Overview: Web.com is the largest dedicated provider of assorted internet services to small businesses. These services include domain name registry through the recent acqusitions of Register.Com and Network Solutions as well as a variety of other applications. These other applications include everything from design and maintenance of a website to the management of local search to interfacing with social media sites such as Facebook and Linked-In as well as mobile. Other services include storage, webmail, analytics, lead generation, eCommerce, merchant services and budgeting. The company is the product of several acquisitions over the years the latest of which in fall 2011 (Network Solutions) transformed WWWW into a large scale (nearly 3mm customers) presence in its niche. Accordingly, the company took on significant leverage to do the deal though WWWW management has a reasonable plan to pay down debt quickly. This plan is aided by the strong cash flow dynamics of the combined entity.
Thesis: Web.com is significantly undervalued based on a reasonable earnings trajectory over the next few years. The company has a huge opportunity to upsell customers from both Register and Network Solutions as it possesses many more products, services and sales capabilities than either company had previously. Specifically, the two acqusitions give them nearly 3MM total customers up from a few hundred thousand previously to upsell. This is extremely attractive given that many of these customers are just the sort that are in need of WWWW's suite of products. Many have domain names and a nominal website but no capabilities whatsoever to actually benefit from any degree of online selling or recognition. This dynamic is already apparent with the company's Register.com customers acquired in the third quarter of 2010. Since that time, the company's overall ARPU has increased 13% to $17.38. The pro forma company ARPU includin Network solutions will go back to $12.86 and the company expects to be able to grow that number through upselling at a similar clip on the new significantly increased user base.
In addition, the company is targeting a minimum of $30 million of cost savings to be achieved over the next two years from the recent Network Solutions deal. This number seems extremely reasonable given that 75% of the savings relate to headcount reductions which were communicated at the time of the deal. In addition, the company is very well positioned to take advantage of the large migration of small businesses to the Internet that will unfold over the medium term. Their customers are the former White Pages advertisers (small businesses such as plumbers, restaurants, etc.) who are the last adopters but who clearly need some presence on the web. WWWW is the only company with scale that is solely dedicated to serving this market.
Financials: The company has guided to Non-Gaap earnings of $1.46 for 2012 putting the stock around 9x current year earnings. 2012 EBITDA should be in the $150 million range compared to current net debt of $705 million giving the company a net debt to '12 EBITDA ratio of 4.7x. These numbers going out a year or two should be greatly improved based on realization of cost savings, debt paydown and growth. for 2013, JP Morgan (today) put out an adjusted EPS estimate of $2.03 (6.4x earnings for a growing company). This should be achievable based on the company's guidance of $30mm of cost savings along with 6-8% revenue growth in 2012 and "low teens" revenue growth in 2013. Importantly, the company is not assuming any pickup in the economy in these targets. In addition, as much of the growth will be achieved by significantly enhanced marketing spend (factored into all of the company's guidance), WWWW has left itself the ability to pull back on certain spending should the economy deteriorate and still preserve profitability and interest converage. In addition, as far as debt paydown, the company benefits from a low cash tax rate (result of NOLs along with amortiztion) along with low levels of capital expenditures. As such, the company is targeting a leverage ratio of 3x by the end of 2013. The company benefits also from being a subscription business and has seen churn come down substantially in recent years despite the poor economic environment for small businesses. Pro forma for the NS deal, it is now running at an impressive level of around 1% per month including involuntary churn (small business closings).
Management: WWWW has a solid management team led by David Brown who has been CEO since August 2000 and has overseen the major acquisitions. Brown owns 2.5% of the company and has shown a strong sense for capital allocation. The company has been aggressive with its buyback program stepping in significantly in the wake of the 2008 market meltdown.
Why Cheap?Based on the above, it would appear that WWWW is trading at a deep discount to intrinsic value. This may be in part due to the following factors:
- General Atlantic (Private Equity firm) "overhang:" General Atlantic was the seller of Network Solutions after owning the company for four years and they received a portion of WWWW equity along with a large cash payment. Concurrent with WWWW's recent earnings release (and as required by the deal), the company filed an S-3 registering all 16.4mm of GA's shares. GA has made no indication of their plans though they do have a seat on the board. Once there is resolution to this situation, not only will the overhang be removed but presumably the liquidity of the stock will increase as well.
- No Obvious Comp: WWWW is a bit of an odd duck in the Internet space. It's closest competitor is probably Go Daddy (purchased by KKR and Silver Lake in 2011) though GD targets anyone who might need a domain name rather than small businesses. WWWW is ramping up their marketing spend to catalyze growth going forward having seen GD grow top line in the 20% range over recent years with a large advertising budget. Other than GD, the market is very fragmented with various players competing with WWWW in various areas but none with a similar combination of scale and focus.
- Perceived threat from the Google(s) of the world: There was a recent short story going around about Google potentially trying to compete with them more directly. This has been an on-again, off-again cited risk factor over the years though the two companies actually announced a partnership http://www.thewhir.com/web-hosting-news/web-host-web-com-named-google-adwords-premier-smb-partner
which should actually serve to benefit WWWW going forward. Additionally of note is that the total dollars to be made in this space are relatively small for someone like google while the target customer is a fickle and somewhat challenging one to serve.
- Leverage from Network Solutions deal: This should come down quickly as discussed above. Further though the company has lost some subscribers from the recent purchases, they expect to start growing the base again during the second half of this year and, in fact, the most recent quarter showed a significant stabilization.
Disclosure: We and our affiliates are long Web.com. We may buy / sell shares in the future. This is not a recommendation to buy or sell shares.
Continued earnings growth
Debt Paydown / Potential refinancing of relatively expensive acqisition related financing