Endurance International Group Holdings (EIGI) Hari K. Ravichandran on Q4 2015 Results - Earnings Call Transcript

| About: Endurance International (EIGI)

Endurance International Group Holdings, Inc. (NASDAQ:EIGI)

Q4 2015 Earnings Call

February 18, 2016 8:00 am ET

Executives

Angela White - Director-Investor Relations

Hari K. Ravichandran - President, Chief Executive Officer & Director

Marc Montagner - Chief Financial Officer

Analysts

Brian L. Essex - Morgan Stanley & Co. LLC

Jason Helfstein - Oppenheimer & Co., Inc. (Broker)

Brian P. Fitzgerald - Jefferies LLC

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Steve D. Ju - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Deepak Mathivanan - Deutsche Bank Securities, Inc.

Priya Parasuraman - Wells Fargo Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Endurance International Group 2015 Fourth Quarter 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. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Angela White, Vice President of Investor Relations. Ma'am, you may begin.

Angela White - Director-Investor Relations

Thanks, Chanel. Good morning, everyone. It's my pleasure to welcome you to our fourth quarter and full-year 2015 earnings call. First, we'll go through some prepared remarks, after which we'll turn to Q&A. We've prepared a presentation to accompany our comments, which is available at the IR section of our website at ir.endurance.com. While not necessary to follow along, we recommend referencing the presentation slides alongside our prepared remarks.

As is customary, let me now read 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 November 6, 2015, and our Form 8K/A filed with the SEC on January 21, 2016 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, UFCF as reported, free cash flow, free cash flow per share, adjusted revenue, and average revenue per subscriber. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the presentation located at the IR section of our website.

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

Hari K. Ravichandran - President, Chief Executive Officer & Director

Thanks, Angela. Good morning, everyone, and welcome to our fourth quarter and full-year 2015 earnings call. We're very pleased with our results for the year. GAAP revenue grew 18% year-over-year, GAAP net loss was $26 million and GAAP cash from operations was $177 million, reflecting 24% year-over-year growth.

Full-year adjusted revenue grew 15% year-over-year to $747 million. Full-year adjusted EBITDA grew 14% year-over-year to $267 million. Unlevered free cash flow as reported grew 14% year-over-year and free cash flow grew 23% year-over-year.

We believe that free cash flow growth will provide us continued opportunity and flexibility and we're pleased to see continued strong growth in this metric. In addition, our total subscriber base increased during the year from $4.1 million to $4.7 million at an ARPS of $14.29.

On slide 5. In addition to finishing a year of healthy growth, we also made progress on our previously announced acquisition of Constant Contact. Last week on February 9, we completed the transaction paying Constant Contact shareholders $32 per share. The total transaction value was $1.1 billion. Net of cash on the Constant Contact balance sheet, the purchase price was approximately $900 million.

We remain very excited about the combination of our subscriber acquisition funnel, product capabilities, talented pool of employees and the opportunity to provide SMBs with a full suite of tools for online marketing services.

Our integration timeline is progressing as planned. Shortly after close of the transaction, we implemented our first phase of integration. We notified employees of head count reductions and also began consolidating field office functions. Initial plans include the winding down of the San Francisco, United Kingdom and Florida footprints, and delivering these functions through the Waltham headquarters office.

We continue to anticipate reaching our originally targeted annual run rate cost synergies of $55 million starting at the end of 2016, with potential upside in revenue and marketing synergies. Both teams have worked diligently to meet our timelines, and we're all focused on building the best teams to move forward.

I would like to welcome the members of the Constant Contact family and its leadership team. Gail Goodman will be moving on to Other Ventures, while Harp Grewal, former CFO of Constant Contact, will lead the brand's operations. Joe Hughes will continue to head up the Emerging Ventures Group, and Ken Surdan will continue to lead the Product and Development Group. Both will work closely with the Endurance team on product development and innovation.

Over the last few months, we also completed the financing related to the transaction. On February 9, we closed on an incremental term loan in the amount of $735 million and $350 million in unsecured notes, and replaced our existing $125 million revolving credit facility with a new $165 million revolving credit facility. We believe that we'll be able to de-lever quickly if we achieve our targeted growth and adjusted EBITDA and free cash flow generation.

Importantly, as part of this acquisition, we believe we have the opportunity to reduce cost and better balance top line and investment in order to drive accretive EBITDA and future cash flows. Our plan for the reduction in cost was based primarily on head count reductions, which accounts for $48 million of the $55 million in targeted annual run rate synergies. With the head count reductions last week, we eliminated approximately $30 million in annual run rate costs. We intend to continue to balance costs and investments appropriately across our brands in order to continue to leverage our scale.

The combination of Endurance and Constant Contact positions us firmly as a leader in the SMB online marketing products and services space. We're excited to add enhanced product and technology capabilities to our existing foundation as we have expanded beyond Web presence to a full suite of SMB products and services.

Importantly, we believe that the transaction will benefit us operationally and financially. As our scale continues to build, we will be able to leverage our position in technology, marketing channels, and product to support longer-term growth and value creation.

In fiscal year 2016, we expect approximately $1.2 billion in revenue and approximately $400 million in adjusted EBITDA. Endurance exited the year with momentum in recent initiatives. Our site builder product, which launched in the second half of 2015 is showing much promise. We're excited with the traction to-date and regard this as an example of the results we can achieve through a combined effort, innovating at a fast pace in order to deliver a product that SMB's value.

In Q4, we launched our mobile site builder product, Impress.ly, which allows SMBs to easily aggregate components of their Web presence. We continue to roll out adjacent products and services that can be secured through one central marketing funnel. In the same vein, we recently rolled out a resume builder tool, which has aimed at helping SMB's network and find potential candidates.

In addition to the recent Constant Contact close, in Q4 we acquired the assets of IX Web Hosting for a total consideration of $28 million. IX provides core web hosting services targeted at SMBs. Subsequent to quarter end, we increased our equity ownership on our site builder joint venture WZ UK, Ltd. Starting in Q1 2016, results of this business will be consolidated with our financial results, which we've been working toward since our initial investment in the joint venture in Q3 of fiscal 2014.

Internationally, we continue to make progress as well. GAAP revenue from subscribers from international geographies totaled 37% of our revenue, an increase from 35% of GAAP revenue in the last fiscal year. The vast majority of our transactions take place in U.S. dollars, which has minimized currency impact to the top line. We continue to see benefit from our investment in Brazil with higher-than-average revenue growth rates. We plan to launch our mobile site builder product in the Brazilian market during H1.

Turning to our partnership pipeline, we launched a partnership with Kabbage, a company that fulfills working capital needs for SMBs. We continue to view partnerships as a way to test interest in certain products and garner key insights into our subscriber base.

As we noted last August, we reorganized primary lines of responsibility between our flagship businesses from our newer gateway businesses which are at higher growth rates. These include our site builder, cloud gateways, mobile site builder, and other solutions. Ron LaSalvia will continue to head up the organization's flagship business and will fold responsibility for the Constant Contact brand. Ron has done an amazing job heading up these efforts as Chief Operating Officer. I am pleased to announce that he will serve in the role of President in addition to Chief Operating Officer, formalizing the role he has played organizationally.

On slide 9. We're excited at all that we have accomplished during the past fiscal year. We believe that our efforts and investments will reap benefits in years to come. Over the years, our business has expanded, and we've done so by setting a strategy and investing ahead of the curve. This year is no different. We plan to invest significantly more in program marketing, while balancing top and bottom line growth appropriately. We believe our focus will drive new subscribers to platform where we can provide solutions to help them grow their businesses. We're excited about 2016 and feel confident in our ability to reach our targets.

With that, I'll turn the call over to Marc Montagner, our Chief Financial Officer.

Marc Montagner - Chief Financial Officer

Thank you, Hari. On slide 11, we could see that we are very happy with our full-year result. For the full year ending December 31, 2015, adjusted revenue grew 15% year-over-year to $747 million within our guidance of $745 million to $750 million. Adjusted EBITDA grew at 14% year-over-year to $267.5 million within our guidance of $265 million to $270 million. Capital expenditure were less than 5% of adjusted revenue. And free cash flow, defined as cash flow from operation less CapEx and capitalized lease, grew 23% year-over-year to $141.2 million resulting in free cash flow per share of $1.07 for the year.

Slide 12. In the fourth quarter of 2015, adjusted revenue was $194.7 million, reflecting year-over-year growth of 11%. Adjusted EBITDA was $71.8 million, reflecting year-over-year growth of 16%. And free cash flow was $33.4 million, resulting in free cash flow per share of $0.25. Free cash flow in the quarter was impacted by transaction expenses, integration charges, restructuring expenses and legal-related expenses of approximately $6.9 million.

On slide 13, you could see the total subscriber on the platform increased during 2015 by over 550,000 to approximately 4.7 million subs. Average revenue per subscriber for the full year was $14.29 versus $14.48 for the same period a year ago. Our forecast is on increasing our total subscriber count in a profitable way. ARPS is being pressured by subscriber coming to our platform through lower-priced product and new subscribers being loaded at low introductory prices in the first year. In 2016, just like in 2015, we will focus on increasing our subscriber numbers.

Slide 14. Last quarter, we noted that we had identified errors while migrating data from our legacy business intelligence system to an upgraded BI system. These errors impacted certain operating metrics. We are reporting our corrected metrics going back to the fourth quarter 2013, which is the time at which the company went public.

At the top of the slide, you could see the evolution of product per subs or PPS since the fourth quarter of 2013. We define PPS as the number of product purchased across our platform divided by a subscriber at the end of the period, whether bundled or individually. In the revised PPS, the updated numbers have been corrected to adjust for coding errors that we discovered last quarter.

We also only counted subscriber who meet our definition of total subscriber for our major brands shown on the slide, and we made the methodology consistent across multiple brands. You will note that there was a significant increase in PPS in the fourth quarter of 2014 due to an adjustment that eliminated inactive customers from our subscriber count, which were first identified as such in that same quarter.

The middle chart shows you the correct number of subscribers spending over $500 per year with us. As you can see here, the actual numbers were lower than originally disclosed as a result of coding errors, but still reflect a positive trend. The third chart reflect our monthly recurring revenue or MRR numbers, which remain unchanged at 99% after a full recalculation of these metrics.

As we stated in the past, our correction of PPS and subscribers spending more than $500 per year with us did not impact our GAAP financial result, adjusted revenue, adjusted EBITDA, free cash flow, or unlevered free cash flow metrics. This does not impact ARPS, subscriber count, churn or unit economics.

Given the material contribution of Constant Contact to our business, and the difference in subscriber profile, we will no longer report PPS or the number of subscribers spending over $500. We're currently reviewing the metrics that we would provide to investors in the future. In addition, for the next four quarters, we plan to break out Constant Contact revenues in our disclosure.

Let's turn to guidance for 2016 on slide 15. We have previously provided guidance on a quarterly and annual basis. Starting this fiscal year, we are moving to annual guidance for adjusted revenue, adjusted EBITDA, capital expenditure, and free cash flow. We define free cash flow as cash flow from operation minus CapEx and capitalized leases. We will no longer provide guidance for unlevered free cash flow as reported.

Given the timing of the close of the acquisition of Constant Contact on February 9, 2016, our 2016 result will not include a full contribution from Constant Contact. Our guidance for 2016 therefore includes pro forma full-year numbers, as well as number based on the date of close. This guidance does not assume any incremental M&A.

For 2016, we expect annual adjusted revenue expectation for full-year pro forma of the Constant Contact acquisition of more than $1.225 million, expected adjusted revenue based on the date of close of greater than $1.175 million, expected adjusted EBITDA on a pro forma basis of approximately $405 million, expected adjusted EBITDA based on the date of close of approximately $400 million, and CapEx of approximately $60 million for the year.

This year, we expect significant transaction expenses related to financing, option acceleration and restructuring charges associated with the Constant Contact deal, which would impact free cash flow. Excluding these expenses, we expect free cash flow, defined as cash flow from operation less CapEx, of $180 million to $190 million. Including the impact of these expenses, which we expect to be approximately $40 million, we expect free cash flow of $140 million to $150 million.

On a combined pro forma basis, we continue to expect $55 million in pro forma annual run rate synergies in 2016. As noted earlier, we eliminated approximately $30 million in annual run rate costs last week with the head count reduction.

I would also like to highlight some items underlying these assumptions. Revenue expectation remain as previously stated. As we streamline operation at Constant Contact, our objective is to maximize free cash flow and focus on profitable growth. We expect to grow Constant Contact at low- to mid-single digit, while we optimize operation and marketing spend. The balance of the gross will come from Endurance product.

As Hari noted, we expect to increase investment in marketing significantly in 2016. Based on the testing done last year and the corresponding marketing yield, we see opportunity to invest behind the Endurance brand in fiscal 2016.

On slide 16, you could see that we financed the Constant Contact transaction through an incremental $1.085 billion in new debt, $735 million in incremental seven-year term loan at a rate of L+500 and $350 million in unsecured note at a coupon of 10.875% with an eight-year maturity.

We also raised a new five-year revolving credit facility in aggregate amount of $165 million, which is undrawn at this stage, and replace the old revolver of $125 million. The spread on our existing term loan has increased to L+523 and will likely further increase to L+548 on February 28. We expect to pay approximately $140 million in cash interest in 2016.

With this transaction, we're able to improve our financial flexibility, adding approximately $50 million of cash to our balance sheet and providing additional liquidity with the undrawn revolver in place, while also extending out maturities. Our next scheduled maturity is November 2019 on the existing term loan.

Based on our pro forma view of last 12 months, adjusted EBITDA at December 31, 2015 this translate into leverage of 4.4 turns on a secured basis and 5.3 turns on unsecured basis. Objective is to reduce total debt to adjusted EBITDA to below 4 turns by the end of 2017.

Slide 17. In conclusion, we are very happy to see that our business achieved strong year-over-year growth in 2015. We feel very confident about 2016.

Now, I'd like to turn the call back to Chanel to begin Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Jason Helfstein of Oppenheimer. Your line is now open. Please go ahead.

And our next question comes from Gregg Moskowitz of Cowen & Co. Your line is now open. Please go ahead.

Unknown Speaker

Yes. Hi. This is actually Mike (20:05), going in for Gregg this morning. I was just wondering how many subscribers did Constant Contact have as of December 31?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. Hey, how is it going? So with Constant Contact, based on how they define their subscribers, so it's over 600,000 subscribers. As we get that forwarded to our platform and look to see what fits our definition, et cetera, we anticipate that being north of half a million. But when we report on a consolidated basis this quarter, we'll have some insights into that.

Unknown Speaker

Okay, great. And just one more. I know a few months ago in limited testing, you guys were driving about 5% of Constant Contact's net ads by virtue of your partnership with them. Can you say how that's been tracking since then?

Hari K. Ravichandran - President, Chief Executive Officer & Director

It's been doing quite well. Off the size of the current funnel, it's anywhere between 7% and 10% of the sign-ups that are coming through us. And now that the deal is closed, the teams are working very closely together to be able to increase that and drive further volume into the Constant Contact funnel, off our existing funnel and off our existing base of customers as well.

Unknown Speaker

Okay, great. Thanks.

Operator

Thank you. And our next question comes from Brian Essex of Morgan Stanley. Your line is now open. Please go ahead.

Brian L. Essex - Morgan Stanley & Co. LLC

Good morning, and thank you for taking the question. Marc a question for you. I guess with the combination of Constant Contact, given the profile that you just kind of highlighted with the reduction in debt target by the end of fiscal 2017, with the addition of Constant Contact to the platform as well, how might your M&A appetite change versus how Endurance has run its acquisition strategy historically? What will you be focusing on? And will you be perhaps taking a pause from M&A or managing it a little bit differently? Maybe a little bit of color there would help.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. This is Hari. So, from an M&A standpoint, obviously we've just completed this sizeable transaction. It's a big team. We have a lot of work still in front of us cut out for getting the integration done, realizing the synergies and the costs on the revenue side. Our bar for M&A is probably significantly higher than it ever has been in the past. We've always been very judicious about capital deployment and looking at return on invested capital, IRRs, and present value of acquisitions as we have done them in the past.

But given the fact that there is significant opportunity within our current asset base, and given the opportunities for further refining those, I would say over the next four to six quarters, from an M&A standpoint, the bar is quite a bit higher, with the focus more on debt pay down for the business to get the leverage down as Marc noted in his remarks.

Brian L. Essex - Morgan Stanley & Co. LLC

Got it. And maybe just to clarify, what will we have going forward for Constant Contact with regard to metrics that will help us fine-tune our models? Will we have subscribers and ARPU and maybe costs associated with them? Or how do you plan to manage those metrics going forward?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Obviously, sort of as integration goes forward, it's always difficult on the cost side to be able to break things out because we run it as one business. But we – similar to Directi, which was the last kind of meaningful acquisition we've done where we've broken out the revenue by quarter for Directi, we would certainly be doing that for Constant Contact for the next four quarters. And again, from the synergies and the synergy realization, we plan on talking to folks about that every quarter and giving people an update as we go along.

Beyond that, we're still assessing metrics and trying to figure out what really represents the combined company and the profile of the combined company because it has changed fairly dramatically from the last few years, and hope to come back with a view on what it is that we'd be providing to folks in the first quarter earnings call.

Brian L. Essex - Morgan Stanley & Co. LLC

Okay. Thank you very much.

Operator

Thank you. And our next question comes from Jason Helfstein of Oppenheimer. Your line is now open. Please go ahead.

Jason Helfstein - Oppenheimer & Co., Inc. (Broker)

Thank you. Had mute technical issues there. So to start, I think the free cash flow was a bit – the guidance for this year is a bit better than we were looking for. And I want to say thank you for focusing on kind of a clean free cash flow. Also, I think Constant Contact guidance is pretty much in line with synergies. However, it does look like the core Endurance margin is going to be a bit lower than we were looking for, and I think in your prepared remarks you talked about more aggressive marketing.

What are you seeing that makes you, effectively – that's a change, I guess, from kind of, I guess – I don't know – let us know if you think that that would change versus when you last talked about the business pre-Constant Contact, and if there's a way to help us understand why you're confident that that is marketing well spent.

Second question, any update on the SEC inquiry? If nothing, that's fine. Just want to ask that. And then lastly, is there a way to talk about the impact of promotional pricing, if you have any data on what you're seeing like on second year ARPS renewals and the kind of the pricing trends there? Thanks.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. Happy to, Jason. I think from our standpoint, we had talked over the course of last year, especially in the second half of the year with the launch of a lot of additional new product gateways, testing on marketing we had been ramping into this year. We feel quite good about the yields we're getting on a lot of these marketing spends. And as we noted in the prepared remarks, we will be spending significantly more in program marketing this year as compared to last year, even without the Constant Contact as a marketing spend addition.

We've been looking at the subscriber acquisition costs against the customer lifetime value. Those have all been looking good. So we feel very comfortable increasing the spend because we believe that it helps both top line and bottom line growth this year and compounds even more so going into next year and the years after. So it is dollars well spent.

Obviously, as we noted, the increase in revenue year-over-year is not inclusive of any M&A. So, all of the growth in the business is coming without any new incremental M&A. A part of that being reflected by the fact that we are accelerating marketing spend, and we feel good about that.

Taking your third question. Also at this point, in terms of renewal dollars, we're certainly seeing the same trend that we've talked about in the past, which is after the first year of intro pricing as people come up for renewal, the revenue per user does go up for those folks because they're as baked in pricing that they renew at higher pricing on the back end. And that trend has been very consistent. And obviously on the SEC inquiry matter, we are working with the SEC, giving them what it is that they need and that's really all we have in terms of an update at this point in time.

Jason Helfstein - Oppenheimer & Co., Inc. (Broker)

Thank you.

Operator

Thank you. And our next question comes from Brian Fitzgerald of Jefferies. Your line is now open. Please go ahead.

Brian P. Fitzgerald - Jefferies LLC

Thanks, guys. We wanted to ask around the macro environment. Have you seen any impacts there, any meaningful change to churn with your current subs, any reluctance to purchase upgrades or additional products? Has the sales cycle lengthened at all?

And then second question, we think the Kabbage relationship is very interesting. Is that exclusive or are there other SMB finance relationships you can add there? Thanks.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. So in terms of the macro climate, obviously we're feeling very bullish about the business based on the guidance we provided. Again, that didn't include any M&A in the future-looking guide for this year, so things are robust as we sit here today. Certainly, in terms of the growth itself, as Marc noticed, we are still indexing almost all, if not more than the rates we've provided towards subscriber additions.

We are still not particularly focused on the average revenue per sub, that's more an output for our business. As long as customers come in, they're high quality and the churn rates are in line and they buy additional products and services from us, and over time ARPS will become something that has a more normalized pattern. So we will continue to index towards net subscriber growth indicative of the fact that there really hasn't been much macro impact to the business to-date.

In terms of the Kabbage relationship, we've had that now for about two months. Actually, very positive feedback from our customers. Lots of folks originating working capital lines through the Kabbage partnership, and capital obviously is a big pain point for small and medium-sized businesses and access to capital. So as we've looked at that, we are certainly now considering other potential financial products that could be relevant to SMBs. We think that's an interesting area that provides some good value for our customer base.

Brian P. Fitzgerald - Jefferies LLC

Great. Thanks, Hari.

Operator

Thank you. And our next question comes from Mitch Bartlett of Craig-Hallum. Your line is now open. Please go ahead.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Thank you. Good morning. Interested in kind of growth assumptions, Constant Contact's, Endurance. You talked about low- to mid-single digits for Constant Contact, and I'm just wondering, given the advantage that you have with the ability to cross-sell and new distribution channels aimed at Constant Contact, why so slow a growth? And then I know this is the bane of your existence trying to parse out organic growth on the Endurance side against all the acquisitions, but if I put 4% growth on Constant Contact, I get Endurance growth of around 13% or numbers. What would be the organic number there?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. On the first question in terms of why we are talking about low- to mid-single-digit growth for Constant Contact, it's primarily because it's a big acquisition. We are in the middle of reorganizing the entire company and getting the teams lined up. Ron has been working hard with Harp to try to get the teams coordinated. As folks may recall, the year after we did the HostGator acquisition, it's pretty normal for us to try to take back marketing spend somewhat until the integration is fully done. We're still testing a lot of product gateways that could line up well for Constant Contact customers.

So what we don't like to do is overspend in that window of time, both from a marketing standpoint until we know where the best yields are. So we're very disciplined about how we think about spending in shorter windows, trying to optimize for longer periods of time. Certainly, we see upside in being able to cross-sell products and services. Those are not necessarily baked into our guidance at this point, and we just want to take some time to make sure the teams are lined up, the costs are in line. And as we did with HostGator, after that acquisition was done, we were able to accelerate marketing the year after. And that's not very dissimilar to our typical playbook as we go through a large acquisition. So that is reflective.

And I think your backing in math for Endurance of about 13%. That does sound right, Mitch. I think that's exactly where it shakes out. And as we noticed, the only sort of inorganic element in that 13% growth would be the full-year contribution of the smaller M&A items we did last year. It does not include any new M&A in that number. We've done a few of the smaller tuck-under hosting asset acquisitions last year over the course of the year, which included Arvixe and Site5 and Verio and IX. So we would have the full-year contribution of that this year. But besides that, everything else would be just growth from the business.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Just as a follow-on on the growth question for Constant Contact. After you take this step back, though, long term it seemed like you could materially affect the economics of that business on customer acquisition and return on that. Do you still believe that? And could you give us a venture? They use to spend over $600 to get a customer. What might it be in the future?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. I think it would be speculative at this point. But from our standpoint, we do see that once we're able to get the acquisition model to be much more Web-acquisition focused where about 90% of the sales for Constant Contact now comes with hand holding for the customer, with phone calls to convert people from trial to pay-ups. The more we convert that to more of a Web-acquisition model, this SAC start to come down obviously because it's more self service and the cost to operate that is lower.

There is good opportunity to be able to upsell additional products and services into the base of Constant Contact customers, and again Constant Contact products into the base of Endurance customers. We're starting to experiment with a free-to-paid model, a freemium type of a model with alternative brands. So a lot in the works. And we do think that if some of these hit, there is some really good potential upside there in this business.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Sounds great. Thank you.

Operator

Thank you. And our next question comes from the line of Steven Ju of Credit Suisse. Your line is now open. Please go ahead.

Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker)

Okay, thanks. So Hari, I'm trying to get a sense of how much downward pressure there will be on your total report at ARPS as you bring on lower price point new subscribers. Are you able to say where the typical entry level of new subscriber is coming in and what that was a year-ago? And as you look to acquire more subscribers, should we be anticipating continuous sort of downward pressure there on the entry price?

And I guess sort of directionally following up on the earlier question, versus the SMBs who were already on Endurance, how do the size or the type of businesses compare at Constant Contact? And at this point, are you able to tell how receptive this newly acquired cohort will be for your more high-value add products? Thanks.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure, Steven. So on the first question, obviously, as we mentioned in the prepared remarks, we added 550,000 – our base of subscribers increased by about 550,000 in 2015. The ARPS went down to about $14.29 or so from $14.40-ish range the prior year.

Introductory pricing still has been fairly consistent year-over-year, but as volume of customers go up, certainly that puts pressure on the average revenue per subscriber side. There are new gateways we're investing behind, so we feel that there are some gateways that actually are at much higher introductory pricing than our existing brands. But we do believe in the indexing towards subscriber strategy because we do consistently see that, over time, subscribers that stay with us pay more and engage with the higher-priced products and services. So that strategy still makes sense to us, and that is something we look at fairly carefully as well.

In terms of Constant Contact and what the profile of the customer there is. Still a majority of the customers there are sub-10 employees, very similar to the Endurance base of customers. They probably skew slightly bigger. If the Endurance average number of employees is four to five employees, they may be closer to six to seven employees. There's a slightly higher indexing towards non-profits in the Constant Contact base as well, but we do believe that across the spectrum, both having a lightweight version of the Constant Contact product within the existing Endurance space at prices that make sense for our kind of customers, and incremental products that we have within the product portfolio of Endurance being offered to the Constant Contact customer base has some good potential upside, none of which we've actually baked into our forecast currently in our guidance.

Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

Operator

Thank you. And our next question comes from the line of Deepak Mathivanan of Deutsche Bank. Your line is now open. Please go ahead.

Deepak Mathivanan - Deutsche Bank Securities, Inc.

Thanks. Two questions, guys. So first, after the close of Constant Contact acquisition, you're likely generating close to $250 million in unlevered free cash flow over the next few years. So is the priority to reduce leverage? And what do you see is the comfortable level where you want to hold leverage? And then I have another follow-up related to the core business.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. I think, Deepak, from an unlevered free cash flow, that number would be probably slightly higher as we kind of work our way into it. I think from our standpoint, given that leverage now is around 5.3 turns, as Marc mentioned, our hope is to get that to 4 turns or lower by end of 2017. So uses of free cash flow primarily towards debt pay down, we would obviously look at opportunistic M&A. and if there's a deal that's too good to pass on, we will consider that, but the bar will be much higher.

So between the combination of growth and EBITDA, and opportunistic pay down of debt, we believe that we can bring that leverage level to below 4 turns by end of next year, and that's the current perspective from the company.

Deepak Mathivanan - Deutsche Bank Securities, Inc.

Got it. That's helpful. And then from a product standpoint, last quarter you mentioned that certain launches were delayed into fourth quarter and then you expect to realize benefits of that in fiscal year 2016. I think products such as WordPress manager (38:25) WordPress hosting. So can you discuss on the progress there and how it tracked during fourth quarter, and what was assumed into the fiscal year 2016 guidance?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. So there's a multiple things that we have been working on. We've launched a series of products around resume and resume management for customers. The cloud product launch, that did quite well. Q4 turned it up quite nicely as compared to Q3, and that trend continues on to this year. And I think as we had kind of anticipated, once the products were out the door, the compounding would start happening and that the take rates would be good.

That's exactly what we're seeing. And if you notice the earlier question from Gregg (sic) [Mitch] (39:07) was around what the assumptions are in the business. If you assume 4% or so as he did for Constant Contact growth, which is 13% growth for the Endurance core, hardly very much of that coming from a full-year contribution of M&A, most of that just coming from the core business. So we feel good about the products that came out the door, and that there are several more that are underway and to be launched soon.

Deepak Mathivanan - Deutsche Bank Securities, Inc.

Got it. If I can ask one more. So the net subs adds was strong even after excluding kind of the asset consolidation that you did. Was there anything specific that you call out? I mean, 4Q is usually the seasonally slow quarter, but the adds were somewhat in line with what we've seen in the first quarter and much better than the third quarter. So is kind of like the current run rate the right way to think about the quarterly net adds that you would be targeting for the quarter?

Hari K. Ravichandran - President, Chief Executive Officer & Director

I think it may be even a little north of that, Deepak, because if you looked at the guides we provided, we say kind of ARPS is flat to slightly down year-over-year for fiscal 2016, which means that all of the growth is coming from the net subscriber addition. So our anticipation is that it will be north of last year's net subscriber addition for the full year this year. And we also mentioned that we're meaningfully increasing marketing spend going into this year, which, obviously, translates to significant subscriber addition growth.

Deepak Mathivanan - Deutsche Bank Securities, Inc.

Got it. That's helpful. Thanks, Hari.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Thanks, Deepak.

Operator

Thank you very much. And our next question comes from the line of Gray Powell from Wells Fargo. Your line is now open. Please go ahead.

Priya Parasuraman - Wells Fargo Securities LLC

Thank you. This is actually Priya Parasuraman for Gray. So can you talk about the competitive environment that you're seeing? And do you think you will still be active in the M&A market in 2016? And what kind of valuations are you seeing in the private market?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sorry. Priya, can you repeat the first part of that question? That was – it got a little choppy.

Priya Parasuraman - Wells Fargo Securities LLC

Just the competitive environment. Any changes, especially with some of the M&A activities that other players in the market have undertaken recently?

Hari K. Ravichandran - President, Chief Executive Officer & Director

Sure. Sort of from the competitive landscape standpoint, as we enter additional markets – so for example, now that WZ UK has been consolidated into our platform, we're very active in the Web builder space. There are obviously different players there than in the hosting space, in other tangential spaces that we look at like security solutions or resume building. There are other players there.

So we certainly sort of – from that perspective, the landscape has broadened both in terms of the kind of products and customers that we're onboarding and the competitive players in those segments are different than hosting. Some of them a little more competitive, some of them a little less competitive depending on what the gateway product is.

Certainly, in terms of the M&A element, we are setting a very high bar for M&A over the next four to six quarters. We would need to be convinced that something is, say, better use of our time and capital versus focusing on the substance of business we have and the subsequent amount of work we have to get done to get the integration completed and realizing synergies.

Certainly from a private market transaction standpoint, the ones we have done to-date with that same framework as we've always talked about, which is 10 to 12 times EBITDA and net of synergies. Maybe it's mid- to high-single digits, depending on the particular transaction. We are not seeing that changing. It's more a focus for ourself to work on the significant task ahead of us and also de-levering the company, which is what we told the markets, which is as long as there is an opportunistic M&A acquisition, we are fine levering up.

But as we did between 2013 and 2015 since we went public, we would then work on de-levering the business back to sub-4 turns.

Priya Parasuraman - Wells Fargo Securities LLC

Thank you.

Operator

Thank you. And I'm showing no further questions at this time, I would now like to turn the call over to Hari for closing remarks.

Hari K. Ravichandran - President, Chief Executive Officer & Director

Great. Thank you all for joining today. We finished a good year and are excited about all the things that are going on in our business in 2016, Constant Contact acquisition, products that are focused on growth and initiatives across the board. We look forward to talking to all of you over the quarter, and thanks again for your time today.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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