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CTCT > SEC Filings for CTCT > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for CONSTANT CONTACT, INC.

Form 10-Q for CONSTANT CONTACT, INC.


7-May-2014

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, 2013 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 5, 2014. 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.

Overview

We are a leading provider of online marketing tools that are designed for small organizations, including small 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. Our tools include our email marketing, social media marketing, event marketing, local deals, online listings and survey products.

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 first quarter of 2014 with approximately 605,000 unique paying customers and had revenue for the first quarter of 2014 of $78.9 million.

Our business strategy is to expand beyond email marketing to provide an integrated multi-product offering that drives higher customer life-time value driven by improvements in average revenue per customer and retention. We believe increasing our customer's life-time value will be a key contributor to our continued success. To drive life-time value, we intend to continue to focus on acquiring and supporting customers in a cost-effective manner, increasing average revenue per customer (through cross-selling, list size growth and bundling of our products) and improving customer retention rates. We recently launched Constant Contact Toolkit™, an integrated online marketing platform that simplifies small business marketing by bringing together the tools needed to drive repeat customers and reach new ones. Toolkit combines new and existing elements of our product set into an integrated online marketing platform that makes it easy for small organizations to find and engage with current and new customers across all of the marketing channels; email, social, mobile and web. Toolkit is now available to all new customers through three different packages; Basic, Essential and Ultimate. We plan to also migrate existing customers to Toolkit. We believe Toolkit will allow us to achieve increased product usage, increased revenue per customer and higher retention rates.

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, 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;


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• "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. This 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.

• We recently launched Constant Contact Toolkit, our new bundled product offering that will allow our customers to have access to multiple products for one monthly fee. Following the launch of Toolkit, we no longer offer individual products to our new customers. Our efforts to offer product bundles may not result in significant revenue growth, may negatively impact trialer conversion rates, may be confusing to our customers and may disrupt existing product offerings, which still account for a significant majority of our revenue, any of which may harm our financial performance and impede our long-term growth strategy.

• In connection with our acquisition of SinglePlatform Inc., or SinglePlatform, as of March 31, 2014, we have an obligation to the former shareholders of SinglePlatform to pay additional cash consideration of up to $7.5 million, contingent on the achievement of certain revenue targets through June 2014. 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 as of March 31, 2014. If actual revenue achievement is significantly different than our estimates, we could be required to pay up to $7.5 million. In addition, our operating results could be adversely impacted if we fail to successfully integrate SinglePlatform or if we fail 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 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 operating results.

• 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, while expected to decline on a percentage of revenue basis, 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.


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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, 2013, 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, 2013. 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, 2013.

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 2013, 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. Our pricing for our SaveLocal product is a fee based on the number of deals sold by our customers and the value of the successful deal. 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 total revenue for each of the three months ended March 31, 2014 and 2013.

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 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.


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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. 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 continue to 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, accounting and analytics personnel, professional fees, board compensation and expenses, certain taxes and other corporate expenses. In 2013, we also recorded litigation expense related to the settlement of a lawsuit and an accrual related to estimated personal property taxes. We expect that general and administrative expenses will increase in absolute dollars 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 but to decrease 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 evaluate quarterly remeasurements of the fair value of this liability through June 2014, the last settlement date. We may also incur acquisition costs and other related charges in future periods if we complete additional acquisitions.

Results of Operations

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

Revenue

Three Months Ended March 31,
2014 2013 Change
(Dollars in thousands)

Revenue $ 78,874 $ 68,205 16 %

Revenue increased by $10.7 million from 2013 to 2014. The increase resulted primarily from an approximately 9% increase in the number of average monthly customers and an approximately 7% increase in average revenue per customer. The increase in average revenue per customer was primarily due to new packaging and pricing plans rolled out to a subset of our customers and to revenue from our SinglePlatform product. We expect our average revenue per customer to increase over time.


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Cost of Revenue



                                        Three Months Ended March 31,
                                     2014              2013         Change
                                           (Dollars in thousands)
             Cost of revenue      $    21,727        $  19,908            9 %
             Percent of revenue            28 %             29 %

Cost of revenue increased by $1.8 million from 2013 to 2014. The increase in absolute dollars resulted primarily from an increase in depreciation, hosting and maintenance costs of $472,000 as a result of scaling and adding capacity to our hosting infrastructure. Personnel costs in our operations group, which is responsible for managing our technology infrastructure, increased by $224,000 and customer support personnel costs increased by $443,000 to support our customer growth. Merchant card fees increased by $278,000 due to the higher volume of billing transactions.

Research and Development



                                            Three Months Ended March 31,
                                         2014              2013        Change
                                               (Dollars in thousands)
           Research and development   $    13,074        $ 10,268           27 %
           Percent of revenue                  17 %            15 %

Research and development expenses increased by $2.8 million from 2013 to 2014. The increase was due primarily to additional personnel-related costs of $2.4 million 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,
                                      2014              2013         Change
                                            (Dollars in thousands)
             Sales and marketing   $    32,800        $  30,802            6 %
             Percent of revenue             42 %             45 %

Sales and marketing expenses increased by $2.0 million from 2013 to 2014. The increase in absolute dollars was largely due to personnel-related costs of $1.8 million.

General and Administrative



                                             Three Months Ended March 31,
                                         2014               2013         Change
                                                (Dollars in thousands)
         General and administrative   $    10,120        $    9,840            3 %
         Percent of revenue                    13 %              14 %

General and administrative expenses increased by $280,000 from 2013 to 2014. The increase in absolute dollars was primarily due to additional personnel costs of $1.1 million as a result of increasing the number of general and administrative employees to support our overall growth, partially offset by a decrease of $1.0 million in legal expense from 2013 to 2014. In 2013, we recorded a litigation expense accrual of $820,000 related to the proposed settlement of a lawsuit. This lawsuit was fully settled in the fourth quarter of 2013.

Interest and other income (expense), net

Three Months Ended March 31, 2014 2013 Change

(Dollars in thousands)

Interest and other income (expense) net $ 23 $ (29 ) 179 %


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Interest and other income (expense), net increased by $52,000 from 2013 to 2014 due to an increase in interest earned on our investment portfolio as a result of higher balances and a decrease in foreign currency transaction expense.

Income Taxes



                                                   Three Months Ended March 31,
                                                   2014                 2013
                                                      (dollars in thousands)
  Income tax expense (benefit)                   $     328         $        (1,988 )
  Percent of income (loss) before income taxes          28 %                    75 %

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 2014, which has been applied to our income before income taxes for the three months ended March 31, 2014, varies from the statutory rate primarily due to non-deductible stock-based compensation expense that increases the effective tax rate, partially offset by state research and development credits that decrease the effective tax rate. The U.S. federal research and development credit has not yet been enacted for 2014 and therefore, is not included in our estimated effective tax rate for 2014. The income tax expense for the first quarter of 2014 was further reduced by the impact of disqualifying dispositions of incentive stock options during the period. Our estimated effective tax rate for 2013, which has been applied to our loss before income taxes for the three months 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.

Liquidity and Capital Resources

During the first quarter of 2014 and 2013, we funded our operations with cash flows generated from operations. At March 31, 2014, our principal sources of liquidity were cash and cash equivalents and marketable securities of $131 million.

The following table summarizes our sources and uses of cash for each of the periods presented below:

                                                     Three Months Ended March 31,
                                                       2014                  2013
                                                            (in thousands)
Cash provided by operating activities             $       11,091         $      9,008
Cash provided by (used in) investing activities   $       (9,027 )       $      5,431
Cash provided by financing activities             $        2,516         $        188

Net cash provided by operating activities

During the three months ended March 31, 2014, operating activities provided $11.1 million of cash. The cash flow provided by operating activities primarily resulted from our net income of $848,000, our net non-cash charges of $9.7 million and cash provided by changes in our operating assets and liabilities of $1.3 million. These amounts were partially offset by cash used to pay taxes for net settlement of equity awards of $751,000. Our net non-cash charges in the first quarter of 2014 primarily consisted of $5.9 million of depreciation and amortization of our long-lived assets and $3.9 million of stock-based compensation. Cash provided from changes in our operating assets and liabilities during the three months ended March 31, 2014 consisted primarily of a $2.1 . . .

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