Web.com Group (WEB, $19.45): “Get Caught in this Web!”
By: Andrew Reed,
AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
·
Web.com Group,
Inc. (NASDAQ: WEB) is
a leading provider of website services, enabling small and medium sized
businesses to effectively reach consumers and clients, alike. The company does
this through a number of solutions, including search engine optimization and
website designs, along with a multitude of other ecommerce solutions.
·
WEB’s
management team, after a successful analyst day and 3Q earnings report, remains
full steam ahead on completing its shareholder-friendly approach to a 2016
described by CEO, David Brown, as “a transition year” for the company.
·
Despite
growing pains from the March 2016 Yodle
acquisition, which have been well documented, Q3 non-GAAP EPS ($.76 vs.
$.63-.67) and EBITDA margins (26% vs. 22%) came in comfortably above
management’s previous estimates.
·
WEB
is steadily on its way into an operationally important 2017 with levers to
pull, small businesses to serve, and shareholders to please.
Key
Points: Web.com,
originally added to the AIM Small Cap fund in November of 2016, has been able
to keep investors happy over the last two months. With the Q3 earnings beat,
and only a slight revenue disappointment, which management attributed mostly to
a commoditizing and shrinking DIY portion of the business, the company seems
poised to effectively march ahead with recently acquired paid-search algorithm
firm, Yodle, Inc. Beyond Yodle’s impressive customer penetration (50,000 small
business customers in 250 industries, according to Yodle’s website), its
presence also allows Web to expand its recurring revenue stream in the long
term in industries such as real estate. Yodle’s real estate platform will allow
Web.com to provide more valuable solutions to more clients in a more cost
effective manner, with further cuts in sales and marketing expenses expected to
aid the margin accelerations.
In addition to business model improvements
provided by recent acquisitions, Web.com management remains steadfast in its
efforts to borrow and repay responsibly. During Q3 alone, the company reduced
its debt burden by $23 million, and has reduced its borrowings related to the
Yodle acquisition by $43 million since March (13% of the total purchase price).
Looking ahead, management expects to continue these repayments and reiterated
guidance for $32 million in total cost synergies from the acquisition. Also
announced on the earnings call, the company’s existing $100 million share
buyback plan was “renewed”, with another $100 million approved by to Board of
Directors, in addition to the $79 million in shares already repurchased since
the program began. Opportunistic and responsible cash deployment have Web.com
set up well for 2017 and beyond.
Moving into broader industry trends,
Web.com finds itself uniquely positioned with its more lucrative and difficult
to replicate “do-it-for-me” marketplace. As indicated by management, DIY gets
more and more difficult with each passing day, with companies like GoDaddy.com
constantly pressured by new entrants. Because of this, there has been a
strategic shift away from DIY, which brought a 12% decline in YoY revenue for
WEB in Q3 2016. The paring down of the DIY business at the company into more
lucrative VAS businesses has hampered short term results; however, should prove
effective for both WEB and the clients it seeks to serve.
What
has the stock done lately?
Following the Q3 earnings call and
subsequent analyst day, WEB’s stock jumped up to its 52-week high of $21.50
just before the new year. Since then, the stock has pulled back ~8%, with
investors likely pulling back hoping for more answers regarding company’s
integration efforts and results on the Q4 earnings call. As margins continue to
improve despite disappointing top line figures, investors will likely seek
reassurance that the company’s strong track record of cash flow generation can
continue.
Past
Year Performance:
The past 365 days have been somewhat of a
bumpy ride for Web.com’s common stock. As mentioned previously, the stock
bottomed for the year at $13.45, only to rally 57% by the final trading session
of 2016. The stock is currently trading at TTM P/E of 12.8x. well below both
historical and peer averages.
My
Takeaway:
We continue to own the stock, and for good
reason. With a quality management team dedicated to the long-term vision of
generating positive returns on invested capital and growing investors’ share of
the pie, WEB.com continues to successfully navigate a dynamic industry
backdrop. While we remain owners, the next two to three quarters will prove
important for the company to show that Yodle and other acquisitions can
continue to build on already ballooning margins, but not at the cost of becoming
too lean. A strong track record of successful acquisitions has us ready to find
out where WEB can take us!
