Web.Com's Extreme Makeover

Web hosting is supposed to be a commodity business, right? The team at Web.com (Nasdaq: WWWW  ) doesn't think so. Since last August, management has undergone an extreme makeover involving new marketing approaches, the sale of a cash-hungry division, and significant cost cuts. The company even changed its name. Apparently, "Interland" didn't send the message it was seeking.

According to the company's first-quarter conference call, the name change has had an immediate impact. Website traffic has increased, and so has organic growth, in the form of 4,000 new accounts. This is the first time in the company's history that it has generated organic subscriber growth.

Revenue growth was pretty much nonexistent for the quarter, but that was the result of the sell-off of its server division. While revenues inched up just barely from $12.1 million to $12.3 million, though, the company posted a net loss of $5.5 million, of which $5.3 million was for expensed stock options and an income tax benefit. Looking at pro forma net income, though, we see that the company actually posted a net profit of $100,000. True, it may not sound like much, but given this company's history, it was actually a strong performance.

Over the past six years, investors have pumped $400 million into Web.com. While there was certainly a good amount of dot-com waste along the way, the company has a strong infrastructure, as well as an impressive patent portfolio. Its 19 issued patents cover such things as data center management, Web services, and website design. A big part of new general counsel Joseph A. Newcomb's mandate is to monetize, through legal strategies, the company's patent portfolio.

Moreover, Web.com is moving away from the typical marketing approach of the Web hosting industry. Instead of focusing on the megabytes, pixels, and servers, Web.com is marketing to the needs of its small-to-mid-size-business customer base by offering things such as online marketing and effective designs.

To grow the company, however, Web.com needs to grow that subscriber base. That means keeping churn low, and the company has done that fairly well. The quarterly churn is about 2% or so.

Next, the company needs to find cost-effective ways to attract customers. Over the past year, subscriber acquisition costs fell from $112 per customer to $103, on a sequential basis.

What's more, Web.com has put in place some key distribution agreements, such as with Microsoft (Nasdaq: MSFT  ) . Even though such deals take time to ripen, there should be a positive impact on the top line over the next year.

Also somewhat heartening is that, in an era when executives are taking huge salaries, Web.com's CEO is taking no salary at all, nor is Newcomb, until the company is EBITDA-positive. True, this move is no guarantee that he or the company will succeed. But at the least, his interests are clearly aligned with the shareholders.

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Microsoft is aMotley Fool Inside Valuepick.

Fool contributor Tom Taulli owns shares in Web.com. The Motley Fool has a disclosure policy.


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