Founded in 1999, Website Pros is a Jacksonville, Florida-based provider of Web services and products to the small and medium business (SMB) market. The company offers a full range of products on an affordable subscription basis, including design and hosting of the Website. WSPI's primary service offerings, eWorks! XL and SmartClicks, are comprehensive packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, and lead generation. In addition to this offering, the company provides a variety of premium services to customers, such as e-commerce solutions and Internet marketing services. As of September 30, 2007, the company had approximately 255,000 subscribers, including 82,000 in its core Website Pros business, including eWorks! XL, SmartClicks, Leads.com, Renovation Experts, 1ShoppingCart, Submitawebsite and premium subscription-based services. WSPI primarily sells it services and products to customers identified through strategic relationships with brand name companies, such as Discover Financial Services, Network Solutions, IBM, and Card Services International. The company has a direct sales force, which utilizes leads provided through its strategic marketing partners. WSPI generates the bulk of its revenue from subscription fees (89.9% of 2006 revenue), licenses (6.9%), and professional services (3.2%). Geographically, the company sells its services to customers located in the United States.
The SMB market where WSPI competes is large and under-penetrated, with little organized competition. Management estimates that there are currently over 25 million SMBs with less than 100 employees, which it considers its target market. Of these, we believe a large number do not have a web presence at all. In addition to companies without a web presence, 30% of WSPI's sales are to companies that already have a Website, but are looking for professional help. According to studies conducted by IDC, Jupiter Research, and Forrester Research, the market for services provided by WSPI is expected to grow at a compound annual growth rate (CAGR) of 9.7% from $22.1 billion in 2006 to $32.0 billion in 2010. The largest of these markets is Online Display/Classified advertising, followed by Search Engine Marketing, then Website Services, and finally Email Marketing.
While it is becoming increasingly important for all businesses to have a presence on the Web in order to attract customers, smaller companies are faced with challenges as many do not have an in house IT department. Because of this, SMBs must deal with high up-front website design RocketFire Studios costs as they typically pay a third party for design of the Website at the time of service. In addition, SMBs typically do not have in-house expertise to provide complex Web services, marketing expertise, maintenance and hosting. By marketing itself as an outsourced or fractional IT department, WSPI is able to streamline solutions for its customers. Once a customer is identified, WSPI's automated CRM platform almost instantly transfers the customer to a Web services consultant, who then interviews the customer and sends the information to a Web designer. This factory style approach allows WSPI to produce an initial Website within 72 hours for its customers and provide hosting, maintenance and ongoing marketing and technical expertise. For its basic services, WSPI charges $79 per month with no upfront fee for design of the Website. Additional services can drive monthly fees to hundreds of dollars.
Website Pros acquisition of Web.com in September 2007 added 255,000 paid subscribers with an annualized revenue of over $121 million. Although Web.com has lower ARPU customers, we believe that WSPI will be able to grow ARPUs by cross selling its higher value "Do-It-For-Me" services to Web.com's "Do-It-Yourself" customers. Moreover, this acquisition should be accretive by more than 10% in 2008 as pre-tax cost synergies are estimated to be in the $5 million to $7 million range during calendar year 2008.
With the earlier acquisition of LEADS.com, WSPI has been able to add powerful marketing services to its customers for an additional monthly fee. For example, WSPI can offer services such as real-time statistics and lead tracking. This service provides data on not only the number of clicks' received, but also phone calls generated through the Website, helping customers realize the ROI created by their Websites. The company has added the services acquired from Renovation Experts.com (Renex, Inc.), an online lead generation marketplace for contractors and homeowners, to its LEADS.com group. In addition, the company further strengthened its offerings in the SMB market with the acquisition of 1ShoppingCart.com, one of the leading providers of shopping cart, Internet marketing, and eCommerce/eBusiness software solutions and services. The addition of these acquired businesses has allowed WSPI to offer higher-end services, helping boost ARPU, which was approximately $69.0 in the third quarter 2007.
We believe WSPI is the market leader in providing Web services for SMBs, with the bulk of its competition coming from small providers of more customized solutions at much higher prices. The March 2007 acquisition of Submitawebsite, Inc., a search engine optimization company, improves WSPI's offering as it will be able to improve the positioning of customer's websites with search engines. Other competition includes Web page design software provided by companies such as Macromedia and Adobe. However, they require the company to have in-house resources. Finally, hosting companies, such as GoDaddy.com does not offer the design and support services that WSPI is able to provide.
Website Pros has successfully attracted and worked with partners to bring in new customers for its services. Current distribution partners include Discover Network, VistaPrint, Yahoo, Network Solutions, IBM, 1&1, MasterCard, Register.com, Earthlink, QuickBooks Merchant Services, and Verio Inc. Its most important distribution partner, Discover provides it with leads for small businesses that it signs up for Discover's payment network. Once provided with this list of qualified prospects, WSPI s direct sales force markets to these prospects. Through new partnerships with companies such as, Intuit (QuickBooks), IBM, WSPI has been continuously making progress in reducing its dependency on Discover, which is currently running at approximately 43%, compared to levels above 60% during 2006. The company has been continuously growing its distribution network, and has added The Company Corporation, Authorize.net, and Internet Secure in its list. In addition, WSPI has entered into an agreement with Microsoft to offer Website design and online marketing services to Microsoft Office Live customers. WSPI also partnered with CorpAmerica, a privately held company and a leading provider of incorporation and financial services for small businesses worldwide to offer newly incorporated businesses a complete suite of Website design, leads generation solutions, Internet marketing, e-commerce technology, and logo and identity development services. WSPI recently announced a partnership with Deluxe Corporation, which should leverage Deluxe's small business relationships to offer customer value. In addition to Website Pros' existing partners, the company also expanded its partnerships with Web.com's partners, such as R.H. Donnelley, Register.com and their retail channels. WSPI launched its own private-brand channel to reduce its dependency on its partners, which will also provide higher margin business without the revenue sharing requirements of customers gained through partnerships. Its private brand business has been growing rapidly, contributing 12.0% of new business during the third quarter, up from 3.0% in the last quarter and 1.0% in the year-ago quarter.
The company's monthly customer churn rate in the third quarter of 2007 was 5.2% versus 6.2% year-over-year. Customer churn rate was an all-time low of 4.8% in the second quarter of 2007. The company's newly released NetObjects Fusion 10 should help drive license revenue from existing customers, which should show up in 2008 results. This update of Website-building software provides all the necessary tools to build, publish, and maintain professional websites. WSPI also offered a free version of NetObjects Fusion Essentials to provide opportunity to consumers and small businesses to build, promote, and manage their website. Meanwhile, Website Pros's subscription model also provides good visibility into future results as roughly 93% of total revenue for nine months ended September 30, 2007, an increase of 4% year-over-year is subscription-based, giving us confidence that the company will be able to meet our expectations for 2008.