Description

Web.com (WEB) is a steady growing business that generates a lot of cash flow based on subscription revenue.  The stock has recently taken a hit due to making a large acquisition and taking on more leverage.  As demonstrated in previous acquisitions, we feel that Web.com can make the acquisition a success and delever the business generating value to shareholders.  

Trading at almost at 20% FCF yield, we feel that WEB can reach $31/share or a 12% FCF yield based on 2017 numbers.  That would represent a  70+% return.

Overview

Web.com Group, Inc. is a leading provider of Internet services to small businesses to help them run and grow their business. Web.com meets the needs of small businesses anywhere 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, and eCommerce solutions.  Essentially Web.com helps small businesses “figure out the internet” and “make it work” for them. Web.com allows business owners to focus on what they do for their business, while helping them with Internet solutions to help have an online presence, which includes marketing and sales.

Market Opportunity

There are approximately 28 million small businesses in the US and more than half do not have a website.  Consumers more and more are spending time online through their computers and mobile devices for entertainment and purchasing goods.  Many small businesses see the opportunity in engaging customers digitally but don’t have the resources or time to do it.  Mainly small businesses want to increase awareness, add new customers, drive sales and enhance customer service through use of the Internet.

Web.com helps these small business by offering a “one stop shop” for digital marketing that addresses online and mobile needs.  They have a broad suite of services and products that can help a broad range of businesses.  

Importantly, is that Web.com offers a consultative approach which many competitors do not offer.  Web.com has expert teams to assist a customer with their needs, who needs more than a DIY solution.  This higher touch service is like an outsourced marketing/IT resource that is helpful to customers navigate the changing landscape of new technologies.

Business Description

Using a consultative approach, Web.com offers small businesses one-stop shopping for an array of effective, affordable online products and services that will help drive their businesses. Web.com is positioned as a partner to small businesses in their Internet marketing, from their initial entry onto the web to more advanced online marketing solutions.

Web.com provides a broad range of web services that customers can subscribe to bundled products that meet a variety of needs, or they can choose to purchase ‘a la carte’ solutions for specific solutions.  Many times customers progress and need more advanced products and consultative services, as they move from low-priced domain registrations towards high-priced, value-added offerings. These DIFM offerings have relatively high barriers to entry, as they require sophisticated technological and business-process expertise

Domain Registry Business

As a global domain registrar, Web.com enables small businesses to establish an online presence by buying a domain name. Though not a differentiating business, Web.com is one of the largest domain name registrars in the world and offers .com and .net domains as well as the latest top-level domains. Web.com also offer a full suite of domain name services, including domain name registration, transfers, renewals, expiration protection and privacy services. However since online activity typically starts with a domain name, Web.com views this business as strategic in that it can typically lead to additional domain business or value added services.

This basic service is the entry point to greater value-added offerings, which span the range of customer budgets and expertise, from inexpensive Do-It-Yourself ("DIY") websites and e-mail hosting for the technically-savvy to Do-It-For-Me ("DIFM") custom website design services, online marketing, social media and eCommerce solutions for those needing full service.

Do It For Me Business

Web.com has created Do-It-For-Me Solutions that undertake virtually all of the work associated with building, maintaining, marketing and enhancing an Internet presence to ultimately drive leads to the small business owner. Since access to these services is through an affordable monthly subscription, these proprietors can have an effective online presence with a minimum outlay of resources. Web.com bundles the most needed products in an efficient manner so the small business owner can focus on his or her core business while the responsibility for making sure the website is optimized for business generation is outsourced to Web.com.

Some of the Do It For Me services include a custom website, Facebook page, eCommerce and Directory Seach assistance.

Do it Yourself Business

Web.com offers a variety of DIY website building and marketing solutions for small businesses that want to build their own websites or enhance their websites with online marketing. The DIY services include website hosting, website building, DIY eCommerce tool and eMail

Do It With Me Business

In 2015, Web.com started "Do-It-With-Me" ("DIWM"), which provides our DIY customers with an opportunity to speak and work with customer service via chat, email or telephone while they are building their websites.   This product is like a cross between a DIY product and a DIFM product.

Online Marketing

Web.com also offers online marketing services designed to increase the potential that a website receives prominence in search engines like Google, Yahoo and Bing.  Some of the services include Seach Engine Optimization, marketing and lead generation sites.

Business success on the Internet begins with a compelling website, but is only fully realized when the website is “found,” prominently displayed by the various search engines, and ultimately when potential customers are motivated to contact the business.

Web.com business is recurring in nature

The success of Web.com’s business is simple.  They want to increase the monthly fees that customers pay on an ongoing basis, and reduce churn.  They retain 87% of customers on a 12 month basis, while they have been able to add net subscriber growth every quarter in September 2013 by a few percent annually.  The company seeks to increase the average monthly subscription by focusing more on value added services in DIWM and DIFM while avoiding the competition in the DIY segment.

Yodle Acquisition

Web.com announced and acquired Yodle in the first quarter of this year.  This acquisition is very strategic as it further bolsters Web.com into value added services for small businesses and away from the DIY commoditized products.  Yodle was acquired for $342 million which is approximately 9X a year’s out EBITDA including synergies.  The value added services that Yodle offers complemented Web.com’s existing product offerings.  In addition to being a higher growth business than Web.com, the Yodle acquisition will enable $30 million of cost savings plus $50 million in NOLs.  Most of these cost savings will be realized in 2017.

Competition

There is significant competition in online services where Web.com competes.  Some of the competitors in the space include GoDaddy, Wix, and Endurance International.  These competitor are all a little different and have different strengths.  

Web.com aims to differentiate itself by both having tools that enable customers to do things on their own while still having the ability to get a lot more services.

Financials

One of the bigger objections to Web.com is the massive amount of pro-forma adjustments that management discloses to try to show the economic return of the business.

Please note that the financials below are non-GAAP and are based on management’s presentation.  And while making adjustments to GAAP earnings are subject to interpretation, is hard to model on a quarterly basis and is not clean, doing so shows the robust cash that WEB generates in its business.

In Millions $

Valuation

We feel that an appropriate valuation metric is to value Web.com by FCF yield.  Currenty, Web.com is valued at 16.7% FCF yield on 2016 proforma FCF.  An appropriate multiple is more like 12%.  Using the FCF/share estimate for 2017 of 3.71, this calculates to a price target of 31/share 12 months out.

Alternatively, Web.com can also be looked at an EV/EBITDA multiple.  Currently, it trades at a 9.2X multiple based on 2016 EBITDA which appears like a fair multiple.  However, given that synergies from the Yodle acquisition do not start occurring until the later half of 2016 and will be fully realized in 2017, one should look at a 2017 multiple.  Web.com should be able to reduce debt or buy back stock to the tune of $150-220mm over the next 12-18  months.  If you were to apply a 9.2X multiple on 2017 EBITDA and add in the $150-220mm of cash you would be looking at roughly a $28/stock price 18 months out.

Catalyst

Continued subscriber growth

Cost synergies coming in faster than expected.

Revenue synergies