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Website Pros, Inc. (WSPI)

Q4 2006 Earnings Call

February 7, 2007 5:00 pm ET

Executives

David Brown - CEO

Kevin Carney - CFO

Analysts

David Hilal - Friedman, Billings, Ramsey

Nate Swanson - ThinkEquity

Brad Whitt - RBC Capital Markets

Michael Kern - Canaccord Adams

Kyle Evans - Stephens Incorporated

Vincent Colicchio - Noble Financial Group

Presentation

Operator

Good day everyone and welcome to today’s Website Pros Fourth Quarter 2006 Earnings Results Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions to participate will be given at that time.

I would now like to turn the call over to Mr. Kevin Carney, Chief Financial Officer. Please go ahead, sir.

Kevin Carney

Alright, thank you. Good afternoon everyone and thank you for joining us today to review our fourth quarter and full year 2006 results. With me on the call today is David Brown, Chief Executive Officer. David and I have some prepared remarks and then we will open up the call to a question-and-answer session.

Please note that our remarks today contain forward-looking statements. These statements are based solely on present information, and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings including our registration statement on Form S-1 and the risk factors contain therein as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Also, please note that a webcast of today's call will be available on our website in the Investor Relations section.

With that, I would like to turn the call over to our CEO, David Brown, so he can provide some color on the Q4 results and an update on our strategic initiatives. Then I will come back later to provide some further details regarding our financials as well as guidance for the first quarter and high-level comments on 2007. David.

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David Brown

Thanks Kevin, and thank you all for joining us on the call as we review our fourth quarter 2006 results, which were highlighted by better than expected revenue and profitability that was at the high-end of our previously issued guidance. We were very encouraged to see such a strong relative performance following the third quarter in which our revenue came in lighter than we had hoped. Better than expected contribution and strong growth in our Renovation Experts.com and 1ShoppingCart.com offerings, combined with incremental improvement and the execution of our Web services team lead the fourth quarter revenue out performance.

I am also very pleased to announce that the fourth quarter marked the sixth consecutive quarter since going public that Website Pros met or exceeded our profitability guidance. And we are highly focused to continue extending that track record. With the integration of our recent acquisitions going better than expected, incremental progress being made with our core Web services teams and our partner channel becoming increasingly diverse and productive, we are optimistic about our outlook for 2007.

Turning to our results for the fourth quarter. From a revenue perspective, total revenue came in at $16.4 million in the fourth quarter, an increase of 46% year-over-year and above the high-end of our guidance of $15.4 million to $16.2 million.

Within in total revenue, subscription revenue came in at $14.9 million, an increase of 57% on a year-over-year basis and 32% sequentially. The strength of our subscription revenue was driven by the inclusion of and momentum in Renex and 1ShoppingCart.com offerings, continued success in new Web services sales programs, and progress in our partner diversification strategy.

In addition to strong momentum in our subscription revenue, our licensed revenue rebounded significantly from the previous quarter as we had expected due to the release of NetObjects Fusion Version 10. While down on a year-over-year basis, our licensed revenue more than doubled from the previous quarter, which is the largest sequential jump driven by a new release that we have experienced in our recent history.

NetObjects Fusion 10 is being well received in the U.S. as well as internationally. The latest version has been favorably reviewed in a variety of international technology publications and has already received the Editors' Choice Award in a popular publication in the UK.

From a profitability perspective, we generated a record non-GAAP operating margin of 14% and non-GAAP EPS of $0.14, which was at the high-end of our guidance and an increase of 75% on a year-over-year basis.

Now let's look at the key drivers to our fourth quarter top-line performance. Last quarter, we discussed the challenges in our Web services business from the sales headcount and productivity perspective. We made progress in the fourth quarter on both of these fronts, significant room for improvement. For comparison, our net subscribers for Web services declined by slightly over 1000 in the third quarter, but improvements in headcount, productivity, and churn over the course of the fourth quarter, cut the decline just slightly over 100 subscribers in the quarter, ending the quarter with approximately 57,000 subscribers.

We believe that we will return to positive net subscriber growth in our Web services during the first quarter, based on the progress we are making in growing our sales force and improving productivity. Given the evolution of our business since we have gone public, we disclosed at our Analyst Day that we are going to begin reporting our subscribers on a consolidated basis moving forward, taking into consideration subscribers across each of our major solutions including Web services, LEADS.com, Renex, and 1ShoppingCart.com.

In the fourth quarter, we saw a solid increase of roughly 1000 net new subscribers on a consolidated basis, going from approximately 73,000 subscribers at the end of the third quarter to approximately 74,000 subscribers at the end of the fourth quarter. Our portfolio of solutions will continue to expand and what we believe it is much more meaningful to evaluate our progress in bringing the overall suite to the market as opposed to any individual solution.

Across both our Web services and overall portfolio of solutions, we made progress in bringing down our level of churn, following the third quarter in which it expectedly rose as a result of the price increase we instituted.

In the Web services business, our monthly churn rate declined from 6.2% in the previous quarter to 5.8% in the December quarter, with the trailing 12-month monthly churn remaining at the prior quarter's level of 5.8% and down from 6% in the prior year quarter. The introduction of higher value solutions such as SmartClicks, focus on customer service, and other initiatives are aimed at minimizing the level of churn in our Web services business, and we believe that we will continue to make annual progress in this area.

Looking at our monthly churn on a consolidated basis, taking into consideration Web services, LEADS.com, Renex, and 1ShoppingCart.com, our monthly churn was even lower at 5.4% during the fourth quarter. The high value-add associated with Renex and 1ShoppingCart.com offerings, combined with the fact that they are traditionally sold to SMB organizations that are larger and more established than a majority of our Web services customers, has a positive impact on the overall level of monthly churn in our subscriber base.

In addition to growing our overall net subscribers and lowering our monthly churn in the fourth quarter, another key driver to the growth in our subscription revenue is the increase in our average revenue per subscriber. During the fourth quarter, our average revenue per subscriber increased as a result of the price increase we implemented during the third quarter, along with the success of our higher price SmartClicks offerings, which combines eWorks! with LEADS.com offerings. This offering carries a monthly price tag between $99 and $169 per month, depending on the customers' vertical market, and we believe the success of this offering should continue to have a positive impact on our ARPU.

Over the past three quarters, SmartClicks has accounted for roughly 15% to 20% of our new Web services customers, evidence of its traction in the marketplace. Specifically, our ARPU on the traditional Web services offering came in at slightly north of $55 in the fourth quarter, which compares to approximately $52 in the prior quarter and $49 in the year ago quarter. Of note, as we start to talk about our metrics inclusive of all of our offerings, we would expect to see an even higher ARPU due to the fact that our LEADS.com, Renex, and 1ShoppingCart.com offerings each have a higher ARPU as compared to our Web services offerings. For example, on a combined basis, our ARPU would have been north of $65 during the fourth quarter.

Another key component to our overall growth strategy is to continue expanding our multi-faceted distribution model with organizations that have strong brand recognition and high volume business models with small and medium size businesses. The fourth quarter marked a milestone in the history of Website Pros, as it was the first time Discover-related leads accounted for less than 50% of our new business. Specifically, Discover represented 46% of our new sales units for the quarter, down from 56% in the prior quarter and 68% a year ago.

The reduction to below 50% level was driven largely by the inclusion of Renex and 1ShoppingCart.com. However, even on a standalone basis, the percentage of business driven by Discover would have declined by several percentage points on a sequential basis and close to 15 points on a year-over-year basis.

Discover is and will remain an important partner to Website Pros, but we believe our success in diversifying our distribution network is a major accomplishment for the long-term health of the business.

Outside of our business with Discover, VistaPrint has been our second largest contributor, followed by positive contributions from partners such as Cardservices International, IBM, Intuit, EarthLink and others.

In addition since our last call we have signed relationships with The Company Corporation, Authorize.net and Internet Secure.

The Company Corporation is an industry leader in providing incorporation services for new businesses. Authorize.net is a leading provider of online gateway services managing the submission of transactions to the payment processing networks on behalf of its more than 158,000 merchant customers. Internet Secure, which is a subsidiary of Nova Payment Systems, one of the top 5 US credit card processors, provides a complete outsource payment solution that services internet businesses, mail order, telephone order, and retail environments. We are early in the implementation and testing phases with each of these partners, so the ultimate level of productivity associated with these programs is still undetermined.

That said, the continual addition of high-quality partner prospects increases the diversity of our business and maximizes the number of partners we can allocate our sales resources across over time.

Before turning it over to Kevin, I would like to comment briefly on our recent acquisitions of RenovationExperts.com and 1ShoppingCart.com, both of which have been fully integrated into Website Pros at this point. We are clearly very pleased with the performance we have seen thus far and we would attribute a large portion of the over-performance relative to our guidance to better than expected contribution from both of these offerings. 1ShoppingCart and Renex have compelling value propositions for customers. They have experienced a higher ARPU and lower churn rate compared to the traditional business of Website Pros, and both companies have established growth track records.

In addition to sustaining their standalone momentum, which is very important whenever acquisitions are integrated, we are seeing early signs of synergistic opportunities on the top-line. For example, while still early, during the fourth quarter, we saw a very nice teamwork between Renex and LEADS.com, whereby excess leads from Renex were passed over to our LEADS.com business to be bundled and sold as part of the Lead packages that LEADS.com sells to their customers. In this manner, Website Pros is optimizing the potential revenue we can generate from each Lead that comes to Renex.

Over time, we believe that there will be additional cross-selling opportunity between 1ShoppingCart.com and our Web services and internet marketing solutions. There is still a lot of work to be done, but we are very pleased with the management commitment and performance of both Renex and 1ShoppingCart.com, both of which are living up to the strategic reasons we acquired them at the end of the third quarter.

In summary, the fourth quarter was encouraging and that we showed progress in our web services business, our recent acquisitions outperformed our initial expectations. We had a successful launch of a new version of our award-winning NetObjects Fusion software and we continue to diversify our partnership channel. The combination of these led to better than expected revenue and record profitability margins in the fourth quarter and they are among the reasons we are optimistic about our outlook heading into 2007.

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

Kevin Carney

Thanks, David. Let me provide more details on our fourth quarter results and financial guidance and then I'll turn it over for Q&A.

Let's start with the highlights of the P&L. Total revenue for the fourth quarter was $16.4 million, an increase of 46% over last year and 36% from the prior quarter. The strong year-over-year and sequential increase in revenue was driven in part by the inclusion of Renex and 1ShoppingCart.com in our results at the beginning of the quarter. Subscription revenue, which is the strategic component to our revenue, was $14.9 million in the fourth quarter, representing 91% of our total revenue and significant growth of 57% on a year-over-year basis and 32% sequentially.

If we were to include Renex and 1ShoppingCart.com subscription revenue in the prior year period, our pro forma subscription revenue growth would have been 26% in the fourth quarter. The remaining $1.4 million or 9% of total revenue for the fourth quarter was generated from software licenses and professional services. This was a decrease of 15% on a year-over-year basis, but up 88% sequentially due primarily to the new releases of the NetObjects Fusion version 10 during the fourth quarter.

Turning to gross profit, we generated $9.1 million in gross profit for the fourth quarter, representing a gross margin of 56%. This was roughly in line with the year-ago quarter and up slightly from the prior quarter. We will focus our discussion on non-GAAP or pro forma results, because we believe that excluding non-cash items such as stock-based compensation and amortization of intangibles arising from business combinations, preferred dividends or one-time items such as IPO costs, provides the best indicator of the health of our overall business and a level of efficiency in our operating infrastructure.

On the operating expense side, non-GAAP sales and marketing came in at $3.6 million or 22% of revenue, down from 24% in the third quarter and prior year's quarter. At our Analysts' Day in December, we discussed that our gross margin could be impacted by the continued success of SmartClicks, because it carries a slightly higher cost of goods due to the inclusion of click costs with LEADS.com. However, our sales cost should see leverage from the inclusion of 1ShoppingCart.com, because their affiliate based marketing has an extremely low cost in the sales area.

On an absolute basis, sales and marketing increased approximately $700,000 sequentially, in part due to the inclusion of the Renex and 1ShoppingCart.com acquisitions.

During the quarter our sales capacity increased to 275 headcount, compared to 237 at the end of the prior quarter. Of more relevance given our discussions around the shortfall in sales headcount last quarter, our outbound telesales rep capacity at the end of the quarter was 128 reps, up from 99 at the end of the previous quarter. We are currently down a handful of reps from this level following what was an unusually large increase in staff in a short period of time. However, we clearly made significant progress in getting this aspect of our business, back on track by growing our headcount by more than 20% sequentially.

Non-GAAP G&A expenses were approximately $2.4 million or 15% of revenue, which is in line with the previous quarter and down from 17% in the prior year's quarter. The absolute dollar increase in G&A of approximately $600,000, is a result of including the G&A from the Renex and 1ShoppingCart.com acquisitions.

Non-GAAP R&D came in at $708,000 or 4% of revenue, which is down from 5% in the year-ago period and in line with the third quarter. Our R&D run-rate increased approximately $300,000 from the third quarter, again due to the inclusion of Renex and 1ShoppingCart.com.

Our fourth quarter non-GAAP income from operations, which excludes stock based compensation and amortization of intangibles, was a record $2.2 million representing growth of over 100% on a year-over-year basis, and a record 14% operating margin.

Based on 19.7 million shares outstanding for the quarter, we generated non-GAAP diluted EPS of $0.14 per share, an increase of 75% on a year-over-year basis and at the high end of our previously issued guidance. 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 summary, the company reported GAAP net income available to common shareholders of $4.8 million, and fully diluted net income per share of $0.25 in the fourth quarter of 2006, compared to $509,000 and $0.03 per share respectively in the year ago period.

GAAP net income included a net tax benefit of $3.2 million or $0.16 for fully diluted share, resulting from a $3.2 million reduction in our deferred tax asset valuation allowance. The principal reasons between GAAP and non-GAAP earnings in the fourth quarter this year are stock-based compensation, amortization of intangibles, and an income tax benefit, none of which are included in the determination of non-GAAP earnings amount.

Taking a summary look at our 2006 results on a full-year basis, total revenue was $52 million, an increase of 38% compared to the prior year. Within total revenue, subscription revenue was $46.8 million, representing 90% of revenue and an increase of 44% compared to the prior year. From a profitability perspective, non-GAAP gross margin was 56%, an increase of approximately 1.5 points from the prior year, while our non-GAAP operating income increased to 150%, from $2.4 million in 2005 to $6 million in 2006. This represented an operating margin of 12%, which is the first time Website Pros has delivered a double-digit margin on a full-year basis.

Of note, our operating margin also increased each quarter throughout the year. Our non-GAAP net income per diluted share was $0.44, an increase of more than 120% compared to $0.20 in the previous year. A more detailed review of our GAAP and non-GAAP full-year results can be found in our press release.

Turning to the balance sheet, cash and investments were $42 million at the end of the quarter, representing an increase of approximately $2 million from the prior quarter. Finally, deferred revenue at the end of the quarter was $4.6 million, which was down slightly from $4.7 million at the end of the prior quarter.

Looking at our cash flow, we generated $2.3 million in cash from operations during the quarter, an increase from $2.2 million in the same period last year. On a full-year basis, our cash flow from operations is up 66% to $6.5 million.

I would now like to turn to our outlook for the first quarter of 2007. We expect the following: Total revenue to be $16.2 million to $16.6 million. From a profitability perspective beginning in the first quarter, we expect the company to begin reporting a full effective tax rate of approximately 37% to 38% due to the reduction of our deferred tax asset valuation allowance. However, from a cash tax perspective, we'll not be paying a full tax rate for a good number of years. During 2007, we estimate that we will only pay an 11% cash tax rate, and as such that is the level that we are using for our non-GAAP tax rate in order to more closely match our reported profitability to the cash profitability of the company. Assuming a non-GAAP tax rate of 11% and 19.9 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.11 to $0.12.

On a full-year basis, we are reiterating our previous guidance. We are looking for total revenue in the range of $70 million to $72 million, representing growth of 35% to 38% compared to the prior year. Assuming the same, 11% non-GAAP tax rate and 20.2 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.53 to $0.55. It's worth mentioning that our current longer-term expectation for taxes is that our cash tax rate would increase to the higher teens percent range in 2008 and expect that it would increase by a couple of percentage points in each of the next couple of years thereafter. We'll provide further updates on our long-term cash tax rates as appropriate over time.

In summary, the fourth quarter showed nice progress from the third quarter. Our recent acquisitions are performing very well. The company met or exceeded our bottom line projections for the sixth consecutive quarter since going public, and we are optimistic about our outlook for 2007.

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. Today's question-and-answer session will be conducted electronically. (Operator Instructions) We will go first to David Hilal with Friedman, Billings, Ramsey.

David Hilal - Friedman, Billings, Ramsey

Two questions, first on ARPU, it's been trending up quite meaningfully. But I wanted to understand the ARPU trends within the SmartClicks customer base?

David Brown

We are -- I think what you are referring to is we have a number of tiers of SmartClicks and the price ranges from 99 to 169. The trend in that area is, average price has been rising and I think we reported at the Analyst Day an average price in the range -- in the high 100 teens, and we continue to see that price move up as more and more customers -- as we expand the geos, the verticals markets that we sell SmartClicks in and the average price of those packages goes up, David.

David Hilal - Friedman, Billings, Ramsey

Okay. And then as a follow-up, are you -- are customers coming after they've kind of experienced SmartClicks. So, they are coming back and buying more clicks and paying more per month?

David Brown

Yes they are. We have variety of up-sell products that we provide to customers. The first way it works is that during the course of a month if a customer receives their full allotment of clicks that they've paid for, they get a notification from us and an opportunity to buy additional clicks immediately. And then, we also proactively contact customers and sell additional bundles of clicks to those that are consistently meeting their full package of clicks in a month, David. So, yes, we are seeing traction in that area.

David Hilal - Friedman, Billings, Ramsey

Okay. I want to shift gears to the net sub number. You commented that for Q1, you expect to see a positive net sub number for the core business, and I guess what gives you that confidence? Obviously, you have more sales people, but we also had more sales people last quarter. So what gives you that level of conviction because its sounds like you feel pretty strongly about that?

David Brown

Sure. At the Analyst Day, we talked a little bit about the mechanics of growing our sales staff, and what I would call the latency that is built into a new employee. So you bring new people on and there is a period of time when they come up a productivity curve, most of that -- we've brought in quite a few new people in the fourth quarter. In fact, many of them joined us in December. So we saw a very little net contribution from those folks in the fourth quarter. But we have continued to see that net contribution increase during January, and we are optimistic that as they mature, we will continue to see their productivity improve, David. So, that’s the main reason why we are confident regarding the first quarter. And as I mentioned during the Analyst Day, we expect that trend to in fact improve throughout the year, and our performance to improve through coming quarters. And we indicated to the analysts that participated that, we will continue to grow net subscribers throughout the course of the year, as our sales staff matures and we continue to optimize some of our programs.

David Hilal - Friedman, Billings, Ramsey

Okay, great. And my last question, the three new partners you signed up. In the past, you’ve kind of run the new partners through kind of a trial period before kind of launching them and should we assume these three are in the trial period or they are beyond that?

David Brown

They are all in the trial period. There is a slight difference in our approach and it's really driven more by our partners than by our own approach in the case of these partners. There is -- there are -- there was some desire on the part of the partners to announce the partnerships at this point they believe that would be meaningful to them. And within the company, we believe there will be meaningful addition of customers as a result of these three partners. So, we were willing to announce them at this point. But we are in the process of running trials or launching all previous partners as we speak.

David Hilal - Friedman, Billings, Ramsey

Great, thank you.

David Brown

You bet.

Operator

We will go next to Nate Swanson with ThinkEquity.

Nate Swanson - ThinkEquity

Hi, I was wondering if you could expand a little bit more on the opportunity for further improvement in your core Web services business? You mentioned the kind of net revolution of bringing sales guys and ramping up the productivity curve. Can you also talk about other areas where you improved or maybe in your partner diversification strategy and in terms of the sales force that you have allocated to those opportunities? How is your productivity trending right now?

David Brown

Sure. So, I think the key point to focus on is the maturity of the sales force. We added, as we noted, almost 20% growth in the quarter, very much of that occurred at the very end of the quarter, and we got five years of experience growing our sales-force. So we have a very good handle on the maturation curve that these folks will go through it. So we are optimistic that as they mature with us, we will see improving productivity. Having said that our sales productivity has continued to improve from the third quarter and we see very solid sales productivity from the group on average and in fact improving from the end of December into the end of January. We saw our sales productivity improving on an average, which is an indication that our sales-force is maturing. And then add to that we are constantly looking at our -- each of our sales programs and moving staff across our programs to optimize our sales performance. So as we add new partners and as we learn of their potential sales productivity success, we will reallocate our sales staff across them.

And then one final note that I relate to the analysts who participate in the Analysts' Day presentation, we've been testing and experimenting with some outsourced sales opportunities and the one that I would highlight today, I highlighted during the Analysts' Day presentation and that's our work with our Renovation Experts organization, where our RenovationExperts call center has actually been selling some of our traditional Web services, had very positive success during the December and into January. So that contribution frankly is on top of the contribution that we have from our Spokane sales center.

Nate Swanson - ThinkEquity

Okay, great. And then, just in terms of the Renex and ShoppingCart business and the success you saw there, you mentioned how Renex was passing leads, excess leads on to LEADS.com business. Did those two businesses, Renex and ShoppingCart, did they accelerate since you made the acquisition, or are they just -- has there not been the level of disruption that you would normally see, and I am trying to get an idea, of --?

David Brown

Sure. I think, that it's a great question, I am very, very pleased with the teamwork that has been demonstrated by the managements and the employees of both organizations and as a result of that team work, we are seeing an acceleration in business in the combined -- in those combined offerings. And it's principally, because we now have two sales-forces that are able to sell the leads that RenovationExperts -- the excess leads that RenovationExperts has had over the past few years, as we talked about at the Analysts' Day. They sell -- they are able to place approximately half of the total volume of leads that they have been generating traditionally and we are now in a position to add an additional sales-force that can sell that remaining half. And the good news for us of course is that the cost of these leads has already been paid for, in the RenovationExperts business. So as our LEADS.com group sells these leads, they are selling a product that has no cost of goods to the company. So we think it's not only an acceleration of top-line, but also an acceleration in our gross margin and our net margin for the company. So we are very pleased with that progress we have already made there and we expect to continue to make progress in the future.

Nate Swanson - ThinkEquity

Okay, great. Thank you.

David Brown

You bet.

Operator

Next we'll go to Brad Whitt with RBC Capital Markets.

Brad Whitt - RBC Capital Markets

Hey guys.

David Brown

Hey.

Kevin Carney

Hi Brad.

Brad Whitt - RBC Capital Markets

Couple of questions, just one for Kevin, how would you be reporting, just on the metrics for next quarter, so you are only going to report combined metrics for churn that's up in ARPU?

Kevin Carney

Correct.

Brad Whitt - RBC Capital Markets

Okay. So that will be going forward. And with the significant uptick, I think you said that a 20% increase in your headcount, your sales organization. Do you think that will pause here in Q1 a little bit?

David Brown

Yes, we typically would expect sales headcount growth in the range of six per quarter. And that's what we are anticipating going forward. But again, we had a lot ground to catch up and we were determined to do it and we made great strides in catching up the ground that we had lost in the third quarter.

Brad Whitt - RBC Capital Markets

Okay. And any comments on the strategy around kind of building your own brand and -- you mentioned that you may re-launch your house brand and whether or not you had any success with that this quarter or is it too earlier?

David Brown

I would say, we did discuss this at the Analyst Day presentation that is one of the strategies of the company and it was being launched in December. So we have very little data from the fourth quarter to report, but I can tell that we are seeing very positive traction with our private brand, our Website Pros brand of eWorks! and SmartClicks, in the first quarter. So far and part of the contribution is coming from RenovationExperts, where when they sell Web services, they are only selling our Website Pros private brand, and then part of it is coming from our Spokane sales center where we have a team dedicated to pushing out our brand into the marketplace.

Brad Whitt - RBC Capital Markets

Okay. And any change in '07, Dave, with compensation plans for your sales agents. Any -- do you compensate -- I assume you compensate on gross ads versus net ads?

David Brown

We compensate -- it's a slightly complex system that looks at both sales and the retention of our customer base. So, it does look at gross sales, but it also has an attribute that looks at the retention of customers and that affects our sales folks' compensation. We are not planning on any significant changes, we are constantly tweaking our sales compensation, when we are working, we are moving people across partners. There are opportunities to tweak our sales compensation, but we don't have any significant plan changes to our comp at this point.

Brad Whitt - RBC Capital Markets

Okay. Thanks for taking my questions. That's all I have for now.

David Brown

Great.

Operator

We will go next to Michael Kern with Canaccord Adams.

Michael Kern - Canaccord Adams

I have a quick question on the partnerships. You mentioned that VistaPrint and Cardservices, were two of the partners that contributed meaningfully in the quarter. [Sensing] the new partners, what enabled you to get these guys up and ramp so quickly?

David Brown

We have been working with the VistaPrint partnership now for over two quarters and we have had a considerable amount of time to work with the management team there. They are very smart and very capable and our team, I think has worked very closely with them to ramp that program up. CSI is very similar in the attributes of their customer base to our Discover partnership. So we had a significant amount of experience already under our belt, when we launched that program. We've had it up and running really for about a quarter now and it launched very-very rapidly, very successfully, based on mostly our previous experience with Discover.

Michael Kern - Canaccord Adams

Okay. And you also mentioned affiliate marketing that you have with Renex and 1ShoppingCart. Can you give a little more color on that? Are you going to promote that more going forward?

David Brown

Sure. Our 1ShoppingCart.com, when we acquired that company, their principle marketing method is affiliate marketing, viral and affiliate marketing. So, as Kevin mentioned in his comments, they have relatively low sales costs, because they are essentially using their own customers to acquire other customers. They have a fully developed online accounting and affiliate marketing system, which we have now borrowed from them and are in the process of beginning to implement in the Website Pros, in the core Web services arena. So you will see in coming months an affiliate marketing program, a strong push by the company to offer its products and services to a variety of affiliated or at least associated providers of Web services in the marketplace. That could range from hosting companies to search engine optimization companies to web designers that have one or two products they sell, and would like to be able to provide their customers with a wider array of products. We plan to use the affiliate marketing and accounting systems from 1ShoppingCart to power that system for all of Website Pros.

Michael Kern - Canaccord Adams

Alright. Thank you very much.

David Brown

Yeah.

Operator

(Operator Instructions). We will go next to Kyle Evans with Stephens Incorporated.

Kyle Evans - Stephens Incorporated

Hi David and Kevin.

David Brown

Hey Kyle.

Kevin Carney

Hi.

Kyle Evans - Stephens Incorporated

Can you talk a little bit about the competitive landscape on a national scale?

David Brown

Sure. From a national scale, we continue to see strong efforts by -- what we would characterize as the major DIY or Do-It-Yourself players. There is strong competition in the market for DIY customers from Yahoo!, Google, there is Network Solutions and a variety of large hosting companies, all of whom are very focused on providing either hosting services or an array of Do-It-Yourself services.

On a national scale, we have not yet seen significant competition on the DIFM side of the business, the Do-It-For-Me side, which is the side that we focus on and specialize in. Our principle competition we continue to see is very locally based, very fragmented. You would tend to find a web design shop or you might find a -- an optimization or a marketing shop and those are very fragmented throughout the United States. But we are -- we've yet to see much change in the competitive landscape on the DIFM side.

And the -- and again, we performed very well with customers that need help and want help in getting on the Internet or being successful on the Internet. And we have typically stayed away from the Do-It-Yourself side of the marketplace. That’s the site where they are very technologically either proficient or have a lot of desire to be extremely confident in the Internet. So that’s what we are seeing at this point, Kyle.

We are always vigilant and we continue to watch companies that have a stated ambition to compete with us. But we are -- we are hopeful that our 7 years of experience in this business, our factory approach, our cost advantage, and our factory approach, and frankly just our attitude towards serving customers and helping small businesses, we think those things represent -- have represented in the past very effective barriers. And, we think that will continue to be advantageous for us going into the future. But we are very attentive to the national competitors and watching them, as they try to work in this SMB space.

Kyle Evans - Stephens Incorporated

Okay. You guys talked a little bit about the affiliate program of 1ShoppingCart and plugging that into the core Web services business. In the past, what I recall that you guys were internally sourcing about 10% of your new net adds or gross adds internally?

Kevin Carney

We have and there have been times when we’ve generated as much as 10% that has ebbs and flows during the course of the year or years, based on where we are allocating our sales resources. So we certainly believe that we can achieve those kind of numbers and perhaps even greater than that, and we mentioned at the Analyst Day that we are absolutely committed to a -- really a permanent commitment to growing our own brand, now that we are of the size that we have achieved. And so, we think you’ll see the percentage of our net adds will -- that is coming from our private brand, we think you will see that grow over the coming quarters very significantly.

Kyle Evans - Stephens Incorporated

Do you kind of have a target in your mind from where you think you can get that number in '08-'09?

Kevin Carney

We don’t. At this point, we are a company that really focuses on constant improvement. So even if I were to set a target, once we hit it, I'll have -- we will set a new one. But I can -- I think the number you threw out at 10%, our initial goal will be to beat that. That will make our private brand a very significant call at partner program within our company. That’s -- that’s one way you can deem it and then, we will grow from there. So, I think that’s the way we will approach it at this point.

Kyle Evans - Stephens Incorporated

Are you -- are you planning to get through that 10% goal by adding -- by first the putting affiliate program in place, then adding to the affiliate program, or is it more maybe a direct marketing approach through your Spokane?

Kevin Carney

I think that the 10% initial goal is a goal that will come from Spokane in our own -- our own sales resources, not including any affiliate marketing that we may do through the course of this year. That will be on -- that will be on top of our initial goal.

Kyle Evans - Stephens Incorporated

Okay and this is an add-on to an earlier question about the variable components to sales comp. And I guess to step back one level from that, how much of the telesales employee expense is fixed versus variable?

Kevin Carney

Roughly half of it is fixed and the other half is variable.

Kyle Evans - Stephens Incorporated

Okay. Okay, thanks guys.

Kevin Carney

You are welcome.

Operator

We will go next to Vincent Colicchio with Noble Financial Group.

Vincent Colicchio - Noble Financial Group

How do the economic arrangements with some of your new partners compared to Discover and some of your more prominent partners?

Kevin Carney

We don't -- although we don't really disclose the economic arrangements, we have directionally told you all at Analyst Day and previous presentations that, that Discover is the highest web share most of our new partners are joining us and the economic arrangements are less expensive to the company. And there are reasons for that, part of this has to do with the amount of effort and other support that is provided by the partners et cetera. But I think in simple answer, the new partners will be joining us at lower economic cost to the company than say our Discover partnership.

Vincent Colicchio - Noble Financial Group

Okay. SmartClicks in the quarter, what portion of overall Web services additions do they represent?

Kevin Carney

They are still fairly in the 15% to 20% range. In this particular quarter, they were closer to 18%.

Vincent Colicchio - Noble Financial Group

Okay. And two minor questions for you Kevin, capital spending in the quarter?

Kevin Carney

Capital spending in the past quarter was about $0.5 million. Mostly computer equipment.

David Brown

You are still with us?

Vincent Colicchio - Noble Financial Group

Yeah. How about this quarter?

Kevin Carney

Oh, the upcoming quarter should be significantly less.

Vincent Colicchio - Noble Financial Group

Okay. And DSOs, I may have missed that, did you mention that?

Kevin Carney

I did not mention it. It's continued -- I took it out of the script quite frankly because it seems to be -- hasn't been very relevant. I think, given our business. I think when you bring in the two acquisitions, it will be less than what we've reported in the past. We continue to do more direct billing, credit card, and ACH.

Vincent Colicchio - Noble Financial Group

Okay, thanks guys for helping out.

Kevin Carney

Thanks.

Operator

We'll take a follow up question from Nate Swanson with ThinkEquity.

Nate Swanson - ThinkEquity

Hi, I was wondering if it's possible to break out churn with your SmartClick's customers versus churn with kind of core Web services customer. Is it materially different or what kind of trends are you seeing there?

David Brown

It's not materially different.

Nate Swanson - ThinkEquity

Okay, thank you.

David Brown

You bet. And by the way, one of the reasons it has been -- it's such a short time that we've been offering the SmartClicks product that we continue to analyze it. But it has been such a short amount of time that we are not clear yet that we are seeing all the benefits that we will see from the SmartClicks product. But there's no real material difference in its maturity rate or its retention.

Operator

And we'll take a follow up question from Brad Whitt with RBC Capital Markets

Brad Whitt - RBC Capital Markets

Hey, Kevin just a quick follow-up question. How should we think about the license business as we go into '07? Shall we just think about it as flat?

Kevin Carney

Yes, I would. I think it has been relatively consistent over the last couple of years. It swings from year-to-year, really just depending upon the timing of our launch in a particular quarter, which is what we saw this year. But I think that's the right answer. It's pretty much flat.

Brad Whitt - RBC Capital Markets

Okay, great thank you.

Operator

And at this time we have no more questions in queue. Mr. Carney I would like to turn the conference back to you for concluding remarks.

Kevin Carney

Okay. Thank you, again I would just like to thank everybody again for participating and, and we'll look forward to the next quarter. Thank you.

David Brown

Thank you.

Operator

This concludes today's conference. Thank you for participating and you may disconnect your phone lines at this time.

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