The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 28, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Executive Overview

We provide online marketing solutions, including email marketing, social media marketing, event marketing, local deals and surveys, for small organizations, including small businesses, associations and non-profits. We seek to help our customers succeed and have a long history of delivering affordable, easy-to-use products, support, knowhow and coaching with a personal touch, all of which empower our customers to create and grow their customer relationships.

We market our products and acquire our customers through a variety of sources including online marketing such as search engines and advertising on online networks and other websites, offline marketing through television and radio advertising, local seminars, relationships with our partners, referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of substantially all of the emails sent by our customers.

We have grown rapidly since launching our first on-demand product in 2000. We ended the first quarter of 2012 with approximately 510,000 unique paying customers and had revenue for the first quarter of $59.9 million.

Our business strategy focuses on expanding beyond email marketing to support a multi-product strategy to drive high customer lifetime value through gains in average revenue per customer, retention and gross margin. We believe increasing our customer's lifetime value will be a key contributor to our continued success. To drive lifetime value we will continue to invest in acquiring new customers, cross-selling our products to our large and growing customer base, driving increased product usage by our customers and improving customer retention rates. We will continue to invest in broadening our platform of engagement marketing solutions, which we believe will better help our customers create and grow their customer and member relationships. We have made numerous investments to drive future growth, including:

• We launched Social CampaignsTM in January 2012. Social Campaigns allows users to create, publish, promote and run campaigns on Facebook that offer promotions or content targeted toward those who "Like" them and to incent others to "Like" and share them. Social Campaigns can be published to a customer's email list, to existing Facebook fans, on LinkedIn and to Twitter followers.

• In February 2012, we launched SaveLocalTM, a new online tool that helps small businesses run local deals. SaveLocal gives merchants control of the deal and allows small businesses to incentivize social sharing to attract qualified new customers, and drive repeat business at an affordable price.

Key Financial and Operating Metrics

In connection with the ongoing operation of our business, our management regularly reviews key financial and operating metrics. Given our growth strategy, we pay particular attention to customer life-time value, customer acquisition metrics, number of products per customer and average revenue per customer. We also consider other operating metrics such as revenue, gross margin, expenses, trialer growth, customer attrition, customer satisfaction rates, success in cross selling and growing customer list sizes, average speed of answer for customer support calls, email deliverability rates and capital expenditures, among others. Management considers these financial and operating metrics critical to understanding and improving our business, reviewing our historical performance, benchmarking our performance versus other companies and identifying current and future trends, and for planning purposes.

In addition, we consider the following non-GAAP financial measures to be key indicators of our financial performance:

• "adjusted EBITDA," which we define as GAAP net income (loss) plus depreciation and amortization and stock-based compensation, and adjusted for interest and other income (expense) and income taxes;

• "adjusted EBITDA margin," which we define as adjusted EBITDA divided by revenue;

• "non-GAAP net income," which we define as GAAP net income (loss) plus stock-based compensation and adjusted for the non-cash portion of income taxes; and

• "free cash flow," which we define as net cash flow from operating activities less acquisition of property and equipment.

We believe that these non-GAAP financial measures are useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations. These non-GAAP financial measures, however, are not a measure of financial performance under accounting principles generally accepted in the United States of America, or GAAP, and should not be considered a substitute for GAAP financial measures, including but not limited to net income (loss) or cash flows from operating, investing and financing activities and may not be comparable to similarly titled measures reported by other companies.

Certain Trends and Uncertainties

The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. The summary should be considered along with the factors set forth under Item 1A -"Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.

• We continue to closely monitor current economic conditions both in the U.S. and abroad, particularly as they impact small businesses, associations and non-profits. We believe that small organizations continue to experience some amount of economic hardship. If this economic hardship continues or worsens, our financial results could be adversely impacted.

• We believe that given the size of our potential market and the relatively low barriers to entry, competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations.

• We believe that as we continue to grow revenue at expected rates, our cost of revenue and operating expenses, including sales and marketing, research and development and general and administrative expenses, will increase in absolute dollar amounts. For a description of the general trends we anticipate in various expense categories, see "Cost of Revenue and Operating Expenses" below.

Sources of Revenue

We derive our revenue principally from subscription fees from our customers. Our revenue is driven primarily by the number of paying customers and the subscription fees for our products and is not concentrated within any one customer or group of customers. In 2011, our top 100 customers accounted for less than 1% of our total revenue. We do not require our customers to commit to a contractual term; however, our customers are required to prepay for subscriptions on a monthly, semi-annual, or annual basis by providing a credit card or bank check. Fees are recorded initially as deferred revenue and then recognized as revenue on a daily basis over the prepaid subscription period.

We also generate a small amount of revenue from ancillary services related to our products, which primarily consist of custom services and training through our experts program. Revenue generated from professional services and training accounted for approximately 1% of gross revenue for each of three months ended March 31, 2012 and 2011. In February 2012, we launched our SaveLocal product for which we charge a fee based on the number of deals sold by our customers. We have not yet generated significant revenue from this product.

Cost of Revenue and Operating Expenses

We allocate certain occupancy and general office related expenses, such as rent, utilities, office supplies and depreciation of general office assets to cost of revenue and operating expense categories based on headcount. As a result, an occupancy expense allocation is reflected as personnel related costs in cost of revenue and each operating expense category.

Cost of Revenue. Cost of revenue consists primarily of wages and benefits for software operations and customer support personnel, credit card processing fees and depreciation and amortization, maintenance and hosting of our software applications underlying our product offerings. We allocate a portion of customer support costs relating to assisting trial customers to sales and marketing expense.

The expenses related to our hosted software applications are affected by the number of customers who subscribe to our products and the complexity and redundancy of our software applications and hosting infrastructure. We expect cost of revenue to increase in absolute dollars as we expect to increase our number of customers but to decrease as a percentage of revenue over time as we gain efficiencies created by our expected revenue growth and cost savings.

Research and Development. Research and development expenses consist primarily of wages and benefits for product strategy and development personnel. We have focused our research and development efforts on improving ease of use, functionality and technological scalability of our existing products as well as on the development of new product offerings. We primarily expense research and development costs. However, direct development costs related to software enhancements that add functionality are capitalized and amortized over their useful life. We expect that in 2012 our research and development expenses will increase both in absolute dollars and as a percentage of revenue due to our expanded investment in our product roadmap. Over the longer term we expect our research and development expenses to increase in absolute dollars but decrease as a percentage of revenue as we expect to grow our revenue at a faster rate.

Sales and Marketing. Sales and marketing expenses consist primarily of advertising and promotional costs, wages and benefits for sales and marketing personnel, partner referral fees and the portion of customer support costs that relate to assisting trial customers. Advertising costs consist primarily of pay-per-click advertising with search engines, other online and offline advertising media, including television and radio, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships and event costs. In order to continue to grow our business and brand and category awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. As a result, we expect that on an annual basis, sales and marketing expenses will increase in absolute dollars, but decrease as a percentage of revenue as we expect to continue to grow our revenue at a faster rate.

General and Administrative. General and administrative expenses consist primarily of wages and benefits for administrative, human resources, internal information technology support, finance and accounting personnel, professional fees, board compensation and expenses, certain taxes and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel in connection with the anticipated growth of our business and incur costs related to operating as a public company. Therefore, we expect that our general and administrative expenses will increase in absolute dollars, but decline slightly as a percentage of revenue as we expect to continue to grow our revenue at a faster rate.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our significant accounting policies, which are described in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC, the following accounting policies involve the most judgment and complexity:

• Revenue recognition;

• Income taxes;

• Goodwill and acquired intangible assets;

• Software and website development costs; and

• Stock-based compensation.

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

There have been no material changes in our critical accounting policies since December 31, 2011, except with respect to the addition to our revenue recognition policy to accommodate our new SaveLocal product which is described in Sources of Revenue above and which policy is described in more detail in note 2, Summary of Significant Accounting Policies, of the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. For further information please see the discussion of critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC.

Results of Operations

Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011

Revenue

Revenue increased by $9.9 million from 2011 to 2012. The increase resulted primarily from an approximately 14% increase in the number of average monthly customers and an approximately 6% increase in average revenue per customer. The increase in average revenue per customer was due to an increase in average customer list size and from add-ons to our email marketing product and an increase in pricing for our event marketing product. We expect our average revenue per customer to increase over time.

Cost of Revenue



                                  Three Months Ended March 31,
                                   2012                  2011           Change
                                     (Dollars in thousands)
          Cost of revenue      $      17,599         $      14,683           20 %
          Percent of revenue              29 %                  29 %

Cost of revenue increased by $2.9 million from 2011 to 2012. The increase resulted primarily from increased customer support personnel costs of $1.7 million to support our customer growth and increased personnel costs of $206,000 in our operations group to manage our infrastructure. Depreciation, hosting and maintenance costs increased by $595,000 as a result of scaling and adding capacity to our hosting infrastructure inclusive of the effects of transitioning to a new datacenter in California in 2011.

Research and Development



                                     Three Months Ended March 31,
                                       2012                2011          Change
                                        (Dollars in thousands)
        Research and development   $       9,471       $       7,438          27 %
        Percent of revenue                    16 %                15 %

Research and development expenses increased by $2.0 million from 2011 to 2012. The increase was due primarily to additional personnel related costs as a result of our continued hiring of research and development employees as well as an increase in consulting expense incurred, both to further develop and enhance our products.

Sales and Marketing



                                  Three Months Ended March 31,
                                   2012                  2011           Change
                                     (Dollars in thousands)
         Sales and marketing   $      25,718         $      24,234            6 %
         Percent of revenue               43 %                  48 %

Sales and marketing expenses increased by $1.5 million from 2011 to 2012. The increase in absolute dollars consisted in large part of increased personnel related costs of $2.6 million primarily as a result of adding employees related to customer acquisition, cross-selling to our customer base and enabling increased usage and better retention. Partner referral fees increased by $522,000 as the number of new customers generated from our partners increased. These increases were partially offset by a decrease of $1.9 million of advertising and promotional expenditures due primarily to a change in the mix and timing of advertising campaigns.

General and Administrative



                                      Three Months Ended March 31,
                                       2012                  2011           Change
                                         (Dollars in thousands)
      General and administrative   $       7,564         $       5,778           31 %
      Percent of revenue                      13 %                  12 %

General and administrative expenses increased by $1.8 million from 2011 to 2012. The increase was due primarily to additional personnel related costs of $1.3 million largely as a result of increasing the number of general and administrative employees to support our overall growth. We also incurred an increase of approximately $313,000 in consulting and professional services fees associated with the growth of our business.

Interest and other income (expense), net

Three Months Ended March 31, 2012 2011 Change

Interest and other income (expense), net decreased by $18,000 from 2011 to 2012 due primarily to a decrease in interest earned on our investment portfolio.

Income Taxes

For the three months ended March 31, 2012, we recorded an income tax benefit of $561,000 as compared to an income tax benefit of $186,000 in the first quarter of 2011. Income tax is related to federal, state, and, to a lesser extent, foreign tax obligations. During 2011 we had recorded a full valuation allowance against our net deferred tax assets which allowance we released in the fourth quarter of 2011. The increase in the tax benefit was primarily due to the full valuation allowance in the first quarter of 2011 versus no valuation allowance in the first quarter of 2012.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal, state or foreign tax laws, deductibility of certain costs and expenses, and as a result of acquisitions. For the three months ended March 31, 2012, our effective tax rate varied from the statutory tax rate primarily due to the recognition for tax purposes of stock based compensation on disqualifying dispositions of stock options that occurred during the first quarter of 2012 partially offset by the non-recognition for tax purposes of stock based compensation.

For the three months ended March 31, 2011, our income tax benefit consisted of a current income tax benefit of $265,000 and a deferred income tax expense of $79,000. The income tax benefit recorded for the three months ended March 31, 2011 related to our net loss for the period multiplied by our estimated annual effective tax rate for 2011. The deferred income tax expense related to the amortization for tax purposes of goodwill from the acquisition of Bantam Networks.

Liquidity and Capital Resources

During the first quarter of 2012 and 2011, we funded our operations with cash flows generated from operations. At March 31, 2012, our principal sources of liquidity were cash and cash equivalents and marketable securities of $143 million.

Net cash provided by operating activities was $10.9 million and $8.2 million for the three months ended March 31, 2012 and 2011, respectively. The improvement in cash flow in 2012 was due primarily to net income generated in the first quarter of 2012 versus a net loss in the first quarter of 2011, increases in the add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation expense, partially offset by an increase in deferred tax assets in the first three months of 2012 as compared to the same period in 2011. Cash provided by operating activities has historically been affected by the amount of net income (loss), growth in prepaid subscriptions, changes in working capital accounts and the timing of rent payment and add-backs of non-cash expense items such as depreciation and amortization and the expense associated with stock-based awards as well as changes in deferred taxes.

Net cash provided by investing activities was $18.1 million in the three months ended March 31, 2012 as compared to net cash used in investing activities of $25.2 million for the three months ended March 31, 2011. Net cash provided by investing activities in the first three months of 2012 consisted primarily of the net cash provided by marketable securities transactions offset partially by cash paid to purchase CardStar and to acquire property and equipment. In January 2012, we completed the acquisition of CardStar, for $5.8 million. Net cash used in investing activities in the first quarter of 2011 consisted primarily of net cash used by marketable securities transactions, partially offset by cash paid to purchase substantially all of the assets of Bantam Networks and to acquire property and equipment. In February 2011, we completed the acquisition of substantially all of the assets of Bantam Networks, excluding cash, for $15.0 million. Acquisition of property and equipment of $5.5 million and $4.3 million in the three month periods ended March 31, 2012 and 2011, respectively, consisted of the purchase of computer equipment for our operations and employees, furniture and leasehold improvements and the capitalization of certain software development costs. In 2011, we transitioned to a new third-party hosting facility in California and made capital expenditures in 2011 for equipment to be used in the new facility. We made additional capital expenditures during 2012 to increase capacity of our operational equipment. We increased the amount of space we occupied under our corporate headquarters lease in 2010 and acquired property and equipment to outfit the additional space in 2011. We also acquired property and equipment to accommodate growth in our sales and support office in Colorado in 2012. During the three months ended March 31, 2012 and 2011, we capitalized $1.6 million and $724,000, respectively, of costs associated with the development of internal use software.

Net cash provided by financing activities was $3.4 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively. Net cash provided by financing activities in the first three months of both 2012 and 2011 consisted of proceeds from stock issued pursuant to the exercise of stock options as well as an income tax benefit from the exercise of stock options in the first quarter of 2012.

As of December 31, 2011, we had federal and state net operating loss carry-forwards of $48.2 million and $2.5 million, respectively, which we intend to use to the extent available, to offset payments of future federal and state . . .