UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2012

or

o		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. o Yes x 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. o Yes x No

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

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

Indicate by checkmark 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act). o Yes x No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $602,817,682 as of June 30, 2012, based upon 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 be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2013, the registrant had 49,740,044 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the registrant’s 2013 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.

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		Page
PART I
Item 1. Business			2
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			22
Item 2. Properties			23
Item 3. Legal Proceedings			23
Item 4. Mine Safety Disclosures			23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			24
Item 6. Selected Financial Data			25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation			26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			44
Item 8. Financial Statements and Supplementary Data			48
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			49
Item 9A. Controls and Procedures			50
Item 9B. Other Information			52
PART III
Item 10. Directors, Executive Officers and Corporate Governance			53
Item 11. Executive Compensation			53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			53
Item 13. Certain Relationships and Related Transactions, and Director Independence			53
Item 14. Principal Accounting Fees and Services			53
PART IV
Item 15. Exhibits, Financial Statement Schedules			53

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What we do

Using a consultative approach, Web.com offers SMBs a single point of entry to an array of effective, affordable online products and services that will help drive their businesses. The breadth and flexibility of our offerings allow us to address the web services needs of a wide variety of customers, ranging from those just establishing their websites to those that want to enhance their existing online presence with more sophisticated marketing and lead generation services. We offer our customers a full range of web services and products on an affordable subscription basis. With just over 3 million subscribers as of December 31, 2012, we are one of the industry’s largest providers of domain names, affordable web services and products that enable SMBs to have an effective online presence.

We have positioned ourselves as a partner to SMBs across all phases of their business’s adaptation to internet technology, from their initial entry onto the web to their use of cutting-edge innovations as they mature. As a domain registrar, we allow the business to establish an online presence by buying a domain name. This basic service is the entry point to higher priced offerings. Having secured a domain, a business next needs a website and e-mail service. Our offerings for these fundamental services span the range of customer budgets and expertise, from inexpensive Do-It-Yourself website and e-mail hosting for the technically-savvy, to Do-It-For-Me custom website design services, online marketing and eCommerce solutions. Customers can engage our experienced consultants for services that range from web design to online advertising campaign management. When online innovations emerge, we can help SMBs leverage the new capabilities.

Through the combination of proprietary website publishing and management 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 technology automates many aspects of creating, maintaining, enhancing, and marketing websites on behalf of our customers.

We sell our products and services via a telesales and direct sales force, which operates in 14 sales centers in the U.S. and Canada. In addition to these sales centers, we acquire many customers through online and affiliate marketing activities. In 2011, we rolled out a “Feet on the Street” direct sales initiative, as well as a Direct Response Television (“DRTV”) campaign. We also sell web services and products to customers identified by companies with which we have strategic marketing relationships.

Our Strategy

Our current objective is to enhance our position as a leading provider of web services and products for SMBs. The key elements of our business model and approach are:

Continuing to target the SMB segment.   The SMB market offers the best opportunity to continue building a leading web services company. This is an attractive market because this large group of businesses needs a comprehensive, affordable solution for their web services requirements. Web services meet critical business needs of these businesses that they often do not have the time, resources, or technical skills to fulfill themselves.

Selling additional services and products to existing customers.   Following our acquisition of leading domain registrars, Register.com in 2010 and Network Solutions in 2011, many of our customers only have a domain name or a domain name with very limited web services. We actively target these acquired domain customers for cross-sell and up-sell marketing. Additionally, as customers who currently have other Web.com DIY (Do-It-Yourself) products or eWorks!XL (our primary Do-It-For-Me subscription offering of bundled products and services) build their online presence, we can offer additional premium services and products. In addition, we expect to increase our marketing and sales activities, invest in developing brand awareness through corporate sponsorships such as the Web.com Tour, expand the scope of current strategic marketing relationships, and pursue additional strategic marketing relationships to expand distribution reach.

Developing or acquiring complementary services and technologies.   Some of the services and products that we sell are provided through relationships and agreements with other vendors. We will seek opportunities either to internally develop such services and products, or to acquire businesses that provide them. Additionally, we may seek to expand our customer base via acquisition.

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Strengthening customer retention.   We intend to enhance customer retention by targeting SMBs that already understand the value of the internet to their success, by educating existing and prospective customers about the value of web services to their businesses, and by focusing on customer satisfaction, consistent communication, web service and product enhancements, and high-quality customer service.

Extending position as an affordable web solutions provider.   Through the combination of our operational scale and geographical locations, we believe that we have been able to also minimize the cost of delivering our web services and products. Our template driven processes enable us to handle orders efficiently. We have strategically located our primary sales and fulfillment facilities in lower cost areas including Jacksonville, Florida; Hazleton, Pennsylvania; Shaverton, Pennsylvania; Barrie, Ontario; Halifax, Nova Scotia; Yarmouth, Nova Scotia; Herndon, Virginia; and Spokane, Washington. In the future, we may look to new international labor markets to further reduce our costs.

Our Services and Products

Our goal is to provide a broad range of web services and products that enable SMBs 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 issues.

As our customers demand more advanced products and consultative services, they move from low-priced domain registrations towards high-priced, value-added offerings. These Do-It-For-Me 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 Do-It-For-Me offerings at an unrivalled scale.

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Our web services and products can be categorized into the following:

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, such as. co, .org and.info. We also offer a full suite of domain name services, including domain name registration, domain name transfers, domain name renewal, domain expiration protection and domain privacy services. Domain name customers have a highly proprietary need to maintain their distinct internet address, and we will continue to be their resource for maintaining and extending their registration. Furthermore, these customers represent prime opportunities for additional domain name sales, particularly as additional top level domain names become available. Since all online activity starts with a domain name, we anticipate continuing to be a market leader in selling and servicing these accounts.

Do-It-For-Me Web Services

These services have been created 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 SMB 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 SMB 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.

This is our flagship Do-It-For-Me offering, which consists of a comprehensive website design and publishing package targeted at getting SMBs online quickly, effectively, and affordably. The package includes a five-page semi-custom website built with our proprietary self-editing tool, which allows for easy maintenance by the customer. The package includes domain name registration, initial site design, online marketing, hosting and technical support, a unique toll-free telephone number that is forwarded to the SMB’s telephone line, webmail, online web tools that implement advanced site features, an Internet Scorecard product to analyze site traffic and report leads generated in real-time, several levels of modification and redesign services, and a version of the customer’s website built specifically for mobile devices.

In addition, our SmartClicks product can be added to this product. Once we gain an understanding of the customer’s goals and budget considerations, we can tailor an online advertising campaign that will guarantee an agreed-upon number of “clicks” within the confines of a predictable monthly budget. We create the pay-per-click ads, buy appropriate keywords, monitor the program’s performance, and report results to customers.

We offer complete custom website design services that provide sophisticated functionality and interactivity beyond those available under eWorks! XL and SmartClicks. These sites are typically built for larger, more established customers that have had an online presence in the past, or that are designing their first website with unique specifications. Customers work directly with our experienced web designers to build a fully customized website. Additionally, we are able to sell any of our subscription-based web services and products to our custom web design customers.

We bundle a number of different services contained in our eWorks! XL package into our Gorilla Marketing offering, which is designed to enhance the effectiveness of an online marketing program. These subscription-based services include initial site analysis, initial search engine optimization, search engine inclusion, monthly online marketing submissions to more than 100 search engines, powerful local directories, social sites and GPS navigation devices, listing in online yellow page directories and site submission to many popular search engines and search submission tools.

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To help SMBs access the growing and increasingly important social media channel, we offer subscription products designed to optimize and increase online exposure by presenting a professionally designed Facebook ^TM Company page, creating content and customizing marketing campaigns designed to build a fan base that “likes” the company.

Call center services offers eCommerce businesses a ‘virtual office’ customer service solution. In addition to providing eCommerce products, call center services can supply both eCommerce and brick and mortar businesses with a full suite of call center services, including answering services, live chat, and virtual office assistants. The call center solution can help businesses sell products, resolve customer disputes and build trust, eliminating the guess work and costly overhead associated with hiring in-house customer service employees.

Do-It-Yourself Web Services

We offer a variety of Do-It-Yourself website building and marketing solutions for SMBs that want to build their own websites or enhance their websites with online marketing. These solutions include hosting services, an easy-to-use web building tool, online marketing options and eCommerce capabilities. Potential customers are identified through traditional and online marketing as well as through a number of distribution partners, resellers and affiliates.

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. Starter packages are designed for websites with relatively low volumes of traffic and allow our customers to establish an online presence at minimal cost. Our hosting services feature easy-to-use control panels and extensive online documentation that allow customers to control their own applications.

Our Website Builder package is an easy-to-use website building tool which includes approximately 11,000 starter templates so users can customize their design. There is starter content that can be tailored for a business’s products or services, plus features that keep businesses connected with their customers and prospects, such as a stock image library, social media “share” icons, location maps, customizable contact forms and more. These features enable SMBs to create a professional and effective website to serve customers and grow business by reaching new prospects.

Our Business Builder package includes the Website Builder package plus leading edge marketing tools, including directory submission to more than 100 directories, search engines, social media sites and GPS directories as well as search engine optimization consultation. Customers can also add a Facebook ^TM Company page as well as eCommerce capability.

We offer e-mail products that offer the customers features they need: e-mail accounts, storage, spam and virus protection, webmail and even document sharing. The added benefit to the customer is that their e-mail address will match their domain names giving them instant creditability.

We offer an e-mail marketing tool that enables our customers to easily communicate with their customers and prospects. To assist our customers in collecting e-mail addresses, a subscription sign-up box is available for site visitors to provide their e-mail information. Included in this product are a variety of professional e-mail templates, a contact management tool and a reporting component to help track an e-mail campaign’s success.

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We are a leading provider of Do-It-Yourself logos and other premium design products to SMBs around the world through our LogoYes products. Our LogoYes Do-It-Yourself logo creation tools provide professional, affordable design products that equip SMBs to compete with larger businesses. LogoYes products and services help build a company’s brand value by presenting a strong, unified image. We also provide the LogoYes design and brand building tools to our Do-It-For-Me web services customers.

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 SMB Partner and as a Yahoo! Local Ambassador. Some of our online marketing products include:

Our search engine optimization products and services are designed to help improve organic search engine rankings and to increase qualified traffic and lead generation. We offer keyword research based on industry and competitor specifics, directory submissions, blogging campaigns and link building. Advanced website analytics accompany these products so customers can track their success.

We offer local and national search engine marketing services, sometimes known as pay-per-click advertising — where we will manage an advertising budget for our customers on Google Ad Words or Bing Ad Center.

Lead Generation

We offer targeted lead generation directed toward service-related businesses. We can work with that customer’s own website, or create a separate, lead-generating website that feeds directly into the customer’s business.

eCommerce

We provide a comprehensive set of products and services that enable eCommerce merchants to sell more on the internet. By coordinating and integrating eCommerce website design and development, internet marketing,

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customer service and back-end order management, we can enable eCommerce merchants to have a complete online store solution by providing support and development on multiple eCommerce platforms.

Customers work directly with our store development project managers, designers and programmers to build high-end custom eCommerce stores. Business and customer security is a top priority, and all Web.com eCommerce sites meet Visa International’s Payment Card Industry (PCI) data standards. As end-customer sales increase, our eCommerce call center provides end-customer sales and customer support for our eCommerce merchants, freeing up time and resources for eCommerce merchants to focus on growing their business.

We provide a proprietary, professional eCommerce tool that can help businesses begin to sell from their website. This shopping cart system supplies all of the tools necessary to create and operate an online store, including built-in e-mail marketing tools, a marketing module, customizable templates and design capabilities, all fully compliant with the Visa Card Information Security Program (CISP) and PCI security standards. Basic packages include Site Builder, unlimited e-mail addresses, and a minimum, Secure Socket Layer (SSL) for security. More sophisticated users may choose to add additional product capacity, affiliate management, multi-level logins, and Dedicated SSL, as well as the ability to accept credit cards and other merchant services.

For customers who wish to outsource their eCommerce needs, we can build eCommerce onto our eWorks! XL bundled website design solution. We can add an online storefront, create an online store catalog and secure shopping cart, help with inventory tracking and management, provide automatic shipping rates and process credit cards. For those who desire a highly customized storefront, we offer custom store design and more sophisticated merchant services.

Other Revenue

Domain names are digital assets that generate advertising cash flow and resale revenue for Web.com. We strive to maximize revenue from domains which are newly registered, purchased from third parties, canceled, expired or retained for our in-house portfolio of domain names.

Web.com offers online advertising opportunities for companies focused on SMBs 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 subscription web services and products comprises several distinct sales channels, including:

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 relationship these customers have with its strategic partners enhances the ability to reach a decision maker, make a presentation, have their 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 clients.

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Online Channel.   We promote our services through the Web.com, Network Solutions.com, Register.com, Leads.com, Leads by Web.com, RenovationExperts.com, 1ShoppingCart.com, SolidCactus.com, Submitawebsite.com and LogoYes.com websites. To drive prospects to these sites, we engage in online marketing and advertising campaigns, and participate in seminars targeting SMBs 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.

Direct Response Television.   We have expanded our efforts of promoting Do-It-For-Me products through television advertising campaigns. In addition to legacy ads supporting eWorks and Facebook ^TM products, we have branded DRTV spots, which describe us and feature real customers who have derived significant business value from our solutions.

Web.com Tour.   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 to medium-sized business owners. In addition, in many Web.com Tour and PGA TOUR markets we host a free, small business forum 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. In February 2013, we entered into an agreement with PGA TOUR professional Jim Furyk to become the Company’s official golf ambassador, with the objective of gaining wider awareness of Web.com and the Web.com Tour. The agreement continues through the 2016 season.

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.

Feet on the Street Web.com has a direct sales “Feet on the Street” initiative in eight geographic markets: Phoenix, Arizona, Jacksonville, Florida; Atlanta, Georgia; St. Louis, Missouri; Raleigh, North Carolina; Houston, Texas; San Antonio, Texas; and Herndon, Virginia; and expect to add additional markets in 2013. At present, this sales initiative is focused on selling the Leads by Web.com products and services.

Marketing

We engage in a variety of marketing activities to sell additional services and products to our existing customer base, and to enhance the value we provide to SMB entities. Our marketing activities include:

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Customers

As of December 31, 2012, we had just over 3 million customers. We generally target SMBs that are primarily focused on their regional or local markets. We also target SMBs with significant monthly spending on local print yellow pages advertising. We seek to create long-term relationships with these businesses by helping them locate new customers at a significantly lower cost per lead compared to traditional print yellow pages marketing campaigns.

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; Atlanta, Georgia, and Sterling, Virginia. These co-location facilities have a secured network infrastructure including intrusion detection at the router level, full network traffic 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 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. In 2012, we started building out two centralized data centers that are expected to be completed during the first half of 2013.

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 Visa Card Information Security Program (CISP) and Visa International’s Payment Card Industry Data Standards (PCI). 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.

Third-Party Providers

We offer some of our services to our customers through third-party technology vendors, which enable us to expand our services and create additional revenue opportunities. We do not have long-term contracts with any of these third parties. Accordingly, we or any of these providers can terminate the relationship at any time, for any reason or no reason, on short notice, often as little as 30 days. If any of these relationships terminate, we may need to seek an alternative provider of services or develop the covered services independently.

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; Endurance International Group; 1&1 Internet; GoDaddy; 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.

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We believe the principal competitive factors in the SMB segment of the web services and online marketing and lead generation industry include:

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, 2012, we owned 25 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 to 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 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, including agreements in which the employees and contractors assign their rights in inventions to us. 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, 2012, we had approximately 1,900 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.

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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 and 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 .

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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.

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:

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:

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.

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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.

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:

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

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

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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:

Any of these issues could slow the growth of the internet, which could limit our growth and revenues.

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 SMBs and their customers. As a result, our web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new web services or products, or enhancements to our web services or products, on a timely and cost-effective basis, or if new web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.

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

Our success depends on a significant number of SMB outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our web services and products is relatively new and untested. Custom website development has been the predominant method of internet enablement, and SMBs may be slow to adopt our template-based web services and products. Further, if SMBs 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.

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.

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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While we cannot determine with certainty why our subscription renewal rates are not higher, we believe there are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers’ businesses, the overall economic environment in the United States and its impact on SMBs, the services and prices offered by us and our competitors, and the evolving use of the internet by SMBs. 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, 2012, 2011 and 2010 and we may not become or stay profitable in the future.

Although we generated net income for the year ended December 31, 2009, we were not profitable for the years ended December 31, 2012, 2011 and 2010, and may not be profitable in future years. As of December 31, 2012, we had an accumulated deficit of approximately $292.5 million. We expect that our expenses relating to the sale and marketing of our web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to again achieve and, if achieved, to later maintain profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.

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, restricted credit, poor 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 SMBs. We believe these businesses are 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 SMBs 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. For example, under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder’s signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction. 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 processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. As of December 31, 2012, our compliance with the established rules is within the guidelines established by the credit card associations. However, 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.

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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.

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.

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:

Integrating Web.com and an acquired company may divert management’s attention away from the combined company’s 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.

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

A key element of our strategy is to combine a variety of functionalities in our web service offerings to provide our customers with comprehensive solutions to their online presence needs, such as internet search optimization, local yellow pages listings, and eCommerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 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; Jacksonville, Florida; and Sterling, Virginia. We obtain internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, we may house other servers and hardware items in facilities owned or operated by other service providers.

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

We 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:

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.

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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 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.

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 laws may be deemed to apply to the internet, 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 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.

We could become involved in claims, lawsuits or investigations that may result in adverse outcomes.

We may become involved in claims, such as lawsuits and investigations, involving but not limited to general business, patents, or employee matters. 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 in lawsuits and investigations 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.

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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. While we do rely on patents acquired from the Web.com acquisition, we do not currently rely on patents to protect all of our core intellectual property. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

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 (NOL) carry forwards to offset future taxable income for U.S. federal income tax purposes may be limited if taxable income does not reach a sufficient level, or as a result of a change in control which could limit available NOLs.

As of December 31, 2012, the Company has Federal net operating loss carry forwards (“NOLs”) of approximately $300.4 million (excluding $30.8 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 2032. 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 $246.8 million of the NOLs will be available during the carry forward period based on our existing Section 382 limitations. As of December 31, 2012, our valuation allowance includes $117.4 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 our existing deferred tax liabilities and current Section 382 limits.

Section 382 of the Code imposes an annual limitation on the amount of post-ownership change taxable income generated that may be offset with pre-ownership change NOLs of the corporation that experiences an ownership change. The limitation imposed by Section 382 of the Code for any post-ownership change year generally would be determined by multiplying the value of such corporation’s stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to

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certain limits, be carried over to later years, and the limitation may, under certain circumstances, be increased by built-in gains or reduced by built-in losses in the assets held by such corporation at the time of the ownership change.

If the Company experiences any future “ownership change” as defined in Section 382 of the Code, the Company’s ability to utilize its NOLs could be further limited depending on several factors, including but not limited to, the amount of taxable income generated during any post-ownership change year and the annual limitation discussed above. Similar results could apply to our state NOLs because the states in which we operate generally follow Section 382.

Additionally, the Company’s ability to use its NOLs will also depend on the amount of taxable income generated in future periods. The NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.

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, 2013 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 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,

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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.

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:

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.

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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

96,304

December 2020

Technology administrative center

Buenos Aires, Argentina

10,000

December 2014

eCommerce operations center

Barrie, Ontario, Canada

8,301

May 2015

Sales and customer support operations center

Hazleton, PA

39,429

January 2013*

Sales and customer support operations center

Yarmouth, Nova Scotia, Canada

30,400

February 2014

Sales and customer support operations center

Belleville, IL

19,428

May 2013

Sales and customer support operations center

Halifax, Nova Scotia, Canada

13,500

April 2017

Sales operations center

Scottsdale, AZ

8,280

May 2013

eCommerce operations center

Shavertown, PA

15,641

March 2013

Technology administrative center

Atlanta, GA

10,235

December 2015

Technology data center

Atlanta, GA

4,000

May 2021

*

In January 2013, the lease was renewed through January 2018.

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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.

		2012								2011
		High				Low				High				Low
First Quarter		$	15.49			$	10.59			$	14.64			$	8.12
Second Quarter		$	18.85			$	12.86			$	16.01			$	9.91
Third Quarter		$	19.27			$	15.40			$	12.85			$	6.94
Fourth Quarter		$	18.41			$	13.58			$	12.25			$	6.47

The closing price for our common stock as reported by the NASDAQ Global Select Market on February 28, 2013 was $17.08 per common share. As of February 28, 2013, there were 690 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

The Company did not repurchase any outstanding common shares during the year ended December 31, 2012.

Stock Performance Graph.

The following graph shows the total stockholder return as of the dates indicated of an investment of $100 in cash on December 31, 2007 for (i) the Company’s common stock, (ii) the Nasdaq Composite Index (iii) the RDG Internet Composite Index and (iv) the Company’s Peer Group. The component companies of the Peer Group are as follows: Savvis, Inc., Monster Worldwide Inc., Rackspace Hosting Inc., Websense, Omniture Inc., United Online Inc., Vistaprint NV, Verisign Inc., WebMD Health Corp., Quinstreet Inc., Digital River Inc., Skillsoft Ltd. and Terremark Worldwide Inc. All values assume reinvestment of the full amount of any dividends, however, no dividends have been declared on our common stock to date. The stock price performance on the graph below is not necessarily indicative of future performance.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Web.com Group, Inc., the NASDAQ Composite Index,
the RDG Internet Composite Index, and a Peer Group

Item 6. Selected Financial Data.

		Year Ended December 31,
		2012(1,3,5)				2011(2-3,5)				2010(2-3,5)				2009				2008 (4)
		(in thousands, except per share data)
Consolidated Statement of Comprehensive Income:
Revenue		$	407,646			$	199,205			$	120,289			$	106,489			$	120,114
Loss from operations			(36,010	)			(40,767	)			(14,536	)			(93	)			(97,077	)
Net (loss) income from continuing operations			(122,217	)			(12,509	)			(6,648	)			1,569				(96,380	)
Income from discontinued operations			—				200				116				1,040				170
Net (loss) income			(122,217	)			(12,309	)			(6,532	)			2,609				(96,210	)
Basic net (loss) income from continuing operations per common share		$	(2.61	)		$	(0.41	)		$	(0.26	)		$	0.06			$	(3.52	)
Basic net income from discontinued operations per common share		$	—			$	0.01			$	—			$	0.04			$	0.01
Basic net (loss) income per common share		$	(2.61	)		$	(0.40	)		$	(0.26	)		$	0.10			$	(3.51	)
Diluted net (loss) income from continuing operations per common share		$	(2.61	)		$	(0.41	)		$	(0.26	)		$	0.06			$	(3.52	)
Diluted net income from discontinued operations per common share		$	—			$	0.01			$	—			$	0.04			$	0.01
Diluted net (loss) income per common share		$	(2.61	)		$	(0.40	)		$	(0.26	)		$	0.10			$	(3.51	)
Basic weighted average common shares outstanding			46,892				30,675				25,515				25,312				27,398
Diluted weighted average common shares outstanding			46,892				30,675				25,515				26,985				27,398

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		As of December 31,
		2012(1,3,5)				2011(2-3,5)				2010(2-3,5)				2009				2008 (4)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	15,181			$	13,364			$	16,307			$	39,427			$	34,127
Working capital (deficiency) (5)		$	(113,875	)		$	(78,843	)		$	(22,133	)		$	32,171			$	23,971
Total assets		$	1,327,270			$	1,399,480			$	299,489			$	122,885			$	122,495
Long-term debt		$	688,140			$	714,703			$	93,623			$	198			$	—
Accumulated deficit		$	(292,463	)		$	(170,246	)		$	(157,937	)		$	(151,405	)		$	(154,014	)
Total stockholders’ equity		$	161,613			$	271,756			$	103,607			$	103,696			$	99,293

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Overview

We are a leading provider of a full line of internet services for small to medium-sized businesses (“SMBs”). Web.com is a global domain name registrar which seeks to further meet the internet needs of SMBs anywhere along their lifecycle with affordable subscription solutions including domain name registration, website design and related services, search engine optimization, search engine marketing, social media and mobile products, local sales leads, eCommerce solutions and call center services. We offer SMBs a single point of entry to an array of effective, affordable online products and services that will help drive their business. The breadth and flexibility of our offerings allow us to address the web services needs of a wide variety of customers, ranging from those just establishing their websites to those that want to enhance their existing online presence with more sophisticated marketing and lead generation services. We offer our customers a full range of web services and products on an affordable subscription basis. With just over 3 million subscribers as of December 31, 2012, we are one of the industry’s largest providers of domain names, affordable web services and products that enable SMBs to have an effective online presence.

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. In measuring monthly turnover, we use the same conventions with respect to free trials and subscribers who are not current in their payments as described above for net subscriber additions. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan.

Average Revenue per User

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 subscribers 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 $83.7 million and $35.2 million for the year ended December 31, 2012 and 2011, 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.

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Sources of Revenue

Subscription Revenue

We currently derive a substantial majority of our revenue from fees associated with our subscription services, which are generally sold through our web services, online marketing, eCommerce, and domain name registration offerings. A portion of our services are offered free of charge for a 30-day trial period during which the customer can cancel at any time. After the 30-day trial period has ended, the revenue is recognized on a daily basis over the life of the contract. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts, and revenue is recognized on a daily basis over the life of the contract which can range from monthly up to 100 years.

Professional Services and Other Revenue

We generate professional services revenue from custom website design, eCommerce store design and support services, and Do It Yourself logo design. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Our Do It Yourself logo design is typically billed upon the point-of-sale of the final product, which is created by the customer. Other revenue consists of all fees earned from granting customers licenses to use our patents.

Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue consists of expenses related to compensation expenses related to our web page development staff, domain name registration fees, directory listing fees, customer support costs, 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.

Cost of Professional Services and Other Revenue

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

Operating Expenses

Sales and Marketing Expense

Our largest direct marketing expenses are the costs associated with the online marketing channels we use to acquire and promote our services. These channels include search marketing, affiliate marketing, 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, including advertising, events, corporate sponsorships and other corporate events and communications.

We plan to continue to invest in sales and marketing by increasing the number of direct sales personnel in order to add new subscription customers as well as increase sales of additional and new services and products to our existing customer base. We also plan to expand our resources to direct response television advertising to further increase revenue growth. As part of our stated objective to use our larger scale to create a brand, we have invested a portion of our incremental marketing budget in branding activities such as the umbrella sponsorship of the newly re-named Web.com Tour and other sports marketing activities.

Our investments in all of these areas are expected to help us expand our customer base, increase revenue per subscriber, build brand awareness and grow our strategic marketing relationships. Accordingly, we expect that, in the future, sales and marketing expenses will increase in absolute dollars.

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Research and Development Expense

Research and development expenses consist primarily of compensation and related expenses for our research and development staff and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our web-based services and products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. We do not anticipate significant increases in our research and development costs in the near term.

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 not expected to materially increase in the near term.

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 computer equipment and other equipment, furniture and fixtures, and building and improvement expenditures.

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 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

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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 based on proportionate standalone unit value to the total value of the arrangement, multiplied by the actual selling price. Typically, the deliverables within multiple-element arrangements are provided over the same service period, and therefore revenue is recognized over the same period.

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.

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

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08 , Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment , and in July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment in ccordance with ASC 350 . These new standards update the impairment testing of goodwill and indefinite–lived intangible assets by permitting 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 as described in ASC 350.

We continued to perform the quantitative tests to determine if it is more likely than not that the carrying value of our indefinite-lived intangible assets and our goodwill is impaired during the year ended December 31, 2012. We test goodwill and intangible assets using one reporting unit. We typically 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:

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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

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, entity specific risk, size premium, and the overall level of inherent risk.

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 or intangible asset to its implied fair value. An impairment charge is recognized for the excess of the carrying value over its implied fair value.

The results of these analyses indicated that our indefinite-lived intangible assets and our goodwill were not impaired at December 31, 2012. See Note 9, 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 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.

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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.

New Accounting Pronouncements

See Note 2, New Accounting Standards , for information on recently issued accounting guidance.

Results of Operations

The following table presents our selected consolidated statement of comprehensive loss for the periods indicated (in thousands):

		Year Ended December 31,
		2012				2011				2010
Revenue:
Subscription		$	396,687			$	195,645			$	117,691
Professional services and other			10,959				3,560				2,598
Total revenue			407,646				199,205				120,289
Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription			153,417				83,406				51,371
Professional services and other			6,913				1,415				1,861
Total cost of revenue			160,330				84,821				53,232
Gross profit			247,316				114,384				67,057
Operating expenses:
Sales and marketing			117,811				51,743				28,678
Research and development			34,258				19,252				10,910
General and administrative			49,807				45,164				24,110
Restructuring charges			2,469				9,536				2,171
Depreciation and amortization			78,981				29,456				15,724
Total operating expenses			283,326				155,151				81,593
Net loss from operations			(36,010	)			(40,767	)			(14,536	)
Interest expense, net			(66,124	)			(18,020	)			(2,832)

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		Year Ended December 31,
		2012				2011				2010
Loss on debt extinguishment			(41,977	)			(3,806	)			—
Gain on sale of equity method investment			5,156				—				—
Loss before income taxes from continuing operations			(138,955	)			(62,593	)			(17,368	)
Income tax benefit			16,738				50,084				10,720
Net loss from continuing operations			(122,217	)			(12,509	)			(6,648	)
Discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax			—				200				116
Income from discontinued operations, net of tax			—				200				116
Net loss		$	(122,217	)		$	(12,309	)		$	(6,532	)

Comparison of Years Ended December 31, 2012 and 2011

The year ended December 31, 2011 included approximately two months of activity from the Network Solutions acquisition as compared to full year activity during the year ended December 31, 2012. The operations of Network Solutions began integrating with the existing legacy Web.com operations immediately following the closing of the acquisition on October 27, 2011. As such, revenue, ARPU or gross margin is not specifically segregated subsequent to the acquisition, nor would it be indicative of each of the standalone entities.

The following table sets forth our key business metrics for the year ended December 31, 2012 and 2011:

		2012				2011 (1)
Net subscriber additions (reductions)			51,639				(51,097	)
Churn			1	%			2	%
Average revenue per unit		$	13.44			$	13.36

Net subscribers increased by 51,639 customers during the year ended December 31, 2012 as compared to a decrease of 51,097 during the same prior period ended December 31, 2011. In addition, due to a continued downward trend in churn as well as the acquisition of Network Solutions’ lower churning significant customer base, churn continued to decrease down to approximately 1% in 2012 as compared to approximately 2% in 2011. The net increase in subscribers is primarily due to our increased marketing efforts throughout the year ended December 31, 2012.

The average revenue per unit was $13.44 during the year ended December 31, 2012 as compared to $13.36 during the same prior year period. The year ended December 31, 2012 includes a full year of the Network Solutions lower monthly ARPU generating customers compared to approximately two months during the same prior year ended December 31, 2011. The average revenue per unit of $13.77 for the three months ended December 31, 2012 represents an increase of 7 percent over the pro forma average revenue per unit of $12.86 for the three months ended December 31, 2011 giving effect to the Network Solutions acquisition.

The average revenue per unit during the year ended December 31, 2012 and 2011 is adjusted to exclude the unfavorable impact of $83.7 million and $35.2 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 percent less than the pre-acquisition historical basis of Network Solutions. The unfavorable impact to our revenue declines on a monthly basis as the acquired deferred revenue becomes fully recognized.

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Revenue

		For the Year Ended December 31,
		2012				2011
		(in thousands)
Revenue:
Subscription		$	396,687			$	195,645
Professional services and other			10,959				3,560
Total revenue		$	407,646			$	199,205

Total revenue increased 105% to $407.6 million in the year ended December 31, 2012 from $199.2 million in the year ended December 31, 2011. A full year of Networks Solutions’ revenue is the primary driver of the increase during the year ended December 31, 2012 as only two months of their revenue was reflected during the same prior year period ended. The growth in average revenue per unit during 2012 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.

Subscription Revenue . Subscription revenue increased 103% during the year ended December 31, 2012 to $396.7 million from $195.6 million during the year ended December 31, 2011. The increase is due to the overall revenue drivers discussed above.

Professional Services and Other Revenue.   Professional services revenue increased to $11.0 million in the year ended December 31, 2012 from $3.6 million in the year ended December 31, 2011. Professional services revenue increased primarily due to non-recurring website design revenue generated from increased custom website development service volume, in addition to a full year of the Network Solutions acquisition being reflected in 2012.

Cost of Revenue

		For the Year Ended December 31,
		2012				2011
		(in thousands)
Cost of revenue:
Subscription		$	153,417			$	83,406
Professional services and other			6,913				1,415
Total cost of revenue		$	160,330			$	84,821

Cost of Subscription Revenue.   Cost of subscription revenue increased 84% during the year ended December 31, 2012 compared to the same prior year period. A majority of the increase was due to a full year of costs associated with the additional revenue due to the Network Solutions’ acquisition in 2011.

Our gross margin on subscription revenue increased from 57% during the year ended December 31, 2011 to 61% during the year ended December 31, 2012 primarily due to favorable product mix. The gross margin was negatively impacted by amortizing into revenue, deferred revenue that was written down to fair value at the acquisition date which was approximately 50% and 51% lower than the historical basis of Register.com LP and Network Solutions, respectively. Excluding the $83.7 million and $35.2 million effect of the adjustment related to the fair value of acquired deferred revenue for the year ended December 31, 2012 and 2011, respectively, the gross margin was 68% and 64%, respectively. The increase is also related to a favorable product mix, such as domain name registration and related services. As the impact of the fair market value adjustment to deferred revenue acquired in the Networks Solutions and Register.com LP transactions continues to decrease over the course of 2013, we expect gross margins to improve.

Cost of Professional Services and Other Revenue.   Cost of professional services revenue increased by $5.5 million to $6.9 million in the year ended December 31, 2012 up from $1.4 million in the year ended

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December 31, 2011. Professional services costs increased primarily due to the increase in the non-recurring website design revenue and a full year of the Network Solutions acquisition being reflected in 2012.

Operating Expenses

		For the Year Ended December 31,
		2012				2011
		(in thousands)
Operating expenses:
Sales and marketing		$	117,811			$	51,743
Research and development			34,258				19,252
General and administrative			49,807				45,164
Restructuring charges			2,469				9,536
Depreciation and amortization			78,981				29,456
Total operating expenses		$	283,326			$	155,151

Sales and Marketing Expenses.    Sales and marketing expenses increased 128% to $117.8 million and were 29% of total revenue during the year ended December 31, 2012, up from $51.7 million or 26% of revenue during the year ended December 31, 2011. Sales and marketing expense increased approximately $66.1 million primarily due to the full year of sales and marketing expenses of Network Solutions. Other increases are from our additional investments in sales and marketing activities including direct response television advertising, corporate sponsorships, additional sales resources and online marketing. Overall, compensation and benefits increased $21.2 million and customer acquisition and marketing expenses increased $42.0 million.

Research and Development Expenses.    Research and development expenses increased 78% to $34.3 million, or 8% of total revenue, during the year ended December 31, 2012 up from $19.3 million, or 10% of total revenue during the year ended December 31, 2011. Research and development expense increased primarily from recognizing a full year of research and development expenses of Network Solutions. Overall, compensation and benefits increased $6.3 million and data center and software support increased $7.0 million. In addition, facility-related expenses increased by $0.8 million.

General and Administrative Expenses.    General and administrative expenses increased 10% to $49.8 million, or 12% of total revenue, during the year ended December 31, 2012, up from $45.2 million, or 23% of total revenue during the year ended December 31, 2011. General and administrative expense increased due to recognizing a full year of Network Solutions. The increase was partially offset by the absence of $12.2 million of acquisition-related expenses that were included during the year ended December 31, 2011. Overall, during the year ended December 31, 2012, employee-related compensation and benefits expense increased approximately $9.2 million, technology and telephone expenses were up by $3.7 million and legal and professional fees increased by $1.9 million when compared to the prior year.

Restructuring Charges.   Restructuring charges decreased $7.0 million during the year ended December 31, 2012 to $2.5 million, down from $9.5 million during the year ended December 31, 2011. The 2011 restructuring charges included employee-related termination costs and relocation expenses resulting from the integration of Network Solutions, in addition to the lease restructure of the Herndon, Virginia office also stemming from 2011 acquisition. In 2012, a $1.5 million contract termination fee and other employee-related termination costs and relocation expenses primarily resulting from the acquisition of Network Solutions were recorded. See Note 8, Restructuring Costs , for additional information surrounding our restructuring charges and reserves.

Depreciation and Amortization Expense.    Depreciation and amortization expense increased to $79.0 million during the year ended December 31, 2012 up from $29.5 million during the comparable prior year period. The increase was primarily due to $45.0 million of intangible asset amortization resulting from a full year of amortization from the Network Solutions acquisition. Depreciation expense increased $4.6 million primarily from an increase in internally developed software projects as well as the build out of two central locations for our data centers.

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Interest Expense, Net.   Net interest expense of $66.1 million during the year ended December 31, 2012 reflects a full year of interest and amortization expense related to the term loans and credit facility issued to finance the acquisition of Network Solutions. Included in the interest expense for 2012 is approximately $11.0 million of amortizing deferred financing fees and loan origination discounts. Our interest expense is expected to decrease during 2013 as we realize the benefits of the lower interest rates from the November 2012 refinance, as well as the further repricing consummated in March 2013. See Note 19, Subsequent Events .

Loss on Debt Extinguishment .  In November 2012, we repriced our First Lien Term Loan (defined below in Liquidity and Capital Resources section) 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 Accounting Standards Codification (“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. During the year ended December 31, 2011, we recorded a $3.8 million loss from accelerating deferred financing fees on debt that was extinguished prior to our entry into the credit agreements in October 2011.

Gain on Sale of Equity Method Investment.     On May 31, 2012, we sold our interest in an equity method investment 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 percent interest in OrangeSoda, Inc. as part of the Network Solutions acquisition on October 27, 2011. 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 from the sale is held in escrow until the standard representations and warranties have been satisfied. These proceeds, if received, will be recorded as additional gain from the sale of the equity method investment.

Income Tax Benefit.     We recorded a net tax benefit from continuing operations of $16.7 million during the year ended December 31, 2012. This benefit includes a federal and state benefit of approximately $54.6 million related to our current year net loss which was offset by a $38.4 million increase in our valuation allowance for the year. The change in valuation allowance includes $3.1 million associated with the deferred tax effect of the final purchase accounting adjustments from the Network Solutions acquisition. Our tax rate was benefitted by approximately $2.1 million related to a change in our estimated state deferred tax rate and was partially offset by approximately $1.6 million related to various other items.

Outlook.

We continue to believe we have the potential for additional revenue growth as we increase our investments in sales and marketing and further execute our cross-sell/up-sell strategies. As we fully integrate our operations and realize the significant post-merger cost savings and benefits from increased scale, we believe that we have the opportunity to generate increased shareholder value. We expect to strengthen our operating cash flows with lower interest rates as a result of the November 2012 and March 2013 repricings of our First Lien Term Loan and subsequent pay down of our Second Lien Term Loan,which bore a higher interest rate. We will use additional cash flows to pay down debt and fund incremental marketing investments. We expect to increase ARPU through our cross-sell/up-sell activities. As the impact of the fair market value adjustment to deferred revenue acquired in the Networks Solutions and Register.com LP transactions continue to decrease over the course of 2013, we expect gross margins to improve.

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Comparison of Years Ended December 31, 2011 and 2010

The year ended December 31, 2010 included approximately five months of activity from the Register.com LP acquisition as compared to full year activity during the year ended December 31, 2011. In addition, there are approximately two months of the Network Solutions’ operations that were included in the results for the year ended December 31, 2011. The operations of Register.com LP and Network Solutions began integrating with the existing legacy Web.com operations immediately following the closing of the acquisitions on July 29, 2010 and October 27, 2011, respectively. As such, revenue, ARPU or gross margin is not specifically segregated subsequent to the acquisitions, nor would it be indicative of each of the standalone entities.

The following table sets forth our key business metrics for the year ended December 31, 2011 and 2010:

		2011 (1)				2010 (2)
Net subscriber reductions			(51,097	)			(21,067	)
Churn			2	%			2	%
Average revenue per unit		$	13.36			$	20.30

Net subscriber reductions increased by 30,030 customers during the year ended December 31, 2011 when compared to same prior year period, however, due to Register.com LP’s and Network Solutions’ lower churning and substantially larger customer base, churn actually decreased slightly from 2.2% in 2010 to 1.5% in 2011.

The average revenue per unit was $13.36 during the year ended December 31, 2011 as compared to $20.30 during the same prior year period. The decrease is primarily due to the addition of approximately two million customers from Network Solutions with a lower monthly ARPU. Excluding the impact from the Network Solutions acquisition, ARPU decreased to $16.48 for the year ended December 31, 2011 from $20.20 for the year ended December 31, 2010. This decrease is due to the full year impact of the lower ARPU subscribers acquired from Register.com LP in July 2010, offset slightly from the increase in ARPU from legacy products.

The average revenue per unit and pro forma average revenue per unit during the year ended December 31, 2011 and 2010 is adjusted to exclude the unfavorable impact of $35.2 million and $13.1 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 percent and 50 percent less than the pre-acquisition historical basis of Network Solutions and Register.com LP, respectively. The unfavorable impact to our revenue declines on a monthly basis as the acquired deferred revenue becomes fully recognized.

Revenue

		For the Year Ended December 31,
		2011				2010
		(in thousands)
Revenue:
Subscription		$	195,645			$	117,691
Professional services and other			3,560				2,598
Total revenue		$	199,205			$	120,289

Total revenue increased 66% to $199.2 million in the year ended December 31, 2011 from $120.3 million in the year ended December 31, 2010. We acquired Network Solutions on October 27, 2011 which increased revenue by approximately $28.0 million during the period October 28, 2011 to December 31, 2011. There was also approximately an increase of $48.4 million in revenue over prior year resulting from the full year impact of the Register.com LP acquisition. Furthermore, we increased revenue by up-selling our Do It For Me

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products to the acquired Register.com LP and Network Solutions customer base, direct advertising television campaigns, and increased marketing efforts focused on our online marketing products.

Subscription Revenue .  Subscription revenue increased 66% during the year ended December 31, 2011 to $195.6 million from $117.7 million during the year ended December 31, 2010. The increase is due to the overall revenue drivers discussed above.

Professional Services and Other Revenue.   Professional services revenue increased 37% to $3.6 million in the year ended December 31, 2011 from $2.6 million in the year ended December 31, 2010. We acquired Network Solutions on October 27, 2011 which increased professional services revenue by approximately $0.6 million during the period October 28, 2011 to December 31, 2011. In addition, we had an increase in web support services of approximately $0.9 million, offset by a reduction of logo sales of $0.3 million.

Cost of Revenue

		For the Year Ended December 31,
		2011				2010
		(in thousands)
Cost of revenue:
Subscription		$	83,406			$	51,371
Professional services and other			1,415				1,861
Total cost of revenue		$	84,821			$	53,232

Cost of Subscription Revenue.    Cost of subscription revenue increased 62% during the year ended December 31, 2011 compared to the same prior year period. A majority of the increase was due to the costs associated with the additional revenue due to the Network Solutions’ acquisition in 2011 and a full year of the costs associated with the additional revenue due to the Register.com LP acquisition in 2010 of approximately $29.3 million. There were additional online marketing costs related to the increase in revenue of online marketing services, such as Pay-Per-Click and Comparison Shopping products.

Our gross margin on subscription revenue increased to 57% during the year ended December 31, 2011 from 56% during the year ended December 31, 2010. The gross margin was negatively impacted by amortizing into revenue, deferred revenue that was written down to fair value at the acquisition date which was approximately 50% lower than the historical basis of Register.com LP and Network Solutions. Excluding the $35.2 million and $13.1 million effect of the adjustment related to the fair value of acquired deferred revenue for the year ended December 31, 2011 and 2010, respectively, the gross margin was 64% and 61%, respectively. The increase in this gross margin is related to the higher gross margin products, such as domain name registration and related services.

Cost of Professional Services and Other Revenue.   Cost of professional services revenue decreased 24% to $1.4 million in the year ended December 31, 2011 from $1.9 million in the year ended December 31, 2010.

Operating Expenses

		For the Year Ended December 31,
		2011				2010
		(in thousands)
Operating expenses:
Sales and marketing		$	51,743			$	28,678
Research and development			19,252				10,910
General and administrative			45,164				24,110
Restructuring charges			9,536				2,171
Depreciation and amortization			29,456				15,724
Total operating expenses		$	155,151			$	81,593

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Sales and Marketing Expenses.    Sales and marketing expenses increased 80% to $51.7 million and were 26% of total revenue during the year ended December 31, 2011, up from $28.7 million or 24% of revenue during the year ended December 31, 2010. Sales and marketing expense increased approximately $17.9 million primarily due to the acquisition of Network Solutions in October 2011 and full year of sales and marketing expenses of Register.com LP from the acquisition in July 2010. The remaining increase in expense was primarily the result of a direct advertising television campaign that was launched in the first quarter of 2011 and continued throughout the year, as well as an overall increase in marketing related compensation expense and online marketing spending due to increased focus and efforts in this area.

Research and Development Expenses.    Research and development expenses increased 76% to $19.3 million, or 10% of total revenue, during the year ended December 31, 2011 up from $10.9 million or 9% of total revenue during the year ended December 31, 2010. Research and development expense increased approximately $7.8 million due to the acquisition of Network Solutions in October 2011 and recognizing a full year of research and development expenses of Register.com LP from the acquisition in July 2010.

General and Administrative Expenses.    General and administrative expenses increased 87% to $45.2 million, or 23% of total revenue, during the year ended December 31, 2011, up from $24.1 million, or 20% of total revenue during the year ended December 31, 2010. General and administrative expense increased approximately $3.6 million due to the acquisition of Network Solutions in October 2011 and recognizing a full year of general and administrative expenses of Register.com LP from the acquisition in July 2010. Due to the acquisition of Network Solutions, we incurred corporate development expenses including $3.3 million of legal, professional and administrative fees related to the October 2011 acquisition of Network Solutions and $7.6 million for investment banking and due diligence services. In addition, due to the successful integration of Register.com LP, a one-time bonus of $1.5 million was awarded in 2011. Furthermore, employee-related compensation and benefits expense increased approximately $5.2 million in the current year when compared to the prior year.

Restructuring Charges.     Restructuring charges increased $7.4 million during the year ended December 31, 2011 to $9.5 million, up from $2.2 million during the year ended December 31, 2010. The 2011 restructuring charges are primarily for employee-related termination costs and relocation expenses, in addition to the lease restructure of the Herndon, Virginia office stemming from the Network Solutions acquisition. See Note 8, Restructuring Costs , for additional information surrounding our restructuring charges and reserves.

Depreciation and Amortization Expense.    Depreciation and amortization expense increased 87% to $29.5 million during the year ended December 31, 2011 up from $15.7 million during the comparable prior year period. Amortization of intangible assets from the Network Solutions and Register.com LP acquisitions contributed $13.1 million of additional expense in 2011 and depreciation expense related to acquired property and equipment added another $1.5 million.

Interest Expense, Net.   Net interest expense of $18.0 million during the year ended December 31, 2011 is primarily from the term loans and credit facility issued to finance the acquisition of Network Solutions and Register.com LP. In addition, amortization of deferred financing fees during the year contributed $2.8 million to total interest expense.

Loss on Debt Extinguishment

In October 2011, we paid off the loans used to finance the acquisition of Register.com LP and immediately recognized the previously recorded deferred financing fees of approximately $3.8 million into interest expense.

Income Tax Benefit (Expense).   We recorded a net tax benefit from continuing operations of $50.1 million during the year ended December 31, 2011, of which $28.4 million was associated with the net change in our valuation allowance during the year. As a result of the Network Solutions acquisition, we determined that a portion of our pre-existing deferred tax assets will more likely than not be realized by the combined entity through the reversal of the deferred tax liabilities acquired from Network Solutions. ASC 805-740 requires that changes in an acquirer’s valuation allowance stemming from a business combination should be recognized as an element of income tax benefit (expense). Other items that benefited our tax rate for the 2011 include a net $4.2 million favorable adjustment associated with certain prior year deferred tax adjustments and a federal and state benefit of approximately $24 million related to our current year loss. Offsetting this benefit was

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$2.3 million of non-deductible transaction costs associated with the Network Solutions acquisition, $1.3 million related to a change in our deferred tax rate and $1.3 million related to unremitted foreign earnings associated with Register.com LP that are not considered to be indefinitely reinvested.

Discontinued Operations.   On May 26, 2009, we sold our NetObjects Fusion software business for approximately $4.0 million. During the years ended December 31, 2011 and 2010, we recorded a gain of $0.2 million and $0.1 million, respectively, from net proceeds received based on the terms in the NetObjects Fusion sales agreement. Income tax expense allocated to discontinued operations was $0.1 million and $0 for 2011 and 2010, respectively. Income tax expense for 2010 was $0 due to our valuation allowance in this period.

Liquidity and Capital Resources

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

		2012				2011				2010
Net Cash Provided by Operating Activities		$	77,965			$	14,924			$	15,751
Net Cash Used in Investing Activities		$	(15,177	)		$	(408,982	)		$	(133,069	)
Net Cash (Used in) Provided by Financing Activities		$	(60,971	)		$	391,115			$	94,198
Increase (Decrease) in Cash and Cash Equivalents		$	1,817			$	(2,943 )			$	(23,120 )

Cash Flows

As of December 31, 2012, we had $15.2 million of cash and cash equivalents and negative $113.9 million in working capital, as compared to $13.4 million of cash and cash equivalents and a negative $78.8 million in working capital as of December 31, 2011. The unfavorable change in working capital during the year is primarily due to a $49.0 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 in working capital was partially offset by a decrease in accrued expenses and restructuring as acquisition related accruals were paid in 2012. The majority of the negative working capital is due primarily from the non-cash balances of deferred revenue, deferred expenses and deferred tax assets. 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, 2012 increased $63.0 million due to reflecting a full year of Network Solutions during 2012, primarily cash receipts from revenue that have been deferred and amortized over the related service period. This was partially offset by $3.9 million of additional restructuring related payments, an increase in prepaid and deferred expense spending and certain acquisition-related payments that were made during 2012. The net loss of $122.2 million adjusted for non-cash items including depreciation and amortization, stock-based compensation expense, gain from the sale of an equity method investment, loss from debt extinguishment and deferred income taxes resulted in net cash outflows of $2.9 million which improved $16.8 million from the twelve months ended December 31, 2011.

Net cash used in investing activities in the year ended December 31, 2012 was $15.2 million as compared to $409.0 million in 2011. Included in the 2012 investing cash flows was $7.2 million of proceeds from the sale of an equity method investment. In addition, capital expenditures increased by $18.0 million to $22.3 million during 2012 due to costs incurred from building out two centralized data centers as well as increased efforts to improve internally developed software and websites. The acquisition of Network Solutions outflow of $405.1 million was reflected in 2011.

Net cash used in financing activities of $61.0 million included net debt repayments and reductions of approximately $52.1 million during the year ended December 31, 2012. Also included was $10.0 million of payments for debt issuance and origination discount fees related to the refinancing of the First Lien Term Loan. Proceeds from the exercise of stock options decreased $3.3 million to $5.8 million in 2012 when compared to the same prior year period ended. Approximately $4.7 million and $0.5 million of cash was used

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to pay employee minimum tax withholding requirements in lieu of receiving common shares during the year ended December 31, 2012 and 2011, respectively.

Financing Network Solutions Acquisition

On October 27, 2011, the Company entered into credit facilities, pursuant to (i) a First Lien Credit Agreement, dated as of October 27, 2011, by and among the Company, J. P. Morgan Securities LLC and Deutsche Bank Securities Inc., as Co-Syndication Agents; Goldman Sachs Lending Partners LLC and SunTrust Bank, as Co-Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders from time to time party thereto (the “First Lien Credit Agreement”) and (ii) a Second Lien Credit Agreement, dated as of October 27, 2011, (the “Second Lien Credit Agreement”). The First Lien Credit Agreement provides for (i) a six-year $600 million first lien loan facility (the “First Lien Term Loan”) and (ii) a five-year revolving credit facility of $50 million (the “Revolving Credit Facility”). The Second Lien Credit Agreement provides for a seven-year $150 million second lien loan facility (the “Second Lien Term Loan”).

Repricing Long Term Debt

In November 2012, we repriced our First Lien Term Loan and increased the outstanding balance by $60 million to $629.5 million. In addition, we increased the maximum amount of available borrowings under the revolving credit facility from $50 million to $60 million. After the repricing, the First Lien Term Loan bears an interest rate of LIBOR plus 4.25%, with a 1.25% LIBOR floor, and the revolving credit facility’s interest rate is LIBOR plus 3.75%. The proceeds received from the additional First Lien Term Loan were used to pay down the Second Lien Term Loan. During the year ended December 31, 2012, a total of $88.0 million was paid down on the $120 million Second Lien Term Loan. See Note 11, Long-Term Debt, for additional information. In addition, in March 2013, we further repriced and increased our First Lien Term Loan, repriced and increased the maximum amount of available borrowings under our revolving credit facility and repaid the Second Lien Term Loan in full. See Note 19, Subsequent Events .

Debt Covenants

The credit agreements entered into on October 27, 2011 and subsequently amended in connection with the repricing became effective on November 20, 2012, as discussed above, require that we maintain a First Lien Net Leverage Ratio (in the case of the First Lien Credit Agreement) and a Total Net Leverage Ratio (in the case of the Second Lien Credit Agreement), as specified in the table below. The First Lien Net Leverage Ratio is defined as the total of the outstanding First Lien Credit Agreement and Revolving Credit Facility less up to $50.0 million of unrestricted cash and cash equivalents, divided by Consolidated EBITDA. 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, acquisition related costs and includes the benefit of annualized synergies due to the Network Solutions integration. Total Net Leverage Ratio is defined as the total debt outstanding on the credit agreements less up to $50.0 million of unrestricted cash and cash equivalents, divided by Consolidated EBITDA (as defined herein).

Outstanding debt amounts for purposes of the First Lien Net Leverage Ratio and the Total Net Leverage Ratio as of December 31, 2012 were approximately $653.7 million and $685.7 million, respectively. The covenant calculations as of December 31, 2012 are calculated on a trailing 12-month basis:

Covenant Description

Covenant Requirement

Ratio at December 31, 2012

Favorable/ (Unfavorable)

First Lien Net Leverage Ratio

Not greater than 5.25

3.89

1.36

Total Net Leverage Ratio

Not greater than 7.00

4.08

2.92

In addition to the financial covenants listed above, the credit agreements include 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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Comparison of Years Ended December 31, 2011 and 2010

Cash Flows

As of December 31, 2011, we had $13.4 million of cash and cash equivalents and negative $78.8 million in working capital, as compared to $16.3 million of cash and cash equivalents and a negative $22.1 million in working capital as of December 31, 2010. The unfavorable change in working capital during the year is primarily due to a $105.5 million increase in current deferred revenue primarily resulting from the October 27, 2011 acquisition of Network Solutions. In addition, accrued expenses, including compensation and benefits related costs, have increased by $19.8 million associated primarily with higher volume resulting from the Network Solutions acquisition. This was partially offset by a $43.1 million and $18.3 million increase in deferred expenses and deferred tax assets, respectively, also resulting from the Network Solutions acquisition. The majority of the negative working capital is due primarily from the non cash balances of deferred revenue, deferred expenses and deferred tax assets, and 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, 2011 decreased 5%, or $0.8 million, compared to the year ended December 31, 2010. Acquisition-related transaction costs during the year ended December 31, 2011 increased approximately $8.6 million. In addition, restructuring-related severance payments from both the Register.com LP and Network Solutions acquisitions increased by $0.9 million in 2011. Finally, accrued compensation related payments contributed to the year over year change in cash provided by operating activities. These cash outflow increases were partially offset by a $17.6 million increase in deferred revenue in 2011.

Net cash used in investing activities in the year ended December 31, 2011 was $409.0 million as compared to $133.1 million in 2010. The acquisition of Network Solutions was an investment of $405.1 million and Register.com LP was $130.1 million in 2011 and 2010, respectively. Property and equipment purchases increased $2.6 million as a result of the data center consolidation following the Register.com LP acquisition, in addition to the initial capital expenditures in connection with the planned Network Solutions integration. In addition, we acquired a customer base at a cost of $1.4 million in 2010.

Net cash provided by financing activities included $733.5 million of proceeds from the credit agreements entered into on October 27, 2011, as discussed below. The proceeds are net of $37.5 million of loan origination discounts and include $21.0 million of initial borrowings from the $50.0 million revolving credit facility. In addition to the loan origination discount, approximately $21.2 million of other related debt issuance costs were incurred in 2011. The net proceeds were used to fund the acquisition of Network Solutions and to repay the outstanding debt of the Company and the assumed debt of Network Solutions as of October 27, 2011. In December 2011, $30 million of outstanding Second Lien Term Loan debt was repaid using cash generated after the acquisition and an additional $12 million of lower interest bearing revolving credit facility proceeds. Proceeds from the exercise of stock options of $9.1 million were received during the year ended December 31, 2011 compared to $1.8 million in the prior year ended.

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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-related purchase obligations. The following summarizes our contractual obligations as of December 31, 2012 (in thousands):

						Payment Due by Period
Contractual Obligations (000’s)		Total				2013				2014				2015				2016				2017				Thereafter
Long-term debt (2)		$	694,631			$	—			$	54,739			$	6,295			$	47,295			$	554,302			$	32,000
Current maturities of long-term debt			6,295				6,295				—				—				—				—				—
Interest payments on long-term debt (2)			179,997				39,549				37,204				36,192				35,562				28,586				2,904
Operating lease obligations (1)			52,077				6,728				6,541				6,420				6,342				6,452				19,594
Uncertain tax positions (3)			—				—				—				—				—				—				—
Purchase obligations (4)			111,641				8,810				12,134				12,702				12,702				12,293				53,000
Total		$	1,044,641			$	61,382			$	110,618			$	61,609			$	101,901			$	601,633			$	107,498

In February 2012, we completed a Form S-3 registration statement to offer and issue 7,000,000 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. In addition, the registration statement also included the resale of 16,434,692 common shares that were issued to General Atlantic, LLC in connection with the October 27, 2011 acquisition of Network Solutions. We will not receive any proceeds from the resale of these common shares. Subsequent to the registration statement, none of the 7 million common shares have been issued, however 8 million of the common shares that were issued to the General Atlantic, LLC resold during 2012.

In February 2013, General Atlantic, LLC sold an additional 2.3 million of the common shares that were issued in connection with the October 27, 2011 acquisition. Subsequent to this transaction, they held approximately 11% of the Company’s outstanding common shares.

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Off-Balance Sheet Obligations

As of December 31, 2012 and 2011, 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:

We believe that our existing cash and cash equivalents at December 31, 2012 in addition to 2013 operating cash flows will be sufficient to meet our projected operating requirements for at least the next 12 months.

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.

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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 elsewhere in this press release.

Relative to each of the non-GAAP measures Web.com presents above, management further sets forth its rationale as follows:

In respect of the foregoing, we provide 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:

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

		Twelve Months Ended December 31,
		2012				2011				2010
Reconciliation of GAAP revenue to non-GAAP revenue
GAAP revenue		$	407,646			$	199,205			$	120,289
Fair value adjustment to deferred revenue			83,732				35,238				13,080
Non-GAAP revenue		$	491,378			$	234,443			$	133,369
Reconciliation of GAAP net (loss) income to non-GAAP net income
GAAP net (loss) income		$	(122,217	)		$	(12,309	)		$	(6,532	)
Amortization of intangibles			70,350				25,389				12,879
Loss on sale of assets			403				10				6
Stock based compensation			11,927				6,933				4,711
Income tax benefit			(16,738	)			(49,958	)			(10,720	)
Restructuring charges			2,469				9,536				2,171
Corporate development			660				13,083				2,892
Amortization of deferred financing fees			11,017				6,856				573
Cash income tax expense			(1,044	)			(214	)			(845	)
Fair value adjustment to deferred revenue			83,732				35,238				13,080
Fair value adjustment to deferred expense			2,376				739				214
Loss on debt extinguishment			41,977				—				—
Gain on sale of equity method investment			(5,156	)			—				—
Non-GAAP net income		$	79,756			$	35,303			$	18,429
Reconciliation of GAAP diluted net (loss) income per share to non-GAAP net income per share
Diluted GAAP net (loss) income		$	(2.61	)		$	(0.40	)		$	(0.26	)
Diluted equity			0.17				0.04				0.02
Amortization of intangibles			1.40				0.76				0.47
Loss on sale of assets			0.01				—				—
Stock based compensation			0.24				0.21				0.17
Income tax benefit			(0.33	)			(1.48	)			(0.39	)
Restructuring charges			0.05				0.28				0.08
Corporate development			0.01				0.39				0.11
Amortization of deferred financing fees			0.22				0.20				0.02
Cash income tax expense			(0.02	)			(0.01	)			(0.03	)
Fair value adjustment to deferred revenue			1.67				1.04				0.48
Fair value adjustment to deferred expense			0.05				0.02				0.01
Loss on debt extinguishment			0.84				—				—
Gain on sale of equity method investment			(0.11	)			—				—
Diluted Non-GAAP net income		$	1.59			$	1.05			$	0.68
Reconciliation of GAAP operating loss to non-GAAP operating income
GAAP operating loss		$	(36,010	)		$	(40,767	)		$	(14,536	)
Amortization of intangibles			70,350				25,389				12,879
Loss on sale of assets			403				10				—
Stock based compensation			11,927				6,933				4,711

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		Twelve Months Ended December 31,
		2012				2011				2010
Restructuring charges			2,469				9,536				2,171
Corporate development			660				13,083				2,892
Fair value adjustment to deferred revenue			83,732				35,238				13,080
Fair value adjustment to deferred expense			2,376				739				214
Non-GAAP operating income		$	135,907			$	50,161			$	21,411
Reconciliation of GAAP operating margin to non-GAAP operating margin
GAAP operating margin			-9	%			-20	%			-12	%
Amortization of intangibles			14	%			11	%			10	%
Restructuring charges			1	%			4	%			2	%
Corporate development			0	%			6	%			2	%
Fair value adjustment to deferred revenue			21	%			17	%			10	%
Fair value adjustment to deferred expense			0	%			0	%			0	%
Stock based compensation			1	%			3	%			4	%
Non-GAAP operating margin			28	%			21	%			16	%
Reconciliation of GAAP operating loss to adjusted EBITDA
GAAP operating loss		$	(36,010	)		$	(40,767	)		$	(14,536	)
Depreciation and amortization			78,981				29,456				15,724
Loss on sale of assets			403				10				—
Stock based compensation			11,927				6,933				4,711
Restructuring charges			2,469				9,536				2,171
Corporate development			660				13,083				2,892
Fair value adjustment to deferred revenue			83,732				35,238				13,080
Fair value adjustment to deferred expense			2,376				739				214
Adjusted EBITDA		$	144,538			$	54,228			$	24,256

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		Three Months Ended
		Mar 31, 2012				Jun 30, 2012 (1)				Sept 30, 2012				Dec 31, 2012 (2)				Mar 31, 2011				Jun 30, 2011				Sept 30, 2011				Dec 31, 2011 (3) (4)
		(in thousands)
Total revenue		$	91,514			$	98,947			$	105,753			$	111,432			$	39,481			$	42,241			$	43,903			$	73,580
Total cost of revenue			38,608				39,801				40,195				41,726				17,707				17,636				17,361				32,117
Gross profit			52,906				59,146				65,558				69,706				21,774				24,605				26,542				41,463
Total operating expenses			71,448				70,388				71,179				70,311				25,352				25,159				30,332				74,308
Loss from operations			(18,542	)			(11,242	)			(5,621	)			(605	)			(3,578	)			(554	)			(3,790	)			(32,845	)
Net (loss) income from continuing operations			(29,779	)			(19,059	)			(21,502	)			(51,877	)			(5,735	)			(1,972	)			(5,471	)			669
Income (loss) from discontinued operations			—				—				—				—				125				125				75				(125	)
Net (loss) income		$	(29,779	)		$	(19,059	)		$	(21,502	)		$	(51,877	)		$	(5,610	)		$	(1,847	)		$	(5,396	)		$	544
Net (loss) income per common share:
Basic continuing operations		$	(0.65	)		$	(0.41	)		$	(0.45	)		$	(1.10	)		$	(0.21	)		$	(0.07	)		$	(0.19	)		$	0.02
Basic discontinued operations		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Diluted continuing operations		$	(0.65	)		$	(0.41	)		$	(0.45	)		$	(1.10	)		$	(0.21	)		$	(0.07	)		$	(0.19	)		$	0.02
Diluted discontinued operations		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—

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Changes in internal control over financial reporting.

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

		Page
Web.com Group, Inc.
Report of Independent Registered Public Accounting Firm			F-55
Consolidated Balance Sheets at December 31, 2012 and 2011			F-56
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012, 2011 and 2010			F-57
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010			F-58
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010			F-59
Notes to Consolidated Financial Statements			F-60

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Web.com Group, Inc.
 
Consolidated Balance Sheets
(in thousands, except share amounts)

		December 31,
		2012				2011
Assets
Current assets:
Cash and cash equivalents		$	15,181			$	13,364
Accounts receivable, net of allowance of $2,337 and $1,560, respectively			15,007				13,094
Prepaid expenses			6,697				5,184
Deferred expenses, current			59,255				57,302
Deferred taxes			18,092				18,563
Other current assets			5,116				5,012
Total current assets			119,348				112,519
Property and equipment, net			40,079				25,696
Deferred expenses, non-current			63,147				68,136
Goodwill			628,176				631,362
Intangible assets, net			469,703				539,979
Other assets			6,817				21,788
Total assets		$	1,327,270			$	1,399,480
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	6,385			$	4,931
Accrued expenses			11,562				15,953
Accrued compensation and benefits			15,413				15,956
Accrued restructuring costs and other reserves			1,477				5,687
Deferred revenue			191,149				142,157
Current portion of debt and capital lease obligations			4,681				4,182
Other liabilities			2,556				2,496
Total current liabilities			233,223				191,362
Deferred revenue			175,816				132,814
Long-term debt and capital lease obligations			688,140				714,703
Deferred tax liabilities			64,126				84,832
Other long-term liabilities			4,352				4,013
Total liabilities			1,165,657				1,127,724
Stockholders’ equity:
Common stock, $0.001 par value; 150,000,000 shares authorized, 49,175,642 and 47,359,304 shares issued and outstanding at December 31, 2012 and 2011, respectively			49				47
Additional paid-in capital			454,022				441,955
Accumulated other comprehensive income			5				—
Accumulated deficit			(292,463	)			(170,246	)
Total stockholders’ equity			161,613				271,756
Total liabilities and stockholders’ equity		$	1,327,270			$	1,399,480

 
 
See accompanying notes to consolidated financial statements.

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

		Year Ended December 31,
		2012				2011				2010
Revenue:
Subscription		$	396,687			$	195,645			$	117,691
Professional services and other			10,959				3,560				2,598
Total revenue			407,646				199,205				120,289
Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription			153,417				83,406				51,371
Professional services and other			6,913				1,415				1,861
Total cost of revenue			160,330				84,821				53,232
Gross profit			247,316				114,384				67,057
Operating expenses:
Sales and marketing			117,811				51,743				28,678
Research and development			34,258				19,252				10,910
General and administrative			49,807				45,164				24,110
Restructuring charges			2,469				9,536				2,171
Depreciation and amortization			78,981				29,456				15,724
Total operating expenses			283,326				155,151				81,593
Loss from operations			(36,010	)			(40,767	)			(14,536	)
Interest expense, net			(66,124	)			(18,020	)			(2,832	)
Loss on debt extinguishment			(41,977	)			(3,806	)			—
Gain on sale of equity method investment			5,156				—				—
Loss before income taxes from continuing operations			(138,955	)			(62,593	)			(17,368	)
Income tax benefit			16,738				50,084				10,720
Net loss from continuing operations			(122,217	)			(12,509	)			(6,648	)
Discontinued operations:
Loss from discontinued operations, net of tax			—				—				(9	)
Gain on sale of discontinued operations, net of tax			—				200				125
Income from discontinued operations			—				200				116
Net loss		$	(122,217	)		$	(12,309	)		$	(6,532	)
Other comprehensive income (loss):
Interest rate swap gain (loss), net of tax			—				40				(40	)
Unrealized gains on investments, net of tax			5				—				—
Total comprehensive loss		$	(122,212	)		$	(12,269	)		$	(6,572	)
Basic earnings per share:
Loss from continuing operations per common share		$	(2.61	)		$	(0.41	)		$	(0.26	)
Income from discontinued operations per common share		$	—			$	0.01			$	—
Net loss per common share		$	(2.61	)		$	(0.40	)		$	(0.26	)
Diluted earnings per share:
Loss from continuing operations per common share		$	(2.61	)		$	(0.41	)		$	(0.26	)
Income from discontinued operations per common share		$	—			$	0.01			$	—
Net loss per common share		$	(2.61	)		$	(0.40	)		$	(0.26	)
Basic weighted average common shares outstanding			46,892				30,675				25,515
Diluted weighted average common shares outstanding			46,892				30,675				25,515

 
 
See accompanying notes to consolidated financial statements.

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Web.com Group, Inc. Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)

		Common Stock								Treasury Stock								Additional Paid-in Capital				Accumulated Other Comprehensive Income				Accumulated Deficit				Total Stockholders’ Equity (Deficit)
		Shares				Amount				Shares				Amount
Balance, December 31, 2009			26,176,967			$	26				1,619,857			$	(5,477	)		$	260,552			$	—			$	(151,405	)		$	103,696
Comprehensive loss:
Net loss			—				—				—				—				—				—				(6,532	)			(6,532	)
Other comprehensive loss, net of income taxes			—				—				—				—				—				(40	)			—				(40	)
Total comprehensive loss			—				—				—				—				—				—				—				(6,572	)
Exercise of stock options			535,442				1				(535,442	)			1,718				120				—				—				1,839
Issuance of restricted stock			668,250				—				(668,250	)			1,863				(1,863	)			—				—				—
Stock compensation expense			—				—				—				—				4,711				—				—				4,711
Common stock repurchased			(40,597	)			—				—				—				(53	)			—				—				(53	)
Issuance costs of common stock			—				—				—				—				(14	)			—				—				(14	)
Balance, December 31, 2010			27,340,062				27				416,165				(1,896	)			263,453				(40	)			(157,937	)			103,607
Comprehensive loss:
Net loss			—				—				—				—				—				—				(12,309	)			(12,309	)
Other comprehensive income, net of tax			—				—				—				—				—				40				—				40
Total comprehensive loss			—				—				—				—				—				—				—				(12,269	)
Issuance of common stock for acquisition (Note 7)			18,000,000				18				—				—				164,862				—				—				164,880
Exercise of stock options			1,707,613				2				(416,165	)			1,896				7,175				—				—				9,073
Issuance of restricted stock			342,000				—				—				—				—				—				—				—
Stock compensation expense			—				—				—				—				6,933				—				—				6,933
Common stock repurchased			(30,371	)			—				—				—				(452	)			—				—				(452	)
Issuance costs of common stock			—				—				—				—				(16	)			—				—				(16	)
Balance, December 31, 2011			47,359,304				47				—				—				441,955				—				(170,246	)			271,756
Comprehensive loss:
Net loss			—				—				—				—				—				—				(122,217	)			(122,217	)
Other comprehensive income, net of tax			—				—				—				—				—				5				—				5
Total comprehensive loss			—				—				—				—				—				—				—				(122,212	)
Exercise of stock options			1,718,766				2				—				—				7,026				—				—				7,028
Common stock repurchased			(413,678	)			—				—				—				(5,896	)			—				—				(5,896	)
Stock compensation expense			—				—				—				—				11,927				—				—				11,927
Issuance of restricted stock			511,250				—				—				—				—				—				—				—
Issuance costs of common stock			—				—				—				—				(990	)			—				—				(990	)
Balance, December 31, 2012			49,175,642			$	49				—			$	—			$	454,022			$	5			$	(292,463	)		$	161,613