Constant Contact, Inc. Q1 2009 Earnings Call Transcript

Constant Contact, Inc. (CTCT) Q1 2009 Earnings Call May 7, 2009 5:00 PM ET

Executives

Jeremiah Sisitsky – Director of Investor Relations
Gail F. Goodman – Chairman, President & Chief Executive Officer
Steven R. Wasserman – Vice President and Chief Financial Officer

Analysts

Brad Reback – Oppenheimer & Co.
Tom Roderick – Thomas Weisel Partners
Richard Davis – Needham & Company
Joe Delcaar – Cowen & Company
Laura Lederman – William Blair & Company, L.L.C.
Michael Huang – ThinkEquity Partners
Richard Baldry – Canaccord Adams
Raghavan Sarathy – Dougherty & Company

Operator

Good day everyone and welcome to the Constant Contact first quarter 2009 earnings conference call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Jerry Sisinski, Director of Investor Relations. Please go ahead sir.

Jeremiah Sisitsky

Thank you, Janey. Good afternoon everyone and welcome to Constant Contact’s Investor Conference Call for the first quarter ended March 31, 2009. I am Jerry Sisinski, Director of Investor Relations at Constant Contact and 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 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-K on file with the SEC. In addition, any forward-looking statements represent our views only as of today, May 7, 2009, 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. 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, non-GAAP net income 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 first quarter 2009 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 this call, Gail will begin by providing business highlights and accomplishments for the first quarter and Steve will then discuss our financial results and forward guidance in detail, after which we will open the call for your questions. With that let me now turn the call over to Gail.

Gail F. Goodman

Thanks Jerry and thanks everyone for joining us on the call. We are very pleased with the company's performance in the first quarter of 2009, which was highlighted by better than expected net customer additions, revenue, and adjusted EBITDA. We continue to monitor the small business market very carefully, as the difficult economic environment is clearly impacting companies of all sizes including small businesses. However, Constant Contact's business momentum exiting 2008 has continued into 2009. And as a result we remain optimistic about our financial outlook for the rest of the year. Steve will discuss this more in a few moments.

Summarizing our results for the first quarter. Revenue was $28.1 million, an increase of 55% year-over-year and adjusted EBITDA came in at $1.7 million, which was up a 112% on a year-over-year basis. Both revenue and adjusted EBITDA came in above the high end of our guidance range. One of the drivers of our revenue over performance and a positive sign for the remainder of the year was very strong net customer additions in the first quarter, while we had previously indicated we expected modest sequential growth from the fourth quarter, we had 11% sequential increase in net ads adding over 27,500 net new email marketing customers during the quarter.

The better than expected net customer ad performance in the quarter led to a quarter ending email marketing customer of just under 281,000, a 55% year-over-year increase. In addition to strong net additions in the first quarter, our key customer metrics were consistent with historical ranges. Our average email-marketing invoice remained in the $33 range, plus or minus $2. The number of customers in our $15 and $30 revenue bands remained at 80% plus or minus 1%, and our monthly retention rate remained within its long-standing range of 97.8%, plus or minus a 0.5%. As expected during the first quarter our average revenue per email-marketing customer did not increase sequentially.

We have expected our ARPU to be roughly flat and during the first quarter, our ARPU was $35.15, down $0.07 from the fourth quarter level. For those of you who are at our Analyst Day, you'll recall our illustration that strength in email marketing customers can result in, in a reduction in ARPU during the given quarter and that was the case in the first quarter. With the survey pricing change now in place for quarter and plans to continue expanding our product suite, we are confident in the long-term trend of steadily increasing our average revenue per email marketing customer.

We do expect ARPU to stay flat in Q2 and modestly grow in both Q3 and Q4. In January, we changed our survey pricing to a flat monthly fee, $15 a month for survey only customers and $10 a month for email marketing customers. During the quarter, we experienced a solid increase in the number of customers adding our survey products and we passed the 20,000-customer milestone. In addition to the pricing change, we made significant enhancements to our survey customer on-boarding process and increase the number of seminars and webinars, dedicate to education our customers about the power surveys. Results to-date suggests our current pricing model combined with the increased educational information and tools deliver clear value to our small business customers and the customer response has been positive.

During the quarter, all of our sales and marketing channels performed well. We believe our national radio advertising campaign helped drive much of the better than expected demand for our email marketing service. Equally important based on the statistical analysis we have recently completed national radio is delivering results within our cost expectations. We expect to continue national radio advertising in the fall following our usual seasonal marketing pullback across all of our acquisition channels during the summer months. While radio is clearly delivering powerful results, each of our other customer acquisition channels are also delivering results that are at and above our expectations.

Our two largest channels, online and wire remain strong during the first quarter and there were a number of other business development highlights I want to share with you. Our Regional Development Directors or RDDs are our team of small-business marketing evangelist. They run seminars teaching small organizations about the power of email marketing, getting started with Constant Contact and other topics such as leveraging social media, driving in a difficult economy.

Our RDD network had its strongest quarter ever in the history of Constant Contact, teaching a record number of customers, prospects, and trailers. Our RDDs work closely with local small business efficacy groups including Chambers of Commerce, Small Business Development Centers and SCORE to deliver educational programs to small businesses and associations. We continue to invest in these programs to deliver education and tools designed to help small businesses be more successful. We have recently brought together leaders of these various organizations together under one roof in a first of its kind small business organization summit to discuss communication and small business success strategies.

We continue to build-out our business partner network and we now have over 4,000 active partners up from 3,500 in the fourth quarter. We also continue to invest in high growth areas of our partnered channel, expanding our reach into franchises as well as local business partners. We signed several new franchises in the past quarter including interiors by Decorating Den and Franchise Services, Inc., which includes Pip Printing, Sir Speedy, Signal Graphics and TeamLogic IT. On April 2, we announced the availability of AppConnect, our web services architecture and developer program.

AppConnect is accessible via the Internet at developer.constantcontact.com and allows developers to learn about and access our APIs. Making it easy for them to develop applications that seamlessly integrate into our email marketing solution. We have seen very good early signs of success out of this program and are excited about the type of applications that are being developed. One of the earliest integrations was developed by ACS Technologies. With over 50,000 customers ACS is the largest U.S. provider of applications to faith-based organizations, including churches, private schools, and denominational organizations.

We work with ACS to develop an integration that allows customers to move data between ACFs products and Constant Contact. So, that from within the ACF application customers can choose a list of recipients and send it to their Constant Contact account all with a simple click of a mouse. Faith-based organizations represent one of our largest group of customers and these types of seamless integration save time and add value for Constant Contact and ACFs customers. There are thousands of opportunities for integration between Constant Contact and other vertical-based applications and our AppConnect program makes it easier than ever for new partners to benefit from and contribute to Constant Contact's large and rapidly growing customer base.

Another program we recently launched was our Constant Contact All Star program, which recognizes customers that have been particularly successful in their email marketing efforts overtime and that adhere to the highest email marketing standards. An example is East Shore Vacation Rentals, which has been a Constant Contact customer since 2006 and uses our email, survey, and archive solutions to inform and stay in communication with their clients as well as homeowners and vendors. Constant Contact is a an important tool that helps drive business to East Shore Vacation Rentals and our email marketing service was used to send promotional offers last summer, which generated an incremental 70,000 in booked reservations, a tremendous return on their investment in Constant Contact.

There were thousands of other customers that were also recognized as All Start email marketers and we were excited to see the up swell of tweak blog posting, emails, and press releases that were issued and distributed by our customers resonating with pride it being recognized as All Stars. All of this of course helps to drive greater loyalty and greater awareness for Constant Contact. As you know, every quarter we allocate funds to test new marketing programs. One new marketing program we launched in Q1 was with the online Wall Street Journal. We are the sole sponsor of their article tools, which allows readers to forward an article to a friend. As a result of when readers view any article online at the wallstreetjournal.com they will see the Constant Contact logo at the bottom of the article.

Every month well over 30 million Wall Street Journal article pages are viewed and in average of 1 million times a months those article are emailed. When an article is email our logo and banner ad are visible to the sender and also appear in the sent email. This sponsorship has the opportunity to reach a large number of individuals, a meaningful portion of which are small business operators and employees. We are very excited about this test and the opportunity to partner with such a prestigious brand as the Wall Street Journal. As we move through 2009, we will continue to invest in testing new customer acquisition channels. At the same time our goal is to continue delivering steady expansion in our adjusted EBITDA margins on an annual basis. With 8% being our target for this year up from 4.5% last year.

As we've stated in the past, if we are running ahead of our EBITDA target, we will look to reinvest into customer acquisition programs as long as we can manage to our annual adjusted EBITDA target and our cost of acquisition tolerances. Our target cost of customer acquisition across all channels remains in the $300 range for 2009. We believe this strategy is in the best interest of the customer, company and our shareholders because of our very large under penetrated market opportunity and our clear industry leadership position.

In the U.S. market alone, we estimate there are over 40 million potential customers and we estimate that the market is less than 2% penetrated today. It is not surprising based on the size of our market opportunity combined with the growth and success of Constant Contact that other companies would enter our market. We believe that VistaPrint's recent introduction of an email-marketing product is further validation of our market opportunity. As many of you know, VistaPrint had been a partner of Constant Contact and while no partner generates more than 1% of our revenue, the number of new customers that VistaPrint contributed was very insignificant. Most importantly, we believe our unique channels to market our mature product and our extraordinary service quality will continue to result in strong growth and expanding market leadership position for Constant Contact in 2009 and beyond.

Turning to the corporate governance front. We’ve recently added Dan Nye to our Board of Directors. Dan brings a strong operating background in the small business market and expertise in web services, social networking, and the internationalization of small business products and services. His experience includes his role as CEO and Board Member of LinkedIn Corporation as well as senior leadership roles at Intuit and Advent Software.

Dan takes the place of Pat Gallagher, who is concentrating on his firm's venture investments. We wanted to wish Pat the best and thank him for his many contributions over the years. In summary, the first quarter was a very strong start to our New Year. Our financial results were better than expected. We added a record number of new email marketing customers. Our survey price change and on-boarding work was met with positive response from the marketplace and our key customer metrics remained within historical ranges.

Looking ahead our target market remains healthy and Constant Contact continues to distance itself from the competition, both of which provide us with optimism for the balance of the year. With that let me turn it over to Steve to review our financials in more detail. Steve?

Steven R. Wasserman

Thank you, Gail and good afternoon everyone. I would like to provide additional details on our first quarter performance and provide financial guidance for the second quarter as well as the full year of 2009. For the first quarter, revenue was a record $28.1 million up 55% over the first quarter of 2008, up 10% on a sequential basis and $200,000 above the high-end of our guidance.

As Gail mentioned we added over 27,500 net new email-marketing customers in the quarter. This was a sequential increase of 11%, compared to over 24,800 net new customer additions during the fourth quarter of 2008. With these net additions, we ended the first quarter with over 280,900 email-marketing customers, an increase of 51% compared to the number a year ago.

Strong customer additions primarily drove the better than expected top line performance in the quarter. As we look ahead from a seasonality perspective, we expect second quarter net customer additions to be generally in the same range as the first quarter, while typical summer seasonality is likely to cause to sequential dip in net additions for the third quarter followed by a return to sequential growth in the fourth quarter.

Turning to expenses and profitability, our gross margin percentage in the first quarter was 71%, which was relatively consistent with the past several quarters including 71.5% in the prior quarter. This change in gross margin percentage was primarily due to expanding our footprint at our primary co-location facility. We continue to expect gross margins to remain in this general range for the reminder of the year. Sales and marketing expense in the quarter was $13.8 million or 49% of revenue as compared to $8.7 million or 48% of revenue in the first quarter of 2008 and $13.1 million or 52% of revenue in the fourth quarter of 2008.

The slight year-over-year percentage increase was do primarily to our investment in national radio, which began in the third quarter of 2008. We also scaled many of the marketing programs including banner advertising with a particularly strong ad network and we began tests including qualification of search terms to improve pay per click efficiency, development of new creator with messages specific to the current economic conditions, expansion of our survey pay per click terms and testing of new web properties targeting small businesses.

Even with all of these tests and other investments and customer acquisition, we expect to generate operating leverage as a percentage of revenue on an annual basis from the sales and marketing line. R&D expense in the first quarter was $4.1 million or 15% of revenue as compared to $3.3 million or 18% of revenue in the year-ago period. While R&D expense increased on an absolute basis we are growing revenue faster than we are growing the size of the R&D team. As a result R&D expense was lower as a percentage of revenue base. We expect to generate operating leverage from the R&D line on a full-year basis. G&A expense in the first quarter was $3.1 million or 11% of revenue as compared to $2 million or 11% of revenue also in the year ago period.

We expect G&A as a percentage of revenue to remain in this general range for the remainder of the year. We reported an adjusted EBITDA of $1.7 million, which was above our guided range of $900,000 to $1.1 million and represented a significant increase compared to approximately $800,000 from the first quarter of 2008. The better than expected adjusted EBITDA was the result of our better than expected revenue performance combined with lower operating expenses. Interest income for the first quarter of 2009 was a $126,000 consistent with our expectations. Our primary investment focus continues to be capital preservation. While interest income was relatively flat with recent quarters, it was down approximately $850,000, compared to the year ago period when interest rates were significantly higher.

We generated a GAAP net loss of one million, as compared to the GAAP net income of $338,000 for the comparable period in 2008. GAAP net loss per share was $0.04 based on $28.1 million weighted average shares outstanding, compared to GAAP net income per share of $0.01 for the comparable period in 2008. Our stock-based compensation expense in the first quarter was $1.1 million excluding this expense, our non-GAAP net income per share was $0.00, which is above our guidance of a non-GAAP loss of $0.03 per share and this compared to a non-GAAP net income per share of $0.03 for the same period in 2008.

Turning to the balance sheet, we ended the quarter with a $108 million in cash, cash equivalents, and marketable securities up slightly from a $107 million at the end of the December quarter. The slight increase was due primarily to positive cash flow from operations of $6.3 million offset by capital expenditures of $5.7 million. Deferred revenue totalled $17.1 million at the end of the quarter up $2 million sequentially and 42% on a year-over-year basis. We expected to generate negative free cash flow during the first quarter, however we generated approximately $600,000 in positive free cash flow. This was primarily the result of the timing of the first quarter's operating expenses and capital addition.

Because a larger portion of our first quarter's operating expenses and capital additions occurred later in the quarter than planned, a portion of vendor payments that we expected in the first quarter shifted to the second quarter. As a result of this shift, we expect to have negative free cash flow in the second quarter, we do continue to expect to generate positive free cash flow for the year. We ended quarter with 476 employees up from 456 employees at the end of the December quarter and we anticipate continued growth in our headcount both in Waltham and Loveland.

With that let me turn to guidance for the second quarter and full year of 2009. For the second quarter, we are targeting revenue in the range of $30.6 million to $30.8 million, adjusted EBITDA to be in the range of $2.1 million to $2.3 million and non-GAAP net loss per share to be in the range of $0.00 to $0.01 based on diluted weighted average shares outstanding of 29.5 million shares. GAAP net loss is expected to be in the range of $900,000 to $1.1 million and GAAP net loss per share to be in the range of $0.03 to $0.04. GAAP net loss per share is based on basic weighted average shares outstanding of 28.2 million shares and includes an estimated stock-based compensation expense of $1.2 million.

Turning to the full year 2009. We are raising the lower end of our revenue guidance by a $1 million. We are now currently expecting revenue in the range of a $126 million to $130 million and an adjusted EBITDA in the range of $10.2 million to $10.6 million. Non-GAAP net income per share is expected to be in the range of $0.07 to $0.08 for the full year of 2009 based on diluted weighted average shares outstanding of 29.5 million shares. We expect to generate a full year GAAP net loss in the range of $2.8 million to $3.2 million and a GAAP net loss per share in the range of $0.10 to $0.11. GAAP net loss per share is based on basic weighted average shares outstanding of 28.2 million shares and includes an estimated stock-based compensation expense of $5.1 million.

We do not expect to pay any income taxes in 2009. I would also like to reiterate comments regarding our full year seasonality that we discussed in the past including during our March Analyst Day. Small organization activity levels are usually lower in the summer months and we typically spend less money and customer acquisition programs during these months. As a result, we expect total sales and marketing spending to be relatively flat from the second quarter to the third quarter. During the fourth quarter, we typically increased our sales and marketing spending to match the increased activity levels of small organization.

We expect this spending pattern to generate the highest adjusted EBITDA both on a dollar and percentage of revenue basis in the third quarter. Please keep this in mind as you build your detailed model. In summary, we were very pleased with the company's strong financial performance in the first quarter of 2009 and we expect to generate robust growth and expanding adjusted EBITDA margins for the remainder of the year. With that let's open it up to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We'll take our first question from Brad Reback with Oppenheimer.

Brad Reback – Oppenheimer & Co.

Hi guys, how are you?

Steven R. Wasserman

Hi, Brad.

Gail F. Goodman

Hi.

Brad Reback – Oppenheimer & Co.

So, as you look into your 60 day free trial pipeline, can you give us some sense about what's going on there?

Gail F. Goodman

We have never actually shared much of our trial pipeline. We really do focus on customer account as the most important metric; we drive trials from a wide range of sources all of which have different conversion rates. We know what the individual source's conversion rates are and focus and forecast based on that, but not something that we've shared in the past, what are you trying to get too?

Brad Reback – Oppenheimer & Co.

I’m just trying to understand the visibility and I think you pretty much answered the question in your commentary earlier, but just sort of trying to understand has that increased sequentially as well has that continue to increase month-after-month and along those lines?

Steven R. Wasserman

I mean Brad, we are not going to give our specific numbers as Gail said, but I mean the way our customer account is going up is based on more trials and better conversion rates.

Brad Reback – Oppenheimer & Co.

Okay. And then I was going to ask that next Steve, the conversion rates have continued to improve. So, I guess the question would be do you think the radio program is bringing you a higher quality prospect?

Gail F. Goodman

Yeah. So, we are definitely seeing, the customers we are generating from radio look just like the aggregate customer base, you see that in the average revenue per customer in which pricing tiers they're falling into, we also see that in their speed of engagement and their conversion rates. So, we are really not seeing substantive differences in the folks coming from the various channels.

Steven R. Wasserman

And Brad just to be clear, conversion rates continue to improve slowly overtime, but I don’t want you to think that the net customer ad number was due in large part to dramatic improvements of conversion because that’s not how it works, it goes up slowly and steadily overtime.

Brad Reback – Oppenheimer & Co.

Great. Thanks a lot.

Steven R. Wasserman

Thank you, Brad.

Gail F. Goodman

Thank you.

Operator

We will take our next question from Tom Roderick with Thomas Weisel.

Tom Roderick – Thomas Weisel Partners

Hi guys. Thanks and good afternoon. So, looking at this net sub-ad number for the quarter 27,500 I guess is a little more than a modest increase from last quarter. So, as we think about our own models for Q2, Q3, Q4 the way you kind of played it out for us before was you get a little increase into Q1 and then things flatten out for Q2 and Q3. Can we still expect to see the sub-count flatten out at this level or was this a level of over performance that you might not suggest we expect in the next coming quarters?

Gail F. Goodman

Yeah. So, looking at Q2 we are thinking that it will be in roughly the same range, maybe modestly down and then Q3 really are expecting at this new range to be slightly down off of this range with the uptick in Q4.

Tom Roderick – Thomas Weisel Partners

Okay, great. And then just back to the ARPU issue you mentioned having it down a little can be expected with as many net new accounts so does that reflect the likelihood that new accounts come in at maybe more accounts coming at the $15 range. Can you just give a little bit more detail about why that dynamic plays out and should we expect that to maybe increase again going forward?

Steven R. Wasserman

Okay. I will start with the easy one Tom, we – we expect ARPU beyond the second quarter to start increasing nickels and dime, which has been our pattern historically. During the Analyst Day, we talked about what keeps ARPU the same is the relation of add-on products and survey to email marketing. So, the reason the ARPU dropped is not because it got more $15 million customer, its because we generated more email marketing customers they grew at a faster rate than survey customers did.

Brad Reback – Oppenheimer & Co.

Got it. Last one for me, just in terms of the survey you are now offering different pricing tiers in survey on its own, can you give us a sense out of those 20,000 survey customers how many or maybe just a lose percentage of our customers that are taking survey as a standalone as their first product?

Gail F. Goodman

Yeah. So, just for clarity, it really is one pricing tier. And then just if you're any in our marketing customer you get that that one-third discount. So, everyone is in kind of the same tier there is actually a piratical limit I think its 5,000 responses a month, but for our customers that's virtually unlimited. The vast majority of customers taking survey at this point are email-marketing customers, we continue to invest to drive new to survey customers into Constant Contact to make sure that we are gaining experience in our marketing channel, in our conversion rates and we'll be tuning that up. Over time, we really actually, we are pleased with the results in Q1 in terms of solidifying our confidence that we had pricing rights and the on-boarding process right and although the numbers are very, very small, we are starting to see new to email marketing with survey customers beginning to add email marketing after the start using survey, very small numbers right now, but we are as we expected seeing conversion going the other way as well.

Tom Roderick – Thomas Weisel Partners

Okay, very helpful. Thanks Gail and thanks Steve.

Steven R. Wasserman

Thanks Tom. Bye now.

Operator

We will take our next question from Richard Davis with Needham & Company.

Richard Davis – Needham & Company

Hey thanks. So, first of all we need to thank you for awarding DJ the All Star award, he has been striding around the office all week, since he got that, it's really a problem, but in any case, so you guys I remember kind of sitting on the desk listening to maybe some of the calls. If I already have a list of customers, you guys are awesome in helping me to be effective there. Have you thought about or is there a way to help if I were a small business to kind of get me either qualified leads or get identified on the web and that going to either be social media or lead generation or something like that. Is that something that you guys would do or partner for kind of how your thoughts about, I don't know broadening the footprints?

Gail F. Goodman

Yes. I mean we really think about this as helping our small businesses understand how important it is to capture customer contact information and offering them the ability to do that in lots of different ways and in lots of different places. So, obviously we gave them that Join My Mailing List link that they can put on their website that they can put into their archive newsletters. We are helping them tweak their newsletters, we actually created a few quarters ago a desktop widget, so they could literally have that Join My Mailing List link on their point of sale computer or terminal. We are in the process of building an Apple iPhone ad for that Join My Mailing List link. So, that they can carry that around and offer people the opportunity to join there and we are increasingly helping them understand how to use social networks to attract audiences, but then convert those audiences into the tighter relationship, which is in the email-marketing subscription. So, it really is a mix of tools, best practices, and learning. One of our favorite online webinars is how to build your mailing list and it's a key topic that our Regional Development Directors talk about in every seminar.

Richard Davis – Needham & Company

Got it. Okay, thanks very much.

Gail F. Goodman

Thank you.

Operator

And we'll next to Peter Goldmacher with Cowen & Company.

Joe Delcaar – Cowen & Company

Hi guys this is Joe Delcaar in for Peter Goldmarket.

Steven R. Wasserman

Hey.

Joe Delcaar – Cowen & Company

Congratulations on the quarter.

Gail F. Goodman

Thank you.

Joe Delcaar – Cowen & Company

So, I was wondering if you guys could sort of take us through the contributions of the partner network and how much it contributes to your business, compared to the other channels and also I have a booking keeping question your 20,000 survey customers that's not included in the, when you quote as the 280,000 customer account rate, its really closer you've got like about 300,000 subscriptions.

Steven R. Wasserman

Yeah. Joe the easy one is we count when we give you that number only email marketing customers because roughly 99% of our survey customers are already email marketing customers and so the 280,000 represents unique customers. With respect to partners, currently partners bring us roughly 15% of our new customers and that 15% comes from roughly 4,000 active partners and no single partner as we said generates 1% of the revenue. So, lots and lots of partners are generating small amounts of customers for us.

Joe Delcaar – Cowen & Company

Great. Thank you very much.

Steven R. Wasserman

You Bet Joe.

Gail F. Goodman

Thank you.

Operator

We will take our next question from Laura Lederman with William Blair.

Laura Lederman – William Blair & Company, L.L.C.

Yeah. Thanks for taking my question and congratulations from me as well on a good quarter. I hate you have been asked, can you talk a little bit about your positioning versus VistaPrint, obviously I've gotten a lot of questions about that, but you've had a little bit more time to kind of think about it and digest it, even though, you saw it at the end of the year. Just like to kind of talk a little bit about your positioning versus theirs and then I have a followup after that. Thank you.

Gail F. Goodman

Sure, yes. We take all of our competitors very seriously. However, we are really confident that our mature product, our very unique go-to-market strategy, our customer service and on-boarding process are all very highly differentiated and will continue to drive our leadership position I think as you all are familiar, word of mouth referrals drive a significant portion of our new customers we just think that that is very differentiated and something that, really doesn't change with VistaPrint in the market.

Laura Lederman – William Blair & Company, L.L.C.

Can you talk a little bit about the Wall Street Journal relationship, do you get any money for that, do they get any money for that or is it really more of a new generation tool where you don't pay for I was just kind of wondering how that?

Gail F. Goodman

Oh, no we are definitely, they are getting money for that.

Laura Lederman – William Blair & Company, L.L.C.

Okay. I was thinking, but I don't know.

Gail F. Goodman

That is an advertising deal with them, so think of it as we are paying dollars for that placement and we are judging that placement on a cost of acquisition generation basis and that is a test in market, we will see how it performs, and if it performs well we will continue it and if not we wont.

Laura Lederman – William Blair & Company, L.L.C.

You did exclusive or do they have the right to do that with others as well?

Gail F. Goodman

At the moment we are the sole sponsor of that tool, we've bought that spot, think of it as we have bought that spot for the time being.

Laura Lederman – William Blair & Company, L.L.C.

And that is series also included in $300 customer acquisition?

Steven R. Wasserman

Yes it is Laura.

Gail F. Goodman

This is fairly small test at this point Laura, so, but yeah even the best testing budget goes into that $300.

Laura Lederman – William Blair & Company, L.L.C.

And how long is that pilot if you will being going on and how long will it go on and any thoughts on how you would role that out?

Steven R. Wasserman

Yeah. I mean it's been going on roughly a month and we've committed through most of the year to give it a shot to see how it works out and if it works well like Gail said we will continue to do it and if we are not satisfied with the results, we will just wind it down and scale another test that's more successful, but its really too early to tell.

Gail F. Goodman

One of the nice things about this one Laura is that it is another highly measurable one, we well know, who clicks through from those particular levels and banner ads on ambiguous place. So, we will be able to attribute accurately to that source.

Laura Lederman – William Blair & Company, L.L.C.

Well final question I will pass it on, any additional color on churn, last year obviously it was a little bit higher than expected was it towards the high end any color out on the churn?

Steven R. Wasserman

I mean Laura, all we are going to say is that was within the bands and as we do with all of our forecasting, we end up flexing a bunch of variables including attrition and we are continuing to model attrition for the remainder of the year at slightly higher than our historical 2.2 number and just to put into perspective and remind you last year it was 2.25% for the entire year of 2008.

Laura Lederman – William Blair & Company, L.L.C.

So, you're modeling it for this year more inline with the 2.25 that you saw last year versus the 2.2 of the past?

Steven R. Wasserman

Again I just, I am going to separate my wording here Laura, we are modeling it above our historical average of 0.2%, but rest assured its we flux lot of variables and it’s exactly the same philosophy and statement that we said in Analyst Day. Nothing has changed.

Laura Lederman – William Blair & Company, L.L.C.

Okay. Thank you.

Steven R. Wasserman

You bet Laura.

Operator

And we’ll go next to Michael Huang with ThinkEquity.

Michael Huang – ThinkEquity Partners

Thanks very much. Just a few questions for you guys. So, first of all as we look at the partnered network and some of the expenses in there, and also the recently launched web services platform. As we look over the next couple of years I mean do you think that we could start seeing the partnered contributions as of percentage of our new business ramp or would you be modeling that roughly consistent with 15% with what you’ve historically generated?

Gail F. Goodman

Yeah. So, the short answer is its too early to tell, but we clearly believe that this, I will call it micro-vertical operational systems market, when you look industry-by-industry, when you look at Power Bed and Breakfast runs their business, they're running a PC based or web-based reservation system, you look at restaurants, you look at any of these verticals there are a set of operational systems, many of which are capturing customer data that there – that they would love to unlock and turn into a customer retention program with email marketing. So, we think there is a big opportunity there the challenge with channels of course is it takes a while for them to build, they have to recruit the channels partners, they have to build their integration and then mainly to bring it to market to their customer base. So, we are really at the early stages of understanding how the web services platform, how AppConnect can contribute to the business, but we are very optimistic that it's a growth channel for us.

Michael Huang – ThinkEquity Partners

Have you guys, do you have any target for the number of ISVs, building or integrating to the web services platform by end of '09. I know you had alluded to in the past of doing some work with Salesforce.com and I don't know if you had any others to announce?

Gail F. Goodman

Yes. So, we definitely have some internal targets that were holding the teams, beat to the fire on, but those are not targets that we are sharing externally we are continuing by the way with our Salesforce.com integration expect to have news on that shortly, but there are no other but there were no other, what I would call mass market integrations that we are going to build that we are – that are on the pipeline right now. We are actually hoping to move from the rebuilded to the third parties building with the web services API.

Michael Huang – ThinkEquity Partners

Great. Thanks guys. And then just drilling a little bit into, just trying that ad performance in Q1, could you provide some color around how the lead activity or customer acquisition activity trending across the months, was it getting stronger or weaker through Q1 or is it relatively steady?

Gail F. Goodman

Yes. So, Q1 is yet another one of our slightly lumpy quarters. January always starts slow and it followed a very typical seasonal pattern, February was strong, February was probably the surprise month, March is usually the strongest month of the quarter and they definitely were both strong this particular quarter.

Michael Huang – ThinkEquity Partners

And so far early in April?

Steven R. Wasserman

I guess in this point in time, we would rather not talk about April, but just to say that we are not seeing anything and it is alarming us in April everything is moving where we expect them were comfortable with the guidance we gave earlier today.

Michael Huang – ThinkEquity Partners

And then the last question for you, I’m not sure if you touched on this, but in terms of product three, is that due out in early Q3 or late Q3 or can you update us on the timing around that?

Gail F. Goodman

Sure, as we had said before, it was targeted for the second half of the year, we do expect it to be in market in Q4 and we will get you more detail on that as it gets closer.

Michael Huang – ThinkEquity Partners

Great. Thank you very much.

Steven R. Wasserman

Thanks Michael.

Operator

We will take our next question from Richard Baldry with Canaccord Adams.

Richard Baldry – Canaccord Adams

Thanks. I think exiting the last quarter you said you thought, you saw some media cost slightly decreasing, could you maybe talk about how that impacted the quarter, where you saw that trending, again maybe more does not to how it trended a little bit exiting the quarter. And then on the momentum you have seen in the radio campaign. Could you talk about whether you think that's really a factor of the reputation sort of seeing and hearing the things again and again versus the numbers of markets and now that you have sort of really proven the cost effectiveness of it, any long-term thoughts on other markets you could drive that into as you had say out into '10 or forward. Thanks.

Steven R. Wasserman

With that being given I got to put this line up, with respect to cost, the national radio was a commitment that we had made prior to the first quarter. So, rates have come down on national radio and as we look forward and if it continues to perform the way it is we are going to, we expect to be continuing national radio we expect to get much better buys on national radio if we do continue going forward. With respect to pay per clip, we saw some slowdowns as we talked about before, but I won't call those materially different in Q1 from Q4, what we are doing is we just have a lot of testing ideas so if we find money available we would try in different things. So, we've got lots of ideas to test if we do see savings in any of the marketing areas, where we have allocated funds.

Gail F. Goodman

And just to your radio question about kind of how it builds over time, we definitely saw in our regional testing that as we move through, a column waves or radio in market, brand recognition and category awareness climbs and the readiness of the audience to act goes up, so we have models and did expect that we would see more impact in Q1 than Q4 and we expect to continue to see that obviously with the normal seasonal patterns on top of it.

Richard Baldry – Canaccord Adams

And then the last on the smaller note that in other quarters, you've talked about the absolute number of emails sent through your system during the quarter I think maybe Q4 is seasonally peak period, but I think those 4 billion you noted last quarter, can you talk maybe about that number as a proxy for the viral impressions that you're getting and maybe how that might be growing as you build the pace. Thanks.

Steven R. Wasserman

Yeah. I mean I honestly didn't bring that number in here with me, but it's going to be very similar if not higher than the 4 billion that we saw in the fourth quarter of last year. Actually, I’m sorry I would just give in a number, closer to 4.8 billion in the first quarter.

Gail F. Goodman

And then I will just say one of the things we do watch closely is the recency and frequency of customer, as a sign for how engaged and active our customers are those numbers continue to be at the high end of the ranges that we’ve seen and we are definitely over the last couple of days feeling the build-up to Mothers’ Day. So, we always have a little internal tool, we watch the top five campaigns sent and top five email they sent in the last two days are on the top five chart.

Richard Baldry – Canaccord Adams

Thanks. Congrats on a great quarter.

Steven R. Wasserman

Thanks Rich.

Gail F. Goodman

Thank you.

Operator

We’ll take our next question from Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy – Dougherty & Company

Good afternoon. Thanks for taking my questions. I got two questions first on the guidance if I look at the midpoint of your second quarter revenue guidance we are looking at $2.6 million sequential increase in revenues similar to the first quarter sequential increase. So, my question is now you have more subscribers than when you started last quarter and I believe you guided for net adds probably flat maybe slightly down. So, I am wondering are you being conservative with your revenue guidance or maybe there is some other variables that are going to be different in the second quarter versus first quarter?

Steven R. Wasserman

I mean I think the answer is if the net adds are roughly flat, which is what we have expected then one would think that the revenue growth from one quarter to next would be pretty similar.

Raghavan Sarathy – Dougherty & Company

But you’re starting at higher subscriber base. So, if I look at the absolute increase in revenues, we are looking at $2.6 million at the mid point same as last quarter, but you do have higher subscriber base starting the second quarter as compared to first quarter.

Steven R. Wasserman

Yeah. Again Rag, without looking at your model and stuff, I mean we truly build a bottoms up model where we forecast trial conversation rates, it's better. So, there is lots of variables that go into this, so I am not quite sure maybe what you can do with email [jury] something what you think of it and we can try to just understand the logic, but basically what we do is we just built it bottoms up and the revenue range we put out, what comfortable based on what we see with predicting trials, conversions, attrition, adoption of survey, et cetera.

Raghavan Sarathy – Dougherty & Company

And in terms of the new customer in voice that turned it down during the last three months of last year. Could you comment on the trend of new customer in voice during the first three months of this year and maybe what we saw last year with a small seasonality. Can you give us some color on that?

Steven R. Wasserman

Yeah. I mean it's not changing a whole lot and even the dive you're referring to we talked about in Analyst Day just wasn't a huge number I mean, we are not seeing anything substantially different and the customers we are adding now versus the customers we added last year.

Raghavan Sarathy – Dougherty & Company

Okay. Thank you.

Steven R. Wasserman

You bet Rag.

Gail F. Goodman

Thank you.

Operator

That does conclude our question-and-answer session. At this time I’d like to turn everything back to you Ms. Goodman for any additional or closing remarks.

Gail F. Goodman

Great. I just want to thank everyone for joining us today and we will look forward to catching up with you in another quarter. Good night.

Operator

That does conclude today's conference.