Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Endurance International Group Holdings Inc (NASDAQ:EIGI)

Q4 2013 Earnings Conference Call

February 25, 2014 4:30 PM ET

Executives

Blake Cunneen – Senior Vice President of Corporate Development and Investor Relations

Hari K. Ravichandran – Founder and Chief Executive Officer

Tivanka Ellawala – Chief Financial Officer

Analysts

Heath P. Terry – Goldman Sachs & Co.

Brian P. Fitzgerald – Jefferies LLC

Peter L. Goldmacher – Cowen & Co. LLC

Operator

Good day, ladies and gentlemen and welcome to the Endurance International Group 2013 Fourth Quarter and Full-Year Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would like now to turn the call over to Blake Cunneen. Mr. Cunneen, you may begin.

Blake Cunneen

Thank you, Hi, my name is Blake Cunneen and I’m the Senior Vice President of Corporate Development and Investor Relations. On behalf of Endurance International Group, it is my pleasure to welcome you to our fourth quarter earnings call.

We will first go through some prepared remarks, after which we’ll turn to Q&A. Our presentation to go alongside our comments is available at the investor relation section of our website at endurance.com. While not necessary to follow along, we recommend using the presentation slides alongside our prepared remarks.

As is customary, let me now read through the Safe Harbor Statement. Statements made on today’s call will include forward-looking statements about Endurance’s future expectations, plans and prospects. All such forward-looking statements are subject to risks and uncertainties.

Please refer to the cautionary language in today’s earnings release and to our Form 10-Q filed with the SEC on December 6, 2013 for a discussion of the risks and uncertainties that could cause our actual results to be materially different from those contemplated in these forward-looking statements. Endurance does not assume any obligation to update any forward-looking statements.

During this call we will present several non-GAAP financial measures, including adjusted EBITDA, unleveraged free cash flow, adjusted revenue and adjusted revenue per subscriber. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is available in a presentation located at the Investor Relations section of website.

With that, I will turn you over to Hari Ravichandran, our Founder and CEO.

Hari K. Ravichandran

Thanks, Blake. Hello, everyone, and welcome to our fourth quarter earnings call. As you may have seen from our earnings release, we had a very strong quarter to cap a great year growing adjusted revenue, adjusted EBITDA and unlevered free cash flow to $528 million, $208 million and $156 million respectively.

Moreover during the year, we added 279,000 net new subscribers on an organic basis, bringing our year-end total to just over $3.5 million, while simultaneously increasing average revenue per subscriber. Given that we have so many new investors, we are still getting to the other company; we thought it might be useful to spend some time giving a high level overview of Endurance.

Our mission is to deliver superior cloud-based solutions that help small and medium-sized businesses succeed online. Our company strategy is based on two simple principles, organically adding more high quality subscribers to our platform and selling our subscribers more value-added services. This, in combination with the best-in-class cloud enablement platform, creates a powerful growth equation that propels our business and financial results.

Our product offerings range from a basic web presence package to more complex and managed cloud-based applications. We are able to identify customer needs and provide solutions that help them not just get found but get new business. Our subscribers can take advantage of our SMB growth-focused solutions to help them succeed, including e-mail marketing tools, eCommerce solutions and virtualized and managed application.

Our go-to-market strategy revolves around two organic growth levers in the business, adding high-quality subscribers and selling them more products and services. On the subscriber acquisition dimension, we’ve adopted a multi-channel, multi-brand approach to establish relationships with SMBs.

Our most powerful channel is customer advocacy and word of mouth. About 45% of new subscribers added to the Endurance platform find us through word of mouth, which does not offers any marketing dollars. We accomplish this by focusing on delivering a superior solution, fueled by our cloud enablement platform, and great customer service.

Our second largest channel is our network of over 400,000 online partners who educate businesses searching online for a web presence solution and refer these businesses to us. Of course the multi-channel approach would not be nearly as successful if not paired with multiple brands.

For a targeted customer base as broad and diverse as the SMB community, we believe that offering solutions through multiple brands is critical. The approach allows us to tailor our message and yields high subscriber conversion rates. What result is a robust subscriber acquisition funnel and attractive subscriber acquisition costs.

The second important aspect to our strategy involves increasing our average revenue per subscriber or ARPS, which we accomplish by distributing a broad portfolio of products across multiple points of engagement. We regularly add products to our broad portfolio and deploy those products via highly engaging customer touch points. Combined with our robust subscriber acquisition funnel, this strategy has a compounding effect that helps drive sustainable organic revenue growth.

The driving agent behind our strategy is our best-in-class cloud enablement technology platform. Through this platform, we can support multiple brands, attract customers through multiple channels and seamlessly deploy multiple products while allowing our customers to scale and to grow.

Our technology platform has taken many years to build and we believe it serves as a great differentiator on the competitive barrier to entry. By delivering cloud-based solutions quickly, reliably, and safely, we seek to attract high quality subscribers who view their web presence as mission critical.

These subscribers then demand high quality products creating a national alignment with our corporate strategy of adding subscribers and upselling products.

Taking together, this strategy yields a strong performance driving both the revenue and cash flow growth seen in 2013. As we examined the fourth quarter and 2013 in greater detail, momentum built during the year not only allowed us to exceed the guidance we provided during the quarter, but also positions us for future success in 2014 and beyond.

In Q4, we generated adjusted revenues up $137 million, adjusted EBITDA of $46 million and unlevered free cash flow of $38 million. During this time, we organically added 62,000 net new subscribers bringing the total to over $3.5 million high quality subscribers platform.

Further during the period, we grew average revenue per subscriber and maintained a 99% monthly recurring revenue or MRR retention rate.

In addition to our initial public offering on October, we’ve closed a refinancing of our senior bank debt and revolving credit facility in late November. Using proceeds from the IPO, cash on hand and incremental first lien facilities, we’ve retired our $315 million second lien term loan and reduced annual interest expense by approximately $35.

Finally, on January 23 of this year, we closed FY transaction substantially expanding our footprint in emerging markets.

With that, I would like to hand it over to Tiv Ellawala, our CFO, who will run through the financials and operating metrics in greater detail. Tiv?

Tivanka Ellawala

Thanks, Hari. For those of you following along in presentation, we are now on Slide 10. As mentioned before, our two key levers of growing revenues are adding subscribers and increasing our average revenue per subscriber. Q4 represented another quarter of steady organic subscriber growth as we added 62,000 net new paying subscribers to our platform.

Over the last eight quarters, we have grown our subscriber base by a compounded annual growth rate of 11% on an organic basis, our average revenue per subscriber for the fourth quarter was $13.15 per month increasing both sequentially and off the prior year fourth quarter.

As noted previously, we completed two large acquisitions in 2012 which we successfully migrated onto our platform over the course of 2013, during migrations we typically manage our investment in the migrating brand to allow us focus on on-boarding these new subscribers to our cloud enabled platform.

Excluding the impact of our 2012 acquisition, our average revenue per subscriber grew 5% over the fourth quarter of 2012.

Finally, we maintained our 99% monthly recurring revenue retention rate in Q4, 2013 consistent with our MRR in Q4, 2012.

For the year, we added 279,000 net new subscribers on an organic basis, subscriber growth remains the highest priority growth lever due to our proven ability to gradually increase our average revenue per subscriber throughout the customer lifecycle.

Our average revenue per subscriber grew to $13.09 per month for the year excluding the impact of 2012 acquisition, the year-over-year growth was 9%, underlying this increasing offers strong growth amongst those subscribers paying $500 or more per year with us which increased by approximately 20,000 in 2013 to nearly 100,000 by the year end.

Growing adoption rates in e-commerce, managed marketing and advanced hosting solutions have fueled this growth. Further we were able to increase the number of additional products we sell to our subscriber base above the initial web presence solution from 3.3 products on average at the end of 2012 to over 4.1 products at the end of 2013. Finally, as previously mentioned, our MRR retention rate remained at 99%.

Turning to the financial results, our GAAP revenue for the fourth quarter of 2013 was $136.4 million, growing 17% over the fourth quarter of 2012. On an adjusted revenue basis, we generated $136.9 million of revenue, almost $3 million ahead of our expectations of $134 million. Excluding the impact of the 2012 acquisition, our adjusted revenue was $83.2 million, a 12% increase over the fourth quarter of 2012.

In order to migrations of HostGator and Homestead are complete, we expect that we will revert to our historic norms for annual growth going forward starting with approximately 14% in 2014. Our adjusted EBITDA of Q4 was $46.2 million, growing 40% over Q4 of 2012. Costs came in line with estimates allowing for the growth in revenue to covert to adjusted EBITDA and exceed expectations by $3 million as well.

Net loss in Q4 was $67.5 million, or $0.57 per share and both impacted by certain changes – charges related to our IPO that totaled $33.6 million. Our unlevered free cash flow for the quarter was $37.5 million, a 37% increase over Q4 2012, and ahead of expectations of $33 million. Our capital expenditures for Q4 were $8.1 million, or approximately 6% of adjusted revenue.

For the GAAP revenue – for the year, GAAP revenue grew to $520.3 million and adjusted revenue to $528.1 million ahead of our adjusted revenue expectation of $525 million. Apart from 2012 acquisitions, adjusted revenue organically grew 17%, adjusted EBITDA increased to $207.9 million ahead of expectation of $204 million, with the majority converting to unlevered free cash flow of $166.5 million, which have ahead of guidance of $162 million. Total capital spending for the year was $33.5 million.

Moving on to our capital structure as Hari noted last quarter, we refinanced our debt and retired in full our $315 million second lien tranche of bank debt and increased our first lien facility to $1.05 billion. As part of the refinancing and IPO, we have reduced our weighted average cost of debt resulting in annualized interest expense savings for term debt of approximately $35 million based on current loan balance and interest rates.

Switching now to guidance, we are confidence that the momentum in the business and the growth opportunities in front of us will translate to a strong 2014. Please note these figures include the impact of Directi, which we acquired in January of this year.

For full year 2014, we are guiding to an adjusted revenue range of $630 million to $635 million. This represents a 14% organic growth rate for the core business over the prior year.

For the first quarter, we anticipate $145 million to $147 million in adjusted revenue. We expect adjusted EBITDA of full-year 2014 to be $230 million to $235 million. For the first quarter, we anticipate $55 million to $57 million in adjusted EBITDA.

Adjusted EBITDA has always represented above with our metrics for the company as it is most closely representing the cash on cash framework by which we manage the business. Equally crucial to that viewpoint is unlevered free cash flow. We expect unlevered free cash flow for full-year 2014 to be between $180 million and $190 million. For the first quarter, we anticipate $42 million to $44 million in unlevered free cash flow.

With that, I will turn you back to Hari to discuss our long-term growth opportunities and why we are confident guiding to these figures.

Hari K. Ravichandran

Thanks Tiv. Our primary goal has always been to add high quality subscribers on to our platform. In 2014, we anticipate the channels that have fueled subscriber growth in the past will continue to do so. Most important of which is subscriber word of mouth referrals that contribute almost half of the new subscribers that sign up with us. Beyond that we are exploring new channels such as expanding our reseller network, extending our university program and attracting subscribers via alternative products.

The metrics behind these channels are also compelling with subscriber acquisition cost and customer life-time values, comparable to our current channels. We’ve been extensively testing these channels for sometime and believe that incremental marketing investments, while neutral to adjusted EBITDA in year one will deliver revenue growth in 2014 and position us for a strong top and bottom line growth in 2015 and beyond.

Additionally, we continue to make investments to build-out our multi-brand strategy evident in our recent acquisition of Directi’s web presence business and its main brands, which includes BigRock, LogicBoxes and ResellerClub. These brands allow us to penetrate attractive emerging market economy such as Brazil, Russia, India, China, Indonesia and Turkey.

By segmenting the potential subscriber base and cater into their unique needs in these markets. Further the local knowledge gained via the leading positions that Directi has in its target markets aid in our expansion efforts abroad. Building upon momentum at Brazil and India, we expect to introduce more targeted and localized offerings in large market, such as China, thereby escalating our growth in international markets.

Finally, our recent re-launch of the Bluehost main website illustrates our commitment to the multi-brand high conversion approach. The new design is not only much more modern in consistent, but also a destination design to reinforce our targeting of more technically savvy small business owners. Though it has only been live for a short time, we are already receiving strong positive feedback from our community of subscribers.

Turning to the ARPS portion of the equation, subscriber appetite for additional product and services remain as strong as ever, growing in fact for more sophisticated cloud-based solutions. The massive appetite we are investing behind our next generation cloud infrastructure platform. This allows us not only to service the changing needs of our existing subscriber base, but also expand our market footprints to more technically sophisticated users would typically transact at higher price points.

Of course, a broad and dynamic products suite is only as good as its delivery mechanism. We continued to make investments to strengthen our existing subscriber outreach programs, particularly with our sales floor and email marketing campaigns. The focus here is on improving the timing, targeting and messaging of these campaigns to ensure that are relevant and highlight Endurance as a trusted advisor.

However, the key element in any engagement strategy relies on knowing your customer. We constantly strive to learn more about our subscribers, regularly referencing and analyzing the petabytes of data at our disposal to ensure all subscriber contacts are made in a thoughtful manner. All in we strive to improve both our first time and returning visitor experiences with more dynamic, targeted and relevant content that allows subscribers to more easily navigate the range of solutions to offer. Taking together the combined impact of these growth initiatives make us confident in our 2014 guidance.

Thank you all for taking the time to listen today and for your interest in Endurance. With that, I’ll turn it back to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Steven Juel [ph]. Your line is now open.

Unidentified Analyst

Hey, how are you? Tiv, a couple of questions on your guidance parameters, so and as you think about the 14% organic growth rate for 2014, how much do you think is going to come from subscriber additions and how much from I guess ARPS increases. And also as I look at your first quarter guidance relative to full year guidance, it seems like you are contemplating, some amount of acceleration in the top line growth as you progressed throughout the year, so can you give us some color in terms of what’s driving that? Thanks.

Tivanka Ellawala

Sure, Steven. This is Tiv. In terms of how to think about subscriber growth versus ARPS growth I think still our focus will be thinking about subscribers initially. So think about half to two-thirds of our growth will come from subscriber growth and remainder from ARPS growth.

Hari K. Ravichandran

And in terms of – This is Hari, and in terms of acceleration over the course of the year, we made with any typical kind of marketing program that we put in place it takes a little time for those going to build-up momentum, we’ve started investing behind, variety of marketing programs as I mentioned in my prepared remarks. Over the course of the late part of last year going into this year, so as we think about those subscribers coming on platform and the recurring revenues from those customers continuing to kind of compound over the course of the year, we anticipate that the revenue growth that the full year guidance versus the first quarter bridge that’s sort of the operational bridge in our minds Steven.

Unidentified Analyst

Thank you.

Operator

The next question comes from Heath Terry of Goldman Sachs. Your line is now open.

Heath P. Terry – Goldman Sachs & Co.

Great thanks. I was wondering if you could give us a sense, particularly as you are seeing such strong retention rates, how you are thinking about the incremental investment that you want to make into product marketing, are you – and particularly into customer acquisition. Is there sort of a hurdle rate for customer acquisition that you are thinking about a top line growth number that you are managing towards being given the margin profile that you’ve got, why not go ahead and push a little bit harder on the customer acquisition side to drive top line growth given the relatively early stage market of the SMB space?

Hari K. Ravichandran

It’s a big question, I am happy to take it, this is Hari. From our perspective historically as we kind of talk through with folks in the road show et cetera. The subscriber acquisition costs have stayed at a level where, you know we feel like we get payback, within a year for any of the new system we bring on platform. So the way we’ve always thought about it is that as you get to point where incremental marginal dollars you are spending on subscriber acquisition, don’t have exactly the same level of yield within our existing channel.

Its time for us to expand our channel base and find other ways to get SMBs on board on to our platform that keep giving sustained kind of cash and cash recurrence on a customer-by-customer basis. So effectively we want to try to keep our SECs consistent because, if you invest lots of dollars within an existing channel.

At some point the channel will saturate and your SECs will start to go up. So the way we’ve going to modeled our business overtime is to get to a point where we say if there is any risk of that happening over time, we want to expand our channel outreach into other ways of on boarding SMBs and that’s what we’ve been doing for the last year plus and we feel pretty good about this new channels now.

And now we are starting to increase our marketing spend inside those channels to keep bringing in customers with the same kind of subscriber acquisition cost and LTVs effectively.

Heath P. Terry – Goldman Sachs & Co.

Great. Thank you.

Operator

Thank you (Operator Instructions). And our next question comes from Brian Fitzgerald of Jefferies.

Brian P. Fitzgerald – Jefferies LLC

I wonder if you could give us a sense of any new products that you’ve added to the platform in the last quarter that you are excited about, which categories of products going forward of the most exciting. And then when you, can you talk a bit about your upsell strategy, maybe specifically with your more mature subs say in years two and three and beyond. And maybe contract sales with upsells in the earlier year one. I guess in other words when are you having the most impactful RPS increases, when are they taking place in the lifecycle of the client?

Hari K. Ravichandran

Sure, it’s a great question, this is Hari again I can take that. Historically, if you look back several years ago most of the success we were having with additional product sales was always happening early in the lifecycle of these SMBs as they got on boarded. And the big reason for it is to that point in time they are very engaged, they are thinking about their business, they are thinking about how to grow their business, they contact you very frequently.

So the national touch points that you have with these SMB customers just happened much more frequently early in their lifecycle, and I would say over the last two or three years we’ve been spending and investing a lot of time and energy into having that same kind of momentum also happened to their core base of customers that have been with you for a period of time because they are sticky, they are over the infant mortality part of the SMB lifecycle and customers that tend to have opportunity to buy higher price products.

So of late we’ve been having more success with that strategy as well I would say. And then in terms of product launches over the last quarter or so that we are excited about a lot more managed solutions like the managed or best solution which we feel is a good product inside the SMB base, a cloud-based backup solution that we released recently as well as getting a lot of good momentum.

So both in terms of the technology, segment and the marketing segment, we continue to keep launching products at higher price points and having a lot of good luck with our customers.

Brian P. Fitzgerald – Jefferies LLC

Awesome. Thanks, Hari.

Operator

Your final question comes from Peter Goldmacher of Cowen. Your line is now open.

Peter L. Goldmacher – Cowen & Co. LLC

Hey, guys thanks for taking my question. Can you give us an update on a competitive environment, all your internal metrics are, it looks like they are going in the right way, but what’s going on out there in the competitive landscape?

Hari K. Ravichandran

In general we would say that in the overall landscape what’s happening with some of the players that are out there, as they are spending brand-based dollars inside various different areas, it is educating the SMB market. So we thought about this segment of the market and as historically always been offline, starting to go online. We are having a lot of good momentum as a result of some of the marketing spend inside that particular segment.

Overall, what we would say is, our business continues to should have on all key dimensions in terms of subscriber ads, average revenue per subscriber growth, MRR retention rates. We have not seen a lot of impact on those, in fact, they all tend to be as you guys have seen in the numbers and guidance, very positive. But in general as more people are educating the market, it seems to be creating a lot of tailwinds for all players in the marketplace, which is a very positive trend.

Peter L. Goldmacher – Cowen & Co. LLC

Great. Thank you.

Hari K. Ravichandran

Thanks, Peter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts