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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________  
FORM 10-K
________________________   
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
or
¨
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)
Registrant’s telephone number, including area code: (904) 680-6600
Securities registered pursuant to Section 12(b) of the Act: None. 
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes  ¨  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ¨ Yes  ý No 
Indicate by check mark whether the registrant (1) 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.   ý Yes  ¨ No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ý   Yes    ¨   No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 x
Accelerated filer ¨
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    ý   No 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $1,055,958,012 as of June 30, 2014 based on the closing sale price of the common stock as quoted by the NASDAQ Global Market reported for such date. Shares of common stock held by each executive officer and each director and by each person who is known by the registrant to own 10% or more of the outstanding common stock have been excluded from this calculation as such persons may deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purpose.
Common Stock, par value $0.001 per share, outstanding as of February 23, 2015: 51,931,350

DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the registrant's 2015 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference in Part III of this Form 10-K.



TABLE OF CONTENTS
Part I
 
 
 
 
 
 
 
 
 
Item 1.
 
Business
 
 
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
 
 
 
 
Item 2.
 
Properties
 
 
 
 
 
 
Item 3.
 
Legal Proceedings
 
 
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
 
 
 
 
 
 
Item 6.
 
Selected Financial Data
 
 
 
 
 
 
Item 7.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
Item 8.
 
Financial Statements and Supplementary Data
 
 
 
 
 
 
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
 
 
 
 
 
Item 9A.
 
Controls and Procedures
 
 
 
 
 
 
Item 9B.
 
Other Information
 
 
 
 
 
 
Part III
 
 
 
 
 
 
 
 
 
Item 10.
 
Directors, Executive Officer and Corporate Governance
 
 
 
 
 
 
Item 11.
 
Executive Compensation
 
 
 
 
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
 
 
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
 
 
 
 
 
Item 14.
 
Principal Accounting Fees and Services
 
 
 
 
 
 
Part IV
 
 
 
 
 
 
 
 
 
Item 15.
 
Exhibits, Financial Statement Schedules
 
 

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PART I

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Item 1. Business.
Web.com Group, Inc. (referred to as "we", “the Company”, “Web.com Group, Inc.” or “Web.com” herein) provides a full range of Internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and eCommerce solutions. Headquartered in Jacksonville, Florida, Web.com is a publicly traded company (NASDAQ: WWWW) serving approximately 3.3 million customers, primarily in North America, with approximately 2,100 employees in North America, South America and the United Kingdom.
On October 27, 2011, the Company completed its acquisition of 100% of the equity interests in Net Sol Parent LLC (formerly known as GA-Net Sol Parent LLC) (“Network Solutions”), a provider of domain names, web hosting and online marketing services. On July 29, 2010, the Company completed its acquisition of the partnership interests in Register.com LP, another provider of domain names, online marketing and web services. Collectively, these acquisitions brought approximately 2.7 million subscribers that present substantial cross- and up-sell opportunities.
Web.com was incorporated under the General Corporation Law of the State of Delaware on March 2, 1999 as Website Pros, Inc. We offered common stock to the public for the first time on November 1, 2005 as Website Pros (NASDAQ: WSPI) and began trading as Web.com (NASDAQ: WWWW) following our acquisition of the legacy Web.com business in September 2007.
Market Opportunity
According to the U.S. Census Bureau, there are more than 28 million small businesses in the United States with fewer than 500 employees. Our focus is to help small businesses succeed online. Small business owners, including sole proprietors, have limited support staff and must devote most of their time to running the daily operations of their businesses. They often have limited knowledge of how to build a web presence and limited time to acquire the skills to do so. At the same time, there is growing acceptance among these small business owners that an effective Internet presence is critical to their marketing efforts and there is evidence that these businesses are shifting their marketing budgets from traditional media to online channels.

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What We Do
Using a consultative approach, Web.com offers small businesses one-stop shopping for an array of effective, affordable online products and services that will help drive their businesses. We have positioned ourselves as a partner to small businesses across all phases of their adoption of Internet marketing, from their initial entry onto the web to more advanced online marketing solutions. As a global domain registrar, we enable small businesses to establish an online presence by buying a domain name. This basic service is the entry point to greater value-added offerings, which span the range of customer budgets and expertise, from inexpensive Do-It-Yourself ("DIY") websites and e-mail hosting for the technically-savvy to Do-It-For-Me ("DIFM") custom website design services, online marketing, social media and eCommerce solutions for those needing full service. We are the technology enabler between small businesses and Internet innovators such as Google and Facebook, allowing the small business customer to take advantage of today’s online and social media outreach.
Through the combination of proprietary software, automated workflow processes, and specialized workforce development and management techniques, Web.com achieves production efficiencies that enable us to offer sophisticated web services at affordable, monthly subscription rates.
Our Services and Products
Our goal is to provide a broad range of web services and products that enable small businesses to establish, maintain, promote, and optimize their online presence. By providing a comprehensive, performance-based offering, we are able to sell to customers whether or not they have already established an online presence. Customers can subscribe to bundled products that meet a variety of needs, and which can be enhanced with additional services; alternatively, they can choose to purchase ‘a la carte’ solutions for specific solutions.
As our customers demand more advanced products and consultative services, they move from low-priced domain registrations towards high-priced, value-added offerings. These DIFM offerings have relatively high barriers to entry, as they require sophisticated technological and business-process expertise. We are unique in having deployed our feature-rich DIFM website offerings at an unrivaled scale.
Domain Name Registration and Services
We have become one of the largest domain name registrars in the world and offer .com and .net domains as well as the latest top-level domains. We also offer a full suite of domain name services, including domain name registration, transfers, renewals, expiration protection and privacy services. Domain name customers have a highly proprietary need to maintain their distinct Internet address, and our goal is to continue to be their resource for maintaining and extending their registration. Furthermore, these customers represent prime opportunities for more domain name sales, particularly as additional top-level domain names become available. Since online activity typically starts with a domain name, we anticipate continuing to be a market leader in selling and servicing these accounts.
Do-It-For-Me Web Solutions
We have created these services to allow Web.com to undertake virtually all of the work associated with building, maintaining, marketing and enhancing an Internet presence to ultimately drive leads to the small business owner. Since access to these services is through an affordable monthly subscription, these proprietors can have an effective online presence with a minimum outlay of resources. We bundle the most needed products in an efficient manner so the small business owner can focus on his or her core business while the responsibility for making sure the website is optimized for business generation is outsourced to Web.com. Some of our DIFM solutions include:
Custom Website. A custom website with built in marketing, analytics and hosting.
Ignite. Enables websites to be promoted in dozens of major directories.
Facebook Boost by Web.com. Design or update the Business Profile page on Facebook and includes monthly advertising and postings.
eCommerce. Design, setup and configure the online store and shopping cart.
Do-It-Yourself Web Solutions
We offer a variety of DIY website building and marketing solutions for small businesses that want to build their own websites or enhance their websites with online marketing. Our DIY services include:
Hosting services. We offer core products that are standardized, scalable managed hosting services that place numerous customers on a single shared server, a cost benefit that is passed along to the customer.

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Website Builder. Our Website Builder package is an easy-to-use website building tool which includes thousands of starter templates so users can customize their design.  
Do-It-Yourself eCommerce Solutions. We provide a proprietary, professional eCommerce tool that can help businesses begin to sell from their website. Our shopping cart system supplies all of the tools necessary to create and operate an online store and are fully compliant with the Visa Card Information Security Program ("CISP") and Visa International's Payment Card Industry Data Standards ("PCI").
E-mail Services. We offer e-mail products with features our customers need: e-mail accounts, storage, spam and virus protection, webmail and even document sharing.
Online Marketing Services
Business success on the Internet begins with a compelling website, but is only fully realized when the website is “found,” prominently displayed by the various search engines, and ultimately when potential customers are motivated to contact the business. We sell a variety of products and services designed to increase the potential that a website receives prominence in the major search engines like Google TM , Yahoo! and Bing, and we have expertise and experience providing pay-per-click advertising as well. Our online marketing proficiency has been recognized by our selection as a Google AdWords Premier small business Partner and as a Yahoo! Local Ambassador. Some of our online marketing products include:
Search Engine Optimization (SEO). Products and services designed to help improve organic search engine rankings and to increase qualified traffic and lead generation.
Search Engine Marketing. Local and national search engine marketing services, sometimes known as pay-per-click advertising, where we manage an advertising budget for our customers.
Leads by Web. Researches relevant keywords in the customer’s industry to create ads designed to bring traffic to the website. When prospects search for a service, they are driven to a lead generation site to request a quote, and then leads are delivered to the subscriber’s computer or phone for follow up.
Renovation Experts. Premium lead generation service specific to contractors, homebuilders and remodeling professionals. We provide a competitive marketplace that matches homeowners in need of remodeling services with qualified contractors in their local area.
Other Revenue
Monetization. Domain names are digital assets with a lifecycle that can be managed to generate advertising cash flow and resale revenue for Web.com. We strive to maximize revenue from domains that are newly registered, purchased from third parties, canceled, expired or retained for our in-house portfolio of domain names.
Advertising. Web.com offers online advertising opportunities for companies focused on small businesses to be featured on our websites. Since our customers return to our website repeatedly to access their account, seek new products and improve their online knowledge via our learning center, we are in an excellent position to provide targeted display advertising, newsletter advertising, and partner sponsorships.
Sales Channels
The sales organization for our web services and products comprises several distinct sales channels, including:
Online.   We primarily promote our services through the Web.com, Network Solutions.com, Register.com, and other Company websites. To drive prospects to these sites, we engage in online marketing and advertising campaigns, and participate in seminars targeting small businesses that wish to sell their services online. Our partners also promote our services by including the company’s products on their websites and by including services in their ongoing marketing and promotional efforts with their customers.
Outbound and Inbound Telesales.   We utilize our telesales organization to cross-sell and up-sell our full product offerings to our entire customer base. In addition, we target customer lists provided by companies with which we have strategic marketing relationships. Our sales staff believes that the relationships our customers have with their strategic partners enhances the ability to reach a decision maker, make a presentation, have our offer considered, and close the sale during the initial call. In addition, we maintain a separate team of sales specialists specifically focused on responding to inbound inquiries generated by programs initiated by the company and its strategic marketing partners through a mix of e-mail, direct mail, website, direct response television (DRTV) and other marketing efforts to help promote services to prospective customers.
Direct Response Television and Radio.   We have expanded our efforts of promoting Do-It-For-Me products through television and radio advertising campaigns. In addition to legacy ads supporting our Custom Website and Facebook TM

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Boost by Web.com solutions, we have branded DRTV spots, which describe us and feature real customers who have derived significant business value from our solutions.
Local Direct Sales. We have a direct sales “Feet on the Street” initiative in over 20 geographic markets throughout the United States; and expect to expand our penetration by expanding our inside sales organization to complement the markets where we do not have a physical presence. Our Local Sales teams are equipped to sell a full complement of solutions including Leads by Web, Custom website Design, Social Media and Paid Search programs.
Branding.   In 2012, we entered a 10-year agreement to become the umbrella sponsor of the renamed Web.com Tour (formerly the Nationwide Tour), and an official marketing partner of the PGA TOUR. As a sponsor, our brand name has gained heightened visibility, and we believe this relationship will help us reach our target market of small business owners. In addition, in many Web.com Tour, PGA TOUR, and Champions Tour markets we host free, small educational seminars designed to help small businesses learn how to be successful on the Internet, as part of an initiative to bring additional benefit to communities where events are held, which in turn helps reach more of our target market.
Reseller, Affiliate Network and Private Label Partners.   We have developed affiliate partners and resellers who sell our services and provide additional opportunities to up-sell and cross-sell Do-It-For-Me services. We have worked closely with these resellers to develop sales support and fulfillment processes that integrate with the resellers’ sales, service, support, and billing practices. The Company provides ongoing marketing and technical support for its partners to ensure a positive customer experience for their end customers. Additionally, we provide these resellers with training and sales materials to support the web services being offered.
Marketing
Our marketing activities are principally focused on acquiring new subscribers and promoting additional products and services to our existing customers. Our marketing activities include:
Websites: Web.com, NetworkSolutions.com, Register.com, Leads.com, Leads by Web.com, 1ShoppingCart.com, RenovationExperts.com, SolidCactus.com, LogoYes.com, Submitawebsite.com, Scoot.co.uk, and Snapnames.com;
DRTV and radio advertising;
Search engine and other online advertising;
Targeted e-mail and direct response campaigns to prospects and customers;
Affiliate programs; and
Sponsorships.

Third-Party Providers

We offer some of our services to our customers through third-party vendors, which enable us to expand our services and create additional revenue opportunities. Some of the products sold to our customers are sourced from third-party vendors. If any of these relationships terminate, we may need to seek an alternative provider of these services or develop the services internally.
Customers
As of December 31, 2014, we had approximately 3.3 million customers. We generally target small businesses with less than 20 employees. We seek to create long-term relationships with these businesses by helping them leverage the Internet as a channel to promote and grow their business. 
Data Security
We maintain major operational facilities in Jacksonville, Florida; Atlanta, Georgia; Herndon, Virginia; Spokane, Washington; Hazleton, Pennsylvania; Barrie, Ontario; and Yarmouth, Nova Scotia for most of our internal operations. These facilities are monitored through our redundant Network Operations Centers (NOC) staffed 24 hours a day, seven days a week. The servers that provide our customers’ website data to the Internet are located within third-party co-location facilities located in Jacksonville, Florida and Atlanta, Georgia. These co-location facilities have a secured network infrastructure including intrusion detection at the router level, full network traffic monitoring, end point monitoring, data collection and event reporting. Our contract obligates our co-location provider to provide us a secured space within their overall data center. The facilities are secured through card-key numeric entry and biometric access. Infrared detectors are used throughout the facility. In addition, the co-location facilities are staffed 24 hours a day, seven days a week, with experts to manage and monitor the carrier

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networks and network access. The co-location facilities also provide multiple Internet carriers to help ensure bandwidth availability to our customers. The availability of electric power at the co-location facilities is provided through multiple uninterruptible power supply and generator systems should power supply fail at any of our major facilities.
Customer data is redundant through the use of multiple application and web servers. Customer data is backed up to other disk arrays with fail-over to help ensure high availability. Customer data is also maintained at our national design center and can be republished from archival data at any time. Currently, this process could take approximately 24 hours. Our financial system reporting also uses redundant systems and can be reconstituted in approximately 12 hours. Our customer data is stored on systems that are compliant and certified to meet CISP and PCI security standards. Furthermore, we have a highly available redundant infrastructure, which provides disaster recovery backup to prevent a disruption to our customers.
We continue to work on plans to provide active load balancing and built in disaster-recovery operations between our Atlanta and Jacksonville co-location sites. Under this scenario, a full copy of data would be backed up at each site. Each co-location site would provide fail-over capability for the other to prevent a disruption of our customers’ websites should either co-location site become unavailable.
Competition
The market for web services is highly competitive and evolving. We expect competition to increase from existing competitors as well as new market entrants. Most existing competitors typically offer a limited number of specialized solutions and services, but may provide a more comprehensive set of services in the future. These competitors include, among others, website designers, domain name registrars, Internet service providers, Internet search engine providers, local business directory providers, eCommerce service providers, lead generation companies and hosting companies. Among the large number of companies we compete with are: GoDaddy, Endurance International Group, 1&1 Internet, Wix.com, Ltd and ReachLocal, Inc. Some of our competitors may have greater resources, more brand recognition, and larger installed bases of customers than we do, and we cannot ensure that we will be able to compete favorably against them or our other competitors.
We believe the principal competitive factors in the small business segment of the web services and online marketing and lead generation industry include:
Value, breadth and flexibility of service offerings;
Proprietary workflow processes and customer relationship management software;
Brand name and reputation;
Price;
Quality of customer support;
Speed of customer service;
Ease of implementation, use and maintenance; and
Industry expertise and focus.

Intellectual Property
Our success and ability to compete is dependent in significant part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We currently rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. As of December 31, 2014, we owned 47 issued U.S. patents. We also have several additional patent applications pending but not yet issued.
Due to the rapidly changing nature of applicable technologies, we believe that the improvement of existing offerings, reliance upon trade secrets and unpatented proprietary know-how, and development of new offerings generally will continue to be our principal source of proprietary protection. While we have hired third-party contractors to help develop our software and design websites, we own the intellectual property created by these contractors. Our software is not substantially dependent on any third-party software, although our software does utilize open source code. Notwithstanding the use of this open source code, we do not believe our usage requires public disclosure of our own source code nor do we believe the use of open source code is material to our business.
We also have an ongoing service mark and trademark registration program pursuant to which we register some of our product names, slogans and logos in the United States and in some foreign countries. License agreements for our software include restrictions intended to protect our intellectual property. These licenses are generally non-transferable and are perpetual. In addition, we require all of our employees, contractors and many of those with whom we have business

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relationships to sign non-disclosure and confidentiality agreements and to assign to us in writing all inventions created while working for us. Some of our products also include third-party software that we obtain the rights to use through license agreements. In such cases, we have the right to distribute or sublicense the third-party software with our products.
We have entered into confidentiality and other agreements with our employees and contractors. We have also entered into nondisclosure agreements with suppliers, distributors and some customers to limit access to and disclosure of our proprietary information. Nonetheless, neither the intellectual property laws nor contractual arrangements, nor any of the other steps we have taken to protect our intellectual property can ensure that others will not use our technology or that others will not develop similar technologies.
We license or lease from others, many technologies used in our services. We expect that we and our customers could be subject to third-party infringement claims as the number of websites and third-party service providers for web-based businesses grows. Although we do not believe that our technologies or services infringe on the proprietary rights of any third parties, we cannot ensure that third parties will not assert claims against us in the future or that these claims will not be successful.
Employees
As of December 31, 2014, we had approximately 2,100 employees. None of our employees are represented by unions. We consider the relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
Corporate Information
Web.com Group, Inc. was incorporated under the General Corporation Law of the State of Delaware on March 2, 1999 as Website Pros, Inc. Our principal offices are located at 12808 Gran Bay Parkway West, Jacksonville, Florida 32258. Our telephone number is (904) 680-6600. Our website is located at www.web.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-K.
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities Exchange Commission ("SEC").
You may read and copy this Form 10-K at the SEC’s public reference room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.
Item 1A. Risk Factors.
In evaluating Web.com and our business, you should carefully consider the risks and uncertainties set forth below, together with all of the other information in this report. The following risks should be read in conjunction with our “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
As of December 31, 2014, we had $292.8 million aggregate principal amount of our Term Loan and Revolving Credit Facility and $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes") 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. We may also choose to use cash flow from operations to repurchase shares of our common stock which would otherwise be available to pay down long-term debt.

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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 evolving business model, and the unpredictability of our evolving 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.
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 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.

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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 us to replace existing equipment or add redundant facilities;
damage our reputation for reliable service;
cause existing customers to cancel their contracts; or
make it more difficult for us to attract new customers.
We could be adversely affected by information security breaches or cyber security attacks.
Information security risks have generally increased in recent years, in part because of the proliferation of new technologies and the use of the Internet, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. Our web services involve the storage and transmission of our customers' and employees' proprietary information. Our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations. Our technologies, systems and networks may become the target of criminal cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of Web.com or third parties with whom we deal, or otherwise disrupt our or our customers’ or other third parties’ business operations. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Although we employ appropriate security technologies (including data encryption processes, intrusion detection systems), and conduct comprehensive risk assessments 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 detect, 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. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Although we have insurance in place that covers such incidents, the cost of a breach or cyber attack could well exceed any such insurance coverage.
Recently, there have been several well-publicized attacks on retailers, financial services companies and an entertainment company in which the criminal perpetrators gained unauthorized access to confidential information and customer or employee data, often through the introduction of computer viruses or malware, cyber attacks, phishing, or other means. We have had past security breaches, and while to-date, the security breaches we have experienced did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future.  Our servers are also frequently subjected to denial of service attacks and other attempts to disrupt traffic to ours and our customers' websites. Although we have been able to minimize these disruptions in the past, there is no guarantee that we will be able to do so successfully in the future. Our customers and employees have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate personal information or to introduce viruses or other malware through “trojan horse” programs to our users' computers. These emails appear to be legitimate emails sent by us, but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” activities remain a serious problem that may damage our brands, discourage use of our websites and services and increase our costs.

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We could become involved in claims, lawsuits or investigations that may result in adverse outcomes.
We may become a target of government investigations, private claims, or lawsuits, involving but not limited to general business, patent, or employee matters, including consumer class actions challenging our business practices. Such proceedings may initially be viewed as immaterial but could prove to be material. Litigation is inherently unpredictable, and excessive verdicts do occur. Adverse outcomes could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business and may have a material adverse effect on our financial condition and results of operations. Given the inherent uncertainties in litigation, even when we are able to reasonably estimate the amount of possible loss or range of loss and therefore record an aggregate litigation accrual for probable and reasonably estimable loss contingencies, the accrual may change in the future due to new developments or changes in approach. In addition, such investigations, claims and lawsuits could involve significant expense and diversion of management's attention and resources from other matters.

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 our new web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.
Mobile devices are increasingly being used to access the Internet, and our cloud-based and mobile support products may not operate or be as effective when accessed through these devices, which could adversely harm our business.

We offer our products across several operating systems and through the Internet. Mobile devices, such as smartphones and tablets, are increasingly being used as the primary means for accessing the Internet and conducting e-commerce. We are dependent on the functionality of our products with third-party mobile devices and mobile operating systems, as well as web browsers that we do not control. Any changes in such devices, systems or web browsers that impact the functionality of our products or give preferential treatment to competitive products could adversely affect usage of our products. In addition, because a growing number of our customers access our products through mobile devices, we are dependent on the interoperability of our products with mobile devices and operating systems. Improving mobile functionality is integral to our long-term product development and growth strategy. In the event that our customers have difficulty accessing and using our products on mobile devices, our customer growth, business and operating results could be adversely affected.

Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.
As a result of the highly competitive nature of our market, and the likelihood that we may face competition from new entrants with well established brands, we believe our own brand name recognition and reputation are important. 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.
Providing web services and products to small businesses designed to allow them to Internet-enable their businesses is a fragmented and changing market; if this market fails to grow, we will not be able to grow our business.
Our success depends on a significant number of small businesses outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our web services and products is relatively fragmented and constantly changing. 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.
A portion 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 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.

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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.
We were not profitable for the years ended December 31, 2014, 2013 and 2012 and we may not become profitable in the future.
We were not profitable for the years ended December 31, 2014, 2013 and 2012, and may not be profitable in future years. As of December 31, 2014, we had an accumulated deficit of approximately $370.6 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.
If Internet usage does not grow or if the Internet does not continue to be the standard for eCommerce, our business may suffer.
Our success depends upon the continued development and acceptance of the Internet as a widely used medium for eCommerce and communication. Rapid growth in the uses of, and interest in, the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:
the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;
the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;
security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information; and
privacy concerns, including those related to the ability of websites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.
Any of these issues could slow the growth of the Internet, which could limit our growth and revenues.
Weakened global economic conditions may harm our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments seemingly unrelated to us or our industry may harm us. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, poor credit, restricted liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy. These conditions affect spending and could adversely affect our customers' ability or willingness to purchase our service, delay prospective customers' purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.
Our existing and target customers are small businesses. These businesses may be more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, a financial crisis affecting the banking system or financial markets or the possibility that financial institutions may consolidate or go out of business would result 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.
If we fail to comply with the established rules of credit card associations, we will face the prospect of financial penalties and could lose our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

A substantial majority of our revenue originates from online credit card transactions. Under credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card

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processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. We face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.

Increases in payment processing fees, changes to operating rules, the acceptance of new types of payment methods or payment fraud could increase our operating expenses and adversely affect our business and results of operations.
 
Our customers pay for our services predominately using credit and debit cards (together, "payment cards"). Our acceptance of these payment cards requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result of a change in our business practices which increase the fees on a cost-per-transaction basis. Such increases may adversely affect our results of operations.

As our services continue to evolve and expand internationally, we will likely explore accepting various forms of payment, which may have higher fees and costs than our currently accepted payment methods. In addition, if more of our customers utilize higher cost payment methods, our payment costs could increase and our results of operations could be adversely impacted.

Furthermore, we do not obtain signatures from customers in connection with their use of payment methods. To the extent we do not obtain customer signatures, we may be liable for fraudulent payment transactions, even when the associated financial institution approves payment of the orders.

From time to time, fraudulent payment methods are used to obtain service. While we do have certain safeguards in place, we nonetheless experience some fraudulent transactions. The costs to us of these fraudulent transaction includes the costs of implementing as well as updating our safeguards. These fraudulent accounts also increase our bad debt expense and complicate our forecasting efforts as they result in almost 100% customer loss when they are discovered.  We do not currently carry insurance against the risk of fraudulent payment transactions. A failure to adequately control fraudulent payment transactions may harm our business and results of operations.
 
Charges to earnings resulting from acquisitions may adversely affect our operating results.
One of our business strategies is to acquire complementary services, technologies or businesses and we have a history of such acquisitions. 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 and/or intangible assets;
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 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.
The failure to integrate successfully the businesses of Web.com and an acquired company, if any, in the future within the expected timeframe would adversely affect the combined company's future results.
One of our business strategies is to acquire complementary services, technologies or businesses. The success of any future acquisition will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Web.com and the acquired company. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Web.com and an acquired company. This integration will be complex and time consuming.

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The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company's failure to achieve some or all of the anticipated benefits of the acquisition.
Potential difficulties that may be encountered in the integration process include the following:
lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;
complexities associated with managing the larger, more complex, combined business;
integrating personnel from the two companies while maintaining focus on providing consistent, high quality services and products;
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and
performance shortfalls at one or both of the companies as a result of the diversion of management's attention caused by completing the acquisition and integrating the companies' operations.
Successful integration of Web.com's and an acquired company's operations, products and personnel may place a significant burden on the combined company's management and internal resources. Challenges of integration include the combined company's ability to incorporate acquired products and business technology into its existing product offerings, and its ability to sell the acquired products through Web.com's existing or acquired sales channels. Web.com may also experience difficulty in effectively integrating the different cultures and practices of the acquired company, as well as in assimilating its' broad and geographically dispersed personnel. Further, the difficulties of integrating the acquired company could disrupt the combined company's ongoing business, distract its management focus from other opportunities and challenges, and increase the combined company's expenses and working capital requirements. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the combined company's business, financial condition and operating results.
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.
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. 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 30 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.
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 and  Jacksonville, Florida. 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

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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 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 highly competitive and is characterized by relatively low barriers to entry. Our competitors vary in terms of their size and what 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 both established and emerging companies. Increased competition may result in reduced gross margins, the loss of market share, or other changes 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.
Our business could be affected by new governmental regulations regarding the Internet.
To date, government regulations have not materially restricted use of the Internet in most parts of the world. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but previously inapplicable or unenforced laws may be deemed to apply to the Internet or regulatory agencies may begin to rigorously enforce such formerly unenforced laws, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect:
the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and defamation, infringement of third-party intellectual property and other abusive conduct;
other claims based on the nature and content of Internet materials;
user privacy and security issues;
consumer protection;
sales taxes by the states in which we sell certain of our products and other taxes, including the value-added tax of the European Union member states, which could impact how we conduct our business by requiring us to set up processes to collect and remit such taxes and could increase our sales audit risk;
characteristics and quality of services; and
cross-border eCommerce.

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The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communications, ecommerce and advertising. In addition, such changes in laws could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and results of operations.
Changes in legislation or governmental regulations, policies or standards applicable to our product offerings may have a significant impact on our ability to compete in our target markets.
The telecommunications industry is regulated by the Federal Communications Commission ('FCC") in the U.S. While most such regulations do not affect us directly, certain of those regulations may affect our product offerings. For example, effective October 16, 2013, new FCC rules require companies to obtain prior express written consent from consumers before calling them with prerecorded telemarketing "robocalls" or before using an autodialer to call their wireless numbers with telemarketing messages unless unambiguous written consent is obtained before the telemarketing call or text message. If we are unable to satisfy such FCC rules, we could be prevented from providing such product offering to our customers, which could materially and adversely affect our future revenues.
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.
The global financial crisis, which included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit and substantial reductions or fluctuations in equity and currency values worldwide, 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.
The Company's ability to use its net operating loss carry forwards ("NOLs") to offset future taxable income may be limited if taxable income does not reach sufficient levels, or as a result of a change in control which could limit available NOLs.
As of December 31, 2014, the Company has U.S. Federal NOLs of approximately $243.4 million (excluding $72.0 million related to excess tax benefits for stock-based compensation tax deductions in excess of book compensation which will be credited to additional paid-in capital when such deductions reduce taxes payable, as determined on a “with-and-without” basis) available to offset future taxable income which expire between 2020 and 2033. The NOLs are subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company estimates that at least $189.8 million of the NOLs will be available during the carry forward period based on our existing Section 382 limitations. As of December 31, 2014, the Company's valuation allowance includes $189.4 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of existing deferred tax liabilities and current Section 382 limits.
If the Company experiences any future “ownership change” as defined in Section 382 of the Code, the Company's ability to utilize its U.S. NOLs could be further limited. Similar results could apply to our U.S. state NOLs because the states in which we operate generally follow Section 382.
As of December 31, 2014, the Company had $62.2 million of NOLs in the United Kingdom obtained in connection with the Scoot acquisition. Although not subject to expiration, pre-acquisition NOLs could be eliminated under certain circumstances, as determined under applicable tax laws in the United Kingdom, in the 3 year periods both before and after the acquisition date. Although the Company does not believe the pre-acquisition NOLs are subject to any such limitations to date, future activities could subject these NOLs to limitation. As of December 31, 2014, the Company's valuation allowance includes $56.2 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of existing deferred tax liabilities.

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The Company's ability to use its NOLs will also depend on the amount of taxable income generated in future periods. The U.S. NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.
The accounting method for convertible debt securities that may be settled in cash, such as the 2018 Notes, could have a material effect on our reported financial results.
Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the 2018 Notes is that the equity component is required to be included in the additional paid-in-capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 2018 Notes. As a result, we will be required to record a greater amount of non-cash interest expense from the amortization of the discounted carrying value of the 2018 Notes to their face amount over the term of the 2018 Notes. We will also report lower net income or increased net loss in our financial results, the trading price of our common, and the trading price of the 2018 Notes.
In addition, under certain circumstances, convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares that would be issuable upon conversion of the 2018 Notes are not included in the calculation of diluted earnings per share except to the extent the conversion value of the 2018 Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit our use the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 2018 Notes, then our diluted earnings per share may be adversely affected.
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.
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 internal control over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2015 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 as 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 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 that 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

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more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.
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.
Our business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain system.
The domain registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system. The widespread acceptance of any alternative systems could eliminate the need to register a domain to establish an online presence and could materially adversely affect our business, financial condition and results of operations.
We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or otherwise harm our competitive position.
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. 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.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Current accounting rules require that goodwill and other intangible assets with indefinite useful lives may not be amortized, but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
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:

17


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 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
 The Company owns a 32,780 square foot building in Spokane, Washington, in which a web services sales center is located. In addition, we lease the following principal facilities:
 
Location
Square
Feet 
Lease Expiration 
Headquarters and principal administrative, finance, and marketing operations
Jacksonville, FL
112,306

July 2019
Technology administrative center
Herndon, VA
43,874

December 2020
Sales and customer support operations center
Hazleton, PA
39,429

January 2018
Sales and customer support operations center
Yarmouth, Nova Scotia, Canada
30,400

August 2017
Sales and customer support operations center
Jacksonville, FL
19,456

July 2019
Sales and customer support operations center
Halifax, Nova Scotia, Canada
13,500

April 2017
Technology administrative center
Atlanta, GA
10,235

December 2015
Technology administrative center
Buenos Aires, Argentina
10,000

December 2016
Sales and customer support operations center
Stockton, England, United Kingdom
10,000

March 2022
eCommerce operations center
Barrie, Ontario, Canada
5,774

May 2015
Technology administrative center
Portland, OR
5,650

March 2015
Technology data center
Atlanta, GA
4,000

May 2022
Administrative and finance operations
London, England, United Kingdom
1,600

April 2016


Item 3. Legal Proceedings.
The Federal Trade Commission ("FTC") is investigating the methods by which Network Solutions has marketed its domain name and web hosting services to customers.  We have cooperated with the FTC investigation, including responding to an FTC Civil Investigative Demand and to additional FTC information requests. We have also negotiated a consent agreement with the FTC staff that would resolve the investigation, and restrict our future web hosting marketing practices but would not require any changes in current practices, and would not impose any monetary penalties or require other payments. There can be no assurance that the consent agreement will be accepted by the FTC Commissioners, and so it is possible that the FTC investigation could conclude with a variety of outcomes, including the closing of the inquiry with no action, an order regarding our marketing practices, or a payment to the government or to customers.

18



On February 20, 2015, the lawsuit in U.S. District Court for the Southern District of California (Tammy Hussin, et al. v. Web.com Group, Inc.) was dismissed pursuant to a settlement agreement between the parties, the terms of which are confidential.

In addition, from time to time, the Company and its subsidiaries receive inquiries from foreign, federal, state and local regulatory authorities or are named 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 marketing practices, customer and vendor contracts and employment related disputes. We believe that the resolution of these investigations, inquiries or legal actions will not have a material adverse effect on our financial position, marketing practices or results of operations. There were no material legal matters that were reasonably possible or estimable at December 31, 2014.

Item 4. Mine Safety Disclosures.
Not applicable.

19


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On January 3, 2011, our common stock began trading on the NASDAQ Global Select Market under our “WWWW” symbol. From October 27, 2008 to January 2, 2011, our common stock was listed on the NASDAQ Global Market under the symbol “WWWW”. Prior to October 27, 2008, our common stock was listed on the NASDAQ Global Market under the symbol “WSPI”. Prior to November 1, 2005, there was no public market for our common stock. The following table sets forth the high and low stock prices of our common stock for the last two fiscal years as reported on the NASDAQ Global Select Market, as appropriate.
 
 
2014
2013
 
High
Low
High 
Low 
First Quarter
$
37.72

$
29.86

$
18.47

$
14.92

Second Quarter
$
36.50

$
26.32

$
26.04

$
15.87

Third Quarter
$
29.66

$
18.61

$
32.71

$
24.82

Fourth Quarter
$
20.90

$
14.71

$
33.70

$
25.21

 
The closing price for our common stock as reported by the NASDAQ Global Select Market on February 23, 2015 was $17.70 per common share. As of February 23, 2015, there were 660 stockholders of record of our common stock, not including those shares held in street or nominee name.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be subject to the limitations set forth in our credit agreements and at the discretion of our board of directors. None of our outstanding capital stock is entitled to any dividends.
Issuer Purchases of Equity Securities
Share repurchase activity during the three months ended December 31, 2014 was as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period
 
Total
Number
of Shares
Purchased(*)
 
Average
Price Paid
per Share
 
Total
Number of
Shares
Purchased
as Part of a
Publicly
Announced
Program
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (*)
 
October 1-October 31, 2014
 
 
 
 
$

 
 
 
$
100,000,000

 
November 1-November 30, 2014
 
234,528
 
 
 
$
16.59

 
234,528
 
 
$
96,110,039

 
December 1-December 31, 2014
 
390,853
 
 
 
$
17.64

 
390,853
 
 
$
89,214,962

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
625,381
 
 
 
$
17.25

 
625,381
 
 
$
89,214,962

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(*)
The share repurchases totaling $10.8 million in the three months ended December 31, 2014 were made under our stock repurchase program announced on November 5, 2014, which authorizes the repurchase of up to $100 million of our outstanding shares of common stock from time to time. This program, according to its terms, will expire on December 31, 2016. Repurchases under the programs may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan.



20


Stock Performance Graph
The graph below compares the cumulative 5-Year total return provided shareholders on Web.com Group, Inc.'s common stock relative to the cumulative total returns of the NASDAQ Composite index, the RDG Internet Composite index and two customized peer groups of twelve companies and eleven companies respectively, whose individual companies are listed in footnotes 1 and 2 below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on 12/31/2009 and its relative performance is tracked through 12/31/2014.
(1.) There are twelve companies included in the Company's new peer group which are: Cimpress NV, Comscore Inc., Concurrent Technologies PLC, Dealertrack Technologies Inc., Demand Media Inc., Digital River Inc., Internap Corp., Linkedin Corp., Pandora Media Inc., United Online Inc., Verisign Inc. and Webmd Health Corp..
(2.) The eleven companies included in the Company's old peer group are: Bankrate Inc., Cimpress NV, Dealertrack Technologies Inc., Demand Media Inc., Digital River Inc., Linkedin Corp., Rackspace Hosting Inc., Realnetworks Inc., United Online Inc., Verisign Inc. and Webmd Health Corp..





21


Item 6. Selected Financial Data.
 
 
 
Year Ended December 31, 
 
 
2014 (1,3,4)
2013 (1,3,4)
2012 (1,3,4)
2011 (2,3,4)
2010 (2,3,4)
 
(in thousands, except per share data)
Consolidated Statement of Comprehensive Income:
 

Revenue
$
543,937

$
492,315

$
407,646

$
199,205

$
120,289

Income (loss) from operations
$
37,663

$
10,241

$
(36,010
)
$
(40,767
)
$
(14,536
)
Net loss from continuing operations
$
(12,458
)
$
(65,664
)
$
(122,217
)
$
(12,509
)
$
(6,648
)
Income from discontinued operations
$

$

$

$
200

$
116

Net loss
$
(12,458
)
$
(65,664
)
$
(122,217
)
$
(12,309
)
$
(6,532
)
Basic loss from continuing operations per common share
$
(0.24
)
$
(1.34
)
$
(2.61
)
$
(0.41
)
$
(0.26
)
Basic net income from discontinued operations per common share
$

$

$

$
0.01

$

Basic loss per common share
$
(0.24
)
$
(1.34
)
$
(2.61
)
$
(0.40
)
$
(0.26
)
Diluted net loss from continuing operations per common share
$
(0.24
)
$
(1.34
)
$
(2.61
)
$
(0.41
)
$
(0.26
)
Diluted net income from discontinued operations per common share
$

$

$

$
0.01

$

Diluted loss per common share
$
(0.24
)
$
(1.34
)
$
(2.61
)
$
(0.40
)
$
(0.26
)
Basic weighted average common shares outstanding
50,920

48,947

46,892

30,675

25,515

Diluted weighted average common shares outstanding
50,920

48,947

46,892

30,675

25,515

 
As of December 31,
 
2014 (1,3,4)
2013 (1,3,4)
2012 (1,3,4)
2011 (2,3,4)
2010 (2,3,4)
 
(in thousands)
Consolidated Balance Sheet Data:
 
Cash and cash equivalents
$
22,485

$
13,806

$
15,181

$
13,364

$
16,307

Working deficiency
$
(117,987
)
$
(118,872
)
$
(113,544
)
$
(78,843
)
$
(22,133
)
Total assets
$
1,238,406

$
1,277,759

$
1,327,979

$
1,399,480

$
299,489

Long-term debt
$
501,085

$
556,506

$
688,140

$
714,703

$
93,623

Accumulated deficit
$
(370,585
)
$
(358,127
)
$
(292,463
)
$
(170,246
)
$
(157,937
)
Total stockholders' equity
$
174,090

$
170,045

$
161,613

$
271,756

$
103,607

 
 
 
 
 
 
1.
The Consolidated Statement of Comprehensive Loss includes a $1.8 million, $20.7 million and $42.0 million loss from extinguishing long-term debt during the year ended December 31, 2014, 2013 and 2012, respectively. In addition, a $0.4 million and $5.2 million gain from the sale of an equity method investment was also recorded during the years ended December 31, 2013 and 2012, respectively. See Note 4, Long-Term Debt and Note 9, Sale of Equity Method Investment, for more information on both of these transactions.
2.
The 2011 Consolidated Statement of Comprehensive Loss and Consolidated Balance Sheet data above includes the acquisition of Network Solutions from October 28, 2011 through December 31, 2011 and as of December 31, 2011, respectively. In addition, the 2010 Consolidated Statement of Comprehensive Loss and Consolidated Balance Sheet data above includes the acquisition of Register.com LP from July 30, 2010 through December 31, 2010 and as of December 31, 2010, respectively.
3.
Included in the net loss for the year ended December 31, 2014 and 2013 is income tax expense of $21.5 million and $21.3 million, respectively. Included in the net loss for the years ended December 31, 2012, 2011 and 2010 is a tax benefit of $16.7 million, $50.1 million, and $10.7 million, respectively. See Note 15, Income Taxes, for information on these transactions.
4.
The working capital deficiency at December 31, 2014, 2013, 2012, 2011 and 2010 is due to the current portion of deferred revenue, partially offset by deferred expenses and deferred tax assets, which get amortized to revenue or expense/benefit rather than settled with cash.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor

22


In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Annual Report on Form 10-K.
We believe presenting non-GAAP net income, non-GAAP net income per share and non-GAAP operating income measures are useful to investors, because they describe 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. We use these non-GAAP measures as important indicators of our past performance and in planning and forecasting performance in future periods. The non-GAAP financial information we present may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.
Overview
Web.com Group, Inc. ("Web.com", the "Company" or "We") provides a full range of internet services to small businesses to help them compete and succeed online. Web.com meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and eCommerce solutions. For more information about the Company, please visit http://www.web.com. We do not incorporate information obtained on or accessible through, our website into this Annual Report on Form 10-K and you should not consider it a part of this Annual Report on Form 10-K.

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, if applicable.

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 quarter, 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. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan.

Average Revenue per User (Subscriber)
Monthly average revenue per user, or ARPU, is a metric we measure on a quarterly basis. We define ARPU as quarterly subscription revenue divided by the average of the number of subscribers at the beginning of the quarter and the number of users at the end of the quarter, divided by three months. 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 $26.2 million, $41.4 million, and $83.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. ARPU is the key metric that allows management to evaluate the impact on monthly revenue from product pricing, product sales mix trends, and up-sell/cross-sell effectiveness.
Sources of Revenue
Subscription Revenue

23


We currently derive a substantial majority of our revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts. The revenue is recognized on a daily basis over the life of the contract.

Professional Services and Other Revenue 
We generate professional services revenue from custom website design, eCommerce store design and support services. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Other revenue consists of all fees earned from granting customers licenses to use our patents. Generally, revenue is recognized when the service has been completed.  

Cost of Revenue 
Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration costs, directory listing fees, customer support costs, eCommerce store design, search engine registration fees, billing costs, hosting expenses, marketing fees, and allocated overhead costs. 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.

Operating Expenses 
Sales and Marketing Expense
Our direct marketing expenses include the costs associated with the online marketing channels we use to promote our services and acquire customers. These channels include search marketing, affiliate marketing, direct television advertising and online partnerships. Sales costs consist primarily of compensation and related expenses for our sales and marketing staff. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.
 
We plan to continue to invest in sales and marketing to add new subscription customers, and increase sales of additional and new services and products to our existing customer base. We also plan to continue investing in direct response television and radio advertising. We have invested a portion of our incremental marketing budget in branding activities such as the umbrella sponsorship of the Web.com Tour and other sports marketing activities.
Technology and development
Technology and development represents costs associated with creation, development and distribution of our products and websites. Technology and development expenses primarily consist of headcount-related costs associated with the design, development, deployment, testing, operation and enhancement of our products, as well as costs associated with the data centers and systems infrastructure supporting those products. Technology and development expenses are expected to remain flat as a percentage of total revenue during 2015.

General and Administrative Expense
General and administrative expenses consist of compensation and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, corporate development costs, other corporate expenses, and allocated overhead costs. General and administrative expenses are expected to remain relatively flat as a percentage of revenue during 2015.

Depreciation and Amortization Expense
Depreciation and amortization expenses relate primarily to our intangible assets recorded due to the acquisitions we have completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures. Depreciation is expected to increase slightly as we continue to increase our efforts for internally developed software projects. Amortization expense is expected to decrease as certain intangible assets became fully amortized in the fourth quarter of 2014, which is expected to more than offset the increase to amortization expense from the February 2014 SnapNames acquisition and the July 2014 Scoot acquisition.

Critical Accounting Policies and Estimates

24


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, The Company and 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 in accordance with ASC 605-25, Revenue Recognition: Multiple-Element Arrangement. We may sell multiple products or services to customers at the same time. For example, we may design a customer website and separately offer other services such as hosting and marketing or a customer may combine a domain registration with other services such as private registration or e-mail. In accordance with ASC 605-25, each element is accounted for as a separate unit of accounting provided the following criteria is met: the delivered products or services has value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by the Company. We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Our products and services do not include a general right of return relative to the delivered products. In cases where the delivered products or services do not meet the separate unit of accounting criteria, the deliverables are combined and treated as one single unit of accounting for revenue recognition. We assign value to the separate units of accounting in multiple element arrangements using the relative selling price method which is calculated by taking the standalone selling price of each unit to the total selling price of the arrangement, multiplied by the total sales price. Typically, the deliverables within multiple-element arrangements are provided over the same service period, and therefore revenue is recognized over the same period.
To determine the selling price in multiple-element arrangements, the Company establishes vendor-specific objective evidence of the selling price using the price of the deliverable when sold separately. If we are unable to determine the selling price because vendor-specific objective evidence does not exist, the Company will first look to third party evidence, and if that is not sufficient, it will determine an estimated sales price through consultation with and approval by the Company’s management, taking into consideration the Company’s relative costs, target profit margins, and any other information gathered during this process.
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 as well as 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. 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.

25


Accounting for Stock-Based Compensation
We grant to our employees and directors options to purchase common stock at exercise prices equal to the quoted market values of the underlying stock at the time of each grant. We determine the fair value of each option award as of the grant date using the Black-Scholes option pricing valuation model in accordance with ASC 718, Compensation-Stock Compensation.
The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model will be affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, forfeitures and expected dividends.
Goodwill and Intangible Assets  
ASC 350, Intangibles-Goodwill and Other, permits an entity to first assess qualitative factors to determine whether it is more likely than not (likelihood of greater than 50%) that the fair value of indefinite-lived intangible assets and goodwill balances are less than their carrying amount as a basis for determining whether it is necessary to perform the quantitative test which is also described in ASC 350. However, we continue to perform the quantitative tests to determine whether the carrying value of our indefinite-lived intangible assets and our goodwill is impaired during the year ended December 31, 2014. We test goodwill and intangible assets using one reporting unit. We use a market approach to test our goodwill for impairment, while our intangible asset test uses the income approach. The following is not a complete discussion of our calculation, but outlines the general assumptions and steps for testing goodwill and intangible assets for impairment:
Goodwill
The first step involves comparing the fair value of our reporting unit to their carrying value, including goodwill. We use a market capitalization approach after considering an estimated control premium.
Intangible Assets
If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of goodwill to its implied fair value. An impairment charge is recognized for the excess of the carrying value over its implied fair value.
We estimate the fair value of indefinite-lived intangibles using the relief-from-royalty method, a form of the income approach. It is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset. Key assumptions in estimating the fair value include, among other items, forecasted revenue, royalty rates, tax rate, and the benefit of tax amortization. We employ a weighted average cost of capital approach to determine the discount rates used in our projections. The determination of the discount rate includes certain factors such as, but not limited to, the risk-free rate of return, market risk, size premium, and the overall level of inherent risk.
If the carrying value of the intangibles exceeds its fair value, an impairment charge is recognized.
The results of these analyses indicated that our indefinite-lived intangible assets and our goodwill were not impaired at December 31, 2014. See Note 7, Goodwill and Intangible Assets, in the consolidated financial statements for additional information.
Accounting for Purchase Business Combinations
All of our acquisitions have been accounted for as purchase transactions, and the purchase price is 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 is allocated to goodwill. Management weighs several factors in determining the fair value. The analysis typically considers, but is not limited to, the nature of the acquired company’s business, its competitive position, strengths, and challenges; its operating and non-operating assets, if any; its historical financial position and performance; and future plans for the combined entity. Amortizable intangibles, which primarily consists of developed technology, customer relationships, non-compete agreements and trade names, are typically valued using third-party valuation experts, valuation studies and other tools in determining the fair value of amortizable intangibles. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary

26


estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the uncertain tax positions estimated value or tax related valuation allowances, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Provision for Income Taxes  
We account 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 deductible temporary differences and net operating loss and tax credit carry forwards. ASC 740 requires companies to assess whether a valuation allowance should be established against deferred tax assets based on consideration of all available evidence using a “more likely than not” threshold. In making such assessments, the Company considers the expected reversals of our existing deferred tax liabilities within the applicable jurisdictions and carry forward periods, based on our existing Section 382 limitations. The Company does not consider deferred tax liabilities related to indefinite lived intangibles or tax deductible goodwill as a source of future taxable income. Additionally, the Company does not consider future taxable income (exclusive of the reversal of existing deferred tax liabilities and carry forwards) because we continue to be in a three-year cumulative loss position.
A valuation allowance is recorded to reduce our deferred tax assets to the amount that is “more likely than not” to be realized based on the above methodology. We review the adequacy of the valuation allowance on an ongoing basis and adjust our valuation allowance in the appropriate period, if applicable.
The Company records liabilities for uncertain tax positions related to federal, state and foreign income taxes in accordance with ASC 740. These liabilities reflect the Company’s best estimate of its ultimate income tax liability based on the tax code, regulations, and pronouncements of the jurisdictions in which we do business. Estimating our ultimate tax liability involves significant judgments regarding the application of complex tax regulations across many jurisdictions. If the Company’s actual results differ from estimated results, our effective tax rate and tax balances could be affected. As such, these estimates may require adjustment in the future as additional facts become known or as circumstances change. If applicable, we will adjust the tax provision in the appropriate period.
Results of Operations
Comparison of the results for the year ended December 31, 2014 to the results for the year ended December 31, 2013  
The following table sets forth our key business metrics for the year ended December 31,
 
For the year ended December 31,
 
2014
 
2013
 
 
Net subscriber additions
144,243

 
111,744

Churn
1
%
 
1
%
Average revenue per user (monthly)
$
14.62

 
$
14.24

  
Net subscribers increased by 144,243 customers during the year ended December 31, 2014, as compared to an increase of 111,744 customers during the year ended December 31, 2013. Churn continued to remain at a low level of 1% during the year ended December 31, 2014. The increase in customers and the maintenance of our low churn level of 1% is primarily due to our increased marketing efforts in prior periods, as well as during the year ended December 31, 2014.
The average revenue per user was $14.62 during the year ended December 31, 2014, as compared to $14.24 during the same period ended December 31, 2013. The growth in average revenue per subscriber continues to be driven principally by our up-sell and cross-sell campaigns focused on selling higher revenue products to our existing customers as well as the introduction of new product offerings and sales channels oriented toward acquiring higher value customers. ARPU is expected to decline

27


sequentially in the first quarter of 2015, primarily due to the issues that impacted our DIY and DIFM businesses in the fourth quarter of 2014. Modest sequential growth in ARPU is expected for the remainder of 2015.
Revenue
 
 
For the year ended December 31,
 
2014
 
2013
 
(in thousands)
Revenue:
 

 
 

Subscription
$
534,955

 
$
482,166

Professional services and other
8,982

 
10,149

Total revenue
$
543,937

 
$
492,315

 
Total revenue increased 10% to $543.9 million in the year ended December 31, 2014 from $492.3 million in the year ended December 31, 2013. Total revenue during the year ended December 31, 2014 and 2013, includes the unfavorable impact of $26.2 million and $41.4 million, respectively, from 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 51% less than the pre-acquisition historical basis of Network Solutions and Register.com. The unfavorable impact declined $15.2 million during the year ended December 31, 2014 compared to the same prior period. The remaining $36.4 million increase in revenue during the year ended December 31, 2014 continues to be driven principally by our up-sell and cross-sell campaigns focused on selling higher revenue products, primarily our domain and domain related services, advertising, subscription-based customer website products and online marketing products and services. In addition, new product offerings and sales channels contributed to higher revenues during the year ended December 31, 2014.
Subscription Revenue. Subscription revenue increased 11% during the year ended December 31, 2014 to $535.0 million from $482.2 million during the year ended December 31, 2013. The increase is due to the overall revenue drivers discussed above. 
Professional Services and Other Revenue. Professional services revenue decreased 11% to $9.0 million in the year ended December 31, 2014 from $10.1 million in the year ended December 31, 2013 due to a lower volume of custom website and ecommerce design revenue.
Cost of Revenue 
 
For the year ended December 31,
 
2014
 
2013
 
(in thousands)
Cost of revenue
$
191,778

 
$
171,747

Cost of Revenue. Cost of revenue increased 12% or $20.0 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, which was relatively proportionate to the increase in revenue after excluding the adjustments to fair value acquired deferred revenue. During the year ended December 31, 2014, domain registration costs increased $15.9 million, partner commissions increased $2.6 million and billing fees were up $1.2 million when compared to the year ended December 31, 2013. These increases were partly offset by $2.3 million of decreased online marketing costs.
Our gross margin was 65% during the year ended December 31, 2013 and remained relatively flat during the year ended December 31, 2014. Excluding the $26.2 million and $41.4 million effect of the adjustment related to the fair value of acquired deferred revenue for the year ended December 31, 2014 and 2013, respectively, gross margin was approximately 66% and 68%, respectively.  
Operating Expenses 

28


 
For the year ended December 31,
 
2014
 
2013
 
(in thousands)
Operating Expenses:
 

 
 

Sales and marketing
$
148,836

 
$
140,618

Technology and development
29,683

 
32,468

General and administrative
58,992

 
55,740

Restructuring charges
166

 
1,657

Asset impairment
2,040

 

Depreciation and amortization
74,779

 
79,844

Total operating expenses
$
314,496

 
$
310,327

 
Sales and Marketing Expenses. Sales and marketing expenses increased 6% to $148.8 million and were 27% of total revenue during the year ended December 31, 2014, up from $140.6 million or 29% of revenue during the year ended December 31, 2013. The $8.2 million increase is primarily from our additional investments in sales and marketing activities including corporate sponsorships, direct response television and radio advertising, as well as additional sales resources and online marketing expenditures. Included in the overall increase during the year ended December 31, 2014 is $1.7 million of sports, television and online marketing costs, including internal travel related expenses, and $6.1 million of additional compensation and benefits from increased sales resources. We expect sales and marketing expenses to decrease during 2015 and to decline slightly as a percentage of revenue. 
Technology and Development Expenses. Technology and development expenses decreased 9% to $29.7 million, or 5% of total revenue, during the year ended December 31, 2014, down from $32.5 million, or 7% of total revenue during the year ended December 31, 2013. The decrease for the year ended December 31, 2014 was driven by approximately $3.0 million of lower data center and support costs and $0.6 million of facilities expense. The decrease was partially offset by $0.7 million of higher salary and compensation expense when compared to the same prior year period. In 2015, we expect technology and development expenses as a percentage of total revenue to remain consistent with 2014 levels.
General and Administrative Expenses. General and administrative expenses increased 6% to $59.0 million, or 11% of total revenue, during the year ended December 31, 2014, up from $55.7 million or 11% of total revenue during the year ended December 31, 2013. Overall, during the year ended December 31, 2014, data center and software support fees increased $2.3 million, facilities and related expenses were up $1.0 million, and consulting and legal fees increased $1.0 million. Corporate development expenses of $0.5 million were incurred during the year ended December 31, 2014. Bad debt expense increased $2.5 million during the year ended December 31, 2014 primarily due to an increase in revenue from our Do-It-Yourself web solutions. Total bad debt expense, however, continues to remain at approximately 1 percent of total revenues. These increases were partly offset by a $5.5 million decrease in employee-related compensation and benefits expense. In 2015, we expect general and administrative expenses to increase modestly.
Restructuring Charges. A restructuring charge for termination benefits of $0.2 million was incurred during the year ended December 31, 2014. A $1.7 million charge was recorded during the twelve months ended December 31, 2013 resulting from the partial termination of the Herndon, VA operating lease. Included was $1.0 million of termination payments that were made in January 2014, the reversal of a $1.9 million tenant improvement asset and a $1.3 million restructuring liability. The tenant improvement asset and restructuring reserve were previously established in connection with the 2011 acquisition of Network Solutions. See Note 6, Restructuring Costs, for additional information surrounding our restructuring charges and reserves.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $74.8 million during the year ended December 31, 2014 down from $79.8 million during the year ended December 31, 2013. Amortization expense decreased by $7.1 million during the year ended December 31, 2014, compared to the same prior year period as certain intangible assets, primarily relating to the 2011 acquisition of Network Solutions, became fully amortized, while depreciation expense increased $2.1 million primarily from internally developed software projects placed into service throughout 2014.  
Interest Expense, net. Net interest expense totaled $26.7 million and $34.3 million for the year ended December 31, 2014 and 2013, respectively. Included in the interest expense for the year ended December 31, 2014 and 2013, respectively, is approximately $10.9 million and $5.4 million from amortizing deferred financing fees and loan origination discounts. The remaining decrease of $13.1 million during the year ended December 31, 2014 is driven from lower interest rates from the convertible debt transaction that closed in August of 2013 and the debt repricings completed in September of 2014, as well as

29


from lower overall debt levels. We expect interest expense to be lower in 2015 as we realize a full year of reduced interest rates and debt levels. See Note 4, Long-term Debt, for additional information.
Loss on Debt Extinguishment. In September 2014, we refinanced our Predecessor Credit Agreement to realize a further reduction in interest rates. The majority of the refinancing of the Predecessor First Lien Term Loan was accounted for as debt extinguishment in accordance with ASC 470, Debt, with the remaining portion considered a debt modification. Approximately 77% of the Predecessor Revolving Credit Facility was accounted for as a debt modification, with the remaining portion treated as debt extinguishment. As a result, a loss on debt extinguishment of $1.8 million was recorded during the year ended December 31, 2014.
In March 2013, we repriced our First Lien Term Loan and increased the outstanding balance of $627.9 million by $32.1 million to $660.0 million. In addition, we increased the maximum amount of available borrowings under the Revolving Credit Facility from $60.0 million to $70.0 million. The proceeds received from the additional First Lien Term Loan were used to pay off the Second Lien Term Loan by $32.0 million in its entirety. The repricing and pay off of the Second Lien Term Loan were accounted for as debt extinguishments in accordance with Accounting Standards Codification (“ASC”) 470, Debt. In addition, the partial pay down of $208.0 million on the First Lien Term Loan, using proceeds from the August 2013 convertible debt issuance, was also accounted for as a debt extinguishment. As a result of the extinguishments, we recorded a $20.7 million loss from accelerating unamortized deferred financing fees and loan origination discounts related to both instruments during the year ended December 31, 2013. Also included in the loss is $7.2 million of prepayment penalties that were paid in March 2013.
Income Tax Expense/Benefit. We recorded a net tax expense of $21.5 million and $21.3 million during the year ended December 31, 2014 and December 31, 2013, respectively. The year ended December 31, 2014 includes federal and state expense of $3.1 million related to current year book income, $14.5 million related to the net increase in our valuation allowance for the year, $1.6 million related to stock-based compensation, a change in our state deferred tax rate, $1.0 million related to non-deductible compensation costs and $1.3 million related to various other items. See Note 15, Income Taxes, for additional information.
Outlook. We continue to believe that we have the potential for additional revenue growth during 2015 as we made significant progress in addressing the issues that have been impacting our DIY and DIFM website and online marketing offerings during the second half of 2014. In 2015, we plan to further differentiate our DIY offerings with a modified approach to the market, which is called "Do-It-With-Me" which will provide our DIY customers with an opportunity to speak and work with us via chat, email or telephone while they are building their websites. In addition, we continue to work with our partners to increase the level of high quality lead flow in the DIFM business channel.
As we look ahead we are confident we have identified issues impacting our business and have taken steps towards improved revenue growth as we move through 2015. We will continue to use strong cash flows to pay down debt, repurchase common stock and fund marketing investments.  As the impact of the fair market value adjustment to deferred revenue acquired in the Network Solutions and Register.com LP transactions continues to decrease even further during 2015, we expect gross margins to continue to improve.
Comparison of the results for the year ended December 31, 2013 to the results for the year ended December 31, 2012
The following table sets forth our key business metrics for the year ended December 31, 2013 and 2012:
 
For the year ended December 31,
 
2013
 
2012
 
 
 
 
Net subscriber additions
111,744

 
51,639

Churn
1
%
 
1
%
Average revenue per user (monthly)
$
14.24

 
$
13.44

 
Net subscribers increased by 111,744 customers during the year ended December 31, 2013, as compared to an increase of 51,639 customers during the year ended December 31, 2012. Churn continued to remain at a low level of 1% during the year ended December 31, 2013. The increase in customers and the maintenance of our low churn level of 1% is primarily due to our increased marketing efforts in prior periods, as well as during the year ended December 31, 2013.

30


The average revenue per user was $14.24 during the year ended December 31, 2013, as compared to $13.44 during the same period ended December 31, 2012. The growth in average revenue per subscriber continues to be driven principally by our up-sell and cross-sell campaigns focused on selling higher revenue products to our existing customers as well as the introduction of new product offerings and sales channels oriented toward acquiring higher value customers.

Revenue
  
For the Year Ended
December 31,
 
2013
 
 
2012
 
(in thousands)
Revenue:
 
 
 
 
Subscription
$
482,166

 
 
$
396,687

Professional services and other
 
10,149

 
 
 
10,959

Total revenue
$
492,315

 
 
$
407,646


Total revenue increased 21% to $492.3 million in the year ended December 31, 2013 from $407.6 million in the year ended December 31, 2012. Total revenue during the year ended December 31, 2013 and 2012, includes the unfavorable impact of $41.4 million and $83.7 million, respectively, from 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 51% less than the pre-acquisition historical basis of Network Solutions and Register.com. The unfavorable impact declined $42.3 million during the year ended December 31, 2013 compared to the same prior period. The remaining $42.4 million increase in revenue during the year ended December 31, 2013 continues to be driven principally by our up-sell and cross-sell campaigns focused on selling higher revenue products, primarily our Do-It-For-Me web services, online marketing and search engine products and services, to our existing customers, higher advertising and domain name related revenues, as well as the introduction of new product offerings and sales channels oriented toward acquiring higher value customers.
Subscription Revenue. Subscription revenue increased 22% during the year ended December 31, 2013 to $482.2 million from $396.7 million during the year ended December 31, 2012. The increase is due to the overall revenue drivers discussed above. 
Professional Services and Other Revenue. Professional services revenue decreased 7% to $10.1 million in the year ended December 31, 2013 from $11.0 million in the year ended December 31, 2012 due to a lower volume of custom website and ecommerce design revenue.

Cost of Revenue
 
For the Year Ended
December 31,
 
2013
 
 
2012
 
(in thousands)
Cost of revenue
$
171,747

 
 
$
160,330

Cost of Revenue. Cost of revenue increased 7% or $11.4 million during the year ended December 31, 2013 compared to the year ended December 31, 2012, which was relatively proportionate to the increase in revenue after excluding the adjustments to fair value acquired deferred revenue. Compensation and benefits increased $3.5 million, direct marketing costs increased $5.0 million and domain costs were up $3.5 million when compared to the same prior year period. These increases were partially offset by a $1.2 million decrease in partner commissions.
Our gross margin of 61% during the year ended December 31, 2012 increased to 65% during the year ended December 31, 2013. Excluding the $41.4 million and $83.7 million effect of the adjustment related to the fair value of acquired deferred revenue for the year ended December 31, 2013 and 2012, respectively, gross margin was approximately 68% and 67%, respectively.  

Operating Expenses

31


  
For the Year Ended December 31,
 
2013
 
 
2012
Operating expenses:
(in thousands)
Sales and marketing
$
140,618

 
 
$
117,811

Technology and development
 
32,468

 
 
 
34,258

General and administrative
 
55,740

 
 
 
49,807

Restructuring charges
 
1,657

 
 
 
2,469

Depreciation and amortization
 
79,844

 
 
 
78,981

Total operating expenses
$
310,327

 
 
$
283,326

 
Sales and Marketing Expenses. Sales and marketing expenses increased 19% to $140.6 million and were 29% of total revenue during the year ended December 31, 2013, up from $117.8 million or 29% of revenue during the year ended December 31, 2012. The $22.8 million increase is primarily from our additional investments in sales and marketing activities including corporate sponsorships, direct response television and radio advertising, as well as additional sales resources and online marketing expenditures. Included in the overall increase during the year ended December 31, 2013 is $18.0 million of sports, television and online marketing costs, including internal travel related expenses, and $4.2 million of additional compensation and benefits from increased sales resources.
Technology and Development Expenses. Technology and development expenses decreased 5% to $32.5 million , or 7% of total revenue, during the year ended December 31, 2013, down from $34.3 million, or 8% of total revenue during the year ended December 31, 2012. The decrease was driven by approximately $1.0 million of lower salary and compensation expense resulting from labor dollars being capitalized in connection with an increase of internally developed software projects during the year ended December 31, 2013 when compared to the same prior year period. In addition, overall headcount was lower during the year ended December 31, 2013 compared to the same prior year period ended, as the acquisition of Network Solutions had been fully integrated. Finally, software support and data center maintenance fees have decreased by $1.3 million during the year ended December 31, 2013.
General and Administrative Expenses. General and administrative expenses increased 12% to $55.7 million, or 11% of total revenue, during the year ended December 31, 2013 , up from $49.8 million or 12% of total revenue during the year ended December 31, 2012. Overall, during the year ended December 31, 2013, the employee-related compensation and benefits expense increased approximately $3.1 million and legal and professional services are up $1.4 million. These increases were partially offset by the absence of $0.7 million of corporate development costs that were incurred during the year ended December 31, 2012. In addition there was a $1.1 million increase in bad debt expense driven from the increase in outstanding accounts receivables, primarily driven from higher revenue.
Restructuring Charges. A restructuring charge of $1.7 million was incurred during the year ended December 31, 2013 resulting from the partial termination of the Herndon, VA operating lease. Included was $1.0 million of termination payments to be made in January 2014, the reversal of $1.9 million tenant improvement asset and a $1.3 million restructuring liability. The tenant improvement asset and restructuring reserve were previously established in connection with the 2011 acquisition of Network Solutions. During the year ended December 31, 2012, employee-related termination costs of $2.5 million from the 2011 acquisition of Network Solutions were incurred. See Note 6, Restructuring Costs, for additional information surrounding our restructuring charges and reserves.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $79.8 million during the year ended December 31, 2013 up from $79.0 million during the year ended December 31, 2012. Amortization expense decreased by $2.5 million during the year ended December 31, 2013, compared to the same prior year period as certain intangible assets were fully amortized, while depreciation expense increased $3.4 million primarily from data centers that were placed in service in the first quarter of 2013 as well as internally developed software projects placed into service throughout 2013.  
Interest Expense, net. Net interest expense totaled $34.3 million and $66.1 million for the year ended December 31, 2013 and 2012, respectively. Included in the interest expense for the year ended December 31, 2013 and 2012, respectively, is approximately $5.4 million and $11.0 million from amortizing deferred financing fees and loan origination discounts. The remaining decrease of $26.2 million during the year ended December 31, 2013 is driven from lower interest rates from debt repricings completed in November 2012 and March 2013, as well as from lower overall debt levels. In addition, we further reduced our interest rates from the convertible debt transaction that closed in August 2013. See Note 4, Long-term Debt , for additional information.

32


Gain on Sale of Equity Method Investment. On May 31, 2012, we sold our interest in a joint venture named OrangeSoda, Inc., a Nevada corporation in the business of developing, marketing, selling and providing search engine marketing and optimization services for small businesses. We acquired the 25.3% interest in OrangeSoda, Inc. as part of the Network Solutions acquisition on October 27, 2011. In June 2012, proceeds of $7.2 million were received from the buyer and a gain of $5.2 million was recorded during the year ended December 31, 2012. Approximately $0.4 million of additional proceeds that were held in escrow were released in June 2013 as the representations and warranties were satisfied. The additional gain of $0.4 million from the sale was recorded during the year ended December 31, 2013.
Loss on Debt Extinguishment. In March 2013, we repriced our First Lien Term Loan and increased the outstanding balance of $ 627.9 million by $32.1 million to $660.0 million . In addition, we increased the maximum amount of available borrowings under the Revolving Credit Facility from $60.0 million to $70.0 million. The proceeds received from the additional First Lien Term Loan were used to pay off the Second Lien Term Loan by $32.0 million in its entirety. The repricing and pay off of the Second Lien Term Loan were accounted for as debt extinguishments in accordance with Accounting Standards Codification (“ASC”) 470, Debt . In addition, the partial pay down of $208.0 million on the First Lien Term Loan, using proceeds from the August 2013 convertible debt issuance, was also accounted for as a debt extinguishment. As a result of the extinguishments, we recorded a $20.7 million loss from accelerating unamortized deferred financing fees and loan origination discounts related to both instruments during the year ended December 31, 2013. Also included in the loss is $7.2 million of prepayment penalties that were paid in March 2013.
In November 2012, we repriced our First Lien Term Loan and increased the outstanding principal by $60 million to $629.5 million in order to realize decreased interest rates as well as pay down the higher interest rate Second Lien Term Loan (also defined below). In addition, we have obtained a lower interest rate and a $10 million increase in the amount of available borrowings on our revolving credit facility. The repricing was accounted for as debt extinguishment in accordance with ASC 470, Debt. As a result of the repricing and the repayment of $88 million on the Second Lien Term Loan, we recorded a $42.0 million loss from accelerating unamortized deferred financing fees and loan origination discounts during the year ended December 31, 2012. In addition, $2.6 million of prepayment penalties on the Second Lien Term Loan that were paid in 2012 are reflected in the loss.
Income Tax Expense/Benefit. We recorded a net tax expense from continuing operations of $21.3 million during the year ended December 31, 2013. This expense includes a federal and state benefit of approximately $18.5 million related to our current year net loss which was offset by a $32.9 million increase in our valuation allowance for the year, $4.1 million related to a change in our state deferred tax rate, and approximately $2.8 million related to various other items. See Note 15, Income Taxes, for additional information.
Liquidity and Capital Resources
The following table summarizes total cash flows for operating, investing and financing activities for the years ended December 31, (in thousands):   
 
2014
 
2013
 
2012
Net cash provided by operating activities
$
117,206

 
$
102,460

 
$
77,965

Net cash used in investing activities
(34,412
)
 
(14,378
)
 
(15,177
)
Net cash used in financing activities
(74,091
)
 
(89,457
)
 
(60,971
)
Effect of exchange rate changes on cash
(24
)
 

 

Increase (decrease) in cash and cash equivalents
$
8,679

 
$
(1,375
)
 
$
1,817

 
Cash Flows Years Ended December 31, 2014 and 2013
As of December 31, 2014, we had $22.5 million of cash and cash equivalents and $118.0 million in negative working capital, as compared to $13.8 million of cash and cash equivalents and $118.9 million in negative working capital as of December 31, 2013. The majority of the negative working capital, as of the years ended December 31, 2014 and 2013, is due to significant balances of deferred revenue, partially offset by deferred expenses and deferred tax assets, which get amortized to revenue or expense/benefit rather than settled with cash. The Company expects cash generated from operating activities to be more than sufficient to meet future working capital and debt servicing requirements.
Net cash provided by operations for the year ended December 31, 2014 increased $14.7 million from the year ended December 31, 2013 primarily due to improvements in operating income during the year ended December 31, 2014, and from the absence of a $7.2 million prepayment penalty that was paid in 2013 in connection with the March 2013 debt repricing. The overall increase during the year ended December 31, 2014 was partially offset by unfavorable working capital changes.

33


Net cash used in investing activities in the year ended December 31, 2014 was $34.4 million, as compared to $14.4 million in the year ended December 31, 2013. In July 2014, we paid $12.1 million in cash and issued 213,200 shares of our common stock to acquire 100% of the equity interests in Touch Local Limited ("Scoot"), the operator of an online business directory network in the United Kingdom. In addition, in February 2014, we acquired substantially all of the assets and certain liabilities of SnapNames.com, Inc. (the "SnapNames Business"), an Oregon corporation from KeyDrive S.A. for which we paid $7.4 million in cash. See Note 5, Business Combinations, for additional information surrounding these purchases. Capital expenditures during the year ended December 31, 2014 increased slightly by $0.5 million to $15.2 million. The year ended December 31, 2013 primarily included costs incurred from building out two centralized data centers that were completed and put into service in the first quarter of 2013. The year ended December 31, 2014 included increased efforts to improve internally developed software and websites.
Net cash used in financing activities of $74.1 million during the year ended December 31, 2014 included a $3.7 million payment for debt issuance costs related to the September 2014 debt refinancing discussed below; compared to $2.8 million incurred during 2013. Net principal payments of $63.1 million and $86.3 million were made during the year ended December 31, 2014 and 2013, respectively. Proceeds received from the exercise of stock options decreased from $14.2 million to $9.9 million in the year ended December 31, 2014 when compared to the same prior year period. Approximately $6.3 million of cash was used to pay employee minimum tax withholding requirements in lieu of receiving common shares during each of the years ended December 31, 2014 and 2013.
Included in financing activities during the year ended December 31, 2014, are common stock repurchases of $10.8 million. The repurchases were made in connection with our stock repurchase program announced on November 5, 2014, which authorizes the repurchase of up to $100 million of our outstanding shares of common stock from time to time. This program, according to its terms, will expire on December 31, 2016. Repurchases under the programs may take place in the open market or in privately negotiated transactions, including derivative transactions, and may be made under a Rule 10b5-1 plan.

Long-term Debt
Refinancing Long-Term Debt
In September 2014, we completed the refinancing of our Predecessor Credit Agreement. The new credit facilities consist of a $200 million secured term loan and a $150 million secured revolving line of credit. Each of the new facilities bears interest at a rate equal to either, at our option, the LIBOR rate plus an applicable margin equal to 2.25% per annum, or the prime lending rate plus an applicable margin equal to 1.25% per annum. The applicable margins for each of the new facilities are subject to reduction by 0.25% or 0.50%, or increase by 0.25%, in each case based upon our consolidate first lien net leverage ratio as of the end of each fiscal quarter. Each of the new facilities mature in September 2019. See Note 4, Long-Term Debt, for additional information on the impact of this transaction.
We used the proceeds of the Term Loan and initially borrowed $109.0 million under the Revolving Credit Facility, together with cash on hand, to repay existing loans under the Predecessor Credit Agreement in their entirety and to pay related fees and expenses. In connection with the repayment, we terminated the Predecessor Credit Agreement.
We must also pay (i) a commitment fee of 0.40% per annum on the actual daily amount by which the revolving credit commitment exceeds then-outstanding loans under the Revolving Credit Facility, subject to reduction by 0.05% or 0.10%, or increase by 0.05%, in each case based upon our consolidated first lien net leverage ratio, (ii) a letter of credit fee to the applicable margin as applied to LIBOR loans under the Revolving Credit Facility and (iii) a fronting fee of 0.125% per annum, calculated on the daily amount available to be drawn under each letter of credit issued under the Revolving Credit Facility.
We are permitted to make voluntary prepayments with respect to the Revolving Credit Facility and the Term Loan at any time without payment of a premium. We are required to make mandatory prepayments of the Term Loan with (i) net cash proceeds from certain asset sales (subject to reinvestment rights) and (ii) net cash proceeds from certain issuances of debt. The Term Loan amortizes in equal quarterly installments in an aggregate annual amount equal to (i) 2.5% of the original principal amount thereof during the first year of the Term Loan, (ii) 5.0% of the original principal amount thereof during the second year of the Term Loan, (iii) 7.5% of the original principal amount thereof during the third year of the Term Loan, and (iv) 10.0% of the original principal amount thereof during the fourth and fifth years of the Term Loan, with any remaining balance payable on the final maturity date of the Term Loan.

Convertible Debt
During the third quarter of 2013, we issued $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes"). The 2018 Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears, on February 15 and August 15 of each year, beginning on February 15, 2014. The conversion price for the 2018 Notes is

34


equivalent to an initial effective conversion price of approximately $35.00 per share of common stock. Net proceeds of $252.3 million were received from the issuance of the 2018 Notes, which are net of $6.5 million of the original issuance discount. In addition, third-party debt issuances costs of $0.5 million were incurred in connection with this transaction.
Debt Covenants
The credit agreement entered into on September 9, 2014 require that we not exceed a maximum first lien net leverage ratio and that we maintain a minimum consolidated cash interest expense to consolidated EBITDA coverage ratio as set forth in the table below. The first lien net leverage ratio is defined as the total of the outstanding consolidated first lien debt minus up to $50.0 million of unrestricted cash and cash equivalents, divided by consolidated EBITDA. The consolidated interest coverage ratio is defined as consolidated EBITDA divided by consolidated cash interest expense. Consolidated EBITDA is defined as consolidated net income before (among other things) interest expense, income tax expense, depreciation and amortization, impairment charges, restructuring costs, changes in deferred revenue and deferred expenses, stock-based compensation expense, non-cash losses and acquisition-related costs.

Outstanding debt as of December 31, 2014 for purposes of the First Lien Net Leverage Ratio is approximately $270.3 million. The covenant calculations as of December 31, 2014 on a trailing 12-month basis is as follows:
Covenant Description
 
Covenant Requirement as of 
December 31, 2014
 
Ratio at December 31, 2014
 
Favorable/
(Unfavorable)
First Lien Net Debt to Consolidated EBITDA
 
Not greater than 2.75
 
1.82

 
0.93

Consolidated Interest Coverage Ratio
 
Greater than 2.00
 
7.06

 
5.06

 
In addition to the financial covenants listed above, the First Lien Credit Agreement includes customary covenants that limit (among other things) the incurrence of debt, the disposition of assets, and making of certain payments. Substantially all of our tangible and intangible assets collateralize the long-term debt as required by the Credit Agreement.
Cash Flows Years Ended December 31, 2013 and 2012
As of December 31, 2013, we had $13.8 million of cash and cash equivalents and negative $118.9 million in negative working capital, as compared to $15.2 million of cash and cash equivalents and a negative $113.5 million in working capital as of December 31, 2012. The unfavorable change in working capital during the year is primarily due to a $18.2 million increase in current deferred revenue is primarily from amortizing deferred revenue that was written down for purchase accounting from the acquisitions of Network Solutions and Register.com LP and replacing with deferred revenue that is reflected at full contract value. The unfavorable change was partially offset by a $17.4 million increase in deferred income taxes. The current portion of long term debt at December 31, 2013 increased by $1.9 million when compared to December 31, 2012. Accrued compensation and benefits also declined by $2.0 million due to the timing of payroll payment dates. The majority of the negative working capital is due to significant balances of deferred revenue, deferred expenses and deferred tax assets, which get amortized to revenue or expense/benefits rather than settled with cash. The Company expects cash generated from operating activities to be more than sufficient to meet future working capital and debt servicing requirements.
Net cash provided by operations for the year ended December 31, 2013 increased $24.5 million from the year ended December 31, 2012 primarily due to improvements in operating income and working capital requirements during the year ended December 31, 2013, but partially offset by the $7.2 million prepayment penalty that was paid in connection with the March 2013 debt repricing.
Net cash used in investing activities in the year ended December 31, 2013 was $14.4 million, as compared to $15.2 million in the year ended December 31, 2012. Capital expenditures during the year ended December 31, 2013 decreased by $7.6 million to $14.7 million. The years ended December 31, 2013 and 2012 both primarily included costs incurred from building out two centralized data centers that were completed and put into service in the first quarter of 2013, as well as increased efforts to improve internally developed software and websites. In May 2012, proceeds of $7.2 million were received from the sale of an investment that was accounted for under the equity method. An additional $0.4 million of proceeds that were held in escrow from the sale were received in June 2013.
Net cash used in financing activities of $89.5 million included a $2.8 million payment for debt issuance costs related to the March 2013 repricing of the First Lien Term Loan and the August convertible debt issuance. In addition, loan origination discount payments of $8.1 million were incurred in connection with the debt issuances. Net principal payments of $86.3 million were made during the year ended December 31, 2013, compared to payments of $52.1 million during the year ended December 31, 2012. Proceeds received from the exercise of stock options increased from $5.8 million to $14.2 million in the year ended December 31, 2013 when compared to the same prior year period. Approximately $6.3 million and $4.7 million of cash was

35


used to pay employee minimum tax withholding requirements in lieu of receiving common shares during the years ended December 31, 2013 and 2012, respectively.
Contractual Obligations and Commitments
Our principal commitments consist of long-term debt and interest payments, obligations under operating leases for office space and other unconditional marketing and operational purchase obligations. The following summarizes our contractual obligations as of December 31, 2014 (in thousands):
 
 
Payment Due by Period  
Contractual Obligations
Total
2015
2016
2017
2018
2019
Thereafter
Long-term debt (1)
$
545,250

$

$
11,250

$
16,250
 
$
278,750
 
$
239,000
 
$

Current maturities of long-term debt
6,250

6,250


 
 
 

Interest payments on long-term debt (1)
39,969

9,665

9,467

9,148
 
7,736
 
3,953
 

Operating lease obligations (2)
35,556

7,228

6,618

6,161
 
5,563
 
4,527
 
5,459

Uncertain tax positions (3)



 
 
 

Purchase obligations (4)
94,326

15,456

13,577

12,293
 
13,000
 
13,000
 
27,000

  Total
$
721,351

$
38,599

$
40,912

$
43,852
 
$
305,049
 
$
260,480
 
$
32,459

 
 
 
 
 
 
 
 
(1)
The scheduled principal payment requirements for the Term Loan are presented. Projected interest payments for the revolving credit facility were calculated based on outstanding principal amounts using interest rates in effect as of December 31, 2014. The 2018 long term debt obligations reflect the maturity of the Senior Convertible Notes that are due August 15,2018.
(2)
Operating lease obligations are shown net of sublease rentals for the amounts related to each period presented.
(3)
The settlement date is unknown for approximately $3.4 million of uncertain tax positions and has been excluded from the table above. See Note 15 - Income Taxes for additional information on uncertain tax positions.
(4)
Purchase obligations include corporate sponsorships and long-term service contracts for data storage and other operating items.

As of December 31, 2014 we have $54.0 million of available borrowings under the Revolving Credit Facility.
In May 2012, we completed a Form S-3 registration statement to offer and issue 7 million shares of common shares. The proceeds from these common shares are to be used for the repayment of outstanding debt, general corporate purposes and funding for potential acquisitions.
Off-Balance Sheet Obligations
As of December 31, 2014 and 2013, 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.
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 (including through acquisitions of other businesses or assets);
 
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 technology 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 at December 31, 2014 in addition to 2015 operating cash flows will be sufficient to meet our projected operating requirements for at least the next 12 months.

36


New Accounting Standards
See Note 2, New Accounting Standards, for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
The majority of our subscription agreements and operating expenses are denominated in U.S. dollars. However we have sales and customer support operations in Canada and a technology administrative center in Argentina. In addition, in July 2014 we acquired an online business directory network in the United Kingdom. All of these operations are exposed to fluctuations in foreign currencies including, but not limited to, the British pound, the Canadian dollar and the Argentina peso. Exchange rate fluctuations have had little impact on our operating results and cash flows but we analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future. As of December 31, 2014 and 2013, there were no expenses that were hedged.
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $22.5 million and $13.8 million at December 31, 2014 and December 31, 2013, respectively. 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 December 31, 2014, we have $551.5 million of total debt outstanding, excluding unamortized debt discounts. We have exposure to market risk for changes in interest rates related to $292.8 million of these borrowings. Our variable rate debt is based on 1-month LIBOR plus 2.25% on the Term Loan and Revolving Credit Facility. A hypothetical 10% increase in the current variable interest rates in effect would have resulted in additional interest expense of $42 thousand during the year ended December 31, 2014, assuming the principal balances remain unchanged.

37


Use of Non-GAAP Financial Measures
Some of the measures in this press release are non-GAAP financial measures within the meaning of the SEC Regulation G. Web.com believes presenting non-GAAP measures is useful to investors, 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. Web.com's management uses these non-GAAP measures as important indicators of the Company's past performance and in planning and forecasting performance in future periods. The non-GAAP financial information Web.com presents may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.
Relative to each of the non-GAAP measures Web.com presents, management further sets forth its rationale as follows:
Non-GAAP Revenue. Web.com excludes from non-GAAP revenue the impact of the fair value adjustment to amortized deferred revenue 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. Web.com excludes from non-GAAP operating income and non-GAAP operating margin, amortization of intangibles, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, stock-based compensation charges, asset impairment, and gains or losses from asset sales. Management believes that excluding these items assists management and investors in evaluating period-over-period changes in Web.com's operating income without the impact of items that are not a result of the Company's day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income Per Diluted Share. Web.com excludes from non-GAAP net income and non-GAAP net income per diluted share amortization of intangibles, income tax provision, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, amortization of debt discounts and fees, stock-based compensation, asset impairment, and loss on debt extinguishment, gains or losses from asset sales and includes estimated cash income tax payments, because management believes that adjusting for such measures helps management and investors better understand the Company's operating activities.
Adjusted EBITDA. Web.com excludes from adjusted EBITDA depreciation expense, amortization of intangibles, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, and fair value adjustments to deferred revenue and deferred expense, gains or losses from asset sales, corporate development expenses and restructuring expenses, because management believes that excluding such items helps investors better understand the Company's operating activities.
In respect of the foregoing, Web.com provides the following supplemental information to provide additional context for the use and consideration of the non-GAAP financial measures used elsewhere in this press release:
Stock-based compensation. These expenses consist of expenses for employee stock options and employee awards under Accounting Standards Codification ("ASC") 718-10. While stock-based compensation expense calculated in accordance with ASC 718-10 constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because such expense is not used by management to assess the core profitability of the Company's business operations. Web.com further believes these measures are useful to investors in that they allow for greater transparency to certain line items in our financial statements. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Amortization of intangibles. Web.com incurs amortization of acquired intangibles under ASC 805-10-65. Acquired intangibles primarily consist of customer relationships, customer lists, non-compete agreements, trade names, and developed technology. Web.com expects to amortize for accounting purposes the fair value of the acquired intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated. Although the intangible assets generate revenue, the Company believes the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Depreciation expense. Web.com records depreciation expense associated with its fixed assets. Although its fixed assets generate revenue for Web.com, the item is excluded because management believes certain non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.

38


Amortization of debt discounts and fees. Web.com incurs amortization expense related to debt discounts and deferred financing fees. The difference between the effective interest expense and the coupon interest expense (i.e. debt discount), as well as, amortized deferred financing fees are excluded because Web.com believes the non-GAAP measures excluding these items provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Restructuring expense. Web.com has recorded restructuring expenses and excludes the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Income tax expense. Due to the magnitude of Web.com's historical net operating losses and related deferred tax asset, the Company excludes income tax from its non-GAAP measures primarily because it is not indicative of the actual tax to be paid by the Company and therefore is not reflective of ongoing operating results. The Company believes that excluding this item provides meaningful supplemental information regarding the Company's operational performance and facilitates management's internal comparisons to the Company's historical operating results and comparisons to the Company's competitors' operating results. The Company includes the estimated tax that the Company expects to pay for operations during the periods presented.
Fair value adjustment to deferred revenue and deferred expense. Web.com has recorded a fair value adjustment to acquired deferred revenue and deferred expense in accordance with ASC 805-10-65. Web.com excludes the impact of these adjustments from its non-GAAP measures, because doing so results in non-GAAP revenue and non-GAAP net income which are reflective of ongoing operating results and more comparable to historical operating results, since the majority of the Company's revenue is recurring subscription revenue. Excluding the fair value adjustment to deferred revenue and deferred expense therefore facilitates management's internal comparisons to Web.com's historical operating results.
Corporate development expenses. Web.com incurred expenses relating to the acquisitions and successful integration of acquisitions. Web.com excludes the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Gains or losses from asset sales or impairment and certain other transactions. Web.com excludes the impact of asset sales or impairment and certain other transactions including debt extinguishments and the sale of equity method investments from its non-GAAP measures because the impact of these items is not considered part of the Company's ongoing operations.
The following table presents our non-GAAP measures for the periods indicated (in thousands):
Web.com Group, Inc.
Reconciliation of GAAP to Non-GAAP Results
(in thousands, except for per share data and percentages)
(unaudited)

 
Twelve months ended December 31,

 
2014
 
2013
 
2012
Reconciliation of GAAP revenue to non-GAAP revenue
 

 

 
 
GAAP revenue
 
$
543,937

 
$
492,315

 
$
407,646

   Fair value adjustment to deferred revenue
 
26,163

 
41,407

 
83,732

Non-GAAP revenue
 
$
570,100

 
$
533,722

 
$
491,378

 
 
 
 
 
 
 
Reconciliation of GAAP net loss to non-GAAP net income
 

 

 
 
GAAP net loss
 
$
(12,458
)
 
$
(65,664
)
 
$
(122,217
)
   Amortization of intangibles
 
60,719

 
67,833

 
70,350

   Loss on sale of assets
 

 
135

 
403

   Asset impairment
 
2,040

 

 

   Stock based compensation
 
19,567

 
18,502

 
11,927

   Income tax expense (benefit)
 
21,544

 
21,327

 
(16,738
)
   Restructuring charges
 
166

 
1,657

 
2,469

   Corporate development
 
499

 

 
660

   Amortization of debt discounts and fees
 
10,932

 
5,431

 
11,017


39


   Cash income tax expense
 
(1,243
)
 
(320
)
 
(1,044
)
   Fair value adjustment to deferred revenue
 
26,163

 
41,407

 
83,732

   Fair value adjustment to deferred expense
 
1,027

 
1,561

 
2,376

   Loss on debt extinguishment
 
1,838

 
20,663

 
41,977

   Gain on sale of equity method investment
 

 
(385
)
 
(5,156
)
Non-GAAP net income
 
$
130,794

 
$
112,147

 
$
79,756

 
 
 
 
 
 
 
Reconciliation of GAAP diluted net loss per share to non-GAAP diluted net income per share
 
 
 
 
 
 
Diluted shares:
 
2014
 
2013
 
2012
   Basic weighted average common shares
 
50,920

 
48,947

 
46,892

   Diluted stock options
 
2,727

 
2,993

 
2,186

   Diluted restricted stock
 
554

 
803

 
1,117

Total diluted weighted average common shares
 
54,201

 
52,743

 
50,195

 
 
 
 
 
 
 
Reconciliation of GAAP diluted net loss per share to non-GAAP diluted net income per share
 
 
 
 
 
 
Diluted GAAP net loss per share
 
$
(0.24
)
 
$
(1.34
)
 
$
(2.61
)
   Diluted equity
 
0.01

 
0.10

 
0.17

   Amortization of intangibles
 
1.12

 
1.30

 
1.40

   Loss on sale of assets
 

 

 
0.01

   Asset impairment
 
0.04

 

 

   Stock based compensation
 
0.36

 
0.35

 
0.24

   Income tax expense (benefit)
 
0.40

 
0.40

 
(0.33
)
   Restructuring charges
 

 
0.03

 
0.05

   Corporate development
 
0.01

 

 
0.01

   Amortization of debt discounts and fees
 
0.20

 
0.10

 
0.22

   Cash income tax expense
 
(0.02
)
 
(0.01
)
 
(0.02
)
   Fair value adjustment to deferred revenue
 
0.48

 
0.79

 
1.67

   Fair value adjustment to deferred expense
 
0.02

 
0.03

 
0.05

   Loss on debt extinguishment
 
0.03

 
0.39

 
0.84

   Gain on sale of equity method investment
 

 
(0.01
)
 
(0.11
)
Diluted Non-GAAP net income per share
 
$
2.41

 
$
2.13

 
$
1.59

 
 
 
 
 
 
 
 
 
Twelve months ended December 31,
 
 
2014
 
2013
 
2012
Reconciliation of GAAP operating income (loss) to non-GAAP operating income
 
 
 
 
 
 
GAAP operating income (loss)
 
$
37,663

 
$
10,241

 
$
(36,010
)
   Amortization of intangibles
 
60,719

 
67,833

 
70,350

   Loss on sale of assets
 

 
135

 
403

   Asset impairment
 
2,040

 

 

   Stock based compensation
 
19,567

 
18,502

 
11,927

   Restructuring charges
 
166

 
1,657

 
2,469

   Corporate development
 
499

 

 
660

   Fair value adjustment to deferred revenue
 
26,163

 
41,407

 
83,732

   Fair value adjustment to deferred expense
 
1,027

 
1,561

 
2,376

Non-GAAP operating income
 
$
147,844

 
$
141,336

 
$
135,907

 
 
 
 
 
 
 
Reconciliation of GAAP operating margin to non-GAAP operating margin
 
 
 
 
 
 
GAAP operating margin
 
7
%
 
2
%
 
(9
)%
   Amortization of intangibles
 
11

 
13

 
14

   Loss on sale of assets
 

 

 

   Asset impairment
 

 

 

   Stock based compensation
 
3

 
3

 
1

   Restructuring charges
 

 

 
1

   Corporate development
 

 

 

   Fair value adjustment to deferred revenue
 
5

 
8

 
21

   Fair value adjustment to deferred expense
 

 

 

Non-GAAP operating margin
 
26
%
 
26
%
 
28
 %
 
 
 
 
 
 
 
Reconciliation of GAAP operating income (loss) to adjusted EBITDA
 
 
 
 
 
 
GAAP operating income (loss)
 
$
37,663

 
$
10,241

 
$
(36,010
)
   Depreciation and amortization
 
74,779

 
79,844

 
78,981

   Loss on sale of assets
 

 
135

 
403

   Asset impairment
 
2,040

 

 

   Stock based compensation
 
19,567

 
18,502

 
11,927

   Restructuring charges
 
166

 
1,657

 
2,469

   Corporate development
 
499

 

 
660

   Fair value adjustment to deferred revenue
 
26,163

 
41,407

 
83,732

   Fair value adjustment to deferred expense
 
1,027

 
1,561

 
2,376

Adjusted EBITDA
 
$
161,904

 
$
153,347

 
$
144,538


40


Item 8. Financial Statements and Supplementary Data.  
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly consolidated statement of operations data for the eight most recent quarters. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this annual report. These quarterly operating results are not necessarily indicative of our operating results for any future period.

41


 
 
Three Months Ended
 
Mar 31,
2014 
Jun 30,
2014
Sept 30,
2014 (1)
Dec 31,
2014 
Mar 31,
2013 (2) 
Jun 30,
2013
Sept 30,
2013 (3)
Dec 31,
2013 
 
 
 
 
 
 
 
 
 
Total revenue
$
133,843

$
138,176

$
137,407

$
134,511

$
115,546

$
120,448

$
125,197

$
131,124

Total cost of revenue
46,586

48,599

47,925

48,667

42,640

42,879

42,692

43,536

Gross profit
87,257

89,577

89,482

85,844

72,906

77,569

82,505

87,588

Total operating expenses
77,712

79,225

80,221

77,339

75,396

75,656

78,048

81,227

Income (loss) from operations
9,545

10,352

9,261

8,505

(2,490
)
1,913

4,457

6,361

Net income (loss)
$
490

$
(794
)
$
(3,419
)
$
(8,735
)
$
(46,503
)
$
(9,744
)
$
(5,988
)
$
(3,429
)
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.01

$
(0.02
)
$
(0.07
)
$
(0.17
)
$
(0.97
)
$
(0.20
)
$
(0.12
)
$
(0.07
)
Diluted
$
0.01

$
(0.02
)
$
(0.07
)
$
(0.17
)
$
(0.97
)
$
(0.20
)
$
(0.12
)
$
(0.07
)
 
(1)
Included in the quarter ended September 31, 2014 is a $1.8 million loss on debt extinguishment. The Company terminated the Predecessor Credit Agreement and entered into a five-year $200 million secured term loan facility and a five-year secured revolving credit facility that provides up to $150 million of revolving loans. The Company used the proceeds of the Term Loan and initially borrowed $109 million of loans under the Revolving Credit Facility, together with cash on hand, to repay existing loans under the Predecessor Credit Agreement in their entirety and to pay related fees and expenses.
(2)
Included in the quarter ended March 31, 2013 is a $19.5 million loss on debt extinguishment. The Company repriced its First Lien Term Loan and increased the outstanding balance to $660.0 million. In addition, the Company increased the maximum amount of available borrowings under the Revolving Credit Facility to $70 million. The proceeds received from the additional First Lien Term Loan were used to extinguish the Second Lien Term Loan's outstanding balance of $32.0 million. The net proceeds were used to pay down the First Lien Term Loan and the Revolving Credit Facility.
(3)
Included in the quarter ended September 30, 2013 is a $1.2 million loss on debt extinguishment. In August 2013, the Company issued $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. 
Based on their evaluation as of December 31, 2014, 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 annual report on Form 10-K 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.
Management's Report on Internal Control over Financial Reporting
The management of Web.com Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance, based on an appropriate cost-benefit analysis, regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with

42


U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework. Based on management’s assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.
Management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting the certain internal controls of SnapNames.com, Inc. and Touch Local Limited, which are included in the 2014 consolidated financial statements of Web.com Group, Inc. and constituted 2% and 8% of total and net assets, respectively, as of December 31, 2014 and less than 5% of revenues for the year ended December 31, 2014. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting.
There have been no changes in our internal controls over financial reporting during the three months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

43


Report of Independent Registered Certified Public Accounting Firm
The Board of Directors and Shareholders of Web.com Group, Inc.
We have audited Web.com Group Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Web.com Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SnapNames.com, Inc. and Touch Local Limited, which are included in the 2014 consolidated financial statements of Web.com Group, Inc. and constituted 2% and 8% of total and net assets, respectively, as of December 31, 2014 and less than 5% of revenues for the year ended December 31, 2014. Our audit of internal control over financial reporting of Web.com Group, Inc. also did not include an evaluation of the internal control over financial reporting of SnapNames.com, Inc. and Touch Local Limited.
In our opinion, Web.com Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Web.com Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of Web.com Group, Inc., and our report dated February 27, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Certified Public Accountants

Tampa, Florida
February 27, 2015


44



Item 9B. Other Information.
None.
PART III

Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item, including such information regarding our directors and executive officers and compliance with Section 16(a) of the Securities Exchange act of 1934, is incorporated herein by reference from the Proxy Statement. We have adopted a written code of conduct that applies to our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. The code of conduct is posted on our website at http://ir.web.com/documents.cfm. Amendments to, and waivers from, the code of conduct that applies to any of these officers, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a current report on Form 8-K.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference from the section entitled “Executive Compensation Discussion and Analysis” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated herein by reference from the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference from the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference from the section entitled “Ratification of Selection of Independent Registered Public Accounting Firm” in the Proxy Statement.


45


PART IV

Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed as part of this Form 10-K:

1. Financial Statements.

 
 
Page
Web.com Group, Inc.
 
 
  
 
Report of Independent Registered Certified Public Accounting Firm
 
 
F-47
 
Consolidated Balance Sheets at December 31, 2014 and 2013
 
 
F-48
 
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013, and 2012
 
 
F-49
 
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012
 
 
F-51
 
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
 
 
F-52
 
Notes to Consolidated Financial Statements
 
 
F-53
 

46



Report of Independent Registered Certified Public Accounting Firm
The Board of Directors and Shareholders of Web.com Group, Inc.
We have audited the accompanying consolidated balance sheets of Web.com Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Web.com Group, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Web.com Group, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP
Certified Public Accountants

Tampa, Florida
February 27, 2015


47



Web.com Group, Inc.
 Consolidated Balance Sheets
(in thousands, except share amount)
 
December 31, 2014
 
December 31,
2013
 
 
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
22,485

 
$
13,806

Accounts receivable, net of allowance of $1,705 and $1,545, respectively
16,932

 
17,062

Prepaid expenses
10,550

 
7,348

Deferred expenses
62,818

 
62,073

Deferred taxes
23,750

 
35,318

Other current assets
5,012

 
2,837

Total current assets
141,547

 
138,444

 
 
 
 
Property and equipment, net
44,000

 
42,090

Deferred expenses
50,901

 
57,235

Goodwill
639,564

 
627,845

Intangible assets, net
357,819

 
401,921

Other assets
4,575

 
10,224

Total assets
$
1,238,406

 
$
1,277,759

 
 
 
 
Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
9,940

 
$
10,351

Accrued expenses
14,937

 
14,449

Accrued compensation and benefits
5,997

 
13,423

Accrued restructuring costs

 
1,139

Deferred revenue
217,394

 
208,856

Current portion of debt
6,197

 
6,586

Other liabilities
5,069

 
2,512

Total current liabilities
259,534

 
257,316

 
 
 
 
Deferred revenue
185,338

 
186,539

Long-term debt
501,085

 
556,506

Deferred tax liabilities
111,503

 
102,421

Other long-term liabilities
6,856

 
4,932

Total liabilities
1,064,316

 
1,107,714

Stockholders' equity:
 

 
 

Common stock, $0.001 par value per share: 150,000,000 shares authorized, 52,108,719 and 51,193,230 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively
52

 
51

Additional paid-in capital
552,991

 
528,101

Treasury stock at cost, 395,395 shares as of December 31, 2014, and 0 shares as of December 31, 2013
(6,975
)
 

Accumulated other comprehensive (loss) income
(1,393
)
 
20

Accumulated deficit
(370,585
)
 
(358,127
)
Total stockholders' equity
174,090

 
170,045

Total liabilities and stockholders' equity
$
1,238,406

 
$
1,277,759

See accompanying notes to consolidated financial statements

48



 Web.com Group, Inc.
 
Consolidated Statements of Comprehensive Loss
(in thousands, except per share amounts)

 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
Revenue
$
543,937

 
$
492,315

 
$
407,646

 
Cost of Revenue:
191,778

 
171,747

 
160,330

 
Gross profit
352,159

 
320,568

 
247,316