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Web.com Group (NASDAQ:WWWW)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Susan Datz Edelman - Director of Investor Relations and Corporate Communications

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

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

Analysts

David M. Hilal - FBR Capital Markets & Co., Research Division

Sameet Sinha - B. Riley & Co., LLC, Research Division

Lloyd Walmsley - Deutsche Bank AG, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

So Young Lee - SunTrust Robinson Humphrey, Inc., Research Division

Jeff Martin - Roth Capital Partners, LLC, Research Division

Hamed Khorsand - BWS Financial Inc.

Operator

Greetings, and welcome to the Web.com Third Quarter 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Susan Edelman, Director of Investor Relations and Corporate Communications. Thank you. Ms. Edelman, you may now begin.

Susan Datz Edelman

Good afternoon, and thank you for joining us today to review Web.com's third quarter 2012 financial results. With me on the call are David Brown, Chairman and CEO; and Kevin Carney, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session.

Please note that our remarks today contain forward-looking statements. The words expect, believes, will, going, begin, see, plan, continue and similar expressions are intended to identify forward-looking statements. These statements are based solely on our current expectations, and there are risks and uncertainties that can cause actual results and the timing of such results to differ materially from those projected in the forward-looking statements.

Please refer to our filings with the SEC and the risk factors contained therein, including our quarterly report on Form 10-Q for the period ended June 30, 2012, for more information on these risks and uncertainties and our limitations that apply to our forward-looking statements. Web.com expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation to the nearest GAAP measure is available at our website, www.web.com, under the Investor Relations tab. Also please note that our webcast and 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 Chairman and CEO, David Brown. David?

David L. Brown

Thank you, Susan, and thank you all for joining us today on the call. I'm pleased to share that Web.com had another record quarterly performance, with third quarter revenue and profitability exceeding the high end of our guidance. As we approach the anniversary of the Network Solutions acquisition, it is clear that Web.com has successfully transformed itself into a faster-growing, more profitable and more scalable business. Web.com, once again, generated a record adjusted EBITDA margin during the third quarter, which was a primary contributor to our strong and growing cash flow. During the third quarter, we continued to repay our debt and have made excellent progress de-leveraging our balance sheet since the Network Solutions acquisition closed, while also tracking ahead of our synergy targets.

As I will discuss in a moment, our better-than-expected operational performance has put us in a position to begin the process of re-pricing our First Lien Credit Facility.

Taking a look at our summary results, our non-GAAP revenue was $124.2 million, which exceeded our guidance range of $122 million to $124 million. This represents 8% year-over-year growth on a pro forma basis, which is meaningful when you consider that Network Solutions was bigger than Web.com and their revenue stream was flat at the time we acquired them. From a profitability perspective, we delivered adjusted EBITDA of $37.5 million, representing a record 30% adjusted EBITDA margin. This contributed to non-GAAP earnings per diluted share of $0.41, which was $0.01 above the high end of our guidance. Our earnings outperformance was driven by a combination of better-than-expected revenue and solid execution against our cost savings initiatives, as we integrate the Network Solutions acquisition.

Finally, we generated $21.2 million in non-GAAP cash flow from operations, and $22.4 million in un-levered free cash flow, a metric we believe gives investors insight into the significant cash generating capabilities of Web.com. We paid down an additional $14.5 million of debt in the third quarter, bringing the total amount of debt we have repaid since closing the Network Solutions acquisition to over $60 million.

Earlier this week, we announced our intention to reprice our First Lien Credit Facility. It is our expectation that we will realize significant cost savings in the range of $8.5 million on an annualized basis with a successful repricing of our senior credit facility. We intend to use the majority of this cash savings to reinvest in sales and marketing to further accelerate growth, as well as to continue to delever our balance sheet. This opportunity represents a meaningful positive for our company and our shareholders.

We are pleased with our operational performance in the third quarter as we continue to make progress across our 3 growth drivers. One, we are now consistently growing our net subscriber base. Two, we are generating ARPU growth across our nearly 3 million subscriber base as we successfully cross-sell our higher value services into our expanded install base. Three, our churn remains at record low levels. Low churn is critically important for us as it provides significant revenue visibility giving us the confidence to be able to make the additional marketing investments necessary to drive accelerated revenue growth.

Our strong quarterly performance comes amid a macro environment that remains challenging for small businesses. The NFIB index continued to trend down during the third quarter and remains well below historical levels that indicate a healthy macro environment for small businesses. Against this backdrop, Web.com is uniquely positioned to help small businesses do more with less in a cost-effective manner to create and strengthen their relationships with new and existing customers. Increasingly, small businesses recognize that they need to adopt technology solutions and become interconnected where their customers and prospects are spending their time. They also need partners to show them how to navigate new technology solutions like local, mobile, social and their Internet presence. This market opportunity is sized at $19 billion and growing, and we believe Web.com is very well-positioned to benefit from this secular trend for years to come.

I'd like to drill down into some of our key accomplishments during the third quarter, which are driving the growing momentum in our business and our optimism going forward. We saw another improvement in subscriber additions in the third quarter with approximately 18,000 net new subscribers. This is up from last quarter's net addition of 14,000 subscribers and it represents the third consecutive quarter of positive subscriber additions. A significant improvement that we have made within our domain business has been a key driver to our net new subscriber growth, which has been a primary focus for us since acquiring Register.com and Network Solutions. As a reminder, these businesses were losing 15,000 to 20,000 subscribers per quarter at the time we acquired each of them. Particularly, following the Network Solutions acquisition, it was a strategic priority to stabilize the domain name subscriber base and prove that it was a growth business with the right focus and investments. We have clearly achieved these objectives. As we look ahead, we are targeting quarterly adds in a general range of what we delivered in the third quarter, as we believe we are arriving at an optimal balance of subscriber adds versus ARPU expansion. We expect to shift more of our incremental sales and marketing dollars with higher ARPU products in order to continue accelerating our revenue growth.

We have the confidence to do so because we are seeing positive trends in our value-added services like eCommerce, Do-It-For-Me and Do-It-Yourself Web services. You can see the traction we are getting with these products through our steadily expanding ARPU, which increased $0.15 sequentially to $13.49. We've recently expanded our marketing efforts around our Do-It-For-Me and Do-It-Yourself Web services and are looking at opportunities within the hosting market as well.

We are only at the very earliest stages of cross-selling into our 3 million strong subscriber base, capitalizing on this opportunity will be a key driver in our ability to further increase our revenue growth into the double-digit and low teens range in the coming years.

Another area where we are seeing very positive results is with our direct response TV or DRTV advertisements. And we have recently expanded our advertising footprint to additional channels and to weekend time slots. The feedback we have been getting from customers has been very positive relative to our new advertisements that leveraged the true stories of the business values small business owners are generating from utilizing Web.com. Returns and cost of customer acquisition that we are seeing from DRTV continue to be favorable, and we expect to make additional investments in this marketing channel in coming quarters.

We've also added our seventh and eighth Feet on the Street markets in our initiative to put a direct sales force in front of larger small businesses that can benefit from our Leads by Web product. The newly opened offices in San Antonio and Atlanta complete our 2012 market entry schedule. While still small in terms of overall contribution, the Feet on the Street channel continues to improve and we anticipate adding new Feet on the Street markets next year.

Finally, in terms of marketing strategies, our Web.com Tour initiative is off to a great start. As we told you last quarter, Web.com has taken over what used to be the Nationwide Tour, and we have been pleased with the broadcast and print exposure the Web.com Tour has been getting during the final push of the 2012 season, which wraps up this weekend with the Web.com Tour championship at TPC Craig Ranch in Dallas.

We've also piloted part of our on-the-ground approach with a couple of Web.com small business forum events where we invited small business owners and select Web.com Tour markets who participated in a forum discussing strategies and tactics to better utilize the Internet to grow their businesses. We will fully roll out this strategy in 2013, and we believe that as we deepen the relationships we are forming with the players, the tournaments, the charities and the business communities where the tour operates, we will begin to leverage the power of this new branding effort.

The last leg of our growth strategies is customer retention. We continued to experience historically low churn of approximately 1% per month during the third quarter, and we believe that this is a sustainable level for us moving forward. Improvements in churn have been critical in giving us the confidence to increase our sales and marketing investments as we know the total lifetime value of a customer continues to increase.

Even as we've been making significant investments in growth, we are also delivering record levels of profitability, highlighted by our 30% adjusted EBITDA margin during the third quarter. We were able to accelerate our integration activities related to Network Solutions acquisition during the quarter, and time-wise -- and timing-wise, we are actually ahead of our plans to deliver $30 million of annualized cost savings in 2012, and a total of $40 million by the end of 2013.

Our ability to drive improved efficiencies in our operations and reinvest those savings back into the business has allowed us to fundamentally change the growth profile of our business without sacrificing our best-in-class profitability. We're committed to responsibly balancing our investments in growth with attractive levels of profitability, all with the goal of maximizing shareholder value.

To summarize, we remain incredibly bullish on the market opportunity ahead of Web.com, and we believe our recent performance demonstrates that our operating strategy is delivering strong results. In addition to strong and improving results, our announcement that we are kicking off a process to reprice our senior credit facility is a significant positive for our shareholders, as it will provide us meaningful cost savings to reinvest in the business and further delever our balance sheet. We believe the future is bright for Web.com.

With that, let me turn it over to Kevin.

Kevin M. Carney

Thank you, David. Let me provide a review of our financial results for the third quarter, then I'll finish with an update to our full year 2012 guidance, as well as guidance for the fourth quarter.

Beginning with the third quarter P&L, non-GAAP revenue was $124.2 million, excluding the $18.4 million impact of the purchase accounting fair value adjustment to deferred revenue in the quarter. As David mentioned earlier, our non-GAAP revenue was above our $122 million to $124 million guidance range. On a pro forma basis, which includes Network Solutions in the prior-year comparable period, our revenue grew approximately 8% year-over-year, which is consistent with the second quarter.

On a consolidated basis, ARPU was $13.49, a $0.15 increase from $13.34 in the second quarter. This remains consistent with our commentary over the past several quarters that we expect ARPU to grow in the dime or dimes range given our substantially larger subscriber base following the acquisition of Network Solutions. In addition to the fact that we have reaccelerated growth in our subscriber base, we are pleased with the continued growth in ARPU and believe it demonstrates the success of our upsell and cross-sell strategy.

We ended the quarter with approximately 2,991,000 subscribers, which was an increase of approximately 18,000 from the second quarter of 2012. As we've stated repeatedly in the past, our ultimate objective is to make sure we are both growing our subscriber base and expanding ARPU in a way that maximizes our long-term revenue growth.

The pace of net customer adds is something that is in our control and reflects what we believe to be the most efficient mix of marketing spending aimed at driving subscriber additions and cross-selling our higher ARPU products into our existing customer base of nearly 3 million subscribers. Our monthly customer retention rate in the quarter remained at approximately 99%. We are confident in our ability to at least maintain our record-high customer retention rates at this approximate level.

Turning to profitability. We generated $84.8 million in non-GAAP gross profit for the third quarter, representing a gross margin of 68.3%, slightly ahead of last quarter and up from 63.4% in the year-ago period. The year-over-year increase in gross margin is driven by the addition of Network Solutions to our results.

Our third quarter non-GAAP income from operations was a record $35.2 million, representing a 28% non-GAAP operating margin. We generated non-GAAP net income of $20.8 million or $0.41 per diluted share, which was above the high end of our guidance range of $19.3 million to $20.4 million or $0.38 to $0.40 per share.

Adjusted EBITDA was a record of $37.5 million for the third quarter, representing a record adjusted EBITDA margin of 30%, and up from a 23% adjusted EBITDA margin in the third quarter of 2011. Our improved EBITDA margins are reflective of the improved economies of scale in the business and the meaningful cost synergies we've realized following the Network Solutions acquisition, as well as our improving organic revenue growth profile.

Quickly moving to our GAAP results. Total revenue was $105.8 million, gross margin was 62%, GAAP sales and marketing expense was $30.9 million, R&D expense was $7.9 million, and G&A expense was $11.4 million. Depreciation and amortization expense was $19.8 million, and restructuring expense was $1.2 million. This resulted in a GAAP operating loss of $5.6 million. Net loss was $21.5 million or $0.45 per share.

Moving to the balance sheet. Unrestricted cash and investments were $11.5 million at the end of the third quarter, which was down from $16.8 million at the end of the previous quarter. We had a solid cash-generation quarter with $20.1 million in GAAP cash flow from operations and $21.2 million in non-GAAP cash flow from operations, which excludes the pay down of accrued restructuring expenses and certain expenses associated with recent acquisitions as we view those as onetime in nature and not reflective of the ongoing cash generation capability of the company. In addition, such adjustments will provide greater comparability in our year-over-year results from a long-term perspective.

In the third quarter, Web.com generated $22.4 million of unlevered free cash flow and $94 million for the first 9 months of 2012. Our unlevered free cash flow not only illustrates the significant ability we have to delever our balance sheet, but it also shows the full extent of the cash flow that Web.com will generate for our common shareholders after we service our debt requirements.

We used our strong cash flow to pay down $14.5 million of debt during the quarter. And since closing the Network Solutions acquisition, we reduced our debt balance by $60.5 million, including $42.5 million year-to-date. We've shown our ability to rapidly delever our balance sheet as we've grown our cash flow generation capabilities and realized significant cost synergies during the integration process.

Another use of cash is CapEx, which was $11.7 million in the quarter and $19 million for the first 9 months of 2012. As we stated previously, we plan for CapEx to be at an elevated level in 2012 due to the integration of the Network Solutions acquisition and the consolidation of our data centers. Our third quarter CapEx spend represents the high point for the year, and we would expect fourth quarter CapEx to be well below third quarter's levels and we now view full-year CapEx in the mid-20s range as we've accelerated some of our integration efforts. As we move into 2013 and the completion of these activities, we expect to see a further reduction on our CapEx run rate.

With that, let me turn to our guidance, starting with the fourth quarter of 2012. We are currently targeting our non-GAAP revenue in the range of $124 million to $125.5 million. This assumes continued sequential growth in our subscription revenue, combined with a sequential decrease of $1 million or greater in our professional services revenue, due primarily to the fact that our largest professional services client, a legacy business we inherited with the Register.com acquisition, has reduced their unit forecast for the foreseeable future. I would remind you that Professional Services represents less than 2% of our total revenue and is not a core focus of our operations towards [ph] at the most profitable part of our business.

We currently expect our non-GAAP net income to be in the range of $20.9 million to $21.4 million, or $0.41 to $0.42 per diluted share for the fourth quarter, which assumes 51 million diluted shares outstanding and a non-GAAP tax rate in the low single-digit percentage range. Our diluted shares outstanding reflect the impact of the increase of our share price in recent quarters. Please note that our guidance does not reflect any incremental cost savings we may realize if we are successful in repricing of First Lien Credit Facility, nor does it incorporate any one-time transaction cost.

As it relates to the full year, we expect revenue in the range of $489.2 million to $490.7 million. We now expect to generate non-GAAP net income in the approximate range of $78.1 million to $78.6 million, or $1.55 to $1.56 per diluted share, which exceeds the high end of our previous guidance of $75.5 million to $78 million, and $1.50 to $1.55, respectively. This assumes a share count of 50.4 million, cash taxes for 2012 continuing to be in the low single-digit range, and no impact from any potential debt repricing including any onetime transaction cost. We continue to expect our adjusted EBITDA margin to be in the 30% range for the full year of 2012.

To summarize, we performed at a high-level in the third quarter, exceeding our guidance on both the top and bottom lines, we're delivering on our three-pronged growth strategy, of growing subscribers, increasing ARPU and maintaining our best-in-class churn levels. We have a long runway for growth ahead of us, and we are focused on gaining additional share in this growing $19 billion market.

With that, we would now like to take questions. Operator, if you could please begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Hilal from FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

Few questions. First, guys, the balance between subs and ARPU, I think we get that, right. The better sub core that you have, the harder it is to drive ARPU higher. It sounds like the strategy is going to shift a little bit now to going after higher ARPU. I guess, I'd like to understand the reasoning behind that, is that because there's just -- you're so under-penetrated with the -- in the install base, I don't want to put words in your mouth, but can you share with us why that shift a little bit?

David L. Brown

Sure. David, we've found in our recent testing, we've had some positive success in accelerating our sales of some of the higher ARPU products into the customer base. We're going to take advantage of that right now. That will give us the best opportunity to grow top line in the near term. We always are looking to see which of the 2 levers will give us the optimal balance for increasing revenue growth. And right now, based on our most recent returns, we think the best course of action is to invest more in these high ARPU products. So you'll see that benefit to our revenue growth in the near term.

David M. Hilal - FBR Capital Markets & Co., Research Division

On the sub piece, how dialed in can you get on that right? So you mentioned your goal is similar to what you did this quarter, about 18. Are you pretty confident that you know how much marketing effort needs to be exerted in the quarter to target the 18. And then therefore, kind of the extra dollars, so to speak, could be used to penetrate the install base or is that still a hard number to try to dial into?

David L. Brown

It's not a hard number anymore. We've been at it now since we acquired Register, which has been over 2 years ago, and we've had even more in-depth experience in the last year since the Network Solutions acquisition. And we've really been -- we've really had our finger on this, we feel very confident that we can dial the number up and down, and it really is a function, it really just relates to the return on investment we get to where we put $1, and right now, we think we'll get a better return by putting incremental dollars. I want to be absolutely clear that we're not taking our foot off the pedal for subscriber growth, we believe we'll continue to grow at around the range we grew this quarter. But incremental dollars that are freed up in our business, and you can see them here in the last several quarters, we're going to invest in higher ARPU products because that's going to give a faster lift to revenue growth.

David M. Hilal - FBR Capital Markets & Co., Research Division

Right. And on the repricing, so of that $8.5 million, it sounds like the majority is going to go back into the business. Should we model any of it going to the bottom line?

David L. Brown

At this point, all that I can tell you is that based on our early analysis, we think a majority will go into additional sales and marketing investments because we see places to put the money that will give us a very good return on investment. But I think there could very likely be some that slows into -- obviously, we've said, delevering, further delevering, and there may also be some that goes to the bottom line. But we're really committed to delivering a 30% EBITDA margin going forward, and then investing everything on top of that into accelerating our growth, as long as we have good practical areas that will give us a good return on investment.

David M. Hilal - FBR Capital Markets & Co., Research Division

And then let me ask you on the Feet on The Street program. You are now in 8 markets or so. Is there anything you can share with us about how much of that's moving the needle, if at all, at this point?

David L. Brown

Well, I would tell you the way we think about it, first off, it's still a small part of our business, small contribution. But because it's a subscription business, and high ARPU business, it has a meaningful -- it's beginning to have a meaningful contribution over time. And as we add these offices and each office has a number of salespeople and each salesperson makes a number of sales each month, you can see the power that we get by adding offices over time. So adding 2 more offices demonstrates our confidence in this channel, and we're also quite confident that next year, you'll see us continue to add offices around the United States.

Operator

Our next question comes from Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley & Co., LLC, Research Division

Kevin, just one housekeeping. What was the shares outstanding that you're forecasting for the fourth quarter?

Kevin M. Carney

51 million.

Sameet Sinha - B. Riley & Co., LLC, Research Division

51 million. So a couple of general questions. I mean, one thing is you've spoken about going after higher ARPU products. I mean, does this entail growing your outbound sales team which will call into your I want to say the broader 3 million subscriber base?

David L. Brown

Sameet, it can, it has historically, and it can involve adding more sales resources, it can also involve expanding our direct response TV advertising program where we are selling $95 eWorks! accounts and with 30% of them attaching a Facebook account. So those are 2 examples of higher ARPU products. We're also selling eCommerce, and we're having great success in the last quarter or 2 in selling eCommerce as an add-on, that's a $55 a month add-on to an eWorks! account. And we have some additional products that we haven't discussed in these calls, that we're now beginning to sell as add-on product. So it really can be across any of those areas.

Sameet Sinha - B. Riley & Co., LLC, Research Division

It's -- there's interesting information on eCommerce, can you give us an update on the Facebook product, how well that is doing, any data on attach rates? And on the same way, you haven't spoken about mobile websites or the mobile call products. If you can give us an update there? One final question on that same line is any other products -- if you were to add other products, what would they be? What type of new products would they be?

David L. Brown

Well -- so, with respect to Facebook, in the recent quarters, we've mentioned that Facebook sales have been strong. In fact, 50% greater than they were last year. That trend has continued. We also have been able to continue the attach rate success that we saw last year into this year, which is in excess of 30% attach rate. And we continue to be innovative with Facebook. So although we haven't publicly announced some of the changes we've made, we tested a number of changes in the product and we'll continue to test a number of changes in the product that we think could be beneficial going forward. With respect to mobile, it's an important product for us, and it's one that we'd like to see most, if not all of our customers, have, because we think mobile will be especially important for these local businesses to connect with their local customers. However, it's still early in the game. And so today, the major utility that's being provided are websites presented well on a mobile platform, and we have those products for our customers for the various platforms. We also have some advertising products that work very well. One call SmartCalls, where we can actually connect a small business with a consumer who's doing a search and allow them to talk to each other through clicked call technology. So those products are products that we do sell, we don't talk a lot about them because it's early in the game and they're still relatively small components, but they are important and they will continue to get a great deal of attention here at Web.com.

Operator

Our next question comes from Walter Pritchard from Citigroup.

Unknown Analyst

It's Ken Wong for Walter Pritchard. Just wanted to quickly ask, I mean, are you guys seeing any kind of impact from macro yet? I mean, we just heard from Verisign and it sounds like they're seeing a little weakness this quarter, they're projecting a little bit out next quarter. And especially since a lot of your subscriber growth has come from reinvigorating that domain businesses. I wanted to see how you guys are thinking about that?

David L. Brown

Well, Ken, we have not seen, at this point, any impacts from the macro environment other than the same impacts that we've been seeing for the last couple of years, which is -- it's tough on our small business customers. I think, what we are in fact seeing is progress in a very, very fragmented marketplace where our strategies are beginning to have success. So in the domain space, we went from losing subscribers to gaining subscribers. That trend has continued, and we're seeing continuing progress in our sales efforts across all of our product spaces. So the market may be bad but the trend to adopt the Internet is even stronger than the difficult market, and we're set up very well to take advantage of that.

Unknown Analyst

Got you. And Kevin, when we kind of look at our model, it looks like cash flow was a little lighter than we're expecting -- do you guys still feel that the $135 million to $143 million cash flow target you guys have for fiscal '12 is still achievable?

Kevin M. Carney

Well, I think, looking at -- obviously, we commented on the fact that we're accelerating some of our CapEx this year. Or I should say, we're seeing a little higher CapEx expectation for the year given the acceleration of some of our integration efforts. So I think it'll be a little lower than we had expected due to that, but we'll see the benefits sooner from the cost savings integration as a result.

Operator

Our next question comes from Lloyd Walmsley from Deutsche Bank.

Lloyd Walmsley - Deutsche Bank AG, Research Division

A couple questions. First is on the ARPU growth. It sounds like you're shifting a little bit of focus back to ARPU, it came in sequentially a little bit lower than it had in the second quarter. Do you think that your focus here is going to keep things kind of where they are around this $0.15 per quarter level or could you get back to the dimes plural level that you saw last quarter? That's the first question. Second question is just on the cost savings going forward, should we continue to expect cost to come out of R&D and G&A? And then just last question, if you can just talk a little bit about what a normalized CapEx level might look like for next year after the integrations are done?

David L. Brown

Sure, So I'll take the first one, Kev, you can take the next 2. Relative to ARPU, I want to be crystal clear that we're very pleased with the strategies that we employed over the last year to turnaround subscriber growth, especially focus in the domain space. Those customers are profitable within their first year. And they have -- we have a long opportunity to continue to grow the revenue stream around those customers. And so we're going to continue down that path. But we do -- we are generating a lot of free cash flow and a lot of earnings power. And we see opportunities to invest that incremental earnings power in other areas that can further enhance our revenue growth. And by the way, they'll also enhance our ARPU growth. So yes, we do see an opportunity for ARPU growth to be enhanced above the level we reported this quarter. Both because we're going to be investing money in higher ARPU product sales areas which will help us. But just the sheer mathematics of the equation, as we grow, the greater number of higher ARPU customers coming in relative to the total customers coming in will enhance that equation.

Kevin M. Carney

Yes, in terms of the cost synergies going forward, I would say that our guidance would certainly incorporate any of those shifts. But I think that as we -- as I look into the fourth quarter and what our guidance reflects, I would say probably not really any significant movement in the fourth quarter. But as I was alluding to earlier, as we complete some of the further integration activities, we'll begin to see further benefits into 2013. And as you suggested, the R&D line would be one of the key areas that will see those. And in terms of CapEx, what I would expect is something more in the 3% to 4% range in terms of -- as I presented you non-GAAP revenue, that will be more of a normalized CapEx level for our business.

Operator

Our question next comes from Lauren Troy [ph] from JPMorgan.

David L. Brown

Lauren?

Unknown Analyst

This is Lauren for Sterling. Just a couple of questions here. So the sub growth of 18K coming up from 14K and it's been accelerating. I guess, as it relates to your guidance, are you continuing to -- is the implication in your guidance that, that should continue to grow? Or because I wasn't sure, I wasn't clear in terms of what you guys were saying. As you're more focused on ARPU, how the sub growth should look like?

David L. Brown

So we think, Lauren, that sub growth will continue at the level that we saw in the third quarter at around that range going forward.

Unknown Analyst

Okay, great. And then the other question was you mentioned that we're still in early stages of penetrating into that 3 million sub base?

David L. Brown

Yes.

Unknown Analyst

I guess, first, would you be able to give us more detail where you are in this penetration curve? And then as you are going after the higher-end solutions, which ones are you, I guess, trying to get the best result out of given that they have better attach rates?

David L. Brown

It's difficult for us to give you good metrics around this because given that we have 3 million customers and they have the potential to buy lots of different products from us, it really -- it depends upon exactly what product category you're talking about. The way we think about it is over the life of a customer, and by now, our average customer life is well in excess of 8 years, we have an opportunity to sell lots of things to them. And it's selling at the appropriate time, Lauren. So we've talked to relatively small percentage of our customers today, we're taking our time, we're using the data we have on our customers about what they bought, how they behaved while they've been a customer with us, and what that tells us about, the probability to buy to determine our campaigns, and what we're trying to do is drive up conversion rates. So the efficiency of our calling programs, and we're very, very pleased with our efforts this year, we've had a significant improvement in conversion rates across our calling campaigns because of this approach that we're taking. But it also requires us to go carefully and slow so that we're not selling something to a customer when they have no interest in buying it. We're trying to line ourselves up at the time. So I wish I could give you a great answer, but it's frankly a moving target for us.

Unknown Analyst

Great. The next question is, I guess, around this customer who reduced your professional services by $1 million in Q4. Can you just give us some more detail on what happened with that -- this customer? Was it that they are doing worse in their business or was it that they're going to someone else, I just wanted to understand what's going on there?

David L. Brown

Sure. Without giving you much in detail, because they're a public company as well, I can tell you that they reviewed their performance -- their opportunities for performance in the fourth quarter and gave us a forecast that reduced their numbers. And we believe it really is a reflection of organizational opportunities and issues within their company, not -- has nothing to do with them moving to someone else or anything like that. It just has to do with the fact that it's the fourth quarter and there are organizational issues in their business that will result in them reducing their -- what they send to us this quarter.

Unknown Analyst

Okay. And last question. Can you just give me the domain name count for this quarter?

David L. Brown

Domain name count?

Unknown Analyst

Yes, I think, total is about 8 million last quarter. I wasn't sure if they went up, down? Was it still around...

David L. Brown

Yes, it's not a statistic that we normally report. The last public report of that number was in the range of 9 million.

Operator

[Operator Instructions] Our next question comes from Peter Stabler from Wells Fargo.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Kevin, could you give us an update on the second lien, what your opportunities are there now that you've anniversary-ed the initial deal? And then I got a couple of follow-ups.

Kevin M. Carney

Yes, now the balance again is -- I think, your question was beyond that, but $120 million, still. Having reached that 1 year anniversary, the -- really, the key with regard to the second lien was there was a no call provision for the first year with one exception, which was we could do an equity offering, use the proceeds of an equity offering to prepay there. So in essence, no call goes away, we still have a 3% prepayment penalty on it. But we have much more flexibility in terms of what we can do in terms of replacing it, paying it, lowering the cost, et cetera.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

And could you remind us the coupon on that lien?

Kevin M. Carney

Today, it's 11%.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

So is there -- could you give us a little bit of your thinking around why not take a look at that, the appetite for high yield paper is strong? Is there a strategic the reason why you wouldn't take a look at that in the near-term?

Kevin M. Carney

Peter, there is absolutely no reason why we wouldn't look at that. But our focus right now is on excellent execution. And we felt that the best way to have an excellent execution was to tackle the bulk of our debt, which is the first lien. And that's why we've announced this repricing on that portion after we finish that, we can then turn our attention to excellent execution on the remaining debt that we have.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Okay, great. And then one more on the product side. So David, I just want to make sure that -- I'm going to revisit your earlier comments, make sure that I understand. So the commitment to this 30% target on the adjusted EBITDA margin is one that you're sticking to. And then as you mentioned earlier, the majority of the savings would be reinvested behind marketing. Would that take the form of kind of support behind the eWorks! Excel, could we expect more television advertising or could that go elsewhere?

David L. Brown

I think, you'll see some of all of the above. I think you'll see us continue to expand our sales force, you'll see us continue to expand our advertising in direct response TV. If you watch TV on the weekends, you can see our ad now. If you watch them in the wee hours of the morning, in fact, if you watch them any time, you can see -- you will begin to see our ads running because they're -- we're getting an excellent cost of acquisition around them. And you'll also see us expanding in some other new categories that we believe have great promise for growing revenue responsibly.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

And last one for me. Could you comment on the retention rate of these higher ARPU products you're selling in? How is the retention rate tracking right now are you happy with that?

David L. Brown

Well, I can -- let me just say that we're really pleased with the retention rate that we're seeing in our higher ARPU products. From our Feet on The Street program, which is $1,000-plus per month product to our eWorks! products, really across the board. And that's a testament to, I think, the great efforts of our staff, the programs that we administer. But frankly, most importantly, to the fact that small businesses need this stuff, and they get it now, and once they adopt a product, if it works, they keep it. So we're very fortunate. Although the churn on some of these higher ARPU products is higher than our domain names, which is below 1%, the combination of those 2 still bring us to 1% and we expect that to be stable going forward despite our greater emphasis on higher ARPU products.

Operator

Our next question comes from So Young Lee from SunTrust.

Unknown Analyst

I was just wondering if there was any update on the opening of Web suffix names and the timeline after ICANN's recent meeting in Toronto? And I guess, where are you in your negotiation with the 6 or so other applicants for the Web suffix? And -- or it hasn't -- has it handed to back to ICANN for further decision-making process and you're seeing a lot of relay process?

David L. Brown

Sure. So I wish I could give you optimistic and positive update, but all I can tell you is watching this process is like watching mud roll uphill. ICANN had a meeting, and what we learned from that is that it's a painful and lengthy process working through this quasi governmental international group, all with different interests. I -- we just continue to believe that this is a well ended 2013 type of an event for the execution of some of these top-level domains. We continue to believe that we're going to be a significant beneficiary when and if it does happen, and we believe it will happen. With respect to .WEB, there's really not much that I can report there, given that the timeframe continues to move light into 2013, it's way too early to give you much information or even predict what that process is going to look like.

So Young Lee - SunTrust Robinson Humphrey, Inc., Research Division

And can you talk about your save rate at the point of departure or return, is it still at a high 60% to 75% or can you give us a little color on that?

Kevin M. Carney

Sure. I can't give you a statistic but I can tell you that, that's a key focus for us. And we think of it as serving customers, and customer service, educating them, providing alternatives, making sure that we actually solve the problem that they called about, and that typically results in a save rate of something in the order of 65% to 70%. That -- when we started many years ago, that was 0, it went to 30%, we've got it up into a range where it's very stable, continues in that range today.

So Young Lee - SunTrust Robinson Humphrey, Inc., Research Division

And is there any difference or you seeing some domain name customers versus sort of your upsell customers?

David L. Brown

We're really not seeing much difference in our save rate. I would comment that there has been a change in one of our strategies, we've historically provided some of our products with a free trial period, and we still do today. But the mix of sales has changed over time. As the market has begun to adopt the Internet and customers have become clear that they need the product, we've, today, provide fewer of our new sales come with a free trial. More of them come immediate -- with an immediate purchase. And interestingly, we see lower churn on those customers than we do on the free trial customers, so that's a positive that's benefiting us right now.

Operator

Our next question is a follow-up from Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley & Co., LLC, Research Division

So just looking at your expectations for savings from your first lien repricing, does that equate to about -- reducing your interest rate by about 150 basis points, is that the right math there or am I...

David L. Brown

\

That seems right.

Sameet Sinha - B. Riley & Co., LLC, Research Division

Okay. And just on this question of free trial. Could you talk about -- I mean, if you're not offering free trials anymore, can we expect gross margins continue to pick up, is there any reason why that should not go up?

Kevin M. Carney

No. I don't think that we would expect to see a material change in gross margin as a result. I think that David's point is we're going to see a beneficial impact from a churn perspective.

Operator

Our next question comes from Jeff Martin from Roth Capital Partners.

Jeff Martin - Roth Capital Partners, LLC, Research Division

David, you made a comment about organic growth rates in the future, not giving a specific timeline, but given the double-digit and the low teens, I was just curious if you could attempt to peg some sort of timeline or timeline range on that?

David L. Brown

I think the best thing that I can do for you, Jeff, is just to point you to what we've done this year which has gone from starting the year in the low single-digits to this point in the year at 8%. I'd tell you that we absolutely see the ability of the company to break into double-digits and into the low teens. And just let you know that we're planning on providing guidance at our next quarterly call for the year, for 2013. So that will be the next real update, I think, with respect to your question.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay. Well, that kind of cuts off my question of asking for some preliminary guidance for next year.

David L. Brown

Sorry about that.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay. And then one other question on ARPU. If you had that kind of segment on a product basis, which buckets are driving that from most impactful to least impactful, how would you do that?

David L. Brown

I'd tell you that, right now, that our eWorks! product, which is close to $100 a month product, it's driven both through our cross-sell and upsell, and also our DRTV work is having a very beneficial impact on ARPU right now, and it's well-received by customers, and it works for customers. So it's a sticky product. So I think that's one that I would put at the top of the list. There are lots of other products that are making contributions from Facebook to our eCommerce product. And even our Feet on the Street, Leads by Web program, even though it's still early and small, because they're $1,000 a month subscriptions, they contribute as well. And more and more of our activity is beginning to focus around these value-added areas because the customers want the value-added, they need the Internet to work, and the value-added is the part that makes it work. So we happen to be well-positioned, we want to make sure we take advantage of that.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay. And then if I could just ask one more on Feet on The Street, how many salespeople do you have today, and how many per office do you foresee, just to give us a sense of how big each market is?

David L. Brown

So the way we thought about is historically, we've had 5 to 7 salespeople per market, and it depends on the size of the market. And we continue to believe that, that's appropriate. So that's the way you should think about it.

Jeff Martin - Roth Capital Partners, LLC, Research Division

Okay. And then can you give us a range of what kind of revenue contribution each should give once they're 3 to 5 years into it?

David L. Brown

We haven't provided that yet. That might be a topic for a future Analyst Day or Earnings Call. But we haven't provided it at this point, Jeff.

Operator

Our last question comes from Hamed Khorsand from BWS Financial.

Hamed Khorsand - BWS Financial Inc.

A couple of questions. First one, do you think there's any seasonality in being able to add the new customers?

Kevin M. Carney

There is some seasonality, it's not a lot. There certainly is the potential for distracted customers during the holiday season, the 4Q period. But fortunately, we've not seen that historically, and so we're not expecting to see it in this particular quarter. So we're confident in our ability to deliver subs in the range that we've been delivering them. Other than that, there can also be some seasonality around churn and that has to do with the fact that early in a year, in the first quarter, late in the first quarter, oftentimes we see more renewals. And there's always an opportunity for churn around a renewal time. And fortunately, we haven't seen that one either. So at this point, the trends are positive for us, but those would be the 2 points of seasonality, Hamed, that we would see.

Hamed Khorsand - BWS Financial Inc.

And similar to that, is there any way to measure how much of the new subscribers are coming from competitors?

Kevin M. Carney

There is. Although we don't have that information for you here on tonight's call.

Hamed Khorsand - BWS Financial Inc.

Is there anything you can provide to clue us in on that?

Kevin M. Carney

I can tell you that a healthy amount of our sales come from customers of other clients. We've provided and stated in previous calls some metrics. For instance, our Gorilla product, which is an online marketing suite of products, typically is sold to customers from other institutions who already have a website, and that is one of our very fast selling products today. So -- but beyond that, we're having great success in bringing customers and we believe we are gaining share right now in the marketplace. So we're very excited about that as well.

Hamed Khorsand - BWS Financial Inc.

Okay. Looking into the fourth quarter in a competitive ad space, do you see any challenges in being able to compete whether it's on TV or Feet on the Street in that way?

David L. Brown

At this point, I would say we're more optimistic than pessimistic. Everything seems to be working in the right direction, as evidenced by the fact that we just added 2 more Feet on the Street markets, and we're spending even more money and we've expanded our hours in DRTV, we've added to our sales staff. I would say we're not looking for obstacles, we're looking for places to invest the strong earnings power of this company so that we can grow even faster. And I think I would view that as an opportunity, not so much a challenge.

Operator

And I'll turn the floor back over to David Brown for our closing comments.

David L. Brown

Thank you all for joining us today to talk about our successful third quarter and the outlook for our business. We appreciate your interest and look forward to speaking with you about our progress. During the fourth quarter, we'll be participating in the Piper Jaffray Technology Media and Telecommunication Conference, and the Wells Fargo Technology Media and Telecom Conference, both in New York City in November. And as always, feel free to contact us here at Web.com if you have additional questions. Thank you and good night.

Operator

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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