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Web.com Group (NASDAQ:WWWW)

Q1 2014 Earnings Call

May 01, 2014 5:00 pm ET

Executives

Jenny R. Kobin - Vice President of Investor Relations

David L. Brown - Chairman, Chief Executive Officer and President

Kevin M. Carney - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Matthew Thornton - SunTrust Robinson Humphrey, Inc., Research Division

Jackson E. Ader - JP Morgan Chase & Co, Research Division

Samad Samana - FBR Capital Markets & Co., Research Division

Kenneth Wong - Citigroup Inc, Research Division

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Hamed Khorsand - BWS Financial Inc.

Kevin LaBuz - Deutsche Bank AG, Research Division

Operator

Greetings, and welcome to the Web.com First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jenny Kobin, Vice President of Investor Relations. Thank you. You may begin.

Jenny R. Kobin

Good afternoon, and thank you for joining us today to review Web.com's first quarter 2014 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 the call to 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 provides 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 annual report on Form 10-K for the year ended December 31, 2013, for more information on these risks and uncertainties and our limitations that apply to our forward-looking statements. Web.com expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

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

David L. Brown

Thank you, Jenny, and thank you, all, for joining us on the call. I'm pleased to share that Web.com reported solid first quarter results with continued success in executing on our strategic and operating plans. In our prepared remarks this afternoon, I will discuss first quarter business highlights, the macro environment, summarize our financial performance and provide operating highlights. Then Kevin will provide a detailed review of the first quarter and our guidance for Q2 and full year 2014.

Web.com delivered a strong first quarter performance that was highlighted by double-digit revenue growth driven by better-than-expected net subscriber additions, continued ARPU gains and a best-in-class retention rate. Both revenue and profitability were above the high end of our guidance.

For the past few years, we have been following a consistent business strategy of cross-selling our robust suite of higher ARPU value-added services into our 3.2 million subscriber base, while more recently taking efforts to build the Web.com brand.

The success of our strategy is now quite clear, as evidenced by the 12% growth in ARPU and more than 200,000 net new subscribers we have added since the first quarter of 2012, while also lowering our churn. This powerful combination has driven revenue growth from low-single digits to double digits over that period, and we see a long runway of opportunities to build upon that momentum going forward.

While generating improved revenue growth has been the top focus for Web.com, it has to be done responsibly. We've been able to deliver the significantly improved revenue growth profile while maintaining our non-GAAP profitability levels. This is a testament to the scalability of our business model and demonstrates our commitment to rigorous analysis on how to best allocate capital in order to achieve our financial objectives.

In terms of the macro environment, small businesses continue to face significant challenges. The NFIB Index continues to bounce around month-to-month without any clear direction, though it remains below pre-recessionary levels more than 5 years after the beginning of the financial crisis.

On a positive note, NFIB owners are modestly increasing employment, with March being the sixth positive month in a row. In an environment where every dollar is precious, small business owners don't have the luxury of learning how to leverage new and unfamiliar marketing channels on their own and risk making marketing investments that don't drive business value. Our combination of world-class customer service and a broad suite of do-it-for-me and do-it-yourself Internet services and online marketing solutions is a best-of-both-worlds solution for small businesses, who are both risk-averse and recognizing they need new tools to reach today's consumers.

Looking at our summary results for the first quarter, non-GAAP revenue was $141.2 million, which was above our guidance range of $139.5 million to $141 million, and represented year-over-year growth of approximately 10%. This compares to 7% growth in the first quarter of 2013.

In terms of profitability, we, again, delivered a strong quarter of earnings. Non-GAAP net income was $33.1 million, a 35% increase from last year. This led to non-GAAP earnings per diluted share of $0.61, which was above the high end of our guidance, and a 27% increase on a year-over-year basis. We generated adjusted EBITDA of $41 million, yielding a 29% margin, even as we continue to make significant investments in our sales and marketing programs to drive future growth. We continue to generate attractive returns from these investments, which have helped to drive our improved growth profile.

Effectively balancing investing for growth and delivering best-in-class profitability is a core competency of this management team, and we strongly believe this strategy is the most effective way to maximize long-term shareholder value.

During the first quarter, we generated operating cash flow of $18.6 million. This was in line with our expectations, given that the first quarter is typically a seasonally low cash quarter.

Now I'd like to give you some color around our performance in the first quarter that demonstrates how our growth strategy is working, why it makes us confident in our ability to continue our track record of increasing growth and how we are 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 first quarter, ARPU grew $0.04 to $14.75, which was consistent with our expectations for the quarter and reflects higher subscriber growth and typical first quarter seasonality. ARPU growth is driven by our ability to cross-sell value-added Internet services to our growing subscriber base, and we continue to see very positive trends from these offerings, including do-it-for-me websites, lead generation in social media, among others. And as in previous years, we expect to see an acceleration of sequential ARPU growth as the year progresses.

Another key driver in our ability to deliver revenue growth is increasing our subscriber base. We had a record first quarter as we added 50,600 net new subscribers, bringing our total subscriber base to approximately 3,172,000. Our net subscriber additions in the first quarter were driven primarily by better-than-expected growth among new domain name customers.

Periodically, we run promotional pricing programs targeted at prospective domain customers. And in the first quarter, we saw a meaningful step-up in new subscribers as a result of this offer.

We don't expect to see the same benefit in future quarters, so we should be within our target range of 25,000 to 30,000 additions per quarter for the remainder of the year.

As we have consistently said, our primary focus is on deploying incremental marketing dollars to generate the most additional revenue growth while maintaining our current levels of profitability, and we continue to believe driving greater adoption of our higher-priced value-added services is the best way to achieve this goal.

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. It is a key driver of our customer satisfaction and low churn rates.

In terms of customer acquisition strategies, our growth is being driven through our investment in 4 channels: one, online marketing; two, inbound and outbound telesales; three, direct-response TV and radio ads; and four, Feet on the Street. We continue to add resources to each of our channels, and we make frequent adjustments based on the effectiveness each one is generating.

In the first quarter, we made good progress in setting up this year's class of Feet on the Street direct sales offices by hiring the managers for 4 of our 8 planned offices: Baltimore, Chicago, Denver and Tampa. We will have 24 Feet on the Street offices up and running in the back half of the year, which will be a positive long-term growth driver.

As these offices mature, they are beginning to broaden their sales focus beyond their core Leads by Web solution to include other elements of our value-added services portfolio.

During the first quarter, we launched an advanced design offering of our custom website solution targeted for larger small businesses that have more extensive needs. Our Feet on the Street sales representatives have been trained on this new solution, which leverages a pricing grid for the reps to quickly provide customer quotes based on number of web pages needed, complexity and desired features. This offering enables us to serve various verticals, such as restaurants, that may not have been interested in a lead generation solution.

During the quarter, we made a small tuck-in acquisition of SnapNames, a global industry leader in the domain resale marketplace. SnapNames brings extensive experience in leveraging the domain aftermarket and partnership agreements with many of the leading global registrars, enhancing our U.S. and international partnership opportunities. This acquisition was a financially attractive way to take advantage of the domain lifecycle market that helps to increase the value and profitability of our existing domain assets.

Given the increasing level of activity in the domain industry, we believe it makes sense to be opportunistic in this area.

From a market opportunity perspective, the process of awarding new top-level domains, or TLDs, by ICANN, continues to make slow and steady progress. The first batch of new TLDs have hit the market, though these have been uncontested ones that are unlikely to be material revenue opportunities.

We now have more than 120 new extensions that are available for sale and expect to have more than 375 by year end. Based on ICANN updates and the current rate of progress in working through the set of contested TLDs that have greater sales potential, we believe the upside from new TLDs is now more likely to be seen in late 2014, 2015 and beyond. In relation to that timing, we now expect that the .WEB public auction will most likely take place in 2015.

New gTLDs remain an interesting growth opportunity, but it's important to remember, this growth would be incremental to what we are generating from our core strategy of up-selling higher-priced value-added services into our installed base.

To summarize, Web.com delivered solid first quarter results that showed our ability to generate double-digit revenue through our success in adding new subscribers, cross-selling our value-added services and bringing in customers at higher initial ARPU levels. It is clear that our operational strategy is working, and we are well-positioned to achieve our 2014 targets and our long-term growth and profitability objectives.

With that, let me turn it over to Kevin.

Kevin M. Carney

Thank you, David. Let me begin by providing a review of our financial results for the first quarter, and I'll finish with our guidance for the second quarter and an update to our full year 2014 guidance.

Beginning with the first quarter P&L, non-GAAP revenue was $141.2 million, excluding a $7.4 million impact of the purchase accounting fair value adjustment to defer revenue in the quarter, and represented 10% year-over-year growth. Subscription revenue for the first quarter was up 11% year-over-year. As David mentioned earlier, our non-GAAP revenue was above the high end of our $139.5 million to $141 million guidance range.

On a consolidated basis, ARPU was $14.75, a $0.04 sequential increase from the fourth quarter, and consistent with our expectations. As we have mentioned before, first quarter sequential ARPU growth is affected by the strength we realize in the fourth quarter for some of our higher-priced value-added services during the holiday season.

We expect ARPU will track our historical trends of increasing sequential improvements, as we move through the year and as some of the initiatives David mentioned earlier, like new Feet on the Street offices and our custom website offering, begin to have an impact.

We ended the quarter with approximately 3,172,000 subscribers, which was an increase of 50,600 from the fourth quarter of 2013. We continue to believe that quarterly net subscriber adds in the range of 25,000 to 30,000 is the appropriate target, as we focus greater resources on our higher-priced value-added services. Our monthly customer retention rate remained at approximately 99%, and we are confident in our ability to maintain this level of customer retention moving forward.

Turning to profitability. We generated $95.4 million in non-GAAP gross profit for the first quarter, representing a gross margin of 68% compared to 69% last quarter and 67% in the same period last year. Our first quarter non-GAAP income from operations was $38 million, representing a 27% non-GAAP operating margin.

We generated non-GAAP net income of $33.1 million, or $0.61 per diluted share. This represented 35% and 27% year-over-year growth, respectively, and came in above the high end of our guidance range of $31.5 million to $32.5 million and $0.58 to $0.60 per share.

Moving on, our adjusted EBITDA was $41 million for the first quarter, representing an adjusted EBITDA margin of 29%. We are pleased with our margin performance in the quarter, which was consistent with our results in recent quarters and in line with our guidance for the full year. We are confident in the inherent scalability of our model and our ability to continue investing to drive additional growth while maintaining margins around current levels.

Turning to our GAAP results. Revenue was $133.8 million. Gross profit was $87.3 million. Income from operations was $9.5 million. Net income was $0.5 million, and net income per share was $0.01. In terms of cash flow, we generated $18.6 million of operating cash flow in the first quarter, which was up from $11 million in the same period a year ago, or $18.2 million, excluding the $7.2 million onetime prepayment penalty for the debt refinancing last year.

During the quarter, we invested approximately $7.4 million in cash for the SnapNames asset acquisition and had capital expenditures in the quarter of $2.9 million, which led to $15.7 million of free cash flow. This was up from $6.5 million or $13.7 million, excluding the prepayment penalty, in the same period a year ago, in which there were capital expenditures of $4.5 million.

During the quarter, we also paid down $6 million of our outstanding debt, and we continued -- we intend to continue, using our growing cash generation capabilities, to rapidly delever our balance sheet.

Moving to the balance sheet. Unrestricted cash and investments were $15.2 million at the end of the first quarter, which compared to $13.8 million at the end of the fourth quarter, and is at our target range of $10 million to $15 million. We ended the quarter with a total debt balance of $559.6 million. Another positive development related to debt occurred in March, when Standard & Poor's Ratings Services raised its long-term corporate credit rating on Web.com Group, Inc. to B+ from B.

With that, let me turn to our near-term guidance and long-term growth targets. For the second quarter of 2014, we're targeting non-GAAP revenue in the range of $146 million to $147.5 million. We expect our non-GAAP net income to be in the range of $33.4 million to $34.4 million or $0.61 to $0.63 per diluted share for the second quarter, which assumes 54.4 million diluted shares outstanding. I'd like to finish by updating our guidance for the full year of 2014.

We're adjusting our revenue guidance upward to $593 million to $600 million, an increase from our prior guidance of $585 million to $595 million. The increase in our annual revenue guidance reflects our positive performance in the first quarter, plus the impact from the acquisition of SnapNames, which we expect to contribute in the range of $5 million for the period of our ownership in 2014.

From a profitability perspective, we are continuing to target an adjusted EBITDA margin of approximately 29%. We now expect to generate non-GAAP net income in the approximate range of $135.5 million to $139.5 million or $2.49 to $2.56 per diluted share, an increase from our prior guidance of $133 million to $138 million or $2.45 to $2.54. This assumes an updated share count of 54.5 million.

We continue to expect the cash tax rate for 2014 in low-single-digit range. In terms of cash flow, we are reiterating our free cash flow guidance of approximately $125 million.

In summary, we are very pleased with our first quarter results, which exceeded our guidance from both a revenue and a profitability perspective. We are pleased with the positive momentum we are seeing across our business and our ability to generate continued gains in ARPU and net subscriber additions while maintaining best-in-class profitability.

We believe the success of our strategy is positioning us to achieve our long-term goals of low-teens revenue growth, mid-teens to 20% earnings growth and scaling free 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 Robert Peck with SunTrust.

Matthew Thornton - SunTrust Robinson Humphrey, Inc., Research Division

Yes. It's actually Matt in for Bob. Dave, just a quick question on the trade-off between the ARPU and the subscriber growth that we saw in 1Q. It seems like the subscriber growth was probably helped by the promotion on the domain name, and that probably weighed on ARPU, I would think, in the first quarter. So as we kind of unwind that over the rest of the year, we should see ARPU cadence tick up over the course of the year. Is that fair?

David L. Brown

That's very fair. In fact...

Kevin M. Carney

Yes, but I think you raised a good point. I think with the over 50,000 net subscribers in the first quarter, had we come in closer to our target range, say 25,000, we would've seen an ARPU sequential growth of about $0.10. I think much more consistent with what we would've seen last year, and then you're right, targeting that kind of a subscriber growth going forward and the growth that we see in the business, we would expect to see much more significant gains in ARPU over the course of the year.

Matthew Thornton - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Perfect. That makes perfect sense. And then just one question, a bigger picture, if I could. International, now that you have SnapNames, I know they've got some fairly good relationships overseas. Can you just maybe update us on how you're thinking about international timing? Any color that you can provide there?

David L. Brown

Sure. Well, we've previously commented that we have a series of test programs running in different parts of the world. The United Kingdom -- we have activities going on in Latin America, in Canada, et cetera. And so we are in the process of learning, testing. And we now have access to a very significant portfolio of global business development partnerships, most of them initially focus around domains, but we expect to begin to take those and expand them into other product categories. So we're very excited about the SnapNames acquisition. Not only does it help us monetize our domain assets better, but it also gives us an entrée into the world scene that we are now ready to take advantage of.

Operator

Our next question comes from Sterling Auty with JPMorgan.

Jackson E. Ader - JP Morgan Chase & Co, Research Division

This is Jackson standing in for Sterling here. Another question on the promotion. Can you give us a sense of when the promotion ran, and maybe, for how long?

David L. Brown

Sure. So this was a pricing promotion, and it ran during the quarter. It ended. It ran its course, its full course, and we run these kinds of promotions all of the time. We don't always get this positive of a result, but that's probably the best way to put it. We can't anticipate that we would get a similar result in future quarters. So we are suggesting that we stay focused on the guidance we provided, which is 25,000 to 30,000 net subscribers going forward.

Jackson E. Ader - JP Morgan Chase & Co, Research Division

And that actually leads me to my -- to the follow-up. And that is, should we just think that, given the guide of 25,000 to 30,000 per quarter, this quarter, you add a little over 50? Should we just think, okay, then back into they added 22,000 roughly of domain customers?

David L. Brown

No. I think you have to take our gross subscribers and our churn, and so this net number really reflects a much larger new customers coming in after you net out the churn. But I would tell you that the principal increase over our target was domain-related and was related to this pricing test that we ran. And we have positive surprises from time to time that come, but we can't predict them. So we can't provide them to you as instructional guidance.

Operator

Our next question comes from Samad Samana [ph] with Northland Securities.

Unknown Analyst

[indiscernible] standing in for Tim Klasell. Just a question on the gross or the high adds. Are you concerned about the quality of those customers or the stickiness as far as the churn rates going forward? Could some of those extra 25,000-or-so adds be, maybe, less sticky? How should we think about that going forward?

David L. Brown

Yes. I would say that we're always concerned about the quality of our subscribers, and that's really what we use to regulate these tests. It's always a balancing act between the opportunity to grow ARPU and opportunity to keep the customer over a long period of time. We don't think that the extent, size and nature of this particular test is going to lead to any meaningful quality problems for us at all. But it's partly because we pay such close attention and throttle these types of tests literally on a daily basis. But it's a good question, and it's really a good insight into how we run our business.

Unknown Analyst

Okay, great, great. And then on the Feet on the Street, you expanded the product set. How is that working up, particularly with your tenured reps, who maybe only focused on leads before? Are they taking to the new products? Or are we seeing some success there? I know it's early days, but any color would be appreciated.

David L. Brown

Yes, it's a great question. So I think we previously commented that we were going to take a little pause in opening offices and move the opening of our offices until later in the year, so that we could step back and add some products into our sales teams' portfolio. And we did that, and we went through a very extensive training cycle with our team and changed some compensation metrics and spent a good amount of time making sure we have the product priced properly, and we gave our folks the proper tools, which I alluded to. We've given them some technology that allows them to really, on the fly, in front of a customer, give them a very responsive quote on what it might cost and what they might get. So we feel really good about the sales preparation, and we've seen good, initial traction from this, from our long-tenured reps, as well as some of our new reps. So we're very, very confident in this product, and we hope to bring some additional products to this team as the year moves on.

Operator

Our next question comes from Samad Samana with FBR.

Samad Samana - FBR Capital Markets & Co., Research Division

So guys, I wanted to ask a question that is more capital management-related. The stock has pulled back in, and you're one of the few companies that I cover that actually has very healthy earnings. Would you ever consider slowing down the debt repayments and instituting a share buyback plan?

David L. Brown

Samad, I think right now, we think we still continue to believe that deleveraging is the best use of capital. Even given the small pullback in our stock, just please remember that our stock was half the price than it is today a year ago. So it's actually at a historically good level. And we see tremendous opportunities, not only to delever but also to invest in growth of the business. So we think those are 2 better places at the current time. It's not to say we wouldn't ever consider a buybacks. We've done them before, and we certainly would consider doing them again. But right now, we think delevering and further accelerating the growth of the business is the right answer for use of capital.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay. And then on the -- for the promotion -- and I missed the early part of the call, multiple companies reporting tonight. Does that have anything to do with more competitors being in the market, trying to grab a share? Or was that independent of Go Daddy and what they're doing and what other -- what your competitors are doing?

David L. Brown

Completely independent of the competitive marketplace. We have established, over the last year, our ability to compete in acquiring subscribers and to compete on the basis of both the quality of the product, but also price, if necessary. So we run these tests more focused on the quality of subscriber. And when I talk about quality, it's not just churn. It's also their willingness and ability to buy more things over time. So those are the 2 factors that we're looking at, and we're constantly monitoring and fine-tuning around those factors.

Samad Samana - FBR Capital Markets & Co., Research Division

Okay, great. Then one last question for me. On the Facebook product, could you give us an update there and how traction there has been? People look at Facebook's results, and it's easy to make conclusions. I was just wondering on how Web is doing there, and that's the last question for me.

David L. Brown

Sure. We're continuing to have very consistent and strong sales performance with our Facebook product. We are very focused on the quality of that product, the value it creates for our customers. And we're continuing to invest and evolve the product, so that it delivers real value for customers. And we think that's one of the reasons why we have such consistent and strong performance with the product.

Operator

Our next question comes from Walter Pritchard with Citigroup.

Kenneth Wong - Citigroup Inc, Research Division

This is Ken Wong for Walter. It looks like today, you guys got the -- kind of the brains of the operations chiming in on across the board. So I think just kind of circling back again to just your strong subgrowth. Was this largely on the domain side, was this typical .com, .net? Because it did sound like, from VeriSign's perspective, it wasn't as good as they were hoping. Or were the gains coming from other domains and, potentially, some of the gTLDs that you guys were talking about, that you guys have started preregistering?

David L. Brown

Yes, good question. So it's principally .com and .net, so the traditional warhorses in the domain industry. They continue to perform well. There is some traction in the gTLDs, but it's very, very light traction at this point because we're talking about the uncontested ones. And that's probably the best answer to your question.

Kenneth Wong - Citigroup Inc, Research Division

Got you. And then, Kevin, any impact from SnapNames this quarter? And then also, for the guide, you've mentioned that roughly $5 million for top line coming from SnapNames. Should we expect that kind of that $2 million -- I mean, that $0.02 uplift on EPS, is that roughly what the contribution from SnapNames is going to be on the earnings side?

Kevin M. Carney

I think -- first, from a revenue perspective, we commented in our prepared remarks that we expected the contribution to be in the range of $5 million for the balance of the year, including contribution of this past quarter. Having said that, there is some growth obviously assumed over the course of the year. Contribution in this quarter, we had them for less than a month. We're talking about a couple hundred thousand dollars, so pretty insignificant. And I would say, from a bottom line perspective, while their overall margins would be slightly below our target today, our expectation is that we will see improvement. As we kind of get our hands into the business and start making some changes, we'll see those margins improve over the course of the year.

Operator

Our next question comes from George Kelly with Craig-Hallum Capital Group.

George A. Kelly - Craig-Hallum Capital Group LLC, Research Division

On for Mitch. Two questions for you. First, to expand on the previous question about the top-level domains, can you go through the time line again of when you expect to see more of those people coming online? I know it's not for a year or so for some of them. And then the second question is on your higher-priced products. Wondering if you could talk about any recent new product launches that have been especially popular?

David L. Brown

So on the top-level domains, the process is it's moving forward. It may be painfully slow, but it is moving forward, and we're seeing -- we've seen a good number of uncontested, top-level domains come in. I think you'll even see in our presentation, there's a slide that shows some of the more popular ones, albeit not huge sales volume, but at least, the normal stratification that you would expect. This is not the normal 80-20 rule. This is really even more concentrated, just a handful of these top-level domains generating a very significant portion of the volume. The contested domains will begin later this year and that -- and when I say begin, it's an awkward, sometimes clumsy process that can involve private auction and even a public auction process. So we expect that to drag out and really will be late this year, late 2014, before some of the more potentially interesting gTLDs will come to market and then -- and really more meaningfully into 2015. And as I commented on the call, for instance, .WEB won't even come to public auction until well into 2015 at this point. So that's kind of the timing. We've always said that be patient. Don't get too excited about this. It's a good thing, but it's going to take time. And it's working out that way. It is taking time. And then on the second one. I think from a higher-priced product perspective, I think it's important to note that our Leads by Web product, is, for us, it's still a relatively new product. And it's continuing to improve in its sales velocity and conversion rates. And that's why we have the confidence to add more offices, and we've said we'll continue to add more offices. We've also opened up different ways of selling that product. We commented on a previous call that we're now selling it to customers who are calling us inbound. And we have a small team that is very effective at selling it in multiple-call close. So that's been very popular. This new custom website product that we're selling is -- keep in mind that this is a few-thousand-dollar upfront fee and then a several-hundred-dollar-a-month subscription. And it's a more robust website product for the larger small businesses, and it's beginning to generate some traction. So those are some examples, and again, as it came up earlier, our Facebook product continues to perform very well.

Operator

Our next question comes from Gray Powell with Wells Fargo.

Gray Powell - Wells Fargo Securities, LLC, Research Division

So I just have a couple of questions. I mean, obviously, you had much better-than-expected subscriber growth this quarter. You received [ph] a partial benefit of the revenue or ARPU in the quarter, but you had the full CPGA hit. So I'm just curious, how we should think about the impact of customer acquisition cost this quarter on EBITDA?

David L. Brown

I would say there was no real customer acquisition cost. I think it's important to note that this test was principally a direct-to-site test. In other words, we weren't using pay-per-click advertising to acquire customers. These are customers who are coming to our site and seeing our price test and buying from us. So there was relatively little cost of acquisition embedded there. But one thing you always need to remember is that domain customers are some of our lowest-priced customers, our lowest ARPU customers, when they first join us. So they do tend to have a slightly dilutive impact on our ARPU. And that's why we pointed out that if we had, had just our normal target amount, you would've seen ARPU growth in the range of $0.10 versus the $0.04 that we reported.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. Then maybe, just switching topics. With the recent security incidents in the retail space, and in particular, the news around the Heartbleed virus, I'm just curious, have you seen any change in customer demand for SSL Certificates or security add-ons, in general?

David L. Brown

I would say that we have seen a modest increase in, certainly, awareness and receptivity to SSL Certificates and, for that matter, all manner of security products. And I would also say that customers are very receptive to our recommendations and suggestions about security. In the past, they might have politely ignored us when we asked them to change their password. Now we're getting more receptivity in that area. But yes, we are seeing a modest improvement. It's interesting. It's not as strong as we would expect, and it's certainly not as strong as we think is warranted. And so we are very active in commenting and communicating with our customers the importance of good security protocols. And as we may have commented in previous calls, we're also very active in trying to create and sell security products that can protect our customers.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Got it. Okay, and then one last one, if I may. You touched on this before, but you reiterated the $125 million for cash flow guidance. And with growth in EBITDA, it looks like leverage could get down to the low 2x range by the end of the year. How should we think about your [indiscernible] given the visibility in your business? And then should we think about you using your improved balance sheet to potentially look at doing another acquisition?

David L. Brown

I mean, just to address your comment, I think, as we said, our plan, unless we see other opportunities where we can get a better return for our shareholders in front of us, at this point, is to continue to use our free cash flow to delever, pay down the debt. And I think as you pointed out, with the free cash flow we're guiding to, we'll have a significant impact on our leverage ratio by end of the year. In terms of using our balance sheet to look at other acquisitions, I mean, I think that we're always looking at opportunities. And I think where we've been successful in the past is just being opportunistic and doing deals when they could be done well. So I think we're -- we'll be in a very good position to look at those opportunities, given, as you pointed out, the strength of our balance sheet and how we'll continue to improve over the course of the year.

Operator

Our next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial Inc.

I just wanted to ask a little bit more on good granular info on the new sub adds. Are you able to give us some info as to how much are these customers going to cost you in the future to go back to them and maintain them or get them to take on new services? I mean, if it's low quality, wouldn't it just be a costly endeavor and just having these customers, wouldn't it be more costly for you, overall?

David L. Brown

So let's start with the quality. We can't tell you that these are low-quality subs. We can tell you that we're -- they were acquired direct-to-site. They are relatively low ARPU customers when they come in. The future will tell us more about the quality of the subs in terms of their ability to buy product. But I will tell you that most of the selling that goes on to domain name customers occurs in a highly automated fashion, where the customer is interacting with the purchase process or with e-mail communication or with a control panel. There is some after-call work that can happen during the course of the year, but much of it is automated. So we're not at all concerned about the cost of supporting these customers. And in our overall mix of 3.2 million subscribers, there are all sorts of quality of customers, and we're happy to take them because they all represent opportunities in the future.

Hamed Khorsand - BWS Financial Inc.

Okay. Is there an update on -- as from your presentation during the Investor Day, related to other services, just like the Facebook page builder that you were talking about like Yelp and so forth?

David L. Brown

We are not -- we didn't provide an update on this call other than to say that we do have some other products in the pipeline. And we're looking forward to bringing them out to you here in the coming quarters, and we're excited about them as well.

Hamed Khorsand - BWS Financial Inc.

Okay. But I mean, I guess you're answering my question as far as -- just marketing-wise. Is it just going to be purely spent on, just generating the same old-fashioned subscribers, domain level?

David L. Brown

So yes, that's a good question. So we -- I think if you watch carefully, you'll see that we're running Facebook ads today, as well as website ads. And you can -- and you'll begin to see a variety of other communications. There was even -- if you listen to radio, you'll hear some e-commerce advertising going on right now. So all of that's already in the public domain, and we're continuing to branch out and market more and more of our products into the marketplace. So it won't be the same old thing. It will be some of the same channels but expanding the number of things that we market into the marketplace. And then as we move in through the second quarter and then into the third quarter, you'll also see some additional new product developments. And we'll be happy to announce -- talk about them once we announce them.

Operator

Our next question comes from Lloyd Walmsley with Deutsche Bank.

Kevin LaBuz - Deutsche Bank AG, Research Division

This is actually Kevin LaBuz on behalf of Lloyd. My first question deals with the competitive environment. And it seems like every day, we're hearing more in this space with, let's say, Wix and Squarespace. So I'm just wondering, are you worried about the amount of R&D you're investing? Or do you think you may have to step that up in the future as competition in the space intensifies?

David L. Brown

Yes, great question. So the truth of the matter is we have stepped up our R&D investment. You can't see it in our numbers because we're still saving, and we're still benefiting from the acquisition of Network Solutions. And we're using those -- those savings are masking a significant investment in R&D. For instance, we mentioned previously that we'll be rolling out a new website design builder at our Analyst Day. We've nicknamed it Neo, and it will be a state-of-the-art -- equal in its capabilities to anything else you've seen. And it will be focused on our do-it-yourself customers. So we're very excited about that. And we have a variety of other product initiatives going on to help keep us current. But at the end of the day, we're the leader in value-added services, and we think the market is -- will move right through a domain name and a website builder and try to figure out how to market themselves, how to get found, how to get conversion, how to sell things online. And that's really what we specialize in and how we've separated ourselves from the competition. And there hasn't been any narrowing of the gap in those particular areas.

Kevin LaBuz - Deutsche Bank AG, Research Division

All right. And my second question is just on ARPU, which you mentioned we should expect to see nice gains over the back end of the year and next quarter. And are there any specific products that are driving that? Or is that broad in terms of the ARPU uplift?

Kevin M. Carney

Yes. I mean, I think it's across all fronts. As David mentioned, in response to an earlier question, our ARPU is continuously diluted as we bring in the lower-priced domain name customers, which represent the vast majority of our new gross adds, and after that, our DIY customers. So it's really, as David mentioned, it's all the value-added services, whether it be our -- the new custom website, our Leads by Web product, or our existing lower-priced custom website products. Our Gorilla marketing product, Ignite. I mean, it's across all of those products and increasingly pushing those through the existing sales channels, as David mentioned, whether it be DRTV or radio, or a new product, like the custom website in Feet on the Street. You really can't point to one specific product. It's all that we're doing across all the channels.

Operator

Ladies and gentlemen, there are no further questions at this time. I'll turn the conference back over to Mr. Brown.

David L. Brown

Thank you, all, for joining us today to review our first quarter and the outlook for our business. We appreciate your interest and look forward to speaking with you about our progress. We will be presenting at the SunTrust Internet Conference in San Francisco on May 14 and the JPMorgan TMT Conference in Boston on May 20. As always, feel free to contact us here at Web.com if you have additional questions. Thank you, and good night.

Operator

This concludes today's conference. All parties may disconnect. Have a great day. Thank you.

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