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Constant Contact Inc. (NASDAQ:CTCT)

Q3 2008 Earnings Call

November 6, 2008 5:00 pm ET

Executives

Jerry Sisinski - Director of Investor Relations

Gail Goodman - Chairman, President and Chief Executive Officer

Steve Wasserman - Chief Financial Officer

Analysts

Richard Davis - Needham & Co.

Peter Goldmacher - Cowen & Co.

Brad Reback - Oppenheimer

Tom Roderick - Thomas Weisel Partners

Laura Letterman - William Blair

Michael Wong - ThinkEquity

Richard Baldry - Canaccord Adams

Operator

Good day everyone and welcome to the Constant Contact third quarter 2008 earnings conference call. Please be aware that today’s program is being recorded. At this time, I’d like to turn the conference over to Mr. Jerry Sisinski, Director of Investor Relations; please go ahead sir.

Jerry Sisinski

Good afternoon and welcome to Constant Contact’s Investor Conference Call for the third quarter ended September 30, 2008. I am Jerry Sisinski, Director of Investor Relations at Constant Contact. With me on the call today is Gail Goodman, Chairman, President and CEO of Constant Contact; and Steve Wasserman, our Chief Financial Officer, is dialing into the call remotely.

Before we begin today’s call, we must provide some cautionary remarks regarding forward-looking statements. During the course of this conference call we will 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 factor section of our most recent Form 10-Q on file with the SEC.

In addition, any forward-looking statements represent our views only as of today, November 6, 2008 and should not be relied upon as representing our views of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will be referring to the company’s adjusted EBITDA, adjust EBITDA margin and non-GAAP net income loss per share. These financial measures are non-GAAP financial measures that 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 measures is available in the press release announcing our third quarter 2008 financial results. This press release is available in the Investor Relations section of our website at www.constantcontact.com.

In terms of the format of today’s call, Gail will begin by providing business highlights and accomplishments for the third quarter and Steve will then discuss the financial results and forward guidance; after which we will open the call for your questions.

Now let me turn the call over to Gail.

Gail Goodman

Thanks Jerry and thanks to everyone for joining us on the call. Today I’m going to review our third quarter results which were highlighted by another quarter of better than expected revenue growth, with solid financial performance. We also delivered another strong quarter for customer additions and as I’ll discuss in a moment, our key customer metrics remain very consistent with historical ranges.

We are benefiting from continued strong demand for our email marketing solution, growing market awareness in a vastly under penetrated market, the launch of our national radio advertising campaign and continued solid execution from all our sales and marketing teams. As a result, we are again raising our revenue guidance for 2008 and we are confident about our growth outlook heading into 2009, in spite of challenging economic environment that we continue to monitor closely.

Summarizing our results for the third quarter; revenue was $22.9 million, up 69% year-over-year and adjusted EBITDA was $1.4 million, up from adjusted EBITDA of $104,000 in the third quarter of 2007. Both revenue and adjusted EBITDA came in above the high end of our range of guidance. We are particularly pleased with the company’s strong financial performance and continued business momentum in light of the current challenging macroeconomic environment.

As evidence of our business momentum, we added over 21,400 net new email marketing customers during the third quarter, bringing our total email marketing customer count to over 228,500, which represented growth of 58% on a year-over-year basis. Net adds were inline with the expectations we shared last quarter and within the third quarter, we saw typical seasonal patterns, including slower summer months at the beginning of the quarter, followed by a very strong September, when small and mid-sized businesses and organizations reengaged following their summer vacations.

We believe there are a number of factors driving our continued success. First and foremost is the fact that we’re addressing a very large market opportunity and we’ve penetrated less than a few percent of what we believe is our addressable market.

In tough economic times, it is all the more important for small businesses and organizations to communicate with their members, customers and prospects. Email marketing has proved to be a very effective means of communication and Constant Contact provides an extremely affordable and easy-to-use solution.

We talk to thousands of customers every week and we consistently hear that Constant Contact is considered to be one of the most important tools that they are using to survive and even thrive in the current economic environment. As a result, we are often told that we would be among the last services they would ever consider turning off because the ROI is so compelling and we are so fundamental to their success.

Constant Contact has established a reputation for delivering very easy to use solutions, combined with world class, industry leading customer service to make our customers successful. This focus on customer service is a key driver of our high levels of customer retention and is the single largest source of driving new business for Constant Contact, as customers that are raving fans of the company refer us to other small businesses and organizations.

During the month of September, we launched our national radio advertisements on five major networks across the United States. Many of you have commented, you have already heard our advertisements; some of you on multiple occasions. It often takes multiple impressions over a period of time to inspire prospects into action and as a result, we have several waves of national radio advertising planned over the course of the next several quarters.

Given the current state of concern over the economy, we have shifted our mix of current radio spots to be more targeted towards helping small businesses and organizations get the most out of their shrinking marketing budgets.

We believe the launch of our campaign had little impact on our strong third quarter net add performance and we continue to expect to see only a modest impact on our Q4 net adds. The majority of the campaign’s impact is expected to be seen in 2009. This is because the radio campaign is focused on the first two stages of the marketing curve and it will take time for market awareness to get to the point where other forms of marketing can be utilized to convert prospects to customers.

While we expect to be able to measure the statistical impact of our national radio campaign in a few quarters, we do have some very, and I stress very, early signs of the positive impact that radio has already have. We’ve already seen an impact on the number of attendees at our regional seminars. In September, we had one of our strongest months ever with regard to the number of seminar attendees. The number of internet searches for the term “Constant Contact” is up and people are visiting our website in record numbers.

Finally, we had a solid customer acquisition month in October, which is very encouraging, particularly in this economy. It is still very early, but these are all positive early indicators that we will be as successful as planned with radio advertising.

It is also encouraging to see continued consistency in our key customer metrics during the third quarter. Our average email marketing invoice remained in the $33 range, plus or minus $2. The number of customers our $15 and $30 revenue bands remained at 80%, plus or minus 1% and our monthly retention rate remained in its long-standing range of 97.8%, plus or minus 0.5%. Our key customer metrics continue to be consistent and predictable quarter-after-quarter.

As we’ve discussed before, we believe changes in our customer retention rates could be a leading indicator of small business failures impacting our business. As of today, our customer retention rate remains within its normal band. As expected during the third quarter, our average revenue per email marketing customers did not increase sequentially, as a result of the change in pricing of our survey product, which occurred during the September quarter.

We continue to grow our survey customer base during the quarter; however the pricing change that we made did not generate the type of up tick in demand we were hoping to see. We are still testing and evaluating the best way to package and price the solution to optimize the penetration rate into our rapidly growing email marketing customer base as well as to target customers who are new to Constant Contact.

We continue to test, scale and tune all aspects of our business; our survey offering is no exception. As such, we are currently evaluating alternative pricing, packaging and positioning strategies for our survey offering and in the coming months, we plan on bringing one of these plans to market. We will share more specifics related to our survey plans after we’ve made a final decision.

On the R&D front, we were pleased to welcome John Walsh as Senior Vice President of Engineering and Operations. In this role, John will serve as a member of our executive team and will oversee all aspects of engineering and software’s as service operations activities.

During the third quarter, we released many new features for our email marketing product; one of them being an auto responder feature and another, a desktop widget, for easily importing individual email marketing contacts. Both of these features were included, free of charge, for any subscriber to our email marketing service. The new auto responder feature allows an organization to schedule an automatic series of emails that goes to each new addition to their email list, triggered from the contact’s sign up date.

Our customers can set up a fixed schedule, so that for example, on day one a new contact will automatically receive a welcome email. Then on day eight, that same contact will automatically receive a hints-and-tips newsletter and on day 15, they would receive an email offering a free consultation. In this way, a small business can create an automated pipeline of messages for new prospects and customers.

Our desktop widget is a downloadable piece of software that runs locally on a computer, allowing customers to easily add new members to their list. Whether it be on a desktop, point of sale terminal or on a mobile device, our customers can easily add members to their list wherever they are. These are just two examples of listening to our customers and continually working to improve the overall user experience for them through improved product functionality.

So in summary, we exceeded our revenue and adjusted EBITDA guidance, added over 21,400 net new email marketing customers, launched our national radio campaign, maintained consistency in our key customer metrics, including retention rates and raised our 2008 full year revenue guidance yet again.

Looking ahead, we are optimistic that our strong business momentum will continue through the end of 2008 and into 2009. We are still early in the planning process for 2009, but we are developing plans that call for continued strong revenue growth, combined with expanding adjusted EBITDA margins.

Now let me turn the call over to Steve for a review of our financial results.

Steve Wasserman

Thank you Gail and good afternoon everybody. For the third quarter, revenue was a record $22.9 million, up 69% over the third quarter of 2007, up 10% on a sequential basis and ahead of our guidance of $22.2 million to $22.4 million. Our revenue over-performance was due primarily to an increase in the average customer email marketing listing size, which in turn led to an entire average email marketing invoice amount.

As Gail mentioned, we added over 21,400 net new email marketing customers in the quarter, up from 21,200 in the second quarter of 2008 and in line with our expectations for the quarter. Our gross margin in the third quarter was 71%, down from the second quarter gross margin of 73%.

As previously discussed, in the third quarter we began to see the cost impact from our second call center facility in Colorado, along with the increased impact from our second co-location facility. Some of these expenses were step functions and were required for continued growth. Our long-term gross margin target remains in the 72% to 74% range.

Sales and marketing expense in the quarter was $10.8 million or 47% of revenue as compared to $6.7 million or 50% of revenue in the year ago period. As we already indicated, we ramped down certain marketing programs during the summer months, but began increasing our marketing spend significantly in September with the roll out of our national radio campaign.

This campaign was timed to correspond with the increased business activity of our customers and prospects. Over time, we expect to continue gaining leverage in our operating model from efficiencies in sales and marketing.

R&D expense during the third quarter was $3.9 million, as compared to $2.5 million in the third quarter of 2007 as we continue to grow our engineering organization. R&D expense was 17% of revenue in the third quarter of 2008, as compared to 19% of revenue in the third quarter of 2007. Again, over time we expect to continue gaining leverage in our operating model from efficiencies in research and development.

G&A expense in the third quarter was $2.6 million, as compared to $1.6 million in the third quarter of 2007. The increase was primarily due to the costs associated with being a public company as well as the expansion of our senior executive team. We reported an adjusted EBITDA profit of $1.4 million, which was above our guided range of $1.1 million to $1.3 million and this was our fifth consecutive quarter of positive adjusted EBITDA.

Interest expense was $600,000 approximately for the quarter. It is worth noting that our cash and equivalents have been invested conservatively with our primary focus being capital preservation. While this limits the yields that we earned in our investments, it provides significant downside protection, which is certainly an important factor when considering the current state of financial markets.

In mid September, in response to the crisis in the financial markets, we moved our investment to a very conservative fund, investing in government and government backed securities with very short maturities. As a result, we currently expect to earn under $100,000 in interest income in the fourth quarter. We paid no income taxes during the quarter and do not expect to incur significant state or federal income taxes in 2008 or 2009.

We generated a net loss of $399,000 in the quarter, resulting in a GAAP basic earnings per share loss of $0.001, based on $28 million weighted average shares outstanding. This is compared to a net loss attributable to common share of $2 million or $0.51 per share in the same period a year ago. Our stock based compensation expense in the third quarter was $757,000 and our non-GAAP diluted earnings per share was $0.001.

Turning to the balance sheet, we ended the quarter with $106 million in cash, cash equivalents and marketable securities, down slightly from $107 million at the end of the June quarter. The slight decrease in cash was due primarily to normal quarter-to-quarter fluctuations in working capital accounts, including for example a pre-payment of roughly $1 million related to our national radio spend. We generated $1.7 million in cash flow from operations during the quarter.

Looking ahead, we expect to be free cash flow positive for the fourth quarter as well as for the full year of 2008. Deferred revenue totaled $14.1 million at the end of the third quarter, up 53% on a year-over-year basis.

Turning to other metrics, our ARPU was $35.02 for the quarter as compared to $35.15 for the second quarter. As you may recall, during last quarter’s conference call, we said we did not expect ARPU to grow during the third quarter.

Today our survey business is growing slower than our rapidly expanding email marketing business. This in turn places some modest pressure on our ARPU. Adoption of image hosting and archive continue to do well, which positively impacts our ARPU. The net result of this is that we expect our ARPU to be relatively flat for the next few quarters, although we remain confident that we’ll be able to increase our ARPU over the long run. We ended the quarter with 421 employees, up from 382 employees at the end of the June quarter and we anticipate continued growth in our employee count.

Now let’s turn to guidance for the fourth quarter and the full year of 2008. For the fourth quarter, the company expects revenue to be in the range of $24.8 million to $25 million; adjusted EBITDA to be in the range of $550,000 to $750,000; GAAP net loss to be in the range of $1.8 million to $2 million; and GAAP net loss per share to be in the range of $0.06 to $0.07.

The company expected non-GAAP net loss per share to be in the range of $0.03 to $0.04. GAAP net loss per share and non-GAAP net loss per share are based on basic weighted average shares outstanding of $28.1 million. These results reflect our normal seasonal fluctuations and marketing spend.

Updating our full year guidance, I’m pleased to say that we are again increasing our revenue guidance and we are increasing our adjusted EBITDA guidance. We expect revenue to be in the range of $86.6 million to $86.8 million, up from previous guidance of $85 million to $86 million.

We expect adjusted EBITDA to be in the range of $3.7 million to $3.9 million, representing an adjusted EBITDA margin of 4.4%, up from previous guidance of adjusted EBITDA in the range of $3.3 million to $3.6 million, which equated to an adjusted EBITDA margin of 4%.

We expect GAAP net loss to be in the range of $2.1 million to $2.3 million and GAAP net loss per share to be in the range of $0.07 to $0.08. GAAP net loss per share is based on basic weighted average shares outstanding of $28 million and includes stock based compensation of $2.8 million. We expect non-GAAP net income per share to be $0.01 to $0.02 based on diluted weight average shares outstanding of $29.3 million shares.

Let me remind you today that our guidance includes fourth quarter interest income of less than $100,000 for the quarter. This reduction in our guidance for net income and EPS on both a GAAP and non-GAAP basis is fully due to the expected reduction in interest income.

We’re also providing guidance for the full year of 2009 for the first time. We currently expect 2009 revenue to be in the range of $125 million to $130 million with an adjusted EBITDA profitability margin of approximately 8%. While we cannot predict the future state of the economy, our long history of extremely consistent business metrics gives us confidence in the guidance that we are providing today.

Our retention rates remain consistent, our affordable price point and the ease of use and proven value of our email marketing solution, make us an attractive choice for our customers. This is a very under-penetrated market and we are the clear market leader, adding thousands upon thousands of new customers every month. In summary, we’re very excited about our results to date and our ability to execute well in this current environment.

At this time, we’d be pleased to take any questions that you have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Davis - Needham & Co.

Richard Davis - Needham & Co.

I think I know the answer, but I figured I’d ask you guys directly because I’ve gotten this question from investors. It’s, you’re adding radio advertising and it probably is more expensive, a bit, than other forms of advertising and marketing. Why would you do that now if the market’s so under-penetrated? Is it just an idea of let’s get out and really rock on and build a big presence or if you could kind of talk to that briefly, that would be awesome.

Gail Goodman

Sure. When you think about the market, we think about really there is an opportunity to first generate demand and then capture demand. As we look in a given quarter or year and decide what to spend our sales and marketing on, we start first by capturing the available demand.

At this point, we are pushing those channels as hard as we can and think that in order to provide growth, we need to back up in the data curve to the awareness and interest stages and actually generate market awareness.

We think the market is ready for that; we believe Constant Contact has both the brand and scale to do that; we really think there’s an opportunity for us to become synonymous with the category in the minds of small business and felt like this was exactly the right time to take advantage of that and then just layer onto that. We had reached the point with testing radio where we had the confidence in the medium.

So, it was really a combination of our readiness and market readiness that led us to really think this was the time to invest in national radio.

Richard Davis - Needham & Co.

Then the follow-up would be, do you believe there’s a time or will there be a time when you combined text, email and voice as an outbound kind of marketing platform? I’ve talked to different people; some people think never, some people think years from now, some people think tomorrow. Do you have a point of view there?

Gail Goodman

Well, certainly our point of view is that mobile in very many forms is becoming a significant part of our world today. One of the things we did announce during the quarter, that we didn’t discuss in the script, was the creation of Constant Contact Labs, which is a small group of folks who will have the bandwidth to really be digging into new technologies, understanding how we can apply them and when is the right time to apply them for our particular audience, the small business and small organization market. One of the very first things on the Constant Contact Lab’s agenda is really digging into mobile and deciding when and how we bring that to market.

Operator

Your next question comes from Peter Goldmacher - Cowen & Co.

Peter Goldmacher - Cowen & Co.

Gail, can you talk a little about if you’ve seen any change in the rationale as you’re getting these new customer sign ups? I’m sure you survey your customers, why they’re going with Constant Contact. Have their reasons changed in the last year and then also, if you could spend a little bit more time digging into the competitive environment that would be great.

Gail Goodman

When we see where customers are coming from, it’s a little bit less of the why and more of the where, we still continue to see referrals; word-of-mouth referrals and referrals from the footer on the bottom of our emails as the single strongest source of new customers for us.

When you talk to folks who come through referrals, the answer is very clear. My buddy is using you and it’s having an amazing impact on their business and they told me I should try this or my chamber told me I should try this. So what we’re really seeing is they are making a decision to try email marketing and try Constant Contact at the same time.

Tying this into the second half of your question, we do not see them even looking at competition on the way in. We literally are the place they were told to go do this and they come to us and do it, which is fantastic and that’s the power of a very satisfied customer base and a great support model for our target market, combined with just the sheer affordability of our solution, reminding everyone.

80% of our customers are paying us $15 or $30. So, it’s a very easy decision to give it a try and see how effective it is and particularly in this market, where they’re looking at every marketing dollar, they are cutting back the more expensive channels and choosing to try email marketing if they haven’t tried it before.

Peter Goldmacher - Cowen & Co.

And what are the reasons when people leave the service?

Gail Goodman

When we look at the reasons for attrition, the largest set of reasons are things that have to do with the nature of their business. They are no longer doing email marketing and when we dig behind that, it tends to be staffing or business challenges that are driving them to stop doing email marketing; they lost the one extra person who used to do it, they need to cut back in some fundamental business; out of business is a reason we hear; competitive is typically a very, very small piece of the attrition rationale.

Then remember, of course, that of our 2.2% lovely attrition, about 0.5% of that is people we ask to leave the system because they do not meet our permission standards.

Operator

Your next question comes from Brad Reback - Oppenheimer.

Brad Reback - Oppenheimer

Could you review, maybe during the quarter, if there were any challenges in the channel, where new customers were coming from?

Gail Goodman

Yes. I mean, we did not see any significant change in the channel mix. So, there was lift in all the channels. We saw growth in the online, growth in our channel partner channel, growth in referrals. So, we really saw it across the board.

Brad Reback - Oppenheimer

Okay and looking forward Gail, you had talked about sort of the radio campaign being a first phase of awareness as you look to capture a new segment of customers. As you move forward trying to convert the awareness of actual customers, can you give us a sense, is that incremental spend on top of what’s going on or will that replace will you actually just move the spend in a different direction?

Gail Goodman

We have planned multiple waves of radio and obviously depending on how successful we see it being, we can make adjustments to those plans as time goes on. That was incremental spend starting September and through the fourth quarter and will be incremental spend in 2009 as well.

Operator

Your next question comes from Tom Roderick - Thomas Weisel Partners.

Tom Roderick - Thomas Weisel Partners

So, I guess the question you guys must get all the time and right now with what’s going on in the economy is what’s happening with the churn rate? You’ve answered that today pretty nicely, stating that the churn rate’s right in the historical range.

When you look though, given the gyrations in the SMB market at the end of September and into October, do you mind just talking about the trend line of that churn rate and what if any modifications you’ve made in customer retention to address what’s going on with potentially small business failures out there and things as the economy gets tighter here?

Steve Wasserman

Tom, we have not seen any significant movement in our churn rate. What we’ve said before is when we affirm that it’s in the range, what we end up doing is affirm that it’s in the range, each of the three months in a particular quarter and as Gail said earlier, she also reaffirmed that in October it was right in the range.

So again, don’t have an absolutely accurate response as to why it hasn’t changed, but perhaps we’re helping our customers succeed through the power of email marketing and that could be helping to mitigate the churn.

Tom Roderick - Thomas Weisel Partners

Okay, let me build on Brad’s question, you’re just talking about the waves of the radio campaign and the spend on the marketing side. As you look into 2009 and the way that we think about modeling this, is $300 cost of acquisition still a pretty good place to be, blended for the year and how would you suggest we sort of front-end load that or back-end load that number?

Gail Goodman

Let me start with front-end load, back-end load piece. We expect the marketing spend to follow the typical seasonal pattern. So, Q1 we will be spending on radio, which was not a channel we had last year, but the way the flow of marketing spend, strong in Q1 and Q2, lower in Q3, biggest spend push in Q4 is the way to think about the ebb and flow of the marketing spend. We have not guided to 2009 COA yet, so I think I’m going to hold my comments on that until the next call. We will definitely get into more 2009 detail on the next call.

Steve Wasserman

Tom, if I could just also add that the 8% EBITDA margin that we are targeting for next year will include all sales and marketing.

Tom Roderick - Thomas Weisel Partners

And Steve, last question for you; can you just repeat what your expected level of interest and other income is set to be for the fourth quarter and if you can offer any commentary or guidance on how you’d suggest we model interest income on a percentage basis for 2009, how should we go about that?

Steve Wasserman

As I mentioned, when the financial crisis hit during the month of September, we had our money in a diversified fund that had corporate bonds, very short-term corporate notes as well as government notes and working with our advisor, there was some question about how stable some of these corporates were. One of the money market funds broke a buck, so we chose to pull that money and move it into a very conservative fund as I said, in terms of the government and government backed securities.

Tom, for the time being, we plan on leaving our cash in the very conservative funds, which of course will impact our interest income. So, we’re counting on less than $100,000 in the fourth quarter. We will, no doubt continue to revisit that decision and when we feel that the capital markets have reached the point where we’d be comfortable adding a bunch of corporates, we will let you know, but for the time being, I would suggest to you keep the $100,000 because that’s how it’s invested and we’re not sure if we will move it, but we may move it next year.

Operator

Your next question comes from Laura Letterman - William Blair.

Laura Letterman - William Blair

Obviously the results were great, but did you see any weakness at any of the little verticals that you serve or business-to-business or business-to-consumer? Was there any detectable weakness in any sub-small segment?

Gail Goodman

So, we look at segment specific performance, kind of in arrears and we do not specifically forecast by segment at that level of detail. We actually forecast by sales channel, what do we expect to get from pay-per-click or online or channel partners and I actually have not looked at the Q3 mix in any detail, so I really can’t answer that question. It was certainly nothing that was at the level of being obvious to the business.

Laura Letterman - William Blair

Moving on, obviously you don’t see competition in most of your deals because it comes from referrals, but when you do see competition, who are you seeing more of, who are you seeing less of and how is pricing up there on the part of your smaller competitors?

Gail Goodman

Yes, so typically our competitors have all been priced under us; some surprisingly similarly, like exactly the same pricing tiers, but a buck or two cheaper per tier. We’ve seen some of the competitors moving their pricing around, but not getting outside of that range of being really similarly priced to us, but within a dollar or two and we really have seen no significant changes in the competitive environment over the last quarter.

I mean, frankly we are creating the market and kind of taking the demand as we create it. I’m sure our competitors are enjoying some of the market we’re creating, but we’re really not feeling like we’re head-to-head competing very often.

Laura Letterman - William Blair

Turning to survey, any ideas that you can share with us at this point on why you think it didn’t work in terms of the change in pricing and some of the ideas you’re kind of throwing around?

Gail Goodman

Yes, we are still very much learning on survey. What is clear about survey is that, particularly for small businesses, unlike email marketing where they send a newsletter or a campaign and they see an immediate value back to the business, in terms of incremental business.

Survey, they have to do two steps and they have to survey their customers and then they have to act on the insight and so the value proposition is less immediate. We, as is typical of even email marketing, need to be better and better at giving them the best practices on how to interpret that data and get the ultimate value out of survey, which is more of a two-step process.

So, we are really just feeling like at the moment, it’s all about helping our customers understand how to use it; how to make it a fundamental part of the business; how to use it in complement with email marketing; to learn more about their customers so they can make their email marketing more targeted and relevant because they understand who’s on their list and what they’re interested in. So, we think the bulk of the challenge here is about presenting the value proposition and the best practices that ultimately help our customers realize how valuable survey is to their business.

So, it’s just going to take a little bit longer, a little less direct and immediate than email marketing.

Laura Letterman - William Blair

Final question; I know you’re not giving guidance for subs sequentially, but before the market or the economy worsened, there was an expectation I think for that to go up nicely, sequentially. Would you still expect that on a general view in terms of what it should do sequentially?

Gail Goodman

Yes. As you said, we don’t provide specific guidance to net adds, but the fourth quarter has typically been one of our stronger quarters and we are expecting to see a modest sequential increase in net adds in Q4. You can kind of back into it from our revenue guidance. So, we definitely are expecting to see added increase in Q4.

Operator

Your next question comes from Michael Wong - ThinkEquity.

Michael Wong - ThinkEquity

A couple of questions for you; so first of all, can you talk about your conversion rate across your sales funnel and how it extended throughout the quarter and early in Q4? Are you detecting any strengthening or weakness of those metrics?

Gail Goodman

Yes, I mean, you can sort of see that through the end-result of net adds. We have really continued to see very good performance throughout our funnel; we draw a little picture of the funnel; we’ve never been specific about the performance of any individual channel as it flows through the funnel, but all the trends are ones that we were happy with. Steve, do you want to add anything to that?

Steve Wasserman

No, I agree with that. Michael, we didn’t see anything materially different. Everything just continued to stay where we expected it to be.

Michael Wong - ThinkEquity

Okay and then I think you had noted record traffic at your website on the heels of the radio advertising during the quarter. So, just to clarify, when you look at October, early November, versus the traffic levels in September, how are those traffic levels comparing and is it above typical seasonality because of radio?

Gail Goodman

Yes. So, October has always been our strongest month and to try to tease out the national radio from the rest, we’ve certainly been trying to do week over week, historical averages, so we’re definitely working our way to try to see that. In the end, we will do a rigorous statistical look back and know exactly what happened.

At this point, we do think we’re seeing a slight; and I emphasize slight, lift over typical seasonal patterns, but it is way too early to judge it at a statistical significance, but we definitely saw a strong October and it was modestly above historical trends.

Steve Wasserman

And one other just minor comment, and also we have a bunch of different conversion rates; one of them is visitor trials, the other is trials per pay. We were pleased with the movement of visitor to trial.

Michael Wong - ThinkEquity

Right and then the last question for you, so in terms of some of the traps that you’re seeing at these workshops right hear, are these typically prospects, trial customers or are they existing customers? Maybe you could talk about whether or not that mix has changed versus historical? Thank you very much.

Gail Goodman

Yes. So, the traffic in the seminars is high. What’s also interesting is that demand from Chambers to do joint seminars with them has actually been increasing. We launched both a Chamber program and program with Score over the course of the last six months and they are also sharing the view that email marketing is something all of their members ought to do to make sure that they survive any economic downturn. So, we’ve been doing more seminars and more attendees per seminar.

When we look at the mix, it is a mix of prospects, trialers and customers and we measure that fairly rigorously and I don’t remember the numbers off the top of my head, but I do think the number of prospects has been increasing.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

Just if we look back a year, sequential adds were about flat Q3 and Q4. I believe that in part we thought it might be due to the increased visibility in Q3 or the IPO. So, is it more fair to look back to the seasonal patterns that we saw in ‘05, ‘06, where there was a clear and substantial Q3, Q4 increase and maybe contrast that against, I think sort of the draw from the increased marketing on the radio campaign. Thanks.

Gail Goodman

So, the challenge is that through the course of our spending, we have been changing our own seasonal patterns and it’s hard to go year-over-year, quarter-over-quarter and see and draw distinct conclusions. So, I think I’ll just reiterate what I said earlier, which is we are expecting to see a modest sequential increase in net adds in the quarter and if you back into that through our revenue guidance, I think you’ll get pretty close.

Richard Baldry - Canaccord Adams

And then it may be a small question, but it seemed to me that the auto responder has some pretty significant functionality to add, that I kind of would weigh pretty valuably. So, could you talk maybe a little bit about how you make the decisions between what types of functions to add for free versus trying to add it as an up sell to your existing base, which is obviously a pretty big customer base? Thanks.

Gail Goodman

Yes, that’s a great question. It is a mix of certainly what the marketplace has done in terms of competitors and other products. Whether we think it is sufficiently distinct that people would pay for it separately -- it is a judgment call; we definitely talked about that with auto-responder internally, but felt like there was kind of a mix of kind of competitors who already had auto-responder embedded in their email marketing products and a feeling that it was so tightly linked to email marketing that it would be hard to sort of tease it out entirely separately. So, really just a judgment call that we felt it was better to embed it in the product.

Operator

Your final question comes from Brad Reback - Oppenheimer.

Brad Reback - Oppenheimer

Just real quick; could you comment on usage of the system, maybe email per customer over the quarter and how that’s sequentially and year-over-year?

Gail Goodman

So, the two metrics we look at most consistently are recency and frequency of both log in and mailing as opposed to number of mailings per se, and it has been entirely consistent. It is a little bit seasonal, it drops a little in the summer, comes back in the fall and we’ve seen exactly that pattern in both frequency and recency of usage.

Brad Reback - Oppenheimer

Okay and just one other, I’m not sure if you have the number Gail, but you had talked about September, the seminars being up fairly significantly; do you have that percentage increase year-over-year of attendees?

Gail Goodman

I don’t.

Operator

And that will conclude today’s question-and-answer session. At this time, I’d like to turn the conference back over to management for closing remarks.

Gail Goodman

Thank you everybody for joining us today and we’ll look forward to catching up with you in another quarter.

Operator

Thank you. That will conclude today’s conference. Have a pleasant day.

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