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Constant Contact, Inc. (NASDAQ:CTCT)

Q2 2008 Earnings Call Transcript

August 12, 2008 8:30 am ET

Executives

Mary Norton – Director, IR

Doug Shaw – President and CEO

Scott Landers – SVP and CFO

Analysts

Richard Davis – Needham & Company

Ralph Schackart – William Blair Fiscal House

Zach [ph] – JP Morgan

Ross Macmillan – Jefferies & Company

Kirk Materne – Banc of America

Operator

Good morning, ladies and gentlemen, and welcome to the Monotype Imaging second quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Ms. Mary Norton, Director of Investor Relations. Ms. Norton, you may begin.

Mary Norton

Thank you, and good morning, everyone. Thank you for joining us for our second quarter conference call. With me this morning, our President and Chief Executive Officer, Doug Shaw, and Senior Vice President and Chief Financial Officer, Scott Landers.

Today’s discussion will reference certain non-GAAP measures such as adjusted EBITDA, and non – I’m sorry, net adjusted EBITDA, which are intended to serve as complements to results provided in accordance with generally accepted accounting principles. Reconciliations with these non-GAAP measures can be found on our Web site, along with a link to today’s call under Events and Presentations in the Investor Relations of our Web site at www.monotypeimaging.com. Both the call and the supplemental financial information will be archived on our Web site for one year.

Before we begin I’d like to remind everyone that matters we are discussing this morning and the information contained in the press release issued by the company earlier today announcing our second quarter and year-to-date financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements including predictions, estimates, expectations, and other forward-looking statements generally identifiable by the use of the words believe, will, expect, anticipate, or similar expressions are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, participants in today’s call are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of today’s date, August 12, 2008. Information on the potential factors and detailed risks that could affect the company’s actual results of operations is included in the company’s filings with the SEC. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our second quarter press release or on this morning’s conference call other than through the filings that will be made with the SEC concerning this reporting period.

And now, I’d like to turn the call over to Doug Shaw for a quarterly review, Doug.

Doug Shaw

Hello, everyone, and thank you for joining us today. In a few moments, Scott Landers will take you to our numbers in greater detail. But first, I’d like to give you my perspective on how we’re doing, where we’re going, and how we intend to get there. We’re coming up a great second quarter. Our traditional businesses are strong. Our newer businesses are enjoying double-digit growth. We continue to execute against our growth strategy, and we are on course to achieve our financial objectives.

This solid momentum is demonstrated in our second quarter results. Total revenues increased 12% quarter-over-quarter to a record $28.8 million driven by strong performance across all areas of business.

And the printer market that is expected to grow at an overall annual rate of 6%, our printer revenue growth quarter-over-quarter significantly outpaced the overall market as our technologies, particularly our driver and color products, were incorporated into more units. The balance of our OEM revenue grew at a double-digit rate as we continue to increase our penetration in the mobile phone, digital camera, set-top box, and navigational device markets.

Our revenue from the creative professional business was also up 12% thanks to continued growth in e-commerce sales. It’s worth noting that we are able to achieve this revenue growth while expanding our margins. Our gross profit margins hit 90%, including amortization of acquired technology, that’s up from 87% in the first quarter of this year, and 88% in the second quarter of 2007.

Net adjusted EBITDA, which excludes expenses related to the recent secondary offering and the non-cash foreign exchange loss on our inter-company loan totaled $13.5 million. That’s an increasing of $1.6 million or 14% over the second quarter of last year. It’s also a new quarterly record for us. As Mary said, our calculation of net adjusted EBITDA is provided in the Investor Relations section of our Web site.

From a cash perspective, we remain well-positioned upon our continued growth through generated cash from operations of $17.4 million.

In other news, we recently strengthened our Board of Directors with the appointment of Bob Lentz. Currently the President and CEO of Permission TV, Bob brings a wealth of experience to the Monotype Imaging Board, including more than 25 years of financial and operational experience in the technology industry. With his broad industry knowledge and strong leadership skills, he will be a valued asset to us as we continue to grow the company.

Another major highlight of the quarter was the appointment of our new CFO, Scott Landers. Scott joined us in early July, replacing Jackie Arthur who left to pursue a new opportunity. We’re very fortunate to have Scott with us. He brings more than 15 years of experience in the global software and public accounting industry. Most recently, he served as Vice President of Global Finance at Pitney Bowes Software, a $450 million division and a leading global provider of location intelligent solutions. He also spent ten years in finance at MapInfo after starting his career at Coopers and Lybrand.

At this point, I’d like to turn the call over to Scott for a more detailed look at the quarterly financial results. And I will conclude with an update on our strategic initiative. Scott.

Scott Landers

Thank you, Doug, and good morning, everyone. I would like to start by reviewing our financial performance, highlight some of the major drivers in our business this quarter, and then discuss the outlook for the remainder of the fiscal year. To reiterate Doug’s comments, we had a great second quarter and the business is on track to meet our growth targets for the year.

Revenue in the second quarter was $28.8 million, up 12% quarter-over-quarter and 5% on a sequential quarter basis. Our growth was driven by several factors. First, OEM revenue increased $2.2 million or approximately 12% quarter-over-quarter. Our traditional printer business outperformed the expected laser printer market growth by more than 50% as printer OEMs continue to add more of our technologies to their devices.

The balance of our OEM business generated double-digit growth quarter-over-quarter benefiting from increased penetration in the mobile phone, digital camera, and personal navigation device bases.

On a sequential quarter basis, we benefited from higher unit shipment volumes and the timing of certain contractual payments. As we mentioned on our last call, we have a few customers who only pay us in the second, third, and/or fourth quarters.

Our creative professional business also grew at a double-digit rate, increasing $900,000 or 12% from the second quarter of last year. This growth was driven by a significant increase in revenue from our e-commerce side. The growth in e-commerce revenue was partially offset by lower direct and custom sales, which tend to be less predictable and more sensitive economic conditions.

Gross profit margins, including the amortization of acquired technology, were 90% of sales in the second quarter of this year, compared to 88% in the second quarter of last year. This is primarily due to product mix. Margin improvement reflects the continued synergies in the Linotype acquisition and a higher percentage of total OEM revenue coming from driver and color.

We also received a higher percentage of creative professional revenue from the e-commerce sales quarter-over-quarter, which generate a higher margin than revenue related to custom work.

Operating expenses, specifically, marketing and selling, research and development, and general and administrative expenses, totaled $15.2 million for the quarter, up $2.9 million or 23% quarter-over-quarter. Of this increase, approximately $600,000 relates to higher non-cash stock-based compensation expense, and approximately $700,000 relates to expenses associated with our secondary offering. In addition, approximately $600,000 relates to cost associated with being a public company. The remaining $1 million, which represents an 8% increase in operating expenses, relates to an increase investment in personnel and marketing to support our growth initiative.

Other expenses declined approximately $2.1 million quarter-over-quarter. This was driven by lower interest expense resulting from a combination of lower debt balances and lower interest rate. This is partially offset by foreign exchange losses of $1.2 million, primarily on our inter-company loan and currency swap.

Our effective tax rate for the second quarter was 44%, compared to 41% in the second quarter of last year. The increase in the effective tax rate was primarily due to the expenses related to our secondary offering, which were not tax deductible.

Net income for the quarter increased to approximately $3.2 million, up $1.2 million or 62% compared to the second quarter of last year.

On a per share basis, we generated positive earnings of $0.09 per diluted share in the second quarter of 2008, compared with a loss per diluted share of $4.95 in the second quarter of 2007. The loss resulted from the $16.5 million reduction in net income available to common shareholders for the accretion of convertible, redeemable, preferred stock. Our preferred stock was fully converted and redeemed in conjunction with the IPO last July, and we will not see this charge going forward.

Non-GAAP adjusted EBITDA in the second quarter was $11.6 million, compared to $11.9 million in the second quarter of last year. Net income and non-GAAP adjusted EBITDA include some items worth noting in the second quarter of this year. First, we spent approximately $700,000 in connection with the offering of our securities. This cost of G&A expenses higher as they were not tax deductible – as they were not tax deductible, they also resulted in a higher than anticipated tax rate.

We also had a loss of $1.2 million related to predominantly non-cash foreign exchange fluctuations on our inter-company note and currency swap. During the second quarter, we entered into a long term currency swap to reduce the foreign exchange fluctuation that we have experienced year-to-date. So we expect foreign exchange to have less of an impact on our results going forward.

Excluding the impact of these items, net income for the quarter was $4.6 million, diluted earnings per share was $0.13, and net non-GAAP adjusted EBITDA was $13.5 million. As Doug pointed out, this reflects the 14% increase over the second quarter of last year, and sets another quarterly record for us.

Moving on to the balance sheet, cash and cash equivalences as of June 30th, 2008 stood at $23.8 million, compared with $19.6 million as of December 31, 2007. Totals at outstanding at the end of our second quarter was $118.5 million, compared to $131.4 million at the end of last year.

During the quarter, we paid $9.8 million against our First Lien Credit Facility. Of this, $6.8 million was related to the annual fallback clause in that agreement, and the remainder was due to regularly scheduled monthly debt payments.

Those are the key financial highlights of our second quarter. And now, I’d like to turn our attention to the outlook for the full year.

Based upon our year-to-date performance and our current outlook, we remain confident that we will deliver results in line with the full year guidance that we provided in May. We continue to expect revenue in the range of $112 million to $116 million for the 2008 fiscal year, reflecting top line growth of 7% to 10%. We expect gross margins, including amortization of acquired technology in the range of 88% to 90%. And we expect operating expenses to be in the range of $66.5 million to $68 million. We also continue to expect diluted earnings per share in the range of $0.38 to $0.43, assuming a full year effective tax rate of 45% and a fully diluted average share count of 36 million shares. Finally, we continue to expect our non-GAAP adjusted EBITDA to be in the range of $49 million to $52 million.

Now, I’d like to turn the call back over to Doug.

Doug Shaw

Thank you, Scott. At this point, I’d like to shift our focus to strategies. Specifically, how do we intend to grow our business? Our company has always had a strong focus on working with the industry leaders in each of the markets that we serve. We focus on capturing key design wins among the leading companies. Then we’ll leverage that leadership affiliation to drive new business growth.

We used this strategy in the late 1980s when we introduced scalable type with the Hewlett-Packard laser printer line. We deployed the same strategy in the mobile phone space where we gained a major foothold for our contract with industry-leading Nokia. When we entered the personal navigation device market, we focused on Garmin, a leader in that space. And our relationship with Sony put us at the forefront of other consumer electronic markets such as digital cameras. This strategy enables us to pursue incremental growth from a position of strength.

With this as a background, I’d like to provide an update on some of our key strategic initiatives to drive growth. First in that list is to increase our leadership in the laser printer market with enhanced font, color, and printer driver technologies.

We made significant progress on that front in Q2 with introduction of our universal font scaling technology or UFST version 6.0. We’re seeing more organizations move from stand-alone printers to multi-function devices, and we’re seeing more OEMs enhancing their LCD control panels to expand printer capabilities. The ability to display high quality legible text on the control panel is critical for ensuring ease of use for accessing the internet, retrieving email, or doing animated instructions. UFST 6.0 addresses these needs by enabling OEMs to more easily display multi-lingual text in addition to ensuring high quality printer output.

As our customers pursue growth in regions such as Asia Pacific, we’re working with them to help leverage this opportunity through innovations such as SmartHint technology, which UFST now support. Our SmartHint technology allows Chinese, Japanese, and Korean characters to display clearly and distinctly on control panels even at very small text sizes. We believe our solution is superior to other vendor’s offerings, and has a major competitive advantage for us.

Also in the second quarter, we released our Macintosh printer driver development kit in support of this growing base of customers. We also released an update to our printer drivers that support the Microsoft’s XML Paper Specification called XPS, which is part of the Vista operating system. Customer feedback in the quality and performance of our XPS solution has been excellent.

The next strategy I’d like to highlight is to increase our penetration within existing mobile customers and to continue our strong account penetration with converging – within emerging consumer electronic device categories. We’ve had several successes in this area in the last few months. For example, we’re seeing growth in the mobile phones as our existing customers sell more units.

But the story behind the growth is more than share volume. Smart phones were first to adopt our scalable fonts and font technology. And now we’re extending down market to midrange and even low-end phones. To further this momentum and to increase our market share across the mobile space, we’re focused on several initiatives. First, we’re actively involved in (inaudible) organizations to help shape technology specifications as they pertain to fonts. Second, through our plug-in solutions, we’re working with OEMs and developers to more easily integrate multi-lingual, scalable type through platforms such as QUALCOMM, BREW, Symbian OS, and open source Linux. Third, we’re working with creative agencies and network operators such as Verizon Wireless in the US and Bell Mobility in Canada, which we’re exploiting highly legible, visually-pleasing fonts to enhance the user experience. In addition, we’re developing our solutions to be more suitable from size, performance, and flexibility perspectives.

The navigational device or GPS market is another area that we are pursuing. As we mentioned on our previous call, we recently signed a contract with one of the leaders in GPS Garmin. Originally, we expected to start receiving revenue from that contract in 2009, but Garmin actually started shipping a range of Nuvi automotive devices using our technology last quarter. And we received an initial royalty payment from the company a few weeks ago, which we will recognize in the third quarter.

Also in the navigational device market, we entered into a licensing agreement with a German auto electronics firm to provide fonts for factory installed GPS devices, one that will be delivered to a high-end luxury car manufacturer. We see similar opportunities with both this and other automotive electronic firms as demand for factory installed navigational devices grows.

Our third strategic initiative is to serve the needs of the creative professional. Here, our plan is to expand our online content and services and drive more traffic towards e-commerce (inaudible). E-commerce has been an area of significant success for us with double-digit growth quarter-over-quarter. This is due in part to our redesigned Fonts.com Web site, which now offers support in multiple languages including French, Spanish, and German, as well as improved usability, aesthetics, and performance.

We also continued to grow our Font Library. Fonts.com now offers more than 120,000 font products, and we have increased our effort to drive more traffic to our Web site via online advertising and the use of affiliate relationships. Fonts.com, in combination with Linotype.com and our other Web site, serve as our major creative professional distribution channels reaching customers worldwide.

The fourth strategy is to supplement our organic growth by pursuing complementary acquisitions, strategic partnerships, and third party intellectual property. Our 2006 Linotype and China Type Design acquisition continues to bear fruit, and we remain on the lookout for new acquisition targets.

To that end, we are in the process of recruiting a new Vice President of Business Development to focus on growth opportunities full-time. And we hope to have that person onboard by the end of our third quarter.

That concludes our prepared remarks. And at this point, Scott and I will be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Richard Davis from Needham & Company. Please go ahead.

Richard Davis – Needham & Company

Hey, thanks. First question is, are you doing anything or what’s kind of the process going on with regard to – some of the big search engine companies have font display, some of which are okay, some of which are not good, and some of which are sourced by the fact? Like if it was the New York Times, and I pulled it up through your search engine, I might see your font there. But can you talk about that, kind of how you’re working with some of the big search engines? And then what processes might be going on there?

Doug Shaw

Yes. Good morning, Rick. How are you?

Richard Davis – Needham & Company

How are you doing? Fine.

Doug Shaw

Good. Nothing specific, obviously, we’re talking to all of the major players. Most of the search engines leverage the operating systems as relying on – relying on. So Google if it’s on a Window’s platform uses the underlying fonts that ship with Windows. If it’s in the Macintosh platform, then they’re leveraging the Apples font scaling system. So really nothing specific, if people like Google get into new markets like the Android initiative on the mobile phone side, that is something where potentially we can offer incremental value down the road. But really, fonts are – you get a free ride if you’re a search engine guy if you’re relying – if you rely on the operating system, namely Windows and Mac.

Richard Davis – Needham & Company

Got it. And then, the question I sometimes get from investors is kind of looking out, say, two or three years you generate plenty of excess cash flow. And at that point, in two or three years from now, you’ll effectively have zero net debt on your balance sheet. How do you think about that cash buildup? I mean, obviously, you make acquisitions here and there, but barring a gigantic acquisition, you’ll still have plenty of excess cash. Would you start doing share repurchases? Have you thought about a dividend policy, not, obviously, immediately, but later?

Scott Landers

Yes. Hi, Richard. It’s Scott.

Richard Davis – Needham & Company

Hi, Scott.

Scott Landers

I think we would continually reassess what we’re going to do with our cash as time evolves. So I think currently, we’re focused on paying down the debt, generating lots of cash, and then using that to either do certain acquisitions or other acquisitions as we see them. I think as the business evolves, I mean take different growth tracks, it could determine what we actually do with that cash. We’ll re-evaluate that at a later time.

Richard Davis – Needham & Company

Okay. Thanks.

Operator

Our next question comes from Ralph Schackart from William Blair Fiscal House.

Ralph Schackart – William Blair Fiscal House

Hey, good morning, guys.

Doug Shaw

Hey, good morning, Ralph.

Ralph Schackart – William Blair Fiscal House

Thanks for the results.

Doug Shaw

Thank you.

Ralph Schackart – William Blair Fiscal House

So I guess – wondering sort of with the bigger picture in the economy question. Six or seven years ago, when the printer market sort of stalled, but still grew low single digits, can you compare and contrast how the business is better positioned for a potential slowdown like that again? I mean looking at the results today, looks like maybe you’re talking in more technologies have a broader products with – et cetera. But seeing just – sort of frame for us how to position – the business’ position today vis-à-vis six, seven years ago?

Doug Shaw

Sure. And these are rough numbers. But six or seven years ago, the way I remember it is units were actually down that year 2%, and our revenue was up about 4%. For the rolling half, it was only a 4% increase, but we were outperforming the market. Back then, we had a limited product offering. So we had a font solution. We were primarily a PCL font solution, and we didn’t have quote all those – to printer vendors. And I think what’s happened is now we’ve expanded until we have a bigger install base of printer vendors, and now we offer not only PCL, but post script solutions.

But I think our most significant add on is now we’re on the printer and color business. And these are targeted higher priced products. So we’re able to keep our font business basically growing at the market rate, and then the incremental performance over market rate is the printer and font business. So I think it’s – the short answer is, more customers and more IP to license to those more customers.

Ralph Schackart – William Blair Fiscal House

Great. That was really helpful, Doug. And then, on the growth drivers, it’s great that you were able to provide some more color. But I was wondering – just because we have to ask. If you could give us a full and a bit more color in terms of the stage or rollout, or the stage of penetration and where you are? Specifically, as it relates to the mobile device, camera, and the personal nav devices. I know that we’re in early innings, but maybe if you could sort of help us frame how you started at the beginning stages of growth.

Doug Shaw

Yes. We still look at it – I don’t have the percentage, but we’re – if I had a – we’re probably in 10% of the font. That’s the number we’ve used around here. So we’re at the very beginning stages of this. We do not have contracts with Samsung and LG. Samsung is number two in the market. And LG, I think, is number four. So there’s an opportunity for us.

On the digital camera side, the only customer we’ve announced is Sony. So there are other people, of course, in that space. So I think, really, in those two markets, we’re starting to get nice traction, but we have a lot of upside, and frankly, a lot of sales effort to get the major players we don’t have today to come aboard.

Ralph Schackart – William Blair Fiscal House

In terms of the technologies and increasing customers in those markets, are you going to market with sort of a core technology, and do you have an opportunity to potentially layer on more technology in this new emerging market going forward?

Doug Shaw

Yes. I think that’s a really good point. So for example, the Garmin relationship, they licensed our Latin fonts and a couple of type aces. So the way we look at it, it’s a nice introductory offering. It’s for targeted product line. It’s not across all their products. And so what we hope is hat over time that Garmin comes to us for their worldwide languages across all their products. And so if you ship more fonts, you ship more languages, the royalty goes up commensurate with that.

Ralph Schackart – William Blair Fiscal House

Great. Thanks, guys.

Dough Shaw

Sure.

Operator

Our next question comes from Sterling Auty from J.P. Morgan. Please go ahead.

Zach – JP Morgan

Hi, guys. It’s Zach [ph] in here for Sterling. How are you?

Doug Shaw

Good. How are you?

Zach – JP Morgan

Not bad. Hey, just a few questions on the printer business. So in the quarter, you talked about increased demand for drivers sort of helping you outpace the growth of the printer market. Can you talk about whether there are any particular drivers behind that?

Doug Shaw

Drivers behind the driver?

Zach – JP Morgan

No pun intended.

Doug Shaw

A stuttering challenge here. Yes, I think it’s a couple of things. There’s a fair amount of printer manufacturers who do drivers and fonts. So we’ve looked at it as a business where we don’t want to compete against these internal resources of our customers. But as they’re adding more – as printer manufacturers are adding more capabilities to their products, increasing the speed, increasing the multi-functional capabilities, printer drivers, I think, has a bit of their resources are now outsourcing that, particularly for new languages like Microsoft XPS.

So we’re seeing people how – traditionally would have said to us, “Hey, well let’s do it in-house.” Saying, “You know what, as long as you offer the right value proposition, we’ll look at bringing it outside.” So I think that’s been a driver. Also, the secret, from our standpoint, is we really do need to work with industry leaders in this business. And we’ll tap people like Ricoh and Konica Minolta, and Sharp, big customers that licensed our printer drivers, in some cases our color technology. And now, we’re starting to spread throughout their product line.

Zach – JP Morgan

Got you. Sort of on the printer business again, Scott, do you expect any major contract that renegotiations are coming up into the second half of this year and going into ’09?

Scott Landers

No, we don’t.

Zach – JP Morgan

Okay. And then on – last question here. On Garmin, you talked about receiving a large – receiving a royalty check a few weeks ago that will be recognized in Q3. Can you quantify that at all?

Doug Shaw

Yes, yes. I don’t – the significance – it’s not much.

Zach – JP Morgan

Okay.

Doug Shaw

But the significance from our standpoint is we’re in the market with the GPS device with our technology, which we, of course, can now showcase to other people in that space. But we do not to overplay this. This is a nice incremental revenue, but it’s not quote significant yet.

Zach – JP Morgan

Okay. That’s helpful. Thank you.

Doug Shaw

Okay.

Operator

Our next question comes from Ross Macmillan from Jefferies & Company. Please go ahead.

Ross Macmillan – Jefferies & Company

Yes. Thanks. I just want to go back to something you said on Garmin, which I think was Latin fonts first off. And my understanding was with most of the handset guys, you started with Asian fonts and kind of were going the other way. Can you just talk to how far you’ve got in terms of being that standard platform with some of the handset guys, where they want to use you possible to non-Asian fonts (inaudible) devices?

Doug Shaw

Yes. That’s a – I think that’s a good point. Typically, because Asian languages were a harder problem to solve that when we – well we signed on the mobile phone side, Nokia, Sony Ericsson, and Motorola, it started with the Asian problem first, and then worked backwards into the Latin one. Garmin had a specific product challenge for a Latin-based solution. So we solved that specific issue, but we hoped it out – basically, worked backwards with them. Then we (inaudible) the benefits or promote benefits of why they should look at our Asian solutions. So they’re kind of the converse of the typical one.

As far as how we’re approaching the market generically, it really is one of trying to promote the printer manufacturer – not printer manufacturer, the CE manufacturer has the opportunity to limit the number of skews they operate, to limit the number of different models with our technology. So they have the opportunity to ship an Asian Font solution or Asian mobile phone or navigational device that supports Chinese, Japanese, Korean, Indec, Arabic, and so on, really offering full capability and wanting them to ship less models. So one way we are promoting this is you can (inaudible) the money (inaudible) model. The other one, of course, is high quality scalable type, which offers the customers inherent advancements.

Ross Macmillan – Jefferies & Company

I guess I just want to – Nokia, I think when – I think Nokia is one who is gone standard across Asian and Latin. Is that correct?

Doug Shaw

Yes.

Ross Macmillan – Jefferies & Company

Have any other ones been that yet or you’re still going to work it through?

Doug Shaw

Sony Ericsson.

Ross Macmillan – Jefferies & Company

Okay. Great. And then, two questions, I guess, more financial ones. Just relative to our expectations, I guess, it’s a material hiccup in the sales marketing costs. Can you just talk about (inaudible) are coming in, what you’re standing on, (inaudible) sort of other initiatives? And then finally, just one on the guidance, I’m assuming that the adjusted EBITDA ranges, the adjusted EBITDA (inaudible) confirmation on that.

Scott Landers

So Ross, you’re starting to fade out a little bit, but I think I’ve got the couple of questions. One, on sales and marketing; two, was the guidance on adjusted EBITDA. Which is, the guidance is not adjusted EBITDA. And if you notice some of the unusual items we had in Q1 and Q2, which gave us to the net adjusted EBITDA, and those pretty much washed out for the first half of the year. So yes, our guidance is on adjusted EBITDA.

From a sales and marketing perspective, you see that going up in the statement. It’s really driven by two things. One, we actually redeployed from resources that we had within engineering into more of a sales and marketing capacity. So you’re going to see an increase there with the corresponding decrease. And we’ve also added, I think, three new headcount, and investing in certain territories overseas. So the majority of the shift is a transfer from engineering, where we’re putting more focus on pre-sales support for the customers.

Ross Macmillan – Jefferies & Company

So (inaudible) EBITDA, sales and marketing up?

Scott Landers

Yes.

Ross Macmillan – Jefferies & Company

Okay. Great.

Doug Shaw

Yes. And we just increased global fonts in support of our e-commerce Web sites.

Ross Macmillan – Jefferies & Company

Perfect. Thank you.

Doug Shaw

Yes.

Operator

(Operator instructions) And our next question come from Kirk Materne from Banc of America. Please go ahead.

Kirk Materne – Banc of America

Yes. Thanks very much. Doug, can you talk a little bit maybe about the seasonality in the creative professional business? I know you guys have had, obviously, strong e-commerce growth attained in the last couple of quarters (inaudible). Can you just talk about some of the trends we maybe should expect? As we head into the summer months, is that seasonally deep and then sort of pick back up, just so I can keep it for modeling purposes?

Doug Shaw

Sure. What’s happened traditionally, but you can’t always to – go to the – bank on it, is that our Q3 – so the summer months does slow down when it comes to our e-commerce sales. People are on vacation. Particularly in August in Europe, we see this slowdown in business. So if we track – when we track our business over time, Q3 is usually a soft quarter. And then Q4 rebounds to about the same level as Q1, Q2, in general terms. Not so much seasonality, but maybe the economic impact to our creative professional business.

I think we mentioned in prior calls and we did see it a bit this quarter, custom orders, when someone comes in and says that, “Will you design a custom (inaudible) for me for, let’s say, $250,000 million.” And then, have all of their users, all their employees use that across their corporation. That business was a little soft for us in Q2. So we’re expecting that for the rest of the year, that business will continue to be soft. It’s built into our guidance. So it’s kind of what we expect to happen. We think it’s our business that is most susceptible to some kind of economic slowdown. It is a discretionary buy. You don’t have to have or do custom-type it.

Ross Macmillan – Jefferies & Company

All right. Thank you for hose helpful facts. And then just – in terms of your comments around M&A going forward, are there any sort of general, I guess, hurdles that you guys look for and targets that – I know you can’t be too specific, but in terms of what we should expect you guys to be looking for. Is there anything in terms of payback from an EBITDA perspective? And I guess the other question I have along those lines would be, do you see of the opportunities for you guys being over and made some acquisitions over Asia Pac recently? Do you see more of the targets coming from that area of the world going forward as well?

Doug Shaw

Yes. As far as our focus – it really is IP first. So we think we’ve built a great support organization here. We think we have a great sales channel with our OEM channel and e-commerce channel. So what can we put through those channels from an IP perspective first? So obviously, to look at working with other font companies is right in our sweet spot. We also look at companies like printer companies, or mobile, or GPS device companies. And say, “What other technology do they need for their next generation products?” And so we talk to companies that maybe we could partner with there.

Our expectations are that year one, they’re financially accretive. It’s been our track record. I wouldn’t say Asia is a primary focus. It’s one of the focuses. We think there’s a lot to be done in Europe as well as Asia, as well as in the US. So we’re not specifically targeting Asia, but clearly that’s one of our growth opportunities.

Ross Macmillan – Jefferies & Company

That’s all I had. Thanks very much.

Doug Shaw

Okay.

Operator

Thank you. I am showing no further questions at this time.

Doug Shaw

Okay. Well, thank you. If there are no further questions, let me summarize briefly. We had a great second quarter. Our strategy is clear and proceeding and we remain on track to achieve our financial objectives for the year. Thank you all for joining us. We look forward to seeing a number of you in the coming weeks at the various investor conferences. Until then, we appreciate your time, and hope you enjoy the rest of the summer. Take care.

Operator

Please note that this conference has been recorded and will be available for replay. Please refer to the company’s Web site for more information. This concludes today's teleconference. Thank you for participating and you may now disconnect.

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Source: Constant Contact Q2 2008 Earnings Call Transcript
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