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Web.com Group, Inc. (NASDAQ:WWWW)

Q1 2010 Earnings Call Transcript

May 4, 2010 5:00 pm ET

Executives

Kori Doherty – IR

David Brown – Chairman, President & CEO

Kevin Carney – CFO

Analysts

David Hilal – FBR Capital Markets & Co.

Randy Katz – JMP Securities

Jeff Martin – Roth Capital Partners

Stephen Ju – RBC Capital Markets

Operator

Greetings and welcome to the Web.com first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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, Kori Doherty, IR for Web.com. Thank you. You may begin.

Kori Doherty

Thank you. Good afternoon and thank you for joining us today to review Web.com’s first quarter 2010 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 are risks and uncertainties that can cause actual results and the timing of such results to differ materially from those projected in the forward-looking statements.

Please refer to our filings with the SEC and the risk factors contained therein including our annual report on Form 10-K for the year ended December 31, 2009 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 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 measure is available at our Web site www.web.com under the Investor Relations tab. Also, please note that our webcast on today’s call will be available on our Web site in the Investor Relations section.

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

David Brown

Thank you, Kori, and thank you all for joining us on the call to review our first quarter 2010 results, which were consistent with the company’s guidance from a revenue and profitability perspective.

During the quarter, we again brought our customer churn metric down to a new record low level and began utilizing a number of customer acquisition strategies to continue expanding our customer base.

Our consistent performance over the past year in driving customer churn down and expanding our customer base is encouraging from a long-term perspective. As is the fact that we continue to make progress expanding our distribution channels and advancing Web.com's direct sales efforts.

Taking a look at the summary highlights of our financial performance, total revenue came in at $25.1 million, which was in the upper half of our guidance range. We believe that Web.com has a solid revenue base in the range of $100 million and we are optimistic that our expanding distribution network and investments in sales and marketing will enable Web.com to begin scaling from this level over the course of 2010.

From a profitability perspective, we delivered an adjusted EBITDA margin of 16% in the first quarter and non-GAAP diluted earnings per share of $0.12, which was at the high end of our guidance. Finally, our balance sheet remains strong at the end of the quarter with nearly $40 million in cash and no debt.

The market environment during the first quarter was largely consistent with our expectations, and our view exiting the quarter has not changed for the better or the worse. We have over a 0.25 million customers in the small business market and we talk to many hundreds of thousands more over the course of any given year. We continue to hear that the economic challenges and tightness of the credit markets are making life difficult for small businesses.

While there is growing optimism that the US economy is on a path to recovery, it is uncertain how long it will take for that increased prosperity to trickle down to small businesses. As a result, our strategy remains the same. We are focused on delivering solid profitability and generating meaningful cash flow at the same time we are selectively increasing sales and marketing investments to enhance the company's growth profile.

We believe these investments will help Web.com to begin scaling its revenue run rate and they will further strengthen the company's position for improved growth when the small business macro environment eventually improves.

During the first quarter, the company added approximately 3,600 net new subscribers, ending the quarter with over 278,000 subscribers. This is the fifth consecutive quarter in which our net subscriber additions grew on a sequential basis. This is important because we have proven our ability to expand customer relationships over time to cross sell and upsell of additional applications across our broad product suite.

In addition to adding customers through a multitude of organic means during the quarter, we also acquired a few thousand subscribers in a transaction similar to the Tucows acquisition that was completed over a year ago. In this situation, we capitalized on an opportunity to bring customers on to Web.com’s hosting platform. Although these customers pay a relatively low monthly fee, this business is very profitable for Web.com.

These are great transactions for us because we're able to leverage the Web hosting infrastructure that we already have in place and, as I just mentioned, we have a proven history of being able to up sell customers to higher value offerings over time.

We remain committed to executing against our overall subscriber acquisition strategy, which included subscriber migrations and acquisitions as well as investing in our own brand and partner generated leads. It is still early but we are pleased with the results that were generated from some of the marketing programs that we increased investments during the quarter and have continued into the second quarter.

As an example, one of the tests involved utilizing a third-party data analytics firm to implement a new methodology for analyzing prospect list. In this test, we appended certain available data to list that we had called historically, and created a model for predicting propensity to purchase. We then used this model to scrub future prospect lists. We saw a meaningful improvement in sales productivity associated with this test program, and we are currently evaluating the potential of expanding this program more broadly.

While partner channels have been and will remain an important component of our overall distribution network, we have spoken in the past about the importance of and our focus on building out a direct sales operation based on our own brand. The reason for this is we cannot always rely on our partners as their businesses may have ups and downs and their business priorities may evolve over time. In addition, it is much more profitable business for Web.com when we are closing leads that are generated through our own prospecting list.

We are also evaluating the opportunity to put salespeople directly in markets to generate proposals and build relationships for small businesses related to delivering leads to their business. Web.com is in a unique position to do this because we can offer customers access to our best-in-class Web site offerings, search engine optimization as well as search engine marketing.

When we are able to control all of these pieces of the equation, Web.com is in a position to deliver a lower cost per lead as compared to competitors who offer a more narrow value proposition. While initial results have been encouraging, we are now focusing on the potential upscaling such a program in a manner that would generate the type of long-term profitability margins that would warrant further investments in this area.

As we discussed in the past, we do not invest in growth just for growth sake. Our intention is to drive long-term profitability for our shareholders. These are just a couple of the programs that we are in the process of testing. To be clear, we test many go-to-market and product strategies over time. It's the nature of our business. Some hit the mark and we scale, others don't show continued promise of delivering against our long-term hurdle rates and are discontinued.

Our intention is not to update each program that we test, but we thought it would be valuable to provide insight into the types of programs that we are investing in as we communicated that we were increasing our level of spend in 2010 to enhance the company's growth.

There additional marketing programs and channels that we will be investing in over the course of 2010, and we will share additional details as these programs are launched.

As I mentioned a moment ago, investing in our partner channel also remains a priority for Web.com, and we believe the company's resilience, strong balance sheet and profitability has made Web.com increasingly viewed as a partner of choice through the economic downturn.

Large organizations focused on serving the small business community appreciate that Web.com has weathered numerous economic recessions in the past, including the most recent one that we are hopefully exiting. And each time, we have emerged a stronger company. We have partnerships in place with many influential and far-reaching organizations such as Discover, MerchantCircle, CCA Global, Dun & Bradstreet and First Data to name a few where Web.com is recommended as the preferred vendor for offering such as, do-it-yourself and do-it-for-me Web services, search engine marketing and optimization as well as e-commerce.

Last quarter, we announced the addition of the National Federation of Independent Business or NFIB as well as Local Insight Media, the fifth-largest directory publisher and local search provider in the US. During the first quarter, we also added the credit card division of Bank of America, one of the largest financial institutions in the world. Their credit card division has over 1 million small business customers and Web.com will be included in the online services portal that they make available to each of their customers in order to help them achieve their business objectives.

Our overall partner strategy continues to be one of diversification. We want to have a large pool of partners that over time and in a healthier economic environment can deliver consistent performance in which the top performers and new additions are able to drive growth that more than offset partners who are struggling in their own business or do not ramp their partner initiatives over time.

Another factor driving the stability in our overall financial performance is the reduction in our churn rate. During the first quarter, our churn rate reached a new record low level of 3.1%, which is down from 3.9% level in the first quarter of 2009. As we pointed out in the past, churn may bounce around on a quarter-to-quarter basis, and we would not typically expect the churn rate to continue to progress downward at the pace that we have seen over the last 12 months to 18 months. However, it is gratifying nonetheless to see our efforts paying off with respect to providing our customers with the technology and service required to make their online businesses successful.

The one detailed metric that did not improve during the first quarter was our average revenue per subscriber, which came in at $29.49, down from $31.04 in the fourth quarter. As our revenue results were in the upper half of our guidance, the reduction in ARPU was expected. It was driven by the fact that our revenue run rate was lower on a sequential basis due to the previously discussed reduction in seasonal e-commerce and online marketing revenue, combined with the fact that our Web services business was still progressing toward stability.

In addition, the first quarter ARPU was impacted by the fact that we grew our subscriber count in the first quarter, including several thousand low-priced but highly profitable customers that were acquired. We believe that Web.com has several product offerings that will have a positive impact on our ARPU from a medium-to-long term perspective.

First is a hybrid product that combines a do-it-for-me search engine optimization offering with our current do-it-yourself Web services solution. This new product enables a customer to utilize our easy-to-use do-it-yourself Web offering tool and hosting, while at the same time leveraging Web.com's search engine optimization and submission to search engines and directory listings.

This will be a higher value offering that we believe will appeal to customers that have traditionally only purchased a do-it-yourself solution. We are currently targeting the launch of this solution in 2Q, 3Q timeframe.

We've also seen initial success with a promotional do-it-yourself product offering with an $11.95 introductory price increasing to $19.95 six months down the road. Customers appreciate getting an attractive price for the first six months and they see the value in the packaged offering that drives toward the standard price that is 67% higher and which is very affordable and delivers a high return on investment.

At the end of the day and as we have discussed many times, our priority is to optimize the combination of ARPU and volumes to drive growth and profitability. We believe we have the marketing programs and products that will enable Web.com to do this, particularly as the macro environment improves and IT spending with small businesses improves.

On a summary perspective, the first quarter was consistent with our expectations as is our view on the macro environment. We remain focused on the areas that we can best control including expense management and running the business in a way that will generate meaningful profitability and cash flow.

In addition, we are doing a number of things on the product and marketing front to position Web.com for improved revenue growth during today's more difficult economic environment and even more so from a long-term perspective.

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

Kevin Carney

Thank you, David. Our total revenue for the first quarter came in at $25.1 million which was in the upper half of our guidance range. Within total revenue, subscription revenue came in at $24.5 million which compared to $25.5 million last quarter. The remaining $648,000 came from professional services and other revenue which was a slight decrease from $842,000 last quarter.

We ended the first quarter with over 278,000 subscribers representing an increase of approximately 3,600 from last quarter. Our ARPU was $29.49 compared to $31.04 last quarter. Our consolidated churn rate reached a new record low level of 3.1% during the first quarter which was down from 3.9% during the year-ago period and 3.3% in the fourth quarter of 2009.

Turning to gross profit, we generated $14.7 million in gross profit for the first quarter representing a gross margin of 58.7% which compared to 60.1% last quarter. The sequential decrease in gross margins was driven primarily by the sequential decrease in revenue during the quarter, the overall mix of our revenue and our decision to maintain fulfillment resources in anticipation of revenue growth in the balance of the year.

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 eliminated in 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, total non-GAAP operating expenses of $11.2 million was down approximately $180,000 compared to last quarter and approximately $2 million compared to the year-ago quarter. Our first quarter non-GAAP income from operations, which excludes the effect of stock-based compensation, amortization of intangibles, restructuring charges and revenue eliminated in purchase accounting, was $3.4 million, representing a 13.4% non-GAAP operating margin.

Based on 27.2 million shares outstanding for the quarter, we generated non-GAAP diluted EPS of $0.12 per share which was at the high end of our guidance of $0.11 to $0.12.

Adjusted EBITDA, which excludes the impact of stock-based compensation, restructuring charges and depreciation and amortization expenses, was $4 million for the first quarter of 2010 representing an adjusted EBITDA margin of 16%. 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 first quarter GAAP results, gross margin was 58.2%, sales and marketing expense was $5.5 million, R&D expense was $2.3 million, G&A expense was $3.8 million, depreciation and amortization expense was $3.3 million and restructuring charges were $60,000 leading to a GAAP operating loss of $315,000, and a net loss from continuing operations of $745,000 or $0.03 per share.

The GAAP results, including a reconciliation to non-GAAP results are available on our Web site at www.web.com under the Investor Relations sections.

Moving to the balance sheet, unrestricted cash and investments were $39.5 million at the end of the first quarter consistent with the end of the fourth quarter. We generated positive cash flows from operations of $2.3 million excluding the pay down of accrued restructuring expenses.

On a GAAP basis, we reported cash flows from operations of $1.8 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 repurchases of the company’s common stock. Which areas we focus on may vary quarter-to-quarter.

I would now like to turn to our outlook. As relates to the second quarter of 2010, we are currently targeting revenue in the range of $24.6 million to $25.2 million which is largely consistent with our guidance range for the first quarter. We view our business as stable in the near term, and we are optimistic that recent increases in activity in areas such as e-commerce, in addition to increased sales and marketing investments, will start to increase the company’s revenue run rate over the course of the year.

Assuming a non-GAAP tax rate in single digits, we currently expect our non-GAAP net income per diluted share to be in the $0.11 to $0.12 range, which is in line with our guidance for the first quarter and assumes 27.2 million diluted shares outstanding. From a full-year perspective, we continue to target a non-GAAP operating margin in the mid teens range.

In summary, Web.com continues to focus on execution, which enabled the company to reduce churn to an all-time low, expand our customer base and deliver profitability that was at the high end of our guidance in the first quarter. We are continuing to test and invest in a number of sales and marketing programs that we believe will help Web.com to restore top line growth and improve our long term growth profile.

We have a strong market position and value proposition, and we are optimistic about the company’s long-term future.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) First question is from David Hilal with FBR Capital Markets. Please go ahead with your question.

David Hilal – FBR Capital Markets & Co.

Great. Thank you. A few questions. David, when you talked about the subs you acquired, I wanted to get more detail. I think at one point you said a few thousand and then several thousand. Can you just be more specific and tell us how much you did acquire and what did the ARPU profile look like of those that you bought?

David Brown

Yes, David. We typically don’t provide that level of detail about our gross subscriber, so I can’t tell you. It was a few thousand. And from that type of subscriber, these were do-it-yourself subscribers, which typically come with a lower ARPU than our average ARPU. In this particular case, they were somewhere – they were relatively in between our average ARPU and our current MSRP for our offerings.

That gives you a sense that they were higher than the DIY customers that we normally bring on, but lower than our average ARPU.

David Hilal – FBR Capital Markets & Co.

Did you acquire more than the net new sub number –

David Brown

It was in that approximate range.

David Hilal – FBR Capital Markets & Co.

Okay. So it would be fair to say, organically net subs were flattish. Would that be accurate?

David Brown

Yes.

David Hilal – FBR Capital Markets & Co.

You talked about your different go-to market strategies and I wanted to drill a little bit on this direct effort. You talked about scaling. Have you tested that to the point where now you are going to scale it or is it still in that test phase?

David Brown

So, it’s still in the test phase and let me tell you what we have done. We have had a number of people on staff in local markets scattered around the United States test the effectiveness of selling our higher-priced lead business. Now we are in the process of taking that handful of people and multiplying it by a number to see whether it scale from a handful to several handfuls. And that will be in one geographic market in the country and if that scales well then you will see us begin to ramp it out to other markets.

But we’ve done a limited test with a handful of people. It passed our – it met all of our metrics. So now we are beginning to see whether it will scale to several handfuls and if it does, then we will begin to multiply that by markets around the United States.

David Hilal – FBR Capital Markets & Co.

What are you seeing from Intuit, because they are offering – they’re seem to be putting a lot of money and I see the commercials quite often. So I guess direct to its competitor, is that working? And then on a bigger picture, does that TV channel work because Constant Contact seems to be using that as well in any of the similar kind of end market as you? That’s kind of the two-part question.

David Brown

So, the first part, what do we see? We obviously have seen the ads. We don’t hear anything from our customers nor do we hear anything from our prospects. Intuit is not a name that’s mentioned as a name when customers leave us that they are leaving us to go to. It is a very, very low-priced limited – I hate to say value – but limited features, functionality and value offering that doesn’t really compete with our bundles of offering.

So we don’t Intuit into very much. It’s now, I guess, to a free offering. Those have existed in the market now for, literally 10 years and we continue to acquire subscribers. So from that perspective, it hasn’t really caught our attention competitively, although we are continuing to monitor that organization and see how they might migrate upscale with products and services beyond their low value offering.

In terms of the media, we have plans to later this year test media, but our previous experiences with media tell us that the cost of acquisition is significantly higher than the cost of acquisitions that we’ve traditionally seen in our PPC or outbound telemarketing campaigns. We’re going to retest that again to see whether or not the environment has changed. But if that test pans out and it’s a profitable return on investment vehicle for us, then you will see us expand it further. It’s one of the items that I was alluding to when I said, “We have many plans to test this year.” And we have some information that tells us that it has traditionally been expensive. But we need to check that from time to time we will be checking it later this year.

David Hilal – FBR Capital Markets & Co.

Okay, great. Thank you.

Operator

(Operator instructions) The next question is from Sameet Sinha with JMP Securities. Please go ahead with your question.

Randy Katz – JMP Securities

Hi guys, this is Randy Katz calling in for Sameet. First of all, just on the acquisition of the subscribers, do you expect any more in the next quarter or throughout the year from this particular partner?

Secondly, I am looking at the gross subscriber number and if I back out the addition of, I’ll call it, a 3,000 number and look at you gross subscribers, it was down about 5,000 from the fourth quarter. And typically if you look back to last few years, the first quarter is a seasonally strong quarter. So I am curious as to what would cause the decline in gross sub additions in the first quarter as you saw perhaps a step down within the small business market and what would give you confidence that you will see the improvement as you move throughout the year? Thank you.

David Brown

So, I’ll answer the first part of your question and Kevin will handle the second part. In terms of the acquisition, we don’t expect to receive any more subscribers from this acquisition. It’s completed. We are in the process of integrating those customers into our company at this point and then we will begin a process of upsell and cross sell. In fact, some of those activities have already begun.

It’s not to say that there won’t be other opportunities like this. We have a very active corporate development program looking at these kinds of opportunities and the way we think about it is when we can acquire subscribers at approximately the same costs that it costs us to acquire them through marketing then we will do that because they typically are more mature. They have lower churn and we can bring them on to our hosting base and leverage that hosting base more efficiently. So we will continue to look at these things.

Now as to the second, regarding subscriber additions –

Kevin Carney

Yes, I think my comment there would be I think really historically sort of the core of the business, I would say that the first quarter really is not typically the strongest quarter, and I say that because, again, a lot of our activities on the DIM side, we’re selling as you know on a trial basis, those convert to be in the first quarter. So we see a little softer performance from a sales perspective. End of the fourth quarter, which really translates into gross adds. And for the first quarter, I think if you’re to try to compare it back to previous quarters, I think there is always going to be just like in this quarter we had an acquisition of customers, and others we had migration that have gone on, we’ve talked about some lower-priced partner – lower-priced ARPU partner programs that have driven substantial units from quarter to quarter.

So I think it’s difficult – I know what’s the comparison you are trying to make, but I think it’s sometimes difficult to make that comparison for those reasons. But I would end by saying I think typically the first quarter, I wouldn’t say is expected to be the strongest from a gross add perspective.

Randy Katz – JMP Securities

Okay. Just a different line of question here; can you provide us with some of the characteristics of the partners come from your different channels? And what I'm looking for, if you can help break up what percent of partners are coming through direct versus the partner channel and if you notice any differences in the uptick of products and the APRU of products that they are purchasing through those channels?

David Brown

The way I will take your question is we have a partner channel and we have a direct channel. And we have historically been very oriented as a partner channel acquisition company. And in fact, when we went public 70% plus of our business came from one partner and the other partners made up the other 20%. So we were practically a 100% partner-oriented.

Today, more than a majority of our business comes to us directly under our own brand, either through PPC advertising for our do-it-yourself products or through our list acquisition method that we talked about where we’re able to bring customers through lists and outbound calling and also to some of our higher value added services, whether it’s e-commerce or other where we have well established brands like Solid Cactus or LEADS.com.

So then answer to your question, more than a majority of our business comes to us directly, less than a majority than comes from the partnership channel. And in terms of churn or ARPU, it’s really – it’s all over the math, Randy, when you think about it. It really has more to do with what product is being purchased that determines ARPU and oftentimes can be the biggest contributor to churn.

I will tell you that we don’t see a significant difference in the churn between directly acquired customers and partner acquired customers today. That wasn’t always the case, but as our value proposition has improved and as we’ve begun to improve even with our brand in the market, we no longer see any difference in churn between direct and partner which is a significant improvement over the past few years.

Operator

Is that all your questions? All right. The next question is from Jeff Martin with Roth Capital Partners. Please go ahead.

Jeff Martin – Roth Capital Partners

Good evening, guys.

David Brown

Hi, Jeff.

Jeff Martin – Roth Capital Partners

Could you go into a little bit of cutting back to the direct sales effort, give us a sense of exactly what’s the sales strategy is? Is this feet-on-the-street going after the larger end of the smaller business environment? And can you also kind of give us a sense of without being too specific what the subscriber acquisition costs and ARPU might be for that type of strategy?

David Brown

Sure. I can answer at least two parts of the question. The third, we have not far enough along yet to answer. But this is in fact a feet-on-the-street program where we have sales people in local markets that call on small businesses and present a concept of lead generation for their business, including a Web site, PPC campaign, and search engine optimization.

So it’s a holistic approach where we control all the components and we are essentially presenting a value proposition that says you don’t need to worry about clicks or SEO. What we are going to do is drive leads – qualified leads to your business at the lowest cost in the competitive marketplace. So that’s the marketing approach and that’s the distribution approach.

And as I mentioned earlier, we tested it in a number of local markets but only with a handful of salespeople. It met our expectations. If it continues to scale the way the initial test did it will be a very profitable distribution mechanism for Web.com, very profitable.

Jeff Martin – Roth Capital Partners

My understanding is that you are basically building and then taking a turn and showing around how you could generate leads for them, then?

David Brown

No, we are essentially going to them helping them understand finding out how they generate leads today. What their cost of lead generation is and helping them understand that we can generate leads competitively with what their currently using, using this medium and building quickly than building a Web site for them that is optimized and then there is a managed PPC campaign or a combinations of thereof; so different customers have different education levels, different levels of maturity, and their use of the Internet.

And so this is a varying program. It really what it intends to do though is holistically manage all the elements for a customer so they get the benefit of SEO and PPC and a well designed Web site that converts that traffic into real leads for their business. Something that’s missing in the marketplace today and something that we want to take in our value proposition.

Jeff Martin – Roth Capital Partners

Okay. And then switching overt to e-commerce, you mentioned some seasonality has dragging down ARPU related e-commerce. Could you give a little bit of color on quantifying that? Are we going to see an uptick in ARPU in the back half because of that seasonality?

Kevin Carney

Yes, this is Kevin. I think we commented on it last quarter when giving our guidance for the first quarter. And so in terms of quantifying it, I would say, it represents the lion’s share of the decline that we saw. And as we said, we hadn’t anticipated fully the seasonality effect in the first quarter, especially with this business.

Again what we are seeing is leading up into the holiday season, small business is spending more money to build out their e-commerce Web sites, spending more money in search engine marketing to drive traffic to those Web sites and then finally spending more money with those – in some of the support activities that we offer as well around that call center and other services that will show up revenue. So those were the things now.

And then for the second part of your question, yes, we would expect to see that same seasonality effect, and in fact on ARPU in the fourth quarter of this year. And I hope that we will be in a much better position I think at this point to anticipate that and communicate that, reflect more guidance in both the fourth quarter and the follow first quarter.

Jeff Martin – Roth Capital Partners

Okay. And then David, what kind of external factors do you think it takes for a small business to start making more of an investment in your types of services?

David Brown

Well, certainly what we are seeing in the marketplace is a small business client who is severely cash trapped, we know that from looking at billing failure rates the number of times that we get insufficient funds recorded back to us when we bill credit cards or a checking account. So I think just job one is small businesses having a stable enough environment and that means having cash in the bank or having a belief that they can generate cash flow before they begin making larger purchases.

And to be straightforward, the biggest pressure that we face today is selling some of our higher priced products, some of our professional services and some of our bigger packages or the packages that have been most pressured over the last couple of years. They also are the greatest opportunity for us going forward. So we continue to invest in those areas and we are continuing to go to the market. But certainly, it is a very credit stressed market right now and I think that has to begin to improve before we see significant macroeconomic relief and higher purchases to getting to grow.

In the meantime, we will take customers on at low ARPUs as long as their profitable and we will slowly but surely demonstrate to them that we can deliver value and they will pay for that if you can demonstrate that there is not high risk in making the lead. And so most of our programs are designed around now bringing new end, demonstrating value and then showing how you can get more of that value by going up the cross sell or upsell pattern.

Jeff Martin – Roth Capital Partners

Okay. That’s helpful. Thanks a lot. Thanks very much.

Operator

Thank you. (Operator instructions) Our next question is from Stephen Ju with RBC Capital Markets. Please go ahead with your question.

Stephen Ju – RBC Capital Markets

Hi, guys. Just looking at the cash flow statement, there is $1.4 million of amount in the cash outflow investment in tangible assets. I was just wondering what that is? And so the CapEx was a little bit higher than expected. I was just wondering if your outlook for the year has changed at all. Thank you.

Kevin Carney

Well, the intangible asset investment would relate to the purchase of accounts that we’ve been talking about. And I think maybe to further comment on that and in fact to David’s point about the relative ARPU, I think as we look at it from a customer acquisition standpoint I would say what we pay for those accounts correlates – I think it’s in proportion to the ARPU that we receive there and the life time value. But that’s what that is. And then in terms of CapEx, I would not say – I would say that perhaps maybe some acceleration, but would not change the long-term outlook for the year.

Stephen Ju – RBC Capital Markets

Okay. Thank you.

Operator

I am showing no further questions in queue.

David Brown

Okay. Well, again, we’d like to thank everyone again for joining us on today’s call. Before we conclude things I’d like to bring to your attention that we will be presenting at several upcoming investor conferences, JMP, Needham and RBC and we look forward to meeting with investors at these events. In addition, 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. Thank you, again and good evening.

Operator

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.

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Source: Web.com Group, Inc. Q1 2010 Earnings Call Transcript
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