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Constant Contact, Inc. (NASDAQ:CTCT)

Q4 2012 Earnings Call

January 31, 2012 5:00 pm ET

Executives

Jeremiah Sisitsky – Director of Investor Relations

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

Harpreet S. Grewal – Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Richard Hugh Davis – Canaccord Genuity, Inc.

Steven Ashley – Robert W. Baird & Co.

Daniel Salmon – BMO Capital Markets

Carter Malloy – Stevens, Inc.

Michael Nemeroff – Credit Suisse

Richard Fetyko – Janney Capital

Peter Goldmacher – Cowen and Company

Brian Schwartz – Oppenheimer & Co.

Arvind Rajamohan – Stifel, Nicolaus & Co.

Jeffrey Houston – Barrington Research

Richard Baldry – Wunderlich Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Constant Contact Fourth Quarter 2012 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time (Operator Instructions).

I would now like to turn the call over to Jerry Sisitsky, Director of Investor Relations. Please go ahead sir.

Jeremiah Sisitsky

Great. Thank you, Jamie. Good afternoon, everyone, and welcome to Constant Contact’s investor conference call for the fourth quarter and fiscal year ended December 31, 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 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 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 January 31, 2013. 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 fourth quarter year-end 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 IR website is a presentation and our historical financial and operating metrics.

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

Gail F. Goodman

Thanks, Jerry. Fourth quarter revenue totaled $66.3 million, representing year-over-year growth of more than 15% and above the range of guidance we provided. We also delivered profitability for the quarter that was in line with our expectations, with adjusted EBITDA of $10.2 million and adjusted EBITDA margin of 15.3%. For the full year revenue increased approximately 18% to over $252 million. Adjusted EBITDA totaled $37 million and adjusted EBITDA margin was 14.5% for the full year, in line with recent guidance.

The fourth quarter was a good finish to the year with positive momentum in our fundamental metrics. The fourth quarter included the addition of 45,000 new and 15,000 net new customer additions, a meaningful improvement over the prior quarter. We’re pleased that the changes we made in the business began to drive improved execution in the quarter, which Harp will discuss in more detail a bit later.

Overall, 2012 was a year of significant investment towards our multi-product engagement marketing strategy. In 2012, we significantly expanded the Constant Contact products suite, from three products to six. We now have a robust collection of online marketing tools for small businesses and non-profits, including Email Marketing, EventSpot, Online Survey, SinglePlatform, Social Campaigns and SaveLocal. Email marketing remains the largest part of our business and we remain focused on driving increased revenue and customer growth in email and believe we can do both.

In 2012, we secured about a 155,000 new paying email marketing customers. We drove email ARPU to record levels and improved email retention rates. Our customers continue to rely on email. They sent out more than 45 billion email s in 2012 to better engage their donors, prospects and customers. They experienced continued strong open rates and our average customer grew their list to over 2,800 contacts.

On Cyber Monday, we set a record for email s sent in a single day of 235 million, translating to more than 500,000 per minute at peak volume. We saw an increased number of prospects sign up for email marketing trials as we move through the year, validating ongoing demand for email marketing. Email marketing is a proven marketing channel for small businesses and one of their strongest ROI channels, and the opportunity remains for Constant Contact to accelerate email marketing revenue and customer growth.

Our event marketing product, EventSpot, continue to mature and scale delivering approximately 100% growth in revenue in 2012. We completed a re-branding of the product in August and interest in demand continues to grow. More than 315,000 events were managed by EventSpot in 2012 with more than five million registrants and well in excess of 100 million in fees were collected on behalf of our small business and non-profit customers.

Recent research reconfirms that over 40% of our email marketing customers run events that need EventSpot’s registration function. In 2013, we will be focused on further developing our cross sell expertise to take advantage of this opportunity.

We launched two products in 2012, Social Campaigns and SaveLocal. Social Campaigns was launched in February giving our small business customers the means to turn social media activity into results driven measurable campaigns designed to generate social word of mouth and grow their fan base.

To-date Social Campaigns have generated more than 120,000 users. Demand for the social products has certainly been validated in the first 11 months since launch. However, as we discussed on our last call, the number of paying customers is below our initial expectations. Based on our learnings, we plan to continue to tune the product experience, pricing, positioning and selling process through the course of 2013 to drive better monetization.

SaveLocal was released to general availability in June as a market disruptive alternative to help merchants run profitable and successful deals. SaveLocal launched more than 9,500 deals in 2012 with more than 20% of the purchases coming from new customers. We continue to see positive trends for SaveLocal, including increased average deal size, revenue per deal, buying per deal and sharing per deal. In 2013, the SaveLocal team will continue to stay out and tune their business model.

We also completed two acquisitions during 2012, CardStar in January and SinglePlatform in June. CardStar allows consumers to easily manage loyalty reward and membership cards on a mobile phone. The CardStar team has been integrated and now represents the core of our mobile loyalty team. The CardStar app itself has grown to more than three million active users.

In 2013, we’ll continue to invest in and develop our future mobile and loyalty marketing solutions. Exporting the power of the smartphone in the hands of both small businesses and their customers will be a strategic emphasis for our future development.

The acquisition of SinglePlatform in June representing an opportunity to solve a large and challenging problem for small businesses, have to be found by their next great customer on web and mobile searches. The value proposition of SinglePlatform is offering is even stronger than we first saw. We expect SinglePlatform to provide a powerful front door to acquire new to the franchise customers for Constant Contact.

Today, however, SinglePlatform’s customer addition sitting below our targets, driven by short-term scaling challenges, the impact of Hurricane Sandy on our facility at southern tip of Manhattan and the loss of the key employee on the enterprise franchise side of the business. Well the ramp in customers and revenue is not as explosive as forecasted at the time of acquisition revenue is expected to increase from just over $1 million in 2012, to around $7 million in 2013.

At year-end, SinglePlatform had approximately 15,000 paying customers. SinglePlatform’s unparalleled publisher network, including the top three business directory sites and the top three ratings and review sites among many others, continues to expand and represents a great value proposition, distributing accurate content rich listing data that represents – that results in increased customer page views and engagements. In 2012, SinglePlatform’s digital storefront had more than 100 million consumer views across their publisher network.

In the month of December, page views surpassed 20 million for the first time. This is up from roughly 2 million page views per month in January of 2012. All of our new products are growing, but their contributions to customer additions and overall revenue growth remains small, and each will ramp at different rates.

We are continuing to learn, iterate, and refine each of our products and over time are confident that we will become strong and meaningful contributors, to both the success of small businesses and ultimately Constant Contact. Driving customer success is a critically important component of our strategy and competitive differentiation. We can continue to combine our expanding product offerings with the best practices, education, coaching and support that make our customer successful.

In 2012, Constant Contact delivered over 1.2 million customer interactions via phone, chat, email, and social media. Our commitment to providing unparalleled support continues to be a key competitive differentiator, one that plays a critical role in our ongoing multi-product strategy.

In 2012, approximately 165,000 small business and non-profit attendees participated in our classes and workshops put on by our regional development directors and their growing team of authorized local experts, around the country, Canada, and the UK.

In 2013, these seminars will increasingly be focused on broader marketing topics, providing an opportunity to introduce appropriate use cases, training and best practices across our entire product suite. Over the course of the year all of our customer facing activities will fully reflect our expanded product offerings.

Looking at our 2013 priorities, we will continue to focus on accelerating customer growth. Our strategy and vision remains compelling. We believe we have the right products and team to execute to our plan. We continue to make investments in individual products, but also in bringing our product suite together, including product integration, a common contacts platform, and multi-product positioning, pricing and packaging. We expect to begin the benefit from these investments in 2013 and even more so over the long-term.

In 2012, we doubled the number of products we offer. In 2013, we will develop the core competencies required to become a true multi-product company. Including learning when, how and where we introduced the full suite of products to our customers.

We will also cement the pillars of our differentiation. Great easy-to-use products and the know-how personal coaching and education delivered at both the national and local level. 2013 is the year of leveraging that differentiation and bringing it all together, to continue the transformation of Constant Contact into a true multi-product company.

With that, I’ll turn it over to Harp to discuss the fourth quarter and fiscal year in more detail as well as review our outlook for fiscal 2013.

Harpreet S. Grewal

Thank you, Gail. We are pleased with our fourth quarter results, which reflect our efforts to get the company back on track after the third quarter challenges. Revenue was ahead of our expectations and profitability was consistent with our guidance. New customer additions showed a nice rebound from the prior quarter and we saw great grow in ARPU and retention continue to demonstrate positive trends.

We ended the year with 555,000 unique paying customers, an increase of more than 10% year-over-year. ARPU was driven primarily by gains in cross sell and list size, and grew approximately 6% to $41.12 from $38.94 in the fourth quarter of 2011, an increase by $0.77 relative to the third quarter of 2012 representing one of our largest sequential gains.

Retention meanwhile remains within our historical event showing strong year-on-year improvement and this resulted from our on going effort to ensure customer success. Given the disappointing customer additions in the third quarter, let me spend a few minutes on fourth quarter customer trends. As was the case in the prior quarter, demand remained strong. The number of trailers not only exceeded the prior quarter but also the prior year.

The challenge we faced last quarter was not a demand problem, but a decline in the conversion rate of trailers to paying customers. Our apotheosis centered on the large number of changes we made to the sales organizations in the first half of 2012. We took steps in the last few months to address some of these execution issues. While still early, our fourth quarter results appear to suggest that we may be reversing some of these third quarter conversion trends. We experienced nice gains in customer conversions rate leading to a rebound in email customer ads in the quarter.

Retention rates meanwhile continue to improve and we are pleased with recent trends on this front. It is worth noting that about 10,000 to 12,000 customers leave Constant Contact each month. It’s clear that for us to grow net new customers, we will need to both continue improving our retention rates and grow the number of new customer additions. We remained focused on doing both.

Looking forward, while we are encouraged by the improved results and the positive momentum, we remain a bit cautious in declaring the sustained reversal until we have a few more periods under our belt. We’ll continue to manage to an increasing amount of complexity those results in higher level of near-term variability after possible outcome.

The challenges in the third quarter have refocused the entire company on the importance of operating discipline. We have put in place to renewed operating rigor focused on clearly defined ownership of the key drivers of our business, performance reviews, better linking compensation plans to performance, creating better forms to question and challenge initiatives and investments, ramping up our bench strength where we see gap and testing more rigorously to determine future outcomes. We are committed to the tightened operational rigor. We are now running the away from change, but committed to managing at more effectively than we have in the recent past.

As we look at the portfolio of our newer product each of the different point in the revolution, scale and contribution to the company. In 2012 we adopted our risen planning framework to better guide us and prioritizing and allocating investment and marketing dollars across the portfolio products. The framework evaluates the status of each product based on where the product is in its life cycle. Aligns development resources and level of investment appropriately and forces to gating approach to valued progress every 60 to 120 days. This framework and attended not only to help us iterate faster, but also guide us in allocating our resources.

Let me now transition to the P&L. I’ll not cover every line item in detail, but we’ll briefly touch on a few key categories. First, for the full fiscal year we delivered revenue above our most recent guidance. Revenue totalled $252.2 million for the year representing about 18% year-over-year growth. Single platform delivered of $1 million in revenue for 2012 in line with our expectations.

As expected we saw sequential improvement in gross margin in the fourth quarter to 71.7% from 70.7% in the third quarter. For the full year gross margin was 70.8%, which was slightly down from the prior year primarily due to our investments to support a doubling of our product offering as well as amortization expenses associated with our recent acquisitions. We delivered $36.6 million in adjusted EBITDA for the year translating to a 14.5% margin consistent with our guidance. EBITDA margin for the year was down from 2011 as a result of expenses associated with scaling SinglePlatform.

In the fourth quarter, we adjusted our expectations relative to the earn-out associated with the SinglePlatform acquisition. As a result, we reduced the contingent consideration from approximately 6 million to zero. This benefit positively impacts our GAAP financial results in the quarter. This assessment however does not alter our prospective on the strategic value of SinglePlatform, but acknowledges that the near-term results are not consistent with our initial expectation. We expect, as Gail noted, for SinglePlatform to deliver about $7 million in revenue in 2013.

With respect to taxes, we had expected that we would be in a position to apply the federal R&D tax credit in 2012 when we guided at our October earnings call. The Congress passing an extension to the R&D tax credit on January 1, we are unable to take any of the benefits in the fourth quarter, but these benefits will be incorporated into our 2013 rate.

Our stock-based compensation expense for the year was $14.3 million, up from $11.7 million in 2011 with the increase primarily driven by equity awards associated with acquisitions. Looking ahead, we plan to drive top line 2013 revenue growth through a recombination of new customer additions, increased ARPU, and improved customer retention. Customer additions will be driven primarily by increased demand, growth in our new products, improved cross sell and some improvement related to our third-quarter conversion rates.

There is a range of potential outcomes in 2013 related to our new offerings. And we have assumed approve it before banking on that perspective of related to our 2013 guidance.

For 2013, we are leading our revenue guidance largely unchanged and are targeting revenue in the range of $284 million to $289 million. Consistent with our prior guidance, we’re targeting expanding adjusted EBITDA margin of 15.1% to 15.6%. This represents between 60 and 110 basis points of adjusted EBITDA margin expansion and equates to adjusted EBITDA in the range of $43 million to $45 million.

For the full year, we expect better efficiency in sales and marketing, resulting in approximately a 150 basis points of improvement on a percentage of revenue basis. These gains come even if we continue to invest in growing and scaling the SinglePlatform team and investing in a more substantial presence in television.

R&D expense will reflect our continued investment to deliver on our platform and multi-product strategy. For the full year, our expectations of R&D spend as a percentage of revenue to increase by approximately 100 basis points. G&A should be roughly flat as a percentage of revenue, and we should see some improvements in gross margin on a year-to-year basis.

We’re guiding to an effective tax rate of approximately 40%. GAAP net income per share includes stock-based compensation expense of about $15.3 million and depreciation of about $22.8 million.

Capital expenditures as a percent of revenue for the year is expected to be about 8%. Free cash flow for the year is expected to be north of $20 million. For the first quarter of 2013, we’re targeting revenue in the range of $67.9 million to $68.2 million.

Adjusted EBITDA is expected to be in the range of $4 million to $4.5 million, representing adjusted EBITDA margin of 5.9% to 6.6%. Depreciation and stock-based compensation for the first quarter are expected to be approximately $5.3 million and $3.8 million respectively.

As I look at the first quarter of 2013, EBITDA margins will be compressed versus last year driven entirely by our decision to have a present television in the first quarter, which we did not last year. And secondly, the incremental expenses associated with single platform, which we did not acquire until June of last year. Without these two variables, EBITDA margin would show a healthy year-on-year increase.

We do expect margins to show nice gains in subsequent quarters. In the second quarter, we expect that EBITDA margin would double sequentially to about 12% with continued gains in the third quarter to over 20% as we reduce marketing spend in the seasonally slow third quarter, and then, finally the fourth quarter a bit of sequential decline.

2013 is an important year in the transformation of Constant Contact. This is the year we start bringing the many elements of our multi-product vision together. We expect to rollout a common contact management system. We look to explore and test new product packaging and pricing options dispensing our cross sell and up sell efforts including better understanding the best methods to cross sell, bundle, brand and segment.

In doing so, we hope to truly establish Constant Contact as a multi-product provider. While disappointed by some of our recent execution challenges, our strategy remains compelling and the market opportunity expands us. We continue to be driven by the desire to deliver unparalleled customer success and take advantage of enormous market opportunity.

With that, I’ll turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Richard Davis from Canaccord.

Richard Hugh Davis – Canaccord Genuity, Inc.

Hey thanks. On the retention, Harp you mentioned it’s still within the band, but it’s kind of inching up, is there a scenario – is that such a big impact on your business obviously, the scenario where it actually kind of reset upward in a favorable manner or I mean obviously it gets something right away, but can you think of a scenario where that happen in 2013?

Harpreet S. Grewal

Absolutely, I think one of things that we talked about particularly on the email marketing side, is that we’ve had a target of getting our email attrition rates from kind of that mid point of 2.2% we keep on talking about and driving towards 2%, and I think it’s fair to say that over the course of 2013 we hope to be able to execute very close to those levels and be able to reset that base.

Gail F. Goodman

I’ll point out that, multi-products also improves retention so as we cross-sell and up-sell we find like many business before us that as soon as our customer has two products their retention improves and as you get to three improves again, so our efforts to become multi-product or also helping us with retention.

Richard Hugh Davis – Canaccord Genuity, Inc.

Got it. And then just a quick a tactical question, CardStar do you view that as the – or is the Apple product, what is it – Passbook, I think is what it is called. Do you view that as a competitive product and does that tend to growth of CardStar or not?

Gail F. Goodman

So we look at the idea of consumers opening any kind of mobile app that gives us a small business access to them, in location as a really great opportunity. So we have invested heavily in Passbook early, so EventSpot already can put its tickets into Passbook and things like coupons can go into Passbook.

So we like all of this and we’ll see how Passbook adoption progresses and really pays our investment in CardStar appropriately. But we do just really like this opportunity for a small business to engage the consumer in-store or near-store and will be using CardStar to start to test this opportunity to do mobile discovery as well of nearby stores when you are engaging with one store. So we think there is lots of potential there and I think we’re actually neutral on whether that ends up being realized through Passbook or CardStar.

Richard Hugh Davis – Canaccord Genuity, Inc.

Got it; thank you very much.

Operator

The next question comes from Steve Ashley from Robert W. Baird.

Steven Ashley – Robert W. Baird & Co.

Terrific, maybe I could start with a housekeeping question around Social Campaigns. I know in the past you provide those metrics around the number of users and the number of paid users and I wonder if you can get for the fourth quarter.

Gail F. Goodman

Yeah, the number we shared was that over 120,000 users. We didn’t share a paying count or update there. In general with our newer products, we’re going to focus more on milestones as we hit different milestones not yet in the habit of breaking down individual metrics for each and every product. So we did not share a new Social Campaigns metric.

Steven Ashley – Robert W. Baird & Co.

And you’re going to do some TV advertising here in the first quarter. Can you share with us the dollar amount of TV ad spending you might be doing and maybe a little color on how and if these TV ads will be any different from those you run in the past?

Harpreet S. Grewal

Yeah, so I think a couple of things, in terms of specific numbers, we haven’t broken that out in the past and we hasn’t to do so, I mean I think last year, we did have mass media spend, which was entirely radio. What we are seeing, as we go into mass media with both radio and television, that dollar amount is higher versus what we spend in Q1 and what we expect to spend in Q2. In terms of the messaging that you will see in the marketplace, I think you will see some of the messages being very consistent but I think you will see an evolution that you might have already seen towards reflecting our multi-product reality that we are moving into.

Steven Ashley – Robert W. Baird & Co.

Thank you very much.

Operator

The next question comes from Dan Salmon from BMO Capital Markets.

Daniel Salmon – BMO Capital Markets

Hi, good afternoon guys. A couple of weeks ago, I think less than that, ten days ago there was some news out on your new solution provider program, but I just interested to hear a little bit more about that Gail and how that expands upon some of your education and coaching efforts and where we should expect that to go this year?

Gail F. Goodman

Dan, as we continue to really understand why it takes for a small business to be successful. We’ve always understood that while they may look to us, they also turn to someone in their neighborhood, may be a marketing consultant, may be a web developer and have a program to really help those folks, b-grade email marketing, service providers and work with us and we call that our solution provider program.

What you are seeing is increased investment in that program as we really try to go deeper into helping them build their business, showing them how to build a real business around us by creating an ecosystem for folks to make money with Constant Contact products, but also expanding to be more than just email marketing to be all of our products and then really trying to help them differentiate themselves with things like accreditation.

So you are seeing a more significant investment in the partner channel for us in a wide variety of ways kind of at one end in the service side with solution providers at the other end throughout connecting our integration partners, and in the middle focused on our franchising partners. Partnering is a very important part of our expanded reach in 2013.

Daniel Salmon – BMO Capital Markets

Great. Thank you.

Operator

The next question comes from Carter Malloy from Stevens, Inc.

Carter Malloy – Stevens, Inc.

Hey guys, thanks for taking my question. Can you talk a little bit more about the TV campaign and help us understand the reason behind running it, just one quarter strongly as oppose to pushing after the year?

Harpreet S. Grewal

Yeah, I think it’s very simple actually. We done television in the past and most recently we obviously went in television in the third quarter in 2012 and we just see the list of the price and demand. We have the brand franchise in the marketplace and television at this point becomes a very powerful vehicle for us in generating that demand.

Gail F. Goodman

Maybe I’ll just hop on on top of that and really talk about our waves of mass media. We have historically matched our mass media waves to our seasonally strong periods. And actually we even tested what mass media does in seasonally weak periods decided not to spend there. So we really end up with two I’ll call them waves mid-January to mid-May is sort of the I call it the spring – winter spring wave and then we go off there and come back mid-September through mid-December.

When we have done all of our mass data both radio and TV, they follow that pattern. So what we’re really highlighting in the Q1 earnings picture is that last year we were just in radio, this year for that first wave will be in radio and TV. So Q1, you’ll see an expense that wasn’t there.

Carter Malloy – Stevens, Inc.

Okay. And then a few questions on disaggregating the results, so sorry to start even at least into that. But and knowing that would be more difficult to disaggregate going forward given the package offering. But can you help us understand also how much of the core email product represents as a whole of your business and the growth there?

Harpreet S. Grewal

Yeah, now I think I see some of the comments and Gail’s prepared remarks. I mean the newer products that we have continue to remain reasonably small relative to the $252 million of revenue we delivered at email, really is the largest portion of that. We’ll save that our newer products in 2013 for our expectation, should deliver revenues in the tens of millions and multiple tens of millions and from that perspective, but email still is the work for us and delivers great ROI for our customers.

Carter Malloy – Stevens, Inc.

And are you taking out of end spot in others as well when you describe. When the benchmark grew a 100% in 2012, I’m trying to understand, what the core email business did in 2012 or will do in 2013?

Harpreet S. Grewal

I think it’s a once again if I total as far as revenue growth which was 18% you would have to assume given the size of email of total amount that email wasn’t that much smaller than that.

Carter Malloy – Stevens, Inc.

Okay. All right. Thanks so much.

Operator

The next question comes from Michael Nemeroff from Credit Suisse.

Michael Nemeroff – Credit Suisse

Hi, thanks for taking my questions. I got a quick question building on couple – previous ones about mass media. I was just wondering if you can tell us if the yield on the mass media spend has been higher or lower than in the past campaign that you’ve run.

Gail F. Goodman

So actually I mean, looking at what we experienced in Q1 and once again we kind of track it during the – when we end wave and we kind of do a rough – analyze it further. What we saw and it’s kind of the most recent Q4 starting Q3, Q4 that productivity of our TV spend was actually better than in previous years.

Michael Nemeroff – Credit Suisse

Okay. And then, Gail, on the social product, because you obviously see how many, how close customers are to becoming paid customers. So wondering if you could tell us, is there a band of customers that get sold out at 50, 75 and I’m just trying to understand what the impediment is there from getting more paying customers?

Gail F. Goodman

Yeah, I think on – let me sort of lift up and focus really more on what we are doing to drive better conversion. So I think the biggest challenge we have had so far with Social Campaigns has really been small business understanding of the channel, how to use the channel, and really how to value the kind of results that we are driving. So if we drive band growth, how do I really understand how that’s going to translate into business overtime? Interestingly enough, we had some of these same questions when we delivered opens and clicks in the year 2001 and 2002.

The second thing is, as we really harm their understanding of what good expectation should be is also simplifying the flow through the product. So they are quicker to publish and a higher percentage of our free users successfully publish a campaign, so they can see those results. And our San Francisco office has done a fantastic job tuning that product and so we are starting to actually measure the time it takes to get that first product, first campaign done and posted and really tracking all of those metrics.

So as is typical of Constant Contact, we think customer success ultimately drives our success. So the team is really focused on the metrics that drive customer success. Publish to campaign, drive great results from that campaign, and what we’re also seeing is the best way to drive results to a social campaign not surprisingly is doing via your email list. So, it is a good chance for us to highlight the power of being a multi-channel provider. So, again I think we’ll take good advantage of that as we head through 2013 to really show people how to drive great results from Social Campaigns.

Michael Nemeroff – Credit Suisse

That’s helpful, thanks. If I may, just one more, I was just wondering if you could give us an update on the datum integration. I know that – I think you had mentioned in the past previously that, like Q4 of last year we would see some sort of an integration or an integrated product there. Could you give us an update on where that stands?

Gail F. Goodman

Yeah, so we are definitely pushing forward towards that Common Contact management system with the long engagement history, cost channel reporting to critical part of our multi-product strategy. And I would expect they will be talking about, internally we call it Contacts 2.0 quite substantially on the next call. At that point, we will definitely be in-market with customers with Contacts 2.0.

Michael Nemeroff – Credit Suisse

Thanks very much.

Operator

The next question comes from Richard Fetyko from Janney Capital.

Richard Fetyko – Janney Capital

Good evening guys, I am trying to isolate the email and the EventSpot products from margin perspective. So, what would you say, what drag some of the other new products having on these two more mature established products in terms of EBITDA margins? So, when you project 15% or so EBITDA margin for 2013, what would have it been without these new products and the drag from those?

Harpreet S. Grewal

Yeah, I mean, I think couple of things that we can leverage in relative to maybe looking at 2012 for a moment. So we reported EBITDA margins of 14.5%. We did note at the time of the SinglePlatform acquisition that there was going to be a $9 million to $10 million drag or almost 300 basis points. So without SinglePlatform in 2012, EBITDA margins would have been north of 17%, so that gives you a little flavor there and is expensed to 2013.

I think we’ve noted that we look forward to deliver $7 million of revenues and obviously the run rate would be north of $9 million, $10 million because that’s what we spent in 2012. I think in terms of newer products, revenues remain small as we’ve talked about Social Campaigns and SaveLocal specifically. So obviously we do look at the investments we are making but we haven’t broken those out, but I think between SinglePlatform and those two new products, we are at the point of investment to scale.

Richard Fetyko – Janney Capital

Okay. Thanks, that’s helpful. And then secondly with the TV campaign in the first quarter, how committed are you in paring that back in the beginning of the second quarter just – I think investors are somewhat concerned that that will spill into the second maybe even third quarter, so just curious how committed you are and actually ending it when you plan on ending it right now. And then secondly what level of gross subscriber additions do you anticipate in the first quarter 2013 or full year 2013, at least directionally versus 2012 if you don’t feel comfortable in giving out numbers or ranges.

Gail F. Goodman

Yes, so let me take the first and I’ll pass for the second to Harp. So we have really good market data and operating history that shows us that mass media efficacy declines dramatically as we head into the summer season. So we will be spending on mass media in April and early May, but that’s obviously built into the guide that Harpreet talked about. So but it is extremely unlikely that we would spend on mass media in the sole summer months, it is not a good spend and we very disciplined in the way we spend our marketing dollars.

Harpreet S. Grewal

I think one of the things to note just on the television spend as well, is obviously the channels that we have just go beyond television, but we’re very pleased with what television is doing. But over the course of the year, even with spending in television and investing to feel SinglePlatform are expecting sales and marketing cost ship a nice leverage with sales and marketing cost as a percent of revenue decreasing by about 150 basis points and we do actually expect lower cost of acquisition over the course of the year, and higher life-time value. So to give a little bit of context there.

To your second question which is, whether we’re expecting in terms of growth in net ads, we don’t get into the habit of guiding to ads, but I think relative to Q1 of 2013, we think growth in net ads have been looking a lot like Q1 of last year.

Richard Fetyko – Janney Capital

Thank you.

Operator

The next question comes from Peter Goldmacher from Cowen and Company.

Peter Goldmacher – Cowen and Company

Hi guys. It appears to me that with all the M&A you’ve done all those stuff is, are products the people are using online, so your ability to collect is an absolute truckload of data about higher customers who are using their products, and they are interacting and when they convert and when they don’t convert. What do you guys doing on the infrastructure side to capture that data, understand that data and work with that data to improve cross selling attrition, conversion.

Gail F. Goodman

I’ll start and then may be Harpreet will hop in since actually then I will report to him. But we are making big investments in using the power of analytics to improve both our business and the business of our customers. So not only do we have great data about how our customers are using the products, we also have great data across our customers about the marketing methods they’re using that are driving success.

So we are making big investments in analytics, we actually hired a Chief Analytics Officer in 2012, but putting in place all of the measuring, monitoring, analytics like in-product analytics that are really helping us guide that. And we are focusing that work first on conversion, second on retention and third on cross sell. So really giving us that opportunity to get fine-grained about the way we’re presenting those cross sell and up sell opportunities really the entire executive team really does champion analytics in the organization, it’s an incredibly important part of our long-term strategy.

Peter Goldmacher – Cowen and Company

And Gail why would you say you’re I would assume something like this is a multiyear endeavor. Where are you, how would you categorize the timeline, which you will start to re-benefit and where are you along that timeline?

Gail F. Goodman

We’ve always been analytic in nature. So I would say we are not starting in the end zone, not quite at a touchdown, but we are probably about a third of the way there. Let’s play with the analytics you don’t need to get all the way there to get benefit. You start to reap insight very, very quickly. So we are literally testing, iterating, measuring and seeing the impact of the power of analytics in the power of the Big Data we have in the business very quickly.

Harpreet S. Grewal

I think one of the key thing for us is starting to just using analytics as kind of the core lever in understanding our business how do we segment and understand businesses that may exist in Normandale, Texas versus New York City. And that’s an important part of what we think we can drive in the future. So Gail noted something that I have the charter on, but very excited that it’s the totality of the company focused on it.

Peter Goldmacher – Cowen and Company

Okay. Thanks guys.

Operator

The next question comes from Brian Schwartz from Oppenheimer.

Brian Schwartz – Oppenheimer & Co.

Yeah. Hi guys, thanks for taking my questions. So I just have a couple here. First one is really tactical, Gail. You’ve been talking lot about cross selling activity as a focus and strategy for the business in 2013. Just wondering how you are planning on going about that? Is there an opportunity to potentially leverage some of your existing distribution folks?

I’m thinking about the single platform sales force you have. You got coaches all throughout the country that are highly confident in your business. Are you trying to utilize them as a direct outreach to maybe this half a million plus subscribers that you have to sell into? Or is the strategy to do your mass media and drive more Internet traffic to the website or really a combination of both? And then I have a quick follow-up.

Gail F. Goodman

Yeah, so it is really going to be a combination of both, really trying to leverage every touch point. I would actually say our acquisition marketing channels are probably the toughest ones to really sell a multi-product messaging because you risk trying to get too much across or very big on a crisp clear short call to action. It is the education channels and coaching channels where I think we have the best opportunity.

So the regional development directors and their authorized local experts will start to incorporate multi-product messaging in their seminars. And we think customer care organization and the support team is a really great opportunity when they are on the phone with the customer to again sense where their needs are and do a really good suggestion of other products they should think about trying.

And the sales coaches, particularly on the email marketing side, while we had them heavily focused on email marketing conversion in Q4, we are once again introducing cross selling incentives, testing and iterating, doing that in slow moves as opposed to some of larger moves we tried last year, but we really think it is that first moment when they are talking to a customer about how they go to market, what kinds of marketing they do, is really the right time to be uncovering their needs and presenting all the opportunities.

So we really think about this as looking at every channel we have, the final one I really highlight kind of goes back to Peter’s conversation is the in-product channel. So when they are, the place our customers spend their most time is in our product, working on their campaigns, and we can get smarter and smarter about understanding everything from the kinds of content they are putting in their campaigns that might suggest they are doing in events, and do you need registration as a suggestion or other things like that really get us to that micro targeting right moment of offer.

So we will be doing really looking at every customer engagement point and saying how can we make this a multi-product or suite-oriented sale.

Brian Schwartz – Oppenheimer & Co.

Thank you, Gail for that and then the follow-up question I’ve had was it just a quick housekeeping, I guess for Harp on where the metric is in terms of number of products per customers, so we can kind of engage on what that opportunity as now they have six products to sell into them?

And then for Gail, those other two big investment areas that you kind of highlight in your introductory commentary, the pricing and packaging, and branding investments as well as the product integration into the common contract management system; is possible to help us in regards to timing, when those investments period could likely be through? Is it something that hopefully you would have done in the first half of the year and could potentially start reaping fruit for the business here in the back half? Thanks.

Harpreet S. Grewal

So including SinglePlatform, that number at the end of December was 1.77. Understanding the SinglePlatform is the vast majority that customers are new to the franchise and we haven’t cross sold into them and part of the strategic rationalist acquire, a good acquisition was a new front door. If you excluded SinglePlatform, that number would have got an apples-to-apples basis increased to about 1.81.

Gail F. Goodman

And then let me speak to that, the timing. So one of the things we are trying to do is really have a better balance on delivering the fundamentals of each quarter; new customer adds, net customer adds while learning our way into multi-product.

So we are testing in iterating rapidly, but those tests are small and focused. So it’s very hard to predict when we are going to uncover the levers that have big returns and so it’s a little early to predict when those investments will payoff. I think you already say them pay off. In the ARPU growth, you say in the fourth quarter of this year and really the ARPU growth you’ve seen over the last couple of years. So, I think I’ve looked at the ARPU line for increased – for the first impact of that cross sell.

Brian Schwartz – Oppenheimer & Co.

Thank you taking my questions today.

Operator

The next question comes from Arvind Rajamohan from Stifel.

Arvind Rajamohan – Stifel, Nicolaus & Co.

Hi guys, how are you doing?

Gail F. Goodman

Good.

Arvind Rajamohan – Stifel, Nicolaus & Co.

Just a quick question I guess, it’s great to see your conversion rates improved over the last quarter. But can you kind of help us on how that’s trending throughout the quarter, kind of linearity and then, how many of that’s progressed in January. I also have a follow-up.

Harpreet S. Grewal

Yeah. So, I mean, first of all, understand the conversion rates can vary little bit in different months based on seasonality and so forth. What we saw is that conversion rates throughout the quarter just recovered very nicely versus the trend we experienced in Q3 which is a pretty substantial degradation on year-to-year basis. And so, we got generally back to kind of historical levels.

Relative to January, not speaking specifically to it, but obviously the guidance we are providing is going to reflect not only what we saw in Q4, but the trends we are seeing in January as well. But it is a core focus of ours which is continuing to arrive that operating rigor and discipline to get gains in conversion rates.

Arvind Rajamohan – Stifel, Nicolaus & Co.

Okay, great. And then, in terms of your mass media spending, do you expect that to have any impact on seasonality throughout the year? Is it going to change kind of [tail] after you guys are done with that?

Gail F. Goodman

No is the short answer. We have – summer is our seasonally slow period. Sometimes when we are in mass media, it’s more exacerbated in terms of the contracts. But now, in general, we expect seasonality to follow similar patterns.

Arvind Rajamohan – Stifel, Nicolaus & Co.

Thank you, guys.

Gail F. Goodman

Thank you.

Operator

The next question comes from Jeff Houston from Barrington Research.

Jeffrey Houston – Barrington Research

Hi, thanks for taking my question. Regarding the Social Campaign product how does it or how do you envision it, really evolving to the help small businesses be optimized for Facebook’s new social graph and offering?

Gail F. Goodman

Yeah, I think I don’t know that I can give you that level of detailed answer. Maybe we’ll take that off line and try to get you connect into the Social Campaigns product manager at another time.

Jeffrey Houston – Barrington Research

Yes absolutely. Second I have too, is digging a bit deeper into the TV advertising in the first quarter, just curious about why you decided to do that more this quarter than in the prior year first quarter, if there was some analytics you saw that it really drove that decision, a bit more color will be great.

Gail F. Goodman

Yeah, so the answer to that is more about why we took a hiatus and less about decision to answer. So TV had always performed well for us. And we had been in TV for a fair amount of time. We had seen a lift in both brand recognition and readiness to act on email marketing that we thought it was sort of reaching saturation levels and that as we wanted to move to multi-product, it seems appropriate to take a pause until we were ready to move the brand a little forward off of email marketing. What we did see was that when we did that, we saw more of a drop in customer growth than we had expected. So we went back on TV in the fall and now going back on TV in the winter spring is really just a continuation of understanding that TV work and when weren’t doing TV, we follow our lower growth.

Harpreet S. Grewal

And the one thing I would certainly add is that obviously as Gail noted, we have very recent experience to talk about demand that we’ve been able to generate, it’s reflected in the trailers and both starting when television came on and that was very recent kind of data point. And as we sit here on January 31 and being having been on TV for about two weeks in January can certainly talk to the fact that our TV came back on and we saw the demand pick up again.

Jeffrey Houston – Barrington Research

Great, that’s a good detail. Thank you.

Operator

The next question comes from Richard Baldry from Wunderlich.

Richard Baldry – Wunderlich Securities, Inc.

Thanks. Given the success that you’ve had on ARPU and seeing year-over-year sort of similar pattern on net gross and net expected for the first quarter, little surprise that your sequential revenue growth would be more in line with what we saw in Q3 than what we saw last Q1. So I’m wondering if there is something seasonally that I’m missing that’s more of a headwind in Q1 2013 that we didn’t have in Q1 of 2012? Thanks.

Harpreet S. Grewal

Yeah. I think the place to start is obviously we’re pleased with some of the underlying trends that we saw in Q4 particularly on the conversion side. And if you look at guidance for Q1 what this guidance really reflects for the couple of things. One is, we will desire to have a couple more periods under our belt where we can show that we can sustain these games that we saw in Q4, Q3 as I noted to both at different points, was a shockingly bad quarter. And just I want to get ahead of ourselves.

The second piece of that Gail as talked about is really our focus on continuing that operating discipline and rigor on email and driving the games we expect an email, but we do our technology as the fact that we will move into our multi-product reality. This level of variability that we just wanted to acknowledge in our guidance, I think that’s what you are seeing.

Richard Baldry – Wunderlich Securities, Inc.

Thanks; and just housekeeping (inaudible). Thanks.

Harpreet S. Grewal

I’m sorry, I just missed that.

Gail F. Goodman

You broke up a little bit.

Richard Baldry – Wunderlich Securities, Inc.

The head count exiting the year?

Harpreet S. Grewal

1,161.

Richard Baldry – Wunderlich Securities, Inc.

Thanks.

Operator

Ladies and gentlemen, that is all the time we have for questions today. I would now like to turn the call back over to Gail Goodman.

Gail F. Goodman

Great. Thank you all for joining us on the call. 2013 is the year we bring it all together, unifying our products and aligning our multi-product go-to-market strategy. We are focused on accelerating both customer and revenue growth overtime. Thank you for joining us for this evening and for your continued support of Constant Contact.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation, you may all disconnect. Have a good day.

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