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CTCT > SEC Filings for CTCT > Form 10-Q on 30-Oct-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.


30-Oct-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 businesses, associations and non-profits. 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, KnowHow®and coaching, all of which allow our customers to create and grow their customer relationships. 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 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 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 third quarter of 2013 with approximately 585,000 unique paying customers and had revenue for the nine months ended September 30, 2013 of $210 million.

Our business strategy is to expand beyond email marketing to provide an integrated multi-product offering 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:

• Introduced our new contact management functionality and have been rolling out that functionality in a phased manner to all of our customers. This enhanced functionality enables small businesses to have additional views of their contacts and allows them to run targeted campaigns to specific segments of their contact list. It also allows customers to track and manage engagement over time, across all of our different campaign types and to build and store contact lists without having a contact's email address.

• Launched several enhancements to our mobile marketing integration tools, including mobile email list building and location-aware text check-ins, as well as Android® and iOS versions of our MyLibrary Plus application.

• Rolled out our new in-product messaging center. We can now run targeted marketing campaigns to small businesses, based on specific demographic and behavioral characteristics. We also continue to test different pricing and packaging opportunities for our existing tools.

• In April 2013, announced that Yelp® is part of our SinglePlatform network of publishers. Menu updates to Yelp will go live within 24 hours. In June 2013, we announced a partnership with GrubHub®, a leading online and mobile food ordering service, to become a menu provider for GrubHub's AllMenus.com and integrate GrubHub's online ordering platform into SinglePlatform menus.

• Launched new programs with Staples and Microsoft. In partnership with Staples we will work to educate small businesses and non-profits across the country with free in-store marketing workshops. Jointly with Microsoft, we are launching an educational


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program to provide best online marketing practices seminars in Microsoft retail stores across North America. To further strengthen our partner network, we held our first ever conference for partners, OneCon, in Boston and San Francisco.

• In April 2013, 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. Through September 30, 2013, we have repurchased 250,000 shares of common stock at an average price of $18.11 per share.

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) before income taxes, interest income and other income (expense), depreciation and amortization, stock-based compensation, litigation contingency accrual and contingent consideration adjustment;

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

• "non-GAAP net income," which we define as GAAP net income (loss) before the non-cash portion of income taxes, stock-based compensation expense, litigation contingency accrual and contingent consideration adjustment; 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, expand and integrate 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 $15.0 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 September 30, 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 or if we fail to continue to successfully sell SinglePlatform's product.

• 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, existing competitors that have been acquired by larger


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enterprises 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 our SaveLocal product, 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.

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. Additionally, sales and marketing expenses include costs related to our efforts to retain our customers and to cross-sell and increase usage of our products. 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 grow our revenue at a faster rate.


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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 and a loss accrual related to estimated personal property taxes. 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 both in absolute dollars and as a percentage of revenue in 2013 due to increased wage costs, particularly as they relate to analytics and business intelligence, increased costs associated with litigation and general increases related to the growth of our business. Over the longer term we expect our general and administrative expenses to decline 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 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 will 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.

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 September 30, 2013 compared to Three Months Ended September 30, 2012

Revenue

Three Months Ended September 30,
2013 2012 Change
(Dollars in thousands)

Revenue $ 72,039 $ 63,846 13 %

Revenue increased by $8.2 million from 2012 to 2013. The increase resulted primarily from an approximately 10% increase in the number of average monthly customers and an approximately 3% increase in average revenue per customer. The increase in average revenue per customer was primarily due to an increase in average number of products per customer and to an increase in average customer list size. We expect our average revenue per customer to increase over time.


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Cost of Revenue



                                      Three Months Ended September 30,
                                    2013                2012          Change
                                           (Dollars in thousands)
           Cost of revenue      $     20,478        $     18,722            9 %
           Percent of revenue             28 %                29 %

Cost of revenue increased by $1.8 million from 2012 to 2013. The increase in absolute dollars resulted primarily from increased customer support personnel costs of $700,000 to support our customer growth and increased personnel costs of $302,000 in our operations group to manage our infrastructure. Depreciation, hosting and maintenance costs increased by $340,000 as a result of scaling and adding capacity to our hosting infrastructure. Merchant card fees also increased by $202,000 due to the higher volume of billing transactions.

Research and Development



                                          Three Months Ended September 30,
                                        2013               2012          Change
                                               (Dollars in thousands)
         Research and development   $     12,133        $     9,776           24 %
         Percent of revenue                   17 %               15 %

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

Sales and Marketing



                                      Three Months Ended September 30,
                                    2013                2012          Change
                                           (Dollars in thousands)
          Sales and marketing   $     24,608        $     24,881           (1 )%
          Percent of revenue              34 %                39 %

Sales and marketing expenses decreased by $273,000 from 2012 to 2013. The decrease was largely due to a decrease in personnel-related costs of $611,000, primarily due to a reduction in salary and stock-based compensation expense during the quarter and a decrease in the allocation of occupancy and general corporate expenses to sales and marketing. A significant contribution to the decrease in salary and stock-based compensation was due to the departure of an executive within the group. The decrease in the allocation of occupancy and general corporate expenses was due to a decrease in sales and marketing wages as a percentage of total wages within our company. The decrease was partially offset by increased advertising and promotional expenditures of $399,000 resulting from a change in the mix and timing of advertising campaigns including our investment in a television campaign.

General and Administrative



                                           Three Months Ended September 30,
                                        2013                2012          Change
                                                (Dollars in thousands)
        General and administrative   $     9,136         $     7,956           15 %
        Percent of revenue                    13 %                12 %

General and administrative expenses increased by $1.2 million from 2012 to 2013. Personnel-related costs increased by $1.1 million largely as a result of increasing the number of general and administrative employees to support our overall growth, including an increase in the number of employees focused on analytics and business intelligence. The company also recorded an expense of $483,000 in the three months ended September 30, 2013 related to estimated property taxes. The increase was partially offset by a decrease in professional service fees of $336,000.


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Acquisition Costs and Other Related Charges

Three Months Ended September 30,
2013 2012
(Dollars in thousands)

Acquisition costs and other related charges $ - $ (6,020 )

Acquisition costs and other related charges consisted primarily of an adjustment to decrease the fair value of the SinglePlatform contingent consideration liability by $6.1 million in the third quarter of 2012 due to the remeasurement of the fair value of our contingent consideration liability. The decrease in the estimated liability resulted from reductions to the SinglePlatform revenue forecast scenarios as a result of SinglePlatform's actual operating results and productivity of its sales organization. This adjustment was partially offset by transaction costs during the three months ended September 30, 2012 related to our acquisition of SinglePlatform that we completed in June 2012.

Interest Income and Other Income (Expense), Net

Three Months Ended September 30,
2013 2012 Change
(Dollars in thousands)

Interest income and other income (expense), net $ 133 $ 68 96 %

Interest income and other income (expense), net increased by $65,000 from 2012 to 2013 due primarily to an increase in foreign currency translation gains of $100,000 partially offset by a decrease in interest income as a result of lower investment balances in 2013 as compared to 2012.

Income Taxes



                                              Three Months Ended September 30,
                                                2013                    2012
                                                   (dollars in thousands)
   Income tax (expense) benefit            $        (2,215 )       $        (1,978 )
   Percent of income before income taxes                38 %                    23 %

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