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WEB COM : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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03/01/2017 | 12:36am CEST
Safe Harbor
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.

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We believe presenting non-GAAP operating income and Adjusted EBITDA 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.

In March 2016, we completed the acquisition of 100% of the outstanding shares of
Yodle, Inc., a Delaware corporation, ("Yodle"). Yodle provides cloud-based local
marketing solutions for small businesses with approximately 1,400 employees and
53,000 subscribers. With the Yodle platform, we are able to provide our
customers with an online, mobile and social presence, and automate, manage and
optimize our customers marketing activities and other consumer interactions.
Yodle's solutions are highly integrated and designed to be easy-to-use, helping
businesses navigate the rapidly evolving, technologically challenging and highly
fragmented digital marketing landscape without having to invest a significant
amount of time and money.
In January 2017, we completed the acquisition of DonWeb.com, located in Rosario,
Argentina, and is a web hosting and domain registration company catering to the
Spanish-speaking market.

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 define total subscribers as the approximate number of subscribers that, as of
the end of a period, are identified as subscribing to our products on a paid
basis. A unique subscriber with subscriptions of more than one brand or with
more than one distinct billing relationship or product subscription with us, are
counted as one subscriber. Total subscribers for a period reflects adjustments
to add or subtract subscribers as we integrate acquisitions and/or are otherwise
able to identify subscribers that meet, or do not meet, this definition of total
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 effectively implementing 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.

Customer Retention Rate (Retention Rate)
Customer retention rate is defined as the trailing twelve month retention metric
which we measure as the subscribers at the end of the period divided by the sum
of the subscribers at the beginning of the period and the new subscribers added
during the last twelve months. Customer cancellations in the trailing twelve
months include cancellations from subscriber additions, which is why we include
subscriber additions in the denominator. Retention rate 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)

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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 $18.4 million, $15.9 million, and $26.2 million for the years
ended December 31, 2016, 2015 and 2014, 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
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 and recognize revenue 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. Generally, revenue is recognized when the service has been completed.

Cost of Revenue and Operating Expenses
Cost of Revenue (Excluding Depreciation and Amortization)

Cost of revenue consists of expenses related to compensation of our web page
development staff, domain name registration costs, directory listing fees,
eCommerce store design, online marketing costs for services provided, billing
costs, hosting expenses and allocated occupancy overhead costs. We allocate
occupancy 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. Costs of revenue are expected to
increase in total dollars as we reflect an entire year of Yodle, Inc., but
remain relatively flat as a percentage of total revenue during 2017.

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, and online partnerships.
Sales costs consist primarily of compensation and related expenses for our sales
and marketing staff as well as our customer support staff and allocated
occupancy overhead costs. 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 customers and to
increase sales of additional and new services and products to our existing
customer base. We continue to invest a portion of our marketing budget in
branding activities such as the umbrella sponsorship of the Web.com Tour and
other sports marketing activities. Sales and marketing expenses are expected to
increase in total dollars as we reflect an entire year of Yodle, Inc., but
remain relatively flat as a percentage of total revenue during 2017.
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 and costs associated with the data centers and all systems
infrastructure costs and allocated occupancy overhead costs. Technology and
development expenses are expected to remain flat as a percentage of total
revenue during 2017, but increase slightly as an entire year of Yodle is
reflected.

General and Administrative Expense
General and administrative expenses consist of compensation and related expenses
for executive, finance, administration, as well as professional fees, corporate
development costs, other corporate expenses, and allocated occupancy overhead
costs. General and administrative expenses are expected to remain relatively
flat as a percentage of revenue during 2017.


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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. This will be offset by a decrease in
depreciation resulting from the leasehold improvements that were abandoned in
connection with the exiting of the Yodle New York lease. Amortization expense is
expected to continue to increase in 2017 as we realize a full year of Yodle
intangible amortization expense.

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

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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, 2016. We
test goodwill 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.
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.
Intangible Assets
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, 2016. See Note 6,
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.
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

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consider deferred tax liabilities related to indefinite lived intangibles or tax
deductible goodwill as a source of future taxable income. Additionally, the
determination of the amount of deferred tax assets which are more likely than
not to be realized is also dependent on projections of future earnings, which
are subject to uncertainty and estimates that may change given economic
conditions and other factors.
A valuation allowance is recorded to reflect the amount of our deferred tax
assets that are 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.
In December 2016, after weighing all available evidence, we recorded a partial
release of $2.4 million associated with our beginning-of-the-year valuation
allowance previously recorded against certain net state deferred tax assets to
reflect the amount more likely than not to be realized. In December 2015, after
weighing all available evidence, we released $68.8 million of our
beginning-of-the-year valuation allowance previously recorded against certain of
our net deferred tax assets to reflect the amount more likely than not to be
realized. See Note 13, Income Taxes, for more information

We record 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
Management's Discussion and Analysis includes the results of operations and cash
flows of Yodle from March 9, 2016 through December 31, 2016. See Note 5,
Business Combinations, for additional information surrounding the acquisition.
The operations of Yodle began integrating with the existing legacy Web.com
operations immediately following the closing of the acquisition on March 9,
2016. As such, our results of operations including revenue and ARPU is not
specifically segregated subsequent to the acquisition, nor would it be
indicative of each of the standalone entities.
Included in the results of operations for the years ended December 31, 2015 and
2014 are adjustments for the correction of an immaterial error in the
classification of infrastructure costs, which were previously classified within
the cost of revenue financial statement line item but have been reclassified to
technology and development. In addition, in an effort to report operating
expenses in a manner more in line with functional areas and to simplify the
related accounting, we have changed the classification of certain information
technology related operating expenses from general and administrative expenses
to technology and development. This reclassification was applied retrospectively
to all periods presented. We also reclassified customer support costs previously
included in cost of revenue to sales and marketing on a prospective basis. See
Note 1, The Company and Summary of Significant Accounting Policies, for a
summary of the changes reflected herein.
Comparison of the results for the year ended December 31, 2016 to the results
for the year ended December 31, 2015
The following table sets forth our key business metrics for the year ended
December 31:
                                           For the year ended December 31,
                                             2016                   2015

Ending subscribers as of December 31,       3,457,572               3,352,554
Net subscriber additions *                    105,018                  76,337
Customer retention rate                          85.4 %                 

87.5 % Average revenue per user (monthly) $ 17.67 $ 13.87

*The metrics for the year ended December 31, 2016 include the operating results and approximately 53,000 customers of Yodle, Inc. from the March 9, 2016 acquisition.


Net subscribers increased by 105,018 customers during the year ended December
31, 2016, as compared to an increase of 76,337 customers during the year ended
December 31, 2015. The subscriber additions include the customers acquired in
the

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March 2016 acquisition of Yodle, Inc. Excluding the acquired customers, the
subscribers increased during the year ended December 31, 2016, when compared to
the same prior year period due to continued improvements in our customer service
and from marketing efforts. Our rolling twelve month customer retention rate as
of December 31, 2016, was 85.4% compared to 87.5% during the same prior year
period. While retention rates remain stable, the overall retention rate declined
from the prior period due principally to the inclusion of Yodle's lower
retention.

The average revenue per user was $17.67 during the year ended December 31, 2016,
as compared to $13.87 during the same period ended December 31, 2015. The
increase in average revenue per subscriber is primarily due to the significantly
higher revenue per subscriber from the Yodle acquisition customer base.
Revenue

                                      For the year ended December 31,
                                             2016                    2015
                                               (in thousands)
Revenue:
Subscription                    $        703,562$ 535,706
Professional services and other            6,943                      7,755
Total revenue                   $        710,505$ 543,461



Total revenue increased to $710.5 million in the year ended December 31, 2016,
from $543.5 million in the year ended December 31, 2015. Total revenue during
the year ended December 31, 2016 and 2015, includes the unfavorable impact of
$18.4 million and $15.9 million, respectively, from amortizing into revenue,
deferred revenue that was recorded at fair value at the acquisition date. The
unfavorable impact increased $2.5 million during the year ended December 31,
2016 compared to the same prior period principally due to the Yodle deferred
revenue acquired in March 2016 and subsequently amortized. The remaining $169.5
million increase in revenue during the year ended December 31, 2016 is also
principally due to the March 2016 Yodle acquisition. In addition, we realized
increased Do-It-For-Me website and premium website revenues, as well as
increases from online marketing and email revenues. The increases were offset,
in part, by decreases in domain-related revenues, hosting, advertising and
Do-It-Yourself website revenues.
Subscription Revenue. Subscription revenue increased during the year ended
December 31, 2016, to $703.6 million from $535.7 million during the year ended
December 31, 2015. The increase was primarily due to the drivers discussed
above.
Professional Services and Other Revenue. Professional services revenue decreased
10% to $6.9 million in the year ended December 31, 2016 from $7.8 million in the
year ended December 31, 2015 due to a lower volume of custom website and
ecommerce design revenue.
Cost of Revenue and Operating Expenses
                                                               For the year ended
                                                                  December 31,
                                                                2016         2015
                                                                 (in thousands)
Cost of Revenue and Operating Expenses:
Cost of revenue                                               224,032      184,751
Sales and marketing                                           210,294      139,971
Technology and development                                     65,800       35,529
General and administrative                                     74,919       64,592
Restructuring charges                                           3,617          559
Asset impairments                                               9,091            -
Depreciation and amortization                                  78,048       

56,345

Total cost of revenue and operating expenses                  665,801      481,747




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Cost of Revenue. Cost of revenue increased 21% or $39.3 million during the year
ended December 31, 2016 compared to the year ended December 31, 2015 to $224.0
million. The increase was primarily driven from March 2016 acquisition of Yodle.
Excluding the acquisition, domain registration costs decreased $2.1 million,
partner-related commissions decreased $2.0 million and hosting costs were also
down $1.0 million during the year ended December 31, 2016 compared to the same
prior year period. Partially offsetting these costs were $1.8 million of higher
online marketing expenses and $1.6 million of additional software-related costs
during the year ended December 31, 2016 when compared to the same prior year
period.
Sales and Marketing Expenses. Sales and marketing expenses increased 50% to
$210.3 million and were 30% of total revenue during the year ended December 31,
2016, up from $140.0 million or 26% of revenue during the year ended December
31, 2015. The $70.3 million increase is primarily from the acquisition of Yodle.
Excluding the acquisition-related costs, salaries and benefits increased $9.9
million, while marketing expenses declined $8.8 million and call center costs
were down $2.2 million during the year ended December 31, 2016 compared to the
same prior year period.
Technology and Development Expenses. Technology and development expenses
increased 85% to $65.8 million, or 9% of total revenue, during the year ended
December 31, 2016, up from $35.5 million, or 7% of total revenue during the year
ended December 31, 2015. The increase for the year ended December 31, 2016 was
driven by the Yodle acquisition. In addition, salaries and benefits are up $8.4
million and data storage, security and network costs have also risen $1.7
million during the year ended December 31, 2016 compared to the same prior year
period.
General and Administrative Expenses. General and administrative expenses
increased 16% to $74.9 million, or 11% of total revenue, during the year ended
December 31, 2016, up from $64.6 million or 12% of total revenue during the year
ended December 31, 2015. Excluding the additional expenses from the Yodle
acquisition, salaries and benefits declined $5.1 million during the current year
ended December 31, 2016 when compared to the same prior year period. In
addition, bad debt expense is lower by $1.7 million due primarily to lower DIY
revenue during the year ended December 31, 2016. Corporate and development
expenses increased by $4.0 million due primarily to transaction-related costs
from the Yodle acquisition.
Restructuring Charges. Restructuring charges of $3.6 million and $0.6 million
during the years ended December 31, 2016 and 2015, respectively, were incurred.
Included in the restructuring expense for the year ended December 31, 2016 was
$1.4 million of lease restructuring costs for a portion of the New York office
of Yodle that was exited on December 31, 2016. The remaining $2.2 million was
principally severance expense from terminating certain Yodle positions.
Asset Impairment. The Company recorded $9.1 million of impairment charges during
the year ended December 31, 2016. Included was a $7.1 million charge for
leasehold improvements that were written off when we exited a portion of the
leased space in Yodle's New York headquarters. In addition, $2.0 million of our
domain name inventory was impaired during the third quarter ended September 30,
2016.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased from $56.3 million during the year ended December 31, 2015 to $78.0
million during the year ended December 31, 2016. Amortization expense increased
by $17.5 million during the year ended December 31, 2016, as we amortized
intangible assets acquired with the March 2016 Yodle acquisition. Depreciation
expense increased $4.2 million, also from the additional assets acquired from
the Yodle acquisition. In addition, depreciation increased from internally
developed software projects placed into service in prior periods as well as
during 2016. Depreciation and amortization expense is expected to remain
relatively consistent during 2017.
Interest Expense, net. Net interest expense totaled $30.5 million and $20.0
million for the year ended December 31, 2016 and 2015, respectively. Included in
the interest expense for the year ended December 31, 2016 and 2015, is
approximately $12.8 million and $11.4 million, respectively, from amortizing
deferred financing fees and loan origination discounts. Excluding this
amortization expense, interest expense increased $7.8 million during the year
ended December 31, 2016, which is driven from the additional debt financed to
acquire Yodle in March of 2016, as well as from a slightly higher interest rate.
See Note 4, Long-term Debt, for additional information.
Income Tax Benefit/Expense. We recorded a net income tax expense of $10.3
million and an income tax benefit of $48.3 million during the year ended
December 31, 2016 and December 31, 2015, respectively. The Company's income tax
expense for the year ended December 31, 2016, includes the impact of higher
stock-based compensation, acquisition-related transaction costs, and other
non-deductible compensation costs, as well as a decrease in foreign deferred tax
rates and foreign currency translation adjustments when compared to the year
ended December 31, 2015. Also included in our income tax expense for the year
ended December 31, 2016, is a $2.4 million partial release of our
beginning-of-the-year valuation allowance previously recorded against certain
net state deferred tax assets that was recorded in the fourth quarter of 2016,
after weighing all available evidence to reflect the amount more likely than not
to be realized. The year ended December 31, 2015 includes the reversal of $68.8
million of valuation allowance related to certain of our deferred tax assets,
resulting in a net benefit for the year. See Note 13, Income Taxes, for
additional information.

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Outlook. For 2017, we expect an increase in revenue over the prior year as we
realize a full year of the Yodle acquisition.  Due to our integration activities
around Yodle, we anticipate revenue will decline in the first quarter.
Thereafter we project modest sequential growth in future quarters with some
acceleration in the back half of the year driven by our value added services
revenue offset by declines in DIY and domains.  Year over year growth will be
helped by the inclusion of DonWeb.com and a full year of owning Yodle.  We
expect to generate strong Non-GAAP free cash flow which will be used to pay down
debt and repurchase common shares.

Comparison of the results for the year ended December 31, 2015 to the results
for the year ended December 31, 2014
Included in the year ended December 31, 2015 and 2014 are adjustments for the
correction of an immaterial error in the classification of infrastructure costs,
which were previously classified within the cost of revenue financial statement
line item but have been reclassified to technology and development. In addition,
in an effort to report operating expenses in a manner more in line with
functional areas and to simplify the related accounting, we have changed the
classification of certain information technology related operating expenses from
general and administrative expenses to technology and development. This
reclassification was applied retrospectively to all periods presented.
The following table sets forth our key business metrics for the year ended
December 31:
                                           For the year ended December 31,
                                             2015                   2014

Ending subscribers as of December 31,      3,352,554                3,276,217
Net subscriber additions                       76,337                 144,243
Customer retention rate                          87.5 %                 

87.9 % Average revenue per user (monthly) $ 13.87 $ 14.62




Net subscribers increased by 76,337 customers during the year ended December 31,
2015, as compared to an increase of 144,243 customers during the year ended
December 31, 2014. The overall increase in subscribers is primarily due to
marketing and customer service efforts in current and prior periods. The
subscriber additions are, however, lower during the year ended December 31,
2015, when compared to the same prior year period, as we have shifted our
emphasis towards subscribers using our products that have higher price points
during the last half of the year. Our rolling twelve month customer retention
rate as of December 31, 2015, was 87.5% compared to 87.9% during the same prior
year period. The retention rate continued to remain strong, also due to customer
service and marketing efforts.

The average revenue per user was $13.87 during the year ended December 31, 2015,
as compared to $14.62 during the same period ended December 31, 2014. The
decline in average revenue per subscriber is primarily due to lower advertising
and hosting revenues, primarily offset by an increase in DIFM services and
domain-related product sales.
Revenue

                                      For the year ended December 31,
                                             2015                    2014
                                               (in thousands)
Revenue:
Subscription                    $        535,706$ 534,955
Professional services and other            7,755                      8,982
Total revenue                   $        543,461$ 543,937



Total revenue declined slightly to $543.5 million in the year ended December 31,
2015, from $543.9 million in the year ended December 31, 2014. Total revenue
during the year ended December 31, 2015 and 2014, includes the unfavorable
impact of $15.9 million and $26.2 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 $10.3 million during the year ended December 31,
2015 compared to the same prior period. The remaining $10.7 million decrease in
revenue during the year ended

                                       31
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December 31, 2015 is principally due to lower advertising and hosting revenue,
partly offset by an increase in email and domain-related product sales.
Subscription Revenue. Subscription revenue increased slightly during the year
ended December 31, 2015, to $535.7 million from $535.0 million during the year
ended December 31, 2014. The increase was due a lower volume of
acquisition-related revenue that was amortized into deferred revenue and higher
email and domain-related sales, partly offset by lower advertising and hosting
revenues.
Professional Services and Other Revenue. Professional services revenue decreased
14% to $7.8 million in the year ended December 31, 2015 from $9.0 million in the
year ended December 31, 2014 due to a lower volume of custom website and
ecommerce design revenue.
Cost of Revenue and Operating Expenses
                                                             For the year ended December 31,
                                                                   2015              2014
                                                                     (in thousands)
Cost of revenue and operating expenses:
Cost of revenue                                             $        184,751$  189,099
Sales and marketing                                                  139,971        148,836
Technology and development                                            35,529         38,657
General and administrative                                            64,592         52,697
Restructuring charges                                                    559            166
Asset impairment                                                           -          2,040
Depreciation and amortization                                         56,345         74,779
Total cost of revenue and operating expenses                $        

481,747 $ 506,274




Cost of Revenue. Cost of revenue decreased 2% or $4.3 million during the year
ended December 31, 2015 compared to the year ended December 31, 2014. During the
year ended December 31, 2015, domain registration costs decreased $6.5 million
and online marketing expense was $1.1 million lower when compared to the same
prior year period. The decrease in domain registration was primarily driven from
a lower overall volume of domain names under management as certain prior year
promotional domains did not renew. The overall decreases were partially offset
by higher partner commission and salaries and benefits, up by $1.3 million and
$1.8 million, respectively.
Sales and Marketing Expenses. Sales and marketing expenses decreased 6% to
$140.0 million and were 26% of total revenue during the year ended December 31,
2015, down from $148.8 million or 27% of revenue during the year ended December
31, 2014. The $8.9 million decrease is primarily from lower investments in sales
and marketing activities, primarily online media and affiliate marketing. In
addition, direct response television and radio advertising campaigns were scaled
back slightly during the year ended December 31, 2015. Partially offsetting the
overall decline in sales and marketing expenses were higher salaries,
commissions and benefits, primarily due to the inclusion of the Scoot
operations, acquired in July 2014, for the entire year ended December 31, 2015.
Technology and Development Expenses. Technology and development expenses
decreased 8% to $35.5 million, or 7% of total revenue, during the year ended
December 31, 2015, down from $38.7 million, or 7% of total revenue during the
year ended December 31, 2014. The decrease for the year ended December 31, 2015,
was driven by approximately $3.2 million of lower salary and benefits expense
resulting from increased labor dollars being capitalized in connection with
internally developed software projects as certain billing systems were
customized for centralization and improvements continued to be made to our DIY
website builder.
General and Administrative Expenses. General and administrative expenses
increased 23% to $64.6 million, or 12% of total revenue, during the year ended
December 31, 2015, up from $52.7 million or 10% of total revenue during the year
ended December 31, 2014. Overall, during the year ended December 31, 2015,
salaries and incentive-based compensation expense increased approximately $11.1
million when compared to the same prior year period. Regulatory fees were $0.7
million higher from the application of new registrars during the year ended
December 31, 2015 compared to the same prior year period.

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Restructuring Charges. Restructuring charges for termination benefits of $0.6
million and $0.2 million during the years ended December 31, 2015 and 2014,
respectively, were incurred.
Depreciation and Amortization Expense. Depreciation and amortization expense
decreased from $74.8 million during the year ended December 31, 2014 to $56.3
million during the year ended December 31, 2015. Amortization expense decreased
by $21.4 million during the year ended December 31, 2015, as certain intangible
assets, primarily relating to the 2011 acquisition of Network Solutions, became
fully amortized in 2014. Depreciation expense increased $3.0 million from an
increase in internally developed software projects placed into service
throughout 2014 and 2015.
Interest Expense, net. Net interest expense totaled $20.0 million and $26.7
million for the year ended December 31, 2015 and 2014, respectively. Included in
the interest expense for the year ended December 31, 2015 and 2014, is
approximately $11.4 million and $10.9 million, respectively, from amortizing
deferred financing fees and loan origination discounts. Excluding this
amortization expense, interest expense decreased $7.2 million during the year
ended December 31, 2015, which is driven from realizing a full year of the lower
interest rate from the debt repricing completed in September of 2014, as well as
from lower overall debt levels resulting from principal payments made during
2015.
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.
Income Tax Benefit/Expense. We recorded a net tax benefit of $48.3 million and
income tax expense of $21.5 million during the year ended December 31, 2015 and
December 31, 2014, respectively. The year ended December 31, 2015 includes the
reversal of $68.8 million of valuation allowance related to certain of our
deferred tax assets, resulting in a net benefit for the year. See Note 13,
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):
                                                       2016           2015  

2014

Net cash provided by operating activities           $ 127,840$ 152,731$ 117,206
Net cash used in investing activities                (326,953 )      (16,077 )      (34,412 )
Net cash provided by (used in) financing activities   200,917       (140,431 )      (74,091 )
Effect of exchange rate changes on cash                   (63 )           

(2 ) (24 ) Increase (decrease) in cash and cash equivalents $ 1,741$ (3,779 )$ 8,679




Cash Flows Years Ended December 31, 2016 and 2015
As of December 31, 2016, we had $20.4 million of cash and cash equivalents and
$209.3 million in negative working capital, as compared to $18.7 million of cash
and cash equivalents and $167.7 million in negative working capital as of
December 31, 2015. The majority of the negative working capital, as of the years
ended December 31, 2016 and 2015, is due to significant balances of deferred
revenue, partially offset by deferred expenses, which get amortized to revenue
and expense, respectively, 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, 2016 decreased
$24.9 million from the year ended December 31, 2015. Included in the cash
provided by operating activities during the year ended December 31, 2016 is $3.9
million of acquisition-related transaction costs that were paid during the year,
as well as $1.6 million of restructuring-related severance payments that were
made. In addition, cash paid for interest is $7.0 million higher than in the
year ended December 31, 2015, due to the increase in debt for financing the
March 2016 Yodle acquisition. The working capital changes reflect the
requirement to fund $5.3 million of letters of credit that are restricted by
operating leases of Yodle. During the year ended December 31, 2016, higher cash
incentive compensation was paid out when compared to the same prior year period
of 2015. In addition, working capital changes were unfavorable during the year
ended December 31, 2016, when compared to the same prior year period, primarily
resulting from accounts receivable and accrued compensation and benefits timing.

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Net cash used in investing activities in the year ended December 31, 2016 was
$327.0 million, as compared to $16.1 million in the year ended December 31,
2015. The quarter ended March 31, 2016 included a $300.3 million payment for the
acquisition of 100% of the outstanding shares of Yodle, Inc., a leader in value
added digital marketing solutions that further solidifies our position as a
leading national provider in this space. In addition, on May 31, 2016, we
purchased the assets of TORCHx, Inc. a Florida corporation for $4.4 million, of
which $3.0 million was paid at closing with the remaining $1.5 million payable
on November 30, 2017. See Note 5, Business Combinations, for additional
information surrounding these acquisitions. Holdback payments of $1.3 million
were made during the twelve months ended December 31, 2015 in connection with
the 2014 acquisitions of Scoot and SnapNames. Capital expenditures during the
year ended December 31, 2016 increased by $7.4 million to $22.1 million when
compared to the same prior year period due to an increase in internally
developed software labor as certain billing systems were customized for
centralization and improvements in our DIY website builder were made. The year
ended December 31, 2015 included costs incurred from building out two
centralized data centers, as well as substantial efforts to improve internally
developed software and websites. Also included in cash used in investing
activities is $1.5 million in payments for domain registrar credentials that
were acquired during the year ended December 31, 2016.
Net cash used in financing activities of $200.9 million during the year ended
December 31, 2016 included an increase in borrowings of $315.0 million to
finance the Yodle acquisition, of which a total of $80.5 million was
subsequently repaid, resulting in a net increase of $234.5 million. Proceeds
received from the exercise of stock options decreased from $8.0 million to $5.0
million in the year ended December 31, 2016 when compared to the same prior year
period. Approximately $4.3 million and $2.4 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, 2016 and 2015, respectively. Debt
issuance costs of $5.7 million were paid during the year ended December 31, 2016
in connection with the March 2016 debt increase and repricing.
Included in financing activities during the year ended December 31, 2016 and
2015, are common stock repurchases of $28.6 million and $50.6 million,
respectively. The repurchases were made in connection with our stock repurchase
program that was originally announced on November 5, 2014, which initially
authorized the repurchase of up to $100 million of our outstanding shares of
common stock. In October 2016, our Board of Directors approved an increase in
our current stock repurchase plan by an additional $100 million and extended the
expiration date of the outstanding available shares to December 31, 2018.
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. As of December 31, 2016, $110.0 million remains
available for repurchase.

Cash Flows Years Ended December 31, 2015 and 2014
As of December 31, 2015, we had $18.7 million of cash and cash equivalents and
$167.7 million in negative working capital, as compared to $22.5 million of cash
and cash equivalents and $118.0 million in negative working capital as of
December 31, 2014. The majority of the negative working capital, as of the years
ended December 31, 2015 and 2014, is due to significant balances of deferred
revenue, partially offset by deferred expenses, which get amortized to revenue
or expense/benefit rather than settled with cash. In addition, we early adopted
Accounting Standards Update ("ASU") No. 2015-17, Income Taxes (Topic 740),
Balance Sheet Classification of Deferred Taxes, on a prospective basis during
the fourth quarter of 2015. The Company's current deferred tax asset balance is
classified as noncurrent and netted with noncurrent deferred tax liabilities as
of December 31, 2015. Prior periods in our consolidated financial statements
were not retrospectively adjusted. 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, 2015 increased
$35.5 million from the year ended December 31, 2014 primarily due to
improvements in operating income during the year ended December 31, 2015, and
from lower cash incentive compensation paid out in 2015 when compared to 2014.
In addition, working capital changes were favorable during the year ended
December 31, 2015 when compared to the same prior year period.

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Net cash used in investing activities in the year ended December 31, 2015 was
$16.1 million, as compared to $34.4 million in the year ended December 31, 2014
due primarily to the absence of cash paid for businesses acquisitions in the
current year ended December 31, 2015. 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, 2015 decreased slightly by $0.4
million to $14.7 million when compared to the same prior year period. Capital
expenditures in the year ended December 31, 2015 included an increase in
internally developed software labor as certain billing systems were customized
for centralization and improvements in our DIY website builder were made. The
year ended December 31, 2014 included costs incurred from building out two
centralized data centers that were completed, as well as substantial efforts to
improve internally developed software and websites.
Net cash used in financing activities of $140.4 million during the year ended
December 31, 2015 included $95.3 million of principal payments compared to
principal payments of $63.1 million during 2014. Proceeds received from the
exercise of stock options decreased from $9.9 million to $8.0 million in the
year ended December 31, 2015 when compared to the same prior year period.
Approximately $2.4 million and $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, 2015 and 2014, respectively. Debt issuance
costs of $3.7 million were paid during the year ended December 31, 2014 in
connection with the September 2014 debt repricing.
Included in financing activities during the year ended December 31, 2015 and
2014, are common stock repurchases of $50.6 million and $10.8 million,
respectively. The repurchases were made in connection with our stock repurchase
program discussed above.

Long-term Debt

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 equivalent to an initial
effective conversion price of approximately $35.00 per share of common stock. At
issuance, net proceeds of $252.3 million were received, 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 amendment to the credit agreement entered into on February 11, 2016 with an
effective date of March 9, 2016, continues to 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, acquisition-related costs and includes the benefit of
annualized synergies due to the Yodle acquisition.

Outstanding debt as of December 31, 2016 for purposes of the First Lien Net Leverage Ratio is approximately $411.6 million. The covenant ratios as of December 31, 2016 on a trailing 12-month basis are as follows:

                                                                    Ratio at
                                   Covenant Requirement as of     December 31,       Favorable/
Covenant Description                    December 31, 2016             2016          (Unfavorable)
First Lien Net Debt to
Consolidated EBITDA                   Not greater than 3.25               2.21              1.04
Consolidated Interest Coverage
Ratio                                   Greater than 2.00                 8.69              6.69


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.

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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, 2016 (in thousands):
                                                                         Payment Due by Period
Contractual Obligations          Total        2017       2018         2019           2020            2021          Thereafter
Long-term debt (1)            $  673,687   $      -   $ 285,563$    36,563$     38,999$       312,562   $          -
Current maturities of
long-term debt                    17,063     17,063           -             -              -                 -              -
Interest payments on
long-term debt (1)                50,110     15,732      14,123        10,300          8,081             1,874              -
Operating lease obligations
(2)                               72,236     14,914      11,790        10,854          9,490             9,116         16,072
Uncertain tax positions (3)            -          -           -             -              -                 -              -
Purchase obligations (4)          70,419     14,870      14,299        14,250         13,000            14,000              -
 Total                        $  883,515$ 62,579$ 325,775$    71,967$     69,570$       337,552$     16,072

(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, 2016. The 2018 long term debt obligations

reflect the maturity of the Senior Convertible Notes that are due August

15,2018 and the 2021 debt obligations reflect the maturity of the Term Loan

and revolving credit facility.

Operating lease obligations are shown gross of sublease rentals for the

amounts related to each period presented. The amounts presented above are

presented gross of rental income of $1.9 million in 2017, $3.7 million in

each of 2018 and 2019, $3.8 million in 2020, $4.0 million in 2021, and $9.4

million thereafter from subleasing a portion of the New York, New York (2) office. (3) The settlement date is unknown for approximately $3.9 million of uncertain

tax positions which have been excluded from the table above. See Note 13 -

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, 2016, we have $98.8 million of available borrowings under the
Revolving Credit Facility.
Off-Balance Sheet Obligations
As of December 31, 2016 and 2015, 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;


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


•       the extent to which we repurchase our common shares under stock
        repurchase programs; and

• the costs involved with the Yodle and DonWeb acquisitions.



We believe that our existing cash and cash equivalents at December 31, 2016 in
addition to 2017 operating cash flows will be sufficient to meet our projected
operating requirements for at least the next 12 months.

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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, 2016 and 2015, there were no expenses that were hedged.
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $20.4 million and $18.7
million at December 31, 2016 and December 31, 2015, 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, 2016, we had $690.8 million of total debt outstanding,
excluding unamortized debt discounts. We have exposure to market risk for
changes in interest rates related to $432.0 million of these borrowings. Our
variable rate debt is based on 1-month LIBOR plus 2.50% 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
$0.3 million during the year ended December 31, 2016, assuming the principal
balances remain unchanged.

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Non-GAAP Financial Measures
In addition to our financial information presented in accordance with U.S. GAAP,
management uses certain "non-GAAP financial measures" within the meaning of the
SEC Regulation G. Generally, a non-GAAP financial measure is a numerical measure
of a company's operating performance, financial position or cash flows that
excludes or includes amounts that are included in or excluded from the most
directly comparable measure calculated and presented in accordance with U.S.
GAAP.

We believe 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. Our 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 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. You are encouraged to review the
reconciliation of non-GAAP financial measures to GAAP financial measures
included in this Annual Report on Form 10-K.

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 management believes
that excluding such measures helps management and investors better understand
the company's 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, asset impairment, fair value adjustment to deferred revenue and
deferred expense, restructuring expenses, corporate development expenses, and
stock-based compensation charges, because management believes that adjusting for
such measures helps management and investors better understand the company's
operating activities.
• Adjusted EBITDA and Adjusted EBITDA Margin. Web.com excludes from adjusted
EBITDA and adjusted EBITDA margin depreciation and amortization expense, asset
impairment, income tax provision, interest expense, interest income, stock-based
compensation, fair value adjustments to deferred revenue and deferred expense,
corporate development expenses and restructuring expenses, because management
believes that excluding such items helps investors better understand the
company's operating activities.
• Non-GAAP Cost of Revenue (excluding depreciation and amortization). Web.com
excludes from non-GAAP cost of revenue (excluding depreciation and amortization)
the fair value adjustment to deferred expense and stock based compensation
charges because management believes that adjusting for such measures helps
management and investors better understand the company's operating activities.
• Free Cash Flow. Free cash flow is a non-GAAP financial measure that Web.com
uses and defines as net cash provided by operating activities less capital
expenditures. The company considers free cash flow to be a liquidity measure
which provides useful information to management and investors about the amount
of cash generated by the business after the acquisition of property and
equipment, which can then be used for investment opportunities.

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 the company's 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.
• Asset impairment. Web.com has recorded expenses related to asset impairment
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.
• 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

                                       38
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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.

• 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.


• 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
acquisitions and the 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
investment from its non-GAAP measures because the impact of these items is not
considered part of the company's ongoing operations.

• Monthly average revenue per user, or ARPU. ARPU is a metric the company
measures on a quarterly basis. The company defines ARPU as quarterly non-GAAP
subscription revenue divided by the average of the number of subscribers at the
beginning of the quarter and the number of subscribers at the end of the
quarter, divided by three months. The company excludes from subscription revenue
the impact of the fair value adjustments to deferred revenue resulting from
acquisition-related write downs.











                                       39
--------------------------------------------------------------------------------
                                     Web.com Group, Inc.
                         Reconciliation of GAAP to Non-GAAP Results
                          (in thousands, except for per share data)
                                         (unaudited)

                                                    Twelve months ended December 31,
                                                 2016             2015              2014
Reconciliation of GAAP revenue to
non-GAAP revenue
GAAP revenue                                $    710,505$  543,461

$ 543,937

  Fair value adjustment to deferred
revenue                                           18,363          15,909            26,163
Non-GAAP revenue                            $    728,868$  559,370$   570,100

Reconciliation of GAAP operating income
to non-GAAP operating income
GAAP operating income                       $     44,704$   61,714$    37,663
  Amortization of intangibles                     56,805          39,283            60,719
  Loss on sale of assets                               7               -                 -
  Asset impairment                                 9,091               -             2,040
  Stock based compensation                        20,714          20,064            19,567
  Restructuring charges                            3,617             559               166
  Corporate development                            4,631             599               499
  Fair value adjustment to deferred
revenue                                           18,363          15,909    

26,163

  Fair value adjustment to deferred
expense                                              301             633             1,027
Non-GAAP operating income                   $    158,233$  138,761$   147,844

Reconciliation of GAAP operating margin
to non-GAAP operating margin
GAAP operating margin                                  6 %            11  %              7  %
  Amortization of intangibles                          8               7                11
  Loss on sale of assets                               -               -                 -
  Asset impairment                                     1               -                 -
  Stock based compensation                             3               4                 3
  Restructuring charges                                -               -                 -
  Corporate development                                1               -                 -
  Fair value adjustment to deferred
revenue                                                3               3                 5
  Fair value adjustment to deferred
expense                                                -               -                 -
Non-GAAP operating margin                             22 %            25  %             26  %

Diluted weighted average shares
Dilutive shares:
  Basic weighted average common shares            49,262          50,243            50,920
  Dilutive stock options                           1,265           1,757             2,727
  Dilutive restricted stock                          352             426               554
  Dilutive performance shares                          1              16                 -
Total dilutive weighted average common
shares                                            50,880          52,442            54,201





                                       40
--------------------------------------------------------------------------------

                                                    Twelve months ended 

December 31,

                                                2016             2015       

2014

Reconciliation of GAAP net income to
adjusted EBITDA
GAAP net income (loss)                      $     3,990$   89,961$   (12,458 )
  Depreciation and amortization                  78,048          56,345            74,779
  Loss on sale of assets                              7               -                 -
  Asset impairment                                9,091               -             2,040
  Stock based compensation                       20,714          20,064            19,567
  Restructuring charges                           3,617             559               166
  Corporate development                           4,631             599               499
  Fair value adjustment to deferred
revenue                                          18,363          15,909     

26,163

  Fair value adjustment to deferred
expense                                             301             633             1,027
  Loss from debt extinguishment                       -               -             1,838
  Interest expense, net                          30,462          20,013            26,739
  Income tax expense (benefit)                   10,252         (48,260 )          21,544
Adjusted EBITDA                             $   179,476$  155,823

$ 161,904


Reconciliation of GAAP net income margin
to adjusted EBITDA margin
GAAP net income margin                                1 %            17  %             (2 )%
  Depreciation and amortization                      11              10                13
  Loss on sale of assets                              -               -                 -
  Asset impairment                                    1               -                 -
  Stock based compensation                            3               4                 3
  Restructuring charges                               -               -                 -
  Corporate development                               1               -                 -
  Fair value adjustment to deferred
revenue                                               3               3                 5
  Fair value adjustment to deferred
expense                                               -               -                 -
  Loss from debt extinguishment                       -               -                 -
  Interest expense, net                               4               4                 5
  Income tax expense (benefit)                        1             (10 )               4
Adjusted EBITDA margin                               25 %            28  %             28  %

Reconciliation of net cash provided by
operating activities to free cash flow
Net cash provided by operating
activities                                  $   127,840$  152,731$   117,206
 Capital expenditures                           (22,140 )       (14,747 )         (15,166 )
Free cash flow                              $   105,700$  137,984$   102,040

Net cash used in investing activities $ (326,953 )$ (16,077 )

   $   (34,412 )
Net cash provided by (used in) financing
activities                                  $   200,917$ (140,431 )$   (74,091 )

Revenue
  Subscription                              $   703,562$  535,706$   534,955
  Professional services and other                 6,943           7,755             8,982
Total                                       $   710,505$  543,461$   543,937




                                       41
--------------------------------------------------------------------------------
                                                    Twelve months ended December 31,
                                                 2016              2015            2014
Stock based compensation
Cost of revenue                             $      1,097$    1,933$     2,045
  Sales and marketing                              5,266            4,632            4,816
  Technology and development                       3,799            2,947            3,125
  General and administrative                      10,552           10,552            9,581
Total                                       $     20,714$   20,064$    19,567

Reconciliation of GAAP cost of revenue
(excluding depreciation and
amortization) to non-GAAP cost of
revenue (excluding depreciation and
amortization)
Cost of revenue (excluding depreciation
and amortization)                           $    224,032$  184,751

$ 189,099

  Fair value adjustment to deferred
expense                                             (301 )           (633 ) 

(1,027 )

  Stock based compensation                        (1,097 )         (1,933 )         (2,045 )
Non-GAAP cost of revenue (excluding
depreciation and amortization)              $    222,634$  182,185

$ 186,027


Reconciliation of GAAP revenue to
non-GAAP subscription revenue used in
ARPU
GAAP revenue                                $    710,505$  543,461

$ 543,937

  Fair value adjustment to deferred
revenue                                           18,363           15,909   

26,163

  Non-GAAP revenue                          $    728,868$  559,370

$ 570,100

  Professional services and other
revenue                                           (6,943 )         (7,755 )         (8,982 )
Non-GAAP subscription revenue used in
ARPU                                        $    721,925$  551,615

$ 561,118

  Average subscribers (in thousands)               3,405            3,314   

3,199

ARPU (Non-GAAP subscription revenue per
subscriber over 3 month period)             $      17.67$    13.87

$ 14.62

© Edgar Online, source Glimpses

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