Web.com Group, Inc.
WEB.COM GROUP, INC. (Form: 10-Q, Received: 05/01/2015 15:31:11)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________  
FORM 10-Q
________________________   
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to                
 
Commission File Number: 000-51595
________________________ 
Web.com Group, Inc.
(Exact name of registrant as specified in its charter)
________________________  
Delaware
94-3327894
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
12808 Gran Bay Parkway, West, Jacksonville, FL
32258
(Address of principal executive offices)
(Zip Code)
 
(904) 680-6600
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
________________________ 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý   Yes    ¨   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý   Yes    ¨   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨   Yes    ý   No 

Common Stock, par value $0.001 per share, outstanding as of April 27, 2015: 51,568,335




Web.com Group, Inc.
 
Quarterly Report on Form 10-Q
 
For the Quarterly Period ended March 31, 2015
 
Index
 
Part I
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 

2



PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

  Web.com Group, Inc.
 
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
(unaudited)  
 
Three months ended March 31,
 
 
2015
 
2014
 
Revenue
$
132,600

 
$
133,843

 
 
 
 
 
 
Cost of Revenue
48,702

 
46,586

 
 
 
 
 
 
Gross profit
83,898

 
87,257

 
Operating expenses:
 
 
 
 
Sales and marketing
35,679

 
37,533

 
Technology and development
5,802

 
7,198

 
General and administrative
17,211

 
13,742

 
Restructuring expense
313

 

 
Depreciation and amortization
13,744

 
19,239

 
Total operating expenses
72,749

 
77,712

 
Income from operations
11,149

 
9,545

 

 
 
 
 
Interest expense, net
(5,249
)
 
(7,492
)
 
Net income before income taxes
5,900

 
2,053

 
Income tax expense
(3,561
)
 
(1,563
)
 
Net income
$
2,339

 
$
490

 
Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustments
(708
)
 

 
Unrealized gain (loss) on investments, net of tax
5

 
(2
)
 
Total comprehensive income
$
1,636

 
$
488

 
 
See accompanying notes to consolidated financial statements

3




Web.com Group, Inc.
 
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
(unaudited)
(continued)
 
 
 
Three months ended March 31,
 
 
2015
 
2014
Basic earnings per share:
 
 
 
 
Net income per common share
 
$
0.05

 
$
0.01

Diluted earnings per share:
 
 
 
 
Net income per common share
 
$
0.04

 
$
0.01

 
 
 
 
 
Basic weighted average common shares
 
50,872

 
50,334

Diluted weighted average common shares
 
52,492

 
54,583

 
See accompanying notes to consolidated financial statements


4




Web.com Group, Inc.
 Consolidated Balance Sheets
(in thousands, except share amounts)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
16,726

 
$
22,485

Accounts receivable, net of allowance of $1,802 and $1,705, respectively
17,157

 
16,932

Prepaid expenses
11,061

 
10,550

Deferred expenses
65,902

 
62,818

Deferred taxes
23,210

 
23,750

Other current assets
4,897

 
5,012

Total current assets
138,953

 
141,547

 
 
 
 
Property and equipment, net
43,639

 
44,000

Deferred expenses
52,098

 
50,901

Goodwill
639,188

 
639,564

Intangible assets, net
347,567

 
357,819

Other assets
4,741

 
4,575

Total assets
$
1,226,186

 
$
1,238,406

 
 
 
 
Liabilities and stockholders' equity
 

 
 
Current liabilities:
 

 
 

Accounts payable
$
7,157

 
$
9,940

Accrued expenses
15,932

 
14,937

Accrued compensation and benefits
5,756

 
5,997

Deferred revenue
223,699

 
217,394

Current portion of debt
7,440

 
6,197

Other liabilities
5,332

 
5,069

Total current liabilities
265,316

 
259,534

 
 
 
 
Deferred revenue
189,747

 
185,338

Long-term debt
485,092

 
501,085

Deferred tax liabilities
114,228

 
111,503

Other long-term liabilities
7,128

 
6,856

Total liabilities
1,061,511

 
1,064,316

Stockholders' equity:
 

 
 

Common stock, $0.001 par value per share: 150,000,000 shares authorized, 51,686,088 and 52,108,719 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively
52

 
52

Additional paid-in capital
554,096

 
552,991

Treasury stock at cost, 1,088,447 shares as of March 31, 2015, and 395,395 shares as of December 31, 2014
(19,131
)
 
(6,975
)
Accumulated other comprehensive loss
(2,096
)
 
(1,393
)
Accumulated deficit
(368,246
)
 
(370,585
)
Total stockholders' equity
164,675

 
174,090

Total liabilities and stockholders' equity
$
1,226,186

 
$
1,238,406

See accompanying notes to consolidated financial statements

5



Web.com Group, Inc.
 Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three months ended March 31,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Net income
$
2,339

 
$
490

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
13,744

 
19,239

Stock based compensation
5,047

 
4,504

Deferred income taxes
3,280

 
1,411

Amortization of debt issuance costs and other
2,796

 
2,719

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(255
)
 
(3,173
)
Prepaid expenses and other assets
(615
)
 
(4,085
)
Deferred expenses
(4,281
)
 
(941
)
Accounts payable
(2,882
)
 
(3,706
)
Accrued expenses and other liabilities
2,015

 
(795
)
Accrued compensation and benefits
(66
)
 
(8,243
)
Accrued restructuring costs and other reserves

 
(1,139
)
Deferred revenue
10,801

 
12,325

Net cash provided by operating activities
31,923

 
18,606

Cash flows from investing activities
 

 
 

Business acquisitions, net of cash acquired
(475
)
 
(7,437
)
Capital expenditures
(3,604
)
 
(2,921
)
Net cash used in investing activities
(4,079
)
 
(10,358
)
Cash flows from financing activities
 

 
 

Stock issuance costs
(24
)
 
(24
)
Common stock repurchased
(2,261
)
 
(4,956
)
Payments of long-term debt
(17,500
)
 
(15,000
)
Proceeds from exercise of stock options
1,971

 
4,154

Proceeds from borrowings on revolving credit facility

 
9,000

Common stock purchases under stock repurchase plan
(15,786
)
 

Net cash used in financing activities
(33,600
)
 
(6,826
)
 
 
 
 
Effect of exchange rate changes on cash
(3
)
 

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(5,759
)
 
1,422

Cash and cash equivalents, beginning of period
22,485

 
13,806

Cash and cash equivalents, end of period
$
16,726

 
$
15,228

Supplemental cash flow information
 

 
 

Interest paid
$
3,108

 
$
5,526

Income tax paid
$
482

 
$
191

See accompanying notes to consolidated financial statements

6



Web.com Group, Inc.
Notes to Consolidated Financial Statements
(unaudited)

1. The Company and Summary of Significant Accounting Policies
 
Description of Company
 
Web.com Group, Inc. ("Web.com" or "the Company") provides 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 and eCommerce solutions. For more information about the Company, please visit http://www.web.com. The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.
The Company has reviewed the criteria of Accounting Standards Codification (“ASC”) 280-10, Segment Reporting, and has determined that the Company is comprised of only one segment, web services and products.

Basis of Presentation
 
The accompanying consolidated balance sheet as of March 31, 2015 , the consolidated statements of comprehensive income for the three months ended March 31, 2015 and 2014 , the consolidated statements of cash flows for the three months ended March 31, 2015 and 2014 , and the related notes to the consolidated financial statements are unaudited.
 
The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2014 , except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or excluded as permitted.
 
In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2015 , the Company’s results of operations for the three months ended March 31, 2015 and 2014 , and the cash flows for the three months ended March 31, 2015 and 2014 . The results of operations for the three months ended March 31, 2015 , are not necessarily indicative of the results to be expected for the year ending December 31, 2015 .

Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted from these interim financial statements. The Company suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in the Company's most recent annual report on Form 10-K filed with the SEC on February 27, 2015, and any subsequently filed current reports on Form 8-K.

Use of Estimates
 
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation

The functional currency of the Company’s United Kingdom-based operations acquired in July 2014 is the British Pound. The Company translates the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets and liabilities, historical rates of exchange for equity and average rates of exchange for revenues, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive (loss) income as a component of stockholders’ equity.




7



Recently Issued Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs . ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2015. The new standard is not expected to have a material effect on the Company's consolidated financial statements and footnote disclosures.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have an impact on our consolidated financial statements or disclosures.
In May 2014, the FASB and International Accounting Standards Board (“IASB”) issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), a converged standard on revenue recognition which supersedes previous revenue recognition guidance. Some of the main areas of transition to the new standard include, among others, transfer of control (revenue is recognized when a customer obtains control of a good or service), allocation of transaction price based on relative standalone selling price (entities that sell multiple goods or services in a single arrangement must allocate the consideration to each of those goods or services), contract costs (entities sometimes incur costs, such as sales commissions or mobilization activities, to obtain or fulfill a contract), and disclosures (extensive disclosures are required to provide greater insight into both revenue that has been recognized, and revenue that is expected to be recognized in the future from existing contracts). This accounting standard will be effective for the Company beginning in its first quarter of 2018, using one of two methods of adoption: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures. The Company is currently evaluating and has not determined the impact of ASU 2014-09 on its consolidated financial statements.
2. Business Combinations
Acquisition of SnapNames
On February 28, 2014, the Company completed the acquisition of substantially all of the assets and certain liabilities of SnapNames.com, Inc. ("SnapNames"), an Oregon corporation, from KeyDrive S.A., which primarily consisted of intangible assets, including trade names, customer relationships and developed technology. The activities of the acquired business include daily auctions, premium auctions, and brokerage transactions related to domain names (the "SnapNames Business"). The Company paid $7.4 million for this business during the first quarter of 2014. The Company also recorded a $0.5 million holdback liability, and such amount was paid to KeyDrive S. A. during the three months ended March 31, 2015.
The Company has accounted for the acquisition of the SnapNames Business using the acquisition method as required in Accounting Standards Codification 805, Business Combinations ("ASC 805"). As such, fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has estimated the fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from optimizing resources and cross-sale opportunities. The goodwill from the acquisition is expected to be deductible for tax purposes.
Acquisition of Scoot
On July 31, 2014, the Company completed the acquisition of 100% of the equity interests in Touch Local Limited (“Scoot”), the operator of an online business directory network in the United Kingdom, pursuant to that certain Purchase Agreement dated July 31, 2014 by and among Web.com Group, Inc., Balderton Capital III, LP, Mark Livingstone and Gary Dannatt.  The Company believes that the acquisition further enhances its position as a leading provider of online marketing and web services to small businesses and positions its local expansion in the United Kingdom. Consideration for the acquisition included $11.9 million , which is net of cash acquired, $11.0 million of which was paid to the sellers in July 2014 and $0.9 million of which is held in an escrow account to be released in July 2015, subject to certain working capital and indemnity adjustments. The Company also recorded a $0.9 million holdback liability that may be paid in July 2015. In addition, the Company issued an aggregate of 213,200 shares of Web.com common stock, with an aggregate acquisition date value of $5.7 million , to the sellers. Finally, $0.3 million of accounts receivable due from Scoot was forgiven by the Company, for total consideration of $18.7 million .


8



The Company has accounted for the acquisition of Scoot using the acquisition method as required in ASC 805. Based on the acquisition method of accounting, the consideration was allocated to the assets and liabilities acquired based on their fair values as of the acquisition date and the remaining amount of the purchase price allocation was recorded as goodwill. The goodwill represents business benefits the Company anticipates realizing from optimizing resources and cross-sale opportunities and is not expected to be deductible for tax purposes.  

3. Net Income Per Common Share
 
Basic net income per common share is calculated using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or vesting of restricted shares.

During the first quarter of 2015, the Company issued an equity award with performance, service and market conditions.
When the performance and market conditions are satisfied, the Company will include the impact of the potential issuance of the underlying shares in our diluted weighted average common shares. These awards will be included in basic shares outstanding once all criteria have been met and the shares have vested. Prior to the end of the vesting period, the number of contingently issuable shares included in diluted EPS is based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period, using the treasury stock method and assuming the result would be dilutive. As of March 31, 2015, neither of these conditions have been met, therefore no incremental common shares from this award have been included. See Note 10, Stock-Based Compensation , for additional information on this award.

As of March 31, 2015 and 2014, 2.3 million and 0.5 million share-based awards, respectively, have been excluded from the calculation of diluted common shares because including these securities would have been anti-dilutive.

The Company's potentially dilutive shares also include incremental shares issuable upon the conversion of the Company's Senior Convertible Notes due August 15, 2018 ("2018 Notes"). See Note 6, Long-term Debt , for additional information regarding the 2018 Notes. Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The Company has adopted a current policy to settle the principal amount in cash and any excess conversion value in shares of our common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes is included in our calculation of diluted net income per common share. When the market price of our stock exceeds the conversion price, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. There were no incremental common shares from the 2018 Notes that were included in the calculation of diluted shares because the Company's average price of its common stock did not exceed the conversion price during the three months ended March 31, 2015 .

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):
 
 
 
Three months ended March 31,
 
 
 
 
2015
 
2014
 
Net income
 
 
$
2,339

 
$
490

 
 
 
 
 
 
 
 
Basic weighted average common shares
 
 
50,872

 
50,334

 
Diluted effect of stock options
 
 
1,354

 
3,546

 
Diluted effect of restricted shares
 
 
266

 
703

 
Dilutive effect of performance shares
 
 

 

 
Dilutive effect of the assumed conversion of the 2018 Notes
 
 

 

 
Diluted weighted average common shares
 
 
52,492

 
54,583

 
Basic earnings per share:
 
 
 
 
 
 
Net income per common share
 
 
$
0.05

 
$
0.01

 
Diluted earnings per share:
 
 
 
 
 
 
Net income per common share
 
 
$
0.04

 
$
0.01

 


9



4. Goodwill and Intangible Assets
 
In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible asset balances for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite-lived intangible assets below their carrying amount. As of December 31, 2014 , the Company completed its annual impairment test of goodwill and other indefinite-lived intangible assets and determined that there was no impairment. There were no indicators of impairment during three months ended March 31, 2015 .

The following table summarizes changes in the Company’s goodwill balances as required by ASC 350-20 for the three months ended March 31, 2015 and the year ended December 31, 2014 , respectively (in thousands):    

 
March 31,
2015
 
December 31,
2014
Goodwill balance at beginning of period
$
741,858

 
$
730,139

Accumulated impaired goodwill at beginning of period
(102,294
)
 
(102,294
)
Goodwill balance at beginning of period, net
639,564

 
627,845

Goodwill acquired during the period-SnapNames (1)

 
3,578

Goodwill acquired during the period-Scoot (1)
11

 
8,824

Foreign currency translation adjustments (2)
(387
)
 
(683
)
Goodwill balance at end of period, net *
$
639,188

 
$
639,564

   
* Gross goodwill balances were $741.5 million as of March 31, 2015 and $741.9 million as of December 31, 2014 . These include accumulated impairment losses of $102.3 million .
(1) The increases of $3.6 million and $8.8 million for the year ended December 31, 2014 are from the SnapNames and Scoot acquisitions, respectively. See Note 2, Business Combinations, for additional information.
(2) The foreign currency translation adjustment is from translating the goodwill acquired from the July 2014 Scoot acquisition at the current balance sheet date.

The Company’s intangible assets are summarized as follows (in thousands): 
 
March 31, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Weighted-average Amortization Period in Years
Indefinite-lived intangible assets:
 

 
 

 
 
 
 
Domain/Trade names
$
132,242

 
$

 
$
132,242

 
 
Definite-lived intangible assets:


 


 


 
 
Customer relationships
375,179

 
(196,757
)
 
178,422

 
8.3
Developed technology
107,580

 
(72,258
)
 
35,322

 
2.6
Other
6,038

 
(4,457
)
 
1,581

 
3.1
   Total *
$
621,039

 
$
(273,472
)
 
$
347,567

 
 
 
 
 
 
 
 
 
* Cumulative foreign currency translation adjustments, reflecting the movement in currencies, decreased total intangible assets by approximately $0.4 million as of March 31, 2015.

10



 
December 31, 2014
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Weighted-average Amortization Period in Years
Indefinite-lived intangible assets:
 

 
 

 
 
 
 
Domain/Trade names
$
132,368

 
$

 
$
132,368

 
 
Definite-lived intangible assets:


 


 


 
 
Customer relationships
289,883

 
(105,685
)
 
184,198

 
8.5
Developed technology
193,137

 
(153,681
)
 
39,456

 
2.8
Non-compete agreements and other
6,134

 
(4,337
)
 
1,797

 
3.3
   Total *
$
621,522

 
$
(263,703
)
 
$
357,819

 
 
 
 
 
 
 
 
 
     
* Cumulative foreign currency translation adjustments, reflecting the movement in currencies, decreased total intangible assets by approximately $0.8 million as of December 31, 2014.

The weighted-average amortization period for the amortizable intangible assets remaining as of March 31, 2015 , is approximately 7.3 years. Total amortization expense was $9.8 million and $16.2 million for the three months ended March 31, 2015 and 2014 .
 
As of March 31, 2015 , the amortization expense for the remainder of the year ended December 31, 2015, and the next four years and thereafter is as follows (in thousands):

2015 (remainder of year)
$
29,421

2016
37,278

2017
27,739

2018
25,045

2019
21,641

2020
19,427

Thereafter
54,774

Total
$
215,325


5. Related Party Transactions
Effective February 6, 2015, the Company elected Mr. John A. Giuliani to serve on its Board of Directors. Mr. Giuliani serves as President and Chief Executive Officer of Conversant, a personalized digital marketing platform, which was sold to AllianceData in December 2014. Mr. Giuliani joined Conversant after the acquisition of Dotomi, a dynamic display ad optimization company, where he had served as Chief Executive Officer. During the year ended December 31, 2014, the Company purchased online advertising solutions from Dotomi and Conversant. The Company did not incur any expenses related to services provided by Dotomi during the three months ended March 31, 2015. The Company incurred $0.2 million of expense related to services provided by Conversant during the three months ended March 31, 2015.
The Company outsources data center services to Quality Technology Services LLC (“QTS”). Prior to May 2014, General Atlantic LLC was one of the Company’s greater than 5 percent shareholders, and had approximately a 50 percent ownership interest in QTS. This business relationship was an agreement between QTS and Network Solutions and was acquired by the Company as a result of the acquisition and commenced on October 27, 2011 upon the consummation of the acquisition. Effective May 2014, General Atlantic no longer held common shares greater than 5 percent of the total outstanding common shares and the affiliated board member has departed the Company's Board of Directors. The Company incurred approximately $0.4 million of expense for data center services during the three months ended March 31, 2014.
6. Long-term Debt

1% Senior Convertible Notes due August 15, 2018

11



In August 2013, the Company issued $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 (the "2018 Notes"). The 2018 Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears, on February 15 and August 15 of each year, beginning on February 15, 2014. The conversion price for the 2018 Notes is equivalent to an initial effective conversion price of approximately $35.00 per share of common stock. Proceeds, net of original issuance discounts and debt issuance costs, of $252.3 million were received from the 2018 Notes. The net proceeds were used to pay down $208.0 million of the First Lien Term Loan and $43.0 million of the Revolving Credit Facility.

The Company may not redeem the 2018 Notes prior to August 20, 2016 . On or after August 20, 2016, the Company may redeem for cash any or all of the 2018 Notes, at its option, if the last reported sale price of our common stock exceeds 130% of the applicable conversion price on each applicable trading day as defined by the indenture. The redemption price will equal 100% of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date. Holders of the 2018 Notes may also convert their notes at any time prior to May 15, 2018 if the sale price of our common stock exceeds 130% of the applicable conversion price on each applicable trading day as defined by the indenture. In addition, holders may also convert their 2018 Notes any time prior to May 15, 2018 , (i) if during the five business days after any five consecutive trading day period in which the trading price of the 2018 Notes was less than 98% of the product of the last reported sale price of our common stock and the conversion rate, (ii) if the Company calls the 2018 Notes for redemption; or (iii) upon the occurrence of specified corporate events.

Prior to August 20, 2016, the 2018 Notes are also redeemable or convertible upon certain fundamental changes, as defined in the indenture, which may require the Company to purchase the 2018 Notes in whole or in part for cash at a price equal to 100% of the principal amount of the 2018 Notes to be purchased, plus any accrued and unpaid interest to, but not including, the purchase date. The 2018 Notes are senior unsecured obligations and will be effectively junior to any of the Company's existing and future secured indebtedness.

The Company determined that the embedded conversion option in the 2018 Notes is not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging . The 2018 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, which requires the Company to separate a liability component and an equity component from the proceeds received. The carrying amount of the liability component at the time of the transaction of $204.4 million was calculated by measuring the fair value of a similar debt instrument that does not have an associated equity component. The fair value of the liability component was subtracted from the initial proceeds and the remaining amount of $47.8 million was recorded as the equity component. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life of 5 years using the effective interest method.
 
Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company has adopted a current policy to settle the $258.8 million of principal amount in cash and any excess conversion value in shares of its common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes may be included in the Company's calculation of diluted net income per common share. When the market price of the Company's stock exceeds the conversion price, it will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. As such, the 2018 Notes have no impact on diluted net income per common share until the price of the Company's common stock exceeds the conversion price (approximately $35.00 per common share) of the 2018 Notes.
 
As of March 31, 2015 and December 31, 2014 , the carrying value of the debt and equity component was $220.4 million and $47.8 million and $217.8 million and $47.8 million , respectively. The unamortized debt discount of $38.4 million as of March 31, 2015 will be amortized over the remaining life of 3.4 years using the effective interest method.

Credit Agreements

Credit Agreement
On September 9, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A. and SunTrust Bank, as co-syndication agents, Regions Bank, Fifth Third Bank, Bank of America, N.A., Barclays Bank plc, Wells Fargo Bank, National Association, Royal Bank of Canada, Deutsche Bank Securities Inc. and Compass Bank, as co-documentation agents, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the "Credit Agreement"). The Credit Agreement provides for (i) a five -year $200 million secured term loan facility (the “Term Loan”) and (ii) a five -year secured revolving credit facility that provides up to $150 million of revolving loans (the “Revolving Credit Facility”). The Credit Agreement replaced the First Lien Credit Agreement, dated as of October 27, 2011 amended and restated as of November 20, 2012, further amended and restated March 6, 2013, and further amended as of April 25, 2014 (the "Predecessor Credit Agreement").

12



The Company used the proceeds of the Term Loan and initially borrowed $109.0 million of loans under the Revolving Credit Facility, together with cash on hand, to repay existing loans under the Predecessor Credit Agreement in their entirety and to pay related fees and expenses. In connection with the repayment, the Company terminated the Predecessor Credit Agreement.
The Term Loan and loans under the Revolving Credit Facility initially bear interest at a rate equal to either, at the Company’s option, the LIBOR rate plus an applicable margin equal to 2.25% per annum, or the prime lending rate plus an applicable margin equal to 1.25% per annum. The applicable margins for the Term Loan and loans under the Revolving Credit Facility are subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio as of the end of each fiscal quarter. The Company must also pay (i) a commitment fee of 0.4% per annum on the actual daily amount by which the revolving credit commitment exceeds then-outstanding usage under the Revolving Credit Facility, also subject to reduction or increase based upon the Company’s consolidated first lien net leverage ratio, (ii) a letter of credit fee equal to the applicable margin that applies to LIBOR loans under the Revolving Credit Facility and (iii) a fronting fee of 0.125% per annum, calculated on the daily amount available to be drawn under each letter of credit issued under the Revolving Credit Facility.
The Company is permitted to make voluntary prepayments with respect to the Revolving Credit Facility and the Term Loan at any time without payment of a premium. The Company is required to make mandatory prepayments of the Term Loan with (i) net cash proceeds from certain asset sales (subject to reinvestment rights) and (ii) net cash proceeds from certain issuances of debt. The Company is also required to maintain certain financial ratios under the Credit Agreement and there are customary covenants that limit the incurrence of debt, the payment of dividends, the disposition of assets, and making of certain payments. Substantially all of the Company's and certain of its domestic subsidiaries' tangible and intangible assets are pledged as collateral under the Credit Agreement.
The refinancing was partially accounted for as debt extinguishment in accordance with ASC 470, Debt, with the remaining amounts not considered extinguished, treated as a modification of the existing credit agreement. As a result of the extinguishment, the Company recorded a $1.8 million loss for the portion of the debt that was extinguished from accelerating unamortized deferred financing fees and loan origination discounts during the third quarter ended September 30, 2014. Approximately $3.7 million of additional loan origination discounts and deferred financing fees were capitalized in 2014 in connection with the refinancing.
The Company has $70.3 million of available borrowings under the Revolving Credit Facility as of March 31, 2015.
Outstanding long-term debt and the interest rates in effect at March 31, 2015 and December 31, 2014 consist of the following (in thousands):
 
March 31,
2015
 
December 31,
2014
Revolving Credit Facility maturing 2019, 2.42%, based on LIBOR plus 2.25%, less unamortized discount of $1,507 at March 31, 2015
$
76,243

 
$
92,409

Term Loan due 2019, 2.42%, based on LIBOR plus 2.25%, less unamortized discount of $1,589 at March 31, 2015, effective rate of 2.64%
195,911

 
197,052

Senior Convertible Notes, maturing 2018, 1.00%, less unamortized discount of $38,372 at March 31, 2015 effective rate of 5.88%
220,378

 
217,821

Total Outstanding Debt
492,532

 
507,282

Less: Current Portion of Long-Term Debt
(7,440
)
 
(6,197
)
Long-Term Portion
$
485,092

 
$
501,085

 
Debt discount and issuance costs
 
The Company recorded $2.8 million and $2.7 million of expense from amortizing debt issuance and discount costs during the three months ended March 31, 2015 and 2014 , respectively.
 
Total estimated principal payments due for the next five years as of March 31, 2015 are as follows:   
Year 1
$
7,500

Year 2
12,500

Year 3
17,500

Year 4
278,750

Year 5
217,750

Total principal payments
$
534,000


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7. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):

 
March 31, 2015
 
December 31, 2014
Foreign currency translation adjustments
$
(2,103
)
 
$
(1,395
)
Unrealized gains on investments
7

 
2

    Total accumulated other comprehensive loss
$
(2,096
)
 
$
(1,393
)
 
 
 
 


8. Fair Value
 
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels as follows:
 
Level 1 -Quoted prices in active markets for identical assets or liabilities.
 
Level 2 -Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 -Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
 
The Company has financial assets and liabilities that are not required to be remeasured to fair value on a recurring basis. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair market value as of March 31, 2015 and December 31, 2014 due to the short maturity of these items. As of March 31, 2015 , the fair value and carrying value of the Company’s 2018 Notes totaled $239.0 million and $220.4 million , respectively. As of December 31, 2014 , the fair value and carrying value of the Company's 2018 Notes totaled term debt was $ 237.7 million and $217.8 million , respectively. The fair value of the 2018 Notes, including the equity component, was calculated by taking the quoted market price for the instruments multiplied by the principal amount. This is based on a Level 2 fair value hierarchy calculation obtained from quoted market prices for the Company’s long-term debt instruments that may not be actively traded at each respective period end. The Revolving Credit Facility and Term Loan entered into in September 2014 are variable rate debt instruments indexed to 1-Month LIBOR that resets monthly and the fair value approximates the carrying value as of March 31, 2015 and December 31, 2014.

9. Income Taxes
 
The Company recorded income tax expense of $3.6 million and $1.6 million during the three months ended March 31, 2015 and 2014 , respectively, based on its estimated annual effective tax rates for each year. The Company's estimated annual effective tax rate for 2014 and 2015 reflects a net increase in its projected year-end valuation allowance related to an increase in its non-reversing deferred tax liabilities, and reduced by forecasted pre-tax income for each year.


10. Stock-Based Compensation
 
In March 2014, the Company's Board of Directors adopted, and in May 2014 stockholders approved, the 2014 Equity Incentive Plan (the "2014 Plan"). The Plan is the successor and continuation of our prior incentive plans; and no additional common stock awards have been granted under the prior incentive plans since the adoption of the 2014 Plan. The 2014 Plan provides for the issuances of incentive stock options, nonstatutory stock options, restricted stock awards and units and other stock awards. The terms and conditions surrounding the granting and vesting of these awards are generally consistent with the prior incentive plans.

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Performance Shares
During the first quarter of 2015, the Compensation Committee of the Board of Directors approved a performance share equity award. The targeted number of shares under a 100 percent payout scenario are 0.2 million common shares over the 3 years vesting period, with one-third vesting each year. The actual number of shares that may be earned and issued, if any, may range from 0-200% of the target number of shares granted based upon the over achievement or under achievement of the financial measures for the annual performance period. In addition, the number of shares that are earned may also be adjusted higher or lower depending on the performance of the Company's total shareholder return, compared against the Company's peer group.
The award contains a performance condition as defined in ASC 718, Share-Based Payment , and as such, the attainment of the conditions are assessed by the Company at each reporting period. The compensation expense is adjusted to reflect the probability of attainment of each performance condition and the requisite service provided through the reporting period end.
The award also contains a market condition as defined in ASC 718, and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period, subject to the above performance condition being probable of being met.
Stock Options

Compensation costs related to the Company’s stock option plans were $ 3.0 million and $ 2.8 million for the three months ended March 31, 2015 and 2014 , respectively. During the three months ended March 31, 2015 and 2014 , 0.2 million and 0.4 million common shares were issued from options exercised, respectively.
 
Restricted Stock
 
Compensation expense related to restricted stock plans for the three months ended March 31, 2015 and 2014 , was approximately $2.1 million and $1.7 million , respectively. During the three months ended March 31, 2015 and 2014 , approximately 0.1 million shares and 0.2 million shares totaling approximately $2.3 million and $5.0 million , respectively, were withheld by the Company for minimum income tax withholding requirements. During the three months ended March 31, 2015 and 2014 , 0.4 million and 0.3 million restricted common shares were granted, respectively.
 
11. Commitments and Contingencies
 
Standby Letters of Credit
The Company utilizes letters of credit to back certain payment obligations relating to its facility operating leases. The Company had approximately $ 2.7 million in standby letters of credit as of March 31, 2015 , $ 2.0 million of which were issued under the Revolving Credit Facility.

Legal Proceedings

The Federal Trade Commission ("FTC") has investigated the methods by which Network Solutions has marketed its domain name and web hosting services to customers and has accepted for public comment a consent agreement resolving the investigation that would restrict certain of our future web hosting marketing practices, but would not require any changes in current practices, and would not impose any monetary penalties or require other payments.  The consent order is subject to public comment for thirty days, after which the FTC will decide whether to make it final.

In addition, from time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our marketing practices, customer and vendor contracts and employment related disputes. We believe that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on our financial position, marketing practices or results of operations. There were no material legal matters that were reasonably possible or estimable at March 31, 2015.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” provisions created by those sections. Forward-looking statements are based on our management’s beliefs and

15



assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
Safe Harbor
 
In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q.

We believe presenting non-GAAP net income attributable to common stockholders, non-GAAP net income per share attributable to common stockholders and non-GAAP operating income measures are useful to investors, because they describe the operating performance of the Company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. We use these non-GAAP measures as important indicators of our past performance and in planning and forecasting performance in future periods. The non-GAAP financial information we present 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.


Overview
 
Web.com Group, Inc. ("Web.com", the "Company" or "We") provides 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 and eCommerce solutions. For more information about the company, please visit http://www.web.com. The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.
  
Key Business Metrics
 
Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:
 
Net Subscriber Additions
We maintain and grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period, if applicable.

We review this metric to evaluate whether we are performing to our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.

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Monthly Turnover (Churn)
Monthly turnover, or churn, is a metric we measure each quarter, and which we define as customer cancellations in the quarter divided by the sum of the number of subscribers at the beginning of the quarter and the gross number of new subscribers added during the quarter, divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan.

Average Revenue per User (Subscriber)
 
Monthly average revenue per user, or ARPU, is a metric we measure on a quarterly basis. We define ARPU as quarterly 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. We exclude from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition-related write downs. The fair market value adjustment was $ 5.1 million and $ 7.4 million for the three months ended March 31, 2015 and 2014 , respectively. ARPU is the key metric that allows management to evaluate the impact on monthly revenue from product pricing, product sales mix trends, and up-sell/cross-sell effectiveness.
 
Sources of Revenue
 
Subscription Revenue

We currently derive a substantial majority of our revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts. The revenue is recognized on a daily basis over the life of the contract.
 
Professional Services and Other Revenue
 
We generate professional services revenue from custom website design, eCommerce store design and support services. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Other revenue consists of all fees earned from granting customers licenses to use our patents. Generally, revenue is recognized when the service has been completed.  

Cost of Revenue
 
Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration costs, directory listing fees, customer support costs, eCommerce store design, search engine registration fees, billing costs, hosting expenses, marketing fees, and allocated overhead costs. We allocate overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category. As our customer base and web services usage grows, we intend to continue to invest additional resources in our website development and support staff.
 
Operating Expenses
 
Sales and Marketing Expense
 
Our direct marketing expenses include the costs associated with the online marketing channels we use to promote our services and acquire customers. These channels include search marketing, affiliate marketing, direct television advertising and online partnerships. Sales costs consist primarily of compensation and related expenses for our sales and marketing staff. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.
 
We plan to continue to invest in sales and marketing to add new subscription customers, and increase sales of additional and new services and products to our existing customer base. We also plan to continue investing in direct response television and radio advertising. We have invested a portion of our incremental marketing budget in branding activities such as the umbrella sponsorship of the Web.com Tour and other sports marketing activities.

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Technology and development
Technology and development represents costs associated with creation, development and distribution of our products and websites. Technology and development expenses primarily consist of headcount-related costs associated with the design, development, deployment, testing, operation and enhancement of our products, as well as costs associated with the data centers and systems infrastructure supporting those products. Technology and development expenses are expected to remain flat as a percentage of total revenue during the remainder of 2015.

General and Administrative Expense

General and administrative expenses consist of compensation and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, corporate development costs, other corporate expenses, and allocated overhead costs. General and administrative expenses are expected to remain relatively flat as a percentage of revenue during the remainder of 2015.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expenses relate primarily to our intangible assets recorded due to the acquisitions we have completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures. Depreciation is expected to increase slightly as we continue to increase our efforts for internally developed software projects. Amortization expense is expected to decrease as certain intangible assets became fully amortized in the fourth quarter of 2014.


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Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2015.


Results of Operations
 
Comparison of the results for the three months ended March 31, 2015 to the results for the three months ended March 31, 2014
 
The following table sets forth our key business metrics:  
 
Three months ended March 31,
 
2015
 
2014
 
(unaudited)
Net subscriber additions
18,658

 
50,618

Churn
1
%
 
1
%
Average revenue per user (monthly)
$
13.75

 
$
14.75

  
Net subscribers increased by 18,658 customers during the three months ended March 31, 2015 , as compared to an increase of 50,618 during the three months ended March 31, 2014 . Churn remained at a low level of 1% during the three months ended March 31, 2015 . The increase in customers and the maintenance of our low churn level is primarily due to marketing efforts in prior periods, as well as during the first quarter ended March 31, 2015 .
 
The average revenue per user was $13.75 during the three months ended March 31, 2015 , down from $14.75 generated during the same prior year period ended March 31, 2014 .

Revenue
 
 
Three months ended March 31,
 
2015
 
2014
 
(unaudited, in thousands)
Revenue:
 

 
 

Subscription
$
130,461

 
$
131,784

Professional services and other
2,139

 
2,059

Total revenue
$
132,600

 
$
133,843

 
Total revenue decreased 1% to $ 132.6 million in the three months ended March 31, 2015 down from $ 133.8 million in the three months ended March 31, 2014 . Total revenue during the three months ended March 31, 2015 and 2014 , includes the unfavorable impact of $5.1 million and $7.4 million , respectively, from amortizing into revenue deferred revenue that was recorded at fair value at the acquisition date. The fair value of the acquired deferred revenue was approximately 51% less than the pre-acquisition historical basis of Network Solutions and Register.com. Overall, the unfavorable impact declined $2.3 million during the three months ended March 31, 2015 , compared to the same prior period. The remaining $3.5 million decrease in revenue during the three months ended March 31, 2015 , is driven principally by lower advertising and hosting revenue partly offset by an increase in sales of our subscription-based custom website and online marketing products. In addition, 2014 acquisitions of SnapNames and Scoot contributed to the increased revenues during the three months ended March 31, 2015 when compared to the same prior year period. See Note 2, Business Combinations, for more information.

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Subscription Revenue . Subscription revenue decreased 1% during the three months ended March 31, 2015 , to $130.5 million down from $131.8 million during the three months ended March 31, 2014 . The decrease is primarily due to the overall revenue drivers discussed above.
 
Professional Services and Other Revenue. Professional services revenue remained essentially flat at $2.1 million in the three months ended March 31, 2015 when compared to the three months ended March 31, 2014 .
 
Cost of Revenue
 
Three months ended March 31,
 
2015
 
2014
 
(unaudited, in thousands)
Cost of revenue
$
48,702

 
$
46,586

 
Cost of Revenue. Cost of revenue increased 5% or $2.1 million during the three months ended March 31, 2015 , compared to the three months ended March 31, 2014 . The overall cost increase during the three months ended March 31, 2015 compared to the same prior year period was due primarily to the acquisitions of SnapNames and Scoot that were completed in February 2014 and July 2014, respectively. The increases include $0.7 million of higher salaries and benefits and $0.6 million of higher partner commissions. In addition, there was $0.3 million of higher security-related service costs during the three months ended March 31, 2015 when compared to the same prior year period.

Our gross margin decreased slightly from 65% during the three months ended March 31, 2014 , to 63% during the three months ended March 31, 2015 . Excluding the $ 5.1 million and $ 7.4 million effect of the adjustment related to the fair value of acquired deferred revenue for the three months ended March 31, 2015 and 2014 , respectively, the gross margin also decreased to 65% for the three months ended March 31, 2015 from 67% for the three months ended March 31, 2014.
 
Operating Expenses
 
 
Three months ended March 31,
 
2015
 
2014
 
(unaudited, in thousands)
Operating Expenses:
 

 
 

Sales and marketing
$
35,679

 
$
37,533

Technology and development
5,802

 
7,198

General and administrative
17,211

 
13,742

Restructuring expense
313

 

Depreciation and amortization
13,744

 
19,239

Total operating expenses
$
72,749

 
$
77,712

 
Sales and Marketing Expenses. Sales and marketing expenses decreased 5% to $ 35.7 million and were 27% of total revenue during the three months ended March 31, 2015 , down from $ 37.5 million , which was 28% of revenue during the three months ended March 31, 2014 . Included in the $1.9 million decrease is approximately $3.3 million of lower online marketing and direct response television advertising costs, partly offset by a $1.5 million increase in salaries and benefits from the Scoot and SnapNames acquisitions.
 
Technology and Development Expenses. Technology and development expenses of $ 5.8 million , or 4% of total revenue, declined by $1.4 million during the three months ended March 31, 2015 , from $7.2 million , or 5% of total revenue during the three months ended March 31, 2014 . The decline was primarily from $1.0 million of lower salaries and benefits from a higher volume of capitalized software projects that were internally developed and $0.6 million of lower third party data center and software support costs resulting from the centralization of data centers.


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General and Administrative Expenses. General and administrative expenses increased $3.5 million to $ 17.2 million , or 13% of total revenue, during the three months ended March 31, 2015 , as compared to $ 13.7 million , or 10% of total revenue during the three months ended March 31, 2014 . Overall, during the three months ended March 31, 2015 , legal, accounting and corporate development expenses were up a total of $1.7 million when compared to the same prior year period. Data service costs increased $0.7 million during the first quarter of 2015 compared to the first quarter of 2014. In addition, bad debt expense increased about $0.5 million during the three months ended March 31, 2015.

Depreciation and Amortization Expense. Depreciation and amortization expense of $ 13.7 million during the three months ended March 31, 2015 decreased $5.5 million when compared to the three months ended March 31, 2014 . Amortization expense decreased by $6.4 million during the three months ended March 31, 2015 , as certain intangible assets primarily from the 2011 acquisition of Network Solutions became fully amortized in the fourth quarter 2014. Depreciation expense increased $0.9 million primarily from an increased volume of internally developed software projects that were placed into service.
 
Interest Expense, net. Net interest expense totaled $ 5.2 million and $7.5 million for the three months ended March 31, 2015 and 2014 , respectively. Included in the interest expense for the three months ended March 31, 2015 and 2014 , respectively, is $2.8 million and $2.7 million of deferred financing fee and loan origination discount amortization. Excluding the impact of amortizing deferred financing fees and loan origination discounts, interest expense decreased $2.4 million during the first quarter ended March 31, 2015 , compared to the first quarter of 2014 , from realizing lower interest rates from the September 2014 refinance and from lower debt levels due to repayments made.

Income Tax Expense. We recorded income tax expense of $3.6 million and $1.6 million during the three months ended March 31, 2015 and 2014 , respectively, based upon our estimated annual effective tax rates for each year. Our estimated annual effective tax rate for 2014 and 2015 reflects a net increase in our projected year-end valuation allowance related to an increase in our non-reversing deferred tax liabilities, and reduced by our forecasted pre-tax income for each year.
 
Outlook. We continue to believe that we have the potential for additional revenue growth during the remainder of 2015 as we made significant progress in addressing the issues that have been impacting our DIY and DIFM website and online marketing offerings during the second half of 2014. In 2015, we have started our plan to further differentiate our DIY offerings with a modified approach to the market, which is called "Do-It-With-Me" which will provide our DIY customers with an opportunity to speak and work with us via chat, email or telephone while they are building their websites. In addition, we continue to work with our partners to increase the level of high quality lead flow in the DIFM business channel.
As we look ahead we are confident we have identified issues impacting our business and have taken steps towards improved revenue growth as we move through 2015. We will continue to use strong cash flows to pay down debt, repurchase common stock and fund marketing investments.  As the impact of the fair market value adjustment to deferred revenue acquired in the Network Solutions and Register.com LP transactions continues to decrease even further during 2015, we expect gross margins to improve.
Liquidity and Capital Resources
 
The following table summarizes total cash flows for operating, investing and financing activities for the three months ended March 31, (in thousands):   
 
Three months ended March 31,
 
2015
 
2014
 
(unaudited, in thousands)
Net cash provided by operating activities
$
31,923

 
$
18,606

Net cash used in investing activities
(4,079
)
 
(10,358
)
Net cash used in financing activities
(33,600
)
 
(6,826
)
Effect of exchange rate changes on cash
(3
)
 

Increase in cash and cash equivalents
$
(5,759
)
 
$
1,422

 
Cash Flows

As of March 31, 2015 , we had $ 16.7 million of cash and cash equivalents and $ 126.4 million in negative working capital, as compared to $ 22.5 million of cash and cash equivalents and $ 118.0 million in negative working capital as of December 31, 2014 . The unfavorable change in working capital is primarily due to increases in deferred revenue, partly offset by an increase

21



in prepaid and deferred expenses. The majority of the negative working capital is due to significant balances of deferred revenue, partially offset by deferred expenses and deferred tax assets, which get amortized to revenue or expense/benefit rather than settled with cash. The Company expects cash generated from operating activities to be more than sufficient to meet future working capital and debt servicing requirements.

Net cash provided by operations for the three months ended March 31, 2015 increased $ 13.3 million from the three months ended March 31, 2014 primarily due to lower cash interest payments and favorable working capital requirements during the three months ended March 31, 2015 . The working capital improvements are primarily driven from lower annual performance bonuses paid in the three months ended March 31, 2015 compared 2014 and from accounts receivable timing.

Net cash used in investing activities during the three months ended March 31, 2015 was $ 4.1 million , as compared to $ 10.4 million in the three months ended March 31, 2014 . Capital expenditures during the quarter ended March 31, 2015 were slightly higher during the same prior year period primarily due to an increase in internally developed software efforts. The prior year first quarter ended included a $7.4 million payment for the acquisition of SnapNames.com, Inc. from KeyDrive S.A. in February 2014. During the three months ended March 31, 2015, the final working capital hold back was paid to KeyDrive S.A. and recorded an investing cash outflow. See Note 2, Business Combinations , for additional information surrounding the purchase.

Net cash used in financing activities reflects a $17.5 million reduction of outstanding debt as principal payments that were made during the three months ended March 31, 2015 . During the three months ended March 31, 2015, common stock repurchases of 904 thousand shares totaling $15.8 million were made in connection with our stock repurchase program announced on November 5, 2014. Proceeds received from the exercise of stock options decreased by $2.2 million to $ 2.0 million in the three months ended March 31, 2015 when compared to the same prior year period. Approximately $ 2.3 million and $ 5.0 million of cash was used to pay employee minimum tax withholding requirements in lieu of receiving common shares during the three months ended March 31, 2015 and 2014 , respectively.

Debt Covenants

The credit agreement entered into on September 9, 2014 with respect to the new credit facilities require that we not exceed a maximum first lien net leverage ratio and that we maintain a minimum consolidated cash interest expense to consolidated EBITDA coverage ratio as set forth in the table below. The first lien net leverage ratio is defined as the total of the outstanding consolidated first lien debt minus up to $50.0 million of unrestricted cash and cash equivalents, divided by consolidated EBITDA. The consolidated interest coverage ratio is defined as consolidated EBITDA divided by consolidated cash interest expense. Consolidated EBITDA is defined as consolidated net income before (among other things) interest expense, income tax expense, depreciation and amortization, impairment charges, restructuring costs, changes in deferred revenue and deferred expenses, stock-based compensation expense, non-cash losses and acquisition-related costs.

Outstanding debt as of March 31, 2015 for purposes of the First Lien Net Leverage Ratio was approximately $258.5 million . The covenant calculations as of March 31, 2015 on a trailing 12-month basis are as follows:

Covenant Description
 
Covenant Requirement as of 
March 31, 2015
 
Ratio at March 31, 2015
 
Favorable/
(Unfavorable)
Consolidated Net Debt to EBITDA
 
Not greater than 2.75
 
1.84

 
0.91

Consolidated Interest Coverage Ratio
 
Greater than 2.00
 
7.56

 
5.56

 
In addition to the financial covenants listed above, the credit agreement includes customary covenants that limit (among other things) the incurrence of debt, the disposition of assets, and making of certain payments. Substantially all of our tangible and intangible assets collateralize the long-term debt as required by the credit agreement.

Stock Repurchase Plan

In October 2014, our Board of Directors authorized a plan for the repurchase of up to $100.0 million of our outstanding common shares through December 31, 2016.

The timing, price and volume of repurchases will be based on market conditions, restrictions under applicable securities laws and other factors. The repurchase program does not require us to repurchase any specific number of shares, and we may terminate the repurchase program at any time.

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The repurchases may be made periodically in a variety of ways including open market purchases at prevailing market prices, in privately negotiated transactions, or pursuant to a 10b5-1 plan implemented. See Item 2, Issuer Repurchases of Equity Securities, for additional information.

Non-GAAP Financial Measures
 
In addition to our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G. Generally, a non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.

We believe presenting non-GAAP measures is useful to investors because it describes the operating performance of the company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. Our 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 we present 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 in this Quarterly Report on Form 10-Q.
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 we believe that excluding such measures helps management and investors better understand our 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, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, and stock-based compensation charges. Management believes that excluding these items assists management and investors in evaluating period-over-period changes in Web.com's operating income without the impact of items that are not a result of the Company's day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income Per Diluted Share . Web.com excludes from non-GAAP net income and non-GAAP net income per diluted share amortization of intangibles, income tax provision, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, amortization of debt discounts and fees, and stock-based compensation, and includes estimated cash income tax payments, because management believes that adjusting for such measures helps management and investors better understand the Company's operating activities.
Adjusted EBITDA . Web.com excludes from adjusted EBITDA depreciation expense, amortization of intangibles, 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.
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 our 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.

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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.
Amortization of debt discounts and fees . Web.com incurs amortization expense related to debt discounts and deferred financing fees. The difference between the effective interest expense and the coupon interest expense (i.e. debt discount), as well as, amortized deferred financing fees are excluded because Web.com believes the non-GAAP measures excluding these items 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.
Income tax expense . Due to the magnitude of Web.com's historical net operating losses and related deferred tax asset, the Company excludes income tax from its non-GAAP measures primarily because it is not indicative of the actual tax to be paid by the Company and therefore is not reflective of ongoing operating results. The Company believes that excluding this item provides meaningful supplemental information regarding the Company's operational performance and facilitates management's internal comparisons to the Company's historical operating results and comparisons to the Company's competitors' operating results. The Company includes the estimated tax that the Company expects to pay for operations during the periods presented.
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 the acquisitions and 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.










24



The following table presents our non-GAAP measures for the periods indicated (in thousands):
Web.com Group, Inc.
Reconciliation of GAAP to Non-GAAP Results
(in thousands, except for per share data and percentages)
(unaudited)

 
Three months ended March 31,

 
2015
 
2014
Reconciliation of GAAP revenue to non-GAAP revenue
 

 

GAAP revenue
 
$
132,600

 
$
133,843

   Fair value adjustment to deferred revenue
 
5,093

 
7,391

Non-GAAP revenue
 
$
137,693

 
$
141,234

 
 
 
 
 
Reconciliation of GAAP net income to non-GAAP net income
 

 

GAAP net income
 
$
2,339

 
$
490

   Amortization of intangibles
 
9,816

 
16,184

   Stock based compensation
 
5,047

 
4,504

   Income tax expense
 
3,561

 
1,563

   Restructuring expense
 
313

 

   Corporate development
 
597

 
40

   Amortization of debt discounts and fees
 
2,798

 
2,718

   Cash income tax expense
 
(267
)
 
(132
)
   Fair value adjustment to deferred revenue
 
5,093

 
7,391

   Fair value adjustment to deferred expense
 
191

 
301

Non-GAAP net income
 
$
29,488

 
$
33,059

 
 
 
 
 
Reconciliation of GAAP diluted net income per share to non-GAAP diluted net income per share
 
Three months ended March 31,
Diluted shares:
 
2015
 
2014
   Basic weighted average common shares
 
50,872

 
50,334

   Diluted stock options
 
1,354

 
3,546

   Diluted restricted stock
 
266

 
703

Total diluted weighted average common shares
 
52,492

 
54,583

 
 
 
 
 
Reconciliation of GAAP diluted net income per share to non-GAAP diluted net income per share
 
 
 

Diluted GAAP net income per share
 
$
0.04

 
$
0.01

   Amortization of intangibles
 
0.19

 
0.29

   Stock based compensation
 
0.10

 
0.08

   Income tax expense
 
0.07

 
0.03

   Restructuring expense
 
0.01

 

   Corporate development
 
0.01

 

   Amortization of debt discounts and fees
 
0.05

 
0.05

   Cash income tax expense
 
(0.01
)
 

   Fair value adjustment to deferred revenue
 
0.10

 
0.14

   Fair value adjustment to deferred expense
 

 
0.01

Diluted Non-GAAP net income per share
 
$
0.56

 
$
0.61

 
 


 



25



 
 
Three months ended March 31,
 
 
2015
 
2014
Reconciliation of GAAP operating income to non-GAAP operating income
 
 
 
 
GAAP operating income
 
$
11,149

 
$
9,545

   Amortization of intangibles
 
9,816

 
16,184

   Stock based compensation
 
5,047

 
4,504

   Restructuring expense
 
313

 

   Corporate development
 
597

 
40

   Fair value adjustment to deferred revenue
 
5,093

 
7,391

   Fair value adjustment to deferred expense
 
191

 
301

Non-GAAP operating income
 
$
32,206

 
$
37,965

 
 
 
 
 
Reconciliation of GAAP operating margin to non-GAAP operating margin
 
 
 
 
GAAP operating margin
 
8
%
 
7
%
   Amortization of intangibles
 
7

 
11

   Stock based compensation
 
4

 
3

   Restructuring expense
 

 

   Corporate development
 

 

   Fair value adjustment to deferred revenue
 
4

 
6

   Fair value adjustment to deferred expense
 

 

Non-GAAP operating margin
 
23
%
 
27
%
 
 
 
 
 
Reconciliation of GAAP operating income to adjusted EBITDA
 
 
 
 
GAAP operating income
 
$
11,149

 
$
9,545

   Depreciation and amortization
 
13,744

 
19,239

   Stock based compensation
 
5,047

 
4,504

   Restructuring expense
 
313

 

   Corporate development
 
597

 
40

   Fair value adjustment to deferred revenue
 
5,093

 
7,391

   Fair value adjustment to deferred expense
 
191

 
301

Adjusted EBITDA
 
$
36,134

 
$
41,020

Contractual Obligations and Commitments
 
We have no material changes outside the ordinary course of business to the Contractual Obligations table as presented in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2014 Annual Report on Form 10-K.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2015 and December 31, 2014 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have not been any material changes to the disclosure about market risk since the year ended December 31, 2014. For a full description of our disclosures about market risk, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk, in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2015.  

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 Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures.
 
Based on their evaluation as of March 31, 2015 , our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, and that such information is accumulated and communicated to us to allow timely decisions regarding required disclosures.
 
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
 
Changes in Internal Controls Over Financial Reporting.
 
There have been no changes in our internal controls over financial reporting during the three months ended March 31, 2015  that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 PART II—OTHER INFORMATION
Item 1. Legal Proceedings.

The Federal Trade Commission ("FTC") has investigated the methods by which Network Solutions has marketed its domain name and web hosting services to customers and has accepted for public comment a consent agreement resolving the investigation that would restrict certain of our future web hosting marketing practices, but would not require any changes in current practices, and would not impose any monetary penalties or require other payments.  The consent order is subject to public comment for thirty days, after which the FTC will decide whether to make it final.

In addition, from time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our marketing practices, customer and vendor contracts and employment related disputes. We believe that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on our financial position, marketing practices or results of operations. There were no material legal matters that were reasonably possible or estimable at March 31, 2015.


27




Item 1A. Risk Factors.
In evaluating Web.com and our business, you should carefully consider the risks and uncertainties set forth below, together with all of the other information in this report. The following risks should be read in conjunction with our “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
The risks relating to our business and industry, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015, are set forth below and are unchanged substantively at March 31, 2015.

In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
As of March 31, 2015 , we had $275.3 million aggregate principal amount of our Term Loan and Revolving Credit Facility (defined above in Note 6, Long-Term Debt ) and $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes") outstanding. Our ability to generate cash flow from operations to make principal and interest payments on our debt will depend on our future performance, which will be affected by a range of economic, competitive and business factors. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to seek additional capital to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or reducing or delaying capital investments and acquisitions. We cannot assure you that such additional capital or alternative financing will be available on favorable terms, if at all. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations. We may also choose to use cash flow from operations to repurchase shares of our common stock which would otherwise be available to pay down long-term debt.
Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.
Due to our evolving business model, and the unpredictability of our evolving industry, our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:
our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers' requirements;
the renewal rates and renewal terms for our services;
changes in our pricing policies;
the introduction of new services and products by us or our competitors;
our ability to hire, train and retain members of our sales force;
the rate of expansion and effectiveness of our sales force;
technical difficulties or interruptions in our services;
general economic conditions;
additional investment in our services or operations;
ability to successfully identify acquisition targets and integrate acquired businesses and technologies; and
our success in maintaining and adding strategic marketing relationships.
These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.
Additionally, in light of current global and U.S. economic conditions, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

28



We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.
One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:
issue additional equity securities that would dilute our stockholders;
use cash that we may need in the future to operate our business; and
incur debt that could have terms unfavorable to us or that we might be unable to repay.
Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.
We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.
The software and workflow processes that underlie our ability to deliver our web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our web services or products, or that materially impact the efficiency or cost with which we provide these web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.
We have a risk of system and Internet failures, which could harm our reputation, cause our customers to seek reimbursement for services paid for and not received, and cause our customers to seek another provider for services.
We must be able to operate the systems that manage our network around the clock without interruption. Our operations depend upon our ability to protect our network infrastructure, equipment, and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. Our networks are currently subject to various points of failure. For example, a problem with one of our routers (devices that move information from one computer network to another) or switches could cause an interruption in the services that we provide to some or all of our customers. In the past, we have experienced periodic interruptions in service. We have also experienced, and in the future we may again experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:
cause customers or end users to seek damages for losses incurred;
require us to replace existing equipment or add redundant facilities;
damage our reputation for reliable service;
cause existing customers to cancel their contracts; or
make it more difficult for us to attract new customers.
We could be adversely affected by information security breaches or cyber security attacks.
Information security risks have generally increased in recent years, in part because of the proliferation of new technologies and the use of the Internet, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. Our web services involve the storage and transmission of our customers' and employees' proprietary information. Our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations. Our technologies, systems and networks may become the target of criminal cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of Web.com or third parties with whom we deal, or otherwise disrupt our or our customers’ or other third parties’ business operations. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Although we employ appropriate security technologies (including data encryption processes, intrusion detection systems), and conduct comprehensive risk assessments and other internal control procedures to assure the security of our customers' data, we cannot guarantee that these measures will be sufficient for this purpose. If our security

29



measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers' data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to detect, remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Although we have insurance in place that covers such incidents, the cost of a breach or cyber attack could well exceed any such insurance coverage.
Recently, there have been several well-publicized attacks on retailers, financial services companies and an entertainment company in which the criminal perpetrators gained unauthorized access to confidential information and customer or employee data, often through the introduction of computer viruses or malware, cyber attacks, phishing, or other means. We have had past security breaches, and while to-date, the security breaches we have experienced did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future.  Our servers are also frequently subjected to denial of service attacks and other attempts to disrupt traffic to ours and our customers' websites. Although we have been able to minimize these disruptions in the past, there is no guarantee that we will be able to do so successfully in the future. Our customers and employees have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate personal information or to introduce viruses or other malware through “trojan horse” programs to our users' computers. These emails appear to be legitimate emails sent by us, but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” activities remain a serious problem that may damage our brands, discourage use of our websites and services and increase our costs.
We could become involved in claims, lawsuits or investigations that may result in adverse outcomes.
We may become a target of government investigations, private claims, or lawsuits, involving but not limited to general business, patent, or employee matters, including consumer class actions challenging our business practices. Such proceedings may initially be viewed as immaterial but could prove to be material. Litigation is inherently unpredictable, and excessive verdicts do occur. Adverse outcomes could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business and may have a material adverse effect on our financial condition and results of operations. Given the inherent uncertainties in litigation, even when we are able to reasonably estimate the amount of possible loss or range of loss and therefore record an aggregate litigation accrual for probable and reasonably estimable loss contingencies, the accrual may change in the future due to new developments or changes in approach. In addition, such investigations, claims and lawsuits could involve significant expense and diversion of management's attention and resources from other matters.

If we cannot adapt to technological advances, our web services and products may become obsolete and our ability to compete would be impaired.
Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small businesses and their customers. As a result, our web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new web services or products, or enhancements to our web services or products, on a timely and cost-effective basis, or if our new web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.
Mobile devices are increasingly being used to access the Internet, and our cloud-based and mobile support products may not operate or be as effective when accessed through these devices, which could adversely harm our business.

We offer our products across several operating systems and through the Internet. Mobile devices, such as smartphones and tablets, are increasingly being used as the primary means for accessing the Internet and conducting e-commerce. We are dependent on the functionality of our products with third-party mobile devices and mobile operating systems, as well as web browsers that we do not control. Any changes in such devices, systems or web browsers that impact the functionality of our products or give preferential treatment to competitive products could adversely affect usage of our products. In addition,

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because a growing number of our customers access our products through mobile devices, we are dependent on the interoperability of our products with mobile devices and operating systems. Improving mobile functionality is integral to our long-term product development and growth strategy. In the event that our customers have difficulty accessing and using our products on mobile devices, our customer growth, business and operating results could be adversely affected.

Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.
As a result of the highly competitive nature of our market, and the likelihood that we may face competition from new entrants with well established brands, we believe our own brand name recognition and reputation are important. If we do not continue to build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.
Providing web services and products to small businesses designed to allow them to Internet-enable their businesses is a fragmented and changing market; if this market fails to grow, we will not be able to grow our business.
Our success depends on a significant number of small businesses outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our web services and products is relatively fragmented and constantly changing. Custom website development has been the predominant method of Internet enablement, and small businesses may be slow to adopt our template-based web services and products. Further, if small businesses determine that having an online presence is not giving their businesses an advantage, they would be less likely to purchase our web services and products. If the market for our web services and products fails to grow or grows more slowly than we currently anticipate, or if our web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.
A portion of our web services are sold on a month-to-month basis, and if our customers are unable or choose not to subscribe to our web services, our revenue may decrease.
A portion of our web service offerings are sold pursuant to month-to-month subscription agreements and our customers generally can cancel their subscriptions to our web services at any time with little or no penalty.
There are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers' businesses, the overall economic environment in the United States and its impact on small businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our financial performance.
We were profitable for the three months ended March 31, 2015 , but we were not profitable for the years ended December 31, 2014 , 2013 and 2012 and we may not stay profitable in the future.
We were profitable for the three months ended March 31, 2015 but we were not profitable for the years ended December 31, 2014 , 2013 and 2012, and may not be profitable in future years. As of March 31, 2015 , we had an accumulated deficit of approximately $368.2 million . We expect that our expenses relating to the sale and marketing of our web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to again achieve and, if achieved, to later maintain profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.
If Internet usage does not grow or if the Internet does not continue to be the standard for eCommerce, our business may suffer.
Our success depends upon the continued development and acceptance of the Internet as a widely used medium for eCommerce and communication. Rapid growth in the uses of, and interest in, the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:
the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;
the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;
security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information; and

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privacy concerns, including those related to the ability of websites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.
Any of these issues could slow the growth of the Internet, which could limit our growth and revenues.
Weakened global economic conditions may harm our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments seemingly unrelated to us or our industry may harm us. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, poor credit, restricted liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy. These conditions affect spending and could adversely affect our customers' ability or willingness to purchase our service, delay prospective customers' purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.
Our existing and target customers are small businesses. These businesses may be more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, a financial crisis affecting the banking system or financial markets or the possibility that financial institutions may consolidate or go out of business would result in a tightening in the credit markets, which could limit our customers' access to credit. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our web services and products. If small businesses experience economic hardship, or if they behave more conservatively in light of the general economic environment, they may be unwilling or unable to expend resources to develop their online presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.
If we fail to comply with the established rules of credit card associations, we will face the prospect of financial penalties and could lose our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

A substantial majority of our revenue originates from online credit card transactions. Under credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. We face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

Increases in payment processing fees, changes to operating rules, the acceptance of new types of payment methods or payment fraud could increase our operating expenses and adversely affect our business and results of operations.
 
Our customers pay for our services predominately using credit and debit cards (together, "payment cards"). Our acceptance of these payment cards requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result of a change in our business practices which increase the fees on a cost-per-transaction basis. Such increases may adversely affect our results of operations.

As our services continue to evolve and expand internationally, we will likely explore accepting various forms of payment, which may have higher fees and costs than our currently accepted payment methods. In addition, if more of our customers utilize higher cost payment methods, our payment costs could increase and our results of operations could be adversely impacted.

Furthermore, we do not obtain signatures from customers in connection with their use of payment methods. To the extent we do not obtain customer signatures, we may be liable for fraudulent payment transactions, even when the associated financial institution approves payment of the orders.

From time to time, fraudulent payment methods are used to obtain service. While we do have certain safeguards in place, we nonetheless experience some fraudulent transactions. The costs to us of these fraudulent transaction includes the costs of implementing as well as updating our safeguards. These fraudulent accounts also increase our bad debt expense and complicate our forecasting efforts as they result in almost 100% customer loss when they are discovered.  We do not currently carry insurance against the risk of fraudulent payment transactions. A failure to adequately control fraudulent payment transactions may harm our business and results of operations.
 


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Charges to earnings resulting from acquisitions may adversely affect our operating results.
One of our business strategies is to acquire complementary services, technologies or businesses and we have a history of such acquisitions. Under applicable accounting, we allocate the total purchase price of a particular acquisition to an acquired company's net tangible assets and intangible assets based on their fair values as of the date of the acquisition, and record the excess of the purchase price over those fair values as goodwill. Our management's estimates of fair value are based upon assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors, among others, could result in material charges that would adversely affect our financial results:
impairment of goodwill and/or intangible assets;
charges for the amortization of identifiable intangible assets and for stock-based compensation;
accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation; and
charges to eliminate certain of our pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.
Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made.
The failure to integrate successfully the businesses of Web.com and an acquired company, if any, in the future within the expected timeframe would adversely affect the combined company's future results.
One of our business strategies is to acquire complementary services, technologies or businesses. The success of any future acquisition will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Web.com and the acquired company. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Web.com and an acquired company. This integration will be complex and time consuming.
The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company's failure to achieve some or all of the anticipated benefits of the acquisition.
Potential difficulties that may be encountered in the integration process include the following:
lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;
complexities associated with managing the larger, more complex, combined business;
integrating personnel from the two companies while maintaining focus on providing consistent, high quality services and products;
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and
performance shortfalls at one or both of the companies as a result of the diversion of management's attention caused by completing the acquisition and integrating the companies' operations.
Successful integration of Web.com's and an acquired company's operations, products and personnel may place a significant burden on the combined company's management and internal resources. Challenges of integration include the combined company's ability to incorporate acquired products and business technology into its existing product offerings, and its ability to sell the acquired products through Web.com's existing or acquired sales channels. Web.com may also experience difficulty in effectively integrating the different cultures and practices of the acquired company, as well as in assimilating its' broad and geographically dispersed personnel. Further, the difficulties of integrating the acquired company could disrupt the combined company's ongoing business, distract its management focus from other opportunities and challenges, and increase the combined company's expenses and working capital requirements. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the combined company's business, financial condition and operating results.



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We may not realize the anticipated benefits from an acquisition.
Acquisitions involve the integration of companies that have previously operated independently. We expect that acquisitions may result in financial and operational benefits, including increased revenue, cost savings and other financial and operating benefits. We cannot be certain, however, that we will be able to realize increased revenue, cost savings or other benefits from any acquisition, or, to the extent such benefits are realized, that they are realized timely or to the same degree as we anticipated. Integration may also be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on product roadmaps or other strategic matters. We may integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which may be dissimilar. Difficulties associated with integrating an acquisition's service and product offering into ours, or with integrating an acquisition's operations into ours, could have a material adverse effect on the combined company and the market price of our common stock.
Our business depends in part on our ability to continue to provide value-added web services and products, many of which we provide through agreements with third parties. Our business will be harmed if we are unable to provide these web services and products in a cost-effective manner.
A key element of our strategy is to combine a variety of functionalities in our web service offerings to provide our customers with comprehensive solutions to their online presence needs, such as Internet search optimization, local yellow pages listings, and eCommerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 30 to 90 days, and without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.
Our data centers are maintained by third parties. A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers.
A substantial portion of the network services and computer servers we utilize in the provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of our servers are housed in data centers in Atlanta, Georgia and  Jacksonville, Florida. We obtain Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, we may house other servers and hardware items in facilities owned or operated by other service providers.

A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although we believe we have taken adequate steps to protect our business through contractual arrangements with our service providers, we cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. Any significant disruption could cause significant harm to us, including a significant loss of customers. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects our ability to support our customers or could result in a decrease in our financial performance.
We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.
The market for our web services and products is highly competitive and is characterized by relatively low barriers to entry. Our competitors vary in terms of their size and what services they offer. We encounter competition from a wide variety of company types, including:
website design and development service and software companies;
Internet service providers and application service providers;
Internet search engine providers;
local business directory providers;
website domain name providers and hosting companies; and

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eCommerce platform and service providers.
In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from both established and emerging companies. Increased competition may result in reduced gross margins, the loss of market share, or other changes which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.
Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline and our business could be harmed.
Our business could be affected by new governmental regulations regarding the Internet.
To date, government regulations have not materially restricted use of the Internet in most parts of the world. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but previously inapplicable or unenforced laws may be deemed to apply to the Internet or regulatory agencies may begin to rigorously enforce such formerly unenforced laws, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect:
the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and defamation, infringement of third-party intellectual property and other abusive conduct;
other claims based on the nature and content of Internet materials;
user privacy and security issues;
consumer protection;
sales taxes by the states in which we sell certain of our products and other taxes, including the value-added tax of the European Union member states, which could impact how we conduct our business by requiring us to set up processes to collect and remit such taxes and could increase our sales audit risk;
characteristics and quality of services; and
cross-border eCommerce.
The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communications, ecommerce and advertising. In addition, such changes in laws could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and results of operations.
Changes in legislation or governmental regulations, policies or standards applicable to our product offerings may have a significant impact on our ability to compete in our target markets.
The telecommunications industry is regulated by the Federal Communications Commission ('FCC") in the U.S. While most such regulations do not affect us directly, certain of those regulations may affect our product offerings. For example, effective October 16, 2013, new FCC rules require companies to obtain prior express written consent from consumers before calling them with prerecorded telemarketing "robocalls" or before using an autodialer to call their wireless numbers with telemarketing messages unless unambiguous written consent is obtained before the telemarketing call or text message. If we are unable to satisfy such FCC rules, we could be prevented from providing such product offering to our customers, which could materially and adversely affect our future revenues.
We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services and products or enhance our existing web services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds.

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The global financial crisis, which included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit and substantial reductions or fluctuations in equity and currency values worldwide, may make it difficult for us to obtain additional financing on terms favorable to us, if at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.
The Company's ability to use its net operating loss carry forwards ("NOLs") to offset future taxable income may be limited if taxable income does not reach sufficient levels, or as a result of a change in control which could limit available NOLs.
As of December 31, 2014 , the Company has U.S. Federal NOLs of approximately $243.4 million (excluding $72.0 million related to excess tax benefits for stock-based compensation tax deductions in excess of book compensation which will be credited to additional paid-in capital when such deductions reduce taxes payable, as determined on a “with-and-without” basis) available to offset future taxable income which expire between 2020 and 2033. The NOLs are subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company estimates that at least $189.8 million of the NOLs will be available during the carry forward period based on our existing Section 382 limitations. As of December 31, 2014 , the Company's valuation allowance includes $189.4 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of existing deferred tax liabilities and current Section 382 limits.
If the Company experiences any future “ownership change” as defined in Section 382 of the Code, the Company's ability to utilize its U.S. NOLs could be further limited. Similar results could apply to our U.S. state NOLs because the states in which we operate generally follow Section 382.
As of December 31, 2014, the Company had $62.2 million of NOLs in the United Kingdom obtained in connection with the Scoot acquisition. Although not subject to expiration, pre-acquisition NOLs could be eliminated under certain circumstances, as determined under applicable tax laws in the United Kingdom, in the 3 year periods both before and after the acquisition date. Although the Company does not believe the pre-acquisition NOLs are subject to any such limitations to date, future activities could subject these NOLs to limitation. As of December 31, 2014, the Company's valuation allowance includes $56.2 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of existing deferred tax liabilities.
The Company's ability to use its NOLs will also depend on the amount of taxable income generated in future periods. The U.S. NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.
The accounting method for convertible debt securities that may be settled in cash, such as the 2018 Notes, could have a material effect on our reported financial results.
Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the 2018 Notes is that the equity component is required to be included in the additional paid-in-capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 2018 Notes. As a result, we will be required to record a greater amount of non-cash interest expense from the amortization of the discounted carrying value of the 2018 Notes to their face amount over the term of the 2018 Notes. We will also report lower net income or increased net loss in our financial results, the trading price of our common, and the trading price of the 2018 Notes.
In addition, under certain circumstances, convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares that would be issuable upon conversion of the 2018 Notes are not included in the calculation of diluted earnings per share except to the extent the conversion value of the 2018 Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit our use the treasury stock method. If we are unable to use the treasury stock method in

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accounting for the shares issuable upon conversion of the 2018 Notes, then our diluted earnings per share may be adversely affected.
Any growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.
Growth in our business may place a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. Growth in our employee base may be required to expand our customer base and to continue to develop and enhance our web service and product offerings. To manage growth of our operations and personnel, we would need to enhance our operational, financial, and management controls and our reporting systems and procedures. This would require additional personnel and capital investments, which would increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.
If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.
Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our internal control over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2015 will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex as we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Select Market, either of which would harm our stock price.
We are dependent on our executive officers, and the loss of any key member of this team may compromise our ability to successfully manage our business and pursue our growth strategy.
Our future performance depends largely on the continuing service of our executive officers and senior management team, especially that of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.
Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.
Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity, if they ever do. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.
Our business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain system.
The domain registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for

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directing Internet traffic without the use of the existing domain system. The widespread acceptance of any alternative systems could eliminate the need to register a domain to establish an online presence and could materially adversely affect our business, financial condition and results of operations.
We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or otherwise harm our competitive position.
Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect all of our core intellectual property. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Current accounting rules require that goodwill and other intangible assets with indefinite useful lives may not be amortized, but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay, or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
establish a classified board of directors so that not all members of our board are elected at one time;
provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders;
require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;
authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Repurchases of Equity Securities

38



Share repurchase activity during the three months ended March 31, 2015 was as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period
 
Total
Number
of Shares
Purchased(*)
 
Average
Price Paid
per Share
 
Total
Number of
Shares
Purchased
as Part of a
Publicly
Announced
Program
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (*)
 
January 1-January 31, 2015
 
157,383
 
 
 
$
17.48

 
157,383
 
 
$
86,463,340

 
February 1-February 28, 2015
 
359,293
 
 
 
$
17.08

 
359,293
 
 
$
80,327,535

 
March 1-March 31, 2015
 
387,318
 
 
 
$
17.81

 
387,318
 
 
$
73,428,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
903,994
 
 
 
$
17.46

 
903,994
 
 
$
73,428,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(*)
The share repurchases totaling $15.8 million in the three months ended March 31, 2015 were made under our stock repurchase program announced on November 5, 2014, which authorizes the repurchase of up to $100 million of our outstanding shares of common stock from time to time. This program, according to its terms, will expire on December 31, 2016. Repurchases under the programs may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan.


Item 3. Defaults Upon Senior Securities.
 
None.

Item 4. Mine Safety Disclosures.
 
Not applicable.

Item 5. Other Information.

None.


39



Item 6. Exhibits.  
Exhibit No.
 
Description of Document
3.1

 
Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)
3.2

 
Amended and Restated Bylaws of Web.com Group, Inc. (2)
3.3

 
Certificate of Ownership and Merger of Registration (3)
4.1

 
Reference is made to Exhibits 3.1 and 3.2
4.2

 
Specimen Stock Certificate. (3)
4.3

 
Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (4)
4.4

 
First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (5)
10.1

 
Agreement by and among Web.com Group, Inc., Okumus Fund Management Ltd., Okumus Opportunistic Value Fund, Ltd., and Ahmet H. Okumus, dated February 6, 2015 (6)
10.2

 
Compensatory Arrangements of Certain Officers. (8)
10.3

 
Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement under Web.com Group, Inc. 2014 Equity Incentive Plan.
31.1

 
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2

 
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1

 
Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (7)
EX-101.INS

 
XBRL Instance Document.*
EX-101.SCH

 
XBRL Taxonomy Extension Schema Document.*
EX-101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.*
EX-101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.*
EX-101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.*
EX-101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.*
  
* The XBRL information is being furnished with this Form 10-Q, not filed
________________________ 
 
(1)
Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
(2)
Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.
(3)
Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.
(4)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.
(5)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.
(6)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 9, 2015 and incorporated herein by reference.
(7)
The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

40



(8)
Filed as Item 5.02 to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 12, 2015.


41




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
Web.com Group, Inc.
 
(Registrant)
 
 
May 1, 2015
/s/ Kevin M. Carney
Date
Kevin M. Carney
Chief Financial Officer
(Principal Financial and Accounting Officer)
   

42





INDEX OF EXHIBITS
 
Exhibit No.
 
Description of Document
3.1
 
Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)
3.2
 
Amended and Restated Bylaws of Web.com Group, Inc. (2)
3.3
 
Certificate of Ownership and Merger of Registration (3)
4.1
 
Reference is made to Exhibits 3.1 and 3.2
4.2
 
Specimen Stock Certificate. (3)
4.3
 
Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (4)
4.4
 
First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (5)
10.1
 
Agreement by and among Web.com Group, Inc., Okumus Fund Management Ltd., Okumus Opportunistic Value Fund, Ltd., and Ahmet H. Okumus, dated February 6, 2015. (6)
10.2
 
Compensatory Arrangements of Certain Officers. (8)
10.3
 
Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement under Web.com Group, Inc. 2014 Equity Incentive Plan.
31.1
 
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2
 
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (7)
EX-101.INS
 
XBRL Instance Document.*
EX-101.SCH
 
XBRL Taxonomy Extension Schema Document.*
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
EX-101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
EX-101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
(1)
Filed as an Exhibit to the Company’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
(2)
Filed as an Exhibit to the Company’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.
(3)
Filed as an Exhibit to the Company’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.
(4)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.
(5)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated by reference.
(6)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 9, 2015 and incorporated herein by reference.
(7)
The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

43



(8)
Filed as Item 5.02 to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on February 12, 2015.




*                     The XBRL information is being furnished with this Form 10-Q, not filed.

44


 
Exhibit 10.3


Web.com Group, Inc.
Performance Stock Unit Award Grant Notice
2014 Equity Incentive Plan


Web.com Group, Inc. (the “Company” ), pursuant to its 2014 Equity Incentive Plan (the “Plan” ), hereby awards to Participant a Performance Stock Unit Award in respect of the target and maximum number of performance stock units (“ PSUs ”) set forth below (the “Award” ). The Award is subject to all of the terms and conditions as set forth herein, including the Vesting Criteria set forth on Exhibit A hereto, the Plan and the Performance Stock Unit Award Agreement. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Vesting Criteria, the Plan or the Performance Stock Unit Agreement, as applicable. Except as provided herein, in the event of any conflict between such provisions, the terms of the Plan shall control.

Participant:                     _____________________________
Date of Grant:          _____________________________
Target number of PSUs subject to Award:     _____________________________    
Maximum number of PSUs subject to Award:     _____________________________    
Performance Period:                 _____________________________


Vesting Criteria :
The Award will vest contingent upon attainment of the performance and service conditions specified on the attached Exhibit A (the “ Vesting Criteria ”).

Determination of Actual Award: On the Date of Grant, the Committee will determine the Target and Maximum number of PSUs subject to Participant’s Award. Following the close of the Performance Period, the Committee will determine and certify the extent to which the Vesting Criteria have been achieved, if at all, and provided that the Participant is in Continuous Service through the last day of the Performance Period, the Company will credit the Participant with an Actual Award representing the number of PSUs, which may be equal to all or a portion (including none) of the Maximum Award, as determined by the Committee.

Issuance Schedule:
The shares of Common Stock to be issued in respect of the Award will be issued in accordance with the issuance schedule set forth in Section 6 of the Performance Stock Unit Agreement.

Additional Terms/Acknowledgements: The undersigned Participant acknowledges receipt of, and understands and agrees to, this Performance Stock Unit Grant Notice, the Performance Stock Unit Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Performance
Stock Unit Grant Notice including the Vesting Criteria, the Performance Stock Unit Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the Award and supersedes all prior oral and written agreements on that subject.


Web.com Group, Inc.                              Participant

By: _________ __________________________                 _
Signature                                  Signature
Title:__________________________________                  Date: ___________________________     





Date:     __________________________________
Attachments :
Vesting Criteria, Performance Stock Unit Award Agreement and 2014 Equity Incentive Plan

Exhibit A

Vesting Criteria

Subject to the Participant’s Continuous Service through the Performance Period, the Performance Stock Units granted hereunder shall vest as to a number of shares of the Company’s Common Stock in an amount equal to the product of (1) the Target number of PSUs subject to the Award and (2) the level of achievement on the Vesting Criteria, as determined below, not to exceed the Maximum number of PSUs subject to the Award.
[Insert Vesting Criteria]
 

Web.com Group, Inc.
2014 Equity Incentive Plan
Performance Stock Unit Award Agreement

Pursuant to the Performance Stock Unit Grant Notice (“ Grant Notice ”) and this Performance Stock Unit Agreement and in consideration of your services, Web.com Group, Inc. (the “ Company ”) has awarded you a Performance Stock Unit Award (the “ Award ”) under its 2014 Equity Incentive Plan (the “ Plan ”). Your Award is granted to you effective as of the Date of Grant set forth in the Grant Notice for this Award. This Performance Stock Unit Award Agreement shall be deemed to be agreed to by the Company and you upon the signing by you of the Performance Stock Unit Grant Notice to which it is attached. Capitalized terms not explicitly defined in this Performance Stock Unit Agreement shall have the same meanings given to them in the Plan or the Grant Notice, as applicable. Except as otherwise explicitly provided herein, in the event of any conflict between the terms in this Performance Stock Unit Agreement and the Plan, the terms of the Plan shall control. The details of your Award, in addition to those set forth in the Grant Notice and the Plan, are as follows.
1. Grant of the Award. This Award represents the right to be issued on a future date a number of shares of the Company’s Common Stock to be determined by reference to the Vesting Criteria and the Target number of performance stock units indicated in the Grant Notice (the “ PSUs ”). As of the Date of Grant, the Company will credit to a bookkeeping account maintained by the Company for your benefit (the “ Account ”) the Target number of PSUs subject to the Award. Except as otherwise provided herein, you will not be required to make any payment to the Company (other than past and future services to the Company) with respect to your receipt of the Award, the vesting of PSUs or the delivery of the Common Stock to be issued in respect of the Award.
2. Vesting. Subject to the limitations contained herein, your Award will vest, if at all, in accordance with the Vesting Criteria provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. Upon such termination of your Continuous Service, the PSUs credited to the Account that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or interest in the PSUs or the shares of Common Stock to be issued in respect of the Award.
3. Number of Shares.
(a) The Target number of PSUs subject to your Award may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan.
(b) Any additional PSUs that become subject to the Award pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other PSUs covered by your Award.
(c) Notwithstanding the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this Section 3. The Board shall, in its discretion, determine an





equivalent benefit for any fractional shares or fractional shares that might be created by the adjustments referred to in this Section 3.
4. Securities Law Compliance. You may not be issued any shares in respect of your Award unless either (i) the shares are registered under the Securities Act; or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award also must comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.
5. Transfer Restrictions. Your Award is not transferable, except by will or by the laws of descent and distribution. In addition to any other limitation on transfer created by applicable securities laws, you agree not to assign, hypothecate, donate, encumber or otherwise dispose of any interest in any of the shares of Common Stock subject to the Award until the shares are issued to you in accordance with Section 6 of this Agreement. After the shares have been issued to you, you are free to assign, hypothecate, donate, encumber or otherwise dispose of any interest in such shares provided that any such actions are in compliance with the provisions herein and applicable securities laws. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of Common Stock to which you were entitled at the time of your death pursuant to this Agreement.
6. Date of Issuance.
(a) The Company will deliver to you a number of shares of the Company’s Common Stock equal to the number of vested PSUs subject to your Award, including any additional PSUs received pursuant to Section 3 above that relate to those vested PSUs on the applicable vesting date(s). However, if a scheduled delivery date falls on a date that is not a business day, such delivery date shall instead fall on the next following business day. Notwithstanding the foregoing, in the event that (i) you are subject to the Company’s policy permitting officers and directors to sell shares only during certain “window” periods, in effect from time to time (the “ Policy ”) or you are otherwise prohibited from selling shares of the Company’s Common Stock in the public market and any shares covered by your Award are scheduled to be delivered on a day (the “ Original Distribution Date ”) that does not occur during an open “window period” applicable to you or a day on which you are permitted to sell shares of the Company’s common stock pursuant to a written plan that meets the requirements of Rule 10b5-1 under the Exchange Act, as determined by the Company in accordance with the Policy, or does not occur on a date when you are otherwise permitted to sell shares of the Company’s common stock on the open market, and (ii) you have elected a same day sale procedure for satisfaction of the applicable withholding tax obligations as specified in Section 9, then such shares shall not be delivered on such Original Distribution Date and shall instead be delivered on the first business day of the next occurring open “window period” applicable to you pursuant to such policy (regardless of whether you are still providing Continuous Services at such time) or the next business day when you are not prohibited from selling shares of the Company’s Common Stock in the open market, but in no event later than the fifteenth (15th) day of the third calendar month of the calendar year following the calendar year in which the shares to be issued in respect of the Award vest (the “ Latest Permitted Distribution Date ”). Delivery of the shares pursuant to the provisions of this Section 6(a) is intended to comply with the requirements for the short-term deferral exemption available under Treasury Regulations Section 1.409A-1(b)(4) and shall be construed and administered in such manner. The form of such delivery of the shares ( e.g. , a stock certificate or electronic entry evidencing such shares) shall be determined by the Company.
(b) The provisions in this Agreement for delivery of the shares in respect of the Award are intended or to provide a basis for the short-term deferral exemption from application of Section 409A of the Code so that the delivery of the shares will not trigger the additional tax imposed under Section 409A, and any ambiguities herein will be so interpreted.
7.      Dividends. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock dividend or other distribution that does not result from a Capitalization Adjustment as provided in the Plan; provided, however, that this sentence shall not apply with respect to any shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.
7. Restrictive Legends. The shares issued in respect of your Award shall be endorsed with appropriate legends determined by the Company.
8. Award not a Service Contract.
(a) Your Continuous Service with the Company or an Affiliate is not for any specified term and may be terminated by you or by the Company or an Affiliate at any time, for any reason, with or without cause and





with or without notice.  Nothing in this Performance Stock Unit Agreement (including, but not limited to, the vesting of your Award pursuant to the schedule set forth in Section 2 herein or the issuance of the shares in respect of your Award), the Plan or any covenant of good faith and fair dealing that may be found implicit in this Performance Stock Unit Agreement or the Plan shall:  (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an Affiliate; (ii) constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this Performance Stock Unit Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
(b) By accepting this Award, you acknowledge and agree that the right to continue vesting in the Award pursuant to the schedule set forth in Section 2 is earned in part by continuing as an employee, director or consultant at the will of the Company (not through the act of being hired, being granted this Award or any other award or benefit) and that the Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its businesses or Affiliates at any time or from time to time, as it deems appropriate (a “reorganization”).  You further acknowledge and agree that such a reorganization could result in the termination of your Continuous Service, or the termination of Affiliate status of your employer and the loss of benefits available to you under this Performance Stock Unit Agreement, including but not limited to, the termination of the right to continue vesting in the Award. You further acknowledge and agree that this Performance Stock Unit Agreement, the Plan, the transactions contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the term of this Agreement, for any period, or at all, and shall not interfere in any way with your right or the Company’s right to terminate your Continuous Service at any time, with or without cause and with or without notice.
9. Withholding Obligations.
(a) On or before the time you receive a distribution of the shares subject to your Award, or at any time thereafter as requested by the Company, you hereby authorize any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate which arise in connection with your Award (the “ Withholding Taxes ”). Prior to the date that your Withholding Taxes obligation is triggered, you will separately be provided with an estimate of your Withholding Taxes liability and an election form upon which you may select the method of satisfaction of your Withholding Taxes obligation (the “ Withholding Taxes Election Form ”).
(b) As further specified on the Withholding Taxes Election Form, you may satisfy all or any portion of the Withholding Taxes obligation relating to your Award by any of the following means or by a combination of such means: (i) deposit cash into your E*Trade account; (ii) a “same day sale” procedure under a Regulation T Program whereby you authorize E*Trade to sell a number of whole shares necessary to cover the Withholding Taxes, (iii) tender a cash payment to the Company via check or money order and authorize the Company to “true up” the actual Withholding Taxes amount owed by crediting or debiting your next regular payroll; or (iv) a “net share settlement” whereby you authorize the Company to withhold shares of Common Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value (measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes; provided, however, that the number of such shares of Common Stock so withheld shall not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income. If you elect to satisfy the Withholding Taxes obligation via a net share settlement, such election will be subject to and contingent upon the prior approval of the Company, in its sole discretion. A “same day sale” procedure method for satisfaction of your Withholding Taxes obligation will not be available if you are not permitted to sell those shares of the Company’s common stock on the open market for any reason on the applicable date.
(c) If you do not make a timely election on the Withholding Taxes Election Form for the method for satisfaction of payment of the Withholding Taxes obligation, or you elect a same day sale procedure that is not available because you are not permitted so sell the shares into the open market, or you make an election to deposit cash into your E*Trade account or to tender a cash payment to the Company but fail to make such payments, then the default method for satisfaction of the Withholding Taxes obligation will be a net share settlement, subject to the prior approval of the Company as specified above. If approval for a net share settlement method (whether elected by you or as the defaulted method) is not received, then the Withholding Taxes will be satisfied via a same day sale; provided,





however that if such procedure is not available due to trading restrictions, then you must satisfy the Withholding Taxes obligation either by depositing cash into your E*Trade account or by tendering a cash payment to the Company via check or money order.
(d) Unless the Withholding Taxes obligations of the Company and/or any Affiliate are satisfied no later than the earlier of (i) fifteen days following the date the distribution of the shares of Common Stock is scheduled to occur, or (ii) the second business day preceding the Latest Permitted Distribution Date, then the Company shall have no obligation to deliver to you any Common Stock, you will forfeit any right that you have to receive such shares, and you will not receive any other consideration for such shares or such portion of the Award to which the shares relate.
(e) In the event the Company’s obligation to withhold arises prior to the delivery to you of Common Stock or it is determined after the delivery of Common Stock to you that the amount of the Company’s withholding obligation was greater than the amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold the proper amount.
10. Unsecured Obligation. Your Award is unfunded, and as a holder of a vested Award, you shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares pursuant to this Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
11. Other Documents . You hereby acknowledge receipt or the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Company’s policy permitting officers and directors to sell shares only during certain “window” periods and the Company’s insider trading policy, in effect from time to time.
12. Notices. Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. Notwithstanding the foregoing, the Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
13. Miscellaneous.
(a) The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns. Your rights and obligations under your Award may only be assigned with the prior written consent of the Company.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.
(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award, and fully understand all provisions of your Award.
(d) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(e) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
14. Governing Plan Document. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. Except as expressly provided herein, in the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.
15. Severability. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement





or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
16. Effect on Other Employee Benefit Plans. The value of the Award subject to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Employee’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.
17. Amendment. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.

Web.com Group, Inc.
2014 Equity Incentive Plan





Exhibit 31.1
CERTIFICATION
I, David L. Brown, certify that:
1.
I have reviewed this Form 10-Q of Web.com Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 1, 2015
By:
/s/ David L. Brown
 
David L. Brown
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)








Exhibit 31.2
CERTIFICATION
I, Kevin M. Carney, certify that:
1.
I have reviewed this Form 10-Q of Web.com Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 1, 2015
By:
/s/ Kevin M. Carney
 
Kevin M. Carney
Chief Financial Officer
(Principal Financial and Accounting Officer)







Exhibit 32.1
CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), David L. Brown, Chief Executive Officer of Web.com Group, Inc., a Delaware corporation (the "Company") and Kevin M. Carney, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1.
The Company's quarterly report on Form 10-Q for the period ended March 31, 2015 , to which this Certification is attached as Exhibit 32.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and
2.
The information contained in the Period Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF , the undersigned has set his hand hereto as of May 1, 2015 .

By:
/s/ David L. Brown
 
By:
/s/ Kevin M. Carney
 
David L. Brown
 
 
Kevin M. Carney
 
Chief Executive Officer and Chairman of the Board
 
 
Chief Financial Officer
 
(Principal Executive Officer)
 
 
(Principal Financial and Accounting Officer)

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.