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CTCT > SEC Filings for CTCT > Form 10-Q on 1-May-2013All Recent SEC Filings

Show all filings for CONSTANT CONTACT, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CONSTANT CONTACT, INC.


1-May-2013

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, 2012 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 28, 2013. 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 are a leading provider of online marketing tools that are designed for small organizations, including small businesses, associations and non-profits. Our tools include our email marketing, social media marketing, event marketing, local deals and survey products. In June 2012, we began offering a distribution platform for online listings following our acquisition of SinglePlatform, Corp., or SinglePlatform. We seek to help our customers succeed by creating and growing their customer and member relationships through our easy-to-use products combined with education, support, KnowHowฎ and coaching, all of which allow 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, including 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 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 2013 with approximately 565,000 unique paying customers and had revenue for the first quarter of $68.2 million.

Our business strategy is to expand beyond email marketing to a multi-product strategy that drives higher customer lifetime value. 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 focus on acquiring customers in a cost-effective manner, increasing average revenue per customer through cross-selling and increased product usage and improving customer retention rates.

Recent highlights include:

• We recently introduced our common contacts functionality and will be continuing to roll out that functionality in a phased manner to all of our customers. This enhanced functionality will enable small businesses to have additional views of their contacts and will allow them to run targeted campaigns to specific segments of their contact list. It will also allow customers to track and manage engagement over time, across all of our different campaign types and allow small businesses to build and store contact lists without having a contact's email address.

• We continue to invest in our SinglePlatform offering and, in April, announced that Yelpฎ is part of our SinglePlatform network of publishers. Menu updates to Yelp will go live within 24 hours.

• In April, we announced a share repurchase program. Under the repurchase program, we are authorized to repurchase up to $20 million of our common stock through December 31, 2013. Shares may be repurchased from time to time in the open market or privately negotiated transactions in accordance with applicable securities and stock exchange rules.


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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 lifetime value, customer acquisition metrics, trialer growth, customer attrition, success in cross selling and growing customer list sizes, number of products per customer and average revenue per customer. We also consider other financial and operating metrics such as revenue, gross margin, expenses, customer satisfaction rates, 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, stock-based compensation and litigation contingency accrual, 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 litigation contingency accrual, 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.

• Our long term strategy is substantially dependent on our ability to continue to generate interest in our existing products and to enhance and expand our product offerings to serve the online marketing needs of small businesses, associations and non-profits. If we fail, our financial results could be adversely impacted.

• In connection with our acquisition of SinglePlatform, we have an obligation to the former shareholders of SinglePlatform to pay additional cash consideration of up to $22.5 million, contingent on the achievement of certain revenue targets through June 2014, measured in six month intervals. Based on our assumptions and estimates related to our revenue forecasts we do not believe we will pay this additional consideration and have recorded no liability at March 31, 2013. 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 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.


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• We believe that given the size of our potential market and the relatively low barriers to entry, competition may 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.

• From time to time, we may be subject to various claims and lawsuits by partners, customers, or other parties arising in the ordinary course of business, including lawsuits alleging patent infringement. We are currently a party to actions that are described in Part II, Item 1 "Legal Proceedings" included elsewhere in this Quarterly Report on Form 10-Q. These matters can be time-consuming, divert management's attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our results of operations, financial condition and cash flows.

• 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 2012, 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.

We generate a small amount of revenue from ancillary services related to our products, which primarily consist of custom services and training. For SaveLocal, we charge a fee based on the number of deals sold by our customers and the value of the successful deal. We do not generate 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, depreciation and amortization, and 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 on an annual basis research and development expenses will continue to increase both in absolute dollars and as a percentage of revenue due to our expanded investment in our product roadmap during 2013. 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.


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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, the portion of customer support costs that relate to assisting trial customers and 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 advertisements, 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, accounting and analytics personnel, professional fees, board compensation and expenses, certain taxes and other corporate expenses. In 2013 we also recorded a loss accrual related to litigation. 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. We expect that our general and administrative expenses will increase in absolute dollars, but after excluding the accrual for litigation contingency, will remain relatively flat or increase slightly as a percentage of revenue during 2013. Over the longer term we expect our general and administrative expenses to decline as a percentage of revenue as we expect to continue 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 includes changes in the fair value of our contingent consideration liability recorded as the result of the SinglePlatform acquisition. This liability was measured at fair value on the acquisition date, and until the liability is settled, it must be remeasured to fair value at each reporting period, with the changes included in our results of operations. We expect to evaluate quarterly remeasurements of the fair value of this liability through June 2014, the last settlement date. 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, 2012, 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.


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There have been no material changes in our critical accounting policies since December 31, 2012. 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, 2012.

Results of Operations

Three Months Ended March 31, 2013 compared to Three Months Ended March 31, 2012

Revenue

Three Months Ended March 31,
2013 2012 Change
(Dollars in thousands)

Revenue $ 68,205 $ 59,938 14 %

Revenue increased by $8.3 million from 2012 to 2013. The increase resulted primarily from an approximately 9% increase in the number of average monthly customers and an approximately 5% increase in average revenue per customer. The increase in average revenue per customer was primarily due to an increase in average customer list size. We expect our average revenue per customer to increase over time.

Cost of Revenue



                                         Three Months Ended March 31,
                                      2013              2012        Change
                                            (Dollars in thousands)
              Cost of revenue      $    19,908        $ 17,599           13 %
              Percent of revenue            29 %            29 %

Cost of revenue increased by $2.3 million from 2012 to 2013. The increase resulted primarily from increased customer support personnel costs of $926,000 to support our customer growth and increased personnel costs of $389,000 in our operations group to manage our infrastructure. Depreciation, hosting and maintenance costs increased by $593,000 as a result of scaling and adding capacity to our hosting infrastructure.

Research and Development



                                            Three Months Ended March 31,
                                        2013               2012         Change
                                               (Dollars in thousands)
          Research and development   $    10,268        $    9,471            8 %
          Percent of revenue                  15 %              16 %

Research and development expenses increased by $797,000 from 2012 to 2013. The increase was due primarily to additional personnel related costs as a result of our continued hiring of research and development employees to further develop and enhance our products.

Sales and Marketing



                                         Three Months Ended March 31,
                                      2013              2012        Change
                                            (Dollars in thousands)
             Sales and marketing   $    30,802        $ 25,718           20 %
             Percent of revenue             45 %            43 %


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Sales and marketing expenses increased by $5.1 million from 2012 to 2013. The increase in absolute dollars was largely due to increased advertising and promotional expenditures of $2.5 million resulting from a change in the mix and timing of advertising campaigns including our first quarter investment in a television campaign. Personnel related costs increased by $2.0 million, primarily from the increase in SinglePlatform sales personnel. Partner referral fees increased by $350,000 as the number of new customers generated from our partners increased. We also incurred an increase in amortization of $312,000 related to the amortization of sales and marketing related intangibles resulting from our acquisitions.

General and Administrative



                                            Three Months Ended March 31,
                                         2013              2012         Change
                                               (Dollars in thousands)
         General and administrative   $    9,894        $    7,415           33 %
         Percent of revenue                   15 %              12 %

General and administrative expenses increased by $2.5 million from 2012 to 2013. 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 recorded an accrual related to a litigation matter of $820,000 in the first quarter of 2013. Professional service fees increased by $307,000 primarily due to increased costs associated with our defense of certain legal matters.

Acquisition Costs and Other Related Charges

Three Months Ended March 31
2013 2012
(Dollars in thousands)

Acquisition costs and other related charges $ - $ 149

Acquisition costs and other related charges consisted of transaction costs during the three months ended March 31, 2012 related to our acquisition of CardStar, Inc., or CardStar, which we completed in January 2012.

Interest and Other Income (Expense), Net

Three Months Ended March 31,
2013 2012 Change
(Dollars in thousands)

Interest and other income (expense), net $ (29 ) $ 71 (141 )%

Interest and other income (expense), net decreased by $100,000 from 2012 to 2013 due to a decrease in interest earned on our investment portfolio as a result of lower balances as well an increase in foreign currency translation expense.

Income Taxes



                                                   Three Months Ended March 31,
                                                     2013                 2012
                                                      (dollars in thousands)
  Income tax benefit                             $       2,182         $       561
  Percent of income (loss) before income taxes             (81 )%             (163 )%

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. Our estimated effective tax rate for 2013, which has been applied to our loss before income taxes for the three months


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ended March 31, 2013, varies from the statutory rate primarily due to 2013 federal and state research and development credits that decrease the effective tax rate, partially offset by non-deductible stock-based compensation expense, that increases the effective tax rate. Additionally, for the three months ended March 31, 2013, the income tax benefit was increased by the 2012 federal research and development credit which was treated as a discrete item. The American Taxpayer Relief Act of 2012, or the Act, was enacted on January 2, 2013. The Act retroactively reinstated the federal research and development credit from January 1, 2012. The effect of the change in the tax law related to 2012 was $1.3 million, which was recognized as a benefit to income tax expense in the first quarter of 2013, the quarter in which the law was enacted.

For 2012, our estimated effective tax rate varied from the statutory tax rate primarily due to non-deductible stock-based compensation expense that increased the effective tax rate partially offset by state research and development credits that decreased the effective tax rate. Additionally, for the three months ended March 31, 2012, the income tax benefit was increased by the recognition for tax purposes of stock-based compensation expense on disqualifying dispositions of incentive stock options that occurred during the period which was treated as a discrete item.

Liquidity and Capital Resources

During the first quarter of 2013 and 2012, we funded our operations with cash flows generated from operations. At March 31, 2013, our principal sources of liquidity were cash and cash equivalents and marketable securities of $97.3 million.

Net cash provided by operating activities was $9.0 million and $10.9 million for the three months ended March 31, 2013 and 2012, respectively. The decrease in cash flow in 2013 was due primarily to a net loss generated in 2013 as compared to net income in 2012, a decrease in the add-backs of non-cash items and a decrease in cash generated from changes in working capital accounts. We . . .

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