- Web.com is slated to report its Q3 earnings on 3rd November after markets close.
- Web.com stock is still down by more than 30% over the last twelve months.
- Can Q3 earnings reverse its fortunes and drive WEB stock higher?
Jacksonville, Florida-based Web.com (NSDQ:WEB) is slated to report is Q3 results on 3rd November after markets close. The company's stock fell sharply after it reported Q2 earnings in August this year, in spite of delivering accelerated revenue growth on the back of its Yodle acquisition. While Web.com reported improvements in most top-line related metrics, lower margins and cash flows, coupled with higher debt seemed to have triggered the fall. WEB stock is now down by more than 16% over the preceding three months. Can Q3 earnings reverse the trend and take the stock closer to the consensus price target of $24 a share?
Web.com Q3 Earnings - Analyst Estimates
Analysts expect Web.com to report a revenue of $194.14 million for Q3, which represents a seemingly aggressive YoY growth projection of ~42%. The consensus expects Web.com to deliver an even faster top-line growth than it did last quarter, when sales grew by ~38%, largely driven by its acquisition of Yodle. The consensus estimates that Web.com will deliver non-GAAP Earnings Per Share (EPS) of 66 cents for the quarter, up 6% from 62 cents a year ago.
Web.com beat analyst estimates for Q4 last year, and Q1 this year. However, the company failed to beat revenue estimates for Q2, albeit by a marginal $0.2 million. Interestingly, the company has managed to beat analyst estimates of EPS for each of these quarters, aided by the share buybacks. What's important to note though, is that the stock has lost significant chunks of value following its previous two earnings announcements. Following its Q1 earnings in May this year, WEB stock plummeted by well over 17%, while Q2 earnings wiped out a little over 11% of its market cap.
What's The Problem?
Web.com does have a few things going for it, but it also seems to have a few problems, which it will need to iron out. For starters, prior to the acquisition of Yodle, the company's growth rates were languishing in low single digits. Web.com's acquisition of Yodle is a positive, at least in terms of growth. However, the acquisition has forced Web.com to raise debt, which is a little bit of a dampener. Quoting from the company's announcement of the acquisition:
"The acquisition will be funded with committed bank debt financing consisting of amendments to the existing credit agreements, a new $200 million term loan as well as approximately $100 million from the current revolving credit facility."
The consequence is lower profitability, reduced cash flows, and a debt/equity ratio of over 3. For Q2 Web.com reported a lower GAAP operating margin of 4% compared to 11% in the year ago. Even on a non-GAAP basis, Web.com's operating margin of 19% fell short of 25% in the year ago quarter. The company's adjusted EBITDA margins also show a similar trend, with Q2's 22% margin declining from 27% YoY, and 26% in Q1 2016. Web.com's cash flows also declined in Q2, with operating cash flows declining by ~32% YoY to $30.8 million, and free cash flows declining ~36% to $26.4 million. While some of these declines may not be solely on account of the acquisition or higher debt, the two factors are likely to have contributed to the fall. That said, the fact that operating and free cash flows are still in positive territory, is a welcome relief for investors.
On The Brighter Side
In the absence of the Yodle acquisition, you would have a company that has neither extra-ordinary growth, nor exceptional profitability to boast of. However, the move to Yodle has propped up nearly all of Web.com's top-line related metrics. Starting from sales growth, which shot up largely on account of the acquisition, Web.com reported improvements on many other metrics. The company's ARPU (average revenue per user) shot up from $13.91 in Q2 last year, to $18.66 in Q2 this year. Further, Web.com also reported a customer retention rate of 86.5% over the Trailing Twelve Months (TTM), and the addition of ~20,000 customers during the quarter, to take its tally to 3.44 million.
Also Read: A Recap Of Q2 Earnings For Web.com
Web.com still has a solid gross margin of ~68%, which implies that the company can turn profitable if it decided to cut back on operating spends. The company is also buying back shares. In Q2, it bought back $5.7 million worth of WEB stock, and still has the authorization to buyback an additional ~22 million worth of stock. And like we said before, the company is still making positive operating and free cash flows. It's worth noting that analysts have assigned a consensus price target of $24 for the stock, and if Q3 earnings manage to meet expectations, the stock could very well head higher.
Summing It Up
Web.com has shown significant improvements in top-line related metrics, driven largely by the Yodle acquisition. However, the move has impacted profitability and cash flows. Further, given its anaemic cash balance and the recent increase in debt, which has taken its debt/equity ratio to over 3, it's unlikely that Web.com will be able to make any more big acquisitions in the near term. So, the company has to make the Yodle acquisition count, and show that it can translate the significantly boosted growth into improved profitability and cash flows. For now, investors might want to sit on the sidelines and see how things pan out for Web.com over the coming quarter or two.
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