Strong financial and operating performance exceeding profitability expectations and at the high end of revenue guidance
Repurchased 3 million shares for $74.4 million
JACKSONVILLE, Fla., Nov. 07, 2017 (GLOBE NEWSWIRE) -- Web.com Group, Inc. (NASDAQ:WEB), a leading global provider of a full range of Internet services and online marketing solutions for small businesses, today announced results for the third quarter ended September 30, 2017.
"Web.com reported third quarter financial results that exceeded our profitability expectations and were at the high end of our revenue guidance. We made good progress executing against our strategic objectives for 2017 and saw positive momentum across our product groupings. Retail had a stronger than anticipated quarter, vertical market solutions gained traction and Web Brand Networks, our franchise and multi-location channel, benefited from our land and expand strategy," said David L. Brown, chairman, chief executive officer and president of Web.com.
Brown added, "We also continued to utilize our strong free cash flow and balance sheet by repurchasing 3 million shares, representing approximately 6% of the company's outstanding common stock, which will benefit current and future shareholders going forward. We are focused on building on the progress we have made so far in 2017 to position the company for long-term growth."
Summary of Third Quarter 2017 Financial Results:
Total revenue, calculated in accordance with U.S. generally accepted accounting principles (GAAP), was $188.6 million for the third quarter of 2017, compared to $190.7 million for the third quarter of 2016. Non-GAAP revenue was $189.8 million for the third quarter of 2017, compared to $192.8 million in the comparable prior year period. Results were at the high end of both GAAP and non-GAAP revenue guidance of $185.8 to $188.8 million and $187 to $190 million, respectively.
GAAP operating income was $23.6 million for the third quarter of 2017, representing a 13% GAAP operating margin, compared to $18.1 million, representing a 9% GAAP operating margin, for the third quarter of 2016. Non-GAAP operating income was $43.5 million for the third quarter of 2017, representing a 23% non-GAAP operating margin, compared to $43.9 million for the third quarter of 2016, representing a 23% non-GAAP operating margin.
GAAP net income was $8.3 million, or $0.16 per diluted share, for the third quarter of 2017, representing a 4% GAAP net income margin. GAAP net income was $3.3 million, or $0.07 per diluted share, for the third quarter of 2016, representing a 2% GAAP net income margin.
Adjusted EBITDA was $48.8 million for the third quarter of 2017, representing an adjusted EBITDA margin of 26%, surpassing the high end of the Company's adjusted EBITDA guidance of $46.5 to $48.5 million. The Company had adjusted EBITDA of $49.6 million for the third quarter of 2016, representing a 26% adjusted EBITDA margin.
The Company generated cash from operations of $33.9 million for the third quarter of 2017, compared to $44.5 million of cash flow from operations for the third quarter of 2016.
Third Quarter Operating Highlights:
Web.com's total net subscribers were approximately 3,460,000 at the end of the third quarter of 2017, declining approximately 30,000 from the end of the second quarter of 2017. The net subscriber reduction during the three months ended September 30, 2017, includes a decrease of approximately 6,000 subscribers that is an adjustment to final subscriber counts related to the DonWeb.com acquisition from the first quarter of 2017.
Web.com's average revenue per user (ARPU) was $18.04 for the third quarter of 2017 compared to $18.47 for the third quarter of 2016. ARPU increased sequentially during the third quarter of 2017 from $17.72 during the second quarter of 2017.
Web.com's trailing twelve month customer retention rate was 84.4% for the third quarter of 2017.
Conference Call Information Management will host a conference call today, November 7, 2017, at 5:00 p.m. ET, to discuss Web.com's third quarter financial results and current business outlook. There will be an accompanying slide presentation which will be available on the Investor Relations page of Web.com's website (http://ir.web.com), along with a live webcast and replay of the call. To access the call, dial 888-442-4145 (domestic) or 719-457-2618 (international). A replay of this conference call will be available until November 21, 2017, at 844-512-2921 (domestic) or 412-317-6671 (international). The replay conference ID is 4120995.
About Web.com Web.com Group, Inc. (Nasdaq:WEB) is a global provider of a full range of Internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products, eCommerce solutions and call center services. For more information, please visit www.web.com; follow the company on Twitter @webdotcom or on Facebook at www.facebook.com/web.com.
Note to Editors: Web.com is a registered trademark of Web.com Group, Inc.
Use of Non-GAAP Financial Measures
Some of the measures in this press release are non-GAAP financial measures within the meaning of the SEC Regulation G. Web.com believes presenting non-GAAP measures is useful to investors, because it describes the operating performance of the Company, in ways that management views or uses to assess the performance of the Company. Web.com's management uses these non-GAAP measures as important indicators of the Company's past performance and in planning and forecasting performance in future periods. The non-GAAP financial information Web.com presents may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.
You are encouraged to review the reconciliation of non-GAAP financial measures to GAAP financial measures included elsewhere in this press release.
Relative to each of the non-GAAP measures Web.com presents, management further sets forth its rationale as follows:
Non-GAAP Revenue. Web.com excludes from non-GAAP revenue the impact of the fair value adjustment to amortized deferred revenue because management believes that excluding such measures helps management and investors better understand the Company's revenue trends.
Non-GAAP Operating Income and Non-GAAP Operating Margin. Web.com excludes from non-GAAP operating income and non-GAAP operating margin, amortization of intangibles, asset impairment, stock-based compensation charges, restructuring expenses, corporate development expenses and fair value adjustment to deferred revenue and deferred expense because management believes that adjusting for such measures helps management and investors better understand the Company's operating activities.
Adjusted EBITDA and Adjusted EBITDA Margin. Web.com excludes from adjusted EBITDA and adjusted EBITDA margin depreciation and amortization expense, loss on sale of assets, asset impairment, income tax provision, interest expense, interest income, stock-based compensation, fair value adjustments to deferred revenue and deferred expense, corporate development expenses and restructuring expenses, because management believes that excluding such items helps investors better understand the Company's operating activities.
Non-GAAP Cost of Revenue (excluding depreciation and amortization). Web.com excludes from non-GAAP cost of revenue (excluding depreciation and amortization) the fair value adjustment to deferred expense and stock based compensation charges because management believes that adjusting for such measures helps management and investors better understand the company's operating activities.
Free Cash Flow. Free cash flow is a non-GAAP financial measure that Web.com uses and defines as net cash provided by operating activities less capital expenditures. The Company considers free cash flow to be a liquidity measure which provides useful information to management and investors about the amount of cash generated by the business after the acquisition of property and equipment, which can then be used for investment opportunities.
In respect of the foregoing, Web.com provides the following supplemental information to provide additional context for the use and consideration of the non-GAAP financial measures used elsewhere in this press release:
Stock-based compensation. These expenses consist of expenses for employee stock options and employee awards under Accounting Standards Codification ("ASC") 718-10. While stock-based compensation expense calculated in accordance with ASC 718-10 constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because such expense is not used by management to assess the core profitability of the Company's business operations. Web.com further believes these measures are useful to investors in that they allow for greater transparency to certain line items in the Company's financial statements. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Amortization of intangibles. Web.com incurs amortization of acquired intangibles under ASC 805-10-65. Acquired intangibles primarily consist of customer relationships, customer lists, non-compete agreements, trade names, and developed technology. Web.com expects to amortize for accounting purposes the fair value of the acquired intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated. Although the intangible assets generate revenue, the Company believes the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Depreciation expense. Web.com records depreciation expense associated with its fixed assets. Although its fixed assets generate revenue for Web.com, the item is excluded because management believes certain non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Restructuring expense. Web.com has recorded restructuring expenses and excludes the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Fair value adjustment to deferred revenue and deferred expense. Web.com has recorded a fair value adjustment to acquired deferred revenue and deferred expense in accordance with ASC 805-10-65. Web.com excludes the impact of these adjustments from its non-GAAP measures, because doing so results in non-GAAP revenue and non-GAAP net income which are reflective of ongoing operating results and more comparable to historical operating results, since the majority of the Company's revenue is recurring subscription revenue. Excluding the fair value adjustment to deferred revenue and deferred expense therefore facilitates management's internal comparisons to Web.com's historical operating results.
Corporate development expenses. Web.com incurred expenses relating to acquisitions and the successful integration of acquisitions. Web.com excludes the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Gains or losses from asset sales or impairment and certain other transactions. Web.com excludes the impact of asset sales or impairment and certain other transactions including debt extinguishments and the sale of equity method investment from its non-GAAP measures because the impact of these items is not considered part of the company's ongoing operations.
Monthly average revenue per user, or ARPU. ARPU is a metric the Company measures on a quarterly basis. The Company defines ARPU as quarterly non-GAAP subscription revenue divided by the average of the number of subscribers at the beginning of the quarter and the number of subscribers at the end of the quarter, divided by three months. The Company excludes from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition-related write downs.
Forward-Looking Statements This press release includes "forward-looking statements" including, without limitation, the statements regarding whether the repurchase of 3 million shares will benefit current and future shareholders going forward and building on progress made so far in 2017 to position the company for long-term growth are subject to risks, uncertainties and other factors that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements. As a result of the ultimate outcome of such risks and uncertainties, Web.com's actual results could differ materially from those anticipated in these forward-looking statements. These statements are based on Web.com's current beliefs or expectations, and there are a number of important factors that could cause the actual results or outcomes to differ materially from those indicated by these forward-looking statements, including, without limitation, risks related to the successful offering of the products and services of Web.com; and other risks that may impact Web.com's business. Other risk factors are set forth under the caption, "Risk Factors," in Web.com's Annual Report on Form 10-K for the year ended December 31, 2016 and Form 10-Q for the quarter ended June 30, 2017, as filed with the Securities and Exchange Commission, which are available on a website maintained by the Securities and Exchange Commission at www.sec.gov. Web.com expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein as a result of new information, future events or otherwise.
Cost of revenue (excluding depreciation and amortization)
59,414
58,380
175,863
167,189
Sales and marketing
51,026
55,304
151,168
157,867
Technology and development
16,331
15,538
50,655
47,896
General and administrative
20,168
19,094
61,274
54,391
Restructuring expense
424
1,133
736
2,047
Asset Impairment
—
1,979
143
1,979
Depreciation and amortization
17,601
21,165
53,435
59,351
Total cost of revenue and operating expenses
164,964
172,593
493,274
490,720
Income from operations
23,603
18,093
67,142
32,583
Interest expense, net
(8,567
)
(8,270
)
(24,603
)
(22,530
)
Net income before income taxes
15,036
9,823
42,539
10,053
Income tax expense
(6,735
)
(6,477
)
(19,676
)
(7,976
)
Net income
$
8,301
$
3,346
$
22,863
$
2,077
Other comprehensive income:
Foreign currency translation adjustments
26
(198
)
1
(1,405
)
Unrealized gain on investments, net of tax
—
—
1
29
Total comprehensive income
$
8,327
$
3,148
$
22,865
$
701
Basic earnings per share:
Net income per basic common share
$
0.17
$
0.07
$
0.47
$
0.04
Diluted earnings per share:
Net income per diluted common share
$
0.16
$
0.07
$
0.45
$
0.04
Web.com Group, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
September 30, 2017
December 31, 2016
Assets
(unaudited)
Current assets:
Cash and cash equivalents
$
7,744
$
20,447
Accounts receivable, net of allowance of $1,473 and $1,695, respectively
24,539
20,567
Prepaid expenses
15,157
12,311
Deferred expenses
63,649
60,217
Other current assets
1,666
1,872
Total current assets
112,755
115,414
Property and equipment, net
57,046
53,132
Deferred expenses
47,393
49,127
Goodwill
882,423
871,751
Intangible assets, net
378,763
413,127
Other assets
22,995
11,282
Total assets
$
1,501,375
$
1,513,833
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
20,422
$
19,619
Accrued expenses
13,171
14,475
Accrued compensation and benefits
19,430
18,307
Deferred revenue
238,274
230,206
Current portion of debt
31,266
16,847
Deferred consideration
23,122
20,244
Other liabilities
5,553
5,034
Total current liabilities
351,238
324,732
Deferred revenue
189,845
195,859
Long-term debt
634,377
647,294
Deferred tax liabilities
69,595
80,135
Other long-term liabilities
19,627
30,361
Total liabilities
1,264,682
1,278,381
Stockholders' equity:
Common stock, $0.001 par value per share: 150,000,000 shares authorized, 48,657,493 and 50,278,137 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
49
50
Additional paid-in capital
582,677
578,486
Treasury stock at cost, 4,509,824 and 3,146,012 shares at September 30, 2017 and December 31, 2016, respectively
(116,255
)
(62,430
)
Accumulated other comprehensive loss
(4,018
)
(4,020
)
Accumulated deficit (1)
(225,760
)
(276,634
)
Total stockholders' equity
236,693
235,452
Total liabilities and stockholders' equity
$
1,501,375
$
1,513,833
(1) The Company adopted Accounting Standards Update ("ASU") 2016-09 on January 1, 2017 using the modified retrospective transition method and recorded a $28.0 million adjustment for previously unrecognized excess tax benefits in opening accumulated deficit on January 1, 2017.
Web.com Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
September 30,
Nine months ended September 30,
2017
2016
2017
2016
Cash flows from operating activities
Net income
$
8,301
$
3,346
$
22,863
$
2,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
17,601
21,165
53,435
59,351
Stock based compensation
5,698
5,008
17,358
15,208
Deferred income taxes
5,482
5,609
16,658
6,208
Amortization of debt issuance costs and other
4,138
3,630
11,537
10,315
Asset impairment
—
1,979
143
1,979
Changes in operating assets and liabilities:
Accounts receivable, net
(4,239
)
(774
)
(3,254
)
(2,532
)
Prepaid expenses and other assets
(679
)
368
(5,895
)
(10,567
)
Deferred expenses
516
1,603
(1,019
)
(983
)
Accounts payable
(450
)
1,673
(619
)
88
Accrued expenses and other liabilities
(364
)
(1,586
)
(17
)
(2,105
)
Accrued compensation and benefits
4,010
5,069
338
(2,306
)
Deferred revenue
(6,150
)
(2,631
)
(698
)
13,014
Net cash provided by operating activities
33,864
44,459
110,830
89,747
Cash flows from investing activities
Business acquisitions
—
—
(8,587
)
(303,262
)
Capital expenditures
(6,219
)
(9,368
)
(16,792
)
(17,674
)
Other
—
(247
)
—
(1,547
)
Net cash used in investing activities
(6,219
)
(9,615
)
(25,379
)
(322,483
)
Cash flows from financing activities
Stock issuance costs
(17
)
(16
)
(21
)
(22
)
Common stock repurchased
(79
)
(1,013
)
(3,638
)
(4,246
)
Payments of long-term debt
(15,000
)
—
(42,954
)
(4,937
)
Payments on revolving credit facility
(10,000
)
(23,000
)
(66,313
)
(50,563
)
Proceeds from exercise of stock options
4,149
2,611
13,128
3,816
Deferred consideration payment
—
—
(18,933
)
—
Proceeds from borrowings on long-term debt
—
—
50,000
200,000
Proceeds from borrowings on revolving credit facility
42,000
—
49,000
115,000
Debt issuance costs
(8
)
—
(1,935
)
(5,700
)
Common stock purchases under stock repurchase plan
(74,382
)
(555
)
(76,463
)
(17,464
)
Net cash (used in) provided by financing activities
(53,337
)
(21,973
)
(98,129
)
235,884
Effect of exchange rate changes on cash
(13
)
(3
)
(25
)
(36
)
Net (decrease) increase in cash and cash equivalents
(25,705
)
12,868
(12,703
)
3,112
Cash and cash equivalents, beginning of period
33,449
8,950
20,447
18,706
Cash and cash equivalents, end of period
$
7,744
$
21,818
$
7,744
$
21,818
Supplemental cash flow information
Interest paid
$
4,868
$
5,370
$
13,680
$
12,221
Income taxes paid
$
1,590
$
741
$
3,163
$
2,787
Web.com Group, Inc.
Reconciliations of GAAP to Non-GAAP Results
(in thousands, except for per share data)
(unaudited)
Three months ended September 30,
Nine months ended September 30,
2017
2016
2017
2016
Reconciliation of GAAP revenue to non-GAAP revenue
GAAP revenue
$
188,567
$
190,686
$
560,416
$
523,303
Fair value adjustment to deferred revenue
1,202
2,108
4,239
16,704
Non-GAAP revenue
$
189,769
$
192,794
$
564,655
$
540,007
Reconciliation of GAAP operating income to non-GAAP operating income
GAAP operating income
$
23,603
$
18,093
$
67,142
$
32,583
Amortization of intangibles
12,325
15,461
37,288
43,608
Loss on sale of assets
2
—
2
—
Asset impairment
—
1,979
143
1,979
Stock based compensation
5,698
5,008
17,358
15,208
Restructuring expense
424
1,133
736
2,047
Corporate development
249
57
1,016
3,925
Fair value adjustment to deferred revenue
1,202
2,108
4,239
16,704
Fair value adjustment to deferred expense
37
80
140
232
Non-GAAP operating income
$
43,540
$
43,919
$
128,064
$
116,286
Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin
13
%
9
%
12
%
6
%
Amortization of intangibles
6
8
7
8
Loss on sale of assets
—
—
—
—
Asset impairment
—
1
—
—
Stock based compensation
3
3
3
3
Restructuring expense
—
1
—
1
Corporate development
—
—
—
1
Fair value adjustment to deferred revenue
1
1
1
3
Fair value adjustment to deferred expense
—
—
—
—
Non-GAAP operating margin
23
%
23
%
23
%
22
%
Reconciliation of GAAP net income to adjusted EBITDA
GAAP net income
$
8,301
$
3,346
$
22,863
$
2,077
Depreciation and amortization
17,601
21,165
53,435
59,351
Loss on sale of assets
2
—
2
—
Asset impairment
—
1,979
143
1,979
Stock based compensation
5,698
5,008
17,358
15,208
Restructuring expense
424
1,133
736
2,047
Corporate development
249
57
1,016
3,925
Fair value adjustment to deferred revenue
1,202
2,108
4,239
16,704
Fair value adjustment to deferred expense
37
80
140
232
Interest expense, net
8,567
8,270
24,603
22,530
Income tax expense
6,735
6,477
19,676
7,976
Adjusted EBITDA
$
48,816
$
49,623
$
144,211
$
132,029
Reconciliation of GAAP net income margin to adjusted EBITDA margin
GAAP net income margin
4
%
2
%
4
%
—
%
Depreciation and amortization
9
11
9
11
Loss on sale of assets
—
—
—
—
Asset impairment
—
1
—
—
Stock based compensation
3
3
3
3
Restructuring expense
—
1
—
1
Corporate development
—
—
—
1
Fair value adjustment to deferred revenue
1
1
1
3
Fair value adjustment to deferred expense
—
—
—
—
Interest expense, net
5
4
5
4
Income tax expense
4
3
4
1
Adjusted EBITDA margin
26
%
26
%
26
%
24
%
Reconciliation of net cash provided by operating activities to free cash flow
Net cash provided by operating activities
$
33,864
$
44,459
$
110,830
$
89,747
Capital expenditures
(6,219
)
(9,368
)
(16,792
)
(17,674
)
Free cash flow
$
27,645
$
35,091
$
94,038
$
72,073
Net cash used in investing activities
$
(6,219
)
$
(9,615
)
$
(25,379
)
$
(322,483
)
Net cash (used in) provided by financing activities
$
(53,337
)
$
(21,973
)
$
(98,129
)
$
235,884
Reconciliation of GAAP cost of revenue (excluding depreciation and amortization) to non-GAAP cost of revenue (excluding depreciation and amortization)
Cost of revenue (excluding depreciation and amortization)
$
59,414
$
58,380
$
175,863
$
167,189
Less: Fair value adjustment to deferred expenses
(37
)
(80
)
(140
)
(232
)
Less: Stock based compensation
(275
)
(270
)
(826
)
(1,033
)
Non-GAAP cost of revenue (excluding depreciation and amortization)
$
59,102
$
58,030
$
174,897
$
165,924
Reconciliation of GAAP revenue to non-GAAP subscription revenue used in ARPU
GAAP revenue
$
188,567
$
190,686
Fair value adjustment to deferred revenue
1,202
2,108
Non-GAAP revenue
$
189,769
$
192,794
Professional services and other revenue
(1,809
)
(1,915
)
Non-GAAP subscription revenue used in ARPU
$
187,960
$
190,879
Average subscribers (in thousands)
3,472
3,445
ARPU (Non-GAAP subscription revenue per subscriber over 3 month period)
$
18.04
$
18.47
Web.com Group, Inc.
Reconciliations of GAAP to Non-GAAP Results
(in thousands, except for per share data)
(unaudited)
Reconciliation of GAAP revenue to non-GAAP subscription revenue used in ARPU
Three months ended June 30, 2017
GAAP revenue
$
186,731
Fair value adjustment to deferred revenue
1,328
Non-GAAP revenue
$
188,059
Professional services and other revenue
(2,220
)
Non-GAAP subscription revenue used in ARPU
$
185,839
Average subscribers (in thousands)
3,497
ARPU (Non-GAAP subscription revenue per subscriber over 3 month period)
$
17.72
Reconciliation of GAAP revenue to non-GAAP revenue
Guidance for three months ended September 30, 2017 as of August 3, 2017
GAAP revenue
$
185,800
$
188,800
Fair value adjustment to deferred revenue
1,200
1,200
Non-GAAP revenue
$
187,000
$
190,000
Note that the Company has not reconciled Adjusted EBITDA guidance to GAAP net income (loss) because it does not provide guidance on GAAP net income (loss) or the reconciling items between Adjusted EBITDA and net income (loss) as a result of the substantial uncertainty regarding, and the potential substantial variability of, these items. The actual amount of net income (loss) and such responding reconciling items will have a significant effect on Adjusted EBITDA. Accordingly a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.
