Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Constant Contact Inc (NASDAQ:CTCT)

Q2 2013 Earnings Call

July 25, 2013 5:00 pm ET

Executives

Jeremiah Sisitsky - Director of Investor Relations

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

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

Analysts

Richard H. Davis - Canaccord Genuity, Research Division

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

Carter Malloy - Stephens Inc., Research Division

Daniel Salmon - BMO Capital Markets U.S.

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

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

Arvind Rajamohan - Stifel, Nicolaus & Co., Inc., Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Constant Contact Second Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Jerry Sisitsky, Investor Relations for Constant Contact. Please go ahead.

Jeremiah Sisitsky

Great. Thank you, Danielle. Good afternoon, everyone, and welcome to Constant Contact's investor conference call for the second quarter ended June 30, 2013. With me on the call today is Gail Goodman, Chairman, President and CEO; and Harpreet Grewal, Chief Financial Officer.

During the course of this conference call, we'll make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-Q and 10-K on file with the SEC.

In addition, any forward-looking statements represent our views only as of today, July 25, 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 financial results. This press release is available in the Investor Relations section of our website at www.constantcontact.com.

Additionally, available for download on our IR website is an Investor Presentation and our historical financial and operating metrics.

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

Gail F. Goodman

Thanks, Jerry. The second quarter represented another quarter of consistent execution as we delivered results at or above expectations. Revenue for the quarter was $70.2 million, representing year-over-year growth of approximately 13%. And adjusted EBITDA was $9.5 million, an adjusted EBITDA margin of 13.6%. Each of our core drivers, customer additions, ARPU and retention showed positive year-over-year trends. We added 50,000 new and 10,000 net new customers during the quarter, representing the second quarter of consecutive -- second consecutive quarter of year-over-year growth in new customers. ARPU showed continued gains, increasing $1.81 versus last year. And retention rates for the quarter also showed improvement.

Our sales organization, bolstered by new leadership, performed well in the quarter. Simplified compensation plans and the back-to-basics approach of right product first yielded good results, evidenced by the growth in new customers. Equally important, sales and marketing efficiencies drove down our cost of acquisition for the quarter. Cost of acquisition was down both sequentially and for the first time in several years, down year-over-year. Combined with gains in ARPU and retention rates, we delivered meaningful improvements in customer lifetime value. We are delivering on a powerful financial model, one driven by 3 distinct growth drivers: new customer additions, gains in ARPU and improved retention. ARPU and retention both delivered high-margin revenue, which enables us to invest in growth and drive margin expansion.

Our product strategy remains on track to deliver to small businesses and nonprofits a robust suite of integrated online marketing tools to help drive their success. Our new, upgraded contact management functionality is an important aspect of the evolution to a successful, integrated marketing suite. The rollout to customers is well underway with tens of thousands of customers on the new platform. The enhanced functionality has been a hit as customers take advantage of additional contact views, enhanced segmentation, more intuitive search and better reporting and analytics.

Slides showing screenshots of the new functionality and the link to an overview video are at the back of our updated investor presentation now on our IR website.

Thousands more customers will migrate to the new platform in the coming weeks with the pace of customer conversions accelerating in Q3 and Q4. As we evolve to an integrated suite of marketing tools, we'll test different packaging, pricing and positioning for our suite of products. In the second half, expect us to test pricing and bundling of our existing marketing tools, services and functionality. To do so, we'll divert a small portion of our web traffic for these tests and recognize there could be some potential near-term trade-offs as a result to minimize any adverse impact to our core business as we learn and optimize for the future of Constant Contact. The financial guidance we're providing takes into account this potential variability.

In addition to testing pricing and bundling opportunities, we continue to test our way into selling and cross-selling multiple products. In the quarter, we've rolled out our new in-product messaging center. We can now run targeted campaigns to customers and trialers based on demographic and behavioral characteristics. We can, for example, offer a targeted list building message to a small business that recently became our customer, logged in twice, sent an e-mail campaign, but still has a relatively small number of contacts. These targeted and increasingly relevant messages should help drive ARPU over time through a combination of list size increases and cross-sell. Based on analysis and feedback from our customers, we implemented 2 pricing changes during the second quarter. SinglePlatform is now offering a monthly pricing plan, which is driving improved sales productivity and higher ARPU. We also changed the pricing of Social Campaigns. Social Campaigns now has flat fee pricing regardless of the number of fans. We expect that by removing the tiered pricing associated with fan size, we will attract more socially active small businesses and accelerate customer additions for our Social Campaigns product at a slightly lower average selling price. We expect to drive an increase in existing Constant Contact customers taking up Social Campaigns, driving a net positive impact on ARPU. Early results appear to be bearing out our expectations.

We're pleased with our recent performance and with the progress we're making to transform Constant Contact into a true multiproduct company. Our core business is showing promising trends: year-on-year improvements in new customer ads, continued growth in ARPU and gains in retention. Our analytic rigor and use of data to meaningfully improve sales and marketing efficiency, customer retention, inversion rates and cross-sell has begun to yield results. We are doing so while making strides in bringing it all together by more tightly integrating our products.

Our newer product offerings are gaining tractions and has the potential for meaningful upside to our business in the second half of the year and into 2014. The wider range of outcomes associated with our newer products and the potential impact of the pricing tests I described are reflected in the wider revenue range for our full year guidance. Our focus remains clear: execute consistently on our near-term plans while focusing on our longer-term goals of accelerating growth and expanding profitability. We believe we have the right strategy in products. And we're pleased with the renewed focus and discipline of the entire team.

With that, I'll turn it over to Harp to discuss the second quarter in more detail, as well as review our outlook for the third quarter and the remainder of the year.

Harpreet S. Grewal

Thank you, Gail. After taking stock of our results midway through the year, I'm pleased with our performance. After somewhat mixed results in 2012, we committed and organized the company to deliver on consistently good execution. The first 2 quarters of 2013, combined with the fourth quarter of 2012, bodes well for our ability to deliver on this goal.

There are a number of financial and operating highlights in the second quarter, including revenue in line with our expectations, profitability for the second consecutive quarter significantly exceeding our expectations for the second consecutive quarter; year-on-year increases in gross customer additions, a trend that we haven't seen since 2009; strong gains in what our customers are paying us with monthly ARPU increasing $1.81 or approximately 5% on a year-on-year basis; gains in retention with e-mail marketing retention rates improving to better than 98% for the month of June; cost of customer acquisition declining sequentially and versus last year, a trend not seen since 2007; gross margin showing meaningful improvements; and finally, taking into account the lower cost of customer acquisition, higher gross margin, growing ARPU and improved retention rates, customer lifetime value increased meaningfully, allowing us to beat our profit expectations in each of the last 2 quarters and raised annual profit guidance for the second consecutive quarter. These trends reflect positive momentum that we look to continue building on.

The quarter's results as well as those of the previous 2 quarters highlight some nice trends. While difficult to quantify, our focus on consistently good execution has begun to manifest itself in powerful ways in the organization. There is a clearer sense of the leading drivers of the business, defined leadership with these drivers, documented targets and compensation plans linked directly to these targets. In the last few quarters, we have raised the bar on testing as a means to scale and using predictive analytics to drive top and bottom line gains. Collectively, we're committed to driving consistently good results.

Revenue for the quarter totaled $70.2 million or about 13% year-over-year of growth. And adjusted EBITDA totaled about $9.5 million or about 13.6% of revenue, both at or above guidance. We remain focused on driving revenue growth while continuing to expand margins and believe we're in position to do both.

As Gail mentioned, we have 3 growth levers at Constant Contact: new customer additions, ARPU and retention. For the second consecutive quarter, each of these levers performed well. New customer additions of 50,000 in the quarter exceeded last year. For the second quarter in a row, we delivered year-on-year growth in new customer additions and ended the quarter with 575,000 unique-paying customers, up from 535,000 a year earlier.

ARPU for the quarter was $41.79 compared to $41.34 last quarter and $39.98 last year. This represents the 18th consecutive quarter of sequential ARPU growth, underscoring our success and expanding our relationships with our customers. We continue to drive ARPU growth through a combination of list growth and cross-sell success. Products per unique customer increased to 1.79 from 1.77 6 months earlier, evidence that our efforts to optimize cross-sell and upsell are gaining traction. The power of ARPU growth is sometimes lost when we speak incremental increases of $0.20 or $0.50 per quarter. But the gains when combined with almost 600,000 customers are meaningful to both the top and bottom line.

Retention rates showed year-on-year improvements as well, as they have in recent quarters. Customer retention rates remained within our historical band of 97.8%, plus or minus 50 basis points. In June, e-mail marketing retention rates improved to better than 98%, underscoring positive trends over the last few quarters. While we're not ready to reset our monthly retention ranges, we may certainly look to provide better visibility on this front going forward. Cost of customer acquisition is another area that's showing the positive impact of the focus on improved execution. In the quarter, we drove sequential and year-on-year improvements in the cost of customer acquisition, the first time we can say as much since 2007. Cost of acquisition in the second quarter declined to $556 versus $616 in the prior quarter and $574 last year. These gains derive from our ability to deliver an increasing number of new customers at a lower cost of acquisition. Over the last few years, we have seen increases in cost of acquisition. Our expectations have always been that COA would stabilize and decline as our effort started yielding gains in new customers at increasingly more efficient spend. The last 2 quarters have demonstrated our progress with year-on-year gains in customers, declining cost of acquisitions and lower sales and marketing spend as a percent of revenue. This is the first time, as I noted before, since 2007, that cost of acquisition has shown both sequential and year-on-year improvements.

Based on our performance in the first half of the year, we're increasingly confident that we can drive a year-on-year decline in COA. COA, however, is only one piece of the equation as it relates to customer lifetime value. In the quarter, not only did we drive lower COA, but combine it with increasing ARPU, better retention rates and higher gross margin, all of which led to meaningful gains in customer lifetime value. This is the first time in many years that we can talk to all of the key metrics of lifetime value showing positive trends.

Adjusted EBITDA for the quarter was $9.5 million or 13.6%, well above guidance of $8.4 million to $8.8 million or 12% to 12.5%. Gains on adjusted EBITDA were driven by a combination of better-than-expected sales and sales and marketing efficiencies, as well as the timing of certain investments that moved to later in the year. Based on the first half trends, as was the case last quarter, we are, again, increasing full year adjusted product EBITDA margin targets. The better-than-expected profitability contributed to GAAP net income for the second quarter of $90,000 or $0.00 per share, outpacing our guidance of a GAAP net loss of $300,000 to $600,000 or $0.01 or $0.02 loss per share.

Turning to the balance sheet. We ended the second quarter with about $99 million in cash and investments, generated cash from operations of over $7 million and free cash flow totaled $2.5 million. In April, we announced the $20 million share repurchase program, reaffirming our confidence in the long-term outlook for Constant Contact and our commitment to enhancing shareholder value.

During the quarter, we repurchased 100,000 shares at an average price of around $16 for a total of approximately $1.6 million. We fully intend to continue repurchasing shares throughout the remainder of the year. In terms of our outlook, we continue to expect revenue for the full year to be generally consistent with our prior guidance. We expect to deliver better adjusted EBITDA margin, non-GAAP and GAAP net income and EPS. For the full year, we're targeting revenue in the $285 million to $288 million range. And once again, raising our profitability guidance for the year and expect full year adjusted EBITDA margins to be in the range of 15.6% to 16%. This represents 110 to 150 basis points of margin expansion versus last year and equates to an adjusted EBITDA in the range of $44.5 million to $46 million.

For the year, we expect capital expenditures as a percent of revenue to be around 7% to 8%, slightly lower than our previous guidance. Free cash flow, as per early expectations, continues to be -- we continue to expect to be north of $20 million for the year.

Looking to the third quarter, we are targeting revenue in the range of $71.8 million to 72.4 million, representing a year-over-year increase of approximately 12% to 13%. Adjusted EBITDA is expected to be in the range of $13.3 million to $13.8 million, representing a margin of 18.5% to 19.1%.

Let me close with the following. The second quarter represents the third consecutive quarter of consistently good results, which reflects both the passion and commitment of an entire team at Constant Contact. We are a stronger, more disciplined and analytically focused company than a year ago. We continue to focus on delivering both near-term results, as well as executing to our longer-term strategic vision.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Richard Davis from Cannacord.

Richard H. Davis - Canaccord Genuity, Research Division

Gail, question -- I mean and you can maybe talk about it on a broad basis, but what holes do you feel you have left in the platform? So kind of when you think about where you need to add features and functionality, what is that? And then I guess for Harp, is there -- do you guys think about hitting a $50 per month ARPU? Or is that just kind of something that would happen naturally? And if it happens, great; if it doesn't, there's other things that drive it. But I just want to kind of hear how you think about the ARPU and then also the holes in the platform that you would like to fill out.

Gail F. Goodman

Yes. I guess I'll start with the areas of focus that we're looking to bring in into the platform over time. I think we've talked about it before. Contacts was the first step. We've talked about common offering and lightweight content management coming next. We actually are in a very early beta with pieces of the offering, the new offering environment. And then the final piece will be analytics and actionable insights. So those were the kind of 3 steps in the platform. They're all moving forward. They bring together the power of the different products, different marketing types of activities. So right now, we're not really seeing holes as much as we're seeing areas of focus to move forward. And then I'd be reticent if I didn't -- remiss if I didn't talk about mobile as an overall theme across our product in terms of both the mobile responsiveness of everything we do as it reaches the end user and increasingly letting our small businesses actually use mobile devices to not just look at reports, but do marketing activities.

Harpreet S. Grewal

And on the ARPU side, we certainly look at the opportunities to grow ARPU to the $50 levels and potentially above. In the most recent IR presentation that we posted this afternoon on our site, you'll see a page on lifetime value, which talks about our aspiration to grow ARPU from the $41.79 level to north of $50. So we are actively working towards that.

Operator

And our next question comes from Peter Goldmacher from Cowen and Company.

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

I want to talk a little bit about some of your initiatives. You talked a little bit about reducing customer acquisition cost, which is great. You talked about experimenting some with pricing promotions and bundling and packaging going into the back half of the year. I've been to a number of data management user conferences and you guys have come up and a couple of them as someone who has invested in some of these newer database technologies. And I'm wondering if you can help me understand where you are in that journey. And if that is partially responsible for enabling you to understand your business better and do some of these things that are driving costs and hopefully driving costs out and hopefully driving revenue higher.

Harpreet S. Grewal

Well, absolutely. I'll start off and have Gail jump in as well. So I think, absolutely, I think we see an opportunity. And we have committed increasingly greater resources and dollars to taking advantage of that. Last year, we brought on a Chief Analytics Officer, Jesse Harriott, who is tasked with this big data initiative. Currently, we have 3 focus areas that we're delving into. One is focused on conversion, second is using predictive analytics to improve retention and third is using predictive analytics to improve cross-sell. And I think while we expect significantly more gains in the future, you are seeing some of the output of that in the last 2 quarters.

Gail F. Goodman

And then I'll just hop in. That team is already at work, really looking to harvest the scale of our customer reach to understand really the best practices that are working for small businesses, so that we can suggest the next best marketing idea to each of our customers. So flowing from great analytics to help us improve our business to great analytics to help our customers improve their business.

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

Gail, can you give us a little more detail on the sorts of things you're doing to get that customer acquisition cost down? I'm sure you're painfully aware that, that was a big part of the beard thesis on the stock, was just your customers were getting more and more expensive. And even though as ARPU is climbing, the math was going the wrong way. So how are you getting that acquisition cost down? And how sustainable is it? And how should we think about it going forward?

Gail F. Goodman

Yep. So I'll start and then maybe Harp will hop in. I'll just start with some great progress on just our acquisition efforts. So we have seen TV working very effectively and cost effectively. We have a world-class digital marketing team that is managing to drive both scale and efficiency simultaneously. To your point earlier, we are using analytics on things like lead scoring to drive conversion and help with sales efficiency. So we're really bringing together multiple points to drive cost of acquisition. And the investments we've been making in our partner channel are starting to drive scale. And I think competitive defensibility over time, which could be another conversation worth having, we now have over 9,000 solution providers, helping our customers successfully use our products and ultimately becoming a channel for us. So a lot of the investments we've talked about in the past, starting to see that. We're very excited about 50,000 gross adds this quarter.

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

But Gail, how are costs coming down? What are you not doing?

Harpreet S. Grewal

I can jump in there. So how are costs coming down? So using lead scoring as an example, being able to understand what trialers are most likely to convert, which trialer should we touch, which trialer should our sales team touch, which trialers will convert without a touch, is leading to our greater efficiency on the sales side. In product analytics, is allowing us to understand where our -- visitors are going, where they're abandoning, where they might be having issues and allowing us to improve workflows, user experiences. And we've seen some gains based on the efforts there across multiple areas. That Social Campaigns is one area that we saw, we've seen some very nice trends based on the efforts there. So those are some of those areas that -- I mean, I can continue, but those are some of the areas just to highlight.

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

So Harp, can I summarize what you're saying, is that these new data sets help you understand your business better and allocate resources more efficiently?

Harpreet S. Grewal

Absolutely. I mean, it also applies we're using analytics more deeply in terms of our media spend, understanding better. And we've always been, I think, good, and getting better understanding the efficacy of some of our media spend. And so it's just -- it's not one area. It's -- and we've made a pretty considerable investment behind us, which actually shows up in the margins in the G&A line, which is one other reason G&A as a percent of revenues is increasing.

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

And let me ask one last question. So I think you guys have been on this journey for about 6 quarters. I think that's the first time you and I talked about it, Harp. How -- if we use the tired and hackneyed baseball metaphor, what inning are you in, in your ability to really leverage data?

Harpreet S. Grewal

I mean, I think if you asked Jesse, who'd be the right person to do so, he'd say we're in the early innings of this. I think he and the team look at far more opportunities than we've been able to take advantage of.

Gail F. Goodman

But I think we've got the technology infrastructure in place. So we actually expect to, I think, be accelerating our way in.

Operator

And our next question comes from Carter Malloy from Stephens.

Carter Malloy - Stephens Inc., Research Division

Congrats on all the great improvement on the metrics. I had a few on cost of customer acquisition. Maybe I'll follow up on those later. Maybe talk a little bit about the new products you spoke to in the transcript, in terms of traction you guys are seeing and if those are driving a meaningful part of growth yet. And then specifically, maybe, if we could discuss SinglePlatform and where you guys are in the maturity of that product.

Gail F. Goodman

Sure. So I'll start and say our new products are gaining traction and are beginning to be increasingly meaningful. We've said this before. We expect them to be in the tens of millions this year. So e-mail marketing's still driving the lion's share of the business, but they're growing. Specifically on SinglePlatform, we saw some really great trends in the quarter. I'll start with their move to monthly pricing. That has had both an increase -- drove an increase in both sales productivity and average monthly ARPU. Second, they've done a really great job of demonstrating customer value more clearly. So always delivering great customer value. But now customers are getting reports when they're on new publishers. They're seeing the amount of time spent on their storefront. So really driving the value demonstration to the customer in a more concrete way, just going great. And then finally, we're starting to get traction in verticals beyond restaurants, which was an important part of their scaling formula. So SinglePlatform, very promising trends across the board.

Carter Malloy - Stephens Inc., Research Division

All right. That's great to hear. And then on the implied acceleration into 4Q, is there a specific driver around that or should we just think about that being more just conservative on 3Q given the testing going on?

Harpreet S. Grewal

Yes. No, I mean, I think the way we look at the wider range that we have for Q4 than applied wide range is that our focus on consistent execution gets us into the range of guidance that we provided. We are making a lot of investments behind growth initiatives to drive incremental growth, but -- and that's what gives us a shot to the high end of the range. But those are less predictable, less certain, the timing less certain. So that's the basis of the Q4 range. We'll also just kind of -- and I'll also talk to you, Q3, what's important to keep in mind, is our seasonally slow quarter, so as we kind of model out Q3 in the guidance we've provided.

Operator

And our next question comes from Dan Salmon from BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

About a year or so ago, the push towards international expansion was an up-and-coming theme for the company. And with some of the headwinds that you have now conquered in the, I guess, more domestic business recently, do you expect to resurrect that at all in the next year or 2? And what sort of should we be thinking around possibly reengaging that?

Harpreet S. Grewal

Yes. So I think we've made a conscious decision in the last year or so that we needed to really focus on bringing the underlying platform, that Gail talked to the contacts database offering. And by bringing these products together, learning our way into bundling and positioning. And in doing so, we had to get back together before really pushing more aggressively internationally. And I would say that in the context of pulling altogether -- back together, we're making very great strides. I don't want to suggest that in the next 6 months we're going to turn our attention full-board internationally, but we continue to see a great opportunity. We see an increasing number of trialers that are coming from International markets. So that is something that, I think in 2014 at some point, you will start hearing us maybe talk about a little more.

Operator

And our next question comes from Jeff Houston from Barrington Research.

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

You mentioned that you had customers on average of 1.79 products up from 1.77 6 months ago. Just curious about which of your newer offerings are the fastest-growing? And in the quarter, was there any meaningful surprise or outperformance on the upside or downside with any of the new offerings?

Harpreet S. Grewal

Yes. I mean, I'll start a little -- start off and then -- yes. So I think what we're seeing is some of the newer offerings are starting to do well. But I think in terms of products per customer, obviously, our biggest one is EventSpot. It's one that has the most substantial revenue run rate. And so it's making gains there, that contributes to it. But we're also finding that our ability to kind of cross-sell, whether it's a survey product, more effectively, it's contributing to these gains that we're seeing. There's not one product I would highlight and say, "That was the difference between 1.77 and 1.79."

Operator

And our next question comes from Brian Schwartz from Oppenheimer.

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

I have a question here, either Harp or Gail, I'd love to get your opinion on this. It's really about the landscape out there. There's certainly been a trend here towards consolidation in the digital marketing space. And just wondering your opinion, if you think Constant Contact stands to be a beneficiary from this industry consolidation. And maybe, Harp, if you've seen any changes that in terms of the number of leads that are coming through the funnel or maybe the size of the new customers that you're adding?

Gail F. Goodman

I guess I'll start here and say we certainly haven't seen a lot of consolidation in the industry. And I'm not sure if everybody saw it, but VerticalResponse was acquired by Deluxe. That was announced today as well. So we continue to see players not only in up marketing now marketing space, but now kind of in the SMB space being consolidated. That said, I don't know that we've played through to seeing any changes in our competitive dynamics in terms of reduced competition for keywords or kind of the places that we've traditionally seen competitive pressure, we've yet to see any changes. We do obviously see a growing number of folks starting to say they're going to be the provider of a suite of products to the SMB space. We expect that we can compete very effectively there because of the way we reached the market, because of the way we teach and drive success to the SMB and because of our trusted brand. So we are confidently looking to execute on that. But again, I haven't yet seen any of these folks stop bidding on our keyword and making our lives easier.

Harpreet S. Grewal

Yes. And to the second part of your question, have we seen anything in terms of trialers or top of funnel dynamics. I mean, we actually, as we have for the last year or so, have seen really nice demand at the top of the funnel in terms of demand generation and trialers that continue to outpace last year. And I think in some capacity, our competitive strength is reflected on our ability to grow our customer adds on a year-over-year basis at a more efficient spend in terms of cost of acquisition.

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

And then one just real quick follow-up. And maybe this is too early for this question, but I'm just wondering if you've seen any -- if there's any data in terms of upselling activity or any data or learnings in regards to the number of support inquiries over the past couple of quarters here. I guess the question is, as you've rolled out this enhanced contact functionality, I'm just wondering if what you've seen from it so far, if it is affecting your upselling activity, if it's affecting your customer support business at all, if you're seeing higher inquiries from that? And I'm just wondering if you could share any learnings that you've had so far as you roll this out into the base?

Gail F. Goodman

Yes. So I'll hop in there. As we designed the new contacts functionality, one of our goals was to make it nondisruptive to our customer base. So the first place that an existing customer would see it is as they go to select lists for their next campaign. And that experience is very similar to the existing experience. And in fact, we kept it in usability to make sure that it wouldn't drive an uptick in calls. So that has actually been very smooth. The next opportunity for us is to start guiding customers to using the enhanced functionality, right? So that only gets them to parity usage. We think the real opportunity to drive stickiness is to make sure they see and understand that they now have a deeper view of their contacts. They can see engagement across different products, different campaigns, that they can see enhanced reporting. They can use things like tagging for better segmentation. We haven't started to roll out those best practices yet. But again, as we do roll those out, we don't really expect to see big spikes in call volume. But we do expect it to drive stickier behavior. We're really just a few months into the rollout, too soon to see that in the financial metrics.

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

Great. And then last question for me. Just how you're thinking about the new pricing strategy in terms of a timeline here. You mentioned the second half, you're going to do a lot of testing upon it. Is the goal to potentially have the testing complete? And then as we enter into 2014, that pricing in itself could potentially be an incremental growth driver for the business next year?

Gail F. Goodman

Yes. So testing is never complete since we're always testing. Once we finish one test, we just start the next one. But we are definitely hoping to be in a position to understand whether we're ready to scale some bundling task, take bundling from testing to scale. And so we will look to be in a position to have a point of view on that by year-end.

Operator

And our next question comes from Arvind Rajamohan from Stifel.

Arvind Rajamohan - Stifel, Nicolaus & Co., Inc., Research Division

Congrats on the improvement execution, guys. I just had a few quick questions. Can you talk about your conversion rates? And are they getting back to kind of historical levels? And do you guys feel comfortable they're at levels they can stay at now?

Harpreet S. Grewal

Yes. So I mean, I think after kind of the discussions after last -- third quarter last year, we have seen an improvement in conversion rates. I think that we've seen a steady improvement over the course of this year. I think what we expect is that we have opportunities to continue improving those conversion rates as, I mean, as we -- as the new leadership teams that we've brought on, as we put in better technologies, lead scoring in terms of predictive analytics, adjusting a bunch of stuff that we haven't done in the past that I think can improve that further. And so the trends have been positive. And we're hoping to get even improved trends.

Arvind Rajamohan - Stifel, Nicolaus & Co., Inc., Research Division

That's great. And then on retention, it sounds like you guys are also making improvements there. If we kind of just hypothetically say we get back to the 15,000 net adds, do you think you guys can actually improve retention rates? Or what do you think retention rates look like at that level?

Harpreet S. Grewal

Yes. So maybe I'll -- so I'll answer the first one and maybe I'll pump the second one for this conversation in terms of getting too specific. So do we think we can improve retention rates? I think the answer is yes. We are leaning in. Once again, we have defined this leadership. They're focused on it, that are learning -- where the analytics team, this is one of their top 3 priorities, which is how do we understand, using predictive analytics, who's most likely to trip not the day before they trip, but 6, 12 months before they trip. And so how can you intercept that before it happens? So we believe that as we bring to bear those powerful kind of insights, we should be able to get gains. I think it's too early to suggest where those gains will take us, but we're excited about what can happen there. And as we do so, and continuing to growing gross adds, that should give us the ability to grow net adds as well.

Operator

And our next question comes from Richard Baldry from Wunderlich Securities.

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

Congrats on the subscriber acquisition number coming down. I'm sort of curious about -- there is a trade-off. If you were to push that number back higher, presumably your gross add number would climb with it. So to what extent are you very sensitive to pushing the SAC down versus accelerating the growth? Where do you really draw the line? Because your NTV per customer is pretty solid. So it is a very discretionary number. I'm sort of curious about the puts and pulls to that as we go forward now.

Harpreet S. Grewal

Yes. I mean -- I'll start. I mean, I think we have always focused on even when cost of acquisition was going up. We kept on reminding everyone that the metric that we really look at is lifetime value. And so to that extent, our goal has been to increase lifetime value. And if you look at our most recent presentation, you'll have -- you've heard us talk for many years that lifetime value remains stable at about $800. In the most current periods, we're actually closer to $900, which is both a function of slight reduction, cost of acquisition, but really the gains in retention and ARPU and gross margin. So that's the metric we'll look at. But we'll look to spend money in a disciplined manner. I think what you're seeing today in the near term is the efforts that we have put in behind growing our partner channel, which is a more levered channel, in the gains that they're making. The efforts behind analytics and strengthening the sales team beyond just analytics and the increased efficiency and productivity that's deriving from that. And we think that's a positive trend that we think we can maintain long-growing customer adds on a year-to-year basis over the course of this year.

Operator

And I'm not showing any further questions. I would now like to turn the call back to Gail Goodman for any closing remarks.

Gail F. Goodman

Great. I just wanted to thank everyone for joining us tonight. We appreciate your continued interest and support. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Constant Contact Inc (CTCT) Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts