Website Pros, Inc.: A young competitor
In these days of 16-letter domain names, you know that a company with a name as simple as Web.com is an original dot-commer. The problem has been that Web.com, which offers software to help small companies create their own websites, has rarely managed to eke out a profit.
On the other hand, much younger competitor Website Pros, Inc. (Nasdaq: WSPI), of Jacksonville, Fla., has managed to produce good growth and decent, if not spectacular, profitability. Both companies are focused on small- to medium-sized businesses (SMB), the markets where there is still substantial growth as more of them eschew Yellow Pages and go online.
So what happens when the newer company acquires the older one? A boost in stock price and hopes of a much more exciting company in 2008.
Website Pros completed its $129 million stock-and-cash acquisition of Web.com last quarter. As a wholly-owned subsidiary of Website Pros, Web.com keeps its domain name and business. Website Pros announced mixed results for its first quarter as a combined company on Nov. 6. Revenues were in line with Wall Street expectations at $17.8 million, up by about 48% from a year ago, and pro forma EPS, at $0.15, up from $0.11 a year ago, exceeded estimates by a penny or two.
On the downside, Website Pros added just 1,300 net subscribers in the quarter, for a total of 82,000 compared to an increase of 4,000 subscribers in the previous quarter. Web.com, however, increased its subscriber base by 7,300 (compared to 7,200 in the second quarter and 3,500 in the first) for a total of 173,000 subscribers.
That’s where investors see the synergy between the companies. Web.com’s customer base provides lower profit margins but is growing faster. That creates the hope that Website Pro will be able to sell more expensive services to the new customers, and keep some of its own subscribers from dropping out by offering them cheaper, do-it-yourself services from Web.com.
The day after the Nov. 6 earnings announcement, Website Pros gained over 16%, rising to $11.68 from $10.04 the day before. It’s currently trading at about $11.36, for a market cap of about $310 million. It hit its 52-week high of $12 on Nov. 8 and its low of $7.85 on Dec. 6, 2006.
Of six analysts polled by Thomson/First Call, price targets range from $11 to $19, with a mean of $14.
Web.com was founded in 1995, at the beginning of the Internet boom. It offers a do-it-yourself website building program for $12 per month, custom site development and marketing services for $100 per month, and a variety of combinations of website, e-commerce and web marketing packages in between.
But its customers come mainly through co-branded services from channel partners such as CNET Networks, Inc. (Nasdaq: CNET), Cisco Systems, Inc. (Nasdaq: CSCO), Compaq and Microsoft Corporation (Nasdaq: MSFT). Its partners typically get a 15% cut of its revenues, dampening its profitability.
Website Pros, founded in 1999, went public in November 2005. For $80 to $100 per month, it offers packages that include professional website design, help with advertising on major search engines, site traffic statistics and marketing services. It also offers separate and more robust advertising and marketing packages for $62 to $80 per month, and custom packages that are priced individually.
Website Pros also has large partners to bring in business, including Discover Financial Services (NYSE: DFS), International Business Machines Corp. (NYSE: IBM) and Microsoft, but is increasingly offering private-label services that increase revenues per customer by about $200 over the life of a contract. Its focus on this business is what led to weaker gains in its subscriptions coming through partners. Private-branded deals increased to 12% of new customers in the third quarter, up from 3% in the second quarter. “Web.com never had the resources to do that,” says ThinkEquity Partners analyst Nate Swanson.
Website Pros has also created something of a production line for developing websites. Sales reps get specifications over the phone or through the company’s own website, and turn that over to its team of site design specialists. Using proprietary software and templates, its developers can churn out a site design in 48 hours.
By combining customer lists, adding Web.com’s do-it-yourself services to Website Pro’s (WSPI) offerings, sharing expertise, upselling and eliminating staff redundancies, analyst Swanson sees 25% profit growth in 2008 and beyond. Based on that, he projects a 25 times P/E multiple for 2008 earnings (up from 13 times now) and a target price of $19.
At the other end of the scale is Stephens Inc., which raised its target price from $11 to just $12 after the earnings announcement. In his Nov. 7 report, analyst Kyle Evans writes that “the operating metrics in the core business were somewhat uninspiring” in the 3rd quarter report. Stephens is maintaining its equal-weight/volatile rating for now.
Nevertheless, the Stephens report also sees the likelihood of improved average revenues per user and decreased churn in 2008 from the merger.
There are no longer any direct competitors offering a complete set of services that include site design, marketing and advertising help for the SMB market — although companies like Microsoft, Salesforce.com, Inc. (NYSE: CRM) or Yahoo! Inc. (Nasdaq: YHOO) could enter the business. Then again, one of these giants could just buy the combined company. After all, who wouldn’t want to own the domain name Web.com?
