Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - Constant Contact, Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - Constant Contact, Inc. | b87807exv31w1.htm |
EX-32.2 - EX-32.2 - Constant Contact, Inc. | b87807exv32w2.htm |
EX-31.2 - EX-31.2 - Constant Contact, Inc. | b87807exv31w2.htm |
EX-32.1 - EX-32.1 - Constant Contact, Inc. | b87807exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33707
CONSTANT CONTACT, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-3285398 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer | |
Identification No.) | ||
1601 Trapelo Road, Third Floor | ||
Waltham, Massachusetts | 02451 | |
(Address of principal executive offices) | (Zip Code) |
(781) 472-8100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of October 31, 2011, there were 29,740,797 shares of the registrants Common Stock, par
value $.01 per share, outstanding.
CONSTANT CONTACT, INC.
INDEX
PAGE | ||||||||
NUMBER | ||||||||
1 | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
14 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
41 | ||||||||
42 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Constant Contact, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Unaudited)
September 30, | December 31, | |||||||
(In thousands, except share and per share data) | 2011 | 2010 | ||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 35,931 | $ | 32,892 | ||||
Marketable securities |
91,771 | 91,461 | ||||||
Accounts receivable, net of allowance for doubtful accounts |
52 | 44 | ||||||
Prepaid expenses and other current assets |
5,670 | 5,562 | ||||||
Total current assets |
133,424 | 129,959 | ||||||
Property and equipment, net |
32,796 | 29,723 | ||||||
Restricted cash |
750 | 750 | ||||||
Goodwill |
18,448 | 5,248 | ||||||
Acquired intangible assets, net |
2,339 | 781 | ||||||
Other assets |
2,162 | 1,214 | ||||||
Total assets |
$ | 189,919 | $ | 167,675 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 4,386 | $ | 7,444 | ||||
Accrued expenses |
11,465 | 6,724 | ||||||
Deferred revenue |
28,375 | 25,103 | ||||||
Total current liabilities |
44,226 | 39,271 | ||||||
Other long-term liabilities |
2,317 | 2,282 | ||||||
Total liabilities |
46,543 | 41,553 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding at September
30, 2011 and December 31, 2010 |
| | ||||||
Common stock, $0.01 par value; 100,000,000 shares
authorized at September 30, 2011 and December 31, 2010;
29,721,576 and 29,337,333 shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively |
297 | 293 | ||||||
Additional paid-in capital |
181,395 | 168,974 | ||||||
Accumulated other comprehensive income |
58 | 13 | ||||||
Accumulated deficit |
(38,374 | ) | (43,158 | ) | ||||
Total stockholders equity |
143,376 | 126,122 | ||||||
Total liabilities and stockholders equity |
$ | 189,919 | $ | 167,675 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
Constant Contact, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands, except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenue |
$ | 54,346 | $ | 44,828 | $ | 156,888 | $ | 126,764 | ||||||||
Cost of revenue |
15,679 | 12,694 | 45,595 | 37,096 | ||||||||||||
Gross profit |
38,667 | 32,134 | 111,293 | 89,668 | ||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
7,338 | 5,890 | 22,325 | 17,454 | ||||||||||||
Sales and marketing |
19,455 | 18,773 | 66,204 | 57,694 | ||||||||||||
General and administrative |
6,191 | 4,551 | 17,887 | 13,454 | ||||||||||||
Total operating expenses |
32,984 | 29,214 | 106,416 | 88,602 | ||||||||||||
Income from operations |
5,683 | 2,920 | 4,877 | 1,066 | ||||||||||||
Interest and other income |
80 | 81 | 264 | 249 | ||||||||||||
Income before income taxes |
5,763 | 3,001 | 5,141 | 1,315 | ||||||||||||
Income tax expense |
(410 | ) | (59 | ) | (357 | ) | (59 | ) | ||||||||
Net income |
$ | 5,353 | $ | 2,942 | $ | 4,784 | $ | 1,256 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.10 | $ | 0.16 | $ | 0.04 | ||||||||
Diluted |
$ | 0.18 | $ | 0.10 | $ | 0.16 | $ | 0.04 | ||||||||
Weighted average shares outstanding used in computing per share amounts: |
||||||||||||||||
Basic |
29,631 | 28,887 | 29,481 | 28,666 | ||||||||||||
Diluted |
30,399 | 29,937 | 30,679 | 29,820 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
Constant Contact, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 4,784 | $ | 1,256 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
10,567 | 8,595 | ||||||
Amortization of premium on investments |
493 | 36 | ||||||
Stock-based compensation expense |
8,643 | 5,810 | ||||||
Recovery of bad debts |
(1 | ) | (1 | ) | ||||
Gain on sales of marketable securities |
(13 | ) | | |||||
Deferred income taxes |
221 | | ||||||
Taxes paid related to net share settlement of restricted stock |
(154 | ) | | |||||
Changes in operating assets and liabilities, net of effects from acquisition: |
||||||||
Accounts receivable |
(7 | ) | 6 | |||||
Prepaid expenses and other current assets |
(108 | ) | (1,148 | ) | ||||
Other assets |
(948 | ) | (54 | ) | ||||
Accounts payable |
(3,058 | ) | (113 | ) | ||||
Accrued expenses |
4,741 | 2,781 | ||||||
Deferred revenue |
3,272 | 4,109 | ||||||
Other long-term liabilities |
(186 | ) | (827 | ) | ||||
Net cash provided by operating activities |
28,246 | 20,450 | ||||||
Cash flows from investing activities |
||||||||
Purchases of marketable securities |
(111,035 | ) | (84,261 | ) | ||||
Proceeds from maturities of marketable securities |
28,563 | 72,695 | ||||||
Proceeds from sales of marketable securities |
81,727 | | ||||||
Payments for acquisitions, net of cash acquired |
(15,000 | ) | (2,225 | ) | ||||
Acquisition of property and equipment, including costs capitalized for
development of internal use software |
(12,921 | ) | (11,917 | ) | ||||
Net cash used in investing activities |
(28,666 | ) | (25,708 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of common stock pursuant to the exercise of stock options |
3,024 | 2,306 | ||||||
Proceeds from issuance of common stock pursuant to employee stock purchase plan |
435 | 390 | ||||||
Net cash provided by financing activities |
3,459 | 2,696 | ||||||
Net increase (decrease) in cash and cash equivalents |
3,039 | (2,562 | ) | |||||
Cash and cash equivalents, beginning of period |
32,892 | 59,822 | ||||||
Cash and cash equivalents, end of period |
$ | 35,931 | $ | 57,260 | ||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||
Issuance of common stock in connection with the acquisition of Nutshell Mail, Inc. |
$ | | $ | 3,603 | ||||
Capitalization of stock-based compensation |
477 | 204 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
Constant Contact, Inc.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except share and per share amounts)
(amounts in thousands, except share and per share amounts)
1. Nature of the Business
Constant Contact, Inc. (the Company) was incorporated as a Massachusetts corporation in 1995. The
Company reincorporated in the State of Delaware in 2000. The Company is a leading provider of
on-demand email marketing, social media marketing, event marketing and online survey products to
small organizations, including small businesses, associations and non-profits. The Companys email
marketing product allows customers to create, send and track email marketing campaigns. The
Companys social media marketing features allow customers to easily manage and optimize their
presence across multiple social media networks. The Companys event marketing product enables
customers to promote and manage events, track event registrations and collect online payments. The
Companys online survey product enables customers to create and send surveys and analyze the
responses. These products are designed and priced for small organizations and are marketed directly
by the Company and through a wide variety of partners.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements
include those of the Company and its
subsidiaries, Constant Contact Securities Corporation, a
Massachusetts corporation, and Constant Contact (UK) Limited,
a corporation, organized under the laws of England and Wales, after elimination
of all intercompany accounts and transactions. The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States
of America (GAAP).
The condensed consolidated balance sheet at December 31, 2010 was derived from audited financial
statements, but does not include all disclosures required by GAAP. The accompanying unaudited
condensed consolidated financial statements as of September 30, 2011 and for the three and nine
months ended September 30, 2011 and 2010 have been prepared by the Company, pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC) for interim financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
However, the Company believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction
with the Companys audited consolidated financial statements and the notes thereto for the year
ended December 31, 2010 included in the Companys Annual Report on Form 10-K, File Number
001-33707, on file with the SEC.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments
necessary for a fair statement of the Companys consolidated financial position as of September 30,
2011 and consolidated results of operations for the three and nine months ended September 30, 2011
and 2010 and consolidated cash flows for the nine months ended September 30, 2011 and 2010, have
been made. The condensed consolidated results of operations for the three and nine months ended
September 30, 2011 and cash flows for the nine months ended September 30, 2011 are not necessarily
indicative of the results of operations and cash flows that may be expected for the year ending
December 31, 2011.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. On an ongoing basis,
management evaluates these estimates, judgments and assumptions, including those related to revenue
recognition, stock-based compensation, goodwill and acquired intangible assets, capitalization of
software and website development costs and income taxes. The Company bases these estimates on
historical and anticipated results and trends and on various other assumptions that the Company
believes are reasonable under the circumstances, including assumptions as to future events. These
estimates form the basis for
4
Table of Contents
making judgments about the carrying values of assets and liabilities
and recorded revenue and expenses that are not readily apparent from other sources. Actual results
could differ from these estimates.
Revenue Recognition
The Company provides access to its products through subscription arrangements whereby the customer
is charged a fee for access for a defined term. Subscription arrangements include access to use the
Companys software via the Internet and support services, such as telephone, email and chat
support. When there is evidence of an arrangement, the fee is fixed or determinable and
collectability is deemed reasonably assured, the Company recognizes revenue on a daily basis over
the subscription period as the services are delivered. Delivery is considered to have commenced at
the time the customer has paid for the products and has access to the account via a log-in and
password. The Company also offers ancillary services to its customers related to its products such
as custom services and training. Custom services and training revenue is accounted for separate
from subscription revenue as those services have value on a standalone basis, do not involve a
significant degree of risk or unique acceptance criteria and as the fair value of the Companys
subscription services is evidenced by their availability on a standalone basis. Custom services and
training revenue is recognized as the services are performed.
Effective January 1, 2011, the Company adopted new guidance applicable to revenue arrangements with
multiple deliverables. The adoption of this guidance did not have a material effect on the
consolidated financial statements.
Goodwill and Acquired Intangible Assets
The Company records goodwill when consideration paid in a business acquisition exceeds the
fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is
not amortized, but rather is tested for impairment annually or more frequently if facts and
circumstances warrant a review. The Company performs its annual assessment for impairment of
goodwill on November 30 and has determined that there is a single reporting unit for the purpose of
conducting this annual goodwill impairment assessment. For purposes of assessing potential
impairment, the Company annually estimates the fair value of the reporting unit (based on the
Companys market capitalization) and compares this amount to the carrying value of the reporting
unit (as reflected by the Companys total stockholders equity). If the Company determines that the
carrying value of the reporting unit exceeds its fair value, an impairment charge would be
required.
Intangible assets acquired in a business combination are recorded under the acquisition method
of accounting at their estimated fair values at the date of acquisition. As the pattern of
consumption of the economic benefits of the intangible assets cannot be reliably determined, the
Company amortizes acquired intangible assets over their estimated useful lives on a straight-line
basis.
Capitalization of Software and Web Site Development Costs
Relative to development costs of its on-demand products and website, the Company capitalizes
certain direct costs to develop functionality as well as certain upgrades and enhancements that are
probable to result in additional functionality. The costs incurred in the preliminary stages of
development are expensed as incurred. Once an application has reached the development stage,
internal and external costs, if direct and incremental, are capitalized as part of property and
equipment until the software is substantially complete and ready for its intended use. Capitalized
software is amortized over a three-year period in the expense category to which the software
relates.
Comprehensive Income
Comprehensive income includes net income, as well as other changes in stockholders equity that
result from transactions and economic events other than those with stockholders. The Companys only
element of other comprehensive income is unrealized gains and losses on available-for-sale
securities.
5
Table of Contents
Comprehensive income was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 5,353 | $ | 2,942 | $ | 4,784 | $ | 1,256 | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized gains (losses) on available-for-sale securities, net |
11 | 9 | 58 | (5 | ) | |||||||||||
Reclassification adjustment for realized gains on
available-for-sale securities included in net income |
(1 | ) | | (13 | ) | | ||||||||||
Comprehensive income |
$ | 5,363 | $ | 2,951 | $ | 4,829 | $ | 1,251 | ||||||||
At September 30, 2011, marketable securities by security type consisted of:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bills and Notes |
$ | 45,846 | 61 | $ | | $ | 45,907 | |||||||||
International Government Bonds |
1,003 | | | 1,003 | ||||||||||||
Corporate and Agency Bonds |
42,865 | 10 | (13 | ) | 42,862 | |||||||||||
Commercial Paper |
1,999 | | | 1,999 | ||||||||||||
Total |
$ | 91,713 | $ | 71 | $ | (13 | ) | $ | 91,771 | |||||||
At September 30, 2011, marketable securities consisted of investments that mature within one year
with the exception of U.S. Treasury Notes with a fair value of $13,032 and agency bonds with a fair
value of $6,509, which have maturities within two years.
At December 31, 2010, marketable securities by security type consisted of:
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bills |
40,191 | 21 | (2 | ) | 40,210 | |||||||||||
International Government Bond |
510 | | (1 | ) | 509 | |||||||||||
Corporate and Agency Bonds |
47,304 | 6 | (11 | ) | 47,299 | |||||||||||
Commercial Paper |
3,443 | | | 3,443 | ||||||||||||
Total |
$ | 91,448 | $ | 27 | $ | (14 | ) | $ | 91,461 | |||||||
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of unobservable inputs. A
fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last is considered unobservable, are used to measure fair value:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
6
Table of Contents
The Company had cash equivalents of $11,523 and $23,488 at September 30, 2011 and December 31,
2010, respectively, which were invested in money market instruments at September 30, 2011 and in
money market instruments and agency bonds at December 31, 2010. The Company carries its cash
equivalents and marketable securities at fair value based on quoted market prices. Quoted market
prices are a Level 1 measurement in the hierarchy of fair value measurements. The Company also
considers receivables related to customer credit card purchases of $2,836 and $1,114 at September
30, 2011 and December 31, 2010, respectively, to be equivalent to cash.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number
of unrestricted common shares outstanding for the period.
Diluted net income per share is computed by dividing net income by the sum of the weighted
average number of unrestricted common shares outstanding during the period and the weighted average
number of potential common shares from the assumed exercise of stock options and the vesting of
shares of restricted stock and restricted stock units using the treasury stock method when the effect is not
anti-dilutive.
The following is a summary of the shares used in computing diluted net income per share:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Weighted average shares used in calculating basic net income per share |
29,631 | 28,887 | 29,481 | 28,666 | ||||||||||||
Stock options |
757 | 1,047 | 1,164 | 1,152 | ||||||||||||
Warrants |
1 | 1 | 1 | 1 | ||||||||||||
Unvested restricted shares and restricted share units |
10 | 2 | 33 | 1 | ||||||||||||
Shares used in computing diluted net income per share |
30,399 | 29,937 | 30,679 | 29,820 | ||||||||||||
The following common stock equivalents were excluded from the computation of diluted net income per
share because they had an anti-dilutive impact because the proceeds from the exercise of the
options under the treasury stock method were in excess of the average fair market value for the
period:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Options to purchase common stock |
3,224 | 2,021 | 1,856 | 1,837 | ||||||||||||
Restricted shares and restricted share units |
116 | | 39 | | ||||||||||||
Total options, restricted shares and
restricted share units exercisable into
or issuable by common stock |
3,340 | 2,021 | 1,895 | 1,837 | ||||||||||||
Accounting for Stock-Based Compensation
The Company values all stock-based compensation, including grants of stock options, restricted
stock and restricted stock units, at fair value on the date of grant, and expenses the fair value
over the applicable service period. The straight-line method is applied to all grants with service
conditions, while the graded vesting method is applied to all grants with both service and
performance conditions.
Income Taxes
Income taxes are provided for tax effects of transactions reported in the financial statements and
consist of income taxes currently due plus deferred income taxes related to timing differences
between the basis of certain assets and liabilities for financial statement and income tax
reporting purposes. Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. A valuation allowance is provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.
7
Table of Contents
The Company accounts for uncertainty in income taxes recognized in the financial statements by
applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax
position must be evaluated to determine the likelihood that it will be sustained upon external
examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position
is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount
that has a greater than 50% likelihood of being realized upon ultimate settlement.
Segment Data
The Company manages its operations as a single segment for purposes of assessing performance and
making operating decisions. Revenue is generated predominately in the U.S. and all significant
assets are held in the U.S.
New Accounting Guidance
In June 2011, the Financial Accounting Standards Board issued new accounting guidance on the
presentation of comprehensive income to provide companies with two options for presenting
comprehensive income. Companies can present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. This guidance
eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders equity. This guidance is effective for the Company on January
1, 2012. Early adoption is permitted. As the new guidance relates only to how comprehensive income
is disclosed and does not change the items that must be reported as comprehensive income, adoption
will not have an effect on the Companys consolidated financial statements.
3. Acquisition of Bantam Networks, LLC
On February 15, 2011, the Company acquired substantially all of the assets, excluding cash, of
Bantam Networks, LLC, a Delaware limited liability company (Bantam Networks), for a cash purchase
price of $15,000. Bantam Networks is a contact management and social customer relationship
management (CRM) software provider. The Company purchased the assets of Bantam Networks in order
to expand the CRM functionality of its products. The operating expenses of Bantam Networks have
been included in the consolidated financial statements beginning on the acquisition date and are
not material to the consolidated results of the Company.
The Company allocated the purchase price as follows:
Purchased technology |
$ | 1,800 | ||
Goodwill |
13,200 | |||
Total assets acquired |
$ | 15,000 | ||
The purchased technology was valued using the cost to replace method. The estimated economic life
of the purchased technology is three years and amortization will commence once the software is
ready for its intended use.
Goodwill was recognized for the excess purchase price over the fair value of the assets acquired.
Goodwill is primarily attributable to Bantam Networks knowledge of CRM and expertise in working
with contact management software. Goodwill from the Bantam Networks acquisition will be included
within the Companys one reporting unit and will be included in the Companys enterprise-level
annual review for impairment. Goodwill resulting from the acquisition of Bantam Networks is
deductible for tax purposes.
The following table presents the pro forma results of the historical condensed consolidated
statements of operations of the Company and Bantam Networks for the nine month period ended
September 30, 2011 and the three and nine month periods ended September 30, 2010, giving effect to
the merger as if it occurred on January 1, 2010:
8
Table of Contents
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2010 | 2011 | 2010 | ||||||||||
Pro forma revenue |
$ | 44,828 | $ | 156,888 | $ | 126,764 | ||||||
Pro forma net income |
$ | 2,689 | 4,657 | $ | 498 | |||||||
Pro forma net income per share: |
||||||||||||
Basic |
$ | 0.09 | $ | 0.16 | $ | 0.02 | ||||||
Diluted |
$ | 0.09 | $ | 0.15 | $ | 0.02 | ||||||
The pro forma net income and net income per share presented primarily include adjustments for
revenue, amortization, interest income and income taxes. This pro forma information does not
purport to indicate the results that would have actually been obtained had the acquisition been
completed on the assumed date, or which may be realized in the future.
4. Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $18,448 as of September 30, 2011. The change in the carrying
amount of goodwill for the nine months ended September 30, 2011 was as follows:
Balance as of December 31, 2010 |
$ | 5,248 | ||
Goodwill related to the acquisition of Bantam Networks |
$ | 13,200 | ||
Balance as of September 30, 2011 |
$ | 18,448 | ||
The Companys goodwill resulted from the acquisition of Nutshell Mail, Inc. (NutshellMail)
in May 2010 and the acquisition of substantially all of the assets of Bantam Networks in February
2011. Goodwill is not amortized, but instead is reviewed for impairment at least annually in the
fourth quarter or more frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. The Company has not recorded an impairment
charge to date.
Acquired intangible assets consist of developed technology and are stated at cost less accumulated
amortization. Amortization is on a straight-line basis over the estimated economic life of three
years commencing once the software is ready for its intended use. The gross and net carrying amount
of acquired intangible assets was $2,770 and $2,339, respectively, at September 30, 2011. Future
estimated amortization expense for the NutshellMail developed software is $81 for the remainder of
2011, $323 for 2012 and $135 for 2013. Amortization of the intangible asset related to developed
technology acquired from Bantam Networks has not yet commenced as the software is not yet ready for
its intended use.
5. Stock-Based Awards
Stock Incentive Plan
The Companys 2007 Stock Incentive Plan (2007 Plan) permitted the Company to make grants of
incentive stock options, non-statutory stock options, restricted stock, restricted stock units and
other stock-based awards with a maximum term of ten years. In conjunction with the approval by
stockholders of the 2011 Stock Incentive Plan, the board of directors voted that no further stock
options or other equity-based awards shall be granted under the 2007 Plan.
In March 2011, the Board of Directors adopted the 2011 Stock Incentive Plan (2011 Plan). The
2011 Plan was approved by the stockholders in May 2011. The 2011 Plan permits the Company to make
grants of incentive stock options, non-statutory stock options, restricted stock, restricted stock
units, stock appreciation rights and other stock-based awards with a maximum term of seven years.
These awards may be granted to the Companys employees, officers, directors, consultants, and
advisors. The Company reserved 4,200,000 shares of its common stock for the issuance under the 2011
Plan. Additionally, per the terms of the 2011 Plan, shares of common stock previously reserved for
issuance under the 2007 Plan as well shares reserved for outstanding awards under the 1999 Stock
Option/Stock Issuance Plan and 2007 Plan for which the awards are cancelled, forfeited, repurchased
or otherwise result in common stock not being issued will be added to the number of shares
available for issuance under the 2011 Plan. Awards that are granted with a per share or per unit
purchase price less than 100% of fair market value as of
9
Table of Contents
the date of grant (e.g., restricted stock and restricted stock unit awards) shall count
towards the total number of shares reserved for issuance under the 2011 Plan on a two-for-one
basis. As of September 30, 2011, 4,367,581 shares of common stock were available for issuance
under the 2011 Plan.
Stock Purchase Plan
The Companys 2007 Employee Stock Purchase Plan, as amended (the Purchase Plan), became effective
upon the completion of the Companys initial public offering. Six-month offering periods begin on
January 1 and July 1 of each year, during which employees may elect to purchase shares of the
Companys common stock according to the terms of the offering. The per share purchase price for
offerings is equal to 85% of the closing market price of the Companys common stock on the last day
of the offering period. The first offering period of 2011 began on January 1, 2011 and was
completed on June 30, 2011. The second offering period of 2011 began on July 1, 2011 and will be
completed on December 31, 2011. As of September 30, 2011, 210,170 shares of common stock were
available for issuance to participating employees under the Purchase Plan.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense on all awards in the following expense
categories:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenue |
$ | 408 | $ | 281 | $ | 1,141 | $ | 804 | ||||||||
Research and development |
831 | 586 | 2,360 | 1,559 | ||||||||||||
Sales and marketing |
478 | 473 | 1,934 | 1,347 | ||||||||||||
General and administrative |
1,075 | 754 | 3,208 | 2,100 | ||||||||||||
$ | 2,792 | $ | 2,094 | $ | 8,643 | $ | 5,810 | |||||||||
In 2011, the Company granted 190,000 options with a grant date fair value of $14.28 per share that
had performance-based vesting criteria. The vesting of these options is determined by a two-tiered
target. If either target is achieved, a corresponding number of options vest. If neither of the
performance objectives is achieved by December 31, 2011, the options will be cancelled. For
financial reporting purposes, the Company has assessed the probability of achieving either of the
performance goals as not probable and, accordingly, has not recorded stock-based compensation
expense associated with these options.
6. Income Taxes
For the three and nine months ended September 30, 2011, the Company recorded an income tax expense
of $410 and $357, respectively. These amounts consisted of a current income tax expense of $347
and $136 for the three and nine months ended September 30, 2011, respectively, and a deferred
income tax expense of $63 and $221 for the three and nine months ended September 30, 2011,
respectively. The current income tax expense recorded for the three and nine months ended
September 30, 2011 related to the Companys income before taxes for the period multiplied by its
estimated annual effective tax rate for 2011. The Company expects to generate federal and state
taxable income for the full year 2011. The Companys federal taxable income is expected to be
fully offset by net operating loss carryforwards and other deferred tax attributes. However, the
Company will be subject to state income taxes. The deferred income tax expense related to the
amortization for tax purposes of goodwill from the Bantam Networks acquisition.
The Company recorded an income tax expense of $59 for the three and nine months ended
September 30, 2010 related to the Companys income before taxes for the period multiplied by its
estimated annual effective tax rate for 2010.
The Company had gross deferred tax assets of $19,766 at December 31, 2010, which has not changed
significantly at September 30, 2011 other than a reduction in net operating loss carryforwards as a
result of taxable net income generated through September 30, 2011. The Company has provided a
valuation allowance for the full amount of its net deferred tax assets because, at September 30,
2011 and December 31, 2010, it was not more likely than not that
any future benefit from deductible temporary differences and net operating loss and tax credit
carryforwards would be realized.
10
Table of Contents
The Company has not recorded any amounts for unrecognized tax benefits as of September 30, 2011 or
December 31, 2010. As of September 30, 2011 and December 31, 2010, the Company had no accrued
interest or tax penalties recorded. The Companys income tax return reporting periods since
December 31, 2008 are open to income tax audit examination by the federal and state tax
authorities. In addition, because the Company has net operating loss carryforwards, the Internal
Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net
operating losses generated in those years.
7. Accrued Expenses
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Payroll and payroll related |
$ | 4,252 | $ | 2,638 | ||||
Licensed software and maintenance |
1,197 | 1,216 | ||||||
Marketing programs |
2,449 | 426 | ||||||
Other accrued expenses |
3,567 | 2,444 | ||||||
$ | 11,465 | $ | 6,724 | |||||
8. Commitments and Contingencies
Office Leases
In May 2009, the Company entered into a new lease (the New Lease) that superseded the
original lease for its headquarters. The New Lease, effective through September 30, 2015 with one
five-year extension option, includes the space under the original lease as well as additional space
that will be made available to the Company at various points during the term of the New Lease. The
New Lease also includes payment escalations and rent holidays. Under the New Lease, the landlord is
responsible for making certain improvements to the leased space at an agreed upon cost to the
landlord. If the landlord and the Company mutually agree to make improvements that cost in excess
of the agreed upon landlord cost, the landlord bills that excess cost to the Company as additional
rent. This additional rent is included in the net calculation of lease incentives, so that rent
expense per square foot is recognized on a straight-line basis over the remaining term of
occupancy. In September 2010, the Company amended the New Lease to include a small amount of
additional space. All other terms and conditions of the amendment, inclusive of the landlords
obligations to make certain improvements, are consistent with the New Lease.
The Company leases a sales and support office in Colorado under a lease agreement effective
through April 2019 with three three-year extension options. The agreement contains certain lease
incentives and payment escalations.
The Company also leases small amounts of general office space in Florida, New York,
California and the United Kingdom under lease agreements that expire at various dates through 2014.
Lease incentives, payment escalations and rent holidays specified in the lease agreements are
accrued or deferred as appropriate such that rent expense per square foot is recognized on a
straight-line basis over the terms of occupancy.
At September 30, 2011 and December 31, 2010, the Company had both prepaid rent and accrued rent
balances related to its office leases. The prepaid rent balance was $1,300 at September 30, 2011,
of which $444 was included in prepaid expenses and other current assets and $856 was included in
other assets. The accrued rent balance was $2,355 at September 30, 2011, of which $260 was included
in accrued expenses and $2,095 was included in other long-term liabilities. The prepaid rent
balance was $1,076 at December 31, 2010, of which $371 was included in prepaid expenses and other
current assets and $705 was included in other assets. The accrued rent balance was $2,525 at
December 31, 2010, of which $243 was included in accrued expenses and $2,282 was included in other
long-term liabilities.
Total rent expense under office leases was $1,567 and $4,567 for the three and nine months
ended September 30, 2011, respectively, and $1,265 and $3,611 for the three and nine months ended
September 30, 2010, respectively.
11
Table of Contents
As of September 30, 2011, future minimum lease payments under non-cancellable office leases are as
follows:
Remainder of 2011 |
$ | 1,317 | ||
2012 |
5,567 | |||
2013 |
5,610 | |||
2014 |
5,631 | |||
2015 |
4,473 | |||
Thereafter |
3,162 | |||
Total |
$ | 25,760 | ||
Third-party Hosting Agreements
The Company has agreements with various vendors to provide specialized space and equipment and
related services from which the Company hosts its software applications. In 2010, the Company
signed a hosting facilities agreement in a new datacenter, which the Company began occupying in
2011. In the first quarter of 2011, the Company signed a new hosting facility agreement that
superseded an existing hosting facilities agreement. The term was also extended for an additional
three years from the original term.
Payment escalations and rent holidays specified in these agreements are accrued or deferred as
appropriate such that rent expense per square foot is recognized on a straight-line basis over the
terms of occupancy. At September 30, 2011, the Company had prepaid rent of $495, which was
included in other assets.
The agreements include payment commitments that expire at various dates through mid-2017. As
of September 30, 2011, future minimum payments under these non-cancellable agreements are as
follows:
Remainder of 2011 |
1,005 | |||
2012 |
4,620 | |||
2013 |
3,385 | |||
2014 |
3,111 | |||
2015 |
3,204 | |||
Thereafter |
4,076 | |||
Total |
$ | 19,401 | ||
Vendor Commitments
As of September 30, 2011, the Company had issued both cancellable and non-cancellable purchase
orders and entered into contractual commitments with various vendors totaling $7,032 related
primarily to marketing programs and other non-marketing goods and services to be delivered over the
next twelve months.
Letters of Credit and Restricted Cash
As of September 30, 2011 and December 31, 2010, the Company maintained a letter of credit totaling
$750 for the benefit of the landlord of the Companys corporate headquarters lease. The landlord
can draw against the letter of credit in the event of default by the Company. The Company was
required to maintain a cash balance of at least $750 as of September 30, 2011 and December 31,
2010, to secure the letter of credit. This amount was classified as restricted cash in the balance
sheet at September 30, 2011 and December 31, 2010.
Indemnification Obligations
The Company enters into standard indemnification agreements with the Companys channel partners and
certain other third parties in the ordinary course of business. Pursuant to these agreements, the
Company indemnifies and
12
Table of Contents
agrees to reimburse the indemnified party for losses incurred by the
indemnified party in connection with certain intellectual property infringement and other claims by
any third party with respect to the Companys business and technology. Based on historical
information and information known as of September 30, 2011, the Company does not expect it will
incur any significant liabilities under these indemnification agreements.
Legal Matters
From time to time, the Company may become involved in legal proceedings arising in the
ordinary course of its business. The Company is not presently a party to any legal proceedings
that, in its opinion, would have a material adverse effect on the Companys business, results of
operations or financial condition.
9. 401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue
Code. This plan covers substantially all employees who meet minimum age and service requirements
and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the Board of Directors. The Company
elected to make matching contributions for the plan years ending December 31, 2011 and 2010 at a
rate of 100% of each employees contribution up to a maximum matching contribution of 3% of the
employees compensation and at a rate of 50% of each employees contribution in excess of 3% up to
a maximum of 5% of the employees compensation.
Through September 30, 2011 and 2010, the Company made matching contributions of $1,450 and
$1,275 for the plan years ended December 31, 2011 and 2010, respectively.
13
Table of Contents
Item 2. Managements 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 managements discussion and analysis of
financial condition and results of operations for the year ended December 31, 2010 included in our
Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 9,
2011. 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 solutions, including email marketing, social media
marketing, event marketing and surveys, 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. We are committed to helping small
businesses succeed and have
a long history of delivering cost effective, easy-to-use products, support, Knowhow and coaching
with a personal touch, all of which allow our customers to create and grow their own 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 and other marketing efforts,
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 the emails sent by our customers.
Our on-demand email marketing product was first offered in 2000. Since that time we have
experienced significant growth in revenue and number of customers. We ended 2010 with approximately
435,000 unique paying customers and had revenue for that year of $174 million. As of September 30,
2011, our unique paying customers increased to approximately 485,000 and we had revenue of $157
million through the third quarter of 2011.
Our business strategy focuses on expanding beyond email marketing to a multi-product
strategy to drive higher customer lifetime value through gains in revenue per customer, retention and
gross margin. We believe increasing our customers 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 and driving increased product
usage by our customers. We will continue to invest in broadening our platform of solutions, which
we believe will enable our customers to create and grow their customer and member relationships.
Accomplishments through the third quarter of 2011 that we believe will drive future growth include:
| We opened and staffed our United Kingdom office during the third quarter, marking our first direct expansion outside of North America. We will continue to increase our international resources and |
14
Table of Contents
plans to establish a market leadership position internationally as we have done domestically. | |||
| Constant Contact Event Marketing surpassed 30,000 paying customers in the third quarter. | ||
| In the second quarter we continued our investment in innovation, launching a number of new tools such as the social media Quickstarter, a completely free step-by-step guide that offers short tutorials for getting up and running and improving success with the most popular social media networks, and Simple Share, which gives small businesses and non-profits the opportunity to share more of their content by creating it once and then spreading it across social networks simply, easily and effectively. We also launched a new SMS feature, Text-to-Join, which allows customers and prospects to sign up for subscriber lists right from their mobile phones and a free mobile application that provides event hosts with an easy, effective way to manage event check-ins directly from their mobile devices. | ||
| We trained the 1,000th Constant Contact expert during the first quarter. Over 1,000 experts around the world are now trained on how to coach and teach small businesses about the power of email marketing and social media marketing. | ||
| In the first quarter we acquired substantially all of the assets of Bantam Networks, LLC, or Bantam Networks, a pioneering contact management and social CRM provider, including the Bantam Live product and technology. Bantam Networks provides Constant Contact a social CRM platform and technology that will serve as the foundation for all of Constant Contacts solutions, plus an experienced and talented team focused on developing products for small businesses. |
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 strategy we pay particular attention to customer
acquisition metrics, number of products per customer, average revenue per customer and retention
rates. We also consider other operating metrics such as revenue, gross margin, expenses, cost of
acquisition, trialer growth, conversion rates for our website visitors and our trialers, 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, minus interest and other income and adjusted for income taxes; | ||
| adjusted EBITDA margin, which we define as adjusted EBITDA divided by revenue; and | ||
| free cash flow, which we define as net cash flow from operating activities less cash paid for the acquisition of property and equipment. |
We believe that these non-GAAP financial measures are useful to our board of directors,
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
15
Table of Contents
substitute for GAAP financial
measures, including but not limited to net income (loss) or cash flows from operating, investing
and financing activities and may not be comparable to similarly titled measures reported by other
companies.
Certain Trends and Uncertainties
The following represents a summary of certain trends and uncertainties, which could have a
significant impact on our financial condition and results of operations. This summary is not
intended to be a complete list of potential trends and uncertainties that could impact our business
in the long or short term. The summary should be considered along with the factors set forth under
Item 1A Risk Factors and elsewhere in this Quarterly Report on Form 10-Q.
| We continue to closely monitor current economic conditions, particularly as they impact small businesses, associations and non-profits. We believe that small organizations continue to experience some amount of economic hardship. If this economic hardship continues or worsens, our financial results could be adversely impacted. | ||
| We believe that given the size of our potential market and the relatively low barriers to entry, competition will continue to increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations. | ||
| We believe that as we continue to grow revenue at expected rates, our cost of revenue and operating expenses, including sales and marketing, research and development and general and administrative expenses, will increase in absolute dollar amounts. For a description of the general trends we anticipate in various expense categories, see Cost of Revenue and Operating Expenses below. | ||
| We continue to expand our product offerings and features, including our planned launch of our new Social Campaigns product. If we fail to develop new products and features or if we fail to launch them on our anticipated schedule or if our new products and features are not accepted by our customers and prospects our financial results and future growth could be adversely affected. |
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 2010, our top 100 customers
accounted for less than 1% of our total revenue. We do not require our customers to commit to a
contractual term; however, our customers are required to prepay for subscriptions on a monthly,
semi-annual, or annual basis by providing a credit card or bank check. Fees are recorded initially
as deferred revenue and then recognized as revenue on a daily basis over the prepaid subscription
period.
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. 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. Additionally, as we transitioned to a new
third-party hosting facility in California in the third quarter of 2011, our cost of revenue increased as a
percentage of revenue during the quarter but we expect it to decrease over time as we gain efficiencies created
by our expected revenue growth and cost savings resulting from this new
16
Table of Contents
hosting facility. We
allocate a portion of customer support costs relating to assisting trial customers to sales and
marketing expense.
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 developing new 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 increase in absolute dollars as we continue to enhance
and
expand our product offerings and, in the shorter term, to also
increase as a percentage of revenue. Over the longer term, however, we expect
our research and development expenses to
decline as a percentage of revenue as we expect to grow our revenue at a faster rate.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and
promotional costs, wages and benefits for sales and marketing personnel, partner referral fees and
the portion of customer support costs that relate to assisting trial customers. Advertising costs
consist primarily of pay-per-click advertising with search engines, other online and offline
advertising media, including television, radio and print 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
and accounting personnel, professional fees, board compensation and expenses, certain taxes and
other corporate expenses. We expect that general and administrative expenses will increase as we
continue to add personnel in connection with the anticipated growth of our business and incur costs
related to operating as a public company. Therefore, in the short term, we expect that our general
and administrative expenses will increase in absolute dollars, but remain generally consistent or
decline slightly as a percentage of revenue as we expect to continue to grow our revenue at a
similar rate. Over the long-term, we expect general and administrative expenses to decrease as a
percentage of revenue as we expect to grow our revenue at a faster rate.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States. 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, 2010, as filed with the SEC, the
following accounting policies involve the most judgment and complexity:
| Revenue recognition; | |
| Income taxes; | |
| Goodwill and acquired intangible assets; | |
| Software and website development costs; and | |
| Stock-based compensation. |
Accordingly, we believe the policies set forth above are critical to fully understanding and
evaluating our financial condition and results of operations. If actual results or events differ
materially from the estimates, judgments and
17
Table of Contents
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, 2010.
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, 2010, as filed with the SEC.
18
Table of Contents
Results of Operations
Three Months Ended September 30, 2011 compared to Three Months Ended September 30, 2010
Revenue
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Revenue |
$ | 54,346 | $ | 44,828 | 21 | % |
Revenue increased by $9.5 million from 2010 to 2011. The increase resulted primarily from an
approximately 18% 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 due to
an increase in average customer list size and additional revenue from add-ons to our email
marketing product and from our event marketing and survey products. We expect our average revenue
per customer to increase over time.
Cost of Revenue
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Cost of revenue |
$ | 15,679 | $ | 12,694 | 24 | % | ||||||
Percent of revenue |
29 | % | 28 | % |
Cost of revenue increased by $3.0 million from 2010 to 2011. The increase resulted primarily
from increased customer support personnel costs of $1.6 million to support our customer growth.
Depreciation, hosting and maintenance costs increased by $716,000 as a result of scaling and adding
capacity to our hosting infrastructure inclusive of the effects of transitioning to a new
third-party hosting facility in California in the third quarter of 2011. We also incurred an additional $374,000 of expense related to
customer incentives that we offered.
Research and Development
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Research and development |
$ | 7,338 | $ | 5,890 | 25 | % | ||||||
Percent of revenue |
14 | % | 13 | % |
Research and development expenses increased by $1.4 million from 2010 to 2011. 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 September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Sales and marketing |
$ | 19,455 | $ | 18,773 | 4 | % | ||||||
Percent of revenue |
36 | % | 42 | % |
19
Table of Contents
Sales and marketing expenses increased by $682,000 from 2010 to 2011. The increase in absolute
dollars was largerly due to increased personnel related costs of
$1.6 million that resulted primarily from adding employees to
focus on customer acquisition, cross-selling to our customer base and
enabling increased usage and better retention. Partner referral fees increased by $484,000 as the
number of new customers generated from our partners increased. These increases were partially
offset by a decrease of $1.6 million of advertising and promotional expenditures due primarily to a
change in the mix and timing of advertising campaigns.
General and Administrative
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
General and administrative |
$ | 6,191 | $ | 4,551 | 36 | % | ||||||
Percent of revenue |
11 | % | 10 | % |
General and administrative expenses increased by $1.6 million from 2010 to 2011. The increase was
due primarily to additional personnel related costs of $1.2 million largely as a result of
increasing the number of general and administrative employees to support our overall growth and
additional stock-based compensation expense resulting from an increase in equity awards and their
related valuations.
Interest and other income
Three Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest and other income |
$ | 80 | $ | 81 | (1 | )% |
Interest and other income decreased by $1,000 from 2010 to 2011.
Income Taxes
For the three months ended September 30, 2011, we recorded an income tax expense of $410,000. This
consisted of a current income tax expense of $347,000 and a deferred income tax expense of $63,000. The
current income tax expense related to our income before taxes for the period multiplied by our
estimated annual effective tax rate for 2011. We expect to generate federal and state taxable
income for the full year 2011. Our federal taxable income is expected to be fully offset by net
operating loss carryforwards and other deferred tax attributes. However, we will be subject to
state income taxes. The deferred income tax expense related to the amortization for tax purposes
of goodwill from the Bantam Networks acquisition.
We recorded an income tax expense of $59,000 for the three months ended September 30, 2010 related
to our income before taxes multiplied by our estimated annual effective tax rate for 2010.
20
Table of Contents
Nine Months Ended September 30, 2011 compared to Nine Months Ended September 30, 2010
Revenue
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Revenue |
$ | 156,888 | $ | 126,764 | 24 | % |
Revenue increased by $30.1 million from 2010 to 2011. The increase resulted primarily from an
approximately 20% 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 due to
an increase in average customer list size and additional revenue from add-ons to our email
marketing product and from our event marketing and survey products.
21
Table of Contents
Cost of Revenue
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Cost of revenue |
$ | 45,595 | $ | 37,096 | 23 | % | ||||||
Percent of revenue |
29 | % | 29 | % |
Cost of revenue increased by $8.5 million from 2010 to 2011. The increase in absolute dollars
resulted primarily from increased customer support personnel costs of $4.2 million to support our
customer growth. Depreciation, hosting and maintenance costs increased by $2.2 million as a result
of scaling and adding capacity to our hosting infrastructure inclusive of the effects of
transitioning to a new third-party hosting facility in California in the third quarter of 2011. We incurred an additional $731,000 of
expense related to customer incentives that we offered. Approximately $723,000 of the increase
related to higher credit card fees due to the higher volume of billing transactions.
Research and Development
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Research and development |
$ | 22,325 | $ | 17,454 | 28 | % | ||||||
Percent of revenue |
14 | % | 14 | % |
Research and development expenses increased by $4.9 million from 2010 to 2011. The increase in
absolute dollars 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
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Sales and marketing |
$ | 66,204 | $ | 57,694 | 15 | % | ||||||
Percent of revenue |
42 | % | 46 | % |
Sales and marketing expenses increased by $8.5 million from 2010 to 2011. The increase in absolute
dollars was largerly due to an increase in personnel related costs of $4.4 million that resulted primarily
from adding employees to focus on customer acquisition, cross-selling to our customer base
and enabling increased usage and better retention. Advertising and promotional expenditures also
increased by of $1.8 million due to continued expansion of our multi-channel marketing strategy
including our television and radio advertising campaigns. Partner referral fees also increased by
$1.8 million as the number of new customers generated from our partners increased.
General and Administrative
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
General and administrative |
$ | 17,887 | $ | 13,454 | 33 | % | ||||||
Percent of revenue |
11 | % | 11 | % |
General and administrative expenses increased by $4.4 million from 2010 to 2011. The increase in
absolute dollars was primarily due to additional personnel related costs of $3.7 million as a
result of increasing the number of
22
Table of Contents
general and administrative employees to support our overall
growth and additional stock-based compensation expense resulting from an increase in equity awards
and their related valuations. We incurred increased professional services fees of $683,000,
primarily due to transaction costs associated with our acquisition of substantially all of the
assets of Bantam Networks in February 2011.
23
Table of Contents
Interest and other income
Nine Months Ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest and other income |
$ | 264 | $ | 249 | 6 | % |
Interest and other income increased by $15,000 from 2010 to 2011.
Income Taxes
For the nine months ended September 30, 2011, we recorded an income tax expense of $357,000. This
amount consisted of a current income tax expense of $136,000 and a deferred income tax expense of $221,000.
The current income tax expense recorded for the nine months ended September 30, 2011 related to
our income before taxes for the period multiplied by our estimated annual effective tax rate for
2011. We expect to generate federal and state taxable income for the full year 2011. Our federal
taxable income is expected to be fully offset by net operating loss carryforwards and other
deferred tax attributes. However, we will be subject to state income taxes. The deferred income
tax expense related to the amortization for tax purposes of goodwill from the Bantam Networks
acquisition.
We recorded an income tax expense of $59,000 for the nine months ended September 30, 2010 related
to our income before taxes for the period multiplied by our estimated annual effective tax rate for
2010.
Liquidity and Capital Resources
At September 30, 2011, our principal sources of liquidity were cash and cash equivalents and
marketable securities of $128 million.
From our inception through the time of our initial public offering, we financed our operations
primarily through the sale of redeemable convertible preferred stock, issuance of convertible
promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from
operations. In 2007, we completed our initial public offering, in which we issued and sold
6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised $90.4
million in net proceeds after deducting underwriting discounts and commissions and other offering
costs. We used $2.6 million of proceeds to repay our outstanding principal and interest under our
term loan facility. In 2008, we completed a secondary public offering in which we issued and sold
314,465 shares of common stock at a price to the public of $16.00 per share. We raised $4.0 million
in net proceeds after deducting underwriting discounts and commissions and other offering costs. In
the future, we anticipate that our primary source of liquidity will be cash generated from our
operating activities.
Net cash provided by operating activities was $28.2 million and $20.5 million for the nine
months ended September 30, 2011 and 2010, respectively. The improvement in cash flow in 2011 was
due primarily to an increase in net income, increases in the add-backs of non-cash expense items
such as depreciation and amortization and stock-based compensation expense, partially offset by a
smaller amount of cash generated from working capital accounts in the first nine months of 2011 as
compared to the same period in 2010. Cash provided by operating activities has historically been
affected by the amount of net income (loss), growth in prepaid subscriptions, changes in working
capital accounts and the timing of rent payment and add-backs of non-cash expense items such as
depreciation and amortization and the expense associated with stock-based awards.
Net cash used in investing activities was $28.7 million and $25.7 million for the nine months
ended September 30, 2011 and 2010, respectively. Net cash used in investing activities in the first
nine months of 2011 consisted primarily of net cash paid to purchase marketable securities,
partially offset by the sales and maturities of marketable securities as well as cash paid to
purchase substantially all of the assets of Bantam Networks and to acquire property and equipment.
In February 2011, we completed the acquisition of substantially all of the assets of Bantam
Networks, excluding cash, for $15.0 million. Acquisition of property and equipment of $12.9
million and $11.9 million in the nine month periods ended September 30, 2011 and 2010,
respectively, consisted of the purchase
24
Table of Contents
of computer equipment for our operations and employees, equipment, furniture and leasehold
improvements and the capitalization of certain software development costs. In the fourth quarter
of 2010, we signed a new agreement for hosting space in a datacenter which we began to occupy in
2011. We increased the amount of space we occupied under our corporate headquarters lease in 2010
and acquired property and equipment to outfit the additional space. During the nine months ended
September 30, 2011 and 2010, we capitalized $3,309 and $2,738, respectively, of costs associated
with the development of internal use software.
Net cash provided by financing activities was $3.5 million and $2.7 million for the nine
months ended September 30, 2011 and 2010, respectively. Net cash provided by financing activities
in the first nine months of both 2011 and 2010 consisted of proceeds from stock issued pursuant to
the exercise of stock options and the purchase of stock pursuant to the employee stock purchase
plan.
As of December 31, 2010, we had federal and state net operating loss carry-forwards of $45.5
million and $6.9 million, respectively, which may be available to offset potential payments of
future federal and state income tax liabilities and which, if unused, expire at various dates
through 2030 for both federal and state income tax purposes.
25
Table of Contents
Contractual Obligations
We lease our headquarters under an operating lease that is effective through September 2015
with one five-year extension option. The lease includes the space we are occupying now as well as
additional space that will be made available to us through the term of the lease. We lease office
space in Colorado for a sales and support office under an operating lease that expires in April
2019 with three three-year extension options. We also lease small amounts of general office space
in Florida, New York, California and the United Kingdom under lease agreements that expire at various dates through
2014.
We have agreements with various vendors to provide specialized space and equipment and related
services from which we host our software application. The agreements include payment commitments
that expire at various dates through mid-2017.
As of September 30, 2011, we had issued both cancellable and non-cancellable purchase orders
and entered into contractual commitments with various vendors totaling $7.0 million. This amount
relates primarily to marketing programs and other non-marketing related goods and services to be
delivered over the next twelve months.
The following table summarizes our contractual obligations at September 30, 2011, and the
effect such obligations are expected to have on our liquidity and cash flow in future periods.
Payments Due In | ||||||||||||||||||||
Less Tehan | More Than | |||||||||||||||||||
Total | 1 Year | 1 - 3 Years | 3 - 5 Years | 5 Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Office lease obligations |
$ | 25,760 | $ | 5,476 | $ | 11,238 | $ | 6,579 | $ | 2,467 | ||||||||||
Hosting facility agreements |
19,401 | 4,453 | 6,885 | 6,457 | 1,606 | |||||||||||||||
Vendor commitments |
7,032 | 7,032 | | | | |||||||||||||||
Total |
$ | 52,193 | $ | 16,961 | $ | 18,123 | $ | 13,036 | $ | 4,073 | ||||||||||
Our future capital requirements may vary materially from those now planned and will depend on many
factors, including, but not limited to, development of new products, market acceptance of our
products, the levels of advertising and promotion required to launch additional products and
improve our competitive position in the marketplace, the expansion of our sales, support and
marketing organizations, the establishment of additional offices in the United States and worldwide
and the building of infrastructure necessary to support our anticipated growth, the response of
competitors to our products and our relationships with suppliers and clients. Since the
introduction of our on-demand email marketing product in 2000, we have experienced increases in our
expenditures consistent with the growth in our operations and personnel, and we anticipate that our
expenditures will continue to increase on an absolute dollar basis in the future.
We believe that our current cash, cash equivalents and marketable securities and operating
cash flows will be sufficient to meet our working capital and capital expenditure requirements for
at least the next twelve months. Thereafter, we may need to raise additional funds through public
or private financings or borrowings to fund our operations, develop or enhance products, to fund
expansion, to respond to competitive pressures or to acquire complementary products, businesses or
technologies. If required, additional financing may not be available on terms that are favorable to
us, or at all. If we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced and these securities might
have rights, preferences and privileges senior to those of our current stockholders or we may be
subject to covenants that restrict how we conduct our business. No assurance can be given that
additional financing will be available or that, if available, such financing can be obtained on
terms favorable to our stockholders and us.
During the last three years, inflation and changing prices have not had a material effect on
our business. We are unable to predict whether inflation or changing prices will materially affect
our business in the foreseeable future.
26
Table of Contents
New Accounting Guidance
In June 2011, the Financial Accounting Standards Board issued new accounting guidance on the
presentation of comprehensive income to provide companies with two options for presenting
comprehensive income. Companies can present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. This guidance
eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders equity. This guidance is effective for us on January 1, 2012.
Early adoption is permitted. As the new guidance relates only to how comprehensive income is
disclosed and does not change the items that must be reported as comprehensive income, adoption
will not have an effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in
entities referred to as variable interest entities, which include special purpose entities and
other structured finance entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. Our revenue and expenses are generally denominated in U.S.
dollars. Accordingly, our results of operations and cash flows are not subject to material
fluctuations due to changes in foreign currency exchange rates.
Interest Rate Sensitivity. We had cash and cash equivalents and marketable securities of $128
million at September 30, 2011, which consisted of cash, government securities, corporate and agency
bonds, commercial paper and money market instruments. Interest income is sensitive to changes in
the general level of U.S. interest rates; however, due to the nature of these investments, we do
not believe that we have any material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures
as of September 30, 2011, our chief executive officer and chief financial officer concluded that,
as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.
(b) Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2011 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
27
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of
our business. We are not presently a party to any legal proceedings that, in our opinion, would
have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
Our business is subject to numerous risks. We caution you that the following important factors,
among others, could cause our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in filings with the SEC, press releases,
communications with investors and oral statements. Any or all of our forward-looking statements in
this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results
may vary materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
If we are unable to attract new customers and retain existing customers on a cost-effective
basis, our business and results of operations will be affected adversely.
To succeed, we must continue to attract and retain a large number of customers on a
cost-effective basis. We rely on a variety of methods to attract new customers, such as paying
providers of online services, search engines, directories and other websites to provide content,
advertising banners and other links that direct customers to our website, television and radio
advertising and the inclusion of a link to our website in substantially all of our customers
emails. In addition, we are committed to providing our customers with a high level of support. As a
result, we believe many of our new customers are referred to us by existing customers. If we are
unable to use any of our current marketing initiatives or the cost of such initiatives were to
significantly increase or such initiatives or our efforts to satisfy our existing customers are not
successful, we may not be able to attract new customers or retain existing customers on a
cost-effective basis and, as a result, our revenue and results of operations would be affected
adversely.
Our business is substantially dependent on the market for email marketing services for small
organizations.
We derive, and expect to continue to derive, a substantial portion of our revenue from our
email marketing product for small organizations, including small businesses, associations and
non-profits. For the year ended December 31, 2010, our revenue from our email marketing product
alone was approximately 90% of our total revenue. Widespread acceptance of email marketing among
small organizations will continue to be critical to our future growth and success. There is no
certainty regarding how the market for email marketing will continue to develop, or whether it will
experience any significant contractions. Our ability to attract and retain customers will depend in
part on our ability to make email marketing convenient, effective and affordable. If small
organizations determine that email marketing does not sufficiently benefit them or utilize
alternative or new electronic methods of communicating with their customers, existing customers may
cancel their accounts and potential customers may decide not to adopt email marketing. In addition,
many small organizations lack the technical expertise to develop and manage email marketing
campaigns effectively. As technology advances, however, small organizations may establish the
capability to manage their own email marketing and therefore may have no need for our email
marketing product. If the market for email marketing services fails to continue to grow or grows
more slowly than we currently anticipate, demand for our services may decline and our revenue would
suffer.
28
Table of Contents
In the event we are unable to retain existing customers or to grow our customer base by adding
new customers, our operating results will be adversely affected.
Our growth strategy is in part driven by our ability to retain our existing customers and grow
our customer base by adding new customers. Customers cancel their accounts for many reasons,
including economic concerns, business failure or a perception that they do not use our product
effectively, the service is not a good value and that they can manage their online marketing
efforts without our products. In some cases, we terminate an account because the customer fails to
comply with our standard terms and conditions. As our customer base continues to grow, even if our
customer retention rates remain the same on a percentage basis, the absolute number of customers we
lose each month will increase. We must continually add new customers to replace customers whose
accounts are cancelled or terminated, which may involve significantly higher marketing expenditures
than we currently anticipate. If too many of our customers cancel our service, or if we are unable
to attract new customers in numbers sufficient to grow our business, our operating results would be
adversely affected.
Current economic conditions may further negatively affect the small business sector, which may
cause our customers to terminate existing accounts with us or cause potential customers to fail to
purchase our products, resulting in a decrease in our revenue and impairing our ability to operate
profitably.
Our products are designed specifically for small organizations, including small businesses,
associations and non-profits. These organizations frequently have limited budgets and are often
resource and time-constrained and, as a result, may be more likely to be significantly affected by
economic downturns than their larger, more established counterparts.
We believe that small organizations continue to experience some
amount of economic hardship. As a result, small organizations may choose to spend the limited funds
that they have on items other than our products and may experience higher failure rates. Moreover,
if small organizations experience economic distress, they may be unwilling or unable to expend time
and financial resources on marketing, which would negatively affect the overall demand for our
products, increase customer attrition and could cause our revenue to decline. There can be no
assurance, therefore, that current economic conditions or worsening economic conditions, or a
recurring recession, will not have a significant adverse impact on our operating and financial
results.
U.S. federal legislation imposes certain obligations on the senders of commercial emails,
which could minimize the effectiveness of our products, particularly our email marketing product,
and establishes financial penalties for non-compliance, which could increase the costs of our
business.
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or
CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies
penalties for the transmission of commercial email messages that are intended to deceive the
recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of
commercial emails to provide recipients with the ability to opt out of receiving future emails from
the sender. In addition, some states have passed laws regulating commercial email practices that
are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly
Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to
receive unsolicited commercial email that markets certain covered content, such as adult or other
harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The
ability of our customers constituents to opt out of receiving commercial emails may minimize the
effectiveness of our products. Moreover, non-compliance with the CAN-SPAM Act carries significant
financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws
not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email,
whether as a result of violations by our customers or if we were deemed to be directly subject to
and in violation of these requirements, we could be required to pay penalties, which would
adversely affect our financial performance and significantly harm our business, and our reputation
would suffer. We also may be required to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain customers or could increase our
operating costs.
29
Table of Contents
If the security of our customers confidential information stored in our systems is breached
or otherwise subjected to unauthorized access, our reputation may be severely harmed, we may be
exposed to liability and we may lose the ability to offer our customers a credit card payment
option.
Our system stores our customers proprietary email distribution lists, credit card information
and other critical data. Any accidental or willful security breaches or other unauthorized access
could expose us to liability for the loss of such information, adverse regulatory action by federal
and state governments, time-consuming and expensive litigation and other possible liabilities as
well as negative publicity, which could severely damage our reputation. If security measures are
breached because of third-party action, employee error, malfeasance or otherwise, or if design
flaws in our software are exposed and exploited, and, as a result, a third party obtains
unauthorized access to any of our customers data, our relationships with our customers will be
severely damaged, and we could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are not recognized until
they are launched against a target, we and our third-party hosting facilities may be unable to
anticipate these techniques or to implement adequate preventative measures. In addition, as we
continue to grow our customer base and our brand becomes more widely known and recognized, we may
become a more inviting target for third parties seeking to compromise our security systems. Many
states, including Massachusetts, have enacted laws requiring companies to notify individuals of
data security breaches involving certain types of personal data. These mandatory disclosures
regarding a security breach often lead to widespread negative publicity, which may cause our
customers to lose confidence in the effectiveness of our data security measures. Any security
breach, whether actual or perceived, would harm our reputation, and we could lose customers and
fail to acquire new customers. In addition, if we fail to maintain our compliance with the data
protection policy standards adopted by the major credit card issuers, we could lose our ability to
offer our customers a credit card payment option. Any loss of our ability to offer our customers a
credit card payment option would harm our reputation and make our products less attractive to many
small organizations by negatively impacting our customer experience and significantly increasing
our administrative costs related to customer payment processing.
Our existing general liability insurance may not cover any, or only a portion of any potential
claims to which we are exposed or may not be adequate to indemnify us for all or any portion of
liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage would increase our operating losses and reduce our net worth and
working capital.
As Internet commerce develops, federal, state and foreign governments may adopt new laws to
regulate Internet commerce, which may negatively affect our business.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign
governments becomes more likely. Our business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws applicable to our products or our
business. The cost to comply with such laws or regulations could be significant and would increase
our operating expenses, and we may be unable to pass along those costs to our customers in the form
of increased subscription fees. In addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the Internet or via email. Such taxes
could discourage the use of the Internet and email as a means of commercial marketing, which would
adversely affect the viability of our products.
The market in which we participate is highly competitive and, if we do not compete
effectively, our operating results could be harmed.
The market for our products is highly competitive and rapidly changing, and the barriers to
entry are relatively low. With the introduction of new technologies and the influx of new entrants
to the market, we expect competition to persist and intensify in the future, which could harm our
ability to increase sales, limit customer attrition and maintain our prices.
Our principal email marketing competitors include providers of email marketing products for
small to medium size businesses such as Vertical Response, Inc., iContact Corporation, AWeber
Systems, Inc., Protus, a subsidiary of j2
Global Communications, Inc. (Campaigner®), Emma, Inc., The Rocket Science
Group LLC (MailChimptm), Deluxe Corporation and VistaPrint N.V., as well as
the in-house information technology capabilities of prospective
30
Table of Contents
customers. Competition could result
in reduced sales, reduced margins or the failure of our email marketing product to achieve or
maintain more widespread market acceptance, any of which could harm our business. In addition,
there are a number of other vendors that are focused on providing email marketing products for
larger organizations, including Alterian Inc., ExactTarget, Inc., Responsys Inc., Silverpop Systems
Inc., StrongMail Systems, Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited).
While we do not compete currently with vendors of email marketing products serving larger
customers, we may face future competition from these providers if they determine that our target
market presents an opportunity for them. Finally, in the future, our email marketing product may
experience competition from Internet Service Providers, or ISPs, advertising and direct marketing
agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or
Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and
established distribution channels. If these companies decide to develop, market or resell
competitive email marketing products, acquire one of our existing competitors or form a strategic
alliance with one of our competitors, our ability to compete effectively could be significantly
compromised and our operating results could be harmed. In addition, one or more of these entities
could decide to offer a competitive email marketing product at no cost or low cost in order to
generate revenue as part of a larger product offering.
Our other products also face intense competition. Our event marketing product competes with
offerings by Eventbrite, Inc., Evite, LLC (a wholly-owned, operating business of
IAC/InterActiveCorp), RegOnline®, (a division of The Active Network, Inc.),
123Signup AMS, Inc., Pingg Corp., Acteva.com, Punchbowl Software, Inc., BonaSource Inc. (Wild
Apricottm) and with r.s.v.p offerings from some of our email marketing
competitors. Our survey product competes with similar offerings by Zoomerang (a division of Market
Tools, Inc.) and Surveymonkey.com Corporation and with similar offerings from many other entities,
including some of our email marketing competitors.
Our current and potential competitors may have significantly more financial, technical,
marketing and other resources than we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. Our current and potential competitors
may have more extensive customer bases and broader customer relationships than we have. In
addition, these companies may have longer operating histories and greater name recognition than we
have and may be able to bundle email marketing, event marketing or survey products with other
products that have already gained widespread market acceptance and offer them at no cost or low
cost. These competitors may be better able to respond quickly to new technologies and to undertake
more extensive marketing campaigns. If we are unable to compete with such companies, the demand for
our products could substantially decline.
Any significant disruption in service on our website or in our computer systems, or in our customer
support services, could reduce the attractiveness of our products and result in a loss of
customers.
The satisfactory performance, reliability and availability of our technology and our
underlying network infrastructure are critical to our operations, level of customer service,
reputation and ability to attract new customers and retain existing customers. In providing our
services, we rely on third-party hosting facilities, bandwidth providers, ISPs and mobile networks.
Our production system hardware and the disaster recovery operations for our production system
hardware are co-located in third-party hosting facilities. These facilities do not guarantee that
our customers access to our products will be uninterrupted, error-free or secure. Our operations
also depend on the ability of our third-party hosting facilities to protect their and our systems
against damage or interruption from natural disasters, power or telecommunications failures, air
quality, temperature, humidity and other environmental concerns, computer viruses or other attempts
to harm our systems, criminal acts and similar events. In the event that our third-party hosting
arrangements are terminated, or there is a lapse of service or damage to these facilities, we could
experience interruptions in our service as well as delays and additional expense in arranging new
facilities. In addition, our customer support services, which are located at our
headquarters in Waltham, Massachusetts and at our sales and support office in Loveland, Colorado,
would experience interruptions as a result of any disruption of electrical, phone or any other
similar facility support services. Any interruptions or delays in access to our products or
customer support, whether as a result of third-party error, our own error, natural disasters,
security breaches or malicious actions, such as denial-of-service or similar attacks, whether
accidental or willful, could harm our
31
Table of Contents
relationships with customers and our reputation. Also, in the
event of damage or interruption, our insurance policies may not adequately compensate us for any
losses that we may incur. These factors could damage our brand and reputation, divert our
employees attention, reduce our revenue, subject us to liability and cause customers to cancel
their accounts, any of which could adversely affect our business, financial condition and results
of operations.
Our production disaster recovery system is located at one of our third-party hosting
facilities. Our corporate disaster recovery system is located at our headquarters in Waltham,
Massachusetts. Neither system provides real time backup or has been tested under actual disaster
conditions and neither system may have sufficient capacity to recover all data and services in the
event of an outage. In the event of a disaster in which our production system hardware and the
disaster recovery operations for our production system hardware are irreparably damaged or
destroyed, we would experience interruptions in access to our products. Moreover, our headquarters
and our production system hardware are located within several miles of each other. As a result, any
regional disaster could affect these locations equally. Any or all of these events could cause our
customers to lose access to our products, which will harm our business and results of operations.
Our growth strategy requires us to expand our product offerings beyond email marketing and
this expansion may not be successful.
We have largely focused our business on providing our email marketing product for small
organizations, but in the last few years we have expanded our service offerings. In 2007, we
introduced our survey product and our add-on email archive service that enables our customers to
archive their past email campaigns. In 2009, we launched our event marketing product. Through our
acquisition of privately-held Nutshell Mail, Inc., or NutshellMail, which we completed in May 2010,
we now provide a tool for small organizations to monitor and engage with social media networks.
In late 2011, we plan to launch our Social Campaigns product which will allow small businesses the ability to run multi-step, results-oriented campaigns on their social networks.
Our efforts to introduce new products beyond our email marketing product, including our event marketing
and survey products and our social media marketing offerings, may not result in significant revenue
growth, may not be timely, may divert management resources from our existing operations and require
us to commit significant financial resources to an unproven business or product, which may harm our
financial performance.
If the delivery of our customers emails is limited or blocked, customers may cancel their
accounts.
ISPs can block emails from reaching their users. The implementation of new or more restrictive
policies by ISPs may make it more difficult to deliver our customers emails. We continually
improve our own technology and work closely with ISPs to maintain our deliverability rates. If ISPs
materially limit or halt the delivery of our customers emails, or if we fail to deliver our
customers emails in a manner compatible with ISPs email handling or authentication technologies
or other policies, then the fees we charge for our email marketing product may not be accepted by
the market, and customers may cancel their accounts. This, in turn, could harm our business and
financial performance.
If we fail to promote and maintain our brand in a cost-effective manner, we may lose market
share and our revenue may decrease.
We believe that developing and maintaining awareness of the Constant Contact brand in a
cost-effective manner is critical to our goal of achieving widespread acceptance of our existing
and future products and attracting new customers. Furthermore, we believe that the importance of
brand recognition will increase as competition in our industry increases. Successful promotion of
our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness
and affordability of our products for our target customer demographic. Historically, our efforts to
build our brand have involved significant expense, and it is likely that our future marketing
efforts will require us to incur additional significant expenses. Such brand promotion activities
may not yield increased revenue and, even if they do, any revenue increases may not offset the
expenses we incur to promote our brand. If we fail to promote and maintain our brand successfully,
or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand,
we may lose our existing customers to our competitors or be unable to attract new customers, which
would cause our revenue to decrease.
32
Table of Contents
We depend on search engines to attract a significant percentage of our customers, and if those
search engines change their listings or our relationship with them deteriorates or terminates, we
may be unable to attract new customers, which would adversely affect our business and results of
operations.
Many of our customers located our website by clicking through on search results displayed by
search engines such as Google, Yahoo! and Bingtm. Search engines typically
provide two types of search results, algorithmic and purchased listings. Algorithmic listings
cannot be purchased, and instead are determined and displayed solely by a set of formulas designed
by the search engine. Purchased listings can be purchased by advertisers in order to attract users
to their websites. We rely on both algorithmic and purchased listings to attract a significant
percentage of the customers we serve to our website. Search engines revise their algorithms from
time to time in an attempt to optimize their search result listings. If search engines on which we
rely for algorithmic listings modify their algorithms, this could result in fewer potential
customers clicking through to our website, requiring us to resort to other costly resources to
replace this traffic, which, in turn, could reduce our revenue and negatively impact our operating
results, harming our business. If one or more search engines on which we rely for purchased
listings modifies or terminates its relationship with us, our expenses could rise, or our revenue
could decline and our business may suffer. The cost of purchased search listing advertising
fluctuates and may increase as demand for these channels grows, and any such increases could
negatively affect our financial results.
The success of our business depends on the continued growth and acceptance of email as a
communications tool and the related expansion and reliability of the Internet infrastructure. If
consumers do not continue to use email or alternative communications tools gain popularity, demand
for our email marketing products may decline.
The future success of our business depends on the continued and widespread adoption of email
as a primary means of communication. Security problems such as viruses, worms and other
malicious programs or reliability issues arising from outages and damage to the Internet
infrastructure could create the perception that email is not a safe and reliable means of
communication, which would discourage businesses and consumers from using email. Use of email by
businesses and consumers also depends on the ability of ISPs to prevent unsolicited bulk email, or
spam, from overwhelming consumers inboxes. In recent years, ISPs have developed new technologies
to filter unwanted messages before they reach users inboxes. In response, spammers have employed
more sophisticated techniques to reach consumers inboxes. Although companies in the anti-spam
industry have started to address the techniques used by spammers, if security problems become
widespread or frequent or if ISPs cannot effectively control spam, the use of email as a means of
communication may decline as consumers find alternative ways to communicate. In addition, if
alternative communications tools, such as those available on social networking sites, gain
widespread acceptance, the need for email may lessen. Any decrease in the use of email would reduce
demand for our email marketing product and harm our business.
Various private spam blacklists have in the past interfered with, and may in the future
interfere with, the effectiveness of our products and our ability to conduct business.
We depend on email to market to and communicate with our customers, and our customers rely on
email to communicate with their customers and members. Various private entities attempt to regulate
the use of email for commercial solicitation. These entities often advocate standards of conduct or
practice that significantly exceed current legal requirements and classify certain email
solicitations that comply with current legal requirements as spam. Some of these entities maintain
blacklists of companies and individuals, and the websites, ISPs and Internet protocol addresses
associated with those entities or individuals that do not adhere to those standards of conduct or
practices for commercial email solicitations that the blacklisting entity believes are appropriate.
If a companys Internet protocol addresses are listed by a blacklisting entity, emails sent from
those addresses may be blocked if they are sent to any Internet domain or Internet address that
subscribes to the blacklisting entitys service or purchases its blacklist.
Some of our Internet protocol addresses currently are listed with one or more blacklisting
entities and, in the future, our other Internet protocol addresses may also be listed with these
and other blacklisting entities. There can be no guarantee that we will not continue to be
blacklisted or that we will be able to successfully remove ourselves from those lists. Blacklisting
of this type could interfere with our ability to market our products and services and
33
Table of Contents
communicate with our customers and could undermine the effectiveness of our customers email
marketing campaigns, all of which could have a material negative impact on our business and results
of operations.
Our customers use of our products and website to transmit negative messages or website links
to harmful applications could damage our reputation, and we may face liability for unauthorized,
inaccurate or fraudulent information distributed via our products.
Our customers could use our products or website to transmit negative messages or website links
to harmful applications, reproduce and distribute copyrighted and trademarked material without
permission, or report inaccurate or fraudulent data or information. Any such use of our products
could damage our reputation and we could face claims for damages, copyright or trademark
infringement, defamation, negligence or fraud. Moreover, our customers promotion of their products
and services through our products may not comply with federal, state and foreign laws. We cannot
predict whether our role in facilitating these activities would expose us to liability under these
laws. Even if claims asserted against us do not result in liability, we may incur substantial costs
in investigating and defending such claims. If we are found liable for our customers activities,
we could be required to pay fines or penalties, redesign business methods or otherwise expend
resources to remedy any damages caused by such actions and to avoid future liability.
Our business may be negatively impacted by seasonal trends.
Sales of our products are impacted by seasonality. Typically, the fourth calendar quarter is
our strongest quarter for customer growth because our prospective customers communicate more
frequently with their customers and members during this time. Accordingly, we increase our sales
and marketing activities at the end of the third quarter and during the fourth quarter. Our
customer growth in the second and third quarters is typically slower as we move into the summer
months, and in response, we moderate certain of our customer acquisition activities, which may
magnify the seasonal trends. If these seasonality trends change materially, our financial and
operating results for any given quarter may be negatively impacted and may differ materially from
results in prior quarterly periods.
If we fail to enhance our existing products or develop new products, our products may become
obsolete or less competitive and we could lose customers.
If we are unable to enhance our existing products or develop new products that keep pace with
rapid technological developments and meet our customers needs, our business will be harmed.
Creating and designing such enhancements and new products entail significant technical and business
risks and require substantial expenditures and lead-time, and there is no guarantee that such
enhancements and new products will be completed in a timely fashion. Nor is there any guarantee
that any new product offerings will gain acceptance among our customers or by the broader market.
For example, our existing email marketing customers may not view any new product as complementary
to our email product offerings and therefore decide not to purchase such product. If we cannot
enhance our existing services or develop new products or if we are not successful in selling such
enhancements and new products to our customers, we could lose customers or have difficulty
attracting new customers, which would adversely impact our financial performance.
Our relationships with our partners may be terminated or may not continue to be beneficial in
generating new customers, which could adversely affect our ability to increase our customer base.
We maintain a network of active partners, which include national small business service
providers and local small business service providers such as web developers and marketing agencies,
which refer customers to us through links on their websites and outbound promotion to their
customers. If we are unable to maintain our contractual relationships with existing partners or
establish new contractual relationships with potential partners, we may experience delays and
increased costs in adding customers, which could have a material adverse effect on us. The number
of customers we are able to add through these relationships is dependent on the marketing efforts
of our partners over which we exercise very little control, and a significant decrease in the
number of new customers generated through these relationships could adversely affect the size of
our customer base and revenue.
34
Table of Contents
Competition for employees in our industry is intense, and we may not be able to attract and
retain the highly skilled employees whom we need to support our business.
Competition for highly skilled engineering and marketing personnel is intense and we continue
to face difficulty identifying and hiring qualified personnel in certain areas of our business and
in certain locations. We may not be able to hire and retain such personnel at compensation levels
consistent with our existing compensation and salary structure. Many of the companies with which we
compete for experienced employees have greater resources than we have and may be able to offer more
attractive terms of employment. In particular, candidates making employment decisions, particularly
in high-technology industries, often consider the value of any equity they may receive in
connection with their employment. As a result, any significant volatility in the price of our stock
may adversely affect our ability to attract or retain highly skilled engineering and marketing
personnel.
In addition, we invest significant time and expense in training our employees, which increases
their value to competitors who may seek to recruit them. If we fail to retain our employees, we
could incur significant expenses in hiring and training their replacements and the quality of our
services and our ability to serve our customers could diminish, resulting in a material adverse
effect on our business.
Our anticipated growth could strain our personnel resources and infrastructure, and if we are
unable to implement appropriate controls and procedures to manage our anticipated growth, we may
not be able to implement our business plan successfully.
We are currently experiencing a period of rapid growth in our headcount and operations, which
has placed, and will continue to place, to the extent that we are able to sustain such growth, a
significant strain on our management and our administrative, operational and financial reporting
infrastructure. Our success will depend in part on the ability of our senior management to manage
this expected growth effectively. To do so, we believe we will need to continue to hire, train and
manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees, or if we are not successful in
retaining our existing employees, our business may be harmed. To manage the expected growth of our
operations and personnel, we will need to continue to improve our operational and financial
controls and update our reporting procedures and systems. The expected addition of new employees
and the capital investments that we anticipate will be necessary to manage our anticipated growth
will increase our cost base, which will make it more difficult for us to offset any future revenue
shortfalls by reducing expenses in the short term. If we fail to manage our anticipated growth
successfully, we will be unable to execute our business plan.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of
growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Our future
also depends on the continued contributions of our executive officers and other key technical and
marketing personnel, each of whom would be difficult to replace. In particular, Gail F. Goodman,
our Chairman, President and Chief Executive Officer, is critical to the management of our business
and operations and the development of our strategic direction. The loss of the services of Ms.
Goodman or other executive officers or key personnel and the process to replace any of our key
personnel would involve significant time and expense, may take longer than anticipated and may
significantly delay or prevent the achievement of our business objectives.
We rely on third-party computer hardware and software that may be difficult to replace or that
could cause errors or failures of our service and that requires us to closely monitor our usage to
ensure that we remain in compliance with any applicable licensing requirements.
We rely on computer hardware purchased and software licensed from third parties in order to
offer our products, including hardware and software from such large vendors as International
Business Machines Corporation, Dell Computer Corporation, 3PAR Inc., a division of the
Hewlett-Packard Company, Oracle Corporation, Juniper Networks, Inc., Cisco Systems, Inc., Ciena
Corporation and EMC Corporation. This hardware and software may not continue to be available on
commercially reasonable terms, or at all. If we lose the right to use any of this hardware or
software or such hardware or software malfunctions, our customers could experience delays or be
unable to
35
Table of Contents
access our services until we can obtain and integrate equivalent technology or repair the cause of
the malfunctioning hardware or software. Any delays or failures associated with our services could
upset our customers and harm our business. In addition, if we fail to remain in compliance with the
licensing requirements related to any third-party computer hardware and software we use, we may be
subject to unanticipated expenses, auditing costs, penalties and the loss of such hardware and
software, all of which could have a material adverse effect on our financial condition and results
of operations.
If we are unable to protect the confidentiality of our unpatented proprietary information,
processes and know-how and trade secrets, the value of our technology and products could be
adversely affected.
We rely upon unpatented proprietary technology, processes and know-how and trade secrets.
Although we try to protect this information in part by executing confidentiality agreements with
our employees, consultants and third parties, such agreements may offer only limited protection and
may be breached. Any unauthorized disclosure or dissemination of our proprietary technology,
processes and know-how or our trade secrets, whether by breach of a confidentiality agreement or
otherwise, may cause irreparable harm to our business, and we may not have adequate remedies for
any such breach. In addition, our trade secrets may otherwise be independently developed by our
competitors or other third parties. If we are unable to protect the confidentiality of our
proprietary information, processes and know-how or our trade secrets are disclosed, the value of
our technology and services could be adversely affected, which could negatively impact our
business, financial condition and results of operations.
Our use of open source software could impose limitations on our ability to commercialize our
products.
We incorporate open source software into our products. Although we monitor our use of open
source software closely, the terms of many open source licenses to which we are subject have not
been interpreted by United States or foreign courts, and there is a risk that such licenses could
be construed in a manner that imposes unanticipated conditions or restrictions on our ability to
commercialize our products. In such event, we could be required to seek licenses from third parties
in order to continue offering our products, to re-engineer our products or to discontinue sales of
our products, or to release our software code under the terms of an open source license, any of
which could materially adversely affect our business. Given the nature of open source software,
there is also a risk that third parties may assert copyright and other intellectual property
infringement claims against us based on our use of certain open source software programs. The risks
associated with intellectual property infringement claims are discussed immediately below.
If a third party asserts that we are infringing its intellectual property, whether successful
or not, it could subject us to costly and time-consuming litigation or require us to obtain
expensive licenses, and our business may be adversely affected.
The software and Internet industries are characterized by the existence of a large number of
patents, trademarks and copyrights and by frequent litigation based on allegations of infringement
or other violations of intellectual property rights. Third parties may assert patent and other
intellectual property infringement claims against us in the form of lawsuits, letters or other
forms of communication. These claims, whether or not successful, could:
| divert managements attention; | ||
| result in costly and time-consuming litigation; | ||
| require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; | ||
| in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or | ||
| require us to redesign our software and services to avoid infringement. |
36
Table of Contents
As a result, any third-party intellectual property claims against us could increase our
expenses and adversely affect our business. In addition, many of our agreements with our partners
require us to indemnify them for third-party intellectual property infringement claims, which would
increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not
infringed any third parties intellectual property rights, we cannot be sure our legal defenses
will be successful, and even if we are successful in defending against such claims, our legal
defense could require significant financial resources and management time. Finally, if a third
party successfully asserts a claim that our products infringe its proprietary rights, royalty or
licensing agreements might not be available on terms we find acceptable or at all and we may be
required to pay significant monetary damages to such third party.
Providing our products to customers outside the United States exposes us to risks inherent in
international business.
Customers in more than 160 countries and territories currently use our email marketing
product, and we expect to expand our international operations in the future. Accordingly, we are
subject to risks and challenges that we would otherwise not face if we conducted our business only
in the United States. The risks and challenges associated with providing our products to customers
outside the United States include:
| localization of our products, including translation into foreign languages and associated expenses; | ||
| laws and business practices favoring local competitors; | ||
| compliance with multiple, conflicting and changing governmental laws and regulations, including tax, email marketing, privacy and data protection laws and regulations; | ||
| foreign currency fluctuations; | ||
| different pricing environments; | ||
| difficulties in staffing and maintaining foreign operations; and | ||
| regional economic and political conditions. |
We have incurred net losses in the past and may incur net losses in the future.
We have incurred net losses in the past and may incur net losses in the future. While we
reported net income for 2010, we experienced net losses in each of the previous years and in the
first quarter of 2011. We reported net income in the second and third quarters of 2011 and year to
date we have generated net income. However, we may experience net losses in future periods and
there is no guarantee we will be profitable in the future. In addition, we expect our operating
expenses to increase as we expand our operations. If our operating expenses exceed our
expectations, our financial performance could be adversely affected. If our revenue does not grow
to offset these increased expenses, we may not be profitable in any future period. Our recent
revenue growth may not be indicative of our future performance. In future periods, we may not have
any revenue growth, or our revenue could decline.
Failure to maintain effective internal controls over financial reporting and disclosure
controls and procedures would have a material adverse effect on our business.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal
control over financial reporting and disclosure controls and procedures. In order to comply with
Section 404 of the Sarbanes-Oxley Acts requirements relating to internal control over financial
reporting, we incur substantial accounting expense and expend significant management time on
compliance-related issues. We expect to continue to incur such expenses and expend such time in the
future. If in the future we are not able to comply with the requirements of Section 404 in a timely
manner, or if we or our independent registered public accounting firm identify deficiencies in our
internal control over financial reporting that are deemed to be material weaknesses, the market
price of our
37
Table of Contents
stock would likely decline and we could be subject to sanctions or investigations by the NASDAQ
Stock Market, the SEC or other regulatory authorities, which would require additional financial and
management resources.
Our ability to use net operating loss carry-forwards in the United States may be limited.
As of December 31, 2010, we had net operating loss carry-forwards of $45.5 million for U.S.
federal tax purposes and $6.9 million for state tax purposes. These loss carry-forwards expire at
varying dates between 2011 and 2030. To the extent available, we intend to use these net operating
loss carry-forwards to reduce the corporate income tax liability associated with our operations, if
any. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount
of net operating loss carry-forwards that may be used to offset taxable income when a corporation
has undergone significant changes in stock ownership. While we do not believe that our public stock
offerings and prior private financings have resulted in ownership changes that would limit our
ability to utilize net operating loss carry-forwards, any subsequent ownership changes could result
in such a limitation. To the extent our use of net operating loss carry-forwards is significantly
limited, our income could be subject to corporate income tax earlier than it would if we were able
to use net operating loss carry-forwards, which could have a negative effect on our financial
results.
Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or
investors, our stock price could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the
expectations of securities analysts or investors, the trading price of our common stock could
decline. Some of the important factors that could cause our revenue and operating results to
fluctuate from quarter to quarter include:
| our ability to retain existing customers, attract new customers and satisfy our customers requirements; | ||
| general economic conditions; | ||
| changes in our pricing policies; | ||
| our ability to expand our business; | ||
| the effectiveness of our personnel; | ||
| new product and service introductions; | ||
| technical difficulties or interruptions in our services as a result of our actions or those of third parties; | ||
| the timing of additional investments in our hardware and software systems; | ||
| the seasonal trends in our business; | ||
| regulatory compliance costs; | ||
| costs associated with future acquisitions of technologies and businesses; and | ||
| extraordinary expenses such as litigation or other dispute-related settlement payments. |
Some of these factors are not within our control, and the occurrence of one or more of them
may cause our operating results to vary widely. As such, we believe that quarter-to-quarter
comparisons of our revenue and operating results may not be meaningful and should not be relied
upon as an indication of future performance.
38
Table of Contents
We may need additional capital in the future, which may not be available to us on favorable
terms, or at all, and may dilute the ownership of our existing stockholders.
We have historically relied on outside financing and cash from operations to fund our
operations, capital expenditures and growth. We may require additional capital from equity or debt
financing in the future to:
| fund our operations; | ||
| respond to competitive pressures; | ||
| take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and | ||
| develop new products or enhancements to existing products. |
We may not be able to secure timely additional financing on favorable terms, or at all. The
terms of any additional financing may place limits on our financial and operating flexibility. If
we raise additional funds through issuances of equity, convertible debt securities or other
securities convertible into equity, our existing stockholders could suffer significant dilution,
and any new securities we issue could have rights, preferences and privileges senior to those of
our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory
to us, if and when we require it, our ability to grow or support our business and to respond to
business challenges could be significantly limited.
We may engage in future acquisitions that could disrupt our business, dilute stockholder value and
harm our business, operating results or financial condition.
In May 2010, we completed our acquisition of NutshellMail and, in February 2011, we completed
the acquisition of substantially all of the assets of Bantam Networks, LLC, or Bantam Networks. We
have, from time to time, evaluated other acquisition opportunities and may pursue acquisition
opportunities in the future. Our acquisitions of NutshellMail and the assets of Bantam Networks
were our first significant acquisitions to date and, therefore, our ability as an organization to
make and integrate them and any other significant acquisitions is unproven. Moreover, acquisitions
involve numerous risks, including:
| an inability to locate a suitable acquisition candidate or technology or acquire a desirable candidate or technology on favorable terms; | ||
| difficulties in integrating personnel and operations from the acquired business or acquired technology with our existing technology and products and in retaining and motivating key personnel from the business; | ||
| disruptions in our ongoing operations and the diversion of our managements attention from their day-to-day responsibilities associated with operating our business; | ||
| increases in our expenses that adversely impact our business, operating results and financial condition; | ||
| potential write-offs of acquired assets and increased amortization expense related to identifiable assets acquired; and | ||
| potentially dilutive issuances of equity securities or the incurrence of debt. |
In addition, any acquisitions we
complete may not ultimately strengthen our competitive position or achieve our goals, or such an
acquisition may be viewed negatively by our customers, stockholders or the financial markets.
39
Table of Contents
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be highly volatile and
could be subject to wide fluctuations in response to various factors. Some of the factors that may
cause the market price of our common stock to fluctuate include:
| fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; | ||
| quarterly unique customer additions; | ||
| changes in estimates of our financial results or recommendations by securities analysts; | ||
| changes in general economic, industry and market conditions; | ||
| failure of any of our products to achieve or maintain market acceptance; | ||
| changes in market valuations of similar companies; | ||
| success of competitive products; | ||
| changes in our capital structure, such as future issuances of securities or the incurrence of debt; | ||
| announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances; | ||
| regulatory developments in the United States, foreign countries or both; | ||
| litigation involving our company, our general industry or both; | ||
| additions or departures of key personnel; | ||
| investors general perception of us; and | ||
| the total number of shares of our common stock that have been sold short |
In addition, if the market for technology stocks or the stock market in general experiences a
loss of investor confidence, the trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of operations. If any of the foregoing
occurs, it could cause our stock price to fall and may expose us to class action lawsuits that,
even if unsuccessful, could be costly to defend and a distraction to management.
If securities or industry analysts do not continue to publish research or publish inaccurate
or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that
securities or industry analysts publish about us or our business. We do not control these analysts.
If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would likely decline. If one or more of
these analysts ceases coverage of our company or fails to publish reports on us regularly, demand
for our stock could decrease, which could cause our stock price and trading volume to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or
prevent a change of control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General
Corporation Law may discourage, delay or prevent a change of control by prohibiting us from
engaging in a business combination with an interested stockholder for a period of three years after
the person becomes an interested stockholder, even if a
40
Table of Contents
change of control would be beneficial to our existing stockholders. In addition, our restated
certificate of incorporation and second amended and restated bylaws may discourage, delay or
prevent a change in our management or control over us that stockholders may consider favorable.
Among other things, our restated certificate of incorporation and second amended and restated
bylaws:
| authorize the issuance of blank check preferred stock that could be issued by our board of directors to impede or delay a takeover attempt; | ||
| establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election; | ||
| require that directors only be removed from office for cause and only upon a supermajority stockholder vote; | ||
| provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office; | ||
| limit who may call special meetings of stockholders; | ||
| prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and | ||
| require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and second amended and restated bylaws. |
We do not currently intend to pay dividends on our common stock and, consequently, the ability
to achieve a return on an investment in our common stock will depend on appreciation in the price
of our common stock.
We do not expect to pay cash dividends on our common stock. Any future dividend payments are
within the absolute discretion of our board of directors and will depend on, among other things,
our results of operations, working capital requirements, capital expenditure requirements,
financial condition, contractual restrictions,
Item 6. Exhibits
The exhibits listed in the Exhibit Index immediately preceding the exhibits are
filed (other than exhibit 32.1 and exhibit 32.2) as part of this Quarterly Report on Form 10-Q and
such Exhibit Index is incorporated herein by reference.
41
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONSTANT CONTACT, INC. |
||||
Date: November 2, 2011 | By: | /s/ Gail F. Goodman | ||
Gail F. Goodman | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 2, 2011 | By: | /s/ Harpreet S. Grewal | ||
Harpreet S. Grewal | ||||
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
42
Table of Contents
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
Exhibit No. | Description | |
10.1(1)
|
2011 Stock Incentive Plan. | |
31.1#
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2#
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*#
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer. | |
32.2*#
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer. | |
101.INS**
|
XBRL Instance Document. | |
101.SCH**
|
XBRL Taxonomy Extension Schema Document. | |
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document. | |
# | Filed herewith. | |
* | This certification shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | |
** | Extensible Business Reporting Language (XBRL) information is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. | |
(1) | Incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 (File No. 333-174621) filed with the Securities and Exchange Commission on May 31, 2011. |
43