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Executives:

Peter Delgrosso, Senior VP Corporate Communications

Jeff Stibel, President and Chief Executive Officer

Gonzalo Troncoso, Executive Vice President and Chief Financial Officer

Analysts:

Vik Grover, Thomas Weisel Partners

Yehuda Fruchter, Envoy Global

Presentation:

Operator

Good day ladies and gentlemen. We would like to welcome you to today’s Interland First Quarter Conference Call. Just a reminder that today’s call is being recorded and at this time I would like to turn the conference over to Mr. Peter Delgrosso, Senior VP Corporate Communications. Please go ahead.

Peter Delgrosso, Senior VP Corporate Communications

Thank you Delia. Good morning and welcome to Interland’s First Quarter Conference Call for the 2006 Fiscal Year. I am Peter Delgrosso, Senior Vice President of Corporate Communications for Interland. And with me on the call today are Jeff Stibel, President and Chief Executive Officer and Gonzalo Troncoso, Executive Vice President and Chief Financial Officer. Following prepared statements we will open the call for corrections, as a reminder to those of you who would like to listen to the call later, a webcast replay will be available at Interland.com under the investor relations section.

Before we begin, I want to make sure everyone understands our reporting schedule moving forward. As previously announced Interland is moving from it’s past practice of reporting on a fiscal year ending August 31st to a conventional calendar reporting year beginning on January 1st, 2006. As a result the company will report financial results for the quarter ending November 30th, 2005 on this call and again for the fourth month transitional or sub period ending December 31st, 2005 roughly one month from today. The specific day and time of that call will be provided in the near future. During this conference call we may make projections and other forward looking statements. These forward looking statements include but are not limited to the ability to build a more efficient enterprise, grow the business, build a powerful world class brand, add revenue, ensure the consumer segment of the web hosting market and strike deals with leading industry players and other factors more particularly identified in the press release we issued today. Actual results may differ materially from those contained in the forward looking statements. Factors which could affect these forward looking statements that Interland does include but are not limited to the ability of the company to execute it’s plan for revenue growth and to build new orders and the impact of competition, these and other risks associated with Interland’s business are discussed in more detail in it’s public filings with the SEC including it’s annual report on Form 10-K, it’s quarterly report on Form 10-Q, and it’s current reports on Form 8-K and it’s proxy statements. This presentation may contain information such as EBITDA that is deemed to be a non-GAAP measure under Regulation G promulgated by the SEC. A reconciliation’s of these measures to the most directly comparable GAAP measures that is contained in the company’s press release which we issued this morning. Again that press release has been posted in the company’s website at Interland.com. Now I turn the call over to Jeff Stibel, President and CEO of Interland.

TRANSCRIPT SPONSOR

Tucows logo

Tucows Inc. (AMEX: TCX) is the largest Internet services provider for hosting companies and ISPs. Through 7,000 partners globally we provide millions of email boxes and manage over five million domains. Tucows remains one of the most popular download sites on the Internet.

Tucows Inc. makes the Internet easier and more effective by reducing business complexity for our B2B and B2C customers as they acquire and deliver services to millions of Internet users around the world.

View our SEC filings, news releases, and learn more about our company and services.

To sponsor a Seeking Alpha transcript click here.

Jeff Stibel, President and Chief Executive Officer

Good morning and thank you for joining us on the quarterly earnings conference call. Before I begin I would like to announce some exciting news. Interland and CNET networks have entered into an agreement in which CNET Networks will transition it’s CNET Advantage, CNET Site Builder and ZDNet Site Builder customer who would like to continue their service on to Interland’s hosting platform. Interland has the opportunity to migrate approximately 5400 subscribers, which are primarily comprised of consumer websites over to its branded service. This agreement adds the complementary group of customers that will fit in well with our recent web.com consumer acquisition. Specific terms of the transactions are not available, however the deal was expected to become accretive to Interland within three months. Since the last earnings call in November we’ve made significant strides as a company to stabilize the business and position it for growth. While we are in the midst of the turnaround, the results to-date is encouraging. And points to the power of our business model and our leader position within in the industry.

Since I joined in August 2005, I have spent the majority of my time restructuring Interland within my senior management team to clearly define the best task for the company. During this past quarter, we made considerable progress in forging important relationships with major industry players, which we will discuss further on this call. We stated in the past that our corporate goals going forward are to stabilize the business and financial results, diversify revenue streams based on what is quarterly business and grow our subscriber base and revenues. This has begun to take shape. As a result of our efforts during the quarter we shrunk our net loss by $3.6 million, improved EBITDA by $800,000 and reduced our stake for subscriber acquisition cost by 35%. This means we are marketing more effectively and spending dollars more efficiently. We feel confident that this can continue. Now let us get right into the highlights from the quarter.

Gonzalo will touch upon on the specific financial results a little later on this call. But for now let us take a look at the milestones for the company at a high level. We are happy to announce that we signed an agreement with RH Donnelley, one of the largest yellow pages publishers and local online search companies in the United States to provide websites and hosting services to it’s customer base. RH Donnelley is a top publisher and is an excellent partner for Interland given its large sales force. While I cannot delve into the specifics of the agreement at this time we are pleased to be working with RHD and look forward to what the future holds. With this relationship in concert with our relationships Dex Media and Ambassador Yellow Pages, we’ve established a dominant position in this market. During the quarter we announced our acquisition of web.com including it’s very powerful domain name, it’s web hosting business comprises of approximately 9000 subscribers, it’s accredited registrar business and trade mark rights. This acquisition contains incredible amount of potential for the company. In addition to it’s tremendous branding opportunity this acquisition added additional revenues, significant online traffic and an entrance into the consumer segment of the web hosting market. As a result of this acquisition the company announced that it intended to change it’s corporate name to web.com Inc. The formal name change is expected to take place in the first half of 2006. The name is a strategic move designed to more clearly align the company with it’s branded line of business. Web services including websites, web hosting, web email and web marketing. The web.com Inc name firmly embraces the company’s mission of providing websites to the masses. We are very excited and look forward to making web.com into a world-class brand synonymous with all things web.

On the employee front it has been a very productive quarter. As I stated on the last earnings call one of my first towards the business has been to round up my management team and to assess the employee base to identify the best corporate structure for the company. During the quarter, we had two significant hires to the company. We hired Vikas Rijsinghani as Chief Technology Officer. In that role Vikas will serve as a key member of my executive team and is responsible for overseeing all technology operations, development and product planning. Vikas was formally a founder and CTO of Vertical One and Proficient Networks and his extent of experience with creating and running technology organizations. He is already contributed significantly to the team in a short time at the company.

Another important hire for the company is Judy Hackett as Chief Marketing Officer. Judy is responsible for overseeing all marketing for the company including the new rebrand of web.com. Judy has over 20 years of experience in strategic planning, marketing, advertising and brand development and has held key marketing roles at companies such as CareerBuilder, HeadHunter, Turner Broadcasting and numerous television station. Judy is rare bread that possess both a strategic and tactical mind. I’ve enjoyed working with her so far and look forward to what we can accomplish together. For these employee additions overall, Interland’s employee base stands at roughly 280 which is what we projected in the past. Before I turn it over to Gonzalo I wanted to talk about important metrics moving forward for investors to track.

In addition to the standard financial reporting we intend to track four variables that we think are key to determining our success.

First, subscriber acquisition cost or SAC. In order for a business to be successful we need to acquire new subscribers profitably. As I mentioned we’ve already reduced SAC by approximatey 35%.

Second average revenue per user or ARPU, it is critically important that we track ARPU as we are in the subscription based business model. Eventhough we are comfortable with our current ARPU we are willing to have that number go down if we can grow subscriber base through lower ARPU efforts such as consumer web hosting, a specific business line we acquired in the web.com deal and have expanded on with CNET Networks. So as long as the margins and profits dictate.

Third subscribers. Our revenue success will be a function of the number of subscribers we have times ARPU. We will work to optimize these variables moving forward.

Lastly Churn. Churn will dictate whether our marketing model is sufficient on a gross basis to fuel subscriber growth. This will determine whether we are building or growing subscriber base. Life time value is also a function for churn. At present our low churn means customers staying with us for approximately 40 months. I now turn it over to Gonzalo Troncoso, our Chief Financial Officer.

Gonzalo Troncoso, Executive Vice President and Chief Financial Officer

We continued to implement stringent financial controls during the quarter and began to see significant cost savings across the board as a result. During the quarter Interland moved closer to being EBITDA positive and significantly reduce our net loss. Now I would like to discuss the financial results for the past quarter.

Total revenues were $12.1 million down from $20.6 million in the previous quarter, substantially fall of the revenue decline was due to the company’s sale of it’s dedicated server assets. You may remember that we had previously disclosed that revenues for the month of September were expected to be approximately $4 million. In line with our guidance we now reporting total revenues of $12.1 million.

Net loss was $2.6 million or negative $0.16 per share and improvement of $3.6 million versus a net loss of $6.2 million or negated $0.38 per share in the previous quarter. This improvement of net loss is a clear indicator of our execution during this turnaround. EBITDA or earnings before interest, taxes, depreciation and amortization for the quarter was $1.3 million negated, an improvement of $800,000 from negated $2.1 million in the previous quarter. This $1.3 million negated EBITDA includes restructuring charges, net of one time gains of roughly $800,000 and stock based compensation of approximately $400,000. Again this EBITDA improvement is another example of business decisions we are making in order to turn the company around.

Our cash and investment position which includes cash and cash equivalents of $23.3 million and restricted investments of $9.4 million was $32.7 million compared to $26.5 million an improvement of $6.2 million versus the previous quarter. As Jeff discussed previously we are going to report various key metrics that we feel will give investors added clarity into our business. I would like to touch upon them at this moment. One of the most critical metrics for any growing business is subscriber acquisition cost or SAC. This is how much we have to spend to bring the customer on board. Compared to last quarter our SAC decreased from $173 to $112, this is a 35% improvement. A 35% reduction in the amount of money we have to invest in order to attract a new customer. This metrics has a tremendous impact on our financial models. Another important metric is customer churn. We have managed to maintain industry leading churn rates. Infact during the quarter, our churn stood at about 2.3%, this is extremely important since churn is a critical element in the evaluation of our last time volume of our customer base.

Street Math will tell us that a 2.3% churn equates to above 4 months of revenue from our customers. If we couple that with a low SAC we end up with a very strong business model. Additionally low churn rate are also a testament to our superior customer service experience and to the reliability of our services. Now eventhough SAC was reduced significantly our subscriber count remained at roughly 137,000 subscribers. This demonstrates the efficiency of our marketing efforts as opposed to adjust our ability to cut cost.

And last ARPU. Average revenue per user remained flat at $27. And now I turn it back to Jeff for his final comments.

Jeff Stibel, President and Chief Executive Officer

As you can see Interland soon to be web.com has begun to deliver on it’s promise of turning around the company and positioning it for future success. We are encouraged with our progress to-date and look forward to the future. I want to end by highlighting some of the key milestones and accomplishments we’ve discussed on this call.

1) We have improved net loss by $3.6 million and EBITDA by $800,000. 2) We demonstrated the ability to appropriately align cost with the business. 3) We’ve improved our SAC and have continued to spend only where it makes sense to acquire these subscribers. 4) We established key relationships with RH Donnelley and Ambassador Yellow Pages and entered into a business agreement with CNET Networks. 5) We purchased web.com and have a plan in place to change our corporate name to Web.com Inc. 6) Last but not least we added top management talent including a Chief Technology Officer and Chief Marketing Officer. With that final note we are now ready to answer questions from the financial community.

Q&A

Operator

Thank you gentlemen. Operator Instructions First step, with Thomas Weisel Partners, we go to Vik Grover.

Q – Vik Grover

I guess a couple of questions, you gave as part of the info there, first can you shed some more color on your consumer strategy, there has been company that had recently gone to market that have pretty stronger evaluations relative to where you are trading site and primarily I think consumer oriented sub, can you talk about what channels you might leverage, you got some existing channels from prior management, that seems like they are pretty powerful there. And then I guess relatedly can you talk about the Qwestor (Ph) relationship Qwest Dex (ph) and any of these other legacy deals Verizon or whoever, where are we with any of those in terms of traction?

A - Jeff Stibel

Sure. I will pick the first piece on the consumer segment, what we are looking to do in terms of diversifying into new market is first. Again what we are looking at is what is core to Interland both from a technology standpoint and a market standpoint. So what we determined is that our hosting platform enables us to very competitively to enter into new markets. The consumer segment is clearly one of that. So everything that we are doing in terms of building a world class model business, small big in size business market place for web hosting websites, web marketing. We can leverage that to enter into the consumer market. We’ve made first inroads with the acquisition of web.com. That gives us roughly 99000 subscribers so it built us a base. The CNET transaction gets us upward of another 5600 subscribers as well and what we are going to look towards fueling is to try to aggressively grow that business model as we grow the small medium business multiplex because we believe that the underlying cost structure is negligible to enter into that market. That answers, hope your first question, Vik?

Q – Vik Grover

Yeah. I guess so, on the consumer space, just a follow up is, you mentioned potential pricing pressure on ARPU, should we try, guys to may be pursue some sort of, giveaway a free site, techno model (ph) low end site, and try to up sell or do you not intend to go that route may be just try to do really low end product like five or ten bucks a month just to get somebody going?

A - Jeff Stibel

Great question. I think we are looking at the entire spectrum. As you know from my background I’ve done a lot of three model business and no but those can be done very cost effectively and profitably and we are not going to simply avoid a market for the model just because it’s special on ARPU. With remaining to break out ARPU between consumers free if we enter that space in business but we certainly won’t avoid just because it puts pressure on ARPU. We are looking for bottom line success and as you mentioned that they are lot of good opportunities to grow and I think that speaks to why evaluations are so high in some of these different consumer market places. Because work can be so strong and we believe that we can enter those markets very cost effectively because of our underlying core technology and possibly ultimately because the margin suffice.

Q – Vik Grover

Okay. Thanks a lot.

A - Jeff Stibel

Let me speak to the second question as well. You asked what was happening with some of our legacy deals, specifically the two that you were mentioning with Dex Media and Verizon. I’ll speak about Verizon since we did mention that last quarter that Verizon’s counts what is going away, I believe that that deal was lost and it was announced in 2004. Again those customers have already started churn, we are not adding new ones and the migrations have already begun that would take a number of quarters before it is fully done. The important thing to note is that our subscriber count last quarter was, the quarter that we are announcing was roughly flat, it is opposed to the fact that we are not adding new Verizon customers and that they were churning out. It is not say that we’ll be able to keep up with that churn going forward as it is a significant base but we did do a strong job in terms of maintaining that. With Dex we still feel very strong about that relationship, it continues. And we continue to leverage it and to try to build that partnership going forward. As you know we also signed a deal with RH Donnelley and Ambassador, we are very excited that we have an independent relationship with RH Donnelley right now as well as the fact that we think that we have positioned ourselves in the yellow pages market to be the leading provider of websites and web services.

Operator

Operator Instructions And we’ll move on to Yehuda Fruchter with Envoy Global.

Q - Yehuda Fruchter

I just wanted to follow up on the last question in terms of the consumer market place and who do you really see as your competitors here, is Go Daddy, Yahoo Small Business Networks Solutions, I just wanted to understand exactly where you are headed and what your strategy is relative to them?

A - Jeff Stibel

Sure. I can break that into a two part question because I think there are two distinct types of competitors in the web hosting or website business. On the one hand you have the very fragmented group of competitors. These are for the most part not well branded, the focus surely is not exclusively on price and they are the ones commoditizing the space. They are certainly competitor in that they are going after the same customer that we are going after. In part they believe that this product is a commodity. We don’t believe that this product is a commodity, we believe that what has happened is this product has been marketed as a technology. People are focused on megabytes and storage and bandwidth. We don’t intend to do that, we intend to focus on what the value is, for small businesses that is having a website and is online. For consumers it is the ability to post photos, to share the network, the potentially to communicate and blogs and email. So that is one area where it is certainly competitive to date, and we are certainly have competitors and you had mentioned a few of them. The other side of that is the people who are focused primarily on consumer hosting and had done a better job of marketing to the consumer. The Yahoos of the world, the Ebays of the world. And Microsoft has done this as well in the past. Each one of them have to have looked at hosting as the non-core market who could read that, but what they have done is, they have acquired a large of customers and those consumers, if it is Yahoo, Yahoo is a search mechanism, or a portal, if it is Ebay, has an option site, and they are trying to leverage the customer base to additional revenues through other vehicles, hosting being one of them. We look at them as both potential competitors but also potential partners, Earthlink is a good example of a company that has a large group of users focused primarily on the ISP markets. And as they look to expand, they moved into hosting. And as a result we actually have a partnership where they actually license some of our Site Builder technology. So we look at those as both opportunity as well as competitors. But in terms that the direction that we are headed we are looking to productize and to offer some real added significant value to both consumers and small business as opposed to just focusing on the price sensitive technology on at the market place.

Q - Yehuda Fruchter

So on the consumer side, you just mentioned Blog, I mean, it’s movable site, the typecast is that sort of the service you will be looking to offer?

A - Jeff Stibel

Well. We are going to look at the wide spectrum, that the powerful thing about our model is that with 18 patents strong, and our core technology and infrastructure has allowed us to move very quickly and effectively into new markets such as what you described. So what we need to do is, we need to focus on what the consumer need is and we need to be looking forward in terms of having that visibility into the vision of what the next new consumer product is going to be. You never wanted to be head on with the large competitor, you want to find a niche and you want to find the next new solid opportunity. So as we move into this market place we’ve acquired a relatively large base. If you had the CNET networks, the transactions as well as web.com, it gives us a very robust base to start with. And then from there we are going to look to determine what the consumer needs are if we are going to enter those markets and we are going to do it in the most cost effective way we can, so that we make sure that we are not spending ahead of others.

Q - Yehuda Fruchter

Great. One just final question is, on the web.com again you mentioned it a couple of times in terms of direct traffic, is there any way you can give us a numbers in terms of what kind of direct traffic are we talking about, the acquisition seemed a bit high from a revenue standpoint?

A - Jeff Stibel

Certainly, we weren’t just purchasing revenue in that case, we were purchasing direct traffic which we did say, was significant, we haven’t disclosed the specifics of that. At this point we just closed that transaction at the end of last year and the brand itself. We think it is going to enable us to be a much stronger company as a result.

Q - Yehuda Fruchter

Okay great, thanks a lot.

Operator

And gentlemen, we have no further questions in queue at this time, I would like to turn the conference back to over our panel for additional or closing remarks.

Jeff Stibel, President and Chief Executive Officer

Great Thank you. And thank you all for joining us on the earnings call. If anybody has any additional follow-up questions as always, feel free to call either myself, Gonzalo or Peter. Thank you all.

Operator

And that does concludes today’s conference call. Thank you again for your participation.

TRANSCRIPT SPONSOR

Tucows logo

Tucows Inc. (AMEX: TCX) is the largest Internet services provider for hosting companies and ISPs. Through 7,000 partners globally we provide millions of email boxes and manage over five million domains. Tucows remains one of the most popular download sites on the Internet.

Tucows Inc. makes the Internet easier and more effective by reducing business complexity for our B2B and B2C customers as they acquire and deliver services to millions of Internet users around the world.

View our SEC filings, news releases, and learn more about our company and services.

To sponsor a Seeking Alpha transcript click here.

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Source: Interland, Inc. FQ1 (CQ4) 2006 Earnings Conference Call Transcript (INLD)
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