ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
|12808 Gran Bay Parkway, West, Jacksonville, FL||32258|
|(Address of Principal Executive Offices)||(Zip Code)|
Registrants Telephone Number, Including Area Code: (904) 680-6600
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by checkmark 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. Yes x No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer o||Accelerated filer x||
(Do not check if a smaller
|Smaller reporting company o|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $140,724,871 as of June 30, 2008, based upon the closing sale price of the common stock as quoted by the NASDAQ Global Market reported for such date. Shares of common stock held by each executive officer and each director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this calculation as such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 27, 2009, the registrant had 26,771,451 shares of common stock outstanding.
Parts of the Proxy Statement for the registrants 2009 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III of this Form 10-K.
Unresolved Staff Comments
Submission of Matters to a Vote of Security Holders
Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Selected Financial Data
Managements Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
This Form 10-K and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I Risk Factors.
Web.com Group, Inc. (formerly known as Website Pros, Inc.) (we, us, our, Web.com Group or the Company) is a leading provider of Do-It-For-Me and Do-It-Yourself website building tools, online marketing, lead generation and technology solutions that enable small and medium-sized businesses to build and maintain an effective online presence. We offer a full range of online services, including online marketing and advertising, local search, search engine marketing, search engine optimization, lead generation, home contractor specific leads, website design and publishing, logo and brand development and eCommerce solutions, meeting the needs of small businesses anywhere along their lifecycle.
The Company is currently doing business as Web.com, having updated its brand, stock symbol and sales and marketing materials in an effort to reflect its new name.
Our primary service offerings, eWorks! XL and SmartClicks, are comprehensive performance-based packages that include website design and publishing, online marketing and advertising, search engine optimization, search engine submission, lead generation, hosting and email solutions, and easy-to-understand Web analytics. As an application service provider, or ASP, we offer our customers a full range of Web services and products on an affordable subscription basis. In addition to our primary service offerings, we provide a variety of premium services to customers who desire more advanced capabilities, such as eCommerce solutions and other sophisticated online marketing services and online lead generation. The breadth and flexibility of our offerings allow us to address the Web services needs of a wide variety of customers, ranging from those just establishing their websites to those that want to enhance their existing online presence with more sophisticated marketing and lead generation services. Additionally, as the Internet continues to evolve, we plan to refine and expand our service offerings to keep our customers at the forefront.
Through the combination of our proprietary website publishing and management software, automated workflow processes, and specialized workforce development and management techniques, we believe we achieve production efficiencies that enable us to offer sophisticated Web services at affordable rates. Our technology automates many aspects of creating, maintaining, enhancing, and marketing semi-custom websites on behalf of our customers. With approximately 265,000 subscribers to our eWorks! XL, SmartClicks, and subscription-based services as of December 31, 2008, we are one of the industrys largest providers of affordable Web services and products that enable small and medium-sized businesses to have an effective online presence.
We traditionally have sold our Web services and products to customers identified primarily through strategic marketing relationships with established brand name companies that have large numbers of small and medium-sized business customers. We have a direct sales force that utilizes leads generated by our strategic marketing relationships to acquire new customers at our sales centers in Spokane, Washington; Atlanta, Georgia; Jacksonville, Florida; Manassas, Virginia; Norton, Virginia; Halifax, Nova Scotia; Barrie, Ontario; and Scottsdale, Arizona. Our sales force specializes in selling to small and medium-sized businesses across a wide variety of industries throughout the United States.
We also acquire a large number of customers directly through online and affiliate marketing activities that target small and medium-sized businesses that want to establish or enhance their online presence.
We have built our business around a subscription-based ASP model that allows small and medium-sized businesses to affordably outsource their Web services needs to us. The key elements of our business model and approach are:
Providing Comprehensive Solutions for Small and Medium-Sized Businesses. Our goal is to enable small and medium-sized businesses to outsource their Web services needs to us. Our experience is that many small and medium-sized businesses do not have the in-house expertise to effectively design an online presence
that will generate adequate traffic to their websites and increase direct consumer interaction. As a result, our customers look to us to provide these services. Our Web services include, among other features, a full range of Web services, including website design and publishing, online marketing and advertising, search engine optimization, lead generation, home contractor specific leads, logo and brand development and shopping cart solutions. We believe this combination provides our customers with a comprehensive solution to their Web services needs.
Offering Affordable Subscription-Based Solutions . Because our customer base is value-driven, we provide our Web services on an affordable subscription basis.
|||eWorks! XL and SmartClicks customers typically pay a recurring monthly fee ranging from approximately $70 to over $100, depending on which services and products they purchase.|
|||Premium online marketing service targeted at businesses with significant spending on local print yellow pages advertising. This service is priced at an average of approximately $300 per month, which we believe is significantly less than the typical cost of traditional campaigns such as half-page or full-page print yellow pages advertisements.|
|||Do-It-Yourself Site Builder Tool targets businesses to design, publish and manage a professional website on a recurring monthly fee ranging from approximately $12 to $90 per month.|
|||1ShoppingCart.com eCommerce and online marketing solutions typically on a recurring monthly fee ranging from approximately $29 to $79 per month.|
|||Lead packages, specifically targeted to contractors in the home services business market, ranging in price from $50 to $1,500, based on the specific trade vertical and geographic area.|
|||Search Engine Optimizing solution packages, ranging in price from $500 to $5,000 per month.|
|||Logo design and branding services, ranging in price from $69 to $99 per month.|
Streamlining Operations for Customer Acquisition, Fulfillment, and Support. We utilize proprietary workflow processes and customer relationship management systems, together with a combination of integrated template-driven and specialized website design tools, to sell, design, and support our Web services and products. We believe this integrated infrastructure has enabled us to significantly reduce the time from initial customer contact to site completion. Our goal is to design a website and have it complete and visible on the Internet within 72 hours from the time we receive initial information from the customer. Additionally, we have extensive experience promoting, selling, and supporting our web services and products to small and medium-sized businesses.
Forming and Enhancing Strategic Marketing Relationships. We focus on forming strategic marketing relationships with companies that have large customer bases of small and medium-sized businesses. These companies generate leads for us by providing lists of their customers, conducting e-mail marketing campaigns about our Web services and products, advertising our Web services and products on the Internet, and using other forms of both direct and indirect solicitation. These companies filter the customer lists they provide to us using a number of criteria that we believe indicate when a small or medium-sized business is likely to understand the value of our Web services and products.
We also develop relationships with leading technology providers, including major software, hardware, development and online marketing organizations, to enhance the design and sales of our products and services. Relationships with these companies allow us to quickly gain access to innovative technologies and provide more creative solutions to our customers.
1ShoppingCart.com, LogoYes, LEADS.com and Renex provide additional sales channels for our core Web services products. 1ShoppingCart.com has a network of affiliate and private-label resellers that are prospects for our other services and that can be leveraged to offer our services to their customers. Renexs growing network of home services contractors is also a source of prospective customers for website and online promotional services. LogoYes customers are also prospects for online marketing and web design services.
Up-Selling or Cross-Selling Additional Services to Existing Customers. Customers acquired through traditional and online marketing programs that target hosting or Do-It-Yourself website design services provide significant opportunities for up-selling and cross-selling additional online marketing, lead generation and search optimization products. Additionally, some of these customers are also prospects for our Do-It-For-Me services.
Our objective is to enhance our position as a leading provider of Web services and products for small to medium-sized businesses. Key elements of our strategy include:
Continuing to Target the Small and Medium-Sized Business Market Segment . We believe the small and medium-sized business market offers us the best opportunity to continue building a leading national Web services company. We believe this is an attractive market because it is large and because these businesses need a comprehensive, affordable solution to their Web services requirements. Our Web services meet critical business needs of these businesses that they often do not have the time, resources, or technical skills to fulfill themselves.
Developing or Acquiring Complementary Services and Technologies. We sell Web services and products that are essential to an effective online presence such as local and regional lead generation, search engine optimization, website search tools, affiliate marketing networks, and Web analytics. While we currently provide many of these services through our relationships and agreements with other vendors, we will seek opportunities either to internally develop some or all of these services and products or acquire businesses that provide them. Additionally, we may seek to acquire companies with existing customer bases in our target market into which we can cross-sell our Web services and products.
Expanding Our Distribution Channels. To sell our Web services and products cost efficiently, we capitalize on the connection those organizations, with which we have strategic marketing relationships, have with their small and medium-sized business customers. We plan both to expand the scope of our current strategic marketing relationships, as well as to develop additional strategic marketing relationships with organizations that have strong brand recognition with small and medium-sized businesses. We also expect to increase our marketing and sales activities so that a larger proportion of our customers are acquired through increased direct sales and new reseller programs. 1ShoppingCart.com and Renex also provide additional opportunities to expand and diversify our distribution channels.
Selling Additional Services and Products to Existing Customers. As of December 31, 2008, we had approximately 265,000 subscribers to our eWorks! XL, SmartClicks, and other subscription-based services. As customers build their online presence, we believe that we can demonstrate the value of the additional premium services and products we offer, which can increase our average revenue per customer and improve our revenue growth. For example, we can provide paid search and eCommerce capabilities to our current customers websites, enabling additional sources of revenue for them while also contributing to a measurable return on their investment.
Strengthening Customer Retention. We are dedicated to enhancing customer retention and building lasting relationships with our customers. We believe it is critical to customer retention to target small and medium-sized businesses that already understand the value of the Internet to their success. Improving customer retention also requires maximizing customer loyalty. Therefore, we are focused on customer satisfaction, consistent communication, Web service and product enhancements, and high quality customer service. Additionally, we believe that by educating our existing and prospective customers about the value of our services to their businesses we can build lasting customer relationships.
Extending Our Position as an Affordable ASP. Through the combination of our operational scale and geographical locations, we believe that we have been able to minimize the cost of delivering our Web services and products. Our template-driven processes enable us to handle orders efficiently. We have strategically located our primary sales and fulfillment facilities in the lower-cost areas of Jacksonville, Florida; Spokane, Washington; and Norton, Virginia, which helps us to better manage our cost of operations even as we expand. In the future, we may look to new international labor markets to further reduce the cost of providing our Web services and products.
Our goal is to provide a broad range of Web services and products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their online presence. By providing a comprehensive performance-based offering, we are able to sell to customers whether or not they have already established an online presence. Our Web services and products can be categorized into the following offerings:
Using our proprietary software and workflow enabled processes, we develop and support subscription Web service packages that include a 5, 10, 20, or 40 page semi-custom website and related services. These comprehensive packages include the tools and functionality necessary for a business to create, maintain, enhance, and market a successful and effective online presence. We build, test, and publish the websites and provide related services for our customers. We also provide tutorials and tools for customers to edit and manage their sites. Alternatively, customers can select from one of several levels of support programs for ongoing management and maintenance of their websites.
Our primary subscription offering is eWorks! XL, a comprehensive website design and publishing package targeted at getting small and medium-sized businesses online quickly, effectively, and affordably when they have no online presence, or a limited one. The package includes a five-page semi-custom website built on our proprietary self-editing tool, which allows for easy maintenance by the customer. By using our comprehensive, performance-based package of services, customers eliminate the need to buy, install, or maintain hardware or software to manage their online presence. This offering includes a broad set of configuration and customization options using a Web browser.
We build the initial website for the customer using the content and design information the customer provides. Our goal is to have a customers website visible on the Internet within 72 hours from the time we receive initial information from the customer.
eWorks! XL includes:
|||Initial Site Design. One of our design specialists begins the process by interviewing the customer and collecting data about the customers business. Using our NetObjects MatrixBuilder software, we then create a unique website tailored to the customers specific needs using one of our templates. Every site we build goes through an extensive quality review and assurance process prior to being published on the Internet. Additionally, every site undergoes a thorough website optimization process to enhance search engine placement.|
|||Online Marketing. We offer our customers online marketing capabilities that cost-effectively promote their websites on a local and national basis. The package includes initial submission and ongoing submissions on a regular basis of the customers websites to many popular national and local search engines. Additionally, eWorks! XL includes listings in online yellow page directories, banner advertisements, search engine optimization tools, and educational guides targeted to small businesses.|
|||Performance Scorecard . Customers receive a detailed report of their website traffic, including visitors generated through the online marketing and advertising services provided in their eWorks! XL package.|
|||Unique 800 Telephone Number. Customers receive a unique 800 number that is forwarded to their business telephone line. Information about the calls received through the 800 number are tracked and reported on the Performance Scorecard.|
|||E-mail Marketing. We provide an e-mail marketing tool that enables our customers to easily communicate with their customers and prospects. To assist our customers in collecting e-mail addresses, every website includes a subscription sign-up box for site visitors to provide their e-mail information.|
|||Webmail. Every customer receives three e-mail boxes tied to its domain name. Webmail is compatible with Microsoft Outlook and features advanced filtering and search capabilities and automatic mail forwarding and responding.|
|||Online Web Tools. eWorks! XL includes advanced online tools such as a forms manager, polling and survey capabilities, a guest book, and site search features that offer interactive website management capabilities.|
|||Modifications and Redesign Service. Customers can choose between several different levels of support, which range from having us make ongoing changes to using the self-edit tools we provide. The basic service included with eWorks! XL includes 60 minutes per month of free modification and phone consultation with one of our Web designers.|
|||Domain Name Registration. We obtain, purchase, and register a domain name appropriate for the business selected by the customer.|
|||Hosting and Technical Support. Our hosting platform offers technology and security designed to ensure the reliable daily operation of a customers website. Our secure Web hosting includes disk storage, daily backups, and a monthly data transfer allotment. We also offer technical support, including services to our customers to provide the information and consultation they need to build and manage an effective online presence.|
SmartClicks is a performance-based service with a higher subscription fee than our eWorks! XL offering. Our SmartClicks offering is targeted to customers that want additional online advertising in their local service areas. SmartClicks includes all of the benefits provided in the eWorks! XL bundle and the added benefit of guaranteed pay-per-click advertising in Google and other major search engines.
An added value of the SmartClicks package is the advertising management function the Company performs for these customers. We create the pay-per-click ads, buy appropriate keywords, monitor the programs performance and report results to customers as part of the customers subscription.
In addition to our eWorks! XL and SmartClicks subscription-based Web services, we offer a number of premium subscription-based services and functionalities for an additional fee. These premium subscription-based services are available to our eWorks! XL customers, to customers of our custom website design services and, in most cases, to customers for whom we have not built a website but who otherwise require these Web services. These premium subscription-based services include:
|||eCommerce Solutions. We offer a comprehensive set of services that enable businesses to sell their services and products online. Our service offering includes creating the online store catalog and secure shopping cart, establishing an online merchant account and assisting in setting up online payment and order processing.|
|||Power Marketing Bundles. Our Power Marketing package is an array of services and products we sell to customers that want increased local or national exposure on the Internet. Options include additional online yellow page listings and search engine submission tools.|
|||Visibility Online. We bundle a number of different services contained in our eWorks! XL package into our Visibility Online offering, which is designed to enhance the effectiveness of an online marketing program for our non-eWorks! XL customers. These services include initial search engine optimization, search engine inclusion, Yahoo! Site Match paid inclusion, listing in Yahoo! Yellow Pages, AOL Yellow Pages Promotional listing, site submission to many popular search engines and search submission tools.|
|||Internet Yellow Pages. We work with customers to design an advertising program using several Internet yellow page directories. This provides our customers the ability to target specific buyers for their own services and products locally, regionally, or nationally.|
|||Search Engine Optimization. We provide search engine optimization tools and consultation to customers that want greater visibility and performance from their online presence. Our search engine optimization products and services are designed to help improve search engine rankings and to increase qualified traffic and lead generation.|
|||Custom Design Extras. We offer several custom design features and services, including map and directions pages, external links pages, the ability to increase the number of products listed on a customers website, more advanced website statistics, database applications, password security, expanded e-mail services, and premium hosting services.|
We offer a variety of Do-It-Yourself website building and marketing solutions for small and medium-sized businesses that are more technically savvy and intend to build their own websites or enhance their websites with online marketing. These solutions include hosting services, an easy-to-use web building tool, eCommerce capabilities and online marketing. Potential customers are identified through traditional and online marketing as well as through a number of distribution partners, resellers and affiliates.
We offer core products that are standardized, scalable managed hosting services that place numerous customers on a single shared server a cost benefit that is passed along to the customer. Starter packages are designed for websites with relatively low volumes of traffic and allow our customers to establish an online presence at minimal cost. Our hosting services feature easy-to-use control panels and extensive online documentation that allow customers to control their own applications. These hosting services are sold stand-alone or bundled with a suite of website tools and services.
We offer complete custom website design services that provide sophisticated functionality and interactivity beyond those available under eWorks! XL and SmartClicks. These sites are typically built for larger, more established customers that have had an online presence in the past, or that are designing their first website with unique specifications. Customers work directly with our experienced Web designers to build a fully customized website. Additionally, we are able to sell any of our subscription-based Web services and products to our custom Web design customers.
Our team of custom design professionals includes experienced Web designers, programmers, copywriters, and search engine optimization experts who work together to ensure that the customers online business objectives are met. Custom sites are built on our NetObjects Fusion software or other sophisticated design tools that provide the flexibility and functionality to meet advanced business needs. Custom sites can include flash, animation, eCommerce solutions, sophisticated interactivity and database functionality.
We offer NetObjects Fusion, our desktop Web authoring software, for businesses that want to design websites either for themselves or for others. Combining easy-to-use wizards, drag-and-drop simplicity, and design tools, NetObjects Fusion offers the flexibility to be an intuitive website building software for novices, as well as an advanced tool for website development professionals. NetObjects Fusion offers features that allow website professionals to build websites quickly, while still enabling these professionals to offer the flexibility and functionality their clients often require. NetObjects Fusion includes eCommerce capabilities, database functionality, and image manipulation tools that website professionals find useful in building clients sites.
Through 1ShoppingCart.com, we offer a robust set of sales and marketing tools for businesses selling products and services online. 1ShoppingCart.com offers an ASP, subscription-based shopping cart solution with add-on modules that allow small and medium-sized businesses to create, promote and manage their online presence. Services include a comprehensive affiliate management program, e-mail marketing, auto-responders and ad trackers.
We offer targeted lead generation services for various business categories through Renex and LEADS.com. Renex is a competitive marketplace that matches homeowners in need of remodeling services with qualified contractors in their local area. Through a subscription-based model, contractors purchase these leads, giving them the opportunity to bid on the homeowners project. LEADS.com offers leads in other home services categories such as plumbers, landscapers, roofers and painters.
We offer search engine marketing services that offer fully customizable solutions based on our customers goals and business plans. Some of these services include search engine optimization, link building, pay-per-click advertising management, public relations and press release distributions.
We are a leading provider of do-it-yourself logos and other premium design products to small businesses around the world through our LogoYes products. Our LogoYes do-it-yourself logo creation tools provide professional, affordable design products that equip small businesses to compete with large ones. LogoYes products and services help build a companys brand value by proving a strong, unified image. We also provide the LogoYes design and brand building tools to our Do-It-For-Me web services customers.
We have invested significant time and capital resources in a set of internal processes and proprietary technologies designed to enable high-scale, high-quality mass customization of our Web services.
The workflow of our sales and fulfillment process for eWorks! XL and SmartClicks is illustrated below.
Utilizing leads provided by our strategic marketing relationships, we identify potential customers through a combination of our outbound and inbound telesales programs. Once our sales specialists have determined that a lead is a potential customer, the customer call is transferred directly to a Web services consultant. In most cases, this transfer takes place immediately so that customer contact is not interrupted. The Web services consultant conducts a Web design interview during which we collect information about the customer, request customer-specific content, and proactively help the customer design an effective online presence based on the goals for its business. Several discrete quality checks on each sale help us maximize the quality of the sale.
Using our proprietary workflow process and customer relationship management software, the interview notes and content gathered by our Web services consultants are then transmitted to our national design center. At this point, our design specialists use the notes and content collected, our proprietary design tool and one of hundreds of design templates that can be modified using a wide variety of color themes and graphics to design a semi-custom website for the customer. After completion of the website, a separate quality assurance process is automatically triggered by our proprietary workflow process and customer relationship management software. This quality assurance process includes testing of the website, reviewing notes and customer-supplied content, confirming appropriateness of styles used, and generally ensuring that the quality of the resulting online presence is consistent with our high standards. Following quality assurance, the website is published and hosted, and the customer is notified that the website is complete.
By utilizing our proprietary workflow process and customer relationship management software, specialized design tools, a large database of design templates, and several years of experience, we have been able to decrease the time of development and increase the utilization rate of our sales, design, and support staff. Our goal is to complete this process, from customer call to initial website deployment, within 72 hours. After the website is available on the Internet, we help our customers maintain, modify, and upgrade their online presence.
For all of our customers, we also provide periodic newsletters and other informational items to increase our number of customer contact events. We actively seek to interact with our customers at a variety of times during the customer life cycle through different media. Through experience and testing, we have found increased contact with customers helps to improve customer loyalty and enhance their understanding of the value of our services and products. We have also initiated several programs to foster customer loyalty, including numerous customer surveys that measure the quality of our service and the effectiveness of our products, a dedicated customer satisfaction team that follows up telephonically with every customer responding negatively to any of our surveys, segmented design experts for handling design changes quickly and professionally, and the introduction of an intensive training curriculum required for all customer care agents.
We maintain four data centers located in Jacksonville, Florida; Atlanta, Georgia and Spokane, Washington, for most of our internal operations. Servers that provide our customers website data to the Internet are located within third-party co-location facilities located in Jacksonville, Florida, and Atlanta, Georgia. These co-location facilities have a secured network infrastructure including intrusion detection at the router level. Our contract obligates our co-location provider to provide us a secured space within their overall data center. The facilities are secured through card-key numeric entry and biometric access. Infrared detectors are used throughout the facility. In addition, the co-location facilities are staffed 24 hours a day, 7 days a week, with experts to manage and monitor the carrier networks and network access. The co-location facilities staff provides 24-hour security through camera-controlled views of our equipment. The co-location facilities provide multiple Internet carriers to help ensure bandwidth availability to our customers. The availability of electric power at the co-location facilities are provided through multiple uninterruptible power supply and generator systems should power supplied by the Jacksonville Electric Authority or Georgia Power fail.
Customer data is redundant through the use of multiple application and Web servers. Customer data is backed up to other disk arrays with fail-over to help ensure high availability. Customer data is also maintained at our national design center and can be republished from archival data at any time through our Oracle 9i database system. Currently, this process could take approximately 24 hours. Our financial system reporting also uses our redundant Oracle systems and can be reconstituted in approximately 12 hours.
We are currently working with our co-location provider to establish a disaster recovery backup operation at one of the providers alternative locations. This would provide a working fail-over site to prevent a disruption of our customers websites should the Jacksonville co-location site become unavailable. The facilities are connected by fiber-optic rings to our co-location providers other centers.
Potential customers for our online marketing packages are identified primarily using an outbound telesales programs based in Manassas and Norton, Virginia. This program targets businesses with established traditional print yellow pages advertising campaigns. Customers who purchase our online marketing package offering are interviewed and advertising information is entered into our proprietary publishing system. Local advertisements are then customized for several distribution platforms, such as Yahoo! Yellow Pages and Google search, and then published to these platforms. Customers receive a monthly report that tracks the number of impressions, clicks, and calls generated by each advertisement that we place on their behalf. LEADS.com also offers lead generation products through their outbound telesales efforts to small businesses in a variety of industries including home services. In addition to selling online marketing packages and lead generation, the LEADS.com sales force sells website and search engine optimization services to its customer base.
Prospects for our 1ShoppingCart.com eCommerce product are typically small business customers that are interested in establishing an online business. Our eCommerce engine integrates a variety of marketing and advertising modules that can be purchased as a bundle, or sold individually. In addition to establishing their business online, our customers can market their services through our e-mail marketing system and auto-responders, track the effectiveness of their advertising and marketing efforts and establish, manage and maintain a robust affiliate program.
Potential customers can also test our services through a paid online trial. Once a customer downloads the trial of our software, we contact them through a series of e-mail communications and auto-responders to encourage conversion of the trial to a paid subscription and to upsell other services.
Our customer data is stored on systems that are compliant and certified to meet Visa Internationals Payment Card Industry Data Standards. We have a highly available redundant infrastructure, which provides disaster recovery backup to prevent a disruption of our customers eCommerce presence.
We offer a suite of merchant processing solutions to 1shoppingcart.com, Do-It-For-Me, Do-It-Yourself, and Renex customers that help customers save money on processing credit and debit card transactions. These services are offered through strategic partnerships with merchant services providers who analyze our customers existing processing fees to determine potential cost savings. In addition to savings on processing fees, this service offers fraud detection and card security compliance features.
Merchant services are sold primarily through online and email marketing campaigns targeting our customers that accept credit and debit cards. Once a prospect is identified through these channels, they receive a call from our payment processing processors to complete a cost analysis and close the sale.
We market our Renex services to homeowners through online advertising. Homeowners complete an online project questionnaire which describes their home remodeling project. Renex receives the online lead and sends it to local contractors in the Renex database. Some qualified contractors that respond are provided the homeowners full contact information and then the contractor works directly with the homeowner to scope the project and to provide cost estimates to the homeowner.
Our services are marketed to contractors online and through our outbound telesales. We also offer a Customer Relationship Lead Management system (CRM system) to contractors, that allows them to manage all of their leads and projects in a comprehensive, easy-to-use system.
Based in Scottsdale, Arizona, Web.com Search Agency (formerly Submitawebsite.com) offers search engine optimization and placement services to customers that want to improve their natural search rankings in popular search engines. These services are marketed to small and medium-sized businesses through organic search and online marketing. Additionally, these services are cross-sold to our customers through our outbound and inbound telesales teams.
Web.com Search Agency services align customers website code and content with strategic keyword phrase targeting, ultimately assisting a search engine algorithm in understanding and recognizing a websites keyword focus. We also sell and manage link building and blogging campaigns for customers as additional strategies to improve search engine rankings and website performance.
LogoYes services are purchased directly from the LogoYes.com website where customers can build a custom, professional logo for their business as part of their brand-building efforts. Customers can also extend their brand identity by ordering business cards through the LogoYes site.
Web.coms Do-It-Yourself customers can purchase LogoYes brand-building services directly through their account control panel. Additionally, we build logos for our Do-It-For-Me customers using the LogoYes technology.
Our hardware and software infrastructure provides an advanced set of integrated tools for design, service, modifications, and billing. NetObjects MatrixBuilder enables website design, end user modification and administration, and includes a variety of other tools accessible by our customers. Our Oracle-based proprietary workflow processes and customer relationship management software, which we developed internally, helps ensure that our production staff provides timely and efficient design services and helps us to efficiently and cost-effectively manage our customer base.
Our proprietary workflow processes and customer relationship management software enables us to build, maintain, and track large numbers of customer websites. The configuration of software and hardware includes six key modules:
|||Account Management. The account management module facilitates the creation and maintenance of a customer account and the consolidation, either manually or electronically through external submission, of pertinent customer demographics, product specifics, and billing information. We track critical aspects of customer activity, which allows customer service representatives to have immediate access to a customers complete account history.|
|||Design Tool. Our design tool, NetObjects MatrixBuilder, is browser-based, supports major Web services standards, and can be easily co-branded or private labeled for an organization with which we have a strategic relationship. NetObjects MatrixBuilder is template-based, yet can provide thousands of different website styles by using hundreds of design templates that can be modified using a wide variety of color themes and graphics. The design tool generates the HTML code, so that manual coding is not required, and facilitates the generation of domain name registration, an eCommerce storefront, and a number of other extended and value added services that our customers can access from any Web browser.|
|||Workflow Module . The workflow module expedites service and product delivery by automatically determining the required production path, such as design, quality control, or submission to search engines, based on the specific attributes of the customer or service. The workflow module also controls production flow through our organization, enabling our design and customer support staff to individually service our website customers either by routing their work automatically to the correct department or handling the request themselves.|
|||Billing Module. The billing module enables us to bill our subscription and custom design customers directly or to bill a third party in the aggregate for its end users. The billing module is integrated with a number of transaction processing tools enabling support for many different payment types.|
|||LEADS.com Publishing and Tracking System. We operate a proprietary publishing and tracking system that allows the automated building, publishing, and tracking of advertisement campaigns. These campaigns currently are published on Yahoo!, Google, Idearc (formerly Verizon Superpages), Switchboard, Looksmart and other sites affiliated with these providers.|
|||Renex Telephony Software. Our proprietary software application enables us to systematically manage the relationships and interactions with homeowners and contractors in Renexs database, enhancing the efficiency and productivity of our sales and account management teams.|
The Web.com proprietary technology includes technologies that enable the company to automate a number of back-end functions and technologies that allow customers to order, change and manage their web hosting accounts easily online without technical expertise.
Our sales organization for our subscription Web services and products comprises several distinct sales channels, including:
Outbound and Inbound Telesales. The organizations with which we have strategic marketing relationships provide us with lists of their small and medium-sized business clients who meet a broad set of criteria.
We analyze these customer lists to determine which of these customers best match our criteria for long-term clients. Our sales specialists call these prospective customers during regular business hours to discuss their Web services needs. We believe the brand and affinity relationship these prospective customers have with the parties with which we have strategic marketing relationships enhances our ability to reach a decision maker, make a presentation, have our offer considered, and close the sale during the initial call. In addition, we maintain a separate team of sales specialists specifically focused on responding to inbound inquiries generated by programs initiated by us and the organizations with which we have strategic marketing relationships. We and these organizations employ a mix of e-mail, direct mail, website, and other marketing efforts to help promote our services to prospective clients.
As of December 31, 2008, we had 239 employees in our outbound and inbound telesales units located in our sales centers in Spokane, Washington; Manassas and Norton, Virginia; Jacksonville, Florida; Atlanta, Georgia; Scottsdale, Arizona; Barrie, Ontario; and Halifax, Nova Scotia. With the benefit of having conducted several years of outbound and inbound telesales activities, we have significant management, business process, training, and product expertise within our sales team. Additionally, we employ practices designed to optimize the management of our employees and increase their sales performance.
Reseller Program. Several of the parties with which we have strategic marketing relationships have their own direct sales organizations. We have worked closely with these resellers to develop sales support and fulfillment processes that integrate with the resellers sales, service, support, and billing practices. Additionally, we provide these resellers with training and sales materials to support the Web services being offered. Companies that currently resell our services and products through their sales organizations include Yahoo!, EarthLink and Register.com.
Online Channel. We promote our services through the Web.com, LEADS.com, RenovationExperts.com 1ShoppingCart.com, Submitawebsite.com, and Globenetix.com websites. To drive prospects to our sites, we engage in online marketing and advertising campaigns, conduct targeted television campaigns to reach homeowners for Renex and participate in seminars targeting small businesses that wish to sell their services online. Our partners also promote our services by including our products on their websites and by including our services in their ongoing marketing and promotional efforts with their customers.
Affiliate Network and Private Label Partners. We sell our shopping cart and business automation solutions through direct online channels and through approximately 3,000 affiliate and private-label partners that market our services on our behalf. These partners are provided with ongoing marketing and technical support to ensure a positive customer experience for their end customers. Through Web.com, we have approximately 5,000 affiliate partners that have the ability to sell our Do-It-Yourself services. We also have a network of direct resellers for our hosting products. We believe that these affiliate partners and resellers provide additional opportunities to upsell and cross-sell our Do-It-For-Me services.
We sell NetObjects Fusion through direct sales, original equipment manufacturers, or OEMs, software bundles, and retail and reseller distribution. Currently, we are evaluating strategic alternatives for the NetObjects Fusion license software as we no longer consider it core to our predominantly subscription business model.
Direct Sales. We sell NetObjects Fusion through strategic e-mail marketing campaigns aimed at users of prior versions of the software, people that use the product on a trial basis, newsletter subscribers, and website visitors. In Europe, we also utilize magazine covermounts, which European magazines utilize to differentiate themselves. With a covermount, a copy of an older version of NetObjects Fusion is provided free with the purchase of the magazine. We require the recipient of the free version to register with us directly to be able to use the free copy of the software. The new user of the software becomes a prospect for new versions of NetObjects Fusion and for the other software products we offer.
OEM Software Bundles . A number of OEMs are offering NetObjects Fusion as part of their packaged product offerings. As needed, we customize the NetObjects Fusion application to meet the OEMs specifications and to feature the OEMs products and brands within the software. Typically, an older version of NetObjects Fusion is offered through OEM bundles, which we believe facilitates later sales of newer versions to these users.
Retail and Reseller Distribution. We work with resellers in the United States, Europe and Australia to sell NetObjects Fusion. These distributors supply smaller resellers, retailers and value added resellers in their markets with NetObjects Fusion.
A key part of our sales strategy is to leverage the brand and distribution of organizations with which we have strategic marketing relationships to sell our Web services and products. We have developed strategic marketing relationships with well-known, brand name companies. We create sales material with each of these organizations, highlighting our Web services and products while also leveraging their brand. Then, on behalf of these companies, we initiate programs where our sales representatives directly contact their small and medium-sized business customers using telesales solicitation, direct mail, and online contact.
We offer a number of benefits to the companies with whom we have established strategic marketing relationships. First, they are able to increase their revenue through the marketing fees paid by us. Second, we allow these companies to offer a comprehensive solution for delivering Web services to their small and medium-sized business customers. This can result in increased loyalty of their customer base and an overall strengthening of their customer relationships. Third, by providing our Web services to their customers through us, we enable them to differentiate their offering from that of their competitors.
We engage in a variety of marketing activities to increase awareness of our services and products, to sell additional services and products to our existing customer base, and to enhance the value we provide to small and medium-sized business entities. Our marketing activities include:
|||Targeted e-mail and direct response campaigns to prospects and customers;|
|||Search engine and other online advertising;|
|||Electronic customer newsletters;|
|||Web.com, LEADS.com, NetObjects Fusion, 1ShoppingCart, Renex, Web.com Search Agency, LogoYes and Globenetix websites;|
|||Online customer tutorials; and|
We generally target small and medium-sized businesses having fewer than 100 employees. These customers normally are focused on regional or local markets. We seek to create long-term relationships with our customers, who cover a diverse set of industries and geographies in the United States. As of December 31, 2008, we had approximately 265,000 subscribers to our eWorks! XL, SmartClicks, and other subscription-based services.
We also target small and medium-sized businesses with significant monthly spending on local print yellow pages advertising. We seek to create long-term relationships with these businesses by helping them locate new customers at a significantly lower cost per lead compared to traditional print yellow pages marketing campaigns.
We offer some of our services to our customers through third-party technology vendors, which helps us to expand our services and create additional revenue opportunities.
We do not have long-term contracts with any of these third parties. Accordingly, we or any of these providers can terminate the relationship at any time, for any reason or no reason, on short notice, often as little as 30 days. If any of these relationships terminate, we may need to seek an alternative provider of services or develop the covered services independently.
The market for Web services is highly competitive and evolving. We expect competition to increase from existing competitors as well as new market entrants. Most existing competitors typically offer a limited number of specialized solutions and services, but may provide a more comprehensive set of services in the future. These competitors include, among others, website designers, Internet service providers, Internet search engine providers, local business directory providers, website domain name registrars, eCommerce service providers, lead generation companies and hosting companies. These competitors may have greater resources, more brand recognition, and larger installed bases of customers than we do, and we cannot ensure that we will be able to compete favorably against them. Our NetObjects Fusion software has two principal competitors: Macromedia Dreamweaver and Adobe GoLive.
We believe the principal competitive factors in the small and medium-sized business segment of the Web services and online marketing and lead generation industry include:
|||Ability to reference strategic partners;|
|||Value and flexibility of the service offerings;|
|||Brand name and reputation;|
|||Quality of customer support;|
|||Speed of customer service;|
|||Ease of implementation, use, and maintenance; and|
|||Industry expertise and focus.|
Our success and ability to compete is dependent in significant part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We currently rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. As of December 31, 2008, we owned 21 issued U.S. patents. We also have several additional patent applications pending but not yet issued. Due to the rapidly changing nature of applicable technologies, we believe that the improvement of existing offerings, reliance upon trade secrets and unpatented proprietary know-how and development of new offerings generally will continue to be our principal source of proprietary protection. While we have hired third party contractors to help develop our software and to design websites, we own the intellectual property created by these contractors. Our software is not substantially dependent on any third party software, although our software does utilize open source code. Notwithstanding the use of this open source code, we do not believe our usage requires public disclosure of our own source code nor do we believe the use of open source code is material to our business.
We also have an ongoing service mark and trademark registration program pursuant to which we register some of our product names, slogans and logos in the United States and in some foreign countries. License agreements for our software include restrictions intended to protect our intellectual property. These licenses are generally non-transferable and are perpetual. In addition, we require all of our employees, contractors and many of those with whom we have business relationships to sign non-disclosure and confidentiality agreements and to assign to us in writing all inventions created while working for us. Some of our products also include third-party software that we obtain the rights to use through license agreements. In such cases, we have the right to distribute or sublicense the third-party software with our products.
We have entered into confidentiality and other agreements with its employees and contractors, including agreements in which the employees and contractors assign their rights in inventions to us. We have also entered into nondisclosure agreements with suppliers, distributors and some customers to limit access to and disclosure of our proprietary information. Nonetheless, neither the intellectual property laws nor contractual arrangements, nor any of the other steps we have taken to protect our intellectual property can ensure that others will not use our technology, or that others will not develop similar technologies.
We license, or lease from others, many technologies used in our services. We expect that we and our customers could be subject to third-party infringement claims as the number of websites and third party service providers for Web-based businesses grows. Although we do not believe that our technologies or services infringe the proprietary rights of any third parties, we cannot ensure that third parties will not assert claims against us in the future or that these claims will not be successful.
As of December 31, 2008, we had a total of 700 employees. None of our employees are represented by unions. We consider the relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
Web.com Group, Inc. was incorporated under the General Corporate Law of the State of Delaware on March 2, 1999. Our principal offices are located at 12808 Gran Bay Parkway West, Jacksonville, Florida 32258. Our telephone number is (904) 680-6600 and our website is located at www.web.com . Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-K.
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities Exchange Commission (SEC).
You may read and copy this Form 10-K at the SECs public reference room at 450 Fifth Street, NW, Washington D.C. 20549. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov .
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. For example, the direction and relative strength of the global economy has recently been increasingly uncertain due to softness in the residential real estate and mortgage markets, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors affecting spending behavior. If economic growth in the United States is slowed, or if other adverse general economic changes occur or continue, many customers may delay or reduce technology purchases or marketing spending. This could result in reductions in sales of our Web services and products, longer sales cycles, and increased price competition.
Our existing and target customers are small and medium-sized businesses. We believe these businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, the current global financial crisis affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted 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 and medium-sized 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.
Typically, our Web service offerings are sold pursuant to month-to-month subscription agreements, and our customers can generally cancel their subscriptions to our Web services at any time with little or no penalty.
Historically, we have experienced a high turnover rate in our customer base. For the years ended December 31, 2008 and 2007, 46% and 43%, respectively, of our subscribers who were customers at the beginning of the respective year were no longer subscribers at the end of the respective year. The turnover rate calculations do not include any acquisition-related customer activity.
While we cannot determine with certainty why our subscription renewal rates are not higher, we believe 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 and medium-sized businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small and medium-sized 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 stock price.
As a key part of our strategy, we have entered into agreements with a number of companies pursuant to which these parties provide us with access to their customer lists and allow us to use their names in marketing our Web services and products. Approximately 85% of our new customers in the year ended December 31, 2007, and as a result of the further diversification of our sales channels and in particular, our acquisitions in 2007, approximately 18% of our new customers in the year ended December 31, 2008, were identified through our strategic marketing relationships. We believe these strategic marketing relationships are critical to our business because they enable us to penetrate our target market with a minimum expenditure of resources. If these strategic marketing relationships are terminated or otherwise fail, our revenue would likely decline significantly and we could be required to devote additional resources to the sale and marketing of our Web services and products. We have no long-term contracts with these organizations, and these organizations are generally not restricted from working with our competitors. Accordingly, our success will depend upon the willingness of these organizations to continue these strategic marketing relationships.
To successfully execute our business plan, we must also establish new strategic marketing relationships with additional organizations that have strong relationships with small and medium-sized businesses that would enable us to identify additional prospective customers. If we are unable to diversify and extend our strategic marketing relationships, our ability to grow our business may be compromised.
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.
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.
During the course of our history, we have completed several acquisitions of other businesses, and a key element of our strategy is to continue to acquire other businesses in the future. In particular, we completed the LogoYes asset purchase in June 2008 and the Tucows customer acquisition in September 2008. Integrating these recently acquired businesses and assets and any businesses or assets we may acquire in the future could add significant complexity to our business and additional burdens to the substantial tasks already performed by our management team. In the future, we may not be able to identify suitable acquisition candidates, and if we do, we may not be able to complete these acquisitions on acceptable terms or at all. In connection with our recent and possible future acquisitions, we may need to integrate operations that have different and unfamiliar corporate cultures. Likewise, we may need to integrate disparate technologies and Web service and product offerings, as well as multiple direct and indirect sales channels. The key personnel of the acquired company may decide not to continue to work for us. These integration efforts may not succeed or may distract our managements attention from existing business operations. Our failure to successfully manage and integrate these current acquisitions, or any future acquisitions could seriously harm our business.
Acquisitions could require us to record substantial amounts of goodwill and other intangible assets. For example, during the year ended December 31, 2008, we completed our annual impairment test of goodwill and other indefinite lived intangible assets. We performed the initial step of our impairment evaluation by comparing the fair market value of our Company, as determined by using a discounted cash flow and market approach giving equal weight to both models, to its carrying value. As the carrying amount exceeded the fair value, we performed the second step of our impairment evaluation to calculate impairment and as a result recorded a goodwill and intangible asset impairment charge of $102.6 million. The primary reason for the impairment charge was the decline of our stock price during the fourth quarter of 2008. Any future impairment of this goodwill, and the ongoing amortization of other intangible assets, could adversely affect our reported financial results.
Although we generated net income for the years ended December 31, 2005, 2006, and 2007, we have not historically been profitable, were not profitable for the year ended December 31, 2008, and may not be profitable in future periods. As of December 31, 2008, we had an accumulated deficit of approximately $154.0 million and during the year ended December 31, 2008, we incurred a loss of $96.2 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.
Due to our limited operating history, our evolving business model, and the unpredictability of our emerging 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 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 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.
As a result of these factors, and 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.
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 60 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.
We must be able to operate the systems that manage our network around the clock without interruption. Our operations will 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 it may 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.|
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.
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.
The market for our Web services and products is competitive and has relatively low barriers to entry. Our competitors vary in size and in the variety of 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; and|
|||website domain name providers and hosting companies.|
In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from other established and emerging companies. Increased competition may result in price reductions, reduced gross margins, and loss of market share, any one of 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.
As a result of the anticipated increase in competition in our market, and the likelihood that some of this competition will come from companies with established brands, we believe brand name recognition and reputation will become increasingly important. Our strategy of relying significantly on third-party strategic marketing relationships to find new customers may impede our ability to build brand awareness, as our customers may wrongly believe our Web services and products are those of the parties with which we have strategic marketing relationships. 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.
Our Web services involve the storage and transmission of our customers proprietary information. Although we employ data encryption processes, an intrusion detection system, 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 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 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.
Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small and medium-sized 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 new Web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.
Our success depends on a significant number of small and medium-sized business outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our Web services and products is relatively new and untested. Custom website development has been the predominant method of Internet enablement, and small and medium-sized businesses may be slow to adopt our template-based Web services and products. Further, if small or medium-sized 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.
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.
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.
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 our core intellectual property, and we have not applied for patents in any jurisdictions inside or outside of the United
States. 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.
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 controls over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2008, 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 to the extent that 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 Market, either of which would harm our stock price.
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. Financial market disruption and general economic conditions in which the credit markets are severely constrained and the depressed equity markets 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.
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.
Achieving the benefits of any acquisition will depend in part upon the integration of the acquisitions services and products with those offered by us in a timely and efficient manner. To provide enhanced and more valuable services and products to our customers after, we also need to integrate our operations. This may be difficult, unpredictable, and subject to delay because our services and products would be developed, marketed and sold independently and were designed without regard to such integration. If we cannot successfully integrate our services and products and continue to provide customers with enhanced services and products after an acquisition on a timely basis, we may lose customers and our business and results of operations may suffer.
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 can not assure you, 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. 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 acquisitions service and product offering into ours, or with integrating an acquisitions operations into ours, could have a material adverse effect on the combined company and the market price of our common stock.
Under purchase accounting, we allocate the total purchase price to an acquired companys net tangible assets, 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 managements estimates of fair value are based upon assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors could result in material charges that would adversely affect our results:
|||impairment of goodwill;|
|||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 income to eliminate certain Web.com Group pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.|
For example, during the year ended December 31, 2008, we completed our annual impairment test of goodwill and other indefinite lived intangible assets. We performed the initial step of our impairment evaluation by comparing the fair market value of our Company, as determined by using a discounted cash flow and market approach giving equal weight to both models, to its carrying value. As the carrying amount exceeded the fair value, we performed the second step of our impairment evaluation to calculate impairment and as a result recorded a goodwill impairment charge of $102.3 million. The primary reason for the impairment charge was the decline of our stock price during the fourth quarter of 2008. We expect to incur additional costs associated with combining of acquired companies, which may be substantial. 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 Web.com Groups net income and earnings per share for the periods in which those adjustments are made.
The Company owns a 25,381 square foot building in Spokane, Washington, in which a Web services sales center is located. In addition, we lease the following principal facilities:
|Headquarters and principal administrative, finance, and marketing operations||Jacksonville, FL||112,306||July 2019|
|Leads.com sales center||Manassas, VA||24,081||September 2009|
|Leads.com sales center||Norton, VA||5,467||November 2010|
|1ShoppingCart.com operations center||Barrie, Ontario, Canada||8,301||May 2012|
|RenovationExperts.com operations center||
Halifax, Nova Scotia,
|Web.com Search Agency operations center||Scottsdale, AZ||8,280||March 2011|
|Web.com operations center||Atlanta, GA||27,482||July 2010|
|Globenetix operations center||Houston, TX||2,251||April 2009|
The following graph shows the total stockholder return as of the dates indicated of an investment of $100 in cash on November 2, 2005 (the date the Companys common stock was first publicly traded) for (i) the Companys common stock, (ii) the Nasdaq Composite Index and (iii) the RDG Internet Composite Index. All values assume reinvestment of the full amount of any dividends, however, no dividends have been declared on our common stock to date. The stock price performance on the graph below is not necessarily indicative of future performance.
|*||$100 invested on November 2, 2005 in stock or on October 31, 2005 in index-including reinvestment of dividends. Fiscal year ending December 31.|
|(1)||This Section is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.|
|(2)||This table dates back to November 2, 2005, the first date on which the Companys stock was publicly traded.|
From time to time we may be involved in litigation relating to claims arising out of our operations. There are several outstanding litigation matters that relate to our wholly-owned subsidiary, Web.com Holding Company, Inc., formerly Web.com, Inc. (Web.com Holding), including the following:
On August 2, 2006, Web.com Holding filed suit in the United States District Court for the Western District of Pennsylvania against Federal Insurance Company and Chubb Insurance Company of New Jersey, seeking insurance coverage and payment of litigation expenses with respect to litigation involving Web.com Holding pertaining to events in 2001. Web.com Holding also has asserted claims against Rapp Collins, a division of Omnicom Media, that are pending in state court in Pennsylvania for recovery of the same litigation expenses. These actions were consolidated in state court in Pennsylvania on September 30, 2008.
On June 19, 2006, Web.com Holding filed suit in the United States District Court for the Northern District of Georgia against The Go Daddy Group, Inc., seeking damages, a permanent injunction and attorney fees related to alleged infringement of four of Web.com Holdings patents. On January 8, 2009, the parties entered into a confidential settlement and patent cross-licensing agreement which resolves the lawsuit.
Web.com Holding was party to a lawsuit in state court in Missouri relating to Web.com Holdings acquisition of Communitech.Net, Inc. in 2002. In February 2008, we settled all claims related to that lawsuit pursuant to a confidential settlement agreement. As part of the settlement, we received a broad release of claims. We had previously adequately reserved for the contingencies arising from this matter, including the settlement. As such, the settlement did not have a material adverse impact on our financial condition, cash flows or results of operations.
Web.com is also defending the appeals of several other cases that were resolved favorably to Web.com but none of which is material to our company.
The outcome of litigation may not be assured, and despite managements views of the merits of any litigation, or the reasonableness of our estimates and reserves, our cash balances could nonetheless be materially affected by an adverse judgment. In accordance with SFAS No. 5 Accounting for Contingencies, we believe we have adequately reserved for the contingencies arising from the above legal matters where an outcome was deemed to be probable and the loss amount could be reasonably estimated. As such, we do not believe that the anticipated outcome of the aforementioned proceedings will have a materially adverse impact on our financial condition, cash flows, or results of operations.
No matters were submitted to a vote of our security holders during the quarter ended December 31, 2008.
Since October 27, 2008, our common stock has been listed on the NASDAQ Global Market under the symbol WWWW. Prior to such time, since November 1, 2005, our common stock has been listed on the NASDAQ Global Market under the symbol WSPI. Prior to November 1, 2005, there was no public market for our common stock. The following table sets forth the high and low stock prices of our common stock for the last two fiscal years as reported on the NASDAQ Global Market.
The closing price for our common stock as reported by the NASDAQ Global Market on February 27, 2009 was $3.00 per share. As of February 27, 2009, there were approximately 538 stockholders of record of our common stock, not including those shares held in street or nominee name.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors. None of our outstanding capital stock is entitled to any dividends.
On September 4, 2008, we announced that our Board of Directors authorized the repurchase of up to $20 million of the Companys outstanding common shares over the next eighteen months. The timing, price and volume of repurchases will be based on market conditions, liquidity, relevant securities laws and other factors. The Company may terminate the repurchase program at any time without notice.
The following table sets forth information about our stock repurchases for the three months ended December 31, 2008.
Paid per Share
as Part of
Dollar Value of
May Yet Be
Thousands) (2) , (3)
|October 1, 2008 to October 31, 2008||202,556||4.54||202,556||$||16,174|
|November 1, 2008 to November 30, 2008||1,170,000||2.10||1,170,000||$||13,717|
|December 1, 2008 to December 31, 2008||220,400||3.24||220,400||$||13,003|
|(1)||Based on trade date; not settlement date.|
|(2)||On September 4, 2008, the Web.com Group announced a stock repurchase program which authorized it to repurchase up to $20 million of the Company's outstanding common stock over the next eighteen months.|
|(3)||During the quarter ended December 31, 2008, the Company had $4.0 million in settled transactions and $147 thousand in unsettled transactions.|
On September 16, 2008, Friedman, Billings, Ramsey Group, Inc. (FBR) exercised, or caused to be exercised, its warrants to purchase 196,943 shares of common stock of the Company. The warrants were net exercised with an exercise price of $2.88. In addition, on December 10, 2008, FBR assigned warrants to purchase 61,286 shares of common stock of the Company to certain of its employees and former employees. The warrants were cash and net exercised by the recipients with an exercise price of $2.88.
|Year Ended December 31,|
|2008 (1) (3)||2007 (1)||2006 (2)||2005||2004|
|(In Thousands, Except per Share Data)|
Consolidated Statement of Operations Data:
|Income (loss) from operations||(96,907||)||1,497||2,997||425||656|
|Net income (loss)||(96,210||)||1,358||8,597||827||924|
|Net income (loss) attributable to common stockholders||(96,210||)||1,358||8,597||(329||)||(370||)|
|Basic net income (loss) attributable per common share||$||(3.51||)||$||0.07||$||0.51||$||(0.05||)||$||(0.12||)|
|Diluted net income (loss) attributable per common share||$||(3.51||)||$||0.06||$||0.44||$||(0.05||)||$||(0.12||)|
|Basic weighted average common shares outstanding||27,398||19,802||16,778||6,222||3,002|
|Diluted weighted average common shares outstanding||27,398||22,224||19,430||6,222||3,002|
|As of December 31,|
Consolidated Balance Sheet Data:
|Cash and cash equivalents||$||34,127||$||29,746||$||42,155||$||55,746||$||6,621|
|Long-term note payable and obligations under capital leases||||59||194||241|||
|Convertible redeemable preferred stock||||||||||17,454|
|Total stockholders equity (deficit)||99,293||196,431||83,956||68,355||(9,191||)|
|(1)||See Note 6 to the Consolidated Financial Statements for information regarding businesses acquired during the years ended December 31, 2008 and 2007.|
|(2)||Included in the net income for the year ended December 31, 2006 is a tax benefit of $3.2 million, which was the result of a reduction in the deferred tax asset reserve allowance.|
|(3)||Included in the net loss for the year ended December 31, 2008 is a goodwill and intangible asset impairment charge of $102.6 million. The primary reason for the impairment charge was the decline of the Companys stock price during the fourth quarter of 2008.|
In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in Item 1A. above and the risk factors set forth in this discussion, especially under the captions Variability of Results and Factors That May Affect Future Operating Results in this Form 10-K. Generally, the words anticipate, expect, intend, believe and similar expressions identify forward-looking statements. The forward-looking statements made in this Form 10-K are made as of the filing date of this Form 10-K with the Securities and Exchange Commission, and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.
We are a leading provider of Do-It-For-Me and Do-It-Yourself website building tools, online marketing, lead generation and technology solutions that enable small and medium-sized businesses to build and maintain an effective online presence. We offer a full range of online services, including online marketing and advertising, local search, search engine marketing, search engine optimization, lead generation, home contractor specific leads, website design and publishing, logo and brand development and eCommerce solutions, meeting the needs of small businesses anywhere along their lifecycle.
Our primary service offerings, eWorks! XL and SmartClicks, are comprehensive performance-based packages that include website design and publishing, online marketing and advertising, search engine optimization, search engine submission, lead generation, hosting and email solutions, and easy-to-understand Web analytics. As an application service provider, or ASP, we offer our customers a full range of Web services and products on an affordable subscription basis. In addition to our primary service offerings, we provide a variety of premium services to customers who desire more advanced capabilities; such as eCommerce solutions and other sophisticated online marketing services and online lead generation. The breadth and flexibility of our offerings allow us to address the Web services needs of a wide variety of customers, ranging from those just establishing their websites to those that want to enhance their existing online presence with more sophisticated marketing and lead generation services. Additionally, as the Internet continues to evolve, we plan to refine and expand our service offerings to keep our customers at the forefront.
Through the combination of our proprietary website publishing and management software, automated workflow processes, and specialized workforce development and management techniques, we believe that we achieve production efficiencies that enable us to offer sophisticated Web services at affordable rates. Our technology automates many aspects of creating, maintaining, enhancing, and marketing websites on behalf of our customers. With approximately 265,000 subscribers to our eWorks! XL, SmartClicks, and subscription-based services as of December 31, 2008, we believe we are one of the industrys largest providers of affordable Web services and products enabling small and medium-sized businesses to have an effective online presence.
We traditionally have sold our Web services and products to customers identified primarily through strategic relationships with established brand name companies that have a large number of small and medium-sized business customers. We have a direct sales force that utilizes leads generated by our strategic marketing relationships to acquire new customers at our sales centers in Spokane, Washington; Atlanta, Georgia; Jacksonville, Florida; Manassas, Virginia; Norton, Virginia; Halifax, Nova Scotia; Barrie, Ontario; and Scottsdale, Arizona. Our sales force specializes in selling to small and medium-sized businesses across a wide variety of industries throughout the United States.
To increase our revenue and take advantage of our market opportunity, we plan to expand our subscriber base as well as increase our revenue from existing subscribers. We intend to continue to invest in hiring additional personnel, particularly in sales and marketing; developing additional services and products; adding
to our infrastructure to support our growth; and expanding our operational and financial systems to manage our growing business. As we have in the past, we will continue to evaluate acquisition opportunities to increase the value and breadth of our Web services and product offerings and expand our subscriber base.
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:
We 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. Additionally, we do not treat a subscription as cancelled, even if the customer is not current in its payments, until either we have attempted to contact the subscriber twenty times or 60 days have passed since the most recent failed billing attempt, whichever is sooner. In any event, a subscribers account is cancelled if payment is not received within approximately 80 days.
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.
Monthly turnover 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 period, 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. In measuring monthly turnover, we use the same conventions with respect to free trials and subscribers who are not current in their payments as described above for net subscriber additions. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan. An increase in monthly turnover may signal deterioration in the quality of our service, or it may signal a behavioral change in our subscriber base. Lower monthly turnover signals higher customer retention.
We derive our revenue from sales of a variety of services to small and medium-sized businesses, including web design, online marketing, search engine optimization, eCommerce solutions, logo design and home contractor lead services. Leads are generated through online advertising campaigns targeting customers in need of web design, hosting or online marketing solutions, through strategic partnerships with enterprise partners, or through our corporate websites.
We currently derive a substantial majority of our revenue from fees associated with our subscription services, which are generally sold through our eWorks! XL, SmartClicks, Visibility Online, Web.com, Renex and 1ShoppingCart.com offerings. A significant portion of our subscription contracts include the design of a five-page website, its hosting, and several additional Web services. In the case of eWorks! XL, upon the completion and initial hosting of the website, our subscription services are offered free of charge for a 30-day trial period during which the customer can cancel at any time. After the 30-day trial period has ended, the revenue is recognized on a daily basis over the life of the contract. No 30-day free trial period is offered to customers for our Visibility Online services, and revenue is recognized on a daily basis over the life of the
contract. The typical subscription is a monthly contract, although terms range up to 12 months. We bill a majority of our customers on a monthly basis through their credit cards, bank accounts, or business merchant accounts.
The Web.com product line subscription revenue is primarily generated from shared hosting, managed services, eCommerce services, applications hosting and domain name registrations. Revenue is recognized as the services are provided. Hosting contracts generally are for service periods ranging from one to 24 months and typically require up-front fees. These fees, including set-up fees for hosting services, are deferred and recognized ratably over the customers expected service period. Deferred revenues represents the liability for advance billings to customers for services not yet provided.
For the year ended December 31, 2008 subscription revenue accounted for approximately 96% of our total revenue as compared to 94% and 90% for the years ended December 31, 2007 and 2006, respectively. The number of paying subscribers to our Web services and lead generation products drives subscription revenue as well as the subscription price that we charge for these services. The number of paying subscribers is affected both by the number of new customers we acquire in a given period and by the number of existing customers we retain during that period. We expect other sources of revenue to decline as a percentage of total revenue over time.
We generate license revenue from the sale of perpetual licenses to use our software products. Our software products enable customers to build websites either for themselves or for others. License revenue consists of all fees earned from granting customers licenses to use our software products. Software may be delivered indirectly by a channel distributor, through download from our website, or directly to end users by us. We recognize license revenue from packaged products upon shipment to end-users. We consider delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end user has been electronically provided with the licenses and software activation keys that allow the end user to take immediate possession of the software. In periods during which we release new versions of our software, our license revenue is likely to be higher than in periods during which no new releases occur.
We also generate professional services revenue from custom website design and outsourced customer service and sales support. Our custom website design work is typically billed on a fixed price basis and over very short periods. Our outsourced customer service and sales support services are typically billed on an hourly basis.
Cost of subscription revenue primarily consists of expenses related to marketing fees we pay to companies with which we have strategic marketing relationships as well as compensation expenses related to our Web page development staff, directory listing fees, customer support costs, domain name and search engine registration fees, allocated overhead costs, billing costs, and hosting expenses. 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.
Cost of license revenue consists of costs attributable to the manufacture and distribution of the software, compensation expenses related to our quality assurance staff, as well as allocated overhead costs.
Cost of professional services revenue primarily consists of compensation expenses related to our Web page development staff and allocated overhead costs. We plan to add additional resources in this area to support the expected growth in our professional services and custom design functions.
Our largest direct marketing expense are the costs associated with the online marketing channels we use to acquire and promote our services. These channels include search marketing, affiliate marketing and online partnerships. Sales costs consist primarily of salaries and related expenses for our sales and marketing staff. Sales and marketing expenses also include commissions, marketing programs, including advertising, events, corporate communications, other brand building and product marketing expenses and allocated overhead costs.
We plan to continue to invest heavily in sales and marketing by increasing the number of direct sales personnel in order to add new subscription customers as well as increase sales of additional and new services and products to our existing customer base. Our investment in this area will also help us to expand our strategic marketing relationships, to build brand awareness, and to sponsor additional marketing events. We expect that, in the future, sales and marketing expenses will increase in absolute dollars and continue to be our largest indirect cost.
Research and development expenses consist primarily of salaries and related expenses for our research and development staff, outsourced software development expenses, and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our Web services and lead generation products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. As a result, we do not have to maintain multiple versions of our software, which enables us to have lower research and development expenses as a percentage of total revenue. We expect that, in the future, research and development expenses will increase in absolute dollars as we continue to upgrade and extend our service offerings and develop new technologies.
General and administrative expenses consist of salaries and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, other corporate expenses, and allocated overhead costs. We expect that general and administrative expenses will increase in absolute dollars as we continue to add personnel to support the growth of our business.
Depreciation and amortization expenses relate primarily to our computer equipment, software, building and other intangible assets recorded due to the acquisitions we have completed.
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 these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies and estimates are described in more detail in Note 1 to our consolidated financial statements included in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 and other related generally accepted accounting principles.
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
Thus, we recognize subscription revenue on a daily basis, as services are provided. Customers are billed for the subscription on a monthly, quarterly, semi-annual, or annual basis, at the customers option. For all of our customers, regardless of their billing method, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize subscription revenue on a daily basis over the applicable service period. When we provide a free trial period, we do not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.
License revenue is derived from sales of software licenses directly to end-users as well as through value-added resellers and distributors. Software may be delivered indirectly by a distributor, through download from our website, or directly to end-users by our company. We recognize revenue generated by the distribution of software licenses directly by us in the form of a boxed software product or a digital download upon sale and delivery to the end-user. End-users who purchase a software license online pay for the license at the time of order. We do not offer extended payment terms or make concessions for software license sales. We recognize revenue generated from distribution agreements where the distributor has a right of return as the distributor sells and delivers software license product to the end-user. We recognize revenue from distribution agreements where no right of return exists when a licensed software product is shipped to the distributor. In arrangements where distributors pay us upon shipment of software product to end-customers, we recognize revenue upon payment by the distributor. We are not obligated to provide technical support in connection with software licenses and do not provide technical support services to our software license customers. Our revenue recognition policies are in compliance with Statement of Position, or SOP, 97-2 (as amended by SOP 98-4 and SOP 98-9), Software Revenue Recognition .
Professional services revenue is generated from custom website designs and outsourced customer service and sales support services. Our professional services revenue from contracts for custom website design is recorded using a proportional performance model based on labor hours incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services.
We account for our multi-element arrangements, such as in the instances where we design a custom website and separately offer other services such as hosting and marketing, in accordance with Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. We identify each element in an arrangement and assign the relative fair value to each element. The additional services provided with a custom website are recognized separately over the period for which services are performed.
In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses based on historical experience and specific customer collection issues. While credit losses have historically been within our expectations and the provisions established in our financial statements, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have a large number of customers, we do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our consolidated financial position.
We also monitor failed direct debit billing transactions and customer refunds and maintain an allowance for estimated losses based upon historical experience. These provisions to our allowance are recorded as an adjustment to revenue. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.
We record compensation expenses for our employee and director stock-based compensation plans based upon the fair value of the award in accordance with SFAS No. 123(R), Share Based Payment , which we adopted on January 1, 2006. Because we previously adopted the expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the adoption of SFAS No. 123(R) had no material impact on our financial statements. Stock-based compensation is amortized over the related vesting periods.
Valuation at the Time of Grant. We granted to our employees options to purchase common stock at exercise prices equal to the quoted market values of the underlying stock at the time of each grant. Upon granting options to our employees, we valued the fair value of each option award, on the date of the grant, using the Black Scholes option valuation model.
The table below summarizes our options granted during the years ended December 31, 2006, 2007, and 2008:
|January 2006||159,000||10.38 10.90|
|March 2007||235,250||8.90 8.92|
|September 2007||2,424,558||(1)||2.77 193.02|
|October 2007||615,750||10.20 10.52|
|(1)||Consists of options assumed by us in connection with the Web.com acquisition.|
In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets , we periodically evaluate goodwill and indefinite lived intangible assets for potential impairment. We test for the impairment of goodwill and indefinite lived intangible assets annually, 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 its carrying amount. Other intangible assets include, among other items, customer relationships, developed technology and non-compete agreements, and they are amortized using the straight-line method over the periods benefited, which is up to eight years. Other intangible assets represent long-lived assets and are assessed for potential impairment whenever significant events or changes occur that might impact recovery of recorded costs. During the year ended December 31, 2008, we completed our annual impairment test of goodwill and other indefinite lived intangible assets. After performing the tests, we determined the carrying amount exceeded the fair value and calculated the impairment. As a result, we recorded a goodwill and intangible asset impairment charge of $102.6 million. The primary reason for the impairment charge was the decline of our stock price during 2008. See Note 8 Goodwill and Intangible Assets in the consolidated financial statements for additional information on goodwill and intangible assets.
All of our acquisitions were accounted for as purchase transactions, and the purchase price was allocated to the assets acquired and liabilities assumed based on the fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired or net liabilities assumed, was allocated to goodwill. Management weighed several factors in determining the fair value of amortizable
intangibles, which primarily consists of customer relationships, non-compete agreements, trade names, and developed technology, including using valuation studies as one of many tools in determining the fair value of amortizable intangibles.
The Company accounts for income taxes under the provisions of SFAS No. 109 Accounting for Income Taxes , using the liability method. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Further, deferred tax assets are recognized for the expected realization of available net operating loss carry forwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize a liability when we believe that it is probable that a liability exists and that the liability is measurable.
In accordance with SFAS No. 109 Accounting for Income Taxes , we annually evaluate the need for a valuation allowance on its deferred tax assets. As a result of this evaluation, we determined no adjustment to the valuation allowance was necessary for the years ended December 31, 2008 and 2007. We believe that we have fully reserved for any tax uncertainties in accordance with FASB Interpretation No. 48 (FIN 48) , Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 , however, if actual results differ from our estimates, we will adjust the tax provision in the period the tax uncertainty is realized.
The following table presents our selected consolidated statement of operations data for the periods indicated (in thousands):
|Year Ended December 31,|
Cost of revenue (excluding depreciation and amortization shown separately below):
|Total cost of revenue||44,423||34,431||22,913|
|Sales and marketing||28,923||19,308||12,511|
|Research and development||9,862||5,075||2,256|
|General and administrative||19,391||16,513||9,652|
|Depreciation and amortization||13,408||5,454||1,712|
|Goodwill and asset impairment||102,552|||||
|Total operating expenses||174,972||46,593||26,131|
|(Loss) income from operations||(96,907||)||1,497||2,997|
|(Loss) income before income taxes||(96,085||)||3,435||5,397|
|Income tax (expense) benefit||(125||)||(2,077||)||3,200|
|Net (loss) income||(96,210||)||1,358||8,597|
The following table sets forth, for each component of revenue, the cost of the revenue expressed as a percentage of the related revenue for each of the periods indicated:
|Year Ended December 31,|
|Cost of subscription revenue||36||%||42||%||44||%|
|Cost of license revenue||21||31||27|
|Cost of professional services revenue||47||54||85|
Total revenue increased 48% to $122.5 million in the year ended December 31, 2008 from $82.5 million in the year ended December 31, 2007.
Subscription Revenue . Subscription revenue increased 51% to $117.3 million in the year ended December 31, 2008 from $77.7 million in the year ended December 31, 2007. The increase in subscription revenue was primarily the result of $36.5 million of additional revenue from the acquisition of Web.com as well as an increase of $4.2 million due to the growth of the average number of customers over the prior year. These increases were partially offset by the $1.1 million impact of a decrease in our average revenue per subscriber as compared to the prior year. The decrease in average revenue per subscriber was due to the addition of lower revenue subscribers from our Do-It-Yourself website building and hosting products as well as a reduction in spending by our enterprise partner subscribers.
Net subscribers increased 2,393 during the year ended December 31, 2008, compared to an increase of 9,636 in the year ended December 31, 2007, which excluded the customers acquired as part of the Web.com acquisition. The net subscriber additions includes approximately 9,300 customers that we acquired in September 2008. The average monthly turnover decreased to 4.0% in the year ended December 31, 2008 from 4.8% in the year ended December 31, 2007.
License Revenue. License revenue increased 2% to $2.5 million in the year ended December 31, 2008 from $2.4 million in the year ended December 31, 2007. This slight increase was due to the timing of the NetObjects Fusion version releases and the natural life cycle of the product.
Professional Services Revenue. Professional services revenue increased 15% to $2.8 million in the year ended December 31, 2008 from $2.4 million in the year ended December 31, 2007. Several events during the year ended December 31, 2008 contributed to the increase of professional service revenues. In June 2008, we acquired a Do-It-Yourself logo product to offer to our customers. Sales from this new product were approximately $355 thousand for the year ended December 31, 2008. In addition, revenue from search engine optimization services, originating from an acquisition completed in March 2007, increased approximately $352 thousand over the prior year. These increases were partially offset by the sale of certain customers unrelated to our core business, in April 2008, which resulted in a decrease of revenue of $173 thousand and a decrease of $157 thousand in our custom web design services.
Cost of Subscription Revenue. Cost of subscription revenue increased 32% to $42.6 million in the year ended December 31, 2008 from $32.4 million in the year ended December 31, 2007. The increase in the cost of subscription revenue was primarily the result of the additional costs of approximately $9.4 million related to the additional subscription revenue associated with customers acquired as part of our acquisitions in 2007. While total costs increased, our gross margin on subscription revenue increased to 64% for the year ended December 31, 2008 as compared to 58% in the year ended December 31, 2007. The increase of gross margin was a result of a better mix of higher margin revenue and the continued benefits of our migration and consolidation activities.
Cost of License Revenue. Cost of license revenue decreased 30% to $528 thousand in the year ended December 31, 2008 from $751 thousand in the year ended December 31, 2007. The decrease in the cost of license revenue was primarily attributable to the timing of the Fusion version release and the natural life cycle of the Fusion product.
Cost of Professional Services Revenue. Cost of professional services revenue remained constant at $1.3 million in the years ended December 31, 2008 and December 31, 2007. While total costs remained constant over the prior year, increases in costs related to the acquired Do-It-Yourself logo product and increased search engine optimization services were offset by decreases in the cost due to the sale of certain customers unrelated to our core business and a reduction in custom web design services. Gross margin on professional services revenue increased to 53% for the year ended December 31, 2008 as compared to 46% for the year ended December 31, 2007. The increase of gross margin was a result of a better mix of higher margin revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased 50% to $28.9 million, or 24% of total revenue, during the year ended December 31, 2008 from $19.3 million, or 23% of total revenue, during the year ended December 31, 2007. An increase of $7.3 million in expense was attributable to the addition of sales and marketing resources in connection with our acquisitions during 2007. During the year ended December 31, 2008, we had an increase in employee compensation and benefits cost of $2.0 million and facility expenses of approximately $261 thousand, which was offset by a reduction of $258 thousand in marketing and advertising expenses.
Research and Development Expenses. Research and development expenses increased 94% to $9.9 million, or 8% of total revenue, during the year ended December 31, 2008 from $5.1 million, or 6% of total revenue, during the year ended December 31, 2007. This was primarily due to an increase of $3.9 million in additional research and development resources associated with our acquisitions in 2007. During the year ended December 31, 2008, we had an increase in compensation and benefits costs of approximately $1.2 million due to an increase in headcount from 68 at December 31, 2007 to 92 at December 31, 2008. This increase was partially offset by a reduction of our subcontractor labor and professional fees expense by approximately $406 thousand, which was primarily due to the reduction of costs associated with the contract termination of our outsourced software developer for NetObjects Fusion.
General and Administrative Expenses. General and administrative expenses increased 17% to $19.4 million, or 16% of total revenue, during the year ended December 31, 2008 from $16.5 million, or 20% of total revenue, during the year ended December 31, 2007. Due to our acquisition in 2007, there was an increase of approximately $4.1 million of additional general and administrative expenses over the prior period. This was partially offset by a reduction of employee compensation and benefits expense of approximately $1.3 million, which was primarily the result of our migration and consolidation activities.
Restructuring Charges. During the year ended December 31, 2008, we recorded $836 thousand for restructuring charges, which consisted of contract termination fees and employee termination benefits. We decided to use existing in-house resources to assist with the future development of its NetObjects Fusion product instead of outsourcing to subcontractors. The cost of terminating this contract was approximately $474 thousand. Furthermore, we are evaluating strategic alternatives for the NetObjects Fusion license software as we no longer consider it core to our predominantly subscription business model. In addition, we restructured personnel in our operations and as a result of this reorganization terminated 51 employees and recorded termination benefits of approximately $362 thousand. During the year ended December 31, 2007, we restructured our organization by terminating six employees and closing facilities in Los Angeles, California and Seneca Falls, New York. The Company accrued expenses of $243 thousand for these restructuring costs.
Depreciation and Amortization Expense. Depreciation and amortization expense increased 146% to $13.4 million, or 11% of total revenue, during the year ended December 31, 2008 from $5.5 million, or 7% of total revenue, during the year ended December 31, 2007. Amortization expense increased to $10.2 million during the year ended December 31, 2008 from $3.8 million in the prior year due to the increase in definite-lived intangible assets as a result of our mergers and acquisitions in 2007. Depreciation expense increased to $3.2 million during the year ended December 31, 2008 from $1.7 million in the prior year due to the increase in fixed assets purchased and acquired as a result of our acquisitions.
Goodwill and Asset Impairment. On December 31, 2008, we completed our annual impairment test of goodwill and other indefinite lived intangible assets. We performed the initial step of our impairment evaluation by comparing the fair market value of our Company, as determined by using a discounted cash flow and market approaches, giving equal weight to both models, to its carrying value. As the carrying amount exceeded the fair value, we performed the second step of our impairment evaluation to calculate impairment and as a result recorded a goodwill and intangible asset impairment charge of $102.6 million. The primary reason for the impairment charge was the decline of our stock price during the fourth quarter of 2008. During the year ended December 31, 2007, based on our annual impairment test of goodwill and other indefinite lived intangible assets, there were no indicators of impairment.
Net Interest Income. Net interest income decreased 58% to $822 thousand, or 1% of total revenue, during the year ended December 31, 2008 from $1.9 million, or 2% of total revenue, during the year ended December 31, 2007. The decrease in interest income was due to the reduced average cash balances available to invest in money market funds as a result of our recent acquisitions and the decline in interest rates.
Income Tax (Expense) Benefit. Income tax expense decreased to $125 thousand during the year ended December 31, 2008 from $2.1 million during the year ended December 31, 2007. The Companys tax rate for the years ended December 31, 2008 and 2007 were 0.1% and 60.2%, respectively. The decrease in tax expense and tax rate was due to the permanent book to tax differences related to the goodwill impairment and stock based compensation.
Total revenue increased 59% to $82.5 million in the year ended December 31, 2007 from $52.0 million in the year ended December 31, 2006.
Subscription Revenue . Subscription revenue increased 66% to $77.7 million in the year ended December 31, 2007 from $46.8 million in the year ended December 31, 2006. Subscription revenue increased $30.9 million over the prior year, which was a result of an increase in customers due to our acquisitions in 2006 and 2007, an increase in customers unrelated to acquisitions, and an increase in the average revenue per customer. Specifically, our subscription revenue increased by $26.3 million over the prior year as a result of our acquisitions in 2006 and 2007. Subscription revenue increased approximately $2.1 million due to an increase in our customer base from approximately 74,000 as of December 31, 2006 to approximately 263,000 as of December 31, 2007, of which approximately 173,000 can be attributed to pre-acquisition Web.com and Submitawebsite. The increase in our average revenue per customer over the prior year resulted in additional revenues of approximately $2.5 million.
The average monthly turnover decreased to 4.8% in the year ended December 31, 2007 from 5.7% in the year ended December 31, 2006. The average monthly turnover for the year ended December 31, 2007 included customers obtained in our recent acquisitions.
License Revenue. License revenue decreased 32% to $2.4 million in the year ended December 31, 2007 from $3.6 million in the year ended December 31, 2006. This decrease was primarily attributable to the timing of the version release and the natural life cycle of the product, which resulted in less units being sold during the year ended December 31, 2007.
Professional Services Revenue. Professional services revenue increased 44% to $2.4 million in the year ended December 31, 2007 from $1.7 million in the year ended December 31, 2006. Professional services revenue increased approximately $1.4 million due to additional revenue resulting from our acquisitions in 2006 and 2007, which was partially offset by the attrition of two of our channel partners who previously supplied us with leads for potential customers.
Cost of Subscription Revenue. Cost of subscription revenue increased 58% to $32.4 million in the year ended December 31, 2007 from $20.5 million in the year ended December 31, 2006. The increase in the cost of subscription revenue of approximately $11.9 million was primarily the result of the costs associated with the increase in our subscriber base since December 31, 2006. More specifically, during the year ended December 31, 2007, we incurred additional costs of approximately $10.3 million related to the additional
subscription revenue associated with customers acquired as part of our acquisitions in 2006 and 2007. In addition, an increase of $1.0 million was due to increased employee compensation and benefits expense. Further, gross margin on subscription revenue increased to 58% for the year ended December 31, 2007 as compared to the year ended December 31, 2006.
Cost of License Revenue. Cost of license revenue decreased 22% to $751 thousand in the year ended December 31, 2007 from $958 thousand in the year ended December 31, 2006. The decrease in the cost of license revenue was primarily attributable to the timing of the Fusion version release and the natural life cycle of the Fusion product.
Cost of Professional Services Revenue. Cost of professional services revenue decreased 9% to $1.3 million in the year ended December 31, 2007 from $1.4 million in the year ended December 31, 2006. The decrease in the cost of professional services revenue was primarily the result of the costs associated with the related decrease in revenue due to the attrition of two of our channel partners, which was partially offset by the costs associated with our outsourced call center and search engine optimization professional services acquired through our acquisitions in 2006 and 2007. Gross margin on professional services revenue increased to 46% from 15% for the year ended December 31, 2007 as compared to the year ended December 31, 2006.
Sales and Marketing Expenses. Sales and marketing expenses increased 54% to $19.3 million, or 23% of total revenue, during the year ended December 31, 2007 from $12.5 million, or 24% of total revenue, during the year ended December 31, 2006. An increase of $4.3 million in expense was attributable to the addition of sales and marketing resources in connection with our acquisitions during 2006 and 2007. In addition, an increase of $2.0 million was due to increased employee compensation and benefits expense.
Research and Development Expenses. Research and development expenses increased 125% to $5.1 million, or 6% of total revenue, during the year ended December 31, 2007 from $2.3 million, or 4% of total revenue, during the year ended December 31, 2006. This was primarily due to an increase of $2.3 million in additional research and development resources associated with our acquisitions in 2006 and 2007.
General and Administrative Expenses. General and administrative expenses increased 71% to $16.5 million, or 20% of total revenue, during the year ended December 31, 2007 from $9.7 million, or 19% of total revenue, during the year ended December 31, 2006. Due to our acquisitions in 2006 and 2007, there was an increase of approximately $4.4 million of additional general and administrative expenses over the prior period. In addition, an increase of $2.1 million was due to increased employee compensation and benefits expense. In general, stock compensation in the year ended December 31, 2007 increased by $768 thousand over the prior year due to the increase in the number of stock options issued to employees.
Restructuring Charges. During the year ended December 31, 2007, the Company restructured its organization by terminating six employees and closing facilities in Los Angeles, California and Seneca Falls, New York. The Company accrued expenses of $243 thousand for these restructuring costs.
Depreciation and Amortization Expense. Depreciation and amortization expense increased 219% to $5.5 million, or 7% of total revenue, during the year ended December 31, 2007 from $1.7 million, or 3% of total revenue, during the year ended December 31, 2006. Amortization expense increased to $3.8 million during the year ended December 31, 2007 from $900 thousand in the prior year due to the increase in definite-lived intangible assets as a result of our mergers and acquisitions in 2006 and 2007. Depreciation expense increased to $1.7 million during the year ended December 31, 2007 from $812 thousand in the prior year due to the increase in fixed assets purchased and acquired as a result of our acquisitions.
Net Interest Income. Net interest income decreased 19% to $1.9 million, or 2% of total revenue, during the year ended December 31, 2007 from $2.4 million, or 5% of total revenue, during the year ended December 31, 2006. The decrease in interest income was due to the reduced average cash balances available to invest in money market funds as a result of our recent acquisitions.
Income Tax (Expense) Benefit. During the year ended December 31, 2007, income tax expense increased to $2.1 million from a benefit of $3.2 million for the year ended December 31, 2006. This increase in expense is due to the release in 2006 of a portion of our valuation allowance on our deferred tax assets. The Companys tax rate in 2007 was approximately 60.2% due to the effect of non-deductible expenses associated with incentive stock options.
As of December 31, 2008, we had $34.1 million of unrestricted cash and cash equivalents and $24.0 million in working capital, as compared to $29.7 million of cash and cash equivalents and $16.5 million in working capital as of December 31, 2007.
Net cash provided by operations for the year ended December 31, 2008 increased 46%, or $4.7 million, to $15.0 million from $10.2 million for the year ended December 31, 2007. This increase was principally due to improved operating performance, which was reflected in a 48% increase in revenue, reduced by the non-cash goodwill and intangible asset impairment charge of $102.6 million.
Net cash used in investing activities in the year ended December 31, 2008 was $3.7 million as compared to $23.7 million in the year ended December 31, 2007. During the year ended December 31, 2008, we acquired certain assets of LogoYes.com and Design Logic, Inc. totaling approximately $4.3 million, including acquisition expenses. We also purchased approximately 9,300 customers at a cost of $1.4 million, which included a $364 thousand liability for service to be provided to the acquired customers. We received proceeds from the sale of restricted investments totaling $8.5 million and reinvested $3.5 million of those proceeds. Proceeds from the sale of $5.0 million of restricted investments were transferred to a money market account and classified as unrestricted cash given that the restrictions have lapsed. In addition, we purchased $4.3 million of property and equipment. During the year ended December 31, 2007, pursuant to the Web.com merger agreement, we paid approximately $27.0 million in cash acquisition consideration to Web.com shareholders and for related expenses, which was partially offset by the receipt of $11.8 million of Web.coms unrestricted cash and cash equivalents upon completion of the acquisition. On March 31, 2007, we acquired substantially all of the assets and select liabilities of Submitawebsite, Inc., in which we made cash payments totaling approximately $2.1 million, including acquisition expenses. In addition, we made cash payments totaling $1.0 million due to contingent conditions being fulfilled in accordance with the Renex, Inc. purchase agreement. Other investing activities during 2007 consisted of the purchase of approximately $3.8 million of fixed assets, including a building in Spokane, Washington.
Net cash used in financing activities in the year ended December 31, 2008 was $6.9 million as compared to net cash provided by financing activities of $1.0 million for the year ended December 31, 2007. During the year ended December 31, 2008, our Board of Directors authorized the repurchase of up to $20 million of the Companys outstanding common shares over the next 18 months of which we had repurchased 2.1 million shares for $6.9 million. We reissued 608 thousand of those shares for exercises of stock options, warrants and restricted share issuances receiving proceeds of $1.2 million. In addition, we reduced our debt obligations by $1.2 million. During the year ended December 31, 2007, employees exercised stock options generating $2.8 million in proceeds. In addition, we reduced our debt obligations by $1.4 million.
Our principal commitments consist of obligations under leases for office space (operating) and notes payable for purchase of the LEADS.com domain name and the obligation assumed from the merger with Web.com. The following summarizes our long-term contractual obligations as of December 31, 2008 (in thousands):
Payment Due by Period
|Operating lease obligations (1)||$||21,768||$||2,683||$||2,392||$||1,834||$||1,807||$||1,824||$||11,228|
|(1)||Operating lease obligations are shown net of sublease rentals for the amounts related to each period presented.|
As of December 31, 2008 and 2007, 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.
Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:
|||the costs involved in the expansion of our customer base;|
|||the costs involved with investment in our servers, storage and network capacity;|
|||the costs associated with the expansion of our domestic and international activities;|
|||the costs involved with our research and development activities to upgrade and expand our service offerings; and|
|||the extent to which we acquire or invest in other technologies and businesses.|
We believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months, including our sales and marketing expenses, research and development expenses, capital expenditures, and any acquisitions or investments in complementary businesses, services, products or technologies.
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the Canadian Dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to reduce the effect of these potential fluctuations. We have not entered into any hedging contracts since exchange rate fluctuations have had little impact on our operating results and cash flows. The majority of our subscription agreements are denominated in U.S. dollars. To date, our foreign sales have been primarily in Euros. Sales to customers domiciled outside the United States were approximately 1% and 2% of our total revenue in each of the years ended December 31, 2008 and 2007, respectively. Sales in Germany represented approximately 66% and 62% of our international revenue in the years ended December 31, 2008 and 2007, respectively.
We had unrestricted cash and cash equivalents totaling $34.1 million and $29.7 million at December 31, 2008 and 2007, respectively. These amounts were invested primarily in money market funds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
The following tables set forth selected unaudited quarterly consolidated statement of operations data for the eight most recent quarters. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included in this prospectus and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this annual report. These quarterly operating results are not necessarily indicative of our operating results for any future period.
|Three Months Ended|
|Mar 31, 2008||Jun 30, 2008||Sept 30, 2008||
|Mar 31, 2007||Jun 30, 2007||Sept 30, 2007||
|Total cost of revenue||11,371||11,521||11,252||10,279||7,414||7,764||7,661||11,592|
|Total operating expenses||18,552||19,029||18,220||119,171||8,314||9,092||9,349||19,838|
Income (loss) from
|Net income (loss)||$||550||$||2,197||$||1,292||$||(100,249||) (1)||$||632||$||551||$||392||$||(217||) (2)|
Net income (loss) per common share:
|(1)||Includes a goodwill and intangible asset impairment charge of $102.6 million.|
|(2)||Reflects an increase of non-cash expenses for amortization of intangibles, due to the acquisition of Web.com, and incentive compensation of $2.2 million and $1.2 million, respectively.|
Based on their evaluation as of December 31, 2008, 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 annual report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions 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 errors 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.
The management of Web.com Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Companys internal control over financial reporting is designed to provide reasonable assurance, based on an appropriate cost-benefit analysis, regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Companys internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on managements assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2008.
The Companys independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of the Companys internal control over financial reporting.
The Board of Directors and Shareholders of
Web.com Group, Inc.
We have audited Web.com Group Inc.s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Web.com Group, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed 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. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Web.com Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2008 consolidated financial statements of Web.com Group, Inc. and our report dated March 4, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Independent Certified Public Accountants
March 4, 2009
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The information required by this item, including such information regarding our directors and executive officers and compliance with Section 16(a) of the Securities Exchange act of 1934, is incorporated herein by reference from the Proxy Statement. We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. The code of ethics is posted on our website at http://ir.websitepros.com/sec.cfm. Amendments to, and waivers from, the code of ethics that applies to any of these officers, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a current report on Form 8-K.
The information required by this item is incorporated herein by reference from the section entitled Executive Compensation in the Proxy Statement.
The information required by this item is incorporated herein by reference from the sections entitled Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the Proxy Statement.
The information required by this item is incorporated herein by reference from the section entitled Certain Relationships and Related Transactions in the Proxy Statement.
The information required by this item is incorporated herein by reference from the section entitled Ratification of Selection of Independent Registered Public Accounting Firm in the Proxy Statement.
The following documents are filed as part of this Form 10-K:
Web.com Group, Inc.
|Report of Independent Registered Public Accounting Firm||47|
|Consolidated Balance Sheets at December 31, 2008 and 2007||48|
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006||49|
|Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2008, 2007 and 2006||50|
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006||51|
|Notes to Consolidated Financial Statements||52|
Board of Directors and Shareholders
Web.com Group, Inc.
We have audited the accompanying consolidated balance sheets of Web.com Group, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Web.com Group, Inc. at December 31, 2008 and 2007 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), Web.com Group, Inc.s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Independent Certified Public Accountants
March 4, 2009
|Cash and cash equivalents||$||34,127||$||29,746|
|Accounts receivable, net of allowance of $645 and $791 thousand, respectively||5,019||6,204|
|Inventories, net of reserves of $78 and $67, respectively||39||26|
|Prepaid marketing fees||665||793|
|Other current assets||134||759|
|Total current assets||42,507||48,304|
|Property and equipment, net||8,204||7,153|
|Intangible assets, net||62,085||69,422|
LIABILITIES AND STOCKHOLDERS EQUITY
|Accrued restructuring costs and other reserves||2,619||10,484|
|Accrued marketing fees||263||279|
|Notes payable, current||59||1,186|
|Total current liabilities||18,536||31,779|
|Accrued rent expense||535||105|
|Accrued restructuring costs and other reserves||1,214||3,116|
|Deferred tax liabilities||2,712||3,351|
|Other long-term liabilities||25||25|
|Common stock, $0.001 par value; 150,000,000 shares authorized, 28,093,759 and 27,472,686 shares issued and 26,633,436 and 27,472,686 outstanding at December 31, 2008 and 2007, respectively||27||27|
|Additional paid-in capital||256,763||254,208|
|Treasury stock, 1,460,323 and 0 shares at December 31, 2008 and 2007, respectively||(3,483||)|||
|Total stockholders equity||99,293||196,431|
|Total liabilities and stockholders equity||$||122,495||$||235,013|
See accompanying notes to consolidated financial statements.
|Year Ended December 31,|
Cost of revenue (excluding depreciation and amortization shown separately below):
|Total cost of revenue||44,423||34,431||22,913|
|Sales and marketing (a)||28,923||19,308||12,511|
|Research and development (a)||9,862||5,075||2,256|
|General and administrative (a)||19,391||16,513||9,652|
|Depreciation and amortization||13,408||5,454||1,712|
|Goodwill and intangible asset impairment||102,552|||||
|Total operating expenses||174,972||46,593||26,131|
|(Loss) Income from operations||(96,907||)||1,497||2,997|
|Interest income, net||822||1,938||2,400|
|Total other income||822||1,938||2,400|
|(Loss) Income before income tax||(96,085||)||3,435||5,397|
|Income tax (expense) benefit||(125||)||(2,077||)||3,200|
|Net (loss) income attributable to common stockholders||$||(96,210||)||$||1,358||$||8,597|
|Basic net (loss) income attributable per common share||$||(3.51||)||$||0.07||$||0.51|
|Diluted net (loss) income attributable per common share||$||(3.51||)||$||0.06||$||0.44|
|Basic weighted average common shares outstanding||27,398||19,802||16,778|
|Diluted weighted average common shares outstanding||27,398||22,224||19,430|
(a) Stock based compensation included above
|Subscription (cost of revenue)||$||357||$||244||$||137|
|Sales and marketing||933||774||365|
|Research and development||441||312||222|
|General and administrative||3,058||2,238||1,309|
See accompanying notes to consolidated financial statements.
|Stockholders Equity (Deficit)|
Treasury Stock Amount
|Balance, December 31, 2005||16,509,602||$||17||||$||||$||136,097||$||(67,759||)||$||68,355|
|Exercise of stock options||550,004||||||||940||||940|
|Exercise of warrants||72,020|||||||||||||
|Issuance of common stock||200,000||||||||1,018||||1,018|
|Stock compensation expense||||||||||2,033||||2,033|
|Issuance of common stock in purchase of Renex||||||||||3,013||||3,013|
|Balance, December 31, 2006||17,331,626||17||||||143,101||(59,162||)||83,956|
|Exercise of stock options||826,392||1||||||2,778||||2,779|
|Issuance of common stock in purchase of Renex||139,461||||||||16||||16|
|Issuance of restricted stock||21,250|||||||||||||
|Issuance of common stock in merger with Web.com||9,153,957||9||||||104,745||||104,754|
|Stock compensation expense||||||||||3,568||||3,568|
|Balance, December 31, 2007||27,472,686||27||||||254,208||(57,804||)||196,431|
|Exercise of stock options||253,711||||(44,722||)||253||800||||1,053|
|Exercise of warrants||142,279||||(43,345||)||205||(87||)||||118|
|Issuance of common stock in purchase of Renex||139,461||||(139,461||)||778||(778||)|||||
|Issuance of restricted stock||693,525||||(380,375||)||2,147||(2,147||)|||||
|Purchase of treasury stock||(2,068,226||)||||2,068,226||(6,866||)||||||(6,866||)|
|Stock compensation expense||||||||||4,789||||4,789|
|Issuance costs of common stock||||||||||(22||)||||(22||)|
|Balance, December 31, 2008||26,633,436||$||27||1,460,323||$||(3,483||)||$||256,763||$||(154,014||)||$||99,293|
See accompanying notes to consolidated financial statements.
|Year Ended December 31,|
Cash flows from operating activities
|Net (loss) income||$||(96,210||)||$||1,358||$||8,597|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|Depreciation and amortization||13,408||5,454||1,712|
|Goodwill and intangible asset impairment||102,552|||||
|Loss on disposal of assets||44|||||
|Stock based compensation expense||4,789||3,568||2,033|
|Deferred income tax expense (benefit)||(9||)||1,719||(3,200||)|
Changes in operating assets and liabilities:
|Accounts receivable, net||1,275||1,064||(1,833||)|
|Prepaid expenses and other assets||3,270||593||(120||)|
|Accounts payable, accrued expenses and other liabilities||(13,936||)||(3,474||)||(673||)|
|Net cash provided by operating activities||14,972||10,228||6,470|
Cash flows from investing activities
|Business acquisitions, net of cash acquired||(4,573||)||(18,069||)||(20,449||)|
|Proceeds from sale of investments securities||8,500||5,000|||
|Purchase of investment securities||(3,491||)||(4,946||)|||
|Change in restricted investments||1,194||263|||
|Investment in intangible assets||(995||)||(2,109||)|||
|Purchase of property and equipment||(4,321||)||(3,807||)||(1,521||)|
|Net cash used in investing activities||(3,686||)||(23,668||)||(21,970||)|
Cash flows from financing activities
|Stock issuance costs||(23||)||(311||)||(736||)|
|Common stock repurchased||(6,866||)|||||
|Repayments of debt obligations||(1,187||)||(1,437||)||(49||)|
|Proceeds from exercise of stock options and other||1,171||2,779||940|
|Net cash (used in) provided by financing activities||(6,905||)||1,031||1,909|
|Net increase (decrease) in cash and cash equivalents||4,381||(12,409||)||(13,591||)|
|Cash and cash equivalents, beginning of period||29,746||42,155||55,746|
|Cash and cash equivalents, end of period||$||34,127||$||29,746||$||42,155|
Supplemental cash flow information
|Income tax paid||$||146||$||233||$|||
Supplemental disclosure of non-cash transactions
|Issuance of equity in connection with acquisitions||$||||$||104,770||$||3,013|
See accompanying notes to consolidated financial statements.
Web.com Group, Inc. (formerly known as Website Pros, Inc.) (the Company) is a provider of Do-It-For-Me and Do-It-Yourself Website building tools, online marketing, lead generation, and technology solutions that enable small and medium-sized businesses to build and maintain an effective online presence. The Company offers a full range of web services, including Website design and publishing, online marketing and advertising, search engine optimization, e-mail, logo design, lead generation, home contractor specific leads, and shopping cart solutions meeting the needs of a business anywhere along its lifecycle.
The Company is currently doing business as Web.com, having updated its brand, stock symbol and sales and marketing materials in an effort to reflect its new name.
The Company has reviewed the criteria of Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information , and has determined that the Company is comprised of only one segment, Web services and products.
Certain prior year amounts have been reclassified to conform to current year presentation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Companys consolidated financial statements include the assets, liabilities and the operating results of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Substantially all of the Companys subscription revenue is generated from monthly subscriptions for website design, shared hosting services, application hosting, domain name registration, and marketing services. For example, one of the Companys subscription standard contracts includes the design of a five-page website, hosting and marketing services. The individual deliverables are not independent of each other and are not sold or priced on a standalone basis. Costs to complete the website and ready it for the end customer are minimal and are expensed to cost of revenue as incurred. Upon the completion and initial hosting of the website, the subscription is offered free of charge for a 30-day trial period during which the customer can cancel at anytime. In accordance with Staff Accounting Bulletin (SAB) No. 104, after the 30-day trial period has ended, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of the Companys fees is probable. These criteria are met monthly as the Companys service is provided on a month-to-month basis and collections are generally made in advance of the services.
Customers are billed for the subscription ranging from one to 24 months, at the customers option. As customers are billed, subscription revenue is recorded as deferred revenue in the accompanying balance sheets. As services are performed, the Company recognizes subscription revenue ratably on a daily basis over the service period. There are no undelivered elements at the end of the monthly service period. In addition, subscription revenue is generated from monthly subscription packages for hosting and marketing services for customized websites. These packages are sold separately from the customized website.
Professional services revenue reflects revenue generated from custom website design. Revenue from contracts for custom design is recorded using a proportional performance model based on labor hours incurred. The extent of progress towards completion of the custom website is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue between reporting periods as they are the primary input to the provision of the Companys professional services.
The Company accounts for its multi-element arrangements, such as in the instances where it designs a custom website and separately offer other services such as hosting and marketing, in accordance with Emerging Issues Task Force 00-21, Revenue Arrangements with Multiple Deliverables . Based upon vendor-specific objective evidence, the Company allocates multi-element arrangement consideration to the separate units of accounting based upon their relative fair values. The additional services provided with a custom website are recognized separately over the period for which services are performed.
In addition, license revenue is generated from the sale of licenses for software which allows a customer to build its own website. The Company markets and licenses software directly to end customers as well as through value-added resellers and distributors. The Companys software licenses are perpetual. Software may be delivered indirectly by a distributor, via download from the Companys website or directly to end-users by the Company. The Company recognizes revenue generated by the distribution of software licenses directly by the Company in the form of a boxed software product or a digital download upon sale and delivery to the end-user. End-users who purchase a software license online pay for the license at the time of order. Subject to some restrictions, the Company permits physical product returns for sales it makes directly to end-users. However, returns historically have been insignificant, and, as such, the Company has not established a reserve for these product returns. The Company does not offer extended payment terms or make concessions for software license sales. The Company recognizes revenue generated from distribution agreements where the distributor has a right of return as the distributor sells and delivers software license product to the end-user. The Company recognizes revenue from distribution agreements where no right of return exists when licensed software product is shipped to the distributor. In arrangements in which distributors pay the Company upon shipment of software product to end-customers, the Company recognizes revenue upon receipt of payment by the distributor. The Company is not obligated to provide technical support in connection with its software license and does not provide technical support services to the Companys software license customers. The Companys revenue recognition policies are in compliance with Statement Of Position (SOP) 97-2 (as amended by SOP 98-4 and SOP 98-9), Software Revenue Recognition .
Cash and cash equivalents include cash on hand, bank demand deposit accounts, and money market accounts. For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Investments consist primarily of commercial paper and money market securities with maturities of less than one year. The Company has classified these investments as held-to-maturity as the Company has the intent and ability to hold these securities to maturity. These investments are carried at cost, which approximates fair market value. Realized gains and losses are included in earnings and are considered immaterial to the Company. These investments are restricted for use by certain vendors and creditors for credit card processing and lease payments. These investments are classified based upon the term of the restriction, and not necessarily the underlying security.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company invests its cash in credit instruments of highly rated financial institutions; four institutions hold 98% of the total investments.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the Companys customer base and their geographic dispersion. The Company has not incurred any significant credit related losses.
The Company markets its products for sale to customers, including distributors, primarily in the United States and Europe. A summary of revenue by geographic area is as follows:
|Year Ended December 31,|
Customers in Germany accounted for over 66%, 62%, and 61% of international revenue for the fiscal years ended December 31, 2008, 2007, and 2006, respectively.
Trade accounts receivable are recorded on the balance sheet at net realizable value. The Companys management uses historical collection percentages and customer-specific information, when available, to estimate the amount of trade receivables that are uncollectible and establishes reserves for uncollectible balances based on this information. The Company does not require deposits or other collateral from customers. Bad debt expense reported in operating expenses excludes provisions made to the allowance for doubtful accounts for anticipated refunds, automated clearinghouse returns, and chargebacks that are recorded as an adjustment to revenue.
Financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and debt. The respective carrying value of these financial instruments approximates fair value since they are short-term in nature or are receivable or payable on demand. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of period end.
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Reserves for obsolete or slow moving inventory are recorded based on managements analysis of movement of inventory items during the period and review of facts and circumstances specific to that inventory.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , goodwill determined to have an indefinite useful life is no longer amortized, but is tested for impairment, at least annually or more frequently if indicators of impairment arise. If impairment of the carrying value based on the calculated fair value exists, the Company measures the impairment through the use of discounted cash flows. Intangible assets acquired as part of a business combination are accounted for in accordance with SFAS No. 141, Business Combinations , and are recognized apart from goodwill if the intangible arises from contractual or other legal rights or the asset is capable of being separated from the acquired enterprise.
Definite-lived intangible assets are amortized over their useful lives, which range between fourteen months and ten years.
The Company expenses research and development costs as incurred. The Company has not capitalized any such development costs under SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed , because the costs incurred between the attainment of technological feasibility for the related software product through the date when the product is available for general release to customers has been insignificant.
Property and equipment, including software, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. Depreciation expense includes the amortization of assets recorded under capital leases.
The asset lives used are presented in the table below:
|Furniture and fixtures||5|
Shorter of assets life
or life of the lease
When events or circumstances indicate possible impairment, the Company performs an evaluation to determine if an impairment of long-lived assets used in operations exists, using undiscounted estimated future operating cash flows attributable to such assets compared to the assets carrying amounts.
If the Company determines that long-lived assets have been impaired, the measurement of impairment will be equal to the excess of the carrying amount of such assets over the discounted estimated future operating cash flows, using a discount rate commensurate with the risks involved. The Company would reflect the impairment through a reduction in the carrying value of the long-lived assets. Long-lived assets to be disposed of are recorded at the lower of carrying amount or estimated fair value less costs to dispose.
Advertising costs are charged to operations as incurred. Total advertising expense was $7.9 million, $2.3 million, and $128 thousand for the years ending December 31, 2008, 2007 and 2006, respectively.
The Company accounts for income taxes under the provisions of SFAS No. 109 Accounting for Income Taxes , using the liability method. SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse.
The Company accounts for stock-based compensation to employees in accordance with SFAS No. 123(R), Share-based Payment . Accordingly, the fair value of all stock awards are recognized in compensation expense over the vesting period.
Comprehensive income (loss) equals net income (loss) for all periods presented.
The Company computes net income (loss) attributable per common share in accordance with SFAS No. 128, Earnings Per Share . Basic net income (loss) attributable per common share includes no dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(r)). SFAS 141(r) retains the fundamental requirements of SFAS No. 141, but revised certain applications of the Standard to improve the financial reporting of business combinations. Some of these revisions include, to recognize assets acquired, liabilities assumed with contractual obligations and any noncontrolling interests at fair market value as of the date of purchase, to recognize other contingencies using the more likely than not definition from FASB Concepts Statement No. 5, Elements of Financial Statements, to recognize consideration and contingent consideration at fair market value as of the date of purchase, and to expense acquisition-related costs as incurred. SFAS 141(r) is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2008. Early adoption of this Standard is not permitted. The Company has not completed its assessment of the impact SFAS 141(r) will have on its financial position, results of operations, cash flows or disclosures.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share Based Payment . Since the Company previously adopted the expense recognition provisions of SFAS No. 123, the adoption of SFAS No. 123(R) had no material impact on its financial statements.