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Executives

Jerry Sisinski [ph] - Director, IR

Gail Goodman - Chairman, President, and CEO

Steve Wasserman – VP and CFO

Analysts

Richard Davis - Needham & Company

Tom Roderick - Thomas Weisel Partners

Peter Goldmacher - Cowen and Company

Laura Lederman - William Blair

Michael Wong - ThinkPanmure

Brad Reback – Oppenheimer

Constant Contact, Inc. (CTCT) Q2 2008 Earnings Call Transcript August 12, 2008 8:00 AM ET

Operator

Good day everyone and welcome to the Constant Contact second quarter 2008 earnings conference call. Please be aware that today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jerry Sisinski.

Mr. Sisinski, please go ahead, sir.

Jerry Sisinski

Good morning and welcome to Constant Contact’s investor conference call for the second quarter ended June 30, 2008. I am Jerry Sisinski, Director of Investor Relations at Constant Contact. With me on the call today are Gail Goodman, Chairman, President and CEO of Constant Contact, and Steve Wasserman, 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 Factors sections 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, August 12, 2008, 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 be referring to the company’s adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income loss, and non-GAAP net income loss per share. These four 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 second quarter 2008 financial results. This 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 second quarter. And Steve will then discuss the financial results and provide financial guidance before we open the call for questions and answers.

Now, let met turn the call over to Gail.

Gail Goodman

Thanks, Jerry, and thanks to everyone joining us from the call and webcast this morning.

Constant Contact reported strong second quarter results and we have again increased our revenue expectations for the year based on the continued momentum of our business.

During the second quarter, we met or exceeded each of our key operational and financial objectives, and we made progress on a number of our strategic initiatives.

Revenue for the quarter was $20.8 million, up 82% over the second quarter 2007 revenue, and above the high end of our guidance range. Adjusted EBITDA for the second quarter was $894,000. This was our fourth consecutive quarter of positive adjusted EBITDA and it was above our $400,000 to $600,000 guidance range.

As we have said on previous calls and are reiterating today, we continue to target a 4% adjusted EBITDA margin for the full year. While we exceeded our targeted adjusted EBITDA for Q2, we continue to believe it is in our company’s and shareholders’ best interest that we invest in customer acquisition programs given our highly attractive per customer economics combined with the nascency of our market.

As long as our per customer economics remain so compelling and generates such positive returns, we will continue to invest in growing our customer base. At the same time, we are committed to delivering expanding adjusted EBITDA margins on an annual basis.

During the second quarter, we continued to extend our market leadership position by adding over $21,200 net new email marketing customers. This was consistent with our first quarter net new customer performance and it was in line with our expectation for net adds that we shared on last quarter’s conference call.

The continued success of our customer acquisition strategies enabled Constant Contact to achieve another milestone during the quarter as we crossed the 200,000 customer mark, ending the quarter at over 207,100 customers. We expect our third quarter net adds to be in the same range of net additions seen during the first two quarters of the year, followed by an increase in the fourth quarter.

One of the drivers of our success and one of our key differentiators is our ability to provide exceptional customer service and ample assistance to our customers. This plays a critical role in helping our customers use our service and use it effectively. To that end, I am extremely proud that we were recognized in the second quarter with a Stevie Award for Best Customer Service Team in the 2008 Annual American Business Awards.

While some software companies treat customer service as a necessary expense in their business, we view it as highly strategic. We believe that we have made our industry-leading customer service a key competitive differentiator for Constant Contact, and a barrier to success for companies looking to enter the market.

Looking at our key customer’s metrics, the second quarter’s metrics were consistent with our historical trends. Our average email marketing invoice remained in the $33, 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 in its long-standing range of 97.8%, plus or minus 0.5%.

Additionally, we achieved another significant milestone in the quarter. We had our highest ever average revenue per email marketing customer of $35.15. We also notably broke through the one billion threshold in monthly emails sent, and the Constant Contact logo now appears in the footer of approximately one billion emails a month that we send on the half of our customers.

The strong growth of our business and consistency of our key customer metrics are evidence that the small to medium business email marketing sector and our small business momentum remained strong in the face of a challenging economic environment.

In addition to a consistent customer retention metric, it has been reassuring that we have not seen any meaningful changes in credit card failures or the number of customers who canceled their email marketing service because they reported they were going out of business.

Turning to our survey product, in the second quarter, we grew the number of survey customers to over 15,000. Because the bulk of our survey customers are also existing email marketing customers, we will continue to price key survey customer milestones as opposed to providing an independent customer count each quarter as we do with the email marketing product.

As previously discussed, our survey price changed moving to a response-based model went into effect in the third quarter. We will continue to refine our go-to-market programs are we further drive survey adoption.

Shifting to the product development front, we continue to develop future products and add on services as well as develop new features and functionality for our email marketing and survey products.

To that end, in the second quarter, we began the development of our third product through the acquisitions of the assets of a small firm doing professional services work that focus on the application space we are targeting for product three.

These new employees are tasked with taking the customizable tool set that they had developed and creating a robust small business-focused product integrated with our existing platform and deliver via the same Software as a Service model as our current products.

For competitive reasons, we are not disclosing the details of this acquisition nor are we disclosing the type of professional services work that these employees performed. But suffice it to say the size of the acquisition was not material.

We expect their application expertise will help us to bring our next product offering to market more effectively. Presently, we expect to have product three delivered to the marketplace in late 2009. We continue to look for modestly sized technology acquisitions that are complementary to our existing suite of products. As we've done in the past, we will continue to perform and make versus buy analysis before deciding whether to move ahead with any acquisition.

Before I turn to other key initiative, I am thrilled that we have already begun taking inbound support calls and making outbound calls from our newest call center facility in Loveland, Colorado.

In July, we announce the construction had begun on our new leased facility in Colorado which will replace the temporary facility where our employees are currently located. The site is Constant Contact’s first major expansion outside of our corporate headquarters in Waltham, Massachusetts. And the 50,000 square-foot leased facility is expected to be completed in the first half of 2009.

We expect that this second call center will provide ample facilities to help support our expanding customer base with an excellent level of service over the next several years. I'm also exited at the enthusiasm and support from the local community in Loveland. We have already attracted a great pool of talent and I'm confident we will continue to find enthusiastic, hard working, customer-centric individuals who will help us grow our presence in Colorado. A special thanks to the team of Massachusetts-based Constant Contact employees who relocated to Colorado to help with the successful launch.

On the subject of supporting our growth, we recently hired Bob Nicoson in the newly created position of Chief Human Resource Officer. Bob will play an important role in overseeing the talent management function at Constant Contact. Our people are the link between Constant Contact and our small business customers, and Bob will help us scale our HR operations with this in mind.

I'd like to finish my comments by sharing with you for the first time the specifics regarding the exciting marketing program we are on the verge of launching. As background, many of you on this call have heard me describe the traditional marketing AIDA curve where we recognized the movement of prospects through the various stages of the purchase decisions from awareness to interest, to desire, to action, AIDA.

The campaign we're preparing to launch in September is intended to drive awareness and create interest at the earliest stages of the AIDA curve by explaining the value proposition of our email marketing solution. We are still in the very early days of an extremely large market opportunity and the bulk of our addressable market is generally unaware of the power of our email marketing and survey solutions.

The marketing medium we effected in several markets and found to be most successful at enabling us to generate significantly more awareness and interest is radio. I'm very pleased to share with you that in September, we will be rolling out a national radio campaign.

Radio allows us to effectively reach our target audience. In 30 seconds, a radio ad allows us to educate small to medium businesses that one's best prospect is an existing customer that email marketing is an effective way of communicating with your customers and that email marketing is affordable and easy to use. We've learned from our past marketing programs that it takes multiple impressions over a period of time to inspire prospects into action. Radio is an extremely effective method in reaching our target audience multiple times to generate the impressions required for action.

In our past test of radio on a regional level, we have found that not only this radio generate positive returns on a standalone basis but when combined with the mix of online print and other marketing medium, it makes all of these marketing efforts more effective.

Let me share with you a sneak preview of one our radio ads on the call. While this is still an unfinished cut, I wanted to give you an idea of what we have planned.

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Beginning in September, this ad as well as six other spots will air on five major networks nationally. At Constant Contact, we test, retest, and retest again before we scale spending program. We have tested these radio spots and focused groups across the US and adjusted their creative content based on the focus group responses. We also carefully selected networks and stations to ensure that we reach our target SMB audience at effective times during the day. We have tailored the campaign applying our learning from past radio test to generate the largest impact at the least cost.

There are a number of reasons why we are confident in this strategy and believe now is exactly the right time to launch it. First, with over 200,000 customers and a tremendous number of customer success stories, we believe we have established a solid reputation as the leader in SMB e-mail marketing.

Second, Constant Contact has the financial resources to execute the program and we've reached a point where we are gaining operational efficiencies in our business model and can absorb the increased marketing expense and continue to grow our annual adjusted EBITDA margins at the same time.

Finally, Constant Contact has the IT infrastructure and customer support infrastructure capable of responding to and managing the demands that we expect such a campaign will generate over time. As I mentioned earlier, customer support and service is a critical element to sustain success, so this is particularly important.

Needless to say, I am extremely excited about this campaign and we are confident that we are going to be able to raise awareness to a whole new audience that our previous marketing strategies were not able to reach.

While we expect to see a modest impact on our Q4 net customer additions from this campaign, the majority of its impact will be seen in 2009. This is because the radio campaign will be focused on the first two stages of the AIDA curve.

Before I turn the call over to Steve for review of our financial results, let me reiterate, this was a great quarter. We exceeded our revenue guidance, added over 21,200 net new customers during the quarter, went live with our second call center, completed our first acquisition, and raised our 2008 full-year revenue guidance for the second time.

Looking ahead, we believe Constant Contact is well positioned to continue growing at a rapid pace. Our target market is very large and remains in its infancy. Market penetration is low.

We offer a cost effective solution that has proven value and Constant Contact has been successful in delighting its customers, helping us to drive referrals and keep retention rates high. These are among the many reasons we remain optimistic about our ability to keep up a rapid pace of growth in 2008 and beyond.

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

Steve Wasserman

Thank you, Gail. I am also very pleased with the results of the quarter. I will provide additional second quarter financial details and provide financial guidance for the third quarter as well as the full year of 2008.

Revenue for the quarter was a record $20.8 million up 82% over the second quarter of 2007, and ahead of our revenue guidance of $20.2 million to $20.4 million. Factors that contributed to our better than expected revenue in the second quarter were the continued strong adoption of our archive product add-on and an increase in our e-mail marketing customers average list size. Both of these, in addition to the uptake of our survey product, contributed to the increase in average revenue for email marketing customer which grew to $35.15 up from $34.57 in the first quarter.

We implemented a pricing change for survey earlier in the third quarter. This change brought our pricing methodology more in line with what customers typically see for this type of service.

As we have said in the past, we expect the pricing change to be revenue-neutral because some customers will see a price decrease under the new methodology while others will see a price increase.

We decided to grandfather a subset of our existing survey customers who otherwise would have experienced a price increase. We feel this is the fairest way to help our customers transition smoothly to the new pricing by allowing these groups of customers to lock in at the lower price per click at a time. We anticipate that our third quarter average revenue per email marketing customer will be in the range of what we have reported in the second quarter.

We would then expect average revenue per email marketing customer to increase sequentially in the fourth quarter and beyond due to increased adoption of archive, survey, and to a lesser extent image hosting.

Our gross margin in the second quarter was 73%, due in part to the second co-location site coming online. The second quarter was the first quarter where we saw the full impact of the second co-location site expenses. Looking to the third quarter, the full impact of the Colorado call center will affect us and will reduce our gross margin percentage as compared to the second quarter.

Sales and marketing expense in the quarter was $10.2 million or 49% of revenue as compared to $6.7 million or 59% of revenue in the year ago period. You can see evidence of the operating leverage in our business model as we continue to grow our customer base.

The increase in sales and marketing expense was due primarily to increases in marketing programs while a secondary factor was the increased cost of pay per click advertising for certain keywords. We expect pay per click cost to continue to trend upward for the foreseeable future.

We continue to manage pay per click as part of our overall marketing portfolio and we believe that improvements in pay per click conversion and the network benefits from being in one of the top search positions will help us to increase the efficiency of our pay per click marketing expense and mitigate some of the cost per click price increases.

Also during the quarter, because we recognized that revenue was running ahead of plan, we were able to increase our marketing spend and allocate more money to test. A few of these tests were very successful and we plan to scale these in Q3 and beyond.

R&D expense during the second quarter was $3.7 million as compared to $2.8 million in the second quarter of 2007, as we have continued to grow our engineering organization. R&D expense was 18% of revenue in the second quarter of 2008 as compared to 25% of revenue in the second quarter of 2007. We expect further leverage in our operating model with R&D expense as a percentage of revenue declining beginning in 2009.

G&A expense in the second quarter was $2.3 million as compared to $1.3 million in the second quarter of 2007, with the increase primarily due to the costs associated with being a public company. We reported an adjusted EBITDA profit of $894,000 above our guided range of $400,000 to $600,000, and this was our fourth consecutive quarter of positive adjusted EBITDA.

Interest income was $709,000 in the quarter and we exited the second quarter with an average yield on our investment portfolio of below 2.5%. We paid no income taxes during the quarter and do not expect to incur any significant state or federal income taxes in 2008 or 2009.

We generated a net loss of $389,000 in the quarter resulting in a GAAP diluted earnings per share loss of $0.01 based on $27.9 million weighted average shares outstanding. This is compared to a net loss attributable to common share of $3.1 million or $0.81 per share in the same period a year ago.

Our stock-based compensation expense was $644,000 or $0.02 per diluted share and our non-GAAP diluted earnings per share was $0.01.

Turning to our balance sheet, we ended the quarter with $107 million in cash, cash equivalents, and marketable securities up from $102 million at the end of the March quarter. During the second quarter, we completed a follow-on offering that included raising $4 million net of expenses for the company.

Deferred revenue totalled $15.2 million at the end of the second quarter and continued to grow steadily with our business. We ended the quarter with 382 employees, up from 348 employees at the end of the March quarter, and we continue to anticipate growth in our employee count throughout the remainder of the year.

Now, let’s turn to guidance for the third quarter and the full year of 2008. For the third quarter, the company expects revenue to be in the range of $22.2 million to $22.4 million adjusted EBITDA to be in the range of $1.1 million to $1.3 million, GAAP net loss to be in the range of $400,000 to $600,000, and GAAP net loss per share to be in the range of $0.01 to $0.02.

GAAP net loss per share is based on basic weighted average shares outstanding of 28.1 million shares and includes stock-based compensation expense of $700,000. The company expects non-GAAP net income per share to be break-even to $0.01 based on diluted weighted average shares outstanding of 29.4 million shares.

Updating our full-year guidance, I'm pleased to say that we are again increasing our revenue guidance. The company expects revenue to be in the range of $85 million to $86 million, up from previous guidance of $82.5 million to $84.5 million. The company expects adjusted EBITDA to be in the range of $3.3 million to $3.6 million which is consistent with our target of delivering an adjusted EBITDA margin of 4% for the year.

The company expects GAAP net loss to be in the range of $1.8 million to $2.1 million and GAAP net loss per share to be in the range of $0.06 to $0.08. GAAP net loss per share is based on basic weighted average shares outstanding of 28 million shares and includes stock-based compensation of $2.8 million.

The company expects non-GAAP net income per share to be $0.03 to $0.04 based on diluted weighted average shares outstanding 29.4 million shares. Our adjusted EBITDA guidance continues to be consistent with our previously issued target of 4% for the full year with the third quarter representing the highest level for the year.

As we exit 2008 and head into 2009, our plan will be the same, driving customer and revenue growth and annually expanding our adjusted EBITDA margins as we progress towards our long term profitability model with adjusted EBITDA margins in the 24% to 26% range. In summary, we are very excited about our results to date this year and our ability to execute well in the current environment.

At this time, we would be pleased to take any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) For our first question, we go to Richard Davis with Needham & Company.

Richard Davis – Needham & Company

Thanks. Maybe for Gail, but if you think about it, you guys have a business model that's predicated on what I would call good technology and great customer service and a monthly fee that, when I talk to people, is so well that it basically goes unnoticed once you’re a subscriber. In other words, it's not a punishingly high number. The question I have is do you guys think about – is there a point where -- you get to a point where your price this thing to the point where you hit resistance or it becomes economically sensitive and are you miles away from that, have you thought about that, is it $50 a month, is it $100 a month, and how do you kind of modulate between becoming a suite and keeping your price points so that it [ph] catch anyone's attention?

Gail Goodman

We are definitely at the point now with email marketing where we are nowhere near the pain point and we are clearly at a very high value point. When folks use our email marketing solution, they typically drive new business of some kind. People come in to buy. People call them up for advice and guidance that they are consulting firm. People attend their events if they are nonprofit. So the immediacy of return against our dollars is incredibly obvious to them and part of what makes them feel like we are a bargain for them and easy to keep using.

As we continue to add incremental products, incremental services, and the number starts to creep up. We do think it will make sense to start looking at some bundled pricing strategies. All of our focus group work, however, suggests that people don’t want us to bundle if they are not sure they are going to use pieces. Small businesses hate paying for things they are not using. So, we are resisting bundling until the point where we see enough product breadth and cross usage that it makes sense to start to offer a bundled discount for people who are choosing to use these different elements of our total costumer solution.

So, I'm not sure if I'm totally answering your questions. I think if we do that entirely right and the value proposition is high enough, that 50 number you mentioned doesn't feel out of the range of still being easy for the small business to understand the return on. But we need to show them that all the pieces are important to them before we start bundling all the pieces together.

Richard Davis – Needham & Company

Got it, that's helpful. Thanks.

Operator

We go next to Tom Roderick with Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

Hi guys, thanks and good morning. Gail, you seem pretty fired up about the marketing campaign here to really go aggressively after radio. Can you share with us any metrics you've gained from your past test in radio and remind us which markets you tested this in and when you tested that? Thanks.

Gail Goodman

Sure. So at the highest level, the way we measure radio is by going into a market, and this is how we've done it regionally then I'll talk about how we're going to do it nationally, looked at the performance in that market prior to the entry of radio and look at the aggregate lift of radio in that geography over time. We do this in arrears [ph] using statistical models that give us a high degree of confidence that the lift we’re seeing is in fact attributable to radio.

An interesting phenomenon is that when you use radio, the response to that comes through multiple channels. People might go to our Web site, people might use a pay per click ad, people might even come through one of our partners having initially heard the radio ad and then seeing a second offer from another channel.

So, it becomes hard to measuring the traditional way we do, which is simply – they came through this campaign coder, partner code, therefore they are attributable here. We need to use a statistical analysis to separate out the aggregate lift caused by radio from the individual sources. So, we do that in arrears, so it does take us a quarter or two to be able to do a statistically significant look back. But we feel the general impact fairly quickly.

In our past regional efforts, what's been very clear is that it takes time to build to impact that people need to hear the radio ad multiple times and over a time period before they are inspired to action. In fact, we call these radio pushes waves.

In our past history, the second wave is where we start to see impact. The third wave is where we see the most impact. We also get cost efficiencies as we go through these waves. We tested radio in four different geographies in a significant way -- see if I can get them off at the top of my head -- Boston, Chicago, Dallas and the Washington DC area, and actually we've been in Seattle with radio recently, but I wouldn't call that a test. That’s just been a continuation of our regional expansion. I think we are in Miami with some – I'm looking at Steve, I think we are in Miami with radio, Southern Florida with radio as well. Those two were continuations of our regional expansion program.

Our first radio test started in the fourth quarter of 2005, so in the markets where we have the most experience, we actually had the opportunity to go in with radio, experience over time, and then actually pull radio out and see what the lag effect of radio in those markets were. So we are at the point where we have a fairly complete understanding of the cycle of radio and how it plays out, as well as understanding its cost of acquisition and how that changes over time.

Clearly, as we enter a market and we're spending, but we're still building the level of impressions, it's fairly expensive, but over time in aggregate, radio does come in within our bands of acceptable cost of acquisition and we do measure that fairly carefully.

Tom Roderick – Thomas Weisel Partners

I guess just a related question there on the cost of acquisition, as you've targeted the COA number to go back up to $300 for the full year, can you give us a sense as to what you have historically learned and what those acceptable bands on cost of acquisition look like from a dollar basis?

Gail Goodman

Without getting into the specifics, as you look at our full year guidance, radios built in and the $300 COA is still our target for this year. So, it is definitely built into our plans for this year and our plans for next year and we feel very comfortable that we can be in that $300 range using radio as a substantial piece of our mix.

Tom Roderick – Thomas Weisel Partners

Okay, that's great detail. Thanks, Gail.

Operator

We go next to Peter Goldmacher with Cowen and Company.

Peter Goldmacher – Cowen and Company

I want to ask you a couple quick questions, one is would love an update on the survey product and the pricing change and how's that being received by your customers? And you had mentioned a billion emails a month. Wanted to know how that correlates to kind of the viral marketing and what impact do you think that is having on ads, and also what impact that has on your ability to market Constant Contact as a partner with other third-party people selling into your end markets and just sort of keeping the whole virtuous cycle going?

Gail Goodman

You want to take the viral piece and then I'll take the survey piece?

Steve Wasserman

Sure. Good morning, roughly 8% of our new customers have historically come from click-throughs on the quarters. So the bigger the number of email guests that we send out, are the larger I should say, the more click-throughs we are going to get. We feel that that's a very important piece of our viral mix, having the logo on the footer with a click through, and the percent hasn’t changed over the past few years.

Gail Goodman

In the survey side, the pricing change is still pretty fresh, measured in weeks. So it's a little soon to see whether it has had a substantial impact on our ability to sell through more survey. What we definitely keep learning is what is the selling model, what is the right value proposition to emphasize with survey, and how do we continue to make survey really, really easy to use and really quick for small businesses to get a measurable impact from. So we're still in the learning mode, but moving along nicely.

Peter Goldmacher – Cowen and Company

Great, do you want to say one or two more words about your new secret product?

Gail Goodman

No, not really.

Peter Goldmacher – Cowen and Company

You sure?

Gail Goodman

I'm really sure.

Peter Goldmacher – Cowen and Company

Okay, thanks.

Operator

(Operator instructions) We go next to Laura Lederman with William Blair.

Laura Lederman – William Blair

Yes, good morning, thank you for taking my questions. The first one is the uptake on archive and image hosting, if you could give us sense of that. And also has there been any change in bill cycle, people that pay you six months in advance, one year in advance versus monthly? And finally, last but not least, competition, see anymore Microsoft and who are you seeing more the less of? Thank you.

Steve Wasserman

Good morning, Laura. With respect to archive, we are still in the single digits, but that has been picked up nicely. Each and every month, we're increasing the penetration. We've done one marketing launch a couple of months ago to try to cross sell that. We're doing another one this month. So we think archive has got a lot of room to grow in terms of additional adoption by our email marketing customer base.

Image hosting, we've said before that it's in the 30% the tax rate penetration. So, image hosting keeps trickling up a little bit, but nowhere near at the pace of archive.

With respect to payment cycle 6 and 12, we just haven’t seen any big change there. It's interesting that there is some seasonality in that a lot of people prepay at the beginning of the year. So we get our most prepayments there, but over the course of the year, the percentages are not changing.

Gail Goodman

And then, I'll take the competition question. We really see no significant change in competition in anyway this quarter. We have not seen the Microsoft entry into the market have an impact on our business nor has that product matured to the point where we see it as a serious head-to-head competitor. What we do feel is that the national radio will really help us expand our lead and create an increasing insurmountable gap between us and the competition in terms of market awareness and really being synonymous with the category for small businesses.

Laura Lederman – William Blair

Final follow-up question which is if you look at the archiving and image hosting, where would you expect the uptake rate to go long term, in other words three years out, where do you see those attached rates, and the same thing with survey and if you have any rough deals?

Steve Wasserman

With respect to image hosting, Laura, we don’t envision that going much higher, maybe it'll creep up a little bit, so that's going to be in the 30% we believe. We don’t see any reason that archive couldn’t be on par with image hosting in a few years. Archive is attractive to nonprofit association and our business-to-business customers, and that's roughly 50% of our base.

With respect to survey, when we initially launched survey, we did some -- actually before we launch it, we did some marketing and research, and one-third of customers were currently doing surveys with a competitive product, one-third said they might be interested in doing a survey if we had it, one-third not really. So potentially, in two-thirds of our customers, we don’t think that’s a realistic target, but certainly it's going to be a lot higher than the single digits where it is right now.

Gail Goodman

The thing I'd add to that is of the three, survey is more of an infrequent usage. So, if you’re hosting images, if you've got a news letter archive, that's a continuous hosting process. Survey may be something that we see people using a couple of times a year as opposed to continuous recurring monthly usage.

Laura Lederman – William Blair

Thank you.

Operator

We go next to Michael Wong with ThinkPanmure.

Michael Wong - ThinkPanmure

Thanks very much and good morning. A couple of questions for you, so first, I know it's early but how could product number three that you're working on change the dynamics of the target customer base, maybe conversion rates around the core products and retention rates and average pricing, and would this primarily be sold to the existing customers first?

Gail Goodman

It is definitely targeted at exactly the same customer base we're targeting now. We really feel our core DNA is about how to serve small businesses and nonprofits and serve them well, and really how to take challenging business problems and make them very simple, very straightforward, and make them have a high impact. So we like to think that the way we onboard small businesses and nonprofits to new solutions is part of what makes us great, and this takes advantage of those core competencies. It has high applicability across our customer base, and certainly we would market it first to our existing customers.

On the other hand, we do think it opens us up to yet another entry point for folks to come to us maybe first for product three and then we would back-sell them email marketing and survey. I guess the only other tidbit I will say about product number three is once again, it leverages our customers' customer database as a key asset for driving more growth for our customers. So it focuses on the top line of our customers.

Steve Wasserman

Michael, the more products and services that we can provide to our customers effectively the more sticky we become. So we're not looking at it as going to increase our retention rate, but it certainly will make us more valuable to our customers.

Michael Wong - ThinkPanmure

So, when you look at the attrition in the customers, it’s nice to see that it is relatively stable, but any sub segments within your attrition date that were weaker than historical offset by growth of others, and any flavor that you could provide there with respect to attrition in the customers?

Gail Goodman

Yes. Michael, we are, to be colloquial, all over the attrition numbers. As we were entering a tough economic environment, we were certainly feeling like if we saw anything, we'd see it there, and we are literally seeing really no significant – no changes, I won't even say significant, really no changes in the attrition pattern by market that gives us any indication that we're seeing the impact.

Steve Wasserman

And one other thing, Michael, I'm not sure that we've expressed this to you, but our customer base are not brand new businesses that are just putting up shingle and buying stationary and business cards. Our customers are people that have been in business for a while and have customers. So, we think that could be another reason – one of the reasons why we're not seeing any change in the attrition.

Michael Wong - ThinkPanmure

Last question for you, can you talk about the number of new regional heads that you are adding through the end of the year and do you have any plans to further expand coverage of that regional program that you guys are running?

Gail Goodman

Great question. We just added two new Regional Development Directors, one in New York, and one in LA. They actually happen to be in town this week getting their training and integration. And really, we were able to enter those markets because of national radio. So, we had always wanted to be in the larger markets, but felt like we could not provide air cover for the Regional Development Directors at enough scale to make them successful. So really, as we had been planning national radio, we were also at the point where we could plan to be in New York and LA.

So, they are just starting now. It will take them a quarter or so to get up to speed, to build the relationships they need in market, to start to have a significant seminar calendar but we do expect to see them having some impact late this year.

Michael Wong - ThinkPanmure

Gail, with respect to any further plans that has been covered [ph], are you looking to add beyond that as you look into ‘09?

Gail Goodman

Yes, we haven’t really gotten into the details of '09 planning yet, so this is all we got for this year. As we look at 2009, we are really trying to balance having regional resources that are ours and finding local experts who are able to deliver the same educational content we deliver and really trying to balance that out as we continue to test what we internally call our Local Experts Program or externally call Constant Contact University.

Michael Wong - ThinkPanmure

Thanks very much.

Operator

And for our next question, we go to Brad Reback with Oppenheimer.

Brad Reback – Oppenheimer

Hi guys. How are you?

Gail Goodman

Good.

Brad Reback – Oppenheimer

Just one follow-up on the RDD, can you talk about maybe what attendance has looked like, the growth you've seen there both people in meetings and how that's looked sequentially and year-over-year?

Gail Goodman

Sure. Without giving specifics, summer is a slow time for everybody. So, July and August are typically our slowest months. And not surprisingly, not a lot of people are going to seminars with us or with our costumers during these months. Early in the second quarter was strong, consistent attendance metrics. As we hit the summer slowdown, the number of seminars they're doing and the number of attendees has slowed down as well. I don't see any reason why we shouldn't continue to grow kind of at a normal pace in the second half.

Steve Wasserman

Yes, and Brad, the reason the RDDs are in town this week is because they are pretty much booked for September. So we expect the seminar activity to dramatically ramp up in September when people are back from summer vacation.

Brad Reback – Oppenheimer

Great, thanks a lot.

Steve Wasserman

Bye now.

Operator

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Ms. Goodman, I will turn the conference back over to you for any closing remarks.

Gail Goodman

Thanks everyone for joining us this morning. I look forward to connecting with you next quarter.

Operator

And ladies and gentlemen, this does conclude the Constant Contact second quarter 2008 earnings conference call. We do appreciate your participation and you may disconnect at this time.

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Source: Constant Contact, Inc. Q2 2008 Earnings Call Transcript
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