Web.com Group Inc., ( WWWW)

Q3 2010 Earnings Call

November 2, 2010 05:06 pm ET

Executives

Timothy Dolan - ICR, Investor Relations

David Brown - Chairman and CEO

Kevin Carney - Chief Financial Officer

Analysts

Philip Dionisio - FBR Capital Markets

Gene Munster - Piper Jaffray

Jeff Martin - Roth Capital Partners

Stephen Ju - RBC Capital Markets

Unidentified Analyst - Lichtenburg

Unidentified Analyst - Unidentified Company

P resentation

Operator

Greetings and welcome to the Web.com Third Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Timothy Dolan of ICR. Thank you, Mr. Dolan. You may begin.

Timothy Dolan

Thank you. Good afternoon. And thank you for joining us today to review Web.com's third quarter 2010 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.

Please note that our remarks today contain forward-looking statements. The words expect, believe, 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 are risks and uncertainties that 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 there quarter ended June 30, 2010, for more information on these risks and uncertainties and other 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 financial measure is available at our website, www.web.com, under the Investor Relations tab. Also, please note that our webcast on today's call will be available on our website in the Investor Relations section.

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

David Brown

Thank you, Tim. And thank you all for joining us on the call to review our third quarter 2010 results. We are pleased with the company's execution during the initial quarter combining Register.com’s operation with Web.com.

The performance of both companies was consistent with or better than our expectations leading to third quarter non-GAAP revenue and profitability that was above the high end of our guidance. Although there is still much work ahead of us, all of the strategic reasons we moved ahead with the Register.com’s acquisition have been confirmed in the first few months of joining forces.

We have plans in place and are on track to achieve our cost savings objectives. Our teams have been hard at work in identifying how we can best modify our combined company’s opportunity from a sales prospective and those opportunities appear to be as good or even better than we initially anticipated. And we are also a faster-than-required start for paying down our debt related to the acquisition which is consistent with our previously shared commitment to use the strong cash flow from the combined company to deliver the company as quickly as possible.

We believe the significant expansion in our revenue, profitability and cash flow as a result of the Register.com’s acquisition will enable Web.com to generate substantial shareholder value over the next 12 to 18 months. We believe there is further upside potential with respect to generating shareholder value as we increase our sales and marketing investments aggressively in 2011 to restore growth in our combined company’s operations.

Taking a look at our results for the quarter, I would remind you that Register.com’s operations only contributed to Web.com’s results for approximately two of the three months of the quarter. The fourth quarter will be the first time our results reflect a full quarter of contribution from Register.com.

With that said, non-GAAP revenue which excludes the 5.7 million impact of the write-down of purchased deferred revenue for the third quarter was 38.5 million above the high end of our guidance, due primarily to the acquisition closing a few days earlier than anticipated.

From a profitability perspective, we delivered adjusted EBIDTA of 7.3 million or a 19% adjusted EBIDTA margin. This contributed to non-GAAP EPS of $0.20 which was well above our guidance of $0.13 to $0.14 due primarily to realizing a lower cash tax rate than anticipated, higher than expected revenue, as well as achieving some of the plan cost synergies earlier than expected.

Finally, we generated adjusted cash flow from operations excluding non-recurring payments associated with the Register.com acquisition of 7.1 million during the third quarter which compares to 5.1 million in the same quarter last year.

From a macro perspective, the market environment during the third quarter was largely consistent with our expectations. A small business community continues to face economic challenges and it remains uncertain when recovery will begin and how quickly it might ramp. Our view is based on talking to tens of thousands of small businesses every month and it was further confirmed by the most recent NFIB report. Their index which is focused on the SMB community shared a slight improvement in September from 88.8 to 89; however, this is still well below its historical average of 98 since March of 2007.

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