Domain Names Help Web.com Group, Inc. (WWWW) To Get A Foot In The Door of SMBs

Headquartered in Jacksonville, Florida and listed in 2005, Web.com Group, Inc. (NASDAQ:WWWW) is a leading provider of internet services and online marketing solutions for small- and medium-sized businesses (SMBs). Web.com meets the needs of SMBs anywhere along their lifecycle by offering a full range of online services and support, including domain name registration, website design, search engine optimization, internet marketing and local sales leads, social media and mobile solutions, shopping cart software, eCommerce website design and call center services. Web.com completed its acquisition of 100% of the equity interests in Net Sol Parent LLC, a provider of global domain names, web hosting and online marketing services for a purchase price of $569.0 million consisting of $405.1 million in cash and the issuance of 18 million shares of Web.com common stock valued at $9.16 per share on Oct. 27, 2011.

Business Quality

Web.com has a recurring revenue base with high visibility. It currently derives 97% or more of its revenue from fees associated with subscription services, which are generally sold through web services, online marketing, eCommerce, and domain name registration offerings. Annual average monthly customer churn, which is calculated as customer cancellations in the quarter divided by the sum of the number of subscribers at the start of the quarter and the number of new subscribers added during the quarter divided by three months, fell from 3.6% in fiscal 2009 to 1.5% and 1.0% in fiscal 2011 and 2012 respectively. Customer churn for Web.com is likely to remain stable going forward with the aging of its customer base, as renewal rates tend to be higher for longer term customers.

Web.com has a large installed subscriber base, which provides for significant growth potential through cross-selling or upselling. Prior to the acquisition of both Register.com and Network Solutions, Web.com did not operate its own registrar. Web.com gained nearly 2 million domain name customers from a premier domain name registrar with the acquisition of Network Solutions and it is now one of the industry’s largest providers of domain names. A domain name purchased from Web.com typically costs $100 for the first year, but allows Web.com to get a foot in the door and introduce its other products to SMBs. One example is Web.com’s eWorks! XL, a comprehensive website design and publishing package targeted at getting SMBs online, priced at $95 per month. Since the acquisition of Network Solutions in October 2011, Web.com increased its Average Revenue Per User (ARPU) for its 3 million subscriber base from $12.86 to $13.77.

There is growing acceptance among SMB owners that an effective internet presence is critical to their marketing efforts and also signs indicating that businesses are spending an increasing proportion of their marketing on online channels in place of traditional media. According to Web.com’s 2011 10-K, approximately 44% of about 27 million SMBs had a website at the end of 2011. Web.com estimated that even among the 44% of SMBs that had a website, most were probably not effective at using the internet for marketing and business development. Web.com with its breadth and depth of proprietary products and services, is well-positioned to benefit from the secular trend of more brick & mortar businesses establishing an online presence and companies which are already online increasing their marketing budgets on new media.