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Constant Contact (NASDAQ:CTCT)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Jeremiah Sisitsky - Director of Investor Relations

Gail F. Goodman - Chairman, 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

Brad Reback - Stifel, Nicolaus & Co., Inc., Research Division

Michael Huang - Needham & Company, LLC, Research Division

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

Ygal Arounian

Michael Anderson - Crédit Suisse AG, Research Division

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

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

Eric Lemus

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

Operator

Good day, ladies and gentlemen, and welcome to the Constant Contact Third Quarter 2012 Earnings Results Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Jerry Sisitsky, Director of Investor Relations. Please go ahead, sir.

Jeremiah Sisitsky

Thank you, Jenny. Good afternoon, everyone, and welcome to Constant Contact's investor conference call for the third quarter ended September 30, 2012. 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-K and 10-Q on file with the SEC. In addition, any forward-looking statements represent our views only as of today, October 25, 2012. 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 second quarter 2012 -- rather, third quarter 2012 financial results. This press release is available on the Investor Relations section of our website at www.constantcontact.com. Also available for download on our Investor Relations website is a presentation and our historical financial and operating metrics.

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

Gail F. Goodman

Thanks, Jerry. We delivered revenue of $63.8 million in the quarter, representing year-over-year growth of 17%, consistent with our guidance. From a profitability perspective, we delivered better-than-expected profitability, with adjusted EBITDA of $11.3 million, representing an adjusted EBITDA margin of 17.6%. We continue to generate positive free cash flow and grew our cash balance to $88 million, representing approximately $2.89 a share.

ARPU grew consistent with our expectations, and retention continued to improve. New customer additions, however, came in lower than our expectations. In the quarter, we added 35,000 gross customer additions as compared to our expectation of approximately 45,000, which resulted in 5,000 net new customers.

The largest part of the Q3 new customer shortfall resulted from the email side of our business. It was not a demand issue, but rather an execution issue.

Visitors and the number of trialers were consistent with our expectations, flat to up over last year. It was conversion of these trialers to paying customers that came in below what we've done in past periods.

We're in the midst of a significant expansion of the Constant Contact product suite. The combination of launching and managing multiple products at various stages of growth and the time and attention required in both evaluating and integrating SinglePlatform absorbed leadership bandwidth and resulted in less execution focus and discipline.

Over the course of 2012, we introduced a number of changes that in hindsight led to our conversion challenges. We made changes in the structure and organization of the sales team and sales compensation plans. We made these changes to accelerate our move to a multiproduct company and to improve conversion based on tests that had shown positive results.

The unexpected outcome was a decline in performance. We are taking steps to reverse the third quarter trends. We've already begun to make changes. Primary among these are strengthening the sales leadership team, refining compensation plans to ensure they both motivate and are aligned with our sales and strategic objectives and better optimizing the structure of our sales organization.

We're also aligning organizationally around improving conversion and have created a conversion across borders team. This cross-functional, cross-product team is adjusting messaging and customer experience around known barriers to conversion. We are refocusing our attention on the core customer success metrics to ensure our customers achieve quick success with our products.

These changes will not result in overnight improvements, but we believe they will result in recovering the declines relative to historical conversion rates. We've identified the execution gaps and are working aggressively to address them. While far too early to declare victory, the first few weeks of October have shown positive year-on-year conversion and customer addition improvements, a trend we hope to continue.

Turning to SinglePlatform. The rationale for acquiring the company was simple. They solved a vexing problem for small businesses, how to be easily discovered on web and mobile searches. After 4 years -- 4 months, 2 things are increasingly clear. First, the strategic rationale related to the acquisition remains compelling. SinglePlatform delivers great value in solving a tough problem for small businesses. And second, some elements of the selling model are less mature and less predictable than we had anticipated.

The direct sales part of the model is scaling quite well. It will simply take time to ramp the large number of recent direct sales hires into fully productive reps and to develop a repeatable model for hiring and on-boarding new reps.

The enterprise or franchise part of the selling model, which represents about 1/3 of the go-forward business, is underperforming. It's lumpier and more difficult to forecast. This area of the SinglePlatform business will take more time to develop and scale.

In the quarter, SinglePlatform added approximately 3,000 new customers, with roughly 1,500 unique new customers for Constant Contact. We had expected about 90% of the SinglePlatform customers to be unique to the franchise. But given our early cross-sell efforts and website lead-generation efforts, more of their customer adds were current Constant Contact customers. We believe the trends in coming quarters will be more consistent with our initial expectations.

We remain excited by the potential of SinglePlatform, and the basic fundamentals remain strong. Publishers continue to discover the unique value that SinglePlatform delivers, and the company has, in the quarter, signed up numerous partnerships, including White Pages, Axiom, and Infogroup. We expect these publishers to be deployed over coming months. With an unparalleled network of publishers, SinglePlatform is the place for publishers to get accurate, content-rich listing data.

Turning to our new products introduced earlier this year, each is growing nicely but not yet making meaningful contributions to overall revenue growth and customer additions. We continue to learn, iterate and refine these businesses.

Social Campaigns has approximately 80,000 users with improving free-to-pay conversion rates. Approximately 20% of these users are new to Constant Contact. We ended the quarter with more than 3,000 paying customers and a free-to-pay conversion rate of 4%. The first 6 months of the Social Campaigns product life cycle have been about optimizing the campaign creation experience. Our next priorities are to improve campaign publish rates and optimize campaign results for our customers. We will continue to improve product usability and functionality, test and iterate our positioning in pricing and optimize our coaching and on-boarding experience to increase our conversion rate.

To date, SaveLocal has launched over 5,000 deals. We continue to see positive trends for SaveLocal, increased average deal size, as well as improving merchant methods including revenue per deal, buying per deal and sharing per deal. More than 20% of the deals purchased have been generated from new consumers, an important and compelling statistic for small businesses looking to engage existing customers and drive new customers. Our next priorities for SaveLocal include continued product enhancements to improve ease-of-use and to optimize customer deal metrics.

Let me close with the following thoughts. For the full year of 2012, we're on track to deliver approximately 17% growth. The third quarter did not live up to our expectations and does not set us up for the anticipated acceleration in customer growth in the fourth quarter of this year and moving into 2013. We take responsibility for the failure in execution. The challenge is not our strategy but our ability to effectively execute while absorbing the transformational changes we're undertaking. We are aggressively taking steps to refocus on the fundamentals and drive customer growth.

We continue to invest to transform Constant Contact into a true multiproduct company, including investments in product integration, branding, positioning, pricing and packaging. The path is more complex and less linear than we anticipated. The road to a true multiproduct company may not be a straight line, but we believe these investments will deliver unparalleled success for our customers, great shareholder returns and a compelling opportunity for our employees.

With that, I'll turn it over to Harp to discuss the third quarter and outlook in more detail.

Harpreet S. Grewal

Thank you, Gail. Revenue in the quarter was consistent with our guidance and profitability ahead of our expectations. Across the 3 growth drivers, ARPU and retention trends continue to show strength, but new customer additions that Gail spoke to, underperformed, not because of the lack of demand or interest but execution. While our strategy remains compelling and the go-forward opportunity increasingly expansive, our sales execution in the quarter failed to meet our expectations.

Let me begin by first reviewing our Q3 results in more detail. From a revenue perspective, we delivered $63.8 million in revenue, representing 17% annual growth and within our guidance range. From a profitability perspective, we delivered adjusted EBITDA of $11.3 million, translating to an EBITDA margin of 17.6%, well ahead of our guidance range.

In the quarter, we added 35,000 gross new customers, including the approximately 10,000 SinglePlatform customers at the time of acquisition. We ended the quarter with 540,000 customers, an increase from 535,000 at the end of last quarter and 485,000 at the end of the third quarter of 2011.

The weakness in new customer additions was not a demand and/or interest issue. Business growth side showed strength and the number of trialers increased versus last year. Both the number of visitors and trialers were consistent with what we thought we needed in order to deliver an acceleration and customer additions in the quarter. Our failure to drive an acceleration in customers resulted from our inability to convert trialers to paying customers at rates consistent with historical performance. As Gail spoke to, we are working hard to reverse Q3 conversion trends and get these rates back to historical levels.

With respect to ARPU, our investment in improving cross-sell and aiding our customers grow their relationships continued to yield meaningful growth. Monthly ARPU continues to show gains in total of $40.35. ARPU was up $0.37 from $39.98 last quarter and increased $2.41 versus last year. Keep in mind that sequential ARPU growth generally slows down in the third quarter in line with summer seasonality. We expect to see continued gains in ARPU going forward as we drive to our longer-term target of $45 to $50 a month.

Customer retention, meanwhile, continues to remain within historical ranges and showed gains versus the same period last year. These gains, as with previous quarters, reflect our commitment to delivering success to our customers.

Let me spend a few minutes on our SinglePlatform update. From a revenue perspective, we expect SinglePlatform to deliver over $1 million in revenue in 2011 -- in 2012, consistent with our guidance. We continue to expect a rapid acceleration in growth in terms of 2012. We are, however, discounting our previous revenue expectations to account for less developed and mature franchise or enterprise part of their sales model. As such, we're expecting that SinglePlatform will deliver roughly $7 million in revenue in 2013. We continue to have high expectations for both the value proposition and revenue potential of SinglePlatform.

Turning to profitability, gross margin in the third quarter was 70.7%, up from 70.3% last quarter and down from 71.1% in the third quarter of 2011. For the fourth quarter, we expect a sequential increase in margin. Sales and marketing spend in the third quarter totaled $24.9 million or 39% of revenue compared to sales and marketing expense of $19.5 million or 35.8% of revenue in the third quarter of 2011. The increase resulted from higher spend in TV and radio advertising, as well as the ramping up of the sales team of SinglePlatform. For the full year, we continue to expect sales and marketing to be essentially flat on a percentage of revenue basis as compared to last year as we invest to grow the SinglePlatform team.

R&D spend in the quarter was $9.8 million or 15.3% of revenue. This compares to $7.3 million or 13.5% of revenue in the third quarter of 2011 and $9.8 million or 15.8% of revenue in the second quarter of 2012. R&D was consistent with our expectations and reflects our continued investments to deliver on our platform and multiproduct strategy. For the full year, our expectations are for R&D to increase as a percentage of revenue by approximately 200 basis points over 2011.

G&A spend in the quarter was $8 million or 12.5% of revenue and remained relatively unchanged at $7.8 million or 12.6% of revenue in the second quarter of 2012. Our stock-based compensation expense in the quarter was $3.8 million as compared to our guidance of $3.7 million.

Our income tax provision for the quarter was $2 million. The cash tax expense for the quarter was approximately $100,000, consistent with our prior guidance. Third quarter non-GAAP net income totaled $6.2 million or $0.20 per share, better than our guidance. We generated GAAP net income of $6.6 million or $0.21 per share compared to GAAP net income of $5.3 million or $0.18 per share for the same period in 2011.

Q3 results reflect a $6.1 million noncash benefit from a change in the fair value of a contingent consideration liability associated with the acquisition of SinglePlatform. Without the benefit of the contingent liability, GAAP net income would have been within our guided range.

Turning to the balance sheet. We ended the quarter with $88.2 million in cash and investments compared with $81.1 million at the end of the second quarter. We generated cash from operations of $10.9 million for the 3 months ended September 30. Free cash flow for the third quarter totaled $6.5 million after taking into consideration $4.4 million of capital expenditures. We would expect to end the year with roughly $95 million to $100 million in cash and investments, resulting in free cash flow for the year of roughly $20 million.

With that, I'd like to turn to the guidance. In light of the Q3 trends on customer addition, we are targeting revenue in the range of approximately $65.2 million to $65.5 million for the fourth quarter, representing year-over-year growth of 13% to 14%. We're targeting adjusted EBITDA margin in the range of 15.3% to 16%, translating to adjusted EBITDA in the range of $10 million to $10.5 million.

Non-GAAP net income per share is expected to be in the range of $0.14 to $0.16 per share based on diluted weighted average shares of 31 million. Non-GAAP net income includes an expected cash tax rate of approximately 10%. GAAP net income is expected to be in the range of $300,000 to $600,000, leading to GAAP net income per share in the range of $0.01 to $0.02 per share. GAAP net income per share includes stock-based compensation expense of about $4 million and depreciation of about $5.5 million.

Turning to the full year. Revenue guidance for 2012 is approximately $251.1 million to $251.4 million. Adjusted EBITDA is expected to be in the range of $36.5 million to $37 million for the full year, representing adjusted EBITDA margin of 14.5% to 14.7%. Adjusted EBITDA for the full year, as a reminder, is impacted by the meaningful investments we have made in SinglePlatform. Non-GAAP net income per share is expected to be in the range of $0.54 to $0.56 per share for the full year 2012 based on diluted weighted average shares outstanding of 31 million.

Non-GAAP net income per share includes an estimated cash tax rate of approximately 10%. GAAP net income is expected to be in the range of $6.6 million to $6.9 million, leading to a GAAP net income per share in the range of $0.21 to $0.22. This is based on an effective annual tax rate of approximately 30%, depreciation of approximately $19.5 million and stock-based compensation expense of about $14.9 million.

For 2013, we are targeting revenue growth in the 13% to 15% range and expect to expand adjusted EBITDA margins by approximately 100 basis points on an annual basis. This guidance layers in some of the third quarter weakness in conversion. While we're working hard to reverse these trends, we do not want to assume the gains until we can show that the actions we are taking are resulting in improved trends.

Let me conclude with the following thoughts. We are disappointed with our execution in the quarter and take responsibility for not delivering on expectations we set. We are focused on rectifying these execution challenges as quickly as possible.

We're encouraged that for the first 24 days of October, we are seeing trends in conversion and new customer additions ahead of last year. As we look out further, we continue to believe that we are uniquely positioned to deliver on an increasingly expansive opportunity which each of our 1,100 employees is committed to delivering.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Richard Davis from Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Does the 2013 outlook assume a trend line of conversion rates on email or an improvement?

Harpreet S. Grewal

The 2013 revenue guidance assumes that some of the weakness that we saw in the third quarter continue. Obviously, we're working hard to change those trend lines, but that's what we've assumed at this point.

Richard H. Davis - Canaccord Genuity, Research Division

And then the last time have you seen -- going back in the statistics to see when you had a decrease in conversion, was that in '08? Or does it feel like it's economy, or do you think it's entirely execution your part?

Gail F. Goodman

I'm going to take this one. It is really execution on our part. As we've grown, involves scale and complexity, we started to really focus on what I would call aggregate metrics and stopped looking at the underlying metrics of both [ph] Customer success. So in conversion, that's things like the percent of trialers you get a campaign out the door, the time it takes them to do that. And we stopped looking at operating kind of productivity metrics like sales calls, number of calls per rep, number of connects, amount of talk time. So what we've really done is renewed our rigor on the detailed metrics of every aspect of the business and gone below the top line result metric to the underlying drivers, which we know and understand well, and when we manage to them, we get the right outcome. So we're very confident that this is in fact execution, rigor and discipline. Very sorry we got here but very confident we can improve it.

Operator

The next question comes from Brad Reback from Stifel, Nicolaus.

Brad Reback - Stifel, Nicolaus & Co., Inc., Research Division

Gail, can you give us a sense of when this became apparent?

Gail F. Goodman

Yes. So we started to see some of the reduction in Q2 and actually began our changes actually in Q3, expecting, perhaps a bit optimistically, that we could turn that ship more rapidly than we could. So as we went into the quarter and saw demands, so visitors and trialers staying high, we were -- we really thought like we were still in the hunt until the last few days of the quarter, and we exited the quarter with an execution reversal plan already in place.

Operator

The next question comes from Michael Huang from Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a few questions for you. So first of all, so how are you thinking now about the expansion of the product road map and kind of launch of either CRM or mobile loyalty as you're kind of working through maybe more of increased focus and scrutiny around core email and sales execution? Like what are you thinking about in terms of timing of launch of new products? And does this kind of push that out a little bit?

Gail F. Goodman

Michael, we still have a tremendous amount of confidence in the strategy and where we're going. And we're not going to stop heading towards this really expansive, really compelling vision. But I think we will go there with less of a brute force turn of the ship like we did for example with [indiscernible] In February, and more of a testing our way into those launches. But we're not holding back on building, launching or learning anything. It is full steam ahead. I think we'll just go at it with more -- with maybe a little less all-in enthusiasm and a little more rigor and discipline.

Michael Huang - Needham & Company, LLC, Research Division

Got you. So I guess when you look at Social Campaigns, and I believe given the paid user metric that you provided us, I guess you probably saw a little growth there but probably not as much as you would have thought. So I was wondering, why do you believe you're not getting more conversion or more kind of growth in paid there? Is there anything that you're going to be -- that you're testing now or that you could employ that would actually help out that product area?

Gail F. Goodman

Yes. So we were pleased with the improvement in conversion from 3% to 4%. This is a steady rigor move things forward. The number one thing we need to do with Social Campaigns is get more of our free users successfully publishing a campaign. And at this point, that's about some product tweaks that we are well in process on but have yet to deliver to the marketplace. So it is a lot about iterating our way through creating simple, crisp success paths. It's in many ways the same disciplines I'm talking about on Email Marketing where we are -- need to be unbelievably rigorous about how many steps it takes for a small business to be successful, how much time it takes them to complete those steps and how great the results are once they do it. Because when we stay focused on the customer metrics, we ultimately drive our business metrics, no questions. And so the Social Campaigns team is rigorously focused on all of the steps it takes from first use to success, and they are tweaking, tuning and in many cases, even eliminating steps.

Michael Huang - Needham & Company, LLC, Research Division

Got you, okay. And I guess last one, so as we're thinking about Q4, I mean, typically this is a quarter where you're benefiting from some seasonal strength at least relative to Q3. I mean, given kind of what we saw in Q3, I mean, should we be expecting gross adds to pick up quarter-on-quarter in Q4? Or could we see another quarter of 35,000 or even worse in Q4?

Harpreet S. Grewal

I mean, I think in Q4, historically, it's been a sequentially stronger month -- quarter, excuse me. I think you should expect north of 35,000. And I think once again, we have 24 days in the books. And so the 24 days, we are seeing that some of the actions we've taken are leading to improvements both in conversion on a year-to-year basis and an uptick in new customer additions on a year-to-year basis. But once again, too early to call victory because we're only 24 days through the quarter.

Operator

The next question comes from Brian Schwartz from Oppenheimer.

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

Gail, Harp, I actually want to ask you a technology question. I'm just trying to understand here the strategy from the technology front. Is the goal here to eventually have one platform and have all of these products with a common interface on the platform? Or is the strategy to sell multiple products and just have APIs built into these different products?

Gail F. Goodman

Yes. Our goal really is to bring the products together in a way that makes it easier and more effective for a small business to use us for everything they need. So that will include a common platform, which is like the contacts database. It'll include common authoring tools and a consistency of metaphor across our products that once you use one, boy, it's going to be incredibly easy for you to use the next because not only will it look familiar, we'll have a starting point for you with all your branding assets and colors and all of that common content that you can share across. Ultimately, in the selling model, we believe small businesses will probably continue to want to start with a first product. Selling a suite or a platform play to our size customer we don't think is a winning strategy, but again, we'll test our way into it. I think the question becomes the second thing they do. Do you go from 1 product to 2 products or do you go from 1 product to a bundle? And our instinct is that's the moment to upsell them into a more compelling suite. So we're just going to start testing bundles. Those will probably be segment-specific because the set of products -- a retail customer might want to use looks very different than, say, a non-profit or a professional services organization. So we'll test our way into those bundles as we work our way into the common experience.

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

Gail, do you have a timeline at all or any sense on when this common experience, common database, common interface will be available for your customers? Is this something that should be available next year in 2013? Or will the development take longer than that?

Gail F. Goodman

Yes, you will absolutely see this rolling out in 2013, certainly the common database and the common offering. There's some other things we want to layer on top of that that we're not talking about yet that may take a little bit longer. But the first 2 building blocks, common contacts, common offering, are definitely 2013 deliverables. In fact, they're well underway and even are kind of in front of customers as we speak.

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

Great. And then, Harp, on SinglePlatform, it sounds like for next year, you're lowering your assumptions here for revenue. I just want make sure I have that correct. Was the original assumption for $10 million next year and then now it's $7 million? I think you did mention in your introductory comments about the enterprise sales going a bit slower than anticipated. Is that the main reason for the lower expectation next year from SinglePlatform? I'm just trying to understand the revision there.

Harpreet S. Grewal

Absolutely. That essentially is that. So it's we, at the time we acquired a company, we created -- we understood the business to the best of our abilities. And our thinking was about 1/3 of the go-forward customers and revenues was going to come from enterprise franchise. And so the $10 million, we would have thought about 1/3 would come from that. And that's where we're seeing the weakness. So as the direct sales model continues to scale, we can refine it, but that's essentially it.

Operator

The next question comes from Dan Salmon from BMO Capital Markets.

Ygal Arounian

This is Ygal Arounian calling in for Dan. I have a question on your ad campaign and what kind of success you guys are seeing out of that. And if it's sort of -- the customers that are coming in through that campaign if they're coming in and signing up for the email or any of the other products, if you try to drive them to specific products.

Gail F. Goodman

Yes. So when we measure mass media, so I assumed you were talking about the TV advertising.

Ygal Arounian

Right.

Gail F. Goodman

Yes. As we measure mass media, we use a variety of ways to do that. The first one is just lift in visitors and trials ultimately we'll measure the lift in brand awareness and use an econometric model to really get at the unique value that brought to us in our media mix. But the initial lift is as expected, and so we are seeing that lift in traffic and that lift in trials. What we're also seeing and will be part of the journey to multiproduct is that when we bring them to a multiproduct website, and if you visited constantcontact.com anytime recently, you'll see that we are presenting a more complete multiproduct experience there. Some of the folks we might have expected to start with email are starting with things like social or events or surveys or SinglePlatform. I think that is the reality of being a multiproduct company and something that we will continue to look at whether there's a way to direct experiences more completely, but we need to get to that multiproduct experience. And sometimes, we'll need to accept variability in individual product performance to reach the more strategic objective of the full suite of products.

Ygal Arounian

Okay. So the customers that are coming in and signing up for SinglePlatform or social, those are coming at the expense of email? Or are they incremental to that?

Gail F. Goodman

This is a modest variance, but we are diagnosing it at this stage that we are seeing a little bit of siphoning off of what would be email traffic into other products.

Ygal Arounian

Okay, great. And then I have a question, on last quarter, you guys gave a number on average products per user. You guys giving that number again?

Harpreet S. Grewal

Yes. So on the average product per user, we started giving that out about 6 quarters ago, and we will update that number every 6 months, so June quarter and then after the December quarter. So we'll update that number in the January earnings call.

Ygal Arounian

Okay, great. And then one last question on just I haven't heard you guys talk so much about CardStar. Maybe we can update on what's going on with that?

Gail F. Goodman

So CardStar continues to gain momentum now over 20 -- over 2 million users. And CardStar and that team are at the center of our future developments around loyalty. Given everything else we've been talking about, because that is not yet fully in market, we've been a little less talking about that. We have plenty on our plate to talk about, but we're very pleased with that team, with CardStar itself. And I'm very excited about the loyalty product, which actually is going into early test this month with real customers.

Operator

The next question comes from Michael Nemeroff from Credit Suisse.

Michael Anderson - Crédit Suisse AG, Research Division

This is Mike Anderson on behalf of Michael Nemeroff. First, can you comment on your hiring plans around SinglePlatform now that you have new expectations for 2013? Do you still intend to hire up to 75 salespeople by the end of this year, or are you going to cut that back a little bit?

Harpreet S. Grewal

I think we are cutting that back a little bit, not because the direct sales team is not leading to the gains that we expect, but we're realizing is for a company of that size -- and keep in mind that it's a reasonably small company, to bring in classes of 10 or 15 salespeople every month is very difficult for them to both recruit the right talent, absorb them, train them and get them productive. And so I think we made the right and a cautious decision to kind of scale that back and improve the underlying ability to kind of scale these teams.

Michael Anderson - Crédit Suisse AG, Research Division

Okay. Second, can you comment, just in general, around commercial email volumes across your current customer base? Have you -- I know there are always this talk out there that email is dead. But do you see volumes improving?

Gail F. Goodman

Yes. To be honest, I didn't look at end-of-quarter numbers, but we consistently see uptrends in the amount of mail volume going through our system. I know we had a couple of record days because we had some fun emails that went around through the course of September, and we continue to see good efficacy, good open rates, good click-through rates. And what we are starting to see in the industry at large is an open acknowledgment that email is what drives social traffic. That if you rely on the social feed, you're not going to drive the traction and engagement you want on your social channels. We even see the big social networks starting to more aggressively use email to pull us all back to their network. So these channels are now not individual or separable channels but a suite of marketing communication tools, and that's definitely what we're seeing.

Michael Anderson - Crédit Suisse AG, Research Division

That's helpful. Also, can you give us any metrics around EventSpot? I believe you had some impressive growth numbers last quarter. And if you can update on that with us?

Gail F. Goodman

So EventSpot continues to move forward nicely. They will more than double this year. They will do more than $10 million in revenue next year. It is our most mature second product. And the team continues to do great things including, this quarter, a little bit of rebranding, I think EventSpot is actually a new name to most folks, and new payment option. So prior to Q3, PayPal was the only available payment option, but we now use other -- now can enable other payment channels.

Michael Anderson - Crédit Suisse AG, Research Division

Great. And last question for me, just to think about ARPU going forward. It looks like you modified the calculation a little to include revenue from SinglePlatform but not the customer base. How should we think about that going into Q4 in terms of modeling it?

Harpreet S. Grewal

Yes, so just a little bit of rationale for that. One of the challenges we faced, that we talked about, is in terms of the bookings pre-acquisition, a substantial part of those bookings we couldn't recognize. And so ARPU was not going to be a clean number. This is our best attempt at creating an apples-to-apples comparison. I think what will happen is as we flow through 2012 and going to 2013, that corrects for itself. And so I think it will go to a more traditional definition of ARPU.

Operator

The next question comes from Richard Baldry from Wunderlich Securities.

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

I'm curious at this implied sequential growth for fourth quarter if the sub adds are trending at least early in the quarter in line to above what you had in last year, sequentially, you're up almost $3.2 million. You're implying and guiding something less than half of that. So with ARPU climbing, it's hard to really rectify those 2 things together. So could you talk a little bit about are there some assumptions that that trend just simply can't hold up for the balance of the quarter, or that ARPU can't hold up as well? So why would we see such a dramatic change? It actually would be a smaller sequential growth than you saw in September on what could be double or 3x [ph] the net adds.

Harpreet S. Grewal

Yes, absolutely. So I think a couple of things to keep in mind. Obviously, our third quarter conversion trends and our -- were disappointing to us. And what we wanted to do right now is really put the effort that we have in the third quarter and focus on improving those. It's great that for the first 24 days, we're seeing these trends. And if these trends continue, then I think one should expect that the revenue performance can be better than what we've guided too. But I just didn't want to and we just didn't want to get it up at [ph] The -- cart ahead of the horse at this point.

Operator

The next question comes from Peter Goldmacher from Cowen.

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

Can you tell a couple of anecdotes on where the execution -- what happened in execution that you noticed? And then can you talk a little bit about the kinds of things you're doing to fix this? Are you going to introduce lower introductory prices? Are you going to start making more outbound calls? What are you thinking?

Gail F. Goodman

Yes. So to give you a little bit of color into the kinds of things that happened, as we went through the year, we really introduced more complexity into the sales organization. We started splitting out specialty teams, separating out product specialties. We changed the comp plans and started testing segment teams, all of which really got us away from the basic sales productivity metrics, calls, connects, talk time, and the basic customer success metrics, frequency of trialware login, percent of them sending a test campaign that ultimately lead to conversion. So the first thing we're doing is just getting back to fundamentals on the rigor around these metrics and really making sure that we start with customer value in mind. So making sure those calls are oriented towards helping that trialer get that first successful campaign done and less focused on other messages, maybe even more strategic messages, that really distract from that main purpose. So the good news is, these are things we know how to do quite well. We just started to reach for doing things that were perhaps a little ahead of our customers, certainly a little ahead of our experience base. And so it's really as simple as getting back to those basics. We're already starting to see first-send rates go up and, ultimately, the conversion that comes from that.

Operator

The next question comes from Eric Lemus from Raymond James.

Eric Lemus

I guess I want to follow on with some earlier questions. But looking on 2013, you touched on email as well as SinglePlatform expectations, but has any of the other product lines like Social Campaigns or Daily Deals, when you look into the preliminary guidance for 2013, are you taking back expectations in those products as well? Or do you see those accelerating, decelerating? Where do you stand on that?

Harpreet S. Grewal

Yes, I think in 2013, I mean, once again, these are smaller offerings in terms of the materiality to -- on a -- for a company our size, but we do see them accelerating both in terms of their ability for acquiring customers and revenues. So that's certainly something that we are thinking. So obviously, we'll provide a little more detail on all of these on the next earnings call. We haven't quite finalized our planning for 2013, but we are anticipating that.

Gail F. Goodman

Everything's accelerating, with the exception of Email Marketing.

Eric Lemus

Okay, great. And then I guess just looking at overall in the space right now, we've seen a lot of M&A activity, and you guys might have a little bit more in your plate right now. But in terms of business-to-business marketing automation or lead management, is there any focus or thoughts towards that particular area of the market whether it be building something organically or through M&A?

Gail F. Goodman

You are right on the first part, which is we have a lot of things on our plate right now. And when we look at that space, and we know that space reasonably well, we really do think for our end of the market, the true S of the SMB, they are really attacking a problem that is a little bit advanced for our customer base. So we have a significant business-to-business customer base, think about 30% of our customers are business-to-business, maybe actually a little bit higher than that. And we think some of the, what I'll call the obvious elements of that lead scoring, which is really engagement scoring, which we have a good visibility to, are things we can help our customers with. But I'm not sure we need to go as far as the marketing automation platforms we've recently seen get consolidated. I think those are more sophisticated than our customers can adopt.

Operator

The next

[Audio Gap]

Unknown Analyst

and whether there's any specific targets that you want them to meet?

Gail F. Goodman

Well, I'll start with the targets. The target is very simple, get back to historical conversion rates and then get above historical conversion rates. The makeup of the team is highly cross-functional. So it's sales, it's marketing, it's our customer care team, it's our product teams, all coming together with a singular focus on customer success metrics. And they are literally going start to finish through the trialer experience and ensuring that we are doing everything to get the customer on a path to success. And the team is being very, I'll call it, kind of agile and aggressive about putting things into test, trying them. They're iterating very quickly and very successfully. It is an excellent model for future teams of Constant Contact.

Operator

The next question comes from Jeff Houston from Barrington Research.

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

So digging a bit deeper into SinglePlatform, I think the initial purchase deal included a $10 million to $30 million contingent earn-out. Is it safe to assume most or all of that is off the table now? Just an update there would be great.

Harpreet S. Grewal

Yes. So you're right, that there -- it had an earn-out that was judged every 6 months over a 2-year, 24-month period. I would say that the initial pieces, which is the first one would have been December 31, the next one would be June, relative to the trends and just the nature of a SaaS company, it's hard for them to kind of make those up. But we continue to have very high expectations, just as the team there has very high expectations. And so I wouldn't say that it's off the table in terms of the back end -- back part of the earn-outs.

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

Okay, great. Then following up on the social tool, who are you seeing the most competitively there?

Gail F. Goodman

That's a good question. There are some competitive products that do similar things, but there's really no one getting traction in the SMB end of the market. So I hate to have a non-answer here, but we really think we are uniquely set up to own the low end of this market.

Operator

The next question comes from Laura Lederman from William Blair.

Unknown Analyst

[Audio Gap]

on for Laura. Can you talk about what product contributed the most of the ARPU increase in the quarter?

Harpreet S. Grewal

Yes, I mean, so I think, once again, ARPU has 2 components to it in terms of driving ARPU growth. The first is on the email side, particularly as we help our customers and grow their relationships, the number of contacts. They move into higher tiers, and as such, they pay us more. That continues to be a strong contributor as it has been in the last 2 years that we've seen that growth in ARPU. So that was a strong factor. And then as SinglePlatform, one of the things that Gail noted on her prepared remarks is of SinglePlatform's almost 3,000 customers, 1,500 were existing customers. We hadn't anticipated that actually. We had anticipated if they were to have 3,000 customers, 2,700 or so would have been new to the franchise, but that was across our [ph] Opportunity in leading to ARPU growth. And then while the numbers are small, Social Campaigns and local deals continues to grow. Those -- so I'd say that's the split, list size growth and the new products.

Unknown Analyst

So you haven't seen execution issues impact the list size growth at all?

Harpreet S. Grewal

This quarter, we did not. It's really is -- as we kind of isolated the revenue drivers, I mean, we had ARPU expectations, retention expectation and customer add expectation. ARPU, we met those expectations. Retention, we're consistent with our expectations and when we look at the funnel for customer add, visitors met our expectations. The number of trialers met our expectations. There wasn't a demand issue. It really was isolated to the conversion of trialer-to-paid.

Gail F. Goodman

And those really are at Constant Contact different teams. So our sales coaches work with the trialers and our award-winning customer care team works with our existing customers.

Unknown Analyst

Great. And then can you talk about the average list size for customers that are using the paid social product? Has this been trending up from the second quarter?

Gail F. Goodman

The list size in this case being fan base?

Unknown Analyst

Correct.

Gail F. Goodman

Yes. To be honest, I have not looked at that level of detail on the Social Campaigns paying customers.

Harpreet S. Grewal

I mean, I have a number but I don't think we disclosed it. But we did see nice -- actually, we continue to see nice transpose and conversion rates. All the things that you look at on the number of growth in fans, average fan base, all of those that -- we have 4 or 5 key metrics that we follow. All of them, if I looked at from June through September, trended in the right direction.

Unknown Analyst

And last question for me, is there any update on the U.K. expansion?

Harpreet S. Grewal

Yes. On the U.K., so we went -- we talked about the fact that we opened up an office in the second half of 2011 there, and we made a focused and disciplined investment. And what we're finding in the U.K. is we're not getting the results out of U.K. relative to incremental revenue and customer growth. The learnings we're getting from that investment are invaluable to us, and I think those include the fact that for markets like the U.K., leveraging a partner-led model is going to be more efficacious, so pivoting towards that. But it is not yielding kind of the top line gains that we expected in 2012.

Unknown Analyst

So does this have anything to do with the lowered expectations for email customers for 2013?

Harpreet S. Grewal

Really not. The U.K., I would say, is a small part of that. I'd say, right now, as we looked at guidance for 2013, and keep in mind that we'll come up with more details and perspectives in 3 months. But as we looked at guidance, it really was looking at the trends and conversion in North America and saying we don't want to bank on improvements until we see the improvements. And once again, it's great up to the first 24 days of October, we're seeing year-on-year improvements. But we don't want to bank on it, so it's really that's the key driver.

Gail F. Goodman

I would say that and the lower starting point of customers. 10,000 less customers has a pretty significant flow-through revenue impact.

Operator

Ladies and gentlemen, that is all the time that we have for questions today. I would now like to turn the call back over to Gail Goodman for closing comments.

Gail F. Goodman

Just want to thank you once again for joining us on the call. We are committed to extending our leadership position as the recognized, trusted marketing solution provider to small businesses. We will leverage our 0.5 million customers and our expansive channels to small businesses. Our confidence in our strategy has never been greater, and we are committed to our vision of providing a full suite of engagement marketing products to our small business customers. We're confident over time our efforts will produce long-term returns for our customers, shareholders and employees. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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