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CTCT > SEC Filings for CTCT > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for CONSTANT CONTACT, INC.

Form 10-Q for CONSTANT CONTACT, INC.


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 also now offer a mobile storefront tool through the acquisition of SinglePlatform, Corp., or SinglePlatform, in June 2012. 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. As of September 30, 2012, we had approximately 540,000 unique paying customers and had revenue for the nine months ended September 30, 2012 of $186 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 over the past nine months 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 January 2012, we acquired CardStar, Inc., or CardStar, a leading developer of mobile applications that extend the use of loyalty cards and mobile coupons among consumers. The CardStar application consolidates membership and rewards cards on smartphones, letting consumers use a single application rather than a series of physical cards. Merchants can track purchase behavior to reward loyalty, simply and easily. We will continue to operate CardStar's free mobile loyalty application, which currently has over two million active users, and which is available on major mobile platforms, including iPhone ®, Android™ and Blackberry®. See also Note 3, Acquisitions, of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

• In February 2012, we launched SaveLocalTM to our existing customers. SaveLocal, which is a new online tool that helps small businesses run local deals, 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. In June 2012, we began offering SaveLocal to the broader market.



• In June 2012, we acquired SinglePlatform, a company that helps small businesses get discovered through web and mobile searches by providing a single place to update important business information. SinglePlatform enables businesses to reach more than 200 million consumers across its extensive publishing network, which includes network sites such as Foursquare, New York Times, YP.com and Urbanspoon. See also Note 3, Acquisitions, of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

• In August 2012, we announced the introduction of EventSpotTM, the latest version of Constant Contact's rebranded and renamed event management product. EventSpot's focus remains on helping small businesses, nonprofits and associations hold successful events. The new name reflects the true value of EventSpot as a comprehensive online tool, encompassing effective event promotion, efficient event registration and web-based meeting tools, and post-event tracking and analytics.

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 financial and 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 contingent consideration adjustment and 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 contingent consideration adjustment and 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 Part II. 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.

• Our long term strategy is substantially dependent on our ability to continue to generate interest in our existing products and to expand our product offerings to serve the online marketing needs of small businesses, associations and non-profits. If we fail to do either of these, 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.



• In connection with our acquisition of SinglePlatform, we incurred an obligation to the former shareholders of SinglePlatform to pay additional cash consideration of up to $30.0 million, contingent on the fulfillment of certain revenue targets over the next two years, measured in six month intervals. Based on certain assumptions and estimates, we recorded an estimated liability of $12.2 million as of the acquisition date. During the three months ended September 30, 2012, we decreased the amount recorded for this liability by $6.1 million to $6.1 million based on a change of estimate in the achievement of the revenue goals. We will continue to assess these assumptions and estimates on a quarterly basis. Changes in the estimated liability related to updated assumptions and estimates and to the actual revenue achievement will be recognized within the consolidated statements of operations. If our assumptions and estimates change significantly or if actual revenue achievement is significantly different than our estimates, our results of operations and cash flows could be materially affected. See also Note 3, Acquisitions, of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, our operating results could be adversely impacted if we fail to successfully integrate SinglePlatform, if we fail to continue to successfully sell SinglePlatform's product or if the acquisition significantly disrupts our ongoing 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 generally 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. 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.

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 through the nine months ended September 30, 2012 and 2011.

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, inclusive of our investment in SinglePlatform. 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 as well as amortization of sales and marketing relating intangible assets. 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, inclusive of our investments in the SinglePlatform business, we expect that we will continue to commit substantial resources to our sales and marketing efforts. As a result, we expect sales and marketing expenses will increase in absolute dollars, but over time decrease as a percentage of revenue as we expect 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, inclusive of our acquisitions, 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 over time decline slightly as a percentage of revenue as we expect to grow our revenue at a faster rate.

Acquisition Costs and Other Related Charges. Acquisition costs and other related charges include expenses associated with third-party professional services we utilize related to the evaluation and execution of successful acquisitions. Acquisition costs and other related charges also include changes in the fair value of contingent consideration liabilities recorded as the result of acquisitions. These liabilities must be measured at fair value on the acquisition date, and until these liabilities are settled, they must be remeasured to fair value at each reporting period, with the changes included in our results of operations. We recorded contingent consideration liabilities as the result of our 2012 acquisition of SinglePlatform, and we expect to record quarterly remeasurements of the fair value of these liabilities until they are settled at six-month intervals through June 2014. We may also continue to incur acquisition costs and other related charges in future periods if we complete additional acquisitions.

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;

• Fair value of financial instruments;

• 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 additions 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 September 30, 2012 compared to Three Months Ended September 30, 2011

Revenue

Three Months Ended September 30,
2012 2011 Change
(Dollars in thousands)

Revenue $ 63,846 $ 54,346 17 %

Revenue increased by $9.5 million from 2011 to 2012. The increase resulted primarily from an approximately 11% increase in the number of average monthly customers and an increase in average revenue per customer. The increase in average revenue per customer was primarily due to an increase in average customer list size and from add-ons to our email marketing product and an increase in pricing for EventSpot, our event marketing product. We expect our average revenue per customer to increase over time.

Cost of Revenue



                                Three Months Ended September 30,
                                  2012                    2011            Change
                                     (Dollars in thousands)
        Cost of revenue      $        18,722         $        15,679           19 %
        Percent of revenue                29 %                    29 %

Cost of revenue increased by $3.0 million from 2011 to 2012. The increase resulted primarily from increased customer support personnel costs of $1.5 million to support our customer growth and increased personnel costs of $403,000 in our operations group to manage our technology infrastructure. Depreciation, hosting and maintenance costs increased by $1.1 million 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 September 30
                                     2012                     2011           Change
                                        (Dollars in thousands)
    Research and development   $          9,776         $          7,338          33 %
    Percent of revenue                       15 %                     14 %

Research and development expenses increased by $2.4 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, both to further develop and enhance our products.

Sales and Marketing



                                Three Months Ended September 30,
                                  2012                    2011            Change
                                     (Dollars in thousands)
       Sales and marketing   $        24,881         $        19,455           28 %
       Percent of revenue                 39 %                    36 %

Sales and marketing expenses increased by $5.4 million from 2011 to 2012. The increase in absolute dollars consisted in large part of increased personnel related costs of $3.3 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. Advertising and promotional expenditures increased by $689,000. Partner referral fees increased by $554,000 as the number of new customers generated from our partners increased. We also incurred an increase in amortization of $389,000 related to the amortization of sales and marketing related intangibles resulting from our acquisitions.

General and Administrative



                                     Three Months Ended September 30
                                     2012                      2011            Change
                                         (Dollars in thousands)
   General and administrative   $         7,956           $         6,191           29 %
   Percent of revenue                        12 %                      11 %


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 $469,000 in consulting and professional services fees associated with the growth of our business.

Acquisition Costs and Other Related Charges

Three Months Ended September 30
2012 2011
(Dollars in thousands)

Acquisition Costs and Other Related Charges $ (6,020 ) $ -

Acquisition costs and other related charges resulted in income of $6.0 million for the three months ended September 30, 2012 and $0 for the three months ended September 30, 2011. Transaction costs during the three months ended September 30, 2012 were $74,000 related to the SinglePlatform acquisition completed in June 2012. We also recorded an adjustment to decrease the fair value of the contingent consideration by $6.1 million in the three months ended September 30, 2012 due to the remeasurement of the fair value of contingent consideration liabilities. The decrease in the fair value of the liability resulted from reductions to the SinglePlatform revenue forecast scenarios and to changes in the probabilities assigned to each scenario. The revenue forecast scenarios were decreased due to SinglePlatform's actual operating results and productivity of its sales organization. Additionally, we re-allocated the probabilities assigned to each revenue scenario to better reflect our probability expectations based on our experience with subscription-based revenue models generally.

Interest income and other income (expense), net

                                               Three Months Ended September 30,
                                                2012                      2011                Change
                                                    (Dollars in thousands)
Interest income and other income
(expense) net                               $          68             $          80               (15 )%

Interest income and other income (expense), net decreased by $12,000 from 2011 to 2012 due primarily to a decrease in interest earned on our investment . . .

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