One of the first things that caught my attention about Web.com (WWWWW) was the amount of focus they put on their non-GAAP numbers and all the add-backs that go into it. What’s that Warren Buffett saying? You know the one about shooting an arrow and then drawing the bulls eye around it. Ah yes, “polishing a turd”.
The largest add-back for Web.com to produce stellar Non-GAAP earnings is deferred revenue. As Special K highlighted in his great Seeking Alpha article yesterday, without the deferred revenue adjustment Web.com is losing money.
However, I was struck by the sheer size of one of the adjustments: the “fair value adjustment to deferred revenue” which increased non-GAAP revenue, adjusted EBITDA and non-GAAP earnings by the same amount at 100% margin. As you can see in the table below, in 2010 this adjustment accounted for 71% of WWWW’s non-GAAP earnings, 100% of non-GAAP earnings in 2011 and a whopping 161% of non-GAAP earnings in the first quarter of 2012. In other words, without this adjustment Web.com is actually losing money, even on a non-GAAP basis.
And Web.com’s cash flow compared to non-GAAP income isn’t so hot either.
As you can see, during the time periods examined, actual free cash flow according to Web.com’s financial statements fell well short of what the company reported as non-GAAP net income. In fact, in 2011 free cash flow was less than 1/3 of reported non-GAAP net income. This means that the fair value adjustments to deferred revenue and truly non-cash and are not being replaced by new deferred revenue collections.
High cost service provider in a commodity business. High leverage. Expiring lock-up period for largest shareholders. Potential stock offering. Tons of financial gymnastics. Sounds like a winner to me.
Read the full article after the jump.
If a commodity business, like Web.com (WWWW), is going to charge premium prices for its services then its customers should receive premium service, this is not the case. Web.com is hard selling its services and then providing sub-par customer service. Fooling All the People Some of the Time highlights Web.com’s aggressive selling and up-selling procedures and the inevitable customer complaints as the “rubes” wisen up.
On June 12, 2012, one customer complained: “It was great for two months now the service is poor. The first website we got the service was fast and great. Two months later the service just stopped. All they wanted was the money. They said we get 2 hours of changes and services but they never updated the items requested. It takes 3 months to do anything”
On June 5, 2012, another customer complained: “BUYERS BEWARE!! DO NOT USE THIS COMPANY!
After numerous attempts to make two amateurish websites work for my business, web.com failed miserably. Less than 5 hits in 5 months on two websites. Tried to cancel and they sweet talk you into more trouble. Run from these scammers before they get you”
On May 25, 2012, another customer complained: “Bate and Swap. Paid for web hosting pakage was told they would build it….no FTP like i was initially promised, was told to hold for a min on phone customer support waited 22 min. then hung up terrible company! they are liars,and never explained pricing properly BEWARE.”
Network Solutions, Web.com’s most recent acquisition and largest web hosting brand, has its own list of complaints. Network solutions charges premium prices too and their customers are also receiving below average service. Premium prices and terrible service lead to this.
I’ve been with NetSol for many years, the quality of support over the years has been getting worse by the day. I just finished moving ALL of the domains that were there, to another company. AVOID AT ALL COST!!!!
Network Solutions Reviews #79
Web hosting is a commodity business and web hosting companies are price takers; customers choose their provider based on who offers the lowest price. Web.com (WWWW), a web hosting company, charges premium prices for its services while its competitors continue to lower theirs and add more services for free. As Fooling All the People Some of the Time points out, Web.com needs to grow significantly in order to pay back it’s large amount of debt, but Web.com’s pricing policy will hinder its attempt.
The following images are the web hosting pricing plans for Web.com’s three main web hosting brands, Network Solutions, Register.com, and Web.com.
Network Solutions’ Pricing Plan
Their full pricing page can be found here.
Register.com’s Pricing Plan
Their full pricing page can be found here.
Web.com’s Pricing Plan
More information on their hosting services can be found here.
Competitor Pricing Plans
The next couple of images are the pricing plans for some of Web.com’s main competitors. I chose these two because they are two of the top rated web hosting companies as ranked here. Both companies offer one pricing plan. Pay attention to the features they offer for under $4 per month.
iPage Pricing Plan
More information on iPage’s pricing plan can be found here.
Just Host’s Pricing Plan
More information on Just Host’s pricing plan can be found here.
It would cost over $27.18 per month at Network Solutions and $29.13 per month at Register.com for the same unlimited services and free tools that both Just Host and iPage offer for under $4 per month. This is over 7x the monthly cost. Prices through Web.com’s site for the same services are still 3x more than Just Host and iPage. Premium prices indeed.
Web.com has two choices. Their first choice is to maintain their current pricing plans, miss out on new customers, and watch their existing customer base erode away. Web.com’s second choice is to lower their pricing plans and add more free services to effectively compete. Both choices lead to lower revenue, less cash flow, and an inability to pay back their debt.
Web.com (WWWW) is one of the top 5 internet stocks in the IBD 50 because of its amazing growth.
In its [Web.com] latest quarter, earnings per share rose by 67% as revenue jumped 132%.
However, when you look further into these growth rates they are a lot less and not really there in the case of earnings per share.
Here is Web.com’s most recent quarterly income statement.
Yes, revenue increased 132% from the first quarter in 2011 but how did Web.com achieve this? Oh yeah, they bought it.
Total revenue for the three months ended March 31, 2012 increased $52.0 million primarily due to the acquisition of Network Solutions in October 2011.
Web.com Q1 2012 10Q
Web.com overpaid too.
The fair value of the acquired deferred revenue was approximately 51% less than the pre-acquisition historical basis of Network Solutions.
Web.com Q1 2012 10Q
Web.com had to take a $28.5 million charge this quarter as a fair value adjustment to acquired deferred revenue and deferred expenses.
Of the $52 million increase in revenue, $44.3 million came from the Network solutions. Backing out the revenue from Network solutions leaves an increase of $7.7 million, a growth rate of 19.5%. Not bad but not the 132% growth rate IBD is trumpeting.
Earnings per Share
I’m no genius but I’m pretty sure earnings per share of $(0.65) for Q1 2012 is less than earnings per share of $(0.21) for Q1 2011. So where does IBD get an eps growth rate of 67%? Non-GAAP earnings of course.
Non-GAAP net income from continuing operations was $17.2 million for the first quarter of 2012, or $0.35 per diluted share, above the company’s guidance of $14.8 million to $15.7 million, or $0.30 to $0.32 per diluted share. The Company had non-GAAP net income of $6.4 million, or $0.21 per diluted share, for the first quarter of 2011.
Web.com Reports Record First Quarter 2012 Financial Results
Back out Web.com’s write-down for overpaying for Network Solutions’ deferred revenue and they become profitable. I know IBD likes to use pro-forma earnings to judge growth but, in this case, backing out the large write-down for overpaying on deferred revenue is a mistake.
I forget how I found Web.com (WWWW) but when I started looking at the company I naturally went to their website. What I found there made me chuckle.
Keep in mind Web.com focuses on helping small businesses build and host websites. To highlight their skill at building websites for small businesses, Web.com should have a success page like Nina Cross Desgins‘. Large images of what the customer’s website looks like with obvious working links to the live websites.
However, Web.com has taken a different approach to the success story. This is Web.com’s success page. A screen shot is below in the off chance Web.com changes the page.
*Web.com has changed their website since I wrote this post. The link to Web.com’s success page still works, however; the success page is no longer a part of their new website.*
*2nd update – the previous success story link no longer works and redirects you to http://www.web.com. Good thing I have the screenshot below.*
Tiny images and no links to these “successful” websites. Since Web.com provides no help, I did my best to find the listed websites.
Mary’s Restaurant and Catering
Not even remotely the same website Web.com is highlighting. I don’t think Web.com built another better website for Mary’s Restaurant and Catering because I saw this at the bottom of the new website.
The next success story, PURSEsnickety!, I had to find through the listed owner’s, Deborah Nail, Linkedin page. Her personal website links lead to two sites and one is www.pursesnickety.com, a dead website. The other link leads to another dead website.
Finally, DiBona Designs’ website actually looks like it does on Web.com’s success page.
Of the three examples Web.com highlights as successes only one exists as presented.
I’m no marketing genius but when your business model is focused on helping small businesses build websites your success page should, you know, actually show real live working websites.