CTCT

Constant Contact, Inc. (CTCT)

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Constant Contact (CTCT)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Jeremiah Sisitsky - Director of Investor Relations

Gail F. Goodman - Chairman, Chief Executive Officer and President

Harpreet S. Grewal - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Richard H. Davis - Canaccord Genuity, Research Division

Brad Reback - Stifel, Nicolaus & Co., Inc., Research Division

Michael Huang - Needham & Company, LLC, Research Division

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Ygal Arounian

Michael Anderson - Crédit Suisse AG, Research Division

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Eric Lemus

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Constant Contact Third Quarter 2012 Earnings Results Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Jerry Sisitsky, Director of Investor Relations. Please go ahead, sir.

Jeremiah Sisitsky

Thank you, Jenny. Good afternoon, everyone, and welcome to Constant Contact's investor conference call for the third quarter ended September 30, 2012. With me on the call today is Gail Goodman, Chairman, President and CEO; and Harpreet Grewal, Chief Financial Officer.

During the course of this conference call, we'll make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-K and 10-Q on file with the SEC. In addition, any forward-looking statements represent our views only as of today, October 25, 2012. While we may elect to update these forward-looking statements at some point in the future, we disclaim any obligation to do so even if our views change.

During this call, we will refer to certain non-GAAP financial measures. These financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is available in the press release announcing our second quarter 2012 -- rather, third quarter 2012 financial results. This press release is available on the Investor Relations section of our website at www.constantcontact.com. Also available for download on our Investor Relations website is a presentation and our historical financial and operating metrics.

With that, I will now turn the call over to Gail.

Gail F. Goodman

Thanks, Jerry. We delivered revenue of $63.8 million in the quarter, representing year-over-year growth of 17%, consistent with our guidance. From a profitability perspective, we delivered better-than-expected profitability, with adjusted EBITDA of $11.3 million, representing an adjusted EBITDA margin of 17.6%. We continue to generate positive free cash flow and grew our cash balance to $88 million, representing approximately $2.89 a share.

ARPU grew consistent with our expectations, and retention continued to improve. New customer additions, however, came in lower than our expectations. In the quarter, we added 35,000 gross customer additions as compared to our expectation of approximately 45,000, which resulted in 5,000 net new customers.

The largest part of the Q3 new customer shortfall resulted from the email side of our business. It was not a demand issue, but rather an execution issue.

Visitors and the number of trialers were consistent with our expectations, flat to up over last year. It was conversion of these trialers to paying customers that came in below what we've done in past periods.

We're in the midst of a significant expansion of the Constant Contact product suite. The combination of launching and managing multiple products at various stages of growth and the time and attention required in both evaluating and integrating SinglePlatform absorbed leadership bandwidth and resulted in less execution focus and discipline.

Over the course of 2012, we introduced a number of changes that in hindsight led to our conversion challenges. We made changes in the structure and organization of the sales team and sales compensation plans. We made these changes to accelerate our move to a multiproduct company and to improve conversion based on tests that had shown positive results.

The unexpected outcome was a decline in performance. We are taking steps to reverse the third quarter trends. We've already begun to make changes. Primary among these are strengthening the sales leadership team, refining compensation plans to ensure they both motivate and are aligned with our sales and strategic objectives and better optimizing the structure of our sales organization.

We're also aligning organizationally around improving conversion and have created a conversion across borders team. This cross-functional, cross-product team is adjusting messaging and customer experience around known barriers to conversion. We are refocusing our attention on the core customer success metrics to ensure our customers achieve quick success with our products.

These changes will not result in overnight improvements, but we believe they will result in recovering the declines relative to historical conversion rates. We've identified the execution gaps and are working aggressively to address them. While far too early to declare victory, the first few weeks of October have shown positive year-on-year conversion and customer addition improvements, a trend we hope to continue.

Turning to SinglePlatform. The rationale for acquiring the company was simple. They solved a vexing problem for small businesses, how to be easily discovered on web and mobile searches. After 4 years -- 4 months, 2 things are increasingly clear. First, the strategic rationale related to the acquisition remains compelling. SinglePlatform delivers great value in solving a tough problem for small businesses. And second, some elements of the selling model are less mature and less predictable than we had anticipated.

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