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Executives

Jenny Kobin - VP, IR

David Brown - Chairman & CEO

Kevin Carney - CFO

Analysts

Ken Wong - Citigroup

Sterling Auty - JPMorgan

Gray Powell - Wells Fargo

Andre Sequin - RBC Capital Markets

Sameet Sinha - B Riley & Co.

Tim Klasell - Northland Securities

Gene Munster - Piper Jaffray

Lloyd Walmsley - Deutsche Bank

Mitch Bartlett - Craig-Hallum Capital Group

Web.com Group, Inc. (WWWW) Q4 2013 Earnings Conference Call February 6, 2014 5:00 PM ET

Operator

Greetings and welcome to the Web.com Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to your host Jenny Kobin, VP of Investor Relations. Thank you. You may begin.

Jenny Kobin

Good afternoon, and thank you for joining us today to review Web.com's fourth quarter and full year 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 September 30, 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 Brown

Thank you Jenny and thank you all for joining us on the call. I’m pleased to share that Web.com reported strong fourth quarter results that were highlighted by double-digit revenue growth and profitability that was above the high end of our guidance. In our prepared remarks this afternoon I will discuss fourth quarter business highlights, review our achievements for the full year and our outlook for the macro-environment, summarize our financial performance and provide operating highlights and then Kevin will provide a detailed review of the fourth quarter and our guidance for Q1 and full year 2014.

Throughout 2013 we have been successfully executing on the growth strategy we laid out for investors by adding new subscribers and increasing our success in cross selling our value added services. We were pleased with our fourth quarter performance which was highlighted by strong gains in ARPU, the second consecutive quarter of net subscriber additions that exceeded 30,000 and continued best in class retention rate. The combination of these three positive growth drivers helped to generate 11% non-GAAP revenue growth during the quarter which is our highest organic growth in more than seven years. This double digit growth is a major milestone for the company to generate on the much larger customer base from our acquisitions of Network Solutions and Register.com

This is a validation of the strategy we’ve put in place of upselling and cross selling our portfolio of valued added services into our subscriber base that is now 3.1 million while continuing to experience best in class retention rates.

We’re still on the earlier stages of this strategy and we see a run-way for continued acceleration and revenue growth as we gain the full benefit of our increased marketing and brand building investments. At the same time we’re delivering strong levels of non-GAAP profitability and are continuing to strengthen our balance sheet. This quarter we reduced our debt by $33 million, for the full year we repaid $86 million of debt. Since completing the Network Solutions transaction we have paid down a $156 million of debt, reduced our leverage ratio from over five times to approximately four times adjusted EBITDA and lowered our average cash interest rate by approximately 450 basis points which equates to $28 million of annualized interest expense savings on our current debt balance.

We will continue to deleverage our balance sheet with our scale and free cash flow generation. In terms of the macro environment small businesses remain under pressure. The NFIB index ended the year slightly up extending the 2013 trend of modest moves up and down without a strong single in either direction. Encouragingly the future expectations reading [ph] has recovered from the sharp downward movement noted in the fourth quarter which was likely caused by the uncertainty surrounding the government shutdown and debt ceiling situation.

Nonetheless the NFIB remains below pre-recessionary levels more than five years after the onset of the financial crisis. This is a macro environment that we’re well versed in navigating. We have expertise in working with small businesses to demonstrate that investments made in emerging online marketing technologies like mobile, social and do it for me web services combined with our best in class customer service can improve their businesses. This is a differentiated approach to the market that we believe is difficult for competitors to replicate.

Turning to our summary results for the fourth quarter non-GAAP revenue was a $139.5 million which was at the high end of our guidance range and represented year-over-year growth of approximately 11% which is up from 9% in Q3. In terms of profitability we again delivered a strong quarter of earnings, non-GAAP net income was $31.9 million, a 41% increase from last year. This led to non-GAAP earnings per diluted share of $0.59 which was a penny above the high end of our guidance and a 31% increase on a year-over-year basis.

We generated adjusted EBITDA of 40.1 million yielding a 29% margin even as we continue to make significant investments in our sales and marketing programs to drive future growth. We’re pleased with the return on investment we’re generating from our incremental marketing investments and we’re confident we can continue generating these types of returns going forward while keeping margins around our current levels. We believe this balance of investing for future top line growth while also generating attractive bottom line growth and cash flow is the right strategy to maximize long term shareholder value.

During the fourth quarter we generated a 34% increase in operating cash flow to 35.6 million. For the year we generated a 31% increase in operating cash flow to a 109.7 million excluding the impact of the onetime 7.2 million prepayment penalty related to our debt refinancing in the first quarter. Our increasing cash flow generation provides the Company with additional financial flexibility and reflects the inherent scalability of our business model. Now I would like to give you some color around our performance in the fourth quarter to demonstrate 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 to driving long term revenue growth is to generate increased ARPU. During the fourth quarter ARPU grew $0.38 to $14.71 which was consistent with our expectations for the quarter. This was a meaningful acceleration from prior quarters and reflects the positive impact we’re seeing from our increased marketing activities in addition to the typical seasonal strength we see in the fourth quarter for some of our value added services. As we gain additional experience selling our broad set of value added services into our install base we’re continuing to refine our message and improve the efficiency of our marketing efforts.

With the broad suite of value added services it is imperative that we target our marketing efforts with the right solution for the right customer at the right time and price. We constantly test and iterate our marketing programs. Our data-driven approach to allocating marketing dollars is a major strength of the company. At the same time our domain business is a feeder system for our value-added services and an important part of our growth strategy. We currently have more than three million domain customers today who provide a substantial install base of potential upsell opportunities. At the same time during 2013 we refined our approach of attracting new domain name subscribers who are more likely to purchase additional solutions upfront at the time of initial purchase. This positively impacts ARPU and also makes Web.com more likely to be viewed as this subscriber’s partner of choice for other potential marketing solutions which has a positive impact on our retention rate.

It's important to note that the success we're seeing and adding net subscribers each quarter reflects increased efficiency in our marketing spend and not higher levels of online spending, or a degradation in the profitability of these subscribers. In terms of customer acquisition strategy our growth is being driven through our investment in four channels, one, online marketing, two, inbound and outbound telesales, three, direct response TV and radio ads, and four, Feet on the Street.

Our recent ARPU growth has been primarily driven from cross-selling by our telesales teams and responses to our advertising campaigns. However, as our Feet on the Street channel expands and matures we would expect that channel to have an increasing future impact on ARPU. In 2013 we successfully scaled the eight Feet on the Street markets we opened and we have identify the next eight markets which will open in 2014. We currently anticipate hiring sales representatives in these markets, primarily in the second and third quarters, which is different than the front loaded approach we took last year.

A key focus in 2014 is to expanded the solutions we’re selling through the Feet on the Street channel to include several value added solutions in addition to our LEADS by Web offering and our sales reps focus on today. As we expand the range of products our sales reps can offer this channel will be significantly enhanced and differentiated from other competitors and will have an increasingly positive impact on ARPU, revenue growth and profitability.

Another important element of our long-term growth strategy is building our brand awareness, which we are driving through our umbrella sponsorship of the Web.com Tour and our direct response TV and radio ads. The first full year of our tour sponsorship was a resounding success, and as the year proceeded we saw a significant increase in our brand awareness, which we believe is a key driver of the improved efficiency we are experiencing in our net subscriber additions. In 2014 we’re focused on building upon the early success we’ve had with the tour sponsorship by nearly doubling the number of small business summits we will host to over 50.

In addition to the Web.com (indiscernible) locations we will be holding a number of these summits in conjunction with PGA Tour and Champions Tour events which are typically held in larger metropolitan areas and will result in broader exposure for our brand. While still in the early days we are excited by the benefits we have already realized as part of our sponsorship agreement and advertising efforts and believe these investments will have an increasingly positive effect on our financial results over time. Another key driver in our ability to deliver revenue growth is increasing our subscriber base. We had a very strong fourth quarter as we added approximate 33,000 net new subscribers, bringing our total subscriber base to approximate 3.121 million. We added more than a 111,000 net new subscribers in 2013 which is a dramatic improvement when compared to the tens of thousands of net subscriber losses occurring at the time we completed the domain acquisitions only two years ago. Our net subscriber gains in 2013 were well ahead of our initial expectations for the year and reflected the increased efficiency of our marketing spend that I referenced earlier. While most of our subscriber add still comes from some domain names we’re encouraged by the positive trends with other products as well.

Another key to the predictability and sustainability of our growth is our monthly customer retention rate, which continues to remain at a best in class rate of 99%. Our customer support is a highly differentiated part of the Web.com model and is a key driver of our customer satisfaction and low churn rates.

From the market opportunity perspective, the process of awarding new top level domains are TLD by ICANN continues to move forward. We have begun to take preregistrations for the first uncontested TLDs entering the market with more than 50 new names available on our sites. With regard to the contested TLDs with multiple applicants such as dot web we expect the resolution process to begin in the April-May time frame of 2014. With auctions being held to selected winning registry. These contested TLDs represent many of the names expected to generate the most buying interest. Our expectation as of this process will go on for some time as there are significant number of contested names ICANN will have to work through. We’re cautious about estimating the potential impact of new TLDs in the near-term and have assumed a minimal benefit in our 2014 guidance that Kevin will outline later.

We continue to think the impact of TLDs can be a positive catalyst for us but is potentially a benefit spread out over several years. To summarize Web.com produced solid fourth quarter results that capped off a strong year of operational and financial performance. We delivered on our growth goals, achieving double-digit revenue growth in the fourth quarter. We started the process of building the Web.com brand for strategic marketing investments and continue to validate our ARPU expansion strategy by providing value-added services to our customers. We strengthened our balance sheet through refinancing’s and debt repayment, and generated significant operating cash flow of more than a $100 million.

Our growth strategies are driving positive results and we believe we’ve put in place the foundation to continue accelerating revenue growth and ultimately scaling into a substantially larger and more profitable company.

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

Kevin Carney

Thank you, David, let me provide a review of our financial results for the fourth quarter and full-year 2013 and then I will finish with our guidance for the full year and the first quarter of 2014. Beginning with the fourth quarter P&L non-GAAP revenue was a $139.5 million excluding the $8.3 million impact of the purchasing accounting fair value adjustments to deferred revenue in the quarter.

As David mentioned earlier our non-GAAP revenue was at the high end of our guidance range. Revenue growth for the quarter was approximately 11% on a year-over-year basis. On a consolidated basis ARPU was $14.71, a $0.38 sequential increase from the third quarter due to increased sales of some of our higher priced value added services such as e-commerce and online marketing which is typical in the seasonally strong fourth quarter. We’re pleased by the strength shown throughout the year in ARPU which reflects the success we’re having in cross selling and up-selling on 3 million plus subscribers. As we look ahead to the full year 2014 we anticipate ARPU to follow a similar seasonal progression as in 2013. We ended the quarter with approximately 3.121 million subscribers which was an increase of approximately 33,000 from the third quarter of 2013. Our net subscriber adds continue to benefit from the improvements we have seen in recent quarters in our conversion rate.

Looking ahead to 2014 we continue to anticipate generating quarterly net subscriber adds of approximately 25,000 to 30,000 over the course of the year. Our monthly customer retention rate remained at approximately 99% and we’re confident in our ability to maintain this level of customer retention moving forward.

Retention is a key focus for us as it gives us the confidence we will achieve attractive returns on our sales and marketing investments. Turning to profitability we generated $96.7 million in non-GAAP post profit for the fourth quarter representing a gross margin of 69% compared to 69% last quarter and 68% in the same period last year. Our fourth quarter non-GAAP income from operations was $37 million representing a 27% non-GAAP operating margin.

We generated non-GAAP earnings per share of $0.59 per diluted share, this represented 31% year-over-year growth and came in above the high end of our guidance range of $0.57 to $0.58 per share. This year-over-year earnings growth was even more impressive when you take into account the approximately 3.9 million share increase from the year ago related to the rise in our stock price.

Moving on our adjusted EBITDA was $40.1 million for the fourth quarter representing an adjusted EBITDA margin of 29%. Our margin performance was consistent with recent quarters and in-line with our target. As we stated previously our plans to hold margins approximately flat with current levels and to reinvest any upside back into the business to drive additional top line growth or as long as we continue to generate attractive returns. We’re confident in the inherent scalability of our model and our ability to continue balancing investing for growth and maintaining margins around current levels.

Summarizing our results on a full year basis non-GAAP revenue totaled 533.7 million, non-GAAP operating income of a 141.3 million leading to a non-GAAP operating margin of 26%. We reported adjusted EBITDA of a $153.3 million or an adjusted EBITDA margin of 29%. Non-GAAP net income totaled a 112.1 million or $2.13 per share up 34% from the $1.59 in 2012.

Now let’s turn to our GAAP results, for the fourth quarter revenue was a $131.1 million, gross profit was 87.6 million, income from operations was 6.4 million, net loss was 3.4 million and net loss per share was $0.07. Our GAAP results for the fourth quarter include approximately $1.7 million in a restructuring charge related to the workout of lease [ph] in Network Solutions old headquarters. This was an attractive opportunity to eliminate the burden of excess office space and will save approximately $10 million over the life of the lease.

For the full year revenue was $492.3 million, gross profit was 320.6 million, income from operations was 10.2 million, net loss was 65.7 million and net loss per share was a $1.34. In terms of cash flow we generated $35.6 million of operating cash flow in fourth quarter which was up 34% from 26.6 million in the same period a year ago. Operating cash flow for the full year 2013 was a 102.5 million up 31% from 78 million for the full year 2012.

Capital expenditures in the quarter were 3.1 million which led to a 32.4 million of free cash flow. This was up 39% from 23.3 million in the same period a year ago. For the full year our free cash flow was 95 million excluding the 7 million of prepayment penalties incurred during the first quarter related to a debt refinancing transaction. This was modestly below our $100 million target and was due primarily to year-end working capital items. Overall we were very pleased with our cash generation for the year.

Moving to the balance sheet unrestricted cash and investments were 13.8 million at the end of the fourth quarter which compares to 10.4 million at the end of the third quarter and it's within our target range of $10 million to $15 million. During the quarter we paid down 33 million of our outstanding debt bringing our total debt repayment to just over $86 million for the year. We intend to continue using our growing cash generation capabilities to further delever our balance sheet in 2014.

With that let me turn to our near term guidance and long term growth targets. We will start with guidance for the full year of 2014. We’re targeting non-GAAP revenue of 585 million to 595 million which represents 10% to 11% year-over-year growth up from 7% pro forma growth in 2012 and 9% growth in 2013. From a profitability perspective we’re continuing to target an adjusted EBITDA margin of approximately 29%. We’re targeting non-GAAP net income in the range of a 133 million to a 138 million for $2.45 to $2.54 per diluted share.

This assumes a share count of 54.3 million and cash taxes for 2014 continuing to be in the low single digit range. As a reminder we currently have an NOL of approximately $284 million and tax deductible amortization of approximately $60 million per year through 2021. As a result we do not anticipate paying a full cash tax rate until the 2021 timeframe.

In terms of cash flow we’re forecasting free cash flow in the range of $125 million this represents 32% year-over-year growth. We expect capital expenditures to be in a range of 3% of revenue similar to last year’s rate. For the first quarter of 2014 we’re currently targeting non-GAAP revenue in the range of 139.5 million to a 141 million which represents approximately 10% year-over-year growth. We expect our non-GAAP net income to be in the range of 31.5 million to 32.5 million or $0.58 to $0.60 per diluted share for the first quarter which assumes 54.3 million diluted shares outstanding and a non-GAAP tax rate in the low single digit percentage range.

You should expect that similar to the last several years there will be a seasonality impact from fourth quarter to first quarter with growth rates building as the year progresses. Similarly in terms of cash our first quarter is naturally a low point on cash flow for the year as we have working capital items such as prior year incentive payouts and prepaid items such as IT maintenance contracts. Revenues and cash flow are expected to continue to grow after the first quarter base over the course of the year and we will continue to use our strong cash flow to rapidly delever which will drive reduced interest expenses for the year.

In summary we’re pleased with our fourth quarter results. We’ve reached our goal of double digit revenue growth while exceeding our profitability guidance. Our growth strategy is working, increasing ARPU via successful upselling and cross selling of our install base while adding net subscribers and maintaining best in class retention rates. We see a significant opportunity to continue those trends going forward. We have made substantial progress towards our growth and profitability objectives over the past two years and we believe we’re well positioned to achieve our longer term goals of low teen’s revenue growth, mid-teens to 20% earnings growth and scaling cash flow generation.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question.

Ken Wong - Citigroup

This is Ken Wong for Walter. Maybe just a quick question on ARPU, VeriSign just talked about how registrars have been discounting less and trying to drive ARPU. When you think about the dynamics of your ARPU growth how much would you say is from less promotional activity versus better upsell?

David Brown

I would say practically all of our ARPU growth is coming from higher value added services and that’s cross sell and up sell and none coming from domain name pricing.

Kevin Carney

The only thing I would add to that is as we have talked in the past we have had some benefit of as promotional offerings we move in subsequent years, we of course getting ARPU growth in that but I would agree with David. Overall ARPU has been driven by upsell cross sell

Ken Wong - Citigroup

And then looking into first year ’14 you guys said you guys are going to try to hold margins flat, I mean any specific product lines that you guys are putting more muscle behind? I mean kind of what are the investments that you guys see could potentially generate the most growth for you?

David Brown

You see a lot of our activity focus around social, mobile, e-commerce and our do it for me oriented products and services and online marketing services. So you will find that in our Feet on the Street channel, you will see that evidenced in our direct marketing TV ads and radio ads and in our cross sell and upsell program. So those continue to be the areas where we put most of our effort and that will continue on in 2014 and likely beyond.

Ken Wong - Citigroup

And then last thing just sort of the housekeeping question for Kevin. It looks like G&A spiked up for a little more than you expected this quarter. Was there anything specific there that caused G&A to go up?

Kevin Carney

One item I would point out is just as we plan and accrue, our management incentive compensation of course it's planned along with our expectations includes profitability. So that will probably be the only item I would spend on the quarter.

Operator

Thank you. Our next question comes from the line of (indiscernible) with FBR Capital Markets. Please proceed with your question.

Unidentified Analyst

So David this is one of the strongest sequential revenue increase the company has seen in several quarters. Could you give us some greater detail as we look at the pyramid, the company has that breaks it out by basics, advanced items and kind of enhanced features, which bucket saw the best traction in the quarter and contributed most to ARPU increase and as you see new subs coming in which of those value-added services are the most attaching at the point of transaction?

David Brown

Sure. So the first part of the question if you look at the pyramid the middle of the pyramid is where we’re having really we’re hitting it the hardest right now so our custom website product which is in the $100ish range, our guerrilla marketing product which is in that $70 to $80 range. Those products, our Facebook product which is in the couple of $100 range. That's really what's driving the majority of our ARPU uptick right now. There's a less going on at the very top of the pyramid but there is some going on in our Feet on the Street program but that's still a relatively small contributor and then we're also beginning to see some very good success lower in the pyramid but still above domains in the hosting and DIY space and that’s becoming a fast grower for us and it does drive ARPU because there we’re charging anywhere from $10 to $20 per month which is as you can tell given our current ARPU is really helping drive ARPU up as an add to existing customers. So that kind of helps you with the first part of the question.

Second part of the question, repeat it again.

Unidentified Analyst

I was wondering when you're seeing new customers that are let’s say that through whatever channel they are coming through and they are buying a value added service which ones are seeing at the entry point versus having to upsell them later on?

David Brown

We have really begun to focus in 2013 on and I commented in my prepared remarks that we have really begun to focus on acquiring customers that have a greater likelihood of buying early in their life and so if it's a domain customer or even a low price DIY customer, we really focus on attracting those that are most likely to buy additional things and selling them early on. So simple things like attaching e-mail and then a DIY website or hosting to a domain customer is a real focus for us and we’re having great success and then again you see us very active on TV and radio advertising bringing in customers who buy bundles of products like our custom website product which has pretty much everything you need to be successful on the Internet or our online marketing bundle which helps you if you already have a website but aren’t getting any traffic or aren’t getting found. So that’s really our approach right now is to get smarted and more effective at getting, finding customers that really want to be successful on the Internet so we can sell them more things early on and attaching things like hosting, DIY websites or selling them bundles of many things so that we can actually help them very early on in their lifecycle.

Unidentified Analyst

Okay and then are you seeing any changes in terms of customer patterns that of Wix which is through under the low end DIY site and endurance now in the market, more prominently with advertising. Does that change the type of customer coming to Web or had any impact in your business?

David Brown

It's neither changed the type of customer coming nor has it had any impact as you can tell from our results. We’re continuing to click on all cylinders here in terms of bringing in subscribers and growing ARPU and again we serve the customer quite differently than either of those other players. We had a very broad product suite of high value added services that deliver what the customers are typically looking for which is they want people to find them and they want people to buy things from them and our products and services are designed to make that happen, not just be the entry point to the Internet but the entry point and in everything you get in value thereon. So we’re not really seeing any impact in the marketplace at this point.

Unidentified Analyst

Okay one last question and then I will hop out of the queue. We heard about your new product I think it's a Registry Lock or a security offering that Web is marketing to it's top 1% customers. That sounds like a pretty big opportunity when you think about against 30,000 subs I think is what we have been hearing. What do you think the opportunity there is? And is that a new product or is that something that you’ve already offered before? Can you just give us some more details on that?

David Brown

Well I can tell you that security is an area of interest and it's here to stay and we’re all over it and we’re very focused on it for our customers. We’ve a variety of security initiatives, some of which are included as just part of being a customer here and others that are very, very enhanced security products that are designed to make sure that our customers don't hacked, that their domain name doesn't get stolen and that their websites don’t get defaced. And so a lot of activity in this area. The product that you just mentioned is designed for the very top of the market but we have initiatives all along the spectrum of our customer base so this will be I think an exciting growth area not one that I plan on talking about today but since you mentioned it, it's one of the reasons why we’re very optimistic about our ability to help customers and generate strong financial profile going forward.

Operator

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Sterling Auty - JPMorgan

So I wanted to step back [ph] we’re bounced around as well VeriSign and you and a couple of other earnings call and I think it's a separation you’re increasing I think your outlook in terms of subscriber adds now it's 30,000 [ph]. VeriSign is talking about it's known as a total only growing 2% to 4% in 2014, as name additions have slowed here in the first month of 2014. I want to make sure that it feels like you’ve got accelerating momentum and they are seeing deceleration don’t know if you can characterize maybe some of the things that you’re seeing that maybe they are not.

David Brown

Well I think Sterling first up we have seen acceleration through the course of the year and we have gotten to the point where we are very comfortable saying 25,000 to 30,000 net new subscribers and it's really has to more to do with our marketing efforts and how we’re penetrating the market and the fact that the market is looking for companies like us that can deliver value-added services. The lot of customers who come to us want to get on the Internet not for vanity reasons, but because it's important to their business now and they need a broad array of products and services and they need quality customer service. So we think we would say that our progress going forward is more linked to our marketing efforts there and to a change in the market and not to what would otherwise just be a pure commodity. We take domain names and make them useful and we move ourselves out of commodity market into the value market.

Sterling Auty - JPMorgan

Since you see that small business it feels like you’ve had finger on the pulse. I’m curious with all the concerns from a macro economy and the idea of tapering and what that could do to economic growth in North America. I would mention if it there was an impact you would start to see in your customer acquisition cost, how does the customer acquisition cost trend through you know through the fourth quarter and how you’re starting in 2014?

David Brown

Well we were delighted with the trends we saw in 4Q, they were consistent with what we saw in 3Q which is stable to better cost of acquisition than we might historically have seen. That’s what’s led to greater subscriber acquisitions even while we’re not spending, we didn’t spend more money. In fact the fourth quarter was actually a light sales and marketing quarter for us, just a little lighter than normal because it's a tough season to market. So we feel pretty good.

A lot of this has to do with the fact again what we call mass adoption as customers get serious about the Internet and about using it. They look for players who can actually deliver results and we're trying to find them anywhere along the marketing line and then help them and so I would say good news for us. We believe that now have they been stable, we think they'll continue to be stable. We have a lot of products and services and a lot of ways that we can go to market to keep our sales and marketing costs under control.

Operator

Thank you. Our next question comes from the line of Gray Powell with Wells Fargo. Please proceed with your question.

Gray Powell - Wells Fargo

So it's good to see revenue growth cost into the double-digit range, how should we think about the mix of growth between ARPU and subscribers over the next couple of years particularly as we look at the potential for growth to go from call it 10% or 11% and through the mid-teens.

David Brown

Yes. So I think you’re going to continue to see the lions share very consistent with what you’ve seen this year, you will continue to see the lion share of our total revenue growth funded by ARPU growth because that’s all about getting value from the Internet and so those value added services are where we’re going to stay focused. We’re going to continue to acquire subscribers because that’s a constant new source of opportunity to cross sell and upsell. So the same kind of ratio you saw in 2013 you will continue to see in ’14 and likely in the future years.

Gray Powell - Wells Fargo

Understood. Okay and then the gross margins continue to steadily improve. Can you talk about the main driver there and how we should think about it going forward? And then I see pretty in the prepared remarks but I expected soon that you put the bulk of any gross margin improvement back into sales and marketing. I’m just curious if there is any other buckets on the OpEx side we should look at?

Kevin Carney

First of all I think just in terms of the improvements we’re seeing obviously getting some leverage on that line as we scale our revenue, some favorable product revenue mix. In terms of how we think about it or what’s reflecting our guidance is we’re not planning for a continued expansion although I would say there is certainly the possibility for that and then your second point in terms of where we’re reinvesting and I think clearly we have been reinvesting it in sales and marketing as we think about next year. We’re going to continue to maintain ourselves on marketing spend in and around that 26% on non-GAAP revenue range, so increasing investments as we continue to grow revenue and I think the rest of our guidance would suggest what we’re doing on the other ones.

Operator

Thank you. Our next question comes from the line of Andre Sequin with RBC Capital. Please proceed with your question.

Andre Sequin - RBC Capital Markets

As you noted earlier the new gTLD is being listed on your site, have you already seen a meaningful impact from the availability of the extensions or is it still too early to tell at this point? And then on a related note you mentioned that you’re also getting better at getting incoming customers to sign up for additional domains upfront. Is that related to the roll out of the gTLDs or more to do with where and how you’re marketing to these customers?

David Brown

I’m going to answer the second one first because it's an easy one. We have spent a lot of time and effort with data understanding the behavior of customers who buys, what they buy and what we might likely see and we have used that data just to refine our marketing processes. So we’re just we believe we’re better marketers today than we were entering the year.

In terms of top level domains all we’ve seen so far is the very beginning of the uncontested top level domain approvals and even that at the very first phase of they are being offered to the market. So there really is no material impact but we’re excited to see some progress in the ICANN process but we continue to believe that the real beef, you know in terms of where is the beef? It's all going to be coming here when the contested domains start coming out and that will start in the April-May time frame but it's going to run for a long time because that’s a cumbersome options process with lots and lots of contested top level domain. So we’re cautiously optimistic that this is going to be a very beneficial thing to Company like ours but we want to see the data. We wanted to experience it before we give you a better information and better idea of what we expect.

Andre Sequin - RBC Capital Markets

And if you want to give us an hint to the focus to the upcoming Investors Day I’m sure you be interested too?

David Brown

Yeah we’re super excited about the Analyst Day coming up and looking forward to seeing you all there in New York.

Operator

Thank you. Our next question comes from the line of Sameet Sinha with B Riley. Please proceed with your question.

Sameet Sinha - B Riley & Co.

Last year on this time you had spoken about a new Feet on the Street markets you’re going into and you said your goal is to make it big even within a year, can you update us if you’re close to that goal or do you think it will take another couple of quarters? Secondly in terms of your debt level, in terms of use of cash at what level of debt do you anticipate you will have the flexibility and the resulting willingness to you think about further expansion maybe acquisitions of international growth, things like that. Last question, in terms of customer acquisition cost, GoDaddy has spoken about their customer acquisition cost being in the $45 range. Obviously scale and everything matters in their case, years of marketing spend. What is your thoughts? I mean would you try to lower your customer acquisition or do you think you’re at a point where you would rather keep it flat and just keep gaining market share? What do you think of that? Thank you.

David Brown

Sure. So on Feet on the Street we’re very pleased with the progress that our offices have shown us and that program continues to perform lot in line with our expectations. We’re making some additional investments this year. I commented in my comments earlier in adding additional product and solution that can be sold by that team. So the team can be even more efficient and effective and serve our customers better. There's demand in the market for more than just on these buy web products [ph] and with sales people face-to-face with customers we want to fill that demand.

So we’re going to be rolling out some additional products and services in our Feet on the Street market that will make them even more effective and then we will be adding the additional eight offices as we’re ready to go in the second and third quarters.

So I would say we're on schedule with that program, it's performing the way within the discipline that we have in our company and now we’re making additional investments to make it even a better channel as we move forward.

In terms of level of debt, we have always felt that we could service the debt that we took when we acquired Network Solutions we were comfortable with the cash flow generation of our company and I think by now we have proven it in the growth rate of our cash and in our ability to pay down debt. So we've always felt free to take advantage of opportunities to grow but we’re very opportunistic and very picky. As you might see over the years all of our acquisitions have been accretive and strategic and we will continue to be that way. But we feel very comfortable today having pay down over a $150 million of debts in the (indiscernible) and with growing ability to pay down debt going forward that we can do whatever is in the best interest of the business and that’s what we’re going to do.

In terms of customer acquisition costs, we've been very stable here recently. And in fact, I’ve commented that they really drifted down a little bit. That's why we've been able to grow more subscribers at the same approximate level of spend and we’re going to continue to try to be innovative and use data to improve our customer cost of customer acquisition and then in some respects that's why we’re very interested in building a brand. We think building a brand is one of the ways that you can manage cost of acquisition over time by bringing in referral traffic, by helping the marketplace be more aware of who you are, so you have a higher propensity to sell to people that contact you. And that’s what we’re doing now, our conversion rates have actually improved in last quarter two quarter. So that’s what brand can do for you and that’s what it will do for us overtime. So you’re going to continue to see us very focused around this cost of acquisition. But it's early days for us, admittedly we have just got started here in the last year and brand building takes time. So in the meantime we will use the intelligence we have to be better direct marketers and what we've been doing here this year.

Operator

Thank you. Our next question comes from the line of Tim Klasell with Northland Securities. Please proceed with your question.

Tim Klasell - Northland Securities

First question, Feet on the Street, normally if we try to front end load that seems like you’re pushing it off, is that just waiting for the new product lines to be available for that sales force or is there something else driving that change?

David Brown

It's just waiting for the new products. We’re very happy with how the market is performing but we're getting a lot of requests from customers for let me give you an example, customers who already have a custom website with e-commerce capability but it doesn't work and they want us to do that for them. So we need to productize that type of product and be able to take it to them, not just the website but the e-commerce capabilities. Amongst these larger small businesses that can be a very compelling product now that they're serious about working on the Internet. So taking a break to make sure that we have those things in our sales force which by the way now is if you do the math on how many offices we have and how many people we see, you’re getting up close to a hundred salespeople. So getting them trained so that they can serve the market well before we rush headlong into even more offices that's really what we’re doing right now.

Tim Klasell - Northland Securities

Okay, great, and then the ARPU growth is impressive. In the past you’ve mentioned that the new customers are sort of a drag on ARPU, are you seeing a trend where maybe customers are coming board and immediately going to some of the higher value added services enhanced maybe not as much of a drag as it once was?

David Brown

I would say that’s true. We commented on the fact that we spent this year really focusing in the domain space and the lower price product space and acquiring customers that had a likelihood of buying more things from us early and that has a tendency to help ARPU grow faster and retention be stronger. And so for those two reasons we have put a lot of time and effort in that focus area.

Operator

Thank you. Our next question comes from the line of (indiscernible) with SunTrust. Please proceed with your question.

Unidentified Analyst

Couple of questions if I could, first and you touched on this a little bit David. I was wondering if you could provide some color on progress in social for clients and then second could you give us an update on the leads of product traction, number of clients, perhaps your ROI is being delivered. Thanks.

David Brown

Essential, the big news in social continues for us to be our Facebook product which continues to sell very well. It attaches even when we’re selling websites, a very high percentage of those customers buy our social our Facebook product and we’re really spending time evolving that product and making it a better quality product and making sure that it delivers value for customers. It's a higher priced product, it's almost $200 a month. So it's important for us that we deliver the value that’s implied in the $200 a month product.

We also have some activities in the Twitter area especially for larger, our larger customers. So you may see that product in the future in our Feet on the Street channel. You will see that type of direction.

In our LEADS by Web product that product continues to be it's really the principal product we have sold in our Feet on the Street channel. So when you hear Feet on the Street for the last year and half just think LEADS by Web as I’ve commented earlier we’ve been very pleased with our sales progress there. But it's a relatively small number because these are customers that might pay upto $1000 a month. There aren’t that many out there think the top 7% [ph] of each market is an addressable market for this and so we’re still talking small numbers but as we add more offices and more sales people that accumulative impact on our income statement is going to be found in future quarters. So I would say still small today in terms of counts but getting better as is the productivity of that business. When we launch a new office we start off slow and in six months into the process we expect to get those offices up into the average range and we've been very pleased with the last batch of eight that we launched as they progressed.

Unidentified Analyst

And just one follow-on if I could, some of your competitors seem to be advertising quite a bit more offline, just curious if you’re seeing any impact there?

David Brown

If you’re talking about TV and radio and things like that, yep we see it as well. Fortunately they are almost all advertising do-it-yourself products where the customer has to basically take on the Internet by themselves and so we’ve not seen an impact in our sales channels because we’re really focused on making sure that we add value for our customers.

Operator

Thank you. Our next question comes from the line of Gene Munster with Piper Jaffray. Please proceed with your question.

Gene Munster - Piper Jaffray

You really haven't talked as much about 2015 there, Kevin doesn’t want to talk about that but just in general you have done a good job of kind of articulating that we would have slow but gradual improvements in ARPU that’s going to drive top-line we have seen that really evolve. If you think of the next three, four quarters is that kind of your internal plan to continue that trajectory?

David Brown

Yes that’s the simple answer. We see a lot of runway for growing ARPU and we have just begun to fight in terms of expanding channels and reaching parts of the market. There are variety of opportunities in front of us that aren’t even included in our current growth rate that will be ahead of us. Things like international and different channels. So I would say we’re very optimistic.

Gene Munster - Piper Jaffray

And could that result in increasing the revenue growth rate? Which we think about more is increasing ARPU?

David Brown

You’re going to see increasing revenue growth rates driven principally by ARPU.

Operator

Thank you. Our next question comes from the line of Lloyd Walmsley with Deutsche Bank. Please proceed with your question.

Lloyd Walmsley - Deutsche Bank

I had a couple of Feet on the Street, first you know in the past you’ve talked about shifting traffic over the life of a customer starting with SEM driven traffic building up I guess a history and then driving it to more organic traffic. I’m wondering how in some of your oldest cohorts that effort is progressing?

David Brown

That’s foundational part of our product as compared to other products in the marketplace. We’re not just a search engine marketing shop. We’re a holistic provider. We control the website and ability to make sure that there is conversion on the website. We then use our search engine optimization skills to heavily optimize the site so that as time goes on it gets founded on organic search and then we believe we’re a good provider of search engine marketing. So all of that combined is designed to get you started quickly and then over time drive more efficient traffic to your site and we have seen that happening and have seen customers where our margins have grown from initial levels in the 40% to 50% range all the way up into the 80% margin range.

So that search engine optimization is really a key to that and of course controlling the website so that you can control, you can optimize the wording on the website and how then customers come to it, what they do? We need them to convert into leads that’s an important part of our value proposition. It isn't found in the competitive landscape.

Lloyd Walmsley - Deutsche Bank

And I guess following up on it seems like it's gaming Google in a fairly competitive exercise and the company is constantly updating the algorithm to favor fresh, unique user generated content. How do you guys, why is that that you think you’ve been able to do so much better job at this than some of your competitors given how competitive that real state is?

David Brown

Well I think there is two key points there, one I think it's important to know that we don’t try to game Google. We follow the rules, we’re well-educated, we’re a partner of Google. We follow the rules as best we know them. So that Google has never really shocked or even (indiscernible) trying to write an algorithm to block our customers out. They are trying to go after people that are trying to cheat, gain their system, or gain an unfair or an unrealistic advantage. So you follow the rules first and ten secondly we control the website. So we keep it fresh, we keep it relevant. We make sure that our customers have appropriate, relevant content so when Google searches it they see what they're looking for because that’s what they are looking for and that’s an important ingredient that is missing from most websites is a fresh and relevant website that reflects what the business does and that’s a piece that we add that just isn't added in the marketplace today.

Lloyd Walmsley - Deutsche Bank

Okay and last one if I may, can you just, you touched on some of the new products you’re going to add to Feet on the Street but curious if you can give us a little more color on what some of these products might be and then to the extent they are similar to what you’re already offering in the non-Feet on the Street business. Are they still going to be fulfilled out of the core Jacksonville office and at kind of similar costs and are they going to be similarly premium price in this channel? Is there anything you guys can tell us there?

David Brown

Sure. I think you should expect them to be consistent with the products that we currently offer, it's productized for this very high-end customer. So higher-priced products, but very high value added products. You expect them to be in the do it for me website space, the e-commerce space, the social space. I think those are the main categories and I think they'll be very consistent with what you would expect from some of the top, the largest small business is what they demand in a marketplace.

And then all will be fulfilled in likely most of it will be fulfilled either here in Jacksonville or wherever we have determined that we’re putting our best in class operations for that particular product which we have now begun to spread that over some of our other operation centers. So even though if you came to Jacksonville you will see a piece of everything we do in the company. We actually now have Centers of Excellence in many of our other operation centers around delivery of some of these products.

Operator

Thank you. Our final question comes from Mitch Bartlett with Craig-Hallum. Please proceed with your question.

Mitch Bartlett - Craig-Hallum Capital Group

The landscape has been pretty well covered at this point so I maybe I will go 60,000 feet [ph] and just ask you a general kind of how the trends are. If you were to separate domain from non-domain revenue sources I would imagine that you’re seeing pretty good growth in the non- domain value-added services side of the business. Can you talk about that and what that growth might look like and whether since the Network Solutions acquisition, how it's trending?

David Brown

I think the main point here it came up in one of the earlier questions. Domain as an industry is growing relatively slow right now. Where all the action is? It's value added services. Once you’ve a domain what are you going to do with it to help grow your business? And that’s where we’re seeing the fastest growth in our business. Our do it for me services, even our DIY services the way we do them that is growing fast and then of course our social products are growing very well and our online marketing product. So that’s all very rapid growth, domain is a Steady Eddy. It continues to fuel the bottom of our pyramid which we then in turn educate those customers and how they are going to get value from their domain.

So that’s really our business model and we happen to be at the right time at the right place with that business model it's really working. Since customers are hot in pursuit of how to make their Internet presence work for them.

Operator

Thank you. I would like to turn the floor back to Mr. Brown for closing comments.

David Brown

Thank you all for joining us today to review our successful fourth quarter and full-year 2013. We appreciate your interest and look forward to speaking with you about our progress in 2014. We will be hosting an Investor Day on Thursday, February 20 in New York City and hope you'll attend in person or via our webcast. If you're interested in attending please contact Jenny Kobin.

In addition, during the second week of March, we will be presenting at the ROTH (indiscernible) Conference in California and the (indiscernible) conferences in New York City. As always, feel free to contact us here at Web.com if you have any additional questions. Thank you and good night.

Operator

This concludes today’s teleconference. You may disconnect your line at this time. Thank you for your participation.

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