Web.com's (WEB) CEO David Brown on Q1 2018 Results - Earnings Call Transcript

Web.com Group, Inc. (NASDAQ:WEB) Q1 2018 Earnings Conference Call May 3, 2018 5:00 PM ET

Executives

Ira Berger - VP, IR

David Brown - Chairman, CEO and President

Kevin Carney - EVP and CFO

Analysts

Naved Khan - SunTrust

Jackson Ader - JPMorgan

Sam Kemp - Piper Jaffray

Deepak Mathivanan - Barclays

Lloyd Walmsley - Deutsche Bank

Tyler Wood - Northland Securities.

Hamed Khorsand - BWS Financial

Sameet Sinha - B. Riley FBR

Operator

Good day, and welcome to the Web.com First Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ira Berger, Vice President of Investor Relations. Please go ahead.

Ira Berger

Good afternoon and thank you for joining us today to review Web.com's first quarter 2018 financial results. With me on the call today are David Brown, Chairman and CEO; and Kevin Carney, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session. In the Investor Relations section of our website, we have provided our financial summary slide presentation, which is intended to follow our prepared remarks and provides a reconciliation of differences between GAAP and non-GAAP financial measures. Please note, that our remarks today contain forward-looking statements. The words expect, believes, will, going, begin, see, plan, continue, guidance, outlook, project, intend, estimate 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 could cause actual results and timing of such results to differ materially from those projected in the forward-looking statements. Please refer to our filings with the SEC and the risk factors contained therein, including our annual report on Form 10-K for the year ended December 31, 2017, for more information on these risks and uncertainties, and our limitations that apply to our forward-looking statements. Web.com expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

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

David Brown

Thank you, Ira, and thank you all for joining us on the call. In our prepared remarks, I will start with an overview of our business performance and strategy, touch on the progress we are making against our objectives for 2018 and then go over key financial and operating highlights. Kevin will finish with a detailed financial review and provide our guidance for the second quarter and full year. Web.com delivered solid first quarter financial results, with both revenue and profitability that exceeded the high end of our guidance ranges.

We made progress against each of our key initiatives for the year and have a well-defined plan to drive additional improvements as we move through 2018. We're confident that successfully executing on these initiatives will enable us to deliver greater value for both customers and shareholders. Every day, we see additional evidence that small businesses are recognizing the positive impact our value-added services can have on their business. In an increasingly digitized and mobile-first world, small businesses simply have to have a sophisticated and relevant technology strategy to engage and retain customers. This is dramatically different world than what small businesses faced even a few years ago, which increases the value that Web.com's digital marketing expertise and compelling easy-to-use, product portfolio can deliver. We are confident that our repositioning of the business to focus on value-added services places Web.com in the sweet spot of what customers are looking for. Continued product investments, like our recently announced Patient FastTrack for Lighthouse Dental and our initiatives to optimize our operations will position the company to maximize this large market opportunity and generate profitable growth. We also remain focused on enhancing our balance sheet to support our strategic priorities, while also using our financial strength to generate value for shareholders.

Earlier this week, we closed on the new $400 million term loan and undrawn $400 million revolving credit facility. This capital structure provides us with lower cost bank debt than our current facility, incremental liquidity, flexibility and a continued maturity. An upcoming use of the undrawn revolver will be to pay off our convert, which comes due in August later this year. Kevin will get into more of the details on this in his section. We capitalized on our attractive market opportunity. In 2018, we are focused on delivering against four strategic priorities across the company. I'd like to take a few minutes and review how we're doing against each of these goals.

Our first objective is to stabilize and optimize the retail business. Our performance in retail was ahead of our expectations for the quarter and down 3% year-over-year. This was driven by the domain aftermarket and some areas in the retail value-added services' product portfolio. We're encouraged by the relative stability we see in retail, given the reduced level of investment we've been making in this part of the business. We remain disciplined in focusing on cross-sell and up-sell opportunities and investing in selected areas that will generate sufficiently attractive returns.

Our second priority is to invest in and grow our Premium Services and multi-location franchise channel, which we recently renamed Web.com for Enterprise. In Premium Services, during the quarter, we continued to refine our go-to-market strategy with respect to our products and sales organization. We saw some positive results from these changes in terms of demand generation, particularly for our vertical solutions, TORCHx and Lighthouse Dental, which are focused on the real estate and dental spaces, respectively. Our local lead generation product, Lead Stream, also continued to make progress but at a slightly slower pace than we were targeting due to a sales staffing shortfall.

We also introduced an exciting new product capability, our new Patient FastTrack functionality within Lighthouse. This new feature enables patients to quickly register, fill out and sign documents necessary for their appointment through their mobile device, all before they arrive for their appointment. This solves a major pain point for both patients and the office staff by greatly reducing the time spent filling out and filing necessary paperwork. This is a great example of how we're becoming more deeply embedded into the daily operations of our customers, which increases the value we deliver and the stickiness of our products. Web.com for Enterprise, again, delivered year-over-year mid-teens revenue growth.

During the first quarter, we added a number of sales staff with the goal of significantly increasing our pipeline of new enterprise prospects. As the pipeline grows and matures through the year, we expect to add new brands to our portfolio at an increasing rate. This is an exciting and underpenetrated market opportunity that we believe can be a good growth driver for us.

Our third goal is to improve retention. We have several initiatives underway that we believe will improve the customer experience and drive higher retention rates among our Premium Services customers. This is a key component of our growth strategy and will also have a positive impact on profitability. We made good progress on the IT and process work related to integrating the recently acquired Acquisio PPC platform and artificial intelligence technology into our Lead Stream platform. We believe that a key benefit of the Acquisio technology will be higher quality leads at a lower cost for our customers.

Our fourth initiative is to drive additional synergies and efficiencies across the company. We made meaningful advances in this area in the first quarter. You will see that we incurred a $2.7 million restructuring charge in the first quarter related to some organizational changes we made. This includes consolidating some of our customer service and tech teams as well as integrating several technology platforms across the organization. Throughout the history of the company, we've always had a number of projects we're working on that enable us to serve our market better and at a lower cost. Rationalizing our expenses enables us to repurpose these savings into product and go-to-market investments that can have a positive impact on our future growth opportunities, while maintaining our strong profitability. While we continue to make progress in the core underlying business, at the end of the first quarter, we became aware of two large customer losses: one in Premium Services and one in Web.com for Enterprise, which will impact us going forward.

Our business is predominantly made up of millions of small businesses, but we do have a few pockets of large customers. As a testament to the value proposition of our lead generation solutions in Premium Services, we have a small handful of customers that were small businesses when they started with Web.com and have grown into much larger enterprises. Late in the first quarter, one of our customer success stories, dating back to our legacy Leads by Web solution, had a change in management, which resulted in the customer leaving. In general, our customer base in Premium Services is very well diversified with predominantly smaller accounts. We have one other large customer like this in Premium Services. As we've mentioned on previous calls, Web.com for Enterprise is an inherently lumpy business and can occasionally see some inconsistent growth rates due to enterprise customer wins and losses.

During the quarter, our largest enterprise customer, who has grown dramatically during the many years they'd been with us, made the decision to in-source their digital marketing. Although infrequent, this is a risk of this channel and makes it all the more important that we have a robust pipeline of new brands. Loss of this one brand does not change the overall opportunity in this market or our belief that Web.com for Enterprise can deliver consistent double-digit revenue growth on a normalized basis. Overall, we feel good about the progress we made in the first quarter, the underlying fundamentals of the core business and how we're set up to drive further improvements as we move throughout the year. The two customer losses will create some revenue and profit impacts this year, which Kevin will lay out more specifically, but the long-term prospects are good, and our team remains focused on executing on our strategic vision. I'm pleased with a positive impact I've seen in the business from the changes we've already made, and I'm confident we'll see the benefit in our operational and financial performance as we complete these initiatives.

Turning to our financial summary results for the quarter. We generated non-GAAP revenue of $187.8 million, which exceeded the high end of our guidance range of $184 million to $187 million. From a profitability perspective, we delivered another strong earnings quarter, adjusted EBITDA was $42.8 million or a 23% adjusted EBITDA margin, which was ahead of our guidance of $40.5 million to $42.5 million in adjusted EBITDA. Our strong profitability demonstrates the strength of our business model. We take a rigorous metrics-driven approach to investing in the business and will continue to solve for the appropriate balance of increasing efficiency and investing in areas that generate good growth and attractive returns. Finally, in the first quarter, we generated $22.2 million of free cash flow.

Net new subscribers declined by approximately 62,000 in the first quarter, and we ended the quarter with approximately 3.3 million customers. The decline in subscribers reflects the impact of our strategy to reduce our investments in the commoditized elements of the retail market, which results in fewer low-priced new subscribers joining Web.com. As we continue to execute on this strategy, we expect subscriber declines to be consistent with this level for at least the next few quarters.

Our trailing 12-month retention rate was 85.5%. This was an improvement from the fourth quarter and ahead of our expectations. This remains a key focus area, and we believe we can drive additional improvements over time. We have been talking with investors about the interplay of our strategy and the impact on subscriber mix. At the highest level, we have a large quantity of lower-priced customers, and we are now more focused on bringing in a lower number of much higher priced customers. While this is happening, we have natural attrition in our lower-priced customer base, where historically we brought in a much larger number of new customers every quarter.

Slide 9 lays out this dynamic by looking back at just before the Yodle acquisition compared to where we are today. You can see that subscriber losses are relatively even, while the bigger change is in new customers. Also, to illustrate the point further, one new Lead Stream customer with $1,000 in ARPU generates the same monthly revenue as 500 domain subscribers with $2 in monthly ARPU.

In summary, Web.com delivered solid first quarter results and made good progress on our operational priorities. We are becoming a more efficient company that is focused on solving the most important problems facing small businesses. We have a targeted set of initiatives to increase sales productivity and customer retention, which will have a positive impact on top-line growth over time, and our strength in balance sheet and strong cash flow provide additional opportunities to create value for long-term shareholders.

With that, Kevin will provide more detail behind the numbers. Kevin?

Kevin Carney

Thank you, David. Let me begin with a review of our financial results for the first quarter, and then I'll finish with our updated guidance for the second quarter and the full year 2018. Beginning with the first quarter P&L. Non-GAAP revenue was $187.8 million, which excludes the $1.1 million impact of the purchase accounting fair value adjustment to deferred revenue in the quarter.

Now turning to a more in-depth discussion around revenue. Web.com for Enterprise was up 16% year-over-year. As David mentioned, our largest Web.com for Enterprise customer decided to in-source these capabilities during the quarter. This will have a near-term impact to growth in Web.com for Enterprise but does not change the fundamental growth opportunity in this large and underpenetrated market. This transition will begin early in the second quarter, and we estimate the revenue impact will be about $3 million of lost revenue per quarter. We expect this to result in a sequential decline from the first to second quarter, and that overall, year-over-year revenue growth will be in the mid- to high single digits. On a pro forma basis, without this customer loss, we are projecting continued double-digit growth year-over-year.

In Premium Services, as anticipated, we were up 4% year-over-year. We are making headway on improving retention among these customers and in aligning our sales team to drive a more efficient and productive sales process.

We are early in implementing and benefiting from many of these changes. We expect to drive improved sales productivity and customer retention in Premium Services as we move through 2018 and beyond. We anticipate the lost Premium Services customer will impact second quarter revenue and the rest of the year revenue by approximately $1 million per quarter. This will result in lower revenue in the second quarter compared to the first quarter, with overall year-over-year revenue growth in the mid- to low single digits. Again, on a pro forma basis, without this customer loss, we are projecting mid-single-digit growth year-over-year. Retail was down 3% year-over-year, which was modestly ahead of our expectations. As David mentioned, we saw a solid performance in the aftermarket and some of our retail value-added services offerings. We are confident we will be successful in stabilizing and optimizing this business. For 2018, we expect retail to decline slightly year-over-year. ARPU in the first quarter was $18.34, which, as anticipated, was down slightly from last quarter but up $0.67 from the same time last year. We ended the quarter with approximately 3.3 million subscribers, which was a decrease of approximately 62,000 from the fourth quarter of 2017. Our strategy of allocating sales and marketing spend towards our value-added digital marketing solutions and away from our lower-priced higher-volume domain in DIY products will likely result in subscriber declines for the next few quarters. For the second quarter, we're projecting subscribers to decline at similar levels to what we experienced in the first quarter.

Turning to profitability. Our first quarter non-GAAP income from operations was $37.5 million, representing a 20% non-GAAP operating margin. Adjusted EBITDA was $42.8 million for the first quarter, representing an adjusted EBITDA margin of 23%. Next, our GAAP results for the first quarter. Revenue was $186.7 million. Cost of revenue, excluding depreciation and amortization, was $62.7 million and income from operations was $15.5 million. Net income was $4.6 million and net income per diluted share was $0.09. In terms of cash flow, we generated $27.2 million of operating cash flow in the first quarter compared to $33.2 million in the same period a year ago. Capital expenditures in the quarter were $5 million, which led to $22.2 million of free cash flow. This compares to $28 million in the same period a year ago in which there were capital expenditures of $5.2 million. Moving to the balance sheet. Unrestricted cash and investments were $9.7 million at the end of the first quarter compared to $12 million at the end of the fourth quarter. We ended the quarter with a total debt balance of $659 million. As David mentioned, we are pleased with our recent debt refinancing, which increases our available capital, while lowering our bank debt cost and enhancing our balance sheet flexibility. On Monday of this week, we closed on a new $400 million term loan A and an undrawn $400 million revolver. This extends our maturity to the second quarter of 2023, provides incremental liquidity with the expanded revolver and has improved pricing and terms compared to the credit facility we replaced. We incurred about $3 million in deal fees and expenses for the new facility. Today, the revolver has a zero balance, and we intend to pay off the convert in August with a portion of the revolver capacity and cash on hand. Our current debt level before and after the convert is paid off, should not materially change, and we should have greater liquidity between the additional revolver capacity and cash we generate between now and August. With the new pricing and current leverage levels today, the term loan will be at L plus $175 million with no LIBOR floor.

On a pro forma basis, assuming current leverage levels and that we draw on the revolver to pay off the convert, the term loan and revolver would be at L plus $225 million, with the opportunity to reduce the interest margin as we delever. We are very comfortable with our current leverage levels and will continue to evaluate the most effective ways to deploy our free cash flow going forward, between investing in the business, deleveraging, acquisitions and stock buybacks.

With that, let me turn to our guidance, starting with the full year 2018. We now expect non-GAAP revenue for the year to be between $743 million to $755 million and adjusted EBITDA to be between $183 million and $190 million. We are forecasting free cash flow to be in the range of $120 million. Looking at the second quarter of 2018. We're targeting non-GAAP revenue in the range of $182 million to $185 million, which assumes Professional Services revenue would be slightly lower than Q1 2018 levels and adjusted EBITDA of $44 million to $46 million.

Let me add some additional color around our guidance. The lower revenue guidance is primarily due to the two lost customers, which we quantified earlier. The other main contributor to the lower guidance is the slower-than-planned ramp up of sales personnel in Premium Services. We expect the second quarter to be the low point for the year, with modest sequential growth in the back half of the year. The guidance range implies that ARPU will be slightly up to down in the second quarter, and we expect ARPU to increase throughout the year in line with our overall revenue in subsequent quarters. For the year, we have expanded our adjusted EBITDA range. This takes into account the impact of the lost customers as well as some of the near-term fixed components of our cost structure. Free cash flow is lower mostly due to our reduced profitability forecast.

And finally, we finished our final assessment of implementing 606, and our guidance does not reflect any material changes to revenues or expenses. As we've discussed in prior calls, we are no longer reporting or guiding to non-GAAP net income or earnings per share. Many of the components of this discontinued metric are available within our press release and are being provided in supplemental information. We no longer provide a cash tax number, which was our estimate of cash taxes due for a specific period. As a proxy for this number, you can look at the cash taxes actually paid, which is supplemental to our GAAP cash flow statement. Please keep in mind that there are almost always timing differences between estimates of cash taxes due and when the tax is actually paid.

For the first quarter, we paid $400,000 in cash taxes and had $8.8 million of GAAP interest, which included $3.8 million of noncash amortization. Also, we had $49.1 million diluted weighted average shares outstanding in the first quarter. Let me provide some insight into some of these components for 2018 and the second quarter. For the year, we're projecting GAAP interest of $32 million, which includes $10 million of noncash amortization debt discounts and issuance costs. We are forecasting about $4 million in cash taxes paid, which will be reported as supplemental information on our cash flow statement and depreciation expense runs about $5 million per quarter. In the second quarter, we're assuming GAAP interest of $9 million, noncash amortization of a little less than $4 million and cash taxes paid of about $1.6 million. Finally, we estimate we will have 49.3 million diluted weighted average shares outstanding for the full year and 49.1 million shares for the second quarter.

In summary, we delivered solid first quarter results. We're making progress against each of our strategic priorities and are confident this strategy will deliver improved growth and profitability over time. We believe the combination of our differentiated market positioning and high levels of profitability and free cash flow generation put Web.com in a good position to deliver long-term shareholder value.

Finally, before I turn it back over to David, I'd like to say that as I reflect on my 20-year journey of helping to build Web.com, it has certainly been both an exciting and rewarding experience. I will miss working with my team, my colleagues and especially, my mentor and CEO, David Brown. But I look forward to the next chapter.

Now I'd like to hand the call back over to David for some closing remarks.

David Brown

Thanks, Kevin. I want to leave you with my thoughts on Web.com's long-term prospects and what it takes to get there. We remain confident and committed to our strategy, which reflects the needs in the market and plays to our strengths of Web.com. Our long-term goal of mid- to high single digit revenue growth and high single to double-digit EBITDA growth are unchanged, although the timing to get there will be longer, considering the two large customer losses we discussed. In order to reach this benchmark, retail will need to stay at the current rates of stabilization, Web.com for Enterprise sustain its underlying mid-teens or greater growth rate and Premium improve to a low teens growth rate.

The results we're seeing in retail are around retention and our upsell and cross-sell initiatives give us increasing confidence we can maintain stability in this part of our business. Web.com for Enterprise has already demonstrated it can grow sustainably in the mid- to high teens. Premium Services offers similar solutions as Web.com for Enterprise, which gives us conviction in the market demand, and Premium Services has an improving growth trajectory. Our internal efforts to improve retention can have a meaningful and compounding effect on our growth rate and building out additional verticals over time can be a big growth driver as well.

Finally, there is inherent operating leverage in our business model, and as the faster growing parts of the business gain scale, we expect to improve our profitability.

With that, we'd now like to begin the Q&A session. Operator, if you could please begin.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Naved Khan with SunTrust.

Naved Khan

I had two. David, previously -- and this is on the Q4 call, I guess, one of my questions was about your plans to add sales headcount this year, and you said, you didn't really have, like, a big ramp in the work. So, wondering if you've been slower than what you had anticipated even with that or it's been a productivity issue, meaning that maybe the productivity is not at a level where you anticipated it might be for at least for the Q1 period? And then a quick follow-up on this retention. It improved sequentially. In fact, it's probably at the highest in the last four or five quarters. But what are the thing that are sort of contributing to that? And do you see it climbing back to historical levels, i.e. before 2017?

David Brown

Yes. So, on the sales headcount, we do still see some modest additions of sales staff in our Premium Services group through the rest of the year -- through this year. The topic that we alluded to really had to do with our hiring during the end of the fourth quarter in the November and December time frames. We missed our headcount, new hire headcount, targets by a small amount and essentially the compounded effect of that through the year is really what we were alluding to when we said it's contributing to just a little bit behind our expectations.

Naved Khan

Got it. And then on the retention?

David Brown

On the retention, we have a number of initiatives that we're working on in Premium Services and in retail that are resulting in improvements in our churn rate, and therefore, positive retention. And then adding to that, we've kind of hit the anniversary, we're well past the anniversary because this is a 12-month trailing metric, it included Yodle retention information, which was diluting us and now we've gone beyond that. So, it's really two things happening. And I think you will see this particular metric, we believe, it will improve over time.

Naved Khan

Okay. That's helpful. And then so the things that you can do by leveraging Acquisio and the AI technology, that is on top of these number?

David Brown

That's right. We believe that will be a significant positive. And we're literally in the process right now. It's actually rolling out to our customers. But we have a number of other initiatives in other areas that are making meaningful improvements in retention. So, we're very optimistic that that's going to become one of the real strengths of this business.

Operator

And we'll take our next question from Sterling Auty with JPMorgan.

Jackson Ader

This is Jackson Ader on for Sterling tonight. I just want to follow up on one of the large customers that you said churned off here at the end of the first quarter. The Premium Services customer that left due to new management, can you give us any color on what the new management team's rationale for leaving was? Where did they go? What are their plans? Whom did they switch to? And what would the kind of the incidence for wanting to change?

David Brown

Sure. Regrettably, they moved the business to a family member, who's in the business, and it's a simple story, one that we rarely run into. Everybody has some family members, but not all of them are in digital marketing. And in this case, we lost out to a family member.

Jackson Ader

All right. And then David, I think you said in your prepared remarks that there was one other customer in the Enterprise segment that's similar to the one that just took their digital marketing in-house. Did I hear that correctly? And do you -- does that then imply that you see some sort of writing on the wall that, that other customer may be going in-house soon?

David Brown

First off, it was -- we have one other customer in Premium Services that is significant, but frankly, far smaller than the one we just lost. And the only reason we wanted to point it out is to give you some sense of whether we had a lot of these or not -- a lot of risk here, we don't. We have one other customer that's of any meaningful size. Most of the customers -- in Premium. Most of the customers in Premium are real small businesses.

Operator

And we'll take our next question from Sam Kemp with Piper Jaffray.

Sam Kemp

On Premium Services, so it declined sequentially. Can you just talk about -- was that because of the exit of the customer that you had within Premium Services? It kind of sounded like that happened at the very end of the quarter. If it wasn't that, then can you can just talk about what's causing that decline? And then the second thing, on the large customer, I guess, I think most of us saw that back in 2014, when the exit of the Enterprise business happened, that's when most of the Premium customers were gone. Can you just talk about how many customers you have that are doing more than $1 million a year and volume with you and [indiscernible] with you? And then the last question would just be, given that you guys have now have the capital structure in place, can you just talk about what your plans are for capital returns, kind of, throughout the year?

Kevin Carney

This is Kevin. Let me take the first and maybe part of the second. So, on the question on the Premium Services, again, as we pointed out, 4% year-over-year growth, which I think is important. And when we laid out our guidance for the quarter, we had noted -- and again, as we pointed out, we exceeded our expectations for the quarter overall. 4% growth in Premium year-over-year but you do have fewer days in the quarter, which was -- did have an impact, not just in Premium but in the other businesses as well, and that's what was reflected in our guidance. But that's probably the principal reason I would point to. And then as you mentioned, yes, the larger Premium Services customer did leave at the tail end of the quarter and did have some impact in the quarter, but it would be the number of days that would be the key. In terms of the large enterprises, the -- years ago, we had talked about -- this was a different business. We had what we call national accounts that came from our Network Solutions acquisition, again, back in 2011, very different business than what we're talking about today. Today, in our Web.com for Enterprise, this is again a -- we're going -- we're helping small businesses, so to speak, that are owned or operated -- that are either owned by a large enterprise or a part of a franchise or network. But they need local advertising that then we had years ago was national advertising for a large enterprise. So very different business. Beyond the customer that we just lost in Web.com for Enterprise, there are probably, approximately, half a dozen, significant of size as you said, but they are much more smaller than the one that we just lost. Where this one was about $1 million a month, the others I'm referring to are more like in the hundreds of thousands per month. But there are half a dozen of them. And then I'd say, it scales down pretty quickly after that within Web.com for Enterprise.

David Brown

And in terms of capital allocation strategy, we're -- we plan to continue to be both balanced in our approach as well as opportunistic. And so, we see -- as we see opportunities either for acquisitions, deleveraging, stock repurchase, we'll take advantage of those opportunities, but we'll continue to move the money around based on what's the best use of the capital at that time.

Operator

And we will take our next question from Deepak Mathivanan with Barclays.

Deepak Mathivanan

Two quick ones. So first, can you elaborate a little bit on the Premium segment, maybe from a product standpoint? With all the moving pieces, can you maybe parse out the growth rates of various products inside between TORCHx, Lighthouse and Leads by Web? That's the first one. And then the second one, going back to your response on customer declines, it's only, if you think about your long-term outlook for potential retail business stabilizing, how confident are you that in this environment, retail can potentially return to growth or stabilize if customer losses are going to sustain?

David Brown

So, on the Premium segment, I think, it's probably worth noting that in the TORCHx and the Lighthouse products are the -- are growing at very, very strong rates. Lead Stream is probably behind them but is growing. So just in terms of giving you some relative ideas, we think the strongest demand for TORCHx and for Lighthouse Dental and then followed by Lead Stream. And those are frankly, the core products in that particular business unit. And now to the question of customer declines, we do see a -- an end in sight. This is the old strategy of the company when we competed in a much more aggressively to acquire customers and domains and in DIY space. We acquired a lot of them, and that's what you saw in the graph. We had a much more robust acquisition strategy, we were getting more units. As we pulled money away from that, that unit volume went down. We're actually seeing improvements in our retention in those products. So, we will see, I think, a gradual improvement. We're just not ready to ring the bell on that. We think we'll likely see levels like we have seen here this quarter for a few more quarters, and then you'll begin to see a gradual improvement. And then of course, we're investing now for a smaller number of subscribers but much, much higher ARPU. That's part of our strategy.

Operator

And we'll take our next question from Lloyd Walmsley with Deutsche Bank.

Lloyd Walmsley

First, it sounds like you are making nice product enhancements to TORCHx and Lighthouse. I'm wondering how you see that impacting the business or unit economics. Is it more just going to help with customer acquisition and retention? Or do you see this helping, generally, more revenue either through pricing or ARPU in those businesses? And then secondly, can you give us a bit more color on, kind of, where we are in the Premium business, sales restructuring and kind of realignment and approach? And elaborate a bit on what you're seeing in terms of sales efficiency and the results of that?

Kevin Carney

Okay. Let me start -- David, I'll start on the first one with the product enhancements and maybe you could elaborate, if necessary. But the -- I would say, a couple of things that we'll benefit from: one is certainly better retention. I think that historically, these products, even as they have existed through a very, very high retention because they are high-value and very operationally embedded in our small dental practice business, for example. And as we continue to add additional enhancements, we add more value and I think that will drive improved retention. The other thing I would say is -- and of course, with that, is revenue opportunity. Because we sell them and we -- the lower we keep them, the better that will assist our revenue growth overall. The other thing I would say, just as it relates to these products, is margin opportunity. That -- I commented earlier in the script that with the growth in some of our online market, of course, that carries Google spend, we have these vertical solutions that are more software-like, which have software-like margins. And so, to the extent we introduce more of them and sell more of them, we don't have that margin enhancement opportunity.

David Brown

And relative to the Premium sales organization, that -- much of that restructuring is now behind us. We've retrained, we've regrouped around what products we're going to sell. I've outlined the 3 main products of the group. We're adding staff to the group again. There is conversion rate. Their sales hit rate is continuing to improve. So, their -- the infrastructure that we built for that team, training and development, the quality of people we're bringing in as new employees, even our sales staff retention, all of those metrics are improving in the business. And as a result, our sales close rate is improving. I'd say the big initiative for Premium for this year is going on right now, and that has more to do with retention of customers and that is to bring the Acquisio technology into the platform, and we are well on our way to effecting that change. We think that's going to drive, frankly, more leads at lower cost to customers and that will result in improved retention as well.

Operator

And we'll take our next question from Tim Klasell with Northland Securities.

Tyler Wood

This is Tyler Wood on for Tim. First off, could you give us an update on the international opportunity? Maybe what geographies you've seen advancing recently? And then specifically, I think you talked about Latin America and England before, but what are you seeing outside of that?

David Brown

I would tell you that most of our efforts are focused on using our Latin America acquisition as a platform to begin to penetrate other countries in Latin America, whether it's Mexico or Columbia, Peru, Chile. We're moving our team and our initiatives throughout Latin America as a result of that. And that Latin American group is growing very nicely. And we're continuing to evolve our U.K., and that's really our principal focus right now. We do have some business development focus outside of those areas -- outside of those really two regions, but it's isolated to some new product development.

Operator

And we'll take our next question from Hamed Khorsand with BWS Financial.

Hamed Khorsand

So first off, can you explain why ARPU declined sequentially if you are losing low dollar amount subscribers?

Kevin Carney

Yes. Again, what it has to do -- someone asked a related question, which was just a sequential decline in Premium Services, and I pointed out that as we gave our guidance, we guided to a sequential, the reduction in revenue based on number of days as well as a reduction in ARPU. And again, the subscriber losses were within the range of our expectations as well. So, it's a function of reporting the same number of customers but less revenue because you have fewer days in the quarter.

Hamed Khorsand

Okay. And as far as subscriber losses go, it's been accelerating. I know, you're saying it's going to be similar. Similar within the range that you lost 60,000 or similar that it's going to be closer towards 80,000 or 100,000?

Kevin Carney

I think our indication is -- we had said in the tens of thousands and I think it's fair question. I mean, I think that we've seen 50,000, 60,000, and I would say, when we say similar expectations, that's kind of what we mean, in that range.

Hamed Khorsand

Okay. And then is there going to be an increased cost in Q2 or actually in the full year as far as your investment in sales force is concerned? And just to bring in the onboarding of the new sales force?

Kevin Carney

No. I think that as David mentioned, we kind of ended -- we weren't at the levels that we had anticipated. We have increased our sales resources. We look at what's reflected in our guidance for the year. Let's just say from a dollar perspective and sales and marketing for quarter, and of course, in that line, Hamed, you have customer service cost as well and some of the cost realignment that David outlined on the call would fall in that area as well. So, you have some reduction of cost there. And overall, I would just say that I would actually expect to see sales and marketing maybe down slightly and then fairly steady over the course of the year.

Hamed Khorsand

Okay. Because the reason I asked that because in the last earnings call, you guys were talking about how you are happy with the sales force and weren't looking to any make additions and looks like there was each turnaround there. So, it would imply that there would have to be some sort of increase as well.

Kevin Carney

No, no. I think, you are right. I mean, I think what we had said is, we talked about some of the key initiatives and drivers, and then over the course of last year, we had really increased pretty dramatically sales productivity. We didn't think it was -- we were done there, we'd see some benefit over 2018. But the focus for 2018, as David said, would be around customer retention and that would be probably the key driver to revenue growth, particularly in Premium Services. But as he said, we kind of started at a lower point than we had anticipated. But we didn't have -- yes, okay.

Operator

We'll take our next question from Sameet Sinha with B. Riley FBR.

Sameet Sinha

A couple of questions. So, I guess, the first one is on the sales hiring. Was this slowed in the end of last year? Was there competitive reasons? Or it was just some internal things that prevented you from going out and hiring? That's my first question. Second is, in terms of -- the way I'm looking at your numbers and it just seems like the gross adds of your subscribers is down like 65% year-over-year. So, is that -- as the retention goes up, should we expect gross adds to continue to decline further to meet your guidance of, kind of, net adds of similar levels? And associated question would be, what sort of ARPU growth should we assume going forward?

Kevin Carney

I think that you are right. And I think that in terms of the gross adds being down and I think that's the point we've been trying to make is -- and you can see it in the retention rate as you alluded to -- that retention is improvement. This is not a churn issue, this is a gross add issue. If you want to call it an issue, it's really by design. It reflects our strategy today. We are selling -- requiring fewer higher value customers than we were a year ago or two years ago. And so, I think that when we talk about the retention benefits that we expect in Premium, in particular, I think we'll see those benefits in our net adds, over time, and then I think, finally, ARPU as well. I think that we've said that ARPU, because of this -- again, the driver for revenue, as we talk about growth in the second half, is going to be ARPU growth. And that's going to come from selling more Premium and Web.com for Enterprise products.

David Brown

And then in terms of the sales hiring shortfall, it was really very narrowly focused around the November-December time frame. And it was slight. It wasn't significant. And we chalked it up to just difficulty hiring during the holiday season. We've since bounced back and are confident that we can add sales people back into the mix. We're also making progress on keeping our sales people and getting them to be successful, which is, frankly, the best driver of profitability.

Operator

And there are no further questions at this time. I'd like to turn the call back over to management for any additional or closing remarks.

David Brown

Thank you all for joining us today to review our first quarter results and the outlook for our business. We appreciate your interest and look forward to speaking with you about our progress. We'll be participating in the SunTrust and JPMorgan conferences during the quarter. And as always, feel free to contact us here at Web.com if you have additional questions. Thank you, and good night.

Operator

And that concludes today's presentation. Thank you for your participation. You may now disconnect.