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Constant Contact, Inc. (NASDAQ:CTCT)

Q4 2008 Earnings Call

February 12, 2009 5:00 pm ET

Executives

Jerry Sisinski – Director Investor Relations

Gail Goodman – Chairman, President, CEO

Steven Wasserman – Chief Executive Officer

Analysts

Tom Roderick – Thomas Weisel Partners

Brad Reback – Oppenheimer

Richard Davis – Needham & Company

Laura Lederman – William Blair

Michael Huang – Thinkequity

Richard Baldry – Canaccord Adams

Operator

Welcome to the Constant Contact fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the conference over to Mr. Jerry Sisinski.

Jerry Sisinski

Good afternoon and welcome to Constant Contact's investor conference call for the fourth quarter and full year ended December 31, 2008. I'm Jerry Sisinski, Director of Investor Relations at Constant Contact. With me on the call today is Gail Goodman, Chairman, President and CEO and Steve Wasserman, our Chief Financial Officer.

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 of 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 February 12, 2009 and should not be relied upon as representing our views as 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 refer to the company's adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income loss attributable to common stock holders, non-GAAP income loss attributable to common stock holders per share and free cash flow. 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 fourth quarter and full year 2008 financial results.

The press release is available in the investor relations section of our web site at www.constantcontact.com. In terms of the format of today's call, Gail will begin by providing business highlights and accomplishments for the fourth quarter and full year 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 to everyone for joining us on the call. Today I am very pleased to be reviewing our fourth quarter and full year 2008 results. In 2008, Constant Contact delivered rapid, predictable revenue growth and expanding margins. We exceeded our revenue and adjusted EBITDA targets for each quarter of the year. We grew revenue year over year by 73% and expanded our adjusted EBITDA margins by over nine percentage points.

I view 2008 as an extraordinary year for the company, especially when one factors in the difficult economic conditions. We are clearly monitoring the macro economic environment closely, but we can again share with you that the demand and need for our solutions remains high and we have not seen any decrease in interest levels.

In addition to strong financial results, each of our key customer metrics remains consistent with historical ranges. We exited 2008 with momentum and believe we're well positioned for 2009.

Let me summarize our results for the fourth quarter and full year. Revenue was $25.5 million in the fourth quarter, an increase of 61% year over year, surpassing the $100 million annualized revenue run rate. Fourth quarter revenue was above the high end of our guidance as was our adjusted EBITDA of $878,000 for the quarter.

Looking at the full year, revenue was $87.3 million, up 73% as compared to 2007 while our adjusted EBITDA went from a loss of $2.4 million in 2007 to a positive $3.9 million in 2008. In addition, we were able to deliver an adjusted EBITDA margin of 4.5% for the year which was above our original target of 4%.

We were able to exceed our adjusted EBITDA target while investing heavily in marketing programs to drive further market awareness and growth. At the same time, we demonstrated the operating leverage inherent in our business model.

The most important growth factor for Constant Contact is continuing to add new customers to our on-demand back offerings. During the fourth quarter we added a record of over 24,800 net new e-mail marketing customers which was a 15% increase from the number of net customer's additions during the third quarter.

As a result of this strong performance, Constant Contact crossed the 250,000 customer milestone, ending the year with over 253,400 customers, representing a 54% year over year growth.

During the fourth quarter, net customer additions were better than we expected. We believe the over performance was driven primarily by the national radio advertising campaign we launched in September.

In addition to strong net additions in the fourth quarter, our key customer metrics were consistent with historical ranges. Our average e-mail marketing invoice remained in the $33.00 range, plus or minus $2.00.

The number of customers in the $15.00 to $30.00 revenue bands remained at 80% plus or minus 1%, and our monthly retention rate remained at its long standing range of 97.8% plus or minus a half percent. Through the fourth quarter and the first full month of 2009, our customer retention rate remained in its normal band.

Our financial results and operating metrics were strong both during the fourth quarter and the full year of 2008. We believe this is directly correlated to the value of our solutions. It starts with the fact that our products are easy to use, affordable and deliver substantial and tangible returns in the form of increased revenue, reduced cost, improved efficiency and most importantly, improved communications with our customers' most critical asset, their customers, their clients, their organization members or their donors.

Our entire business model is focused on helping our customers to be successful. We continue to offer live assistance, educational tools and regional seminars which provide our customers with proven marketing strategies to help them be a successful as possible. We recently released a free guide on Finding Opportunity in a Down Economy, a back to basics approach to successful marketing in difficult times and will continue to provide on-going advice and guidance to help our customers.

Further, the value of our solution can be seen in the usage of our product. During the fourth quarter, we recorded the highest usage levels by our customers for the entire year. The number of log in's was up as well as the number of emails sent. We delivered over 4 billion permission based emails during the fourth quarter, and equally important, we delivered those emails with 98% delivery rate in the U.S. which is considered best in class for our industry, and is a reflection of the quality of our systems, processes and compliance efforts.

Along with our hire solution we are still in the early adoption curve of email marketing by small and mid size organizations. Penetration of our available market is still in the low single digit range, but awareness is growing rapidly.

While much of Constant Contact's awareness has been and continues to be generated by word of mouth referrals, in September we launched our national radio advertising campaign to accelerate the awareness of email marketing and that of Constant Contact. As we commented before the launch, national radio is focused on the first true stages of the marketing data curve; awareness and interest, and it frequently takes multiple impressions before a prospect is motivated to the final aid, action.

We are still collecting early data points on the impact that radio is having, but we attribute our better than expected net add performance in the fourth quarter to quicker impact from national radio than anticipated.

A clear indication of some of the early success we've been experiencing is the fact that in the fourth quarter, the number of unique visitors navigating directly to our web site each month was up almost 50% from the beginning of 2008. As Steve will go into in more detail later, we were able to make this investment in national radio while keeping our cost of acquisition consistent with our target for the year.

National radio is only one of the many marketing and educational channels that we're investing in, all of which are performing at high levels. For example, during 2008 we hosted more than 36,000 attendees at our regional seminars which are often offered in partnership with local Chambers of Commerce, Small Business Development and SCORES, Chapters, and during 2008 we added Regional Development Directors in Las Angeles and the New York Metro region.

Our business partner channel continues to grow and we now work with over 3,500 active business partners. They range from local web developers and PR firms to the large multi-national organizations. In early January, we announced one of our newer partnerships with Cisco Eye Care.

Cisco Eye Care is a service of Cisco, the global leader in selling, marketing and distributing food products to restaurants and other facilities. Cisco works with several hundred restaurants and they are promoting both our email marketing and survey products to their customers.

We also launched a partnership with Ladies Who Launch; an organization with over 50,000 members comprised of entrepreneurs and would be entrepreneurs. Ladies Who Launch focuses on making entrepreneurship accessible to any woman with a project, dream or aspiration to start her own business.

With growing awareness of the marketing Constant Contact, it's important that we have the infrastructure in place to support the rapid growth of the company. Our focus on education and customer service helps our customers to succeed which in turn helps us to maintain high retention and referral rates.

During 2008, we opened a second call center facility so we can continue to support our growing customer base, and we expanded the ways in which customers can interact with us. We now support our customers through email, phone support, chat and twitter as well as through our Regional Development Directors and our on-line community. We also continue to build out our server and data storage capacity to handle increased volumes, and we added a second call locations facility for further redundancy.

To put the magnitude of our operations in perspective, during 2008 we sent over 12 billion permission based emails, each of which needed to be tracked, and all the data including opens and click throughs needed to be compiled and reported.

In addition to the strong growth in our email marketing solutions, we also scaled our survey solution during 2008, ending the year with approximately 17,500 customers. We shared with you last quarter that we are still testing and evaluating the best ways to package and price the solution.

In early 2009, you may have noticed on our web site the new survey pricing went into effect. Survey pricing is now a flat monthly fee where survey stand alone customers pay $15.00 a month and our email marketing customers get a 33% discount on the monthly fee for survey, bringing their price down to $10.00 per month.

These monthly plans are for up to 5,000 survey responses which when you take into consideration the list sizes of our customers and the likely response rate is essentially an unlimited use solution for the vast majority of small and medium businesses.

We believe the updated pricing will help increase usage and are already seeing an increase in adoption rates for survey since the pricing change took place. We believe the combination of Constant Contact's market presence in this new pricing, will increase survey adoption and we look forward to sharing our progress in this area during 2009.

In summary, 2008 was a tremendous year for Constant Contact. We continue to monitor the economic climate and its impact on the small business space very closely. We understand the challenges facing our customers and are working to bring them additional tools, advice and guidance to help them through the recession.

However, all indications at this time support our belief that we are very well positioned to deliver another year of strong growth and profitability expansion. Now, let me turn the call over to Steve for a review of our financial results.

Steven Wasserman

Good afternoon everybody. I'd like to provide additional details on our fourth quarter and full year performance. In addition, I'll be providing guidance for the first quarter and full year of 2009.

For the fourth quarter, revenue was a record $25.5 million, up 61% over the fourth quarter of 2007, up 11% on a sequential basis and $500,000 above the high end of our guidance. As Gail mentioned, we added over 24,800 net new email marketing customers in the quarter. This was a sequential increase of 15% compared to the over 21,400 net customer additions during the third quarter of 2008, and this was also above our previously shared expectation for a modest sequential increase in Q4 net adds.

In addition, our ARPU for the fourth quarter was $35.20, also contributing to our revenue over performance in the quarter.

Turning to expenses and profitability, our gross margin the fourth quarter was 71.5% up slightly from the prior quarter. During the second half of the year, our gross margin was in the 71% to 72% range as compared to 73% to 74% in the first half of the year. As we have previously discussed, this was expected due to investments we made in our second call center facility in Colorado. We expect our gross margin to remain stable at current levels for the full year of 2009.

Sales and marketing expense in the quarter was $13.1 million or 52% of revenue as compared to $7.8 million or 49% of revenue in the year ago period. On a full year basis, we realized approximately 5% points of leverage in sales and marketing. However, during the fourth quarter of 2008, sales and marketing expense was higher because this was the first full quarter of spending on our national radio campaign.

Our cost of acquisition for 2008 was $304.00 and in line with our target of $300 for the year. In a short while, I'll discuss our COA in a bit more depth. We expect to continue gaining leverage in sales and marketing on a full year basis in 2009.

R&D expense during the fourth quarter was $4.2 million or 16% of revenue as compared to $2.8 million or 18% of revenue in the fourth quarter of 2007. We continued to grow our engineering organization in 2008. Furthermore, we are benefiting from economies of scale and we expect to continue gaining leverage in research and development on a full year basis in 2009.

G&A expense in the fourth quarter was $2.6 million or 10% of revenue as compared to $1.5 million or 9% of revenue in the fourth quarter of 2007. The slight increase in G&A as a percentage of revenue was due primarily to higher public company costs as well as the expansion of our senior executive team over the course of 2008. We expect a G&A expense as a percentage of revenue to remain relatively stable at current levels for the full year 2009.

During the fourth quarter, we successfully reinvested much of the margin on our higher revenue primarily in sales and marketing. Even with this increased level of investment, we reported an adjusted EBITDA profit of $878,000 which is above our guided range of $550,000 to $750,000. This was also our sixth consecutive quarter of positive adjusted EIBTDA.

Interest income for the fourth quarter of 2008 was $110,000. Our current portfolio yield is now approximately 30 basis points. The investment portfolio consists of short term U.S. Treasury notes and our number one priority with respect to our cash balances, capital preservation. As a result of the current interest rate environment, we anticipate that the yield on our investment portfolio will not materially change as we move through 2009 unless interest rates change significantly. So please keep this in mind as you update your models.

We generated a GAAP net loss attributable to common stock holders of $1.6 million in the quarter, resulting in a GAAP loss attributable to common stock holders per share of $0.06 based on 28.1 million weighted average shares outstanding. This compares to a loss of $1.1 million or $0.04 per share in the same period a year ago.

Our stock based compensation expense in the fourth quarter was $895,000. Excluding this expense, our non GAAP loss attributable to common stock holders per share was $0.03 equal to the $0.03 we reported in the fourth quarter of 2007.

Turning to our full year 2008 results, full year revenue came in at $87.3 million, a 73% increase from $50.5 million in 2007. We recorded an adjusted EBITDA profit of $3.9 million which was the company's first full year of adjusted EBITDA profitability and was a significant improvement from the adjusted EBITDA loss of $2.4 million in 2007.

For the full year 2008, non GAAP net income attributable to common stock holders per diluted common share was $0.03 as compared to $0.90 in 2007. GAAP net loss attributable to common stock holders was $2.1 million or $0.07 per share as compared to $9.1 million or $0.97 per share in 2007.

We ended the quarter with $107 million in cash and cash equivalents and marketable securities, up slightly from the $106 million at the end of the September quarter. The increase in cash was due primarily to positive cash flow from operations of $3.3 million partially offset in the quarter by capital expenditures of $2.3 million.

Capital expenditures came in at $13.4 million for the full year 2008 as compared with $5.7 million in 2007. While much of that increase was to support the over 88,600 net customers that we added in 2008 as well as to equip the 138 net new employees that we hired during 2008, we did incur a couple of step function investments.

During 2008 the company invested approximately $1 million to set up a second call location facility and approximately $2.8 million for the build out of the second call center facility in Loveland, Colorado. We expect to spend an additional $2.8 million in 2009 to complete the build out of the second call center.

Our landlord will be reimbursing us approximately $2.2 million in total for a tenant improvement allowance of which $400,000 was received in 2008. As a result, we expect a net cash cost to the company of the second call center to be approximately $3.4 million.

In accordance with generally accepted accounting principals, we will record the tenant improvement reimbursement in the operating section of the cash flow and the gross construction cost in the investing section of the cash flow statement.

We plan to continue investing in our infrastructure to support the growth of the company. We expect capital expenditures to be approximately 12% to 13% of revenue in 2009 which would be down on a percentage of revenue basis yet up from a total dollars perspective compared to 2008. Because the remainder of the capital cost related to the second call center are expected to occur in the first quarter of 2009, we expect free cash flow to be negative for the first quarter, yet positive for the full year.

Deferred revenue ended the quarter at $51.1 million, up 45% on a year over year basis. Turning to other metrics, our ARPU was $35.20 for quarter, a sequential increase of approximately $0.18. The increase in ARPU was driven primarily by the increase in the list sizes of our email marketing customers.

We expect ARPU to be roughly flat sequentially in the first quarter of 2009 after taking into consideration the latest survey pricing change, after which we expect slow steady growth in our ARPU each quarter throughout the year.

As I mentioned a short while ago, from a cost of acquisition perspective we ended the year with a COA of $304.00 in line with our target of $300.00 for the year. The COA metric that we provide annually is calculated by taking GAAP sales and marketing expense and dividing it by gross customer additions for the year.

I would remind you that this is a fully loaded number and is not just a marketing program spend because the calculation is based on GAAP sales and marketing expense. We are targeting a COA for 2009 that is in line with our 2008 target, although it could vary up or down by 5% based on numerous factors.

Finally, we ended the quarter with 456 employees, up from 421 employees at the end of the September quarter and we anticipated continued growth in our employee head count. Of those 456 employees, 178 are in our customer operations organization, 108 are in our sales and marketing group and 143 are in our engineering, product strategy and ASP operations organization.

With that let me turn to our guidance for the first quarter and full year 2009. Starting with the first quarter of 2009, we are targeting revenue in the range of $27.7 million to $27.9 million, adjusted EBITDA to be in the range of $900,000 to $1.1 million and non GAAP net loss attributable to common stock holders per share to be in the range of $0.02 to $0.03 based on basic weighted average shares outstanding of 28.1 million.

GAAP net loss is expected to be in the range of $1.7 million to $1.9 million and GAAP net loss per share to be in the range of $0.06 to $0.07. GAAP net loss per share is based on basic weighted average shares outstanding of 28.1 million shares and includes an estimated stock based compensation expense of $1.1 million.

Turning to the full year 2009, we are currently targeting revenue in the range of $125 million to $130 million and an adjusted EBITDA in the range of $10 million to $10.4 million representing an adjusted EBITDA margin of 8%. Non GAAP net income attributable to common stock holders per share is expected to be in the range of $0.06 to $0.07 for the full year 2009 based on diluted weighted average shares outstanding of 29.5 million shares.

We expect to generate a full year net GAAP loss in the range of $2.9 million to $3.3 million and a GAAP net loss per share in the range of $0.10 to $0.12. GAAP net loss per share is based on diluted weighted average shares outstanding of 28.3 million shares and includes an estimated stock based compensation expense of $5 million.

We do not expect to pay any income taxes in 2009. In summary, we were very pleased with the company's strong financial performance in the fourth quarter of 2008 and we are greatly pleased to have exceeded all of our major financial goals for the year. The company's momentum is strong exiting 2008 and we are optimistic about the company's growth outlook for 2009.

At this time we'd be pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Roderick – Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

In looking at the cost of acquisition number, you did in fact hold it right around that $300.00 level that you're targeting for the year and if I do my math, it would sort of suggest that the churn for the year is actually slightly below the 2.2% range that you talked about. So can you a, can you confirm that math works, and b, can you talk about any trends that are worth noting on the issue of churn.

Gail Goodman

We have seen churn remain incredibly consistent with our normal historical range, so it has in some months fluctuated about 2.2% and some months below 2.2%, so the year really was very consistent with our historical averages. I'm not exactly sure how you're backing into the math but I don't think there's anything strong to read into that. Our metrics were very consistent with history.

Tom Roderick – Thomas Weisel Partners

In terms of the radio campaign, it seems as though you've already had some success in starting to re-accelerate the subscriber numbers. Any additional commentary you can add as far as what you've learned from this round of radio campaign advertising and do you intend to continue to invest as aggressively as you have been over the last three to four months?

Gail Goodman

It's worth noting that our evaluation of radio when done completely, really actually needs more time than we've had to date so our full evaluation of our spend won't happen until we can look back and do statistical analysis.

So at this point we're looking at some early indicators that let us know that we are seeing lift, like direct navigation to the web site, and for example, the number of people searching on the key words Constant Contact. So I guess the very good news is that we saw lift in both of those metrics that was un-attributable to anything else and could infer that radio was doing what we hoped it would do.

So with that in mind, we are continuing our investment in radio in the first half of 2009 while we continue to evaluate and as we look to the second half of 2009, we'll continue to evaluate and then make that decision. At this point we have actually budgeted spending on radio in the second half of the year.

Tom Roderick – Thomas Weisel Partners

What's your assumption for depreciation and amortization in 2009?

Steven Wasserman

It's not a number we've typically given out so I guess I would prefer you just back into the number. I think we've given you enough pieces with income, with non cash based comp for you to get a very close estimate.

Operator

Your next question comes from Brad Reback – Oppenheimer.

Brad Reback – Oppenheimer

I heard everything you said about nothing changing out there which is great, but if things were to change from a churn perspective or some other issues because of the economy, how fast do you think you could react to those changes?

Gail Goodman

As we look forward and model our business we are actually blessed with a very movable business given high volume, low dollar nature of our customer base, so we have clearly already looked forward and done just the kind of modeling you would have expected us to have done. What happens if churn goes up? What happens if survey adoption is more rapid? What happens if certain marketing spends are more effective or less effective?

The net is, having stretched our assumptions up and down on almost all the variables that go into our model, we are extremely comfortable putting out the revenue and EBITDA guidance that we put out.

Brad Reback – Oppenheimer

I've heard from others that at the end of the day with the slowing economy certain advertising channels are actually getting cheaper per impression, so is it correct to assume number one, are you seeing that, and number two, if you are is it correct to say that you'll take the savings and get more impressions and keep spending the same?

Gail Goodman

Yes we are starting to see some of the cost of media moving down. Radio in particular has long lead time purchase time frame and commitments, so rather than realize that in lower dollars, we saw for late '08 and early '09 then just giving us some more impressions so we were unable to realize an actual cost savings, but did get some extra impressions in market.

As we go to re-negotiate for the second half should we continue we do expect to actually get real cost efficiency in terms of cost per gross rating point? We've also seen some improvement in cost per click in banner ad networks, and we are choosing to re-invest that in not necessarily but other marketing pieces of the sales and marketing spend mix.

Operator

Your next question comes from Richard Davis – Needham & Company.

Richard Davis – Needham & Company

When a customer churns out from you are they gone forever or do they come back? I know there's a mix of answers and the reason I ask is one of the questions people have, and it's a different business but Netflix churns like 50% of its customers and the theory is well people try it and they never want to come back. So the issue is, you are still way under penetrated but I'm just curious have you seen people when do leave do they come back, and if so why, and things like that?

Gail Goodman

I can't quantify this but there are a variety of scenarios where we do see some people leave and come back. One would be one goes out of business and they start up a new business having loved their tool, they use it for the next business.

The second thing we see is some people are seasonal mailers. I remember an Alaskan river rafter who really lived in the wilderness during the winter without electricity or internet as a result and would literally come from out of the woods in May and begin marketing and return to the woods in October and he would cancel his account and would restart it. Seasonal is a good example.

The third example and one we hear fairly frequently is an employee churn issue. Somebody loses a marketing person who was doing email marketing for them. The business owner either doesn't feel confident doing it themselves or doesn't have the time to do it themselves and so they cancel their Constant Contacts account, but when they rehire a marketing person, they're back.

Those are three examples. I can't really quantify it.

Steven Wasserman

I'll just give you one anecdote which ties right into it. As you know we tend to look at all our metrics weekly, daily, monthly and during the month of January we did see an expected increase in the number of customers that left us because they're seasonal mailers and we fully expect that group of customers to come back to us in the fourth quarter in 2009. So as Gail said, we can't quantify it exactly, but we do see it in areas like I just described.

Operator

Your next question comes from Laura Lederman – William Blair.

Laura Lederman – William Blair

One question I have is would it be likely that the subscriber additions would be flat sequentially and kind of flat throughout the year until we get to Q4? Just any rough commentary you're willing to provide on that? And on the competition who are you seeing more and who are you seeing less? One of your competitors mentioned that they've been losing share to you as people move off higher cost solutions that have more bells and whistles because they don't need that any more. Are you seeing any vertical response?

Gail Goodman

Let me talk about the pattern for net adds for the year. Typically prior to the use of national radio, we would have guided to Q1 being essentially flat to Q4. This year we are expecting to see a modest sequential increase into Q1 as we begin to see that repetition of radio raise the level of awareness and brand in the marketplace.

We are expecting to see a modest sequential rise in Q1 and then Q2 and Q3 we would expect to see flat, maybe to even slightly down. I'll remind you it's sort of a tale of two very different quarters. It's all about the summer which means in Q2 we have a good April and May and a very bad June. And then Q3 we have a very bad July and August and then outstanding September as we come back into our strongest season which is the fall, so then we would expect to see a nice jump in sequential net adds in Q4.

In terms of competition, we have not seen any significant change in the competitive landscape. I-Contact and Vertical Response are definitely the two most direct head to head competitors and we continue to see them in the market, mostly in media buying and those sorts of situations rather than necessarily specific customer evaluations.

I really don't have my head in the sand. We just really don't see a lot of change in the competitive landscape.

Laura Lederman – William Blair

Are you going to add any more of the regional sales people in 2009 in additional cities?

Steven Wasserman

Currently we're planning on doing that, but we haven't quite yet determined the cities and the number, but it is something we plan to do.

Operator

Your next question comes from Michael Huang – Thinkequity.

Michael Huang – Thinkequity

When you look at the different stages of the conversion funnel, what would the direction of conversion rate that cross stages in Q4 and what are you assuming in 2009 given the economic environment?

Gail Goodman

When we look at our conversion funnel, first of all let me remind everybody that our conversion funnel is pretty fast so unlike perhaps a direct sales or enterprise sales where they're talking about sales cycles that are measured in months, we measure more in weeks going into two to three months.

We have consistently been able to move overall trial to paying conversion up small amounts over time and we continue to tweak our process, our on-boarding process, our early customer experience in the product to continue to smooth out that initial experience and that on-boarding process to continue to move that number. The short answer is, it keeps getting a little bit better and we don't see real seasonality in that.

Michael Huang – Thinkequity

In terms of your assumptions through '09, you would continue to expect it to edge up through the year.

Gail Goodman

We're talking about edging up very modestly.

Steven Wasserman

We don't need dramatic increases in conversion to attain our guidance number. It's basically as Gail said, you will see slight, steady increases.

Michael Huang – Thinkequity

In terms of what you saw in January versus what you saw in December in terms of activity levels maybe leads or trials, was there any notable trend? Were things getting stronger in January versus December, were things getting weaker or were they stable?

Gail Goodman

January is one of those months that starts very slowly. Small businesses are very slow to come back from the holidays and get active so the beginning of the month was traditionally, seasonally slow, and the end of the month was consistent with the expectation that I set we would see net adds up slightly quarter over quarter.

Steven Wasserman

It's fair to say that January was a strong month based on customer additions.

Michael Huang – Thinkequity

Given the success you're seeing with email marketing, and I know you had talked about this on an earlier call around a couple of the product development focus areas and some new product that you're working on, anything to update us on that? Are you to planning to launch these later on this year or does that get pushed out into 2010?

Steven Wasserman

We're on track towards releasing our third product in the later half of the year. It's right on schedule.

Operator

Your next question comes from Richard Baldry – Canaccord Adams.

Richard Baldry – Canaccord Adams

You talked a little bit about how many major networks are on your campaign. I think at the end of Q3 it was at five where we might be with that now, and then a brief discussion around partners, the efficacy of the partners you've got. You've mentioned things like you were working with franchisees and pipeline of new partners.

Gail Goodman

Let me start with the radio networks. We committed to the media mix for really the first year of radio, the Q4 through Q1, Q2 upfront and so we have not changed the radio networks or media mix. We have continued to tweak the creative moving more into an economy sensitive creative treatment so really messaging to current concerns, but it's the same radio networks that we launched in.

Second question was partners; we continue to find the franchise market very attractive. The IFA show, the International Franchise Association show is coming up and we will have a significant presence there. We continue to find that with franchises, they are more effective at sell through than most of our other channels so a franchisee listens to their franchisor when they recommend tools.

But we're also able to go a little further with franchises in terms of the franchisor to help both brand and write content for the email that makes adoption by the franchisee even easier. So that's a great channel for us, but like a mom we love all of our partners equally.

Steven Wasserman

One of the things about our channel partners that we find is that the big guys in a network solutions, Vista print etc., they're trying to sell their product first and our product obviously second. More of a growth area as we said before are the small regional guys where we get a much higher tough rate from them to their end customers.

So of the 3,500 active partners that we have, the larger number of them are the small guys and the small guys are very effective for us as well as Gail said, some of the big guys so we go after all of them but they have different characteristics and perform differently. The top partner, if I had my choice would be all franchises because those are the ones that we just have the best sell through to.

Operator

There are no further questions at this time. I'd like to turn the call back over to Miss Goodman for any closing or additional comments.

Gail Goodman

Thank you all for you questions. For those of you who did not yet receive the invitation, I'd like to let everyone know that we are planning our first analyst day at our offices on Thursday, March 5. Additionally, we will be having a live web cast of the event. The half day event will feature presentations by many members of the executive team and will be a great opportunity to learn more about the company, our team, our customers.

If you would like to register to attend the event, to participate in the web cast or just want to get more details about the event, please contact Jerry Sisinski, our Director of Investor Relations. You can reach him via email a j.sisinski@constantcontact.com

Thanks everyone for your time. We really appreciate you joining us today and look forward to seeing you on March 5.

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Source: Constant Contact, Inc. Q4 2008 Earnings Call Transcript
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