in the third quarter 2008. We continue to have approximately 40% of the original $20 million approved amount still available to repurchase under our current share repurchase program.

From a summary perspective we are encouraged by the further stabilization of our financial results in the face of the most challenging economic environment Web.com has ever faced. We believe the company has weathered the most difficult part of the storm but expect the economy to remain challenging for at least a couple of quarters. That said, we believe the company’s solid execution is putting Web.com in a position to resume modest sequential revenue improvement in the coming quarters.

In addition, we believe our success in expanding our distribution channels positions the company well to generate accelerated revenue growth when the business environment eventually improves in our target markets. Before turning it over to Kevin I would like to thank Jeff Stibel for the contributions that he made to Web.com. As we announced roughly three months ago, he and the company mutually agreed that it was the right time for Jeff to transition to the next stage of his career. Jeff played an important role in successfully integrating the Web.com acquisition which we shared was complete during our second quarter call and which has put our company in a position to deliver strong profitability and cash flow throughout this challenging economic period. We wish Jeff the best of luck.

With that, let me turn it over to Kevin to review the quarterly financials in more detail.

Kevin M. Carney

Total revenue for the third quarter came in at $26.1 million which was slightly above the midpoint of our $25.5 million to $26.5 million guidance range. Within total revenue subscription revenue came in at $25.2 million which compared to $25.4 million in the previous quarter. The remaining $892,000 came from professional services and other revenue which was a slight decrease from $1 million during the previous quarter.

As a reminder, last quarter we announced that we sold our NetObjects Fusion product line and as such we do not anticipate generating license revenue moving forward. Rather, we are exclusively focused on selling our broad suite of subscription based solutions and related professional services. There is $3 million remaining purchase consideration that is expected to be paid over the next couple of years and will be reported on the discontinued operations line as cash is received. However, future payments are not anticipated to begin until the second quarter of 2010. Revenue derived from the licensing of our patent portfolio as it occurs will be reported on a separate line item now called other revenue.

We ended the third quarter with over 272,000 subscribers, an increase of approximately 5,600 from last quarter and our ARPU was $31.12 down from the $31.85 last quarter as the result of the addition of approximately 6,000 lower priced but high margin ARPU customers that David referred to earlier. Over the next couple of quarters we expect to see ARPU start to stabilize as new higher price services are promoted with new and existing partners.

Our overall strategy has not changed, we will continue to balance our objectives for maximizing ARPU and subscriber additions and are likely to see fluctuations in these numbers on a quarter-to-quarter basis. We do not view one as a greater strategic priority over the other. The key is to manage both in a way that can drive profitable growth for the company over the long term. Our consolidated churn rate came in at a record low level of 3.4% during the third quarter which was down from the previous record low level of 3.7% last quarter.

Turning to gross profit, we generated $15.9 million in gross profit for the third quarter representing a gross margin of 61.1% which compared to 62.3% last quarter. The slight sequential decrease in gross margins relates primarily to lower professional services revenues off a similarly sized cost structure and secondarily due to an increase in search marketing revenues from a mix perspective.

Moving on to operating profitability, we’ll focus our discussion on non-GAAP or pro forma results because we believe that excluding the effects of the non-cash and non-recurring items such as stock-based compensation, amortization of intangibles arising from business combinations, restructuring charges and revenue eliminating and purchase accounting provides the best indicator of the health of our overall business and the level of efficiency of our operating infrastructure.

On the operating expense side, non-GAAP sales and marketing came in at $5.8 million compared to $5.7 million in the prior quarter and representing 22% of revenue. As we pointed out on our last call, while not significant, we started to increase investments in a number of marketing programs that we believe will contribute towards the company’s goal of returning to positive revenue growth. Non-GAAP general and administrative expenses were approximately $3.4 million representing 13% of revenue and down $642,000 sequentially due primarily to decreases in legal and professional fees as well as compensation related expenses.

Non-GAAP research and development expenses came in at $2.1 million, up slightly compared to last quarter and representing 8% of our revenue. Our third quarter non-GAAP income from operations which excludes the effect of stock-based compensation, amortization of intangibles, restructuring charges and revenue eliminating and purchase account was $4.1 million representing a 16% non-GAAP operating margin. Based on 27.3 million shares outstanding for the quarter, we generated non-GAAP diluted EPS of $0.15 per share which was consistent with our guidance of $0.14 to $0.16.

Adjusted EBITDA which excludes the impact of stock-based compensation, restructuring charges and depreciation and amortization expenses was $4.8 million for the third quarter of 2009 representing an adjusted EBITDA margin of 19%. We also appreciate that investors need to analyze our results on a GAAP basis so we provided a full tabular reconciliation of these GAAP results and the non-GAAP results as part of the earnings release.

In summarizing, the third GAAP results, gross margin was 61%, sales and marketing expense was $6 million, R&D expense was $2.2 million, G&A expense was $4.1 million, depreciation and amortization expense was $3.4 million and non-recurring restructuring and related stock compensation charges were $1.9 million leading to a GAAP operating loss of $1.6 million, a net loss from continuing operations of $1.6 million and a net loss per common share of $0.06.

Of note, the non-recurring charge reported in the third quarter was associated with the completion of the Web.com integration discussed last quarter and earlier in today’s call. The GAAP results including a reconciliation to non-GAAP results are available on our website at www.Web.com under the investor relations sections.

Turning to the balance sheet, unrestricted cash and investments were $37.3 million at the end of the third quarter up from $35.6 million at the end of the second quarter. We generated positive cash flows from operations of $5.1 million excluding the pay down of accrued restructuring expenses. On a GAAP basis we reported cash flow from operations of $3.5 million. We will continue to evaluate the best way to manage the company’s balance sheet and cash flow generation and our actions may include, among others, capital preservation, M&A opportunities as well as continued repurchase of the company’s common stock. Which areas we focus on may vary from quarter-to-quarter.

I would now like to turn to our outlook. For the fourth quarter of 2009 we are targeting revenue in the range of $25.5 to $26.5 million which is similar to our guidance for the third quarter and reflects the stabilization in our revenue. Assuming a non-GAAP tax rate in the single digits, we expect our non-GAAP net income per diluted share to be in the $0.14 to $0.16 range in the fourth quarter. This also assumes an increase in our dilutive shares to 27.7 million diluted shares outstanding due to the increase in our stock price.

In summary, we’re pleased with the company’s continued high level of execution. Our focus on continually improving our operational efficiencies has enabled Web.com to continue delivering strong non-GAAP profitability and cash flow and we continue to expand our sales channels while quality services help to bring churn down to record low levels. We believe our efforts will enable Web.com to return to modest top line improvement in the coming quarters and we are confident in Web.com’s long term market position and ability to deliver and enhance revenue growth when the economic environment improves.

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) Your first question comes from David Hilal – FBR Capital Markets & Co.

David Hilal – FBR Capital Markets & Co.

David, you spoke about some of the new partnerships that are gaining traction, I know also you have the direct channel, the private label business that you were going to increase your focus on there and I wanted you to talk a little bit about any early traction you’re seeing with that channel.

David L. Brown

In our direct channel, also known as our private label channel, the Web.com channel, we have been continuing to make very quiet silent strides to grow that part of our business essentially going in to the market and building a brand. A significant portion of our DIFM sales today are coming from lists that don’t come from partners and almost all of our DIY sales are sold under the Web.com brand. So, even though partnerships are very important to us in helping to diversify our go to market strategy, increasingly our private brand is driving more and more of our sales.

We think this is very positive for the long run of the company. It helps establish a brand in the market. It also is a more profitable segment of our business because it eliminates revenue share which is one of our cost of goods.

David Hilal – FBR Capital Markets & Co.

Kevin, on the guidance – when I look at the revenue guidance for Q4 I guess the top half of the range looks good but the bottom half suggests that revenues could be sequentially down. When I deconstruct the business I think about net subs being up again in Q4 so the biggest other variable which would lead to sequentially down rev would be lower ARPU and I would think with this one partner winding down, the partner that you’re getting the kind of very low ARPU customers from, I would think ARPU shouldn’t be down or at least not down that much to cause revenues to be sequentially down. When I think of the moving pieces maybe you can help understand under what scenario revenues would be down sequentially in Q4?

Kevin M. Carney

I think as you saw and we commented in our remarks, we saw the professional services were down sequentially although not significantly but I think that we’ve seen a little bit of pressure with the economy on the higher priced professional services packages and I would say to kind of speak to the lower end of that guidance range that’s where we could see some softness but not expecting at this point.

David Hilal – FBR Capital Markets & Co.

Related to that, the gross margins on PS, I know that fluctuates kind of wildly but was that lower this quarter simply because of the lower top line on PS?

Kevin M. Carney

Exactly, exactly.

Operator

Your next question comes from Jeff Martin – Roth Capital Partners, LLC.

Jeff Martin – Roth Capital Partners, LLC.

Could you give us what gross adds are for the quarter and what percentage of new adds were partner driven?

Kevin M. Carney

Well, I think you can back in to the numbers. I think you’ll get from a gross add perspective you’re going to come out just a little under 37,000 for the quarter and I think we’ve talked, I don’t know that we break out the contribution among our partners at this point but I would say not a significant change. I think we’ve highlighted those things that are significant in terms of the migrations that we saw in the quarter as David commented, in the range of 6,000.

Jeff Martin – Roth Capital Partners, LLC.

When you say winding down on the migrations, does that mean that you’re done or to be a modest level in Q4?

David L. Brown

For all practical purposes, we’re finished. There could be some remnants of migration still occurring in the fourth quarter but nothing material.

Jeff Martin – Roth Capital Partners, LLC.

Could you give us a little bit of detail in to what are the specific efforts that you’ve put in place to lower churn? You spent quite a bit of time discussing that and you’ve done a nice job at it. What are some of the specific things that you are doing to accomplish that?

David L. Brown

It’s basic blocking and tackling. It’s improved customer service, we answer the phone within 30 seconds for every call that comes in or better, we really stress customer satisfaction. We measure it by surveying our customers every month. Every customer interaction is surveyed and we then randomly survey several hundred of our customers every month and even churned customers to understand their degree of satisfaction with a variety of different metrics in our business. It’s a very intensive blocking and tackling process that is paying off. We even have gone so far as to completely reengineer our billing processes and how we look at billing failures and how we improve those types of activity.

So again, every little piece of the customer process here is examined and we believe in continuous improvement. There won’t be a time in the life of Web.com that we aren’t trying to make the various metrics that we measure get better even if it’s just a small improvement across many different metrics, you can see the kinds of affects it’s having on customer churn. This is from our perspective a very pleasant surprise. We certainly wouldn’t have expected to see churn continue to move down at the significant step that it is. But, we’re very encouraged by that trend.

Jeff Martin – Roth Capital Partners, LLC.

On the sales and marketing side of things, on specifically the marketing, are there certain non-partner areas that you’re starting to see some nice sequential improvement in terms of success rates and cost of customer acquisition?

David L. Brown

Yes there are. There are two areas where we’ve been consistently strong and we’re now beginning to see even some greater traction. The first area is in online marketing. When we made the Web.com acquisition, one of the things that we brought in to the company was some real expertise around advertising on the Internet and acquiring customers that were shopping on the Internet. After all, we’re helping small businesses with this, we needed to be very good at this and today we are very good and we have a very low cost of acquisition.

We’re beginning to see an increase in new subscribers coming from that channel even at the same cost of acquisition so that’s a positive step for us. But, another area that was already touched on earlier relates to our own brand, our ability to acquire customer lists in the marketplace and then to market to those lists but not in a partnership mode. These are lists that we purchase or we acquire organically through our own development and then do outbound calling.

That is becoming an increasingly large part of our calling list and the benefits for that are significant. One, it’s solely under our brand and two, it’s devoid of revenue share so it’s more profitable for us over the long term.

Jeff Martin – Roth Capital Partners, LLC.

Last question, on the restructuring charge, if you went in to detail on this I missed, what specifically was that for?

Kevin M. Carney

I think as we mentioned on the last call we did comment very briefly on this call that it was related to the completion of the Web.com integration and then freed up a number of resources that we have maintained over the last two years to complete that. I don’t know that we did comment but just in terms of the details there, there’s $1.9 million of restructuring charge and approximately, you can see on the bottom of the income statement about $1.2 million of that would be stock-based compensation and that would be due to the acceleration of incentive stock options.

Operator

Your next question comes from Stephen Ju – RBC Capital Markets.

Stephen Ju – RBC Capital Markets

Can you talk about the competitive landscape? It seems like Web.com is finding stabilization, it doesn’t seem like others in the industry are seeing the same thing as far as you can tell. Is the competitive intensity starting to pick up in direct channel?

David L. Brown

From a competitive perspective, really nothing has changed. The word, what we hear from competitive CEOs and other business development officers that we run in to in the marketplace is that it is still a very challenging environment. Competitors are still struggling to grow in the business. Much of our progress and what we would call stabilization is really just a result of work that we began last year adding more partners. We’re in a very enviable position in that we can ramp our business by bringing in more leads by adding more partners.

Even if our partners are struggling we have been able to overcome some of that just by adding more partners to our mix and at the same time as the economy has begun to stabilize a little bit, we’ve been spending a little bit more on marketing as I mentioned making some inroads in acquiring lists on our own not through partners. We’re very fortunate that we’ve made that progress and then on the other side of the equation, any time you can lower churn in a subscription business, it is a very powerful drive of both growth and profitability.

We’ve never given up, we’ve been relentless in focusing on our churn and customer satisfaction in our business and we’re beginning to see the payoff from that. I’ve commented on this before Stephen and that is we can’t take all the credit for this. I think some of it is just the natural adoption of the Internet by small businesses perhaps even this difficult economic times forcing small businesses to turn to the Internet as a low cost marketing avenue is really the wind at our back here.

We’re very encouraged by that, we’ve always expected that to be the case and perhaps these difficult economic times are actually beginning to benefit the company by causing customers to hang on to us even more than before.

Operator

Your next question comes from James Cakmak – Sidoti & Company.

James Cakmak – Sidoti & Company

Turning to the balance sheet, you guys are obviously utilizing your cash position towards share repurchases. Can you comment on how you’re thinking about that now that the stock is up from when you first got the authorization in? Any color you can provide on the repurchase of the option?

David L. Brown

Let me answer buzz questions, first off we look at our use of cash whether it’s in share repurchases or acquisitions of customers or companies for that matter, we look at it very opportunistically and on a quarter-by-quarter basis. It really is a function of what opportunities existed in front of us. We’re even more opportunistic on share repurchases today than we would have been when our stock price was in the $2s, $3s or $4s but there will be opportunities where we can enhance shareholder value by using our share repurchase program going forward.

There will also be opportunities where we can acquire customers or acquire companies, additional needed assets. You should expect us to continue to be very opportunistic in our use. We’ll still use both of them, it just depends upon the circumstances at the time. With respect to the repurchase of the options, we viewed that essentially as a repurchase of shares. These were dilutive options, in the money options.

The reason we acquired them rather than letting them be exercised and acquiring the shares is because it actually allowed us to reclaim those options back, in to our options pool which can then be let back out to our employees in long term incentives in the future. We really got a double benefit. We reduced shares outstanding and we also reclaimed some additional options that we can reuse in the future.

James Cakmak – Sidoti & Company

Drilling down further on the acquisitions, are you guys seeing opportunities out there? How much of a priority would you say acquisitions are because you can benefit from the significant scale that you have? How active would you say you are looking?

David L. Brown

Well, we continue to be active. In fact, we’ve never stopped being active. As you would note if you look back through the last two years we’ve done an acquisition or two each year and that’s after going through many different opportunities and eliminating many different opportunities that didn’t fit the profile that we have. Our profile again is it’s an asset that we think is going to be valuable in helping a small business succeed on the Internet, it’s an accretive transaction, it’s one that fits in to a small business marketplace.

That has been our focus and in a few rare cases we’ve looked at acquisitions that could help build scale and drive additional profitability and therefore EPS for our investors. Those are how we look at them and there are opportunities in the marketplace today so we’re very active. We have a full time team that looks at that. I stay active with that, Kevin stays active with it as well and we’re cycling through opportunities all the time.

But, I will tell you it’s a true Easter egg hunt, trying to find good opportunities that fit the requirements that I just defined that will also fit in to the culture of our company and that we can implement successfully. After seven of these we feel that we’ve demonstrated to the market that we know how to integrate acquisitions successfully and we also know how to walk away from ones that won’t make sense. We’re going to continue to be very careful but also very, very vigorous in looking for acquisitions.

Operator

Your next question comes from Analyst for Sameet Sinha – JMP Securities.

Analyst for Sameet Sinha – JMP Securities

Question, last quarter you talked about some investments you’d be making in order to service some of these new partnerships and if you look at the sales and marketing line it was up very marginally and I’m wondering if that’s perhaps masked by some other efficiencies that you had. So, if you can give us a sense of where you are in terms of hiring there and investments you are making to drive some of your growth opportunities?

Kevin M. Carney

I think last quarter I tried to give some indication of what we meant by that and I would say that there are a couple of areas. One, you commented on very modest increase in sales and marketing but probably more so on these other areas would be as we talked about on the call a number of new partnerships that we’ve implemented there are implementation costs and investment in people that come along with those so that’s where you’ve seen it. You would see those on the R&D line, you’d see them as cost of sales as well as we begin to staff and then ramp those partnerships.

Analyst for Sameet Sinha – JMP Securities

Just you’d commented on this quarter on the ramping of online marketing ecommerce services being over 30% of revenue, can you give us a sense of how fast that piece of you business is growing?

David L. Brown

All I can really note to you is that it was a little over 25% at the end of 2008. We went past 25% during the course of this year and have exceeded 30%, we’re just above 30% now. So, you can see that it is growing relatively fast compared to the rest of the business. Having said that, we have gotten questions from folks about the core web services and whether we believe that business can grow and we are very confident that the core web services is also a business that can grow and as the economy improves and as some of our programs that we put in place continue to develop you will see sequential growth in both web services and even faster growth in ecom and online marketing.

Analyst for Sameet Sinha – JMP Securities

How do you think the growth of that segment of the business speaking to the marketing and ecommerce business, it seems as if your churn is significantly lower than others in the industry and how do you thinking the ramping of those two services continue to impact churn going forward?

David L. Brown

Well, I think our value proposition has always been to try and make sure that our customers succeed. Sometimes, that’s hard medicine. That means bundling a variety of services together when the customer just came to us for one service. We’ve learned in our history that when customers have a website but they don’t optimize it, it doesn’t get any traffic. If they have a website and an ecommerce store and they don’t have online marketing, they don’t get any traffic.

What we’ve also learned is when customers get traffic or sales, they don’t churn so a lot of our efforts and the whole value proposition is built around bringing together a number of things that are all designed to make sure that you have success and with success comes low churn and I believe we’re beginning to see now the fruits of that labor. When we went public a few years ago our churn was in excess of 6%, we just reported 3.4%. We believe there’s additional room for churn to improve as we continue to improve the value proposition. So again, online marketing, ecommerce, these are powerful ways to drive churn down in our business and to make our business model even more profitable.

Operator

Your next question comes from Vincent Colicchio – Noble Financial Capital Markets.

Vincent Colicchio – Noble Financial Capital Markets

Most of my questions were answered, just one question the enterprise channel seems like a very large opportunity David. When do you think we’ll see meaningful revenue there and could you give me some color on the pipeline for additional partnerships?

David L. Brown

First off, we mentioned it today because we’ve mentioned it previously, we didn’t want it to go unmentioned but I do want to be cautious in the enterprise channel. Once bitten, we will be very careful of this one. We don’t want to be creating a very optimistic forecast for the enterprise channel. But, when the economy improves we expect large corporations to embrace online marketing. Like they did two years ago, we expect them to embrace it very vigorously and this time we expect them to bring their small business affiliates with them.

We’re one of those companies that has the infrastructure and the ability to deliver sales capability and fulfillment capability in a massive way across the United States footprint. There are very few companies that can match our ability to manage thousands of campaigns at the same time efficiently and deliver high conversion rates. So, we do Vince think it’s a great potential but we think it’s early in the game right now with the recovery in the economy. It may be several quarters off before we see any material contribution from this area.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

David L. Brown

Thank you very much. We’d like to thank everyone for joining us on today’s call. Before we conclude things I’d like to bring to your attention that we will be on the road in the near future meeting with investors. In addition, we’ll be presenting at Sidoti’s investor conference on November 20th and at FBR’s conference on December 2nd in New York City. If you plan on attending either of these events we look forward to seeing you there. As always, please don’t hesitate to contact Tim Dolan within our investor relations group to schedule time with us or for follow up questions. Again, 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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