WEB.COM GROUP, INC. - FORM 10-Q

Attached files

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EX-31.1 - WEB.COM GROUP, INC.	v220977_ex31-1.htm
EX-32.1 - WEB.COM GROUP, INC.	v220977_ex32-1.htm
EX-31.2 - WEB.COM GROUP, INC.	v220977_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51595

Web.com Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-3327894
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12808 Gran Bay Parkway, West, Jacksonville, FL		32258
(Address of principal executive offices)		(Zip Code)

(904) 680-6600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Common Stock, par value $0.001 per share, outstanding as of April 29, 2011: 29,067,063

Web.com Group, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended March 31, 2011

Index

Part I	Financial Information	3

Item 1.	Financial Statements	3

	Consolidated Statements of Operations (unaudited)	3

	Consolidated Balance Sheets (unaudited)	5

	Consolidated Statements of Cash Flows (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

Part II	Other Information	34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	(Removed and Reserved)	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

Signatures		44

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Web.com Group, Inc.

Consolidated Statements of Operations

(in thousands except per share amounts)

(unaudited)

	Three months ended March 31
	2011			2010
Revenue:
Subscription	$	38,779		$	24,480
Professional services		702			648
Total revenue		39,481			25,128
Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription		17,329			10,034
Professional services		378			478
Total cost of revenue		17,707			10,512
Gross profit		21,774			14,616
Operating expenses:
Sales and marketing		10,441			5,546
Research and development		3,549			2,271
General and administrative		6,445			3,775
Restructuring charges		96			60
Depreciation and amortization		4,821			3,279
Total operating expenses		25,352			14,931
Loss from operations		(3,578	)		(315	)

Interest (expense) income, net		(1,584	)		41
Loss before income taxes from continuing operations		(5,162	)		(274	)
Income tax expense		(573	)		(471	)
Net loss from continuing operations		(5,735	)		(745	)
Discontinued operations:
Loss from discontinued operations, net of tax		—			(9	)
Gain on sale of discontinued operations, net of tax		125			—
Income (loss) from discontinued operations		125			(9	)
Net loss	$	(5,610	)	$	(754	)

See accompanying notes to consolidated financial statements

Web.com Group, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

(continued)

	Three months ended March 31,
	2011			2010
Basic earnings per share:
Loss from continuing operations per common share	$	(0.21	)	$	(0.03	)
Income from discontinued operations per common share	$	—		$	—
Net loss per common share	$	(0.21	)	$	(0.03	)
Diluted earnings per share:
Loss from continuing operations per common share	$	(0.21	)	$	(0.03	)
Income from discontinued operations per common share	$	—		$	—
Net loss per common share	$	(0.21	)	$	(0.03	)

Basic weighted average common shares outstanding		26,618			25,410
Diluted weighted average common shares outstanding		26,618			25,410

See accompanying notes to consolidated financial statements

Web.com Group, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31, 2011			December 31, 2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,816		$	16,307
Restricted investments		301			300
Accounts receivable, net of allowance of $680 and $523 thousand, respectively		9,614			8,100
Prepaid expenses		3,388			2,551
Prepaid registry fees		14,434			14,193
Deferred taxes		233			248
Deferred financing fees and other current assets		1,330			1,221
Total current assets		47,116			42,920
Restricted investments		1,110			1,110
Property and equipment, net		9,087			8,765
Prepaid registry fees		14,259			13,569
Goodwill		122,727			122,512
Intangible assets, net		102,905			106,843
Other assets		3,327			3,770
Total assets	$	300,531		$	299,489

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,181		$	3,276
Accrued expenses		4,617			5,276
Accrued compensation and benefits		4,818			6,799
Accrued restructuring costs and other reserves		1,299			2,325
Deferred revenue		40,557			36,664
Current portion of debt and capital lease obligations		10,074			9,533
Other liabilities		1,215			1,180
Total current liabilities		65,761			65,053
Accrued rent expense		1,136			914
Deferred revenue		27,498			25,149
Long-term debt and capital lease obligations		88,553			93,623
Deferred tax liabilities		10,497			10,005
Other long-term liabilities		1,150			1,138
Total liabilities		194,595			195,882

Stockholders’ equity:
Common stock, $0.001 par value per share; 150,000,000 shares authorized, 28,955,566 and 27,756,227 shares issued and 28,955,566 and 27,340,062 outstanding at March 31, 2011 and December 31, 2010, respectively		29			27
Additional paid-in capital		269,469			263,453
Treasury stock, 0 and 416,165 shares at March 31, 2011 and December 31, 2010, respectively		—			(1,896	)
Accumulated other comprehensive loss, net of income tax benefit		(15	)		(40	)
Accumulated deficit		(163,547	)		(157,937	)
Total stockholders’ equity		105,936			103,607
Total liabilities and stockholders’ equity	$	300,531		$	299,489

See accompanying notes to consolidated financial statements

Web.com Group, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three months ended March 31,
	2011			2010
Cash flows from operating activities
Net loss	$	(5,610	)	$	(754	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of discontinued operations, net of tax		(125	)		—
Depreciation and amortization		4,821			3,279
Stock based compensation expense		1,533			1,006
Deferred income tax benefit		402			398
Other non cash expenses		306			—
Changes in operating assets and liabilities:
Accounts receivable, net		(1,402	)		800
Prepaid expenses and other assets		(809	)		75
Prepaid registry fees		(931	)		—
Accounts payable		643			481
Accrued expenses and other liabilities		(524	)		(354	)
Accrued compensation and benefits		(2,007	)		(2,521	)
Accrued restructuring		(1,026	)		(440	)
Deferred revenue		6,254			(121	)
Net cash provided by operating activities		1,525			1,849

Cash flows from investing activities
Proceeds from sale discontinued operations		125			—
Investment in intangible assets		—			(1,396	)
Purchase of property and equipment		(1,993	)		(384	)
Net cash used in investing activities		(1,868	)		(1,780	)

Cash flows from financing activities
Stock issuance costs		(3	)		(3	)
Common stock repurchased		(448	)		(53	)
Payments of debt obligations		(4,528	)		(66	)
Proceeds from exercise of stock options		6,831			76
Net cash provided by (used in) financing activities		1,852			(46	)
Net increase in cash and cash equivalents		1,509			23
Cash and cash equivalents, beginning of period		16,307			39,427
Cash and cash equivalents, end of period	$	17,816		$	39,450

Supplemental cash flow information
Interest paid	$	1,290		$	9
Income tax paid	$	497		$	64

See accompanying notes to consolidated financial statements

Web.com Group, Inc.

Notes to Consolidated Financial Statements

(unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Web.com Group, Inc. is a leading provider of online marketing for small businesses. On July 30, 2010, the Company completed its acquisition of Register.com (Cayman) LP, a Cayman limited partnership, and all its affiliates (collectively, “Register.com LP”), a provider of global domain name registration and complementary website design and management services. Collectively, Web.com Group, Inc. and Register.com LP (referred to as “the Company”, “Web.com Group, Inc.” or “Web.com” herein) meet the needs of small businesses anywhere along their lifecycle by offering a full range of online services and support, including website design, domain name registration, lead generation, logo design, search engine optimization, search engine marketing and local sales leads, general contractor leads, franchise and homeowner association websites, shopping cart software, eCommerce website design and call center services.

The Company has reviewed the criteria of Accounting Standards Codification (“ASC”) 280-10, Segment Reporting, and has determined that the Company is comprised of only one segment, Web services and products.

Certain prior year amounts have been reclassified to conform to current year presentation.

Basis of Presentation

The accompanying consolidated balance sheet as of March 31, 2011, the consolidated statements of operations for the three months ended March 31, 2011 and 2010; the consolidated statements of cash flows for the three months ended March 31, 2011 and 2010, and the related notes to the consolidated financial statements are unaudited. The consolidated statement of operations and consolidated statement of cash flows for the three months ended March 31, 2011 include the operations of Register.com LP. The consolidated balance sheets as of March 31, 2011 and December 31, 2010 include the assets and liabilities of Register.com LP.

The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2010, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or excluded as permitted.

In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2011, and the Company’s results of operations for the three months ended March 31, 2011 and 2010 and cash flows for the three months ended March 31, 2011 and 2010. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”), on March 14, 2011.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Significant Accounting Policies

Goodwill and Other Intangible Assets

In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is determined to have an indefinite useful life and is tested for impairment, at least annually or more frequently if indicators of impairment arise. If impairment of the carrying value based on the calculated fair value exists, the Company measures the impairment through the use of discounted cash flows. The Company completed its annual goodwill impairment test during the fourth quarter of 2010 and determined that there were no indicators of impairment during the year ended December 31, 2010. In addition, there were no impairment indicators during the three months ended March 31, 2011.

Intangible assets acquired as part of a business combination are accounted for in accordance with ASC 805, Business Combinations, and are recognized apart from goodwill if the intangible arises from contractual or other legal rights or the asset is capable of being separated from the acquired enterprise. Indefinite-lived intangible assets are tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired in accordance with ASC 350. The Company completed its annual indefinite-lived intangible asset impairment test as of December 31, 2010 and determined that there was no impairment. In addition, there were no impairment indicators during the three months ended March 31, 2011.

Definite-lived intangible assets are amortized on a straight-lined basis over their useful lives, which range between fourteen months and sixteen years. The Company uses the straight line method because it is consistent with how the intangible assets are utilized.

Financial Instruments

The Company financed the July 30, 2010 acquisition of Register.com LP with a $95 million term loan and a $15 million revolving credit facility, of which a total of $93.5 million is outstanding as of March 31, 2011. In connection with the business combination, the Company acquired an outbound marketing and customer support call center located in Nova Scotia, Canada. As a result, the Company has increased exposure to various market risks, including changes in interest rates from debt and foreign exchange rates due to the increased proportion of operating costs incurred in Canadian dollars. The Company’s objective is to partially mitigate the economic impact of these market risks by entering into certain derivative contracts. The Company does not enter into financial instruments for trading or speculative purposes.

Prepaid Registry Fees

Prepaid registry fees represent prepayments to registries for domain name registrations. Prepaid registry fees are amortized to cost of sales over the same period that the deferred revenue is recognized for the related domain name registration.

Revenue Recognition and Deferred Revenue

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of its fees is reasonably assured.

Thus, the Company recognizes subscription revenue on a daily basis, as services are provided. Customers are billed for the subscription on a monthly, quarterly, semi-annual, annual or on a multi-year basis, at the customer’s option. For all of the Company’s customers, regardless of their billing method, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, the Company recognizes subscription revenue on a daily basis over the applicable service period. When the Company provides a free trial period, it does not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.

The Company accounts for its multi-element arrangements, such as in the instances where it designs a custom website and separately offers other services such as hosting and marketing, in accordance with ASC 605-25, Revenue Recognition: Multiple-Element Arrangement. The Company identifies each element in an arrangement and assigns the relative selling price to each element. The additional services provided with a custom website are recognized separately over the period for which services are performed.

Income Taxes

Stock-Based Employee Compensation

The Company accounts for stock-based compensation to employees in accordance with ASC 718, Compensation – Stock Compensation. Accordingly, the fair value of all stock awards is recognized as compensation expense over the vesting period.

Earnings per Share

The Company computes earnings per share in accordance with ASC 260, Earnings Per Share. Basic net income per common share includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

New Accounting Standards

In October 2009, the Financial Accounting Standards Board (FASB) issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, (ASU 2009-13). ASU 2009-13 requires entities to allocate revenue in the absence of vendor-specific objective evidence or third-party evidence of selling price for deliverables using a selling price hierarchy associated with the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of ASU 2009-13 on January 1, 2011 did not have a material impact on the Company’s consolidated results of operations or financial condition during the three months ended March 31, 2011.

In December 2010, the FASB issued ASU No. 2010-28 , Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . The amendments in ASU 2010-28 affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in ASU 2010-28 modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance will become effective for the Company at the beginning of its second quarter of fiscal year 2011. The adoption of this guidance is not expected to have a material impact, if any, on the Company’s financial position or results of operations.

In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of ASU 2010-29 is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance will become effective for the Company for acquisitions occurring on or after the beginning of its 2012 fiscal year. The Company does not expect the adoption of this guidance will have a material impact upon its financial position or results of operations.

2. Discontinued Operations

On May 26, 2009, the Company sold its NetObjects Fusion software business for $4.0 million. The Company received a partial payment of $1.0 million at the closing of the sale and approximately $0.1 million during the year ended December 31, 2010. The buyer paid the Company $125 thousand in March 2011, leaving approximately $2.7 million outstanding. The balance is scheduled to be paid by May 26, 2013 and payments, if received, will be recorded as a gain from the sale of discontinued operations upon receipt.

During the three months ended March 31, 2011 and 2010, the Company recorded a net loss of $0 and $9 thousand, respectively, from the operating results of NetObjects Fusion.

3. Business Combinations

Acquisition of Register.com LP

On July 30, 2010, the Company completed its acquisition of the partnership interests in Register.com LP, a provider of global domain name registration and complementary website design and management services. The Company believes that the acquisition further enhances the Company’s position as a leading provider of online marketing and web services to small businesses. In addition to bringing approximately 787,000 subscribers, which present substantial cross and up-sell opportunities, Register.com LP brings highly complementary products, sales channels and operating capabilities. Consideration for the interests in Register.com LP was approximately $135.1 million financed with a $95 million term loan, a $15 million revolving credit facility, approximately $20 million in cash and a $5 million seller note. In connection with the acquisition, the Company incurred approximately $2.9 million of acquisition costs during the year ended December 31, 2010 and recorded the expenses in the general and administrative expense line in the consolidated statement of operations, primarily reflected in the three months ended September 30, 2010. These costs include investment banking, legal and other professional services.

The Company has accounted for the acquisition of Register.com LP using the acquisition method as required in ASC 805, Business Combinations. As such, fair values have been assigned to the assets and liabilities acquired and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has estimated fair value of certain intangible assets. The goodwill represents business benefits the Company anticipates realizing from optimizing resources and cross-sale opportunities. The goodwill is not expected to be deductible for tax purposes.

Purchase Price Allocation

The Company is still reviewing information surrounding certain liabilities assumed as well as income tax considerations resulting from the acquisition, which may result in changes to the Company’s purchase price allocation in the second quarter of 2011. The following table summarizes the Company’s preliminary purchase price allocation based on the fair values of the assets acquired and liabilities assumed on July 30, 2010 (in thousands):

Tangible current assets	$	13,445
Tangible non-current assets		1,808
Prepaid registry fees		26,799
Developed technology		28,720
Customer relationships		20,570
Domain/trade names		15,890
Goodwill		109,756
Current liabilities		(14,488	)
Deferred revenue		(44,232	)
Deferred tax liability		(22,108	)
Non-current liabilities		(1,018	)
Net assets acquired	$	135,142

The developed technology and the customer relationships intangible assets will be amortized over a weighted-average period of 96 months and 116 months, respectively. The domain/trade names have indefinite lives and are not amortized.

The fair value of accounts receivables acquired is $3.9 million, with the gross contractual amount being $4.0 million.

Register.com LP contributed approximately $15.9 million in revenue during three months ended March 31, 2011. Register.com LP has been incorporated with the existing Web.com operations subsequent to the transaction closing. As such, the determination of operating income and net income of Register.com LP is not readily available nor would it be indicative of the standalone entity if presented.

Pro Forma Financial Information The Company has prepared unaudited condensed pro forma financial information to reflect the consolidated results of operations of the combined entities as though the acquisition had occurred at the beginning of each year presented. The Company has made adjustments to the historical Web.com and Register.com, LP financial statements that are directly attributable to the acquisition, factually supportable and expected to have a continuing impact on the combined results. The following summarizes unaudited pro forma total revenue, operating loss and net loss for the three months ended:

	March 31, 2010
Revenue	$	37,542
Net loss	$	(8,655	)

Basic earnings per share:
Net loss per share	$	(0.34	)

Diluted earnings per share:
Net loss per share	$	(0.34	)
Basic weighted-average common shares outstanding		25,410
Diluted weighted-average common shares outstanding		25,410

4. Earnings per Share

The following table sets forth the computation of basic and diluted net loss per common share (in thousands except per share amounts):

	Three months ended March 31,
	2011			2010
Loss from continuing operations	$	(5,735	)	$	(745	)
Income (loss) from discontinued operations		125			(9	)
Net loss		(5,610	)		(754	)

Weighted-average outstanding shares of common stock		26,618			25,410
Dilutive effect of stock options and restricted stock		—			—
Common stock and common stock equivalents		26,618			25,410
Basic earnings per share:
Loss from continuing operations	$	(0.21	)	$	(0.03	)
Income from discontinued operations		—			—
Net loss per share	$	(0.21	)	$	(0.03	)
Diluted earnings per share:
Loss from continuing operations	$	(0.21	)	$	(0.03	)
Income from discontinued operations		—			—
Net loss per share	$	(0.21	)	$	(0.03	)

For the three months ended March 31, 2011 and 2010, options to purchase approximately 6.6 million and 6.5 million shares, respectively, of common stock were not included in the calculation of the weighted average shares for diluted net income per common share because the effect would have been anti-dilutive.

5. Goodwill and Intangible Assets

Goodwill represents the cost in excess of the fair value of the net assets of acquired businesses. In accordance with ASC 350, Intangibles-Goodwill and other, goodwill is not amortized. The Company has determined that it has one reporting unit and performs its annual goodwill impairment test as of December 31 each year. In analyzing goodwill and intangible assets for potential impairment, the Company uses projections of future discounted cash flows and other procedures to determine whether the Company’s estimated fair value exceeds its carrying value. During the year ended December 31, 2010, the Company completed its annual goodwill and other indefinite lived intangible assets impairment test and the results determined that the goodwill and indefinite lived intangible assets were not at risk of failing step 1 and therefore not impaired at December 31, 2010. In addition, the Company believes there were no indicators of impairment during the quarter ended March 31, 2011.

The following table summarizes changes in the Company’s goodwill balances as required by ASC 350-20 for the periods ended (in thousands):

	March 31, 2011			December 31, 2010
Goodwill balance at beginning of period	$	224,806		$	115,189
Accumulated impaired goodwill at beginning of period		(102,294	)		(102,294	)
Goodwill balance at beginning of period, net		122,512			12,895
Goodwill acquired during the period		—			109,617
Goodwill adjusted during the period		215			—
Goodwill balance at end of period, net	$	122,727		$	122,512

The Company’s intangible assets are summarized as follows (in thousands):

	March 31, 2011			December 31, 2010			Weighted-average Amortization Period as of March 31, 2011
Indefinite-lived intangible assets:
Domain/Trade names	$	29,770		$	29,770
Definite lived intangible assets:
Non-compete agreements		3,408			3,408		11 months
Customer relationships		55,077			55,077		77 months
Developed technology		57,923			57,923		70 months
Other		100			100
Accumulated amortization		(43,373	)		(39,435	)
	$	102,905		$	106,843

The weighted-average amortization period for the amortizable intangible assets as of March 31, 2011, is approximately 73 months. Total amortization expense was $3.9 million and $2.6 million for the three months ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, the amortization expense for the next five years is as follows (in thousands):

2011 (remainder of year)	$	11,796
2012		15,408
2013		13,319
2014		8,908
2015		5,786
Thereafter		17,918
Total	$	73,135

6. Restructuring Costs and Other Reserves

The Company had approximately $2.3 million of accrued restructuring charges as of December 31, 2010 primarily related to relocating and terminating employees from the Register.com LP acquisition. The Company incurred approximately $0.1 million of adjustments to restructuring costs during the three months ended March 31, 2011. Payments of $1.1 million were made during the first quarter ended March 31, 2011. The $1.3 million of outstanding restructuring charges as of March 31, 2011 are expected to be paid by February 2012.

The table below summarizes the activity of total accrued restructuring costs and other reserves during the three months ended March 31, 2011 (in thousands):

	Balance as of December 31, 2010		Additions		Cash Payments			Change in Estimates		Balance as of March 31, 2011
Restructuring costs	$	428	$	—	$	(175	)	$	96	$	349
Employee termination benefits		1,876		—		(947	)		—		929
Other acquisition related costs		21		—		—			—		21
Balance	$	2,325	$	—	$	(1,122	)	$	96	$	1,299

7. Financial Instruments

The Company is exposed to various market risks, including changes in interest rates and foreign exchange rates. In order to partially mitigate the economic impact of these risks, derivative contracts are used as described below. The Company does not enter into such financial instruments for trading or speculative purposes. See related fair value disclosures in Footnote 9, Fair Value.

Interest Rate Swap Agreements

In August 2010, the Company entered into an interest rate swap on $55 million of its variable rate term loans. The swap converts interest payments from the variable rate 1 month LIBOR plus 4.5 percent rate to a fixed rate of 0.0074 percent plus 4.5 percent rate and qualifies as a cash flow hedge under ASC 815, Derivatives and Hedging. The interest rate swap matures on July 30, 2013. Realized gains and losses are reported as interest expense in the Consolidated Statements of Operations and as operating cash flows in the Consolidated Statements of Cash Flows. The Company had $15 thousand, net of income tax, and $40 thousand, net of tax, of unrealized losses recorded in accumulated other comprehensive income as of March 31, 2011 and December 31, 2010, respectively. The notional amount for this contract was approximately $44.4 million and $51.2 million at March 31, 2011 and December 31, 2010, respectively.

The following presents the location of all assets and liabilities associated with the Company’s derivative instruments within the consolidated balance sheets:

		Fair Value at
Derivatives designated as hedging instruments:	Balance sheet	March 31, 2011	December 31, 2010
Interest rate swap	Other long-term liabilities	$(25) thousand	$(64) thousand

The following presents the losses recorded from the derivative instruments and the location within the consolidated statements of operations:

Derivatives designated as hedging instruments:		Income statement		For the three months Ended March 31, 2011
Interest rate swap		Interest expense		$(59) thousand

8. Long-term Debt and Capital Lease Obligations

Long-term Debt

On July 30, 2010, the Company entered into a Credit Facility Agreement (“Credit Agreement”) with the Royal Bank of Canada and issued a $95 million five year term loan and a $15 million revolving credit facility to finance the acquisition of Register.com LP. The term loan and the revolving credit facility both bear variable interest rates of 1-month LIBOR plus 4.5 percent with the rate resetting at each month end. The term loan and the revolving credit facility mature on July 30, 2015. During 2011, the Company made principal payments of $4.5 million; $2.2 million was a required principal payment on the term loan and the remaining $2.3 million paid down the revolving credit facility. The Company has approximately $6.0 million of available borrowing capacity at March 31, 2011 under the revolving credit facility.

In conjunction with the term loan and revolving credit facility, the Company incurred approximately $5.3 million of financing related fees that have been recorded as an asset that will be amortized to interest expense over the life of the related long-term debt using the interest method. As of March 31, 2011, the Company has approximately $4.4 million of unamortized financing fees remaining.

On July 30, 2010, the Company issued a $5 million note payable to the sellers of Register.com LP. The note payable bears interest at a rate of 5 percent with interest payments made on a quarterly basis and matures on July 30, 2015.

As of March 31, 2011, total principal payments due for all long-term debt during the next five years are as follows:

2011(remainder of year)	$	7,231
2012		11,125
2013		11,125
2014		20,025
2015		48,994
Total		98,500
Less current portion		(10,013	)
Total long-term debt	$	88,487

Debt Covenants

In addition to scheduled principal payments above, the Credit Agreement requires the Company to pay an additional principal amount equal to fifty percent of any excess cash flow, as defined in the Credit Agreement, for such year. The required percentage of excess cash flow shall be reduced to thirty-three percent if the Consolidated Leverage Ratio is reduced to 1.5 to 1. The Consolidated Leverage Ratio is defined as consolidated debt divided by Covenant EBITDA (see below). For the year ended December 31, 2011 only, the required excess cash flow payment shall be reduced by $7.5 million. Excess cash flow payments are due within ninety-five days of each year end, commencing with the year ended December 31, 2011.

The Credit Agreement also requires that the Company maintain a Consolidated Fixed Charge Coverage Ratio which is defined as Covenant EBITDA divided by consolidated fixed charges. Consolidated fixed charges include consolidated interest expense and scheduled debt payments made in a given period.

For purposes of determining the Consolidated Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio, consolidated covenant EBITDA is defined in the Credit Agreement for the fiscal quarters ended September 30, 2010 and June 30, 2010 as $10.2 million and $10 million, respectively. The combined entity that includes Register.com LP did not exist until the acquisition on July 30, 2010; therefore these amounts were stated in the Credit Agreement so that the debt covenants can be calculated based on a trailing 12-month basis.

Covenant EBITDA is defined as consolidated net income before:

Income tax expense

Interest expense, amortization or write-off of debt issuance costs

Depreciation and amortization expense

Extraordinary gains or losses

Non-cash gains on the sales of assets outside of the ordinary course of business

Non-cash income

Cash restructuring, integration, transition, severance, facilities discontinuation or transaction costs for any period prior to December 31, 2011 up to $6 million and, subsequent to December 31, 2011, an aggregate amount not to exceed $5 million

Adjustments to revenue or expense resulting from a fair market value adjustment to deferred revenue or prepaid expenses in purchase accounting

Other non-cash expenses, excluding any accrual for a future cash expenditure

Acquisition expenses incurred prior to December 31, 2010 and audit or valuation services expense which constitute acquisition expenses incurred prior to December 31, 2011

Marketing program expenditures in any period to the extent that such expenditures exceed the projected marketing program expenditures as reflected in the financing projection model up to $3 million per year

The covenants as of March 31, 2011, are calculated on a trailing 12-month basis:

		Ratio at	Favorable /
Covenant Description	Covenant Requirement	March 31, 2011	(Unfavorable)
Consolidated Leverage Ratio	Not to exceed 3.50 to 1	2.59 to 1	0.91
Consolidated Fixed Charge Coverage Ratio	Minimum of 2.00 to 1	3.17 to 1	1.17

In addition to the financial covenants listed above, the term loan and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and making of certain payments. Substantially all of the Company’s tangible and intangible assets collateralize the long-term debt as required by the Credit Agreement.

Capital Lease Obligations

The Company acquired various capital lease obligations as part of the Solid Cactus acquisition in April 2009, which consisted of non-cancelable lease agreements of computers and equipment that continue through 2013. The required minimum payments on these capital leases as of March 31, 2011 are (in thousands):

2011	$	53
2012		59
2013		25
Total		137
Less interest		(10	)
		127
Less current portion		(61	)
Total obligations under capital leases, long term	$	66

9. Fair Value

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels as follows:

Level 1-Quoted prices in active markets for identical assets or liabilities.

Level 2-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3-Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands of dollars):

	Level 1		Level 2		Level 3
Total	As of March 31, 2011:
Liabilities:
Interest rate swap	$	-	$	25	$	-

Total	As of December 31, 2010:
Liabilities:
Interest rate swap	$	-	$	64	$	-

The estimate of fair values for the interest rate swap is based on applicable and commonly used pricing models and prevailing financial market information as of March 31, 2011.

The Company also has financial assets and liabilities that are not required to be remeasured to fair value on a recurring basis. The Company’s cash and cash equivalents carrying value approximates fair market value. In addition, the term loans and revolving credit facility are both variable rate debt instruments and the fair value approximates the carrying values as of March 31, 2011.

10. Comprehensive Income

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s accumulated other comprehensive loss as of March 31, 2011 consists of the unrealized loss of $15 thousand, net of tax of $10 thousand, for an interest rate swap accounted for as a cash flow hedge.

11. Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, using the liability method. ASC 740 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse.

The Company recognized income tax expense of $0.6 million and $0.5 million during the three months ended March 31, 2011 and 2010, respectively, based upon its estimated annual effective rate. The Company’s effective rate results in income tax expense primarily due to changes in the valuation allowance related to non-reversing deferred tax liabilities and the alternative minimum tax credit.

The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company’s policy is that it recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the three months ended March 31, 2011, the Company accrued $16 thousand in interest expense associated with unrecognized tax benefits.

As of March 31, 2011 and December 31, 2010, the Company had federal net operating loss carryforwards of approximately $208 million and $207.7 million, respectively, which begin to expire in the year 2020. The net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code. Accordingly, the Company estimates that at least $130.6 million of net operating loss carryforwards will be available during the carryforward period.

12. Stock Based Compensation

Equity Incentive Plans

At March 31, 2011, the Company had multiple stock based compensation plans. The Company’s Board of Directors adopted and stockholders approved the 1999 Equity Incentive Plan (“the 1999 Plan”), the 2005 Equity Incentive Plan (“the 2005 Plan”) and the 2008 Equity Incentive Plan (“the 2008 Plan”). The 1999 Plan provided for the issuance of 4.1 million incentive stock options, non-statutory stock options and stock bonuses. In November 2005, the 1999 Plan terminated and the Company no longer issues shares under the 1999 Plan, however forfeited or cancelled shares from this plan become available for issuance under the 2005 Plan. The 2005 and 2008 Plans provide for the issuance of 6.5 million incentive stock options, non-statutory stock options and restricted share awards. At March 31, 2011, approximately 320 thousand shares remain available for issuance under these two plans. The Company issues new shares of common stock upon the exercise of stock options and the granting of restricted shares.

The Company’s Board of Directors adopted and stockholders approved the 2005 Non-Employee Directors’ Stock Option Plan (“the 2005 Directors’ Plan”), which provides for the automatic grant of non-statutory stock options and restricted shares to non-employee directors. Approximately 1 million shares were authorized under the 2005 Directors’ Plan. As of March 31, 2011, 433 thousand shares remain available for future issuance.

In addition to the plans discussed above, the Company has additional equity incentive plans that were established in conjunction with the acquisitions of Web.com, Solid Cactus and Register.com, LP. The Company reserved 2.4 million shares, 147 thousand shares and 466 thousand shares, for the Web.com, Solid Cactus and Register.com LP acquisitions, respectively. These plans are considered one-time, inducement awards of incentive stock options, non-statutory stock options and restricted shares. Once the inducement awards are granted, no additional shares, including forfeitures and cancellations, are available for future grant under these plans.

Vesting periods for the options issued under the Web.com plans range from zero to five years and have an option term of ten years. The options issued under the Solid Cactus plan have a ten year term and generally vest ratably each month over a four year period. The Register.com LP plan includes option grants to purchase 216 thousand shares that vest over four years, with 25 percent vesting on the one year anniversary of the grant date and 1/48 of the shares vesting monthly thereafter. The Register.com LP plan also includes options to purchase 125 thousand shares that vest over four years with 50 percent vesting on the second year anniversary and 1/48 of shares vesting monthly thereafter. These options have a ten year term. Finally, the Register.com LP plan included the issuance of 125 thousand restricted shares that also vest over the course of four years with 50 percent vesting on the second year, 25 percent on the third year and 25 percent on the fourth anniversary of the grant date.

Incentive stock options and non-statutory stock options issued under the 1999 Plan, the 2005 Plan and the 2008 Plan generally vest ratably over three to four years, are contingent upon continued employment and expire ten years from the grant date. Restricted share awards that have been granted under these plans generally vest 25 percent each year over a four year period.

The Board of Directors or a committee thereof, administers all of the equity incentive plans and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the plans. Options have a maximum term of 10 years and vest as determined by the Board of Directors.

The following table outlines the activity in each of the stock based compensation plans from inception through March 31, 2011:

	1999 Plan			2005 Plan			2005 Directors' Plan			Web.com Plans			2008 Plan			Solid Cactus Plan			Register.com Plan
Authorized		4,074,428			2,964,644			985,000			2,424,558			3,000,000			146,900			465,900
Outstanding Options		(1,841,203	)		(2,990,359	)		(437,000	)		(51,646	)		(836,945	)		(83,747	)		(327,050	)
Outstanding RSA		-			-			(42,000	)		-			(1,476,600	)		-			(125,000	)
Exercised Options		(1,736,178	)		(357,085	)		-			(1,878,764	)		(165,954	)		(32,388	)		-
Released RSA		-			(10,000	)		(73,125	)		-			(420,216	)		-			-
Released RSA (minimum withholding taxes paid in lieu of shares)		-			3,245			-			-			112,111			-			-
Subtotal		497,047			(389,555	)		432,875			494,148			212,396			30,765			13,850
Adjustment		(497,047	)		497,047			-			-			-			-			-
Available for future grants		N/A			107,492			432,875			N/A			212,396			N/A			N/A

The fair value of each option award is estimated on the date of the grant using the Black Scholes option valuation model and the assumptions noted in the following table. Expected volatility rates are based on the Company’s historical volatility, since the Company’s initial public offering, on the date of the grant. The expected term of options granted represents the period of time that they are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

	Three months ended March 31,
	2011			2010
Risk-free interest rate		1.87-2.40	%		2.23-2.65	%
Dividend yield		0	%		0	%
Expected life (in years)		5			5
Volatility		61	%		61	%

Stock Option Activity

The following table summarizes option activity for the three months ended March 31, 2011 for all of the Company’s stock options:

	Shares Covered by Options			Exercise Price per Share		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2010		6,995,021		$	0.50 to 46.40	$	5.92
Granted		1,053,000		9.50 to 9.97			9.96
Exercised		(1,404,102	)	0.50 to 10.98			5.01
Forfeited		(55,193	)	3.43 to 10.44			6.55
Expired		(20,775	)	3.43 to 46.40			8.18
Balance, March 31, 2011		6,567,951		0.50 to 40.15			6.75		6.62	$	51,520
Exercisable at March 31, 2011		3,822,321		$	0.50 to 40.15	$	6.39		4.83	$	31,445

Compensation costs related to the Company’s stock option plans were $896 thousand and $741 thousand for the three months ended March 31, 2011 and 2010, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. As of March 31, 2011, the Company had $8.8 million of unrecognized compensation costs related to share-based payments, which is expected to recognized over a weighted average period of 3.0 years.

The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $9.9 million and $18 thousand, respectively. The fair value of options vested during the three months ended March 31, 2011 and 2010 was $762 thousand and $751 thousand, respectively. The weighted average grant-date fair value of options granted during the three months ended March 31, 2011 and 2010 was $5.26 and $2.97, respectively.

Price ranges of outstanding and exercisable options as of March 31, 2011 are summarized below:

	Outstanding Options						Exercisable Options
Exercise Price	Number of Options		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
$0.50 – $4.41		1,549,371		3.51	$	2.19		1,339,490	$	1.88
$4.42 – $5.66		1,376,033		8.91		5.26		298,239		5.29
$5.67 – $8.92		1,470,309		7.06		8.30		1,058,012		8.69
$8.93 – $9.97		1,729,991		7.55		9.58		708,889		9.04
$9.98 – $40.15		442,247		5.27		11.22		417,691		11.28
		6,567,951						3,822,321

Restricted Stock Activity

The following information relates to awards of restricted stock and restricted stock units that have been granted under the 2005 Directors’ Plan, the 2005 Plan, the 2008 Plan and the Register.com LP plan. The restricted stock is not transferable until vested and the restrictions lapse upon the completion of a certain time period, usually over a one- to four-year period. The fair value of each restricted stock grant is based on the closing price of the Company’s stock on the date of grant and is amortized to compensation expense over its vesting period, which ranges between one and four years. At March 31, 2011, there were 1,643,600 shares of restricted stock outstanding.

The following restricted stock activity occurred under the Company’s equity incentive plans during the three months ended March 31, 2011:

Restricted Stock Activity	Shares			Weighted Average Grant–Date Fair Value
Restricted stock outstanding at December 31, 2010		1,481,200			4.98
Granted		297,500			9.95
Lapse of restriction		(135,100	)		6.03
Forfeited		—			—
Restricted stock outstanding at March 31, 2011		1,643,600			5.80

Compensation expense for the three months ended March 31, 2011 and 2010 was approximately $637 thousand and $265 thousand, respectively. As of March 31, 2011, there was approximately $6.0 million of total unrecognized compensation cost related to the restricted stock outstanding, which is expected to be recognized over a weighted average period of 2.6 years. The intrinsic value and fair value of outstanding restricted stock as of March 31, 2011 is $24.0 million and $9.5 million, respectively.

During the three months ended March 31, 2011, $0.4 million of cash was used to pay the minimum withholding tax requirements in lieu of receiving 37,408 common shares.

13. Related Party Transactions

On February 3, 2010, the Company entered into an Asset Purchase Agreement with Innuity, Inc. (“Innuity”) for the purchase of website hosting accounts. Timothy Maudlin is the Lead Director of the Company and a shareholder of Innuity. The approximate dollar value of the amount involved in the transaction is $1.4 million plus a potential share of revenue from the sale of additional Company services to the website hosting account end users.

On December 22, 2009, the Company entered into a Master Channel Partner Agreement with ExactTarget, Inc. (“ExactTarget”) to provide email marketing solutions to the Company. Timothy Maudlin is the Lead Director of the Company and a member of the board of directors and a shareholder of ExactTarget. The approximate dollar value of the amount involved in the transaction is $169 thousand plus a potential share of revenue from the sale of the email marketing solutions to end users. The total amount of fees paid to ExactTarget during the three months ended March 31, 2011 and 2010 was $79 thousand and $71 thousand, respectively.

14. Commitments and Contingencies

Letters of Credit

The Company utilizes letters of credit to back certain payment obligations relating to its facility operating leases and certain vendor requirements. The Company has approximately $1.3 million in outstanding standby letters of credit.

Legal Matters

In November 2001, Register.com Inc. (“Register.com”), its Chairman, President, Chief Executive Officer and former Vice President of Finance and Accounting Richard D. Forman and its former President and Chief Executive Officer Alan G. Breitman (the “Individual Defendants”) were named as defendants in class action complaints alleging violations of the federal securities laws in the United States District Court for the Southern District of New York. A Consolidated Amended Complaint, which is now the operative complaint, was filed in the Southern District of New York on April 19, 2002.

The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 (the “1933 Act”) and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”) against Register.com and Individual Defendants. The essence of the complaint is that defendants issued and sold Register.com’s common stock pursuant to the Registration Statement for the March 3, 2000 Initial Public Offering (“IPO”) without disclosing to investors that certain underwriters in the offering had solicited and received excessive and undisclosed commissions from certain investors. The complaint also alleges that the Registration Statement for the IPO failed to disclose that the underwriters allocated Register.com shares in the IPO to customers in exchange for the customers’ promises to purchase additional shares in the aftermarket at pre-determined prices above the IPO price, thereby maintaining, distorting and/or inflating the market price for the shares in the aftermarket. The action seeks damages in an unspecified amount.

The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On July 15, 2002, Register.com moved to dismiss all claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against Register.com. On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six of the approximately 300 nearly identical actions that are part of the consolidated litigation, which are intended to serve as test, or “focus” cases. The plaintiffs selected these six cases, which do not include Register.com. On April 6, 2007, the Second Circuit denied the petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

The parties in the approximately 300 coordinated cases, including the parties in Register.com’s case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Register.com. On October 6, 2009, the Court granted final approval to the settlement. Two appeals are proceeding. Plaintiffs have moved to dismiss both appeals. Four additional appeals that had been filed have been withdrawn. We intend to continue to defend the action vigorously if the settlement does not survive the appeal. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of this matter. We have notified our underwriters and insurance companies of the existence of the claims. We presently believe, after consultation with legal counsel, that the ultimate outcome of this matter will not have a material adverse effect on our results of operations, liquidity or financial position.

In addition to the legal matters mentioned above, we and our subsidiaries are named from time to time as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our customer and vendor contracts and employment related disputes. We believe that the resolution of these legal actions will not have a material adverse effect on our financial position or results of operations. There were no material legal matters that were reasonably possible and estimable at March 31, 2011. In addition, there were no material legal matters for which an estimate could not be made.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Safe Harbor

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the captions “Factors That May Affect Future Operating Results” in this Form 10-Q. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The forward-looking statements made in this Form 10-Q are made as of the filing date of this Form 10-Q with the Securities and Exchange Commission (SEC), and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Item 1 above and with our financial statements and notes thereto for the year ended December 31, 2010, contained in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 14, 2011.

Overview

We are a leading provider of domain names, online marketing and eCommerce for small businesses. We meet the needs of small businesses anywhere along their lifecycle by offering a full range of online services and support, including website design, domain name registration, lead generation, logo design, search engine optimization, search engine marketing and local sales leads, general contractor leads, franchise and homeowner association websites, shopping cart software, eCommerce website design and call center services. Our primary service offerings, eWorks! XL and SmartClicks, are comprehensive performance-based packages that include domain name registration, website design and publishing, online marketing and advertising, search engine optimization, search engine submission, lead generation, hosting and email solutions, and easy-to-understand Web analytics. As an application service provider, or ASP, we offer our customers a full range of Web services and products on an affordable subscription basis. In addition to our primary service offerings, we provide a variety of premium services to customers who desire more advanced capabilities, such as eCommerce solutions and other sophisticated online marketing services and online lead generation. The breadth and flexibility of our offerings allow us to address the Web services needs of a wide variety of customers, ranging from those just establishing their websites to those that want to enhance their existing online presence with more sophisticated marketing and lead generation services. As the Internet continues to evolve, we plan to refine and expand our service offerings to keep our customers at the forefront.

On July 30, 2010, we completed the acquisition of Register.com LP for total consideration of $135.1 million. Register.com LP offers domain registration and a wide array of website design and web hosting services from “Do It Yourself” tools to fully customized offerings, targeted primarily to small businesses. We believe that the acquisition of Register.com LP provides highly complementary products, sales channels and operating capabilities. With approximately 787,000 subscribers acquired, Register.com LP represents a substantial cross- and up-sell opportunity for us. The Company determined that the operations of Register.com LP are considered Web products and services and therefore, no change to our operating segment resulted. See Note 3, Business Combinations, for additional information on the acquisition.

Through the combination of our proprietary website publishing and management software, automated workflow processes, and specialized workforce development and management techniques, we believe that we achieve production efficiencies that enable us to offer sophisticated Web services at affordable rates. Our technology automates many aspects of creating, maintaining, enhancing, and marketing websites on behalf of our customers. The Register.com LP acquisition enabled us to increase our total subscribers to approximately 940,000 at March 31, 2011, compared to total subscribers of 278,000 as of March 31, 2010. We believe we are one of the industry’s largest providers of affordable Web services and products enabling small businesses to have an effective online presence.

We have traditionally sold our Web services and products to customers identified through strategic relationships with established brand name companies that have a large number of small business customers. In the fourth quarter of 2010, we partnered with SuperMedia, the advertising agency for local small-to-medium sized businesses across the United States, to provide greater opportunities for small business customers to develop, support and expand their online presence. In addition, we have a direct sales force that utilizes leads generated by our strategic marketing relationships to acquire new customers at our sales centers in Spokane, Washington; Atlanta, Georgia; Jacksonville, Florida; Shavertown, Pennsylvania; Yarmouth, Nova Scotia; Halifax, Nova Scotia; Barrie, Ontario; and Scottsdale, Arizona. Our sales force specializes in selling to small businesses across a wide variety of industries throughout the United States and Canada.

To increase our revenue and take advantage of our market opportunity, we plan to expand our subscriber base as well as increase our revenue from existing subscribers by executing our cross-sell/upsell strategy with our recently acquired domain name customers from Register.com LP. We intend to continue to invest in hiring additional personnel, particularly in sales and marketing; developing additional services and products; adding to our infrastructure to support our growth; and expanding our operational and financial systems to manage our growing business. As we have in the past, we will continue to evaluate acquisition opportunities to increase the value and breadth of our Web services and product offerings and expand our subscriber base.

Key Business Metrics

Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:

Net Subscriber Additions

We maintain and grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period. Additionally, we do not treat a subscription as cancelled, even if the customer is not current in its payments, until either we have made numerous attempts to contact the subscriber or 60 days have passed since the most recent failed billing attempt, whichever is sooner. In any event, a subscriber’s account is cancelled if payment is not received within approximately 80 days.

We review this metric to evaluate whether we are performing to our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.

Monthly Turnover (Churn)

Monthly turnover, or churn, is a metric we measure each quarter, and which we define as customer cancellations in the quarter divided by the sum of the number of subscribers at the beginning of the quarter and the gross number of new subscribers added during the period, divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. In measuring monthly turnover, we use the same conventions with respect to free trials and subscribers who are not current in their payments as described above for net subscriber additions. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan. An increase in monthly turnover may signal deterioration in the quality of our service, or it may signal a behavioral change in our subscriber base. Lower monthly turnover signals higher customer retention.

Average Revenue per Subscriber

Average revenue per subscriber, or ARPU, is a metric we measure each quarter, which we define as subscription revenue divided by the average of the number of subscribers at the beginning of the period and the number of subscribers at the end of the period. We exclude from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition related write downs. The fair market value adjustment was $5.6 million and $10 thousand for the three months ended March 31, 2011 and 2010, respectively. Average revenue per subscriber is the key metric that allows management to evaluate the revenue impact of product pricing and product sales mix trends.

Sources of Revenue

We derive our revenue from sales of a variety of services to small businesses, including web design, domain name registration, online marketing, search engine optimization, eCommerce solutions, logo design and home contractor lead services. Leads are generated through online advertising campaigns targeting customers in need of web design, hosting or online marketing solutions, through strategic partnerships with enterprise partners, or through our corporate websites.

Subscription Revenue

We currently derive a substantial majority of our revenue from fees associated with our subscription services, which are generally sold through our web services, online marketing, eCommerce, and domain name registration offerings. A portion of our services are offered free of charge for a 30-day trial period during which the customer can cancel at any time. After the 30-day trial period has ended, the revenue is recognized on a daily basis over the life of the contract. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts, and revenue is recognized on a daily basis over the life of the contract which can range from monthly up to 10 years.

For the three months ended March 31, 2011, subscription revenue accounted for approximately 98% of our total revenue as compared to 97% for the three months ended March 31, 2010. The number of paying subscribers to our Web services and lead generation products drives subscription revenue as well as the subscription price that we charge for these services. The number of paying subscribers is affected both by the number of new customers we acquire in a given period and by the number of existing customers we retain during that period. We expect other sources of revenue to decline as a percentage of total revenue over time.

Professional Services Revenue

We generate professional services revenue from custom website design, eCommerce store design, and "Do It Yourself” logo design. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Our "Do It Yourself” logo design is typically billed upon the point-of-sale of the final product, which is created by the customer.

Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue primarily consists of expenses related to marketing fees we pay to companies with which we have strategic marketing relationships as well as compensation expenses related to our Web page development staff, domain name registration fees, directory listing fees, customer support costs, search engine registration fees, allocated overhead costs, billing costs, and hosting expenses. We allocate overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category. As our customer base and Web services usage grows, we intend to continue to invest additional resources in our website development and support staff.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of compensation expenses related to our Web page development staff, eCommerce store design, logo design, and allocated overhead costs. While in the near term, we expect to maintain or reduce costs in this area, in the long term, we may add additional resources in this area to support the growth in our professional services and custom design functions.

Operating Expenses

Sales and Marketing Expense

Our largest direct marketing expenses are the costs associated with the online marketing channels we use to acquire and promote our services. These channels include search marketing, affiliate marketing and online partnerships. Sales costs consist primarily of salaries and related expenses for our sales and marketing staff. Sales and marketing expenses also include commissions, marketing programs, including advertising, events, corporate communications, other brand building and product marketing expenses and allocated overhead costs.

As market conditions improve, we plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new subscription customers as well as increase sales of additional and new services and products to our existing customer base. Our investment in this area will also help us to expand our strategic marketing relationships, to build brand awareness, and to sponsor additional marketing events. Accordingly, we expect that, in the future, sales and marketing expenses will increase in absolute dollars.

Research and Development Expense

Research and development expenses consist primarily of salaries and related expenses for our research and development staff and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our Web services and lead generation products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. As a result, we do not have to maintain multiple versions of our software, which enables us to have lower research and development expenses as a percentage of total revenue. We expect that, in the future, research and development expenses will increase as we continue to upgrade and extend our service offerings and develop new technologies.

General and Administrative Expense

General and administrative expenses consist of salaries and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, other corporate expenses, and allocated overhead costs. We expect that general and administrative expenses will increase in absolute dollars as we continue to add personnel to support the growth of our business.

Depreciation and Amortization Expense

Depreciation and amortization expenses relate primarily to our computer equipment, software, building and intangible assets recorded due to the acquisitions we have completed.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies and estimates are described in more detail in Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification, or ASC 605, Revenue Recognition. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is reasonably assured.

Thus, we recognize subscription revenue on a daily basis, as services are provided. Customers are billed for the subscription on a monthly, quarterly, semi-annual, annual or on a multi-year basis, at the customer’s option. For all of our customers, regardless of the method we use to bill them, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize subscription revenue on a daily basis over the applicable service period. When we provide a free trial period, we do not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.

We account for our multi-element arrangements, such as in the instances where we design a custom website and separately offer other services such as hosting and marketing, in accordance with ASC 605-25, Revenue Recognition: Multiple-Element Arrangement. We identify each element in an arrangement and assign the relative selling price to each element. The additional services provided with a custom website are recognized separately over the period for which services are performed.

Allowance for Doubtful Accounts

In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses based on historical experience and specific customer collection issues. While credit losses have historically been within our expectations and the provisions established in our financial statements, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have a large number of customers, we do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our consolidated financial position.

We also monitor failed direct debit billing transactions and customer refunds and maintain an allowance for estimated losses based upon historical experience. These provisions to our allowance are recorded as an adjustment to revenue. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.

Accounting for Stock-Based Compensation

We record compensation expenses for our employee and director stock-based compensation plans based upon the fair value of the award in accordance with ASC 718, Compensation – Stock Compensation. Stock-based compensation is amortized over the related vesting periods.

We grant to our employees options to purchase common stock at exercise prices equal to the quoted market values of the underlying stock at the time of each grant. Upon granting options to our employees, we value the fair value of each option award, on the date of the grant, using the Black Scholes option valuation model.

Goodwill and Intangible Assets

In accordance with ASC 350, Intangibles - Goodwill and Other, we periodically evaluate goodwill and indefinite lived intangible assets for potential impairment. We test for the impairment of goodwill and indefinite lived intangible assets annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite lived intangible assets below its carrying amount. Other intangible assets include, among other items, customer relationships, developed technology and non-compete agreements, and they are amortized using the straight-line method over the periods benefited. Other intangible assets represent long-lived assets and are assessed for potential impairment whenever significant events or changes occur that might impact recovery of recorded costs. During the year ended December 31, 2010, we completed our annual impairment test of goodwill and other indefinite lived intangible assets. The results of this test determined that goodwill and other indefinite lived intangible assets were not at risk of failing step 1 and therefore not impaired at December 31, 2010. See Note 5 “Goodwill and Intangible Assets” in the consolidated financial statements for additional information on goodwill and intangible assets. There were no impairment indicators during the three months ended March 31, 2011.

Accounting for Business Combinations

All of our acquisitions were accounted for as purchase transactions, and the purchase price was allocated based on the fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired or net liabilities assumed, was allocated to goodwill. Management weighs several factors in determining the fair value of amortizable intangibles, which primarily consists of developed technology, customer relationships, non-compete agreements and trade names, including using third-party valuation experts, valuation studies and other tools in determining the fair value of amortizable intangibles.

Provision for Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Income Taxes, using the liability method. ASC 740 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Further, deferred tax assets are recognized for the expected realization of available net operating loss carry forwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize a liability when we believe that it is probable that a liability exists and that the liability is measurable.

In addition, we believe that we have fully reserved for any tax uncertainties in accordance with ASC 740, Income Taxes, which clarifies the accounting for uncertainty in income tax positions recognized in financial statements. However, if actual results differ from our estimates, we will adjust the tax provision in the period the tax uncertainty is realized.

Comparison of the Results for the Three Months Ended March 31, 2011 to the Results for the Three Months Ended March 31, 2010

The following table sets forth our key business metrics for the three months ended March 31:

	2011*			2010

Net subscriber (reductions) additions		(15,233	)		3,631
Churn		1.8	%		3.1	%
Average revenue per subscriber	$	15.64		$	29.49

*The metrics for the three months ended March 31, 2011 include the operating results of Register.com, LP.

Net subscribers decreased by 15,233 customers during the three months ended March 31, 2011 as compared to an increase of 3,631 during the three months ended March 31, 2010. However, due to a continued downward trend in churn as well as the acquisition of Register.com LP’s lower churning significant customer base, churn decreased by 1.3% to 1.8% in the three months ended March 31, 2011 compared to the same prior year period ended.

The average revenue per subscriber excluding Register.com LP was $28.46 during the three months ended March 31, 2011 down from $29.49 for the same prior year period. The decrease in average revenue per subscriber was mainly due to the addition of lower revenue subscribers from our Do-It-Yourself website building and hosting products. In addition, there was a decline in revenues from our higher revenue customers from the contractor-focused lead generation business due to the difficult economic environment.

During the first quarter ended March 31, 2011, the Register.com LP pro forma average revenue per subscriber was $9.53. This is adjusted for the unfavorable $5.6 million impact of amortizing into revenue, deferred revenue that was recorded at fair value at the acquisition date. The fair value of the acquired deferred revenue was approximately 50 percent less than the pre-acquisition historical basis of Register.com LP. The unfavorable impact to the Company’s revenue will decline on a monthly basis as the acquired deferred revenue becomes fully recognized.

Revenue

	Three months ended March 31,
	2011		2010
	(unaudited)
Revenue:
Subscription	$	38,779	$	24,480
Professional services		702		648
Total revenue	$	39,481	$	25,128

Total revenue for the three months ended March 31, 2011 increased $14.4 million, or 57%, primarily due to a $15.9 million increase from our July 2010 acquisition of Register.com LP. Excluding Register.com LP, revenue declined $1.5 million during the three months ended March 31, 2011 due to a combination of a lower number of subscribers during the period as well as lower average revenue per subscriber.

Subscription Revenue. Subscription revenue increased $14.3 million or 58% to $38.8 million in the three months ended March 31, 2011 from $24.5 million for the same prior year period. The increase is due to the $15.9 million of Register.com LP subscription revenue. Excluding the acquisition related increase, revenue for the three months ended March 31, 2011 declined by $1.5 million due to fewer subscribers during the period as well as lower average revenue per subscriber. The decrease in average revenue per subscriber was mainly due to the addition of lower revenue subscribers from current promotions for our Do-It-Yourself website building and hosting products. The year over year decline in the number of subscribers is due to the continued impact of the depressed economic conditions.

Professional Services Revenue. Professional services revenue increased 8% to $0.7 million in the three months ended March 31, 2011 from $0.6 million in the same prior year period ended. Professional services revenue increased primarily due to customer support services generated from a new partnership arrangement.

Cost of Revenue

	Three months ended March 31,
	2011		2010
	(unaudited)
Cost of revenue
Subscription	$	17,329	$	10,034
Professional services		378		478
Total cost of revenue	$	17,707	$	10,512

Cost of Subscription Revenue. Cost of subscription revenue increased $7.3 million to $17.3 million, or 45% of subscription revenue, in the three months ended March 31, 2011 from $10.0 million in the three months ended March 31, 2010 primarily due to an additional $7.5 million of costs from the Register.com LP acquisition. Our gross margin on subscription revenue decreased from 59% during the three months ended March 31, 2010 to 55% during the three months ended March 31, 2011. Excluding the impact of the Register.com LP acquisition, gross margin was 57% for the three months ended March 31, 2011 principally due to a shift in the subscription revenue mix to lower margin products.

Gross margin from Register.com LP operations was 52% during the three months ended March 31, 2011. The gross margin was negatively impacted by amortizing deferred revenue based on the fair value calculated at the acquisition date which was approximately 50% lower than the historical basis of Register.com LP. Excluding the $5.6 million effect of the adjustment related to the fair value of acquired deferred revenue, the gross margin for Register.com LP for the three months ended March 31, 2011 was 65%.

Cost of Professional Services Revenue. Cost of professional services revenue decreased 21% to $0.4 million in the three months ended March 31, 2011 from $0.5 million during the same prior year period. The decrease was primarily the result of lower employee compensation and benefits expense.

Operating Expenses

	Three months ended March 31,
	2011		2010
	(unaudited)
Operating expenses:
Sales and marketing	$	10,441	$	5,546
Research and development		3,549		2,271
General and administrative		6,445		3,775
Restructuring charges		96		60
Depreciation and amortization		4,821		3,279
Total operating expenses	$	25,352	$	14,931

Sales and Marketing Expenses. Sales and marketing expenses increased $4.9 million to $10.4 million, or 26% of total revenue, during the three months ended March 31, 2011, up from $5.5 million, or 22% of total revenue, during the three months ended March 31, 2010. Register.com LP contributed $4.5 million of the overall increase, reflecting a $0.4 million increase when the acquisition is excluded. This increase was primarily the result of a direct advertising television campaign that was launched in the first quarter of 2011.

Research and Development Expenses. Research and development expenses increased 56% to $3.5 million, or 9% of total revenue, during the three months ended March 31, 2011 from $2.3 million, or 9% of total revenue, during the three months ended March 31, 2010. The July 2010 acquisition of Register.com contributed $1.2 million of additional research and development costs during the quarter ended March 31, 2011.

General and Administrative Expenses. General and administrative expenses increased $2.7 million to $6.4 million, or 16% of total revenue, during the three months ended March 31, 2011, up from $3.8 million, or 15% of total revenue, during the three months ended March 31, 2010. Employee related compensation costs were $1.3 million higher during the three months ended March 31, 2011 compared to the same prior year period. The first quarter ended March 31, 2011 included a $0.2 million increase in other franchise and business taxes. In addition, we had increases of general and administrative expenses of $0.8 million for Register.com LP costs not included in the comparative prior year period. Finally, the three months ended March 31, 2010 included a $0.2 million favorable reserve adjustment.

Restructuring charges. Restructuring charges of $0.1 million were recorded in the first quarter ended March 31, 2011 primarily to adjust the original estimates for employee relocation and termination expenses as a result of the Register.com LP acquisition.

Depreciation and Amortization Expense. Depreciation and amortization expense increased 47% to $4.8 million during the three months ended March 31, 2011, up from $3.3 million, during the same prior year period. Amortization related to the intangible assets and depreciation expense from property and equipment acquired from Register.com LP, increased the total depreciation and amortization expense by approximately $1.7 million.

Interest (Expense) Income, net. Net interest expense of $1.6 million for the three months ended March 31, 2011 was primarily from the term loan, revolving credit facility and seller note issued to finance the acquisition of Register.com LP. In addition, deferred financing fee amortization of $0.3 million also contributed to interest expense during the three months ended March 31, 2011. Interest income of $41 thousand during the three months ended March 31, 2010 was earned on cash and cash equivalent balances during the period.

Income tax expense. We recorded income tax expense of $0.6 million and $0.5 million in the three months ended March 31, 2011 and 2010, respectively, based upon our estimated annual effective tax rate. The Company’s effective rate results in income tax expense primarily due to changes in the valuation allowance related to non-reversing deferred tax liabilities and the alternative minimum tax credit.

Discontinued operations. On May 26, 2009, we sold our NetObjects Fusion software business for approximately $4.0 million. For the three months ended March 31, 2010, a net loss of $9 thousand was generated by the NetObjects Fusion software. Proceeds of $0.1 million were received during the three months ended March 31, 2011 and were recorded as a gain from the sale of discontinued operations.

Outlook. We believe the Company has the potential to accelerate revenue growth as we increase Web.com's investments in sales and marketing and execute our cross-sell/up sell strategy with our recently acquired domain name customers. As we continue to integrate our operations, realize the significant post-merger cost savings and benefit from increased scale, we believe that we have the opportunity to generate substantial shareholder value. We expect strong operating cash flows that will be used to pay down debt and potentially fund incremental marketing investments. We expect to drive increasing average revenue per subscriber through our cross-sell/up sell activities but continue to expect net subscriber losses in the near term. As we complete various marketing tests and begin to fund marketing investments, we expect to drive sequential net subscriber growth later in 2011. As the impact of the fair market value adjustment to deferred revenue acquired in the Register.com transaction decreases over the course of 2011, we expect to see gross margins to continue improving.

Liquidity and Capital Resources

The following table summarizes total cash flows for operating, investing and financing activities for the three months ended March 31, (in thousands):

	2011			2010

Net Cash Provided by Operating Activities	$	1,525		$	1,849
Net Cash Used in Investing Activities		(1,868	)		(1,780	)
Net Cash Provided by (Used in) Financing Activities		1,852			(46	)

Increase in Cash and Cash Equivalents	$	1,509		$	23

As of March 31, 2011, we had $17.8 million of unrestricted cash and cash equivalents and $18.6 million in negative working capital, as compared to $16.3 million of cash and cash equivalents and $22.1 million in negative working capital as of December 31, 2010. The deficit in working capital is due to the significant portion of deferred revenue from Register.com LP subscription revenue. In addition, there are approximately $10.1 million of current debt obligations as of March 31, 2011. We have received approximately $2.5 million of cash and cash equivalents during the three months ended March 31, 2011 that will be submitted to the Internal Revenue Service in April 2011 for minimum tax withholding requirements from exercises of non qualified stock options by former employees of Web.com Group, Inc.

Net cash provided by operations for the three months ended March 31, 2011 was $1.5 million as compared to the net cash provided by operations of $1.8 million for the three months ended March 31, 2010. The net loss of $5.6 million adjusted for non cash items including depreciation and amortization, stock based compensation expense and deferred income taxes resulted in cash inflows of $1.3 million. Other balance sheet changes included $6.3 million of net favorable cash flows from changes in deferred revenue, which more than offset the increase in cash uses from other working capital and balance sheet accounts by approximately $0.2 million. Included in the other balance sheet changes during the quarter ended March 31, 2011 was approximately $1.1 million of payments made for the restructuring activities resulting from the July 2010 acquisition of Register.com LP.

Net cash used in investing activities in the three months ended March 31, 2011 was $1.9 million compared to $1.8 million for the same prior year period. Purchases of property and equipment of $2.0 million were made in the three months ended March 31, 2011 primarily to migrate and streamline data centers to a centralized location. This was offset slightly by a $0.1 million payment received during the first quarter ended March 31, 2011 from the sale of our discontinued NetObjects Fusion business, sold in 2009. The three months ended March 31, 2010 included a $1.4 million purchase of approximately 5,700 customers. Approximately $0.4 million of property and equipment was purchased during the first quarter ended March 31, 2010.

Net cash provided by financing activities in the three months ended March 31, 2011 was $1.9 million as compared to net cash used for financing activities of $0.1 million for the same prior year quarter ended. Proceeds from the exercise of stock options of $6.8 million were received during the three months ended March 31, 2011. Approximately $0.4 million of cash was used to pay employee minimum tax withholding requirements in lieu of receiving common shares during the first quarter ended March 31, 2011. Principal payments on long term debt obligations of $4.5 million were made in the first quarter of 2011, of which $2.3 million was discretionary.

Long-term Debt

On July 30, 2010, we entered into a Credit Facility Agreement (“Credit Agreement”) with the Royal Bank of Canada and issued a $95 million five year term loan and a $15 million revolving credit facility to finance the acquisition of Register.com LP, of which a total of $93.5 million was outstanding at March 31, 2011. The term loan and the revolving credit facility both bear variable interest rates of 1-month LIBOR plus 4.5 percent with the rate resetting at each month end. The term loan and the revolving credit facility mature on July 30, 2015. Approximately 47 percent of the term loan and revolving credit facility has been hedged with an interest rate swap that fixes 1-month LIBOR at 0.74 percent.

In addition, on July 30, 2010, we issued a $5 million note payable to the sellers of Register.com LP. The note payable bears interest at a rate of 5 percent with interest payments made on a quarterly basis and matures on July 30, 2015.

Debt Covenants

The Credit Agreement requires that we pay an additional principal amount equal to fifty percent of any excess cash flow, as defined in the Credit Agreement, for such year. The required percentage of excess cash flow shall be reduced to thirty-three percent if the Consolidated Leverage Ratio is reduced to 1.5 to 1. The Consolidated Leverage Ratio is defined as consolidated debt divided by Covenant EBITDA (see Note 8, Long-Term Debt and Capital Lease Obligations, for additional information). For the year ended December 31, 2011 only, the required excess cash flow payment shall be reduced by $7.5 million. Excess cash flow payments are due within ninety-five days of each year end, commencing with the year ended December 31, 2011.

The Credit Agreement also requires that we maintain a specified Consolidated Fixed Charge Coverage Ratio which is defined as Covenant EBITDA divided by consolidated fixed charges. Consolidated fixed charges include consolidated interest expense and scheduled debt payments made in a given period. For purposes of determining the Consolidated Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio, consolidated Covenant EBITDA is defined in the Credit Agreement for the fiscal quarters ended September 30, 2010 and June 30, 2010 as $10.2 million and $10 million, respectively. The combined entity that includes Register.com LP did not exist until the acquisition on July 30, 2010; therefore these amounts were stated in the Credit Agreement so that the debt covenants can be calculated based on a trailing 12-month basis. Covenant EBITDA for the quarterly periods ended March 31, 2011 and December 31, 2010 was $8.7 million and $9.1 million, respectively. The consolidated debt and interest payments used in the covenant calculation below were $98.5 million and $1.3 million, respectively.

The covenant calculations as of March 31, 2011, are calculated on a trailing 12-month basis:

		Ratio at	Favorable /
Covenant Description	Covenant Requirement	March 31, 2011	(Unfavorable)
Consolidated Leverage Ratio	Not to exceed 3.50 to 1	2.59 to 1	0.91
Consolidated Fixed Charge Coverage Ratio	Minimum of 2.00 to 1	3.17 to 1	1.17

Summary

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

the costs involved in the expansion of our customer base;

the costs associated with the principal and interest payments of future debt service;

the costs involved with investment in our servers, storage and network capacity;

the costs associated with the expansion of our domestic and international activities;

the costs involved with our research and development activities to upgrade and expand our service offerings; and

the extent to which we acquire or invest in other technologies and businesses.

We believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months, including our sales and marketing expenses, research and development expenses, capital expenditures and debt service requirements.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. We monitor non-GAAP financial measures because it describes the operating performance of the company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. Relative to each of the non-GAAP financial measures, we further set forth our rationale as follows:

Non-GAAP Revenue. We exclude from non-GAAP revenue the fair value adjustment to deferred revenue resulting from acquisition related write downs, because we believe that excluding such measures helps management and investors better understand our revenue trends.

Non-GAAP Operating Income and Non-GAAP Operating Margin. We exclude from non-GAAP operating income and non-GAAP operating margin amortization of intangibles, fair value adjustment to deferred revenue, restructuring charges, corporate development expenses and stock-based compensation charges. We believe that excluding these items assist investors in evaluating period-over-period changes in our operating income and operating margin without the impact of items that are not a result of our day-to-day business and operations.

Non-GAAP Net Income and Non-GAAP Net Income per Basic Share and per Diluted Share. We exclude from non-GAAP net income and non-GAAP net income per diluted share and per basic share amortization of intangibles, income tax expense, fair value adjustment to deferred revenue, restructuring charges, corporate development expenses and stock-based compensation, amortization of deferred financing fees, gains/losses on operating assets and liabilities and include cash income tax expense, because we believe that excluding such measures helps management and investors better understand our operating activities.

Adjusted EBITDA. We exclude from Adjusted EBITDA depreciation expense, amortization of intangibles, fair value adjustment to deferred revenue, income tax, interest expense, interest income, stock-based compensation, corporate development expenses, and restructuring charges, because we believe that excluding such items helps management and investors better understand operating activities.

The following table presents our non-GAAP measures for the periods indicated (in thousands):

	Three Months Ended March 31,
	2011			2010
Reconciliation of GAAP revenue to non-GAAP revenue
GAAP revenue	$	39,481		$	25,128
Fair value adjustment to deferred revenue		5,619			10
Non-GAAP revenue	$	45,100		$	25,138

Reconciliation of GAAP net loss to non-GAAP net income
GAAP net loss	$	(5,610	)	$	(754	)
Amortization of intangibles		3,937			2,618
Gain on sale of assets		(2	)		-
Stock based compensation		1,533			1,006
Income tax expense		573			471
Restructuring charges		96			60
Corporate development		13			-
Amortization of deferred financing fees		308			-
Cash income tax expense		(174	)		(65	)
Fair value adjustment to deferred revenue		5,619			10
Fair value adjustment to prepaid registry fees		93			-
Non-GAAP net income	$	6,386		$	3,346

Reconciliation of GAAP diluted net loss per share to non-GAAP net income per share
Fully diluted shares:
Common stock		26,618			25,410
Diluted stock options		2,569			1,398
Diluted restricted stock		1,011			359
Total		30,198			27,167

Diluted GAAP net loss per share	$	(0.21	)	$	(0.03	)
Diluted equity per share		0.02			-
Amortization of intangibles per share		0.13			0.09
Gain on sale of assets per share		-			-
Stock based compensation per share		0.05			0.04
Income tax expense per share		0.02			0.02
Restructuring charges per share		-			-
Corporate development per share		-			-
Amortization of deferred financing fees per share		0.01			-
Cash income tax expense per share		(0.01	)		-
Fair value adjustment to deferred revenue per share		0.20			-
Fair value adjustment to prepaid registry fees per share		-			-
Diluted Non-GAAP net income per share	$	0.21		$	0.12

	Three Months Ended March 31,
	2011			2010
Reconciliation of GAAP operating loss to non-GAAP operating income

GAAP operating loss	$	(3,578	)	$	(315	)
Amortization of intangibles		3,937			2,618
Stock based compensation		1,533			1,006
Restructuring charges		96			60
Corporate development		13			-
Fair value adjustment to deferred revenue		5,619			10
Fair value adjustment to prepaid registry fees		93			-
Non-GAAP operating income	$	7,713		$	3,379

Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin		-9	%		-1	%
Amortization of intangibles		9	%		10	%
Restructuring charges		0	%		0	%
Corporate development		0	%		0	%
Fair value adjustment to deferred revenue		14	%		0	%
Fair value adjustment to prepaid registry fees		0	%		0	%
Stock based compensation		3	%		4	%
Non-GAAP operating margin		17	%		13	%

Reconciliation of GAAP operating loss to adjusted EBITDA

GAAP operating loss	$	(3,578	)	$	(315	)
Depreciation and amortization		4,821			3,279
Stock based compensation		1,533			1,006
Restructuring charges		96			60
Corporate development		13			-
Fair value adjustment to deferred revenue		5,619			10
Fair value adjustment to prepaid registry fees		93			-
Adjusted EBITDA	$	8,597		$	4,040

Stock based compensation
Subscription (cost of revenue)	$	188		$	132
Sales and marketing		283			153
Research and development		210			144
General and administration		852			577
Total	$	1,533		$	1,006

Contractual Obligations and Commitments

We have no material changes to the Contractual Obligations table as presented in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2010 Annual Report on Form 10-K. See Note 14, Commitments and Contingencies, for additional information.

Off-Balance Sheet Arrangements

As of March 31, 2011 and December 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, specifically changes in the Canadian Dollar. The majority of our subscription agreements are denominated in U.S. dollars. The majority of our expenses are denominated in U.S. dollars; however, with the acquisition of Register.com LP, we have a higher exposure from our Canadian dollar expenditures. Exchange rate fluctuations have had little impact on our operating results and cash flows. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to reduce the effect of these potential fluctuations.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $17.8 million and $16.3 million at March 31, 2011and December 31, 2010, respectively. These amounts were invested primarily in money market funds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we do not anticipate that the interest rates will materially fluctuate therefore; we believe we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

As of March 31, 2011, we have $98.5 million of total debt outstanding. As a result, we have exposure to market risk for changes in interest rates related to these borrowings and as a result have entered into an interest rate swap on approximately 47 percent of our term loan swapping variable rate debt with fixed rate debt. Our variable rate debt is based on 1-month LIBOR plus 4.5 percent. A hypothetical 10 percent increase/decrease in 1-month LIBOR would result in an annual increase/decrease of interest expense of approximately $13 thousand.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Based on their evaluation as of March 31, 2011, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, and that such information is accumulated and communicated to us to allow timely decisions regarding required disclosures.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

Changes in Internal Controls Over Financial Reporting.

There have been no changes in our internal controls over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On July 15, 2002, Register.com moved to dismiss all claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003 the Court denied the motion to dismiss the complaint against Register.com. On December 5, 2006, the Second Circuit vacated a decision by the district court granting class certification in six of the approximately 300 nearly identical actions that are part of the consolidated litigation, which are intended to serve as test, or “focus” cases. The plaintiffs selected these six cases, which do not include Register.com. On April 6, 2007, the Second Circuit denied the petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

Item 1A. Risk Factors.

Factors That May Affect Future Operating Results

In addition to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

Depressed general economic conditions or adverse changes in general economic conditions could adversely affect our operating results. If economic or other factors negatively affect the small business sector, our customers may become unwilling or unable to purchase our Web services and products, which could cause our revenue to decline and impair our ability to operate profitably.

We have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. For example, the direction and relative strength of the global economy has recently been increasingly uncertain due to softness in the residential real estate and mortgage markets, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors affecting spending behavior. If economic growth in the United States is slowed, or if other adverse general economic changes occur or continue, many customers may delay or reduce technology purchases or marketing spending. This could result in reductions in sales of our Web services and products, longer sales cycles, and increased price competition.

Our existing and target customers are small businesses. We believe these businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, the current global financial crisis affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, which could limit our customers’ access to credit. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our Web services and products. If small businesses experience economic hardship, or if they behave more conservatively in light of the general economic environment, they may be unwilling or unable to expend resources to develop their online presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.

We may find it difficult to integrate recent and potential future business combinations, which could disrupt our business, dilute stockholder value, and adversely affect our operating results.

During the course of our history, we have completed several acquisitions of other businesses, and a key element of our strategy is to continue to acquire other businesses in the future. Most recently, we completed the acquisition of Register.com LP in July 2010, our largest acquisition to date. Integrating Register.com LP, or any businesses or assets we may acquire in the future, could add significant complexity to our business and additional burdens to the substantial tasks already performed by our management team. In the future, we may not be able to identify suitable acquisition candidates, and if we do, we may not be able to complete these acquisitions on acceptable terms or at all. In connection with our recent and possible future acquisitions, we may need to integrate operations that have different and unfamiliar corporate cultures. Likewise, we may need to integrate disparate technologies and Web service and product offerings, as well as multiple direct and indirect sales channels. The key personnel of the acquired company may decide not to continue to work for us. These integration efforts may not succeed or may distract our management’s attention from existing business operations. Our failure to successfully identify appropriate acquisition targets or to manage and integrate recent acquisitions, or any future acquisitions, could seriously harm our business.

We may not realize the anticipated benefits from an acquisition.

Acquisitions involve the integration of companies that have previously operated independently. We expect that acquisitions may result in financial and operational benefits, including increased revenue, cost savings and other financial and operating benefits. We cannot be certain, however, that we will be able to realize increased revenue, cost savings or other benefits from any acquisition, or, to the extent such benefits are realized, that they are realized timely or to the same degree as we anticipated. Integration may also be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on product roadmaps or other strategic matters. We may integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which may be dissimilar. Difficulties associated with integrating an acquisition’s service and product offering into ours, or with integrating an acquisition’s operations into ours, could have a material adverse effect on the combined company and the market price of our common stock.

In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations.

In July 2010, we entered into debt financing arrangements totaling $115 million all of the proceeds of which were used to complete the acquisition of Register.com. At March 31, 2011, $98.5 million of total debt remains outstanding. Our ability to generate cash flow from operations to make principal and interest payments on our debt will depend on our future performance, which will be affected by a range of economic, competitive and business factors. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to seek additional capital to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or reducing or delaying capital investments and acquisitions. We cannot assure you that such additional capital or alternative financing will be available on favorable terms, if at all. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.

Most of our Web services are sold on a month-to-month basis, and if our customers are unable or choose not to subscribe to our Web services, our revenue may decrease.

A significant portion of our Web service offerings are sold pursuant to month-to-month subscription agreements and our customers generally can cancel their subscriptions to our Web services at any time with little or no penalty.

Historically, we have experienced a high turnover rate in our customer base. For the three months ended March 31, 2011 and 2010, 16% and 15%, respectively, of our subscribers who were customers at the beginning of the respective year were no longer subscribers at the end of the respective year. The turnover rate calculations do not include any acquisition related customer activity.

While we cannot determine with certainty why our subscription renewal rates are not higher, we believe there are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers’ businesses, the overall economic environment in the United States and its impact on small businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our financial performance.

Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.

Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity, if they ever do. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.

Charges to earnings resulting from acquisitions may adversely affect our operating results.

Under applicable accounting, we allocate the total purchase price of a particular acquisition to an acquired company’s net tangible assets, and intangible assets based on their fair values as of the date of the acquisition and record the excess of the purchase price over those fair values as goodwill. Our management’s estimates of fair value are based upon assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors, among others, could result in material charges that would adversely affect our financial results:

•

impairment of goodwill;

•

charges for the amortization of identifiable intangible assets and for stock-based compensation;

•

accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation; and

•

charges to income to eliminate certain of our pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.

Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made.

Though we were profitable for the years ended December 31, 2006, 2007 and 2009, we were not profitable for the years ended December 31, 2010 and 2008 or for the first quarter ended March 31, 2011 and we may not become or stay profitable in the future.

Although we generated net income for the years ended December 31, 2006, and 2007 and 2009, we have not historically been profitable, were not profitable for the years ended December 31, 2010 and 2008 or for the first quarter ended March 31, 2011, and may not be profitable in future periods. As of March 31, 2011, we had an accumulated deficit of approximately $163.5 million. We expect that our expenses relating to the sale and marketing of our Web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to again achieve and, if achieved, to later maintain profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.

One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:

•

issue additional equity securities that would dilute our stockholders;

•

use cash that we may need in the future to operate our business; and

•

incur debt that could have terms unfavorable to us or that we might be unable to repay.

Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

We depend on our strategic marketing relationships to identify prospective customers. The loss of several of our strategic marketing relationships, or a reduction in the referrals and leads they generate, would significantly reduce our future revenue and increase our expenses.

As a key part of our strategy, we have entered into agreements with a number of companies pursuant to which these parties provide us with access to their customer lists and allow us to use their names in marketing our Web services and products. Approximately 10% of our new customers in the three months ended March 31, 2011 were identified through our strategic marketing relationships. We believe these strategic marketing relationships are critical to our business because they enable us to penetrate our target market with a minimum expenditure of resources. If these strategic marketing relationships are terminated or otherwise fail, our revenue would likely decline significantly and we could be required to devote significant additional resources to the sale and marketing of our Web services and products. We have no long-term contracts with these organizations, and these organizations are generally not restricted from working with our competitors. Accordingly, our success will depend upon the willingness of these organizations to continue these strategic marketing relationships.

To successfully execute our business plan, we must also establish new strategic marketing relationships with additional organizations that have strong relationships with small businesses that would enable us to identify additional prospective customers. If we are unable to diversify and extend our strategic marketing relationships, our ability to grow our business may be compromised.

Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.

Due to our limited operating history, our evolving business model, and the unpredictability of our emerging industry, our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:

•

our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ requirements;

•

the renewal rates and renewal terms for our services;

•

changes in our pricing policies;

•

the introduction of new services and products by us or our competitors;

•

our ability to hire, train and retain members of our sales force;

•

the rate of expansion and effectiveness of our sales force;

•

technical difficulties or interruptions in our services;

•

general economic conditions;

•

additional investment in our services or operations;

•

ability to successfully identify acquisition targets and integrate acquired businesses and technologies; and

•

our success in maintaining and adding strategic marketing relationships.

These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.

Additionally, in light of current global and U.S. economic conditions, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

Our business depends in part on our ability to continue to provide value-added Web services and products, many of which we provide through agreements with third parties, and our business will be harmed if we are unable to provide these Web services and products in a cost-effective manner.

A key element of our strategy is to combine a variety of functionalities in our Web service offerings to provide our customers with comprehensive solutions to their online presence needs, such as Internet search optimization, local yellow pages listings, and eCommerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 60 to 90 days, and without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.

We have a risk of system and Internet failures, which could harm our reputation, cause our customers to seek reimbursement for services paid for and not received, and cause our customers to seek another provider for services.

We must be able to operate the systems that manage our network around the clock without interruption. Our operations depend upon our ability to protect our network infrastructure, equipment, and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. Our networks are currently subject to various points of failure. For example, a problem with one of our routers (devices that move information from one computer network to another) or switches could cause an interruption in the services that we provide to some or all of our customers. In the past, we have experienced periodic interruptions in service. We have also experienced, and in the future we may again experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:

Cause customers or end users to seek damages for losses incurred;

Require the Company to replace existing equipment or add redundant facilities;

Damage the Company’s reputation for reliable service;

Cause existing customers to cancel their contracts; or

Make it more difficult for the Company to attract new customers.

Our data centers are maintained by third parties. A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers.

A substantial portion of the network services and computer servers we utilize in the provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of our servers are housed in data centers in Atlanta, Georgia; Jacksonville, Florida; and Ontario, Canada. We obtain Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, we may house other servers and hardware items in facilities owned or operated by other service providers.

A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although we believe we have taken adequate steps to protect our business through contractual arrangements with our service providers, we cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. Any significant disruption could cause significant harm to us, including a significant loss of customers. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects our ability to support our customers or could result in a decrease in our financial performance.

We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.

The software and workflow processes that underlie our ability to deliver our Web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our Web services or products, or that materially impact the efficiency or cost with which we provide these Web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.

Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.

As a result of the anticipated increase in competition in our market, and the likelihood that some of this competition will come from companies with established brands, we believe brand name recognition and reputation will become increasingly important. Our strategy of relying on third-party strategic marketing relationships to find new customers may impede our ability to build brand awareness, as our customers may wrongly believe our Web services and products are those of the parties with which we have strategic marketing relationships. If we do not continue to build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.

We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.

The market for our Web services and products is competitive and has relatively low barriers to entry. Our competitors vary in size and in the variety of services they offer. We encounter competition from a wide variety of company types, including:

•

Website design and development service and software companies;

•

Internet service providers and application service providers;

•

Internet search engine providers;

•

Local business directory providers;

•

Website domain name providers and hosting companies; and

•

eCommerce platform and service providers.

In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from other established and emerging companies. Increased competition may result in price reductions, reduced gross margins, and loss of market share, any one of which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline and our business could be harmed.

If our security measures are breached, our services may be perceived as not being secure, and our business and reputation could suffer.

Our Web services involve the storage and transmission of our customers’ proprietary information. Although we employ data encryption processes, an intrusion detection system, and other internal control procedures to assure the security of our customers’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers’ data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

If we cannot adapt to technological advances, our Web services and products may become obsolete and our ability to compete would be impaired.

Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small businesses and their customers. As a result, our Web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our Web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new Web services or products, or enhancements to our Web services or products, on a timely and cost-effective basis, or if new Web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.

Providing Web services and products to small businesses designed to allow them to Internet-enable their businesses is a new and emerging market; if this market fails to develop, we will not be able to grow our business.

Our success depends on a significant number of small business outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our Web services and products is relatively new and untested. Custom website development has been the predominant method of Internet enablement, and small businesses may be slow to adopt our template-based Web services and products. Further, if small businesses determine that having an online presence is not giving their businesses an advantage; they would be less likely to purchase our Web services and products. If the market for our Web services and products fails to grow or grows more slowly than we currently anticipate, or if our Web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.

We are dependent on our executive officers, and the loss of any key member of this team may compromise our ability to successfully manage our business and pursue our growth strategy.

Our future performance depends largely on the continuing service of our executive officers and senior management team, especially those of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.

Any growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.

Growth in our business may place a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. Growth in our employee base may be required to expand our customer base and to continue to develop and enhance our Web service and product offerings. To manage growth of our operations and personnel, we would need to enhance our operational, financial, and management controls and our reporting systems and procedures. This would require additional personnel and capital investments, which would increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.

We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or force us to reduce our prices.

Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, Web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our Web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. While we do rely on patents acquired from the Web.com acquisition, we do not currently rely on patents to protect all of our core intellectual property. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.

Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2011 will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Select Market, either of which would harm our stock price.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services and products or enhance our existing Web services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. For example, as a result of the acquisition of Register.com LP, we have entered into debt arrangements for a total of $115 million, of which $98.5 million remained outstanding at March 31, 2011. Financial market disruption and general economic conditions in which the credit markets are severely constrained and the depressed equity markets may make it difficult for us to obtain additional financing on terms favorable to us, if at all. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay, or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

•

establish a classified board of directors so that not all members of our board are elected at one time;

•

provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders;

•

require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

•

authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

•

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

•

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

•

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits.

Exhibit No.		Description of Document

3.1		Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)

3.2		Amended and Restated Bylaws of Web.com Group, Inc. (2)

3.3		Certificate of Ownership and Merger of Registration (3)

4.1		Reference is made to Exhibits 3.1 and 3.2

4.2		Specimen Stock Certificate. (3)

10.1		Compensation Arrangements with Named Executive Officers (4) +

10.2		Amended and Restated Employment Agreement by and between the Company and David L. Brown, dated March 7, 2011. (5) +

10.3		Amended and Restated Employment Agreement by and between the Company and Kevin M. Carney, dated March 7, 2011. (6) +

31.1		CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (7)

+ Indicates management contract or compensatory plan.

(1)	Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(2)	Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.

(3)	Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.

(4)	Filed as Exhibit 10.15 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on February 9, 2011, and incorporated herein by reference.

(5)	Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on March 11, 2011, and incorporated herein by reference.

(6)	Filed as Exhibit 10.2 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on March 11, 2011, and incorporated herein by reference.

(7)

The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Web.com Group, Inc.
		(Registrant)

May 6, 2011		/s/ Kevin M. Carney
Date		Kevin M. Carney
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

Exhibit No.		Description of Document

3.1		Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)

3.2		Amended and Restated Bylaws of Web.com Group, Inc. (2)

3.3		Certificate of Ownership and Merger of Registration (3)

4.1		Reference is made to Exhibits 3.1 and 3.2

4.2		Specimen Stock Certificate. (3)

10.1		Compensation Arrangements with Named Executive Officers (4) +

10.2		Amended and Restated Employment Agreement by and between the Company and David L. Brown, dated March 7, 2011. (5) +

10.3		Amended and Restated Employment Agreement by and between the Company and Kevin M. Carney, dated March 7, 2011. (6) +

31.1		CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (7)

+ Indicates management contract or compensatory plan.

(1)	Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.

(2)	Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.

(3)	Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.

(4)	Filed as Exhibit 10.15 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on February 9, 2011, and incorporated herein by reference.

(5)	Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on March 11, 2011, and incorporated herein by reference.

(6)	Filed as Exhibit 10.2 to the Registrant’s current report on Form 8-K (000-51595), filed with SEC on March 11, 2011, and incorporated herein by reference.

(7)

WEB.COM GROUP, INC. - FORM 10-Q - May 6, 2011

Attached files

WEB.COM GROUP, INC. Reports