Constant Contact, Inc. (NASDAQ:CTCT)
Q1 2008 Earnings Call
May 8, 2008 8:00 am ET
Steve Wasserman - Chief Financial Officer
Gail Goodman - Chairman, President and CEO
Brad Reback – Oppenheimer
Tom Roderick – Thomas Weisel Partners
Peter Goldmacher – Cowen and Company
Richard Davis – Needham & Company
Laura Lederman – William Blair
Richard Baldry – Canaccord Adams
(Operator Instructions) Welcome to the Constant Contact First Quarter Earnings Conference Call. At this time I would like to turn the conference over to Mr. Steve Wasserman.
Welcome to Constant Contact’s Investor Conference Call for the first quarter ended March 31, 2008. I’m Steve Wasserman, Chief Financial Officer of Constant Contact. With me on our call today is Gail Goodman, Chairman, President and CEO, [Sheri Siziski], Director, Investor Relations is traveling and not here today. Thank you for joining us.
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, May 8, 2008 and should not be relied upon as representing our view 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 of any date subsequent to today. During this call we will be referring to the company’s adjusted EBITDA and non-GAAP earnings per share. These 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 are available in the press release announcing our first quarter 2008 financial results. This press release is available in the investor relations section of our website at www.ConstantContact.com.
In terms of the structure of today’s call Gail will begin by speaking to our first quarter’s business results first reported on April 11, 2008, then she’ll provide an operational update and close by providing some thoughts about our plans for the remainder of 2008. Then, I will then discuss the financial results and provide financial guidance before opening the call to Q&A. Now let me turn the call over to Gail.
We are very excited about our performance in the first quarter. We met or exceeded all of our key operational and financial metrics during the quarter and continue to build on the strong momentum we generated in 2007. Revenue for the first quarter was $18.2 million an increase 87% over the first quarter of 2007 and ahead of our guidance of $17.5 to $17.8 million. Adjusted EBITDA for the quarter was $804,000, our third consecutive quarter of positive adjusted EBITDA and also above our guidance of $200,000 to $300,000.
The revenue upside in the quarter was the result of two factors. First, we exceeded our expectations for net e-mail marketing customer additions in the quarter driven by a record number of gross customer additions. In the quarter we added 21,279 net new e-mail marketing customers bringing our quarter end total e-mail marketing customer base to 185,948.
Second, our average revenue per e-mail marketing customer increased to $34.57 in the first quarter up from $33.98 in the fourth quarter and up from $33.59 in the first quarter of 2007. This was due in part to strong early adoption of our archive add on service. This add on to our e-mail marketing product provides our customers a quick and easy way to host their past campaigns or newsletters for an additional $5.00 a month.
We believe the strong uptake for archive was due to pent up demand for this service which was introduced in the fourth quarter of 2007 and marketed to the customer base in the first quarter of 2008. We also saw continued uptake of our survey product during the quarter. We exceeded our adjusted EBITDA target as a result of the margin on the higher revenue and lower salary expense due to the timing of new hires during the quarter.
We were able to redeploy a portion of the excess EBITDA by increasing our sales and marketing spending above plan in the quarter. As we’ve indicated previously we will attempt to redeploy excess EBITDA to grow the business to the extent that we can spend prudently. We remain committed to delivering an overall 4% adjusted EBITDA margin for the full year.
For the first four months of 2008 our key customer metrics remain consistent within historical ranges. Our average e-mail marketing invoice remained in its historical range of $33 plus or minus $2.00. The percent of e-mail marketing customers paying us $15 or $30 a month remained in its historical range of 80% plus or minus 1%. And our monthly customer retention remained in its historical range of 97.8% plus or minus 0.5%.
We continue to expect each of these key customer metrics to remain within these ranges for the remainder of 2008. In this volatile macro economic environment we’ve been very diligent about monitoring small business trends. In particular we are focused on our customer attrition and have not detected any changes through the first four months of the year.
We collect data when a customer cancels its service and ask for the reasons behind the decision. Answers include; going out of business, no longer doing e-mail marketing among others. Year to date we’ve not seen any evidence of an increase in customer terminations attributed to going out of business. There is empirical data that small business formation has increased in prior economic slow downs. We’ve not seen recent small business formation data. We have seen small business hiring data.
ADPs National Employment Report indicated that non-farm private employment in the small business sector, that’s businesses with one to 49 employees, grew 53,000 jobs in March and another 42,000 jobs in April. This compares to large organizations with over 500 employees that lost 53,000 jobs in March and lost another 18,000 in April.
During the quarter we announced that Constant Contact has deepened its partner relationship with Intuit and we are now featured prominently in the Intuit marketing tool center. We are pleased to be associated with such a leading customer focused institution like Intuit. We share a common focus on the small and medium business market and with a shared commitment to making these organizations successful.
Intuit and Constant Contact are both committed to delighting our customers as well as providing exceptional value and support for our products and services. Further, our Intuit relationship is even more noteworthy because it marks our continued progress to developing technologies to assist in the easy transfer of contact data between Constant Contact’s e-mail marketing product and other third party applications.
Moving to our survey product, we had another strong quarter and are pleased with the continued traction that we’re getting from survey. Our 2007 marketing strategy for survey was characterized as launch and learn. Based on our learning to date, in mid 2008 we plan to make a pricing change for survey. We will be transitioning to a response based pricing model that’s more consistent with how customers view the benefits of the survey.
We believe this pricing change will be revenue neutral to Constant Contact but also believe it will be more intuitive to prospects and make it easier for us to acquire new survey customers. We plan to begin marketing survey more aggressively during the second half of the year after the pricing change has been implemented.
We’ve also been focused on making our solution more user friendly for Spanish language users. By adding a multi-lingual regional development director in the Miami market, hosting Spanish language Webinars and having multi-lingual call center support personnel we feel we’re better able to serve the broad base Spanish language community.
In the first quarter of 2008 we went live with our second co-location sight which has replaced our headquarters as our primary disaster recovery sight. We are also on track to go live with our second call center in the second half of the year. We have selected Loveland, Colorado as the location for a second call center and are establishing a sight that will have ample room for expansion.
Moving to sales and marketing. We have been very successful scaling pay per click, display and print advertising. We’re continuing to add channel partners and expanding the reach of our regional development directors. Each of these channels has been a very effective marketing method for attracting new customers.
We are still in the early days of the development of the e-mail marketing market for small organizations. We believe the North American market is less than 1% penetrated. We continue to educate the small and medium business marketplace about the power of e-mail marketing and believe we’ve made progress. That being said, the vast majority of small organizations do not currently utilize e-mail marketing. As a result we will continue to dedicate a significant portion of our marketing spending to increase market awareness.
During our Q4 call I stated that our marketing spend in 2008 would be heavily weighted to the back half of the year because we plan to roll out a major campaign beginning in September. A key goal of this campaign will be to educate more small businesses on the benefits of e-mail marketing. These launch plans remain on tract and I will provide statistics later in the year.
We are targeting a cost of acquisition in the $300 range for the full year of 2008. While we will only be reporting costs of acquisition metrics at year end for the full year we do expect our cost of acquisition to be lower in the first half of the year than in the second half. We expect to remain adjusted EBITDA positive in each quarter of 2008, however adjusted EBITDA will clearly see a quarter to quarter impact based on the timing of this marketing spend.
Also, we successfully completed a follow on offering that closed on April 30th. We are pleased that the offering was well received by our investors. I’d like to finish by saying I’m very proud of the entire Constant Contact team and what we’ve achieved. The entire team continues to execute as we scale our business and further strengthen our leadership position in the e-mail marketing space. We believe 2008 will be a strong year for Constant Contact. Now let me turn the call over to Steve for a review of our financial results.
I am also pleased with the results of the quarter. I plan to provide additional first quarter financial details and then I’ll provide financial guidance for the second quarter as well as the full year of 2008. Revenue was a record $18.2 million up 87% over the first quarter of 2007 and ahead of our revenue guidance of $17.5 million to $17.8 million.
As Gail indicated we exceeded our expectations for net customer additions which was driven by record gross customer additions. Additionally, archive and survey adoption contributed to the strong revenue growth in the first quarter and allowed us to exceed our revenue expectations.
Our total e-mail marketing customer base at the end of the first quarter of 2008 was 185,948 as compared to 104,265 at the end of the first quarter of 2007 a 78% increase. While we are not giving specific guidance with respect to quarterly net customer additions we expect the second and third quarter net customer additions to be similar to those of the first quarter with an increase in the fourth quarter our strongest quarter for net customer additions. This net customer addition pattern is what we had tended to see on an historical basis.
The fourth quarter tends to be our strongest quarter for net customer additions because business to consumer customers gear up for the holiday season, non-profit and association customers focus on year end fund raising and business to business customers work to build their sales pipeline for the upcoming year. The average revenue per e-mail marketing customer inclusive of all products was $34.57 in the first quarter up from $33.98 in the fourth quarter of 2007.
Much of the sequential increase was due to increased adoption of our archive add on and our survey product. We’ve launched the archive add on in the fourth quarter of 2007 and while its uptake has been better than anticipated its overall percentage penetration is still quite low and there is still significant room for growth. The adoption rate of our survey product has also been increasing, its overall percentage penetration is also low and there again is significant room for growth.
Our gross margin in the first quarter was 74% compared to the 72% gross margin from a year ago. As we discussed during the last quarter’s conference call we expected our Q1 gross margin to return to more traditional levels as the second hosting site came online during the quarter. Because the second site went live in the later part of the quarter the second quarter 2008 will be the quarter where we see the full impact of the expense associated with the second hosting site.
Sales and marketing expense in the quarter was $8.7 million as compared to $6.1 million in the year ago period. We continue to scale our online channels including pay per click and banner ads and as Gail mentioned we are on track to launch a significant second half marketing initiative. As a result our marketing expense will be heavily weighted to the back half of the year. Sales and marketing is an expense where we get natural leverage in our business model.
Because our install base of customers does not have any sales and marketing expense associated with it beyond channel partner’s revenue sharing as go our install base we get natural leverage from our business model. We can spend more in sales and marketing on an absolute dollar basis quarter over quarter yet sales and marketing will become a declining percentage of our total revenue. Sales and marketing expense as a percentage of revenue fell to 48% in the first quarter 2008 as compared to 63% of revenue in the first quarter of 2007.
R&D expense was $3.3 million in the first quarter as compared to $2.2 million in the first quarter 2007. We continue to prudently grow our engineering organization and plan to do so going forward. We feel that this is another area where we will get operating leverage from our business because we have built out the organization and will not be scaling engineering as rapidly as our revenue will grow. R&D expense as a percentage of revenue fell to 18% in the first quarter of 2008 as compared to 22% of revenue in the first quarter 2007.
G&A expense in the first quarter was $2 million as compared to $1.1 million in the first quarter of 2007. G&A expense increased primarily due to the costs associated with being a public company which we currently estimate in the range of $2 million per year. Total operating expenses for the first quarter were $14 million and we reported an adjusted EBITDA profit of $804,000. This was a significant improvement from an adjusted EBITDA loss of $1.8 million in the first quarter of 2007 and as Gail mentioned it was our third consecutive quarter of positive adjusted EBITDA.
As we mentioned before adjusted EBITDA is calculated by adding back depreciation and amortization as well as stock based compensation expense to GAAP operating income or operating loss. A detailed reconciliation of GAAP net income or loss to non-GAAP adjusted EBITDA was included in the press release filed this morning.
Interest income was $976,000 in the quarter. I do want to stress though our interest rates declined steadily in the first quarter and we exited the quarter with an average yield of below 2.5%. We did not pay any income taxes during the quarter and do not expect to incur any significant state or federal income taxes in either 2008 or 2009.
We generated net income of $338,000 in the quarter and as a result of being GAAP net income positive when calculated our diluted earnings per share the total is $29.1 million which was approximately a [inaudible] and a half shares higher than our basic shares of 27.5 million shares. Our GAAP diluted earnings per share were $0.01 and our base compensation of $560,000 equated to $0.02 per diluted share. Our non-GAAP diluted earnings per share were $0.03.
Turning to our balance sheet, we ended the quarter with $102 million in cash, cash equivalents for marketable securities. While we don’t give specific guidance from a capital additions perspective, in addition to the annual growth and capital additions that we need to support our customer and headcount growth there are two non-recurring capital additions for 2008 that I do want to specifically highlight.
We spent approximately $1 million in the first quarter that was related to the build out of our second hosting facility and we expect to spend approximately $3 million in the second half of this year related to the establishment of our second call center facility. Deferred revenue totaled $12 million at the end of the quarter and continue to grow steadily with our business. We ended the quarter with 348 employees, up from 318 employees at year end and we continue to anticipate significant hiring throughout the remainder of the year.
Now let’s turn to second quarter and full year 2008 guidance. For the second quarter Constant Contact expects revenue in the range of $20.2 million to $20.4 million. We expect adjusted EBITDA to be in the range of $400,000 to $600,000. Our GAAP net loss is expected to be $700,000 to $900,000 and our GAAP net loss per share is expected to be $0.02 based on a basic share count of 28 million shares. We expect FAS 123 expense to be $700,000 and we expect our non-GAAP earnings per share to be $0.00.
Now I’ll spend a minute updating our full year guidance. We are increasing our 2008 revenue guidance from what we said last quarter of $81 to $83.5 million to $82.5 to $84.5 million. This incorporates the better than expected results from our first quarter. Our new guidance represents revenue growth of 63% to 67% over the full year 2007. We now expect adjusted EBITDA to be in the range of $3.2 million to $3.6 million as we continue to plan to reinvest the margin on higher revenue and maintain the four percentage adjusted EBITDA target for the year.
Our GAAP net loss per share is expected to be in the range of $0.06 to $0.08 an improvement from the prior guidance of a loss of $0.09 to $0.11 per share. This is based on a basic share count of 28 million shares. We expect our FAS 123 expense to be $3 million and we expect our non-GAAP earnings per share to be $0.03 to $0.04 positive based on a diluted share count of 29.4 million shares.
Due to the timing of the second half planned marketing program we expect our adjusted EBITDA margin to vary quarter by quarter. We do expect the third quarter 2008 to have our highest adjusted EBITDA margin percentage for the year. In summary, we’re very excited about our results to date and plan to focus on strengthening our leadership position in a very nascent market. At this time we’d be pleased to take any questions that you may have.
(Operator Instructions) Your first question comes from Brad Reback – Oppenheimer.
Brad Reback – Oppenheimer
On the marketing spend that you guys are talking about for the second half of the year I appreciate you don’t want to give your competitors any advantage by telling us what it is too early but maybe you can give us some sense what type of testing you’ve done and what type of results we should expect to see from this.
We have experimented with this particular sale and marketing methodology in the past and have experienced with its impact on a small scale. We are using that to forecast its impact at a much larger scale that we’re going to execute it at in the second half of this year. While we’re not giving specifics as to the net customer additions we expect to see from it, we do expect to start to see its impact in Q4 although we will see most of its impact in 2009 and we are confident that we can hit the $300 cost of acquisition target for the year as a whole obviously the tail end of year will be the highest cost of acquisitions.
There’s no reason that we see any increase in the $300 cost of acquisition for 2009 also.
Brad Reback – Oppenheimer
If we look back to 2006 when you rolled out the radio and print and the acceleration you saw in 2007 should we be thinking along the same lines as we head into ’09?
I think we had small numbers as base working for us in a very substantial way at that time. Growth rates were obviously extraordinary. In terms of cost of acquisition I think we are expecting a very similar impact.
Brad Reback – Oppenheimer
With the new products with survey and archive could you give us a sense longer term what your expectations might be on penetration rate?
I’ll start with survey. Before we launched survey we did some research into the appetite from our customer base for a survey tool. At that point about a third of our customers were doing some form of online surveys with another product. About a third expressed interest if we offered it, another third not sure they’d ever take it. We think the opportunity side is two thirds of the customer base obviously not expecting to hit that kind of a mark.
Really still thinking that we have lots of opportunity for upside and that it could hit the kind of ranges we see with image hosting which is around a 30% penetration. I will remind everybody that we do think that the usage of survey will be more incidental so not necessarily have quite as great a recurring revenue characteristic as we’ve seen with e-mail marketing. We’re still in the early stage of understanding that usage pattern.
In terms of archive, a little harder to guestimate exactly how deep the penetration will be there. It does have heavy applicability in about two thirds of our customer base as well. Really our business to business non-profit and association markets are where we receive the most demand for that. It’s focused on people who write contents that has enduring value. A sales promotion generally does not have enduring value. Again, taking a hair cut off of that to set realistic expectations we think its probably lower than image hosting but we’re not sure how much lower.
Your next question comes from Tom Roderick – Thomas Weisel Partners.
Tom Roderick – Thomas Weisel Partners
There’s been a fair bit of noise in the past couple of quarters here with respect to your net adds, I was hoping you could just remind us what some of the artificial factors or some of the upside in Q3 and Q4 were with respect to the net adds in those quarters and then compare that against seasonal trends as you were talking about. Can you give us a sense or how the net add number came in this quarter relative to your expectations and then if you could repeat again your comments with respect to how we should think about net adds pacing out throughout the year and the growth of those.
Let me start with our historical experience and then I’ll turn it back to Steve to reiterate what we said about looking forward. Prior to 2007 our typical historical pattern was modest growth in Q1, a flattening through the slower summer season and then our biggest growth in Q4. The Q4 experience that a new watermark and we continue into the next year basically at the Q4 run rate and again repeat the pattern.
Two thousand seven was an extraordinary year and the story for Q2 and Q3 are different. In Q2 we saw the one time influx of customers from the Microsoft List Builder end of life. To remind everyone, Microsoft used to have an e-mail marketing product called List Builder. They decided to get out of the business in the second quarter of 2007 and through a series of e-mail promotions notified their customer base and suggested Constant Contact as the recommended destination tool for them to move to.
The lions share of the customers hit in Q2 it was really a one time influx of customers. I will also point out it was at zero cost of acquisitions so as you look at the year its one of the reasons why we had a better than expected cost of acquisition. Incremental customers no cost. Then in Q3 we also saw a one time influx of customers which we attribute to the press associated with filing to go public.
We filed in early July and as a result of that got a greatly enhanced amount of press coverage, blogging, mentions on sites well beyond the financial market that drove an increase in customers in July and August which are typically, by the way, are very slow months. By September we were actually back on our forecasted growth for the year.
We attribute that to a one time press opportunity, we wish we could replicate it and certainly we’ll continue to try to do great work in the PR front to do that but I think we’ll never have another moment quite like that one. I will point out that influx of customers also came in at zero cost of acquisition. As we look at the cost of acquisition we attained in 2007 which was $255 against a goal of $300 those were really the two main factors driving that down.
There were two influxes of customers with no cost associated with them. This year, absent a special event we really expect to return more to the historical pattern. I’ll pass it to Steve to talk about that.
Its just as Gail said, we’re expecting the Q1 net customer adds were 21,000 looking over the next couple quarters we expect similar numbers for Q2 and Q3 with the jump up in Q4. To put this into perspective 1,000 net adds at $30 a month is $30,000 of revenue in a month, it’s just not a big number. Our revenue growth is coming from two sources, its coming from growth in customers so we add one customer we grow revenue. Net customer additions are driving revenue.
In addition the average revenue per unit we’ve been able to move up what I didn’t say this call that I said last call is with survey penetration increasing, archive penetration increasing, we expect to continue to grow the average revenue for e-mail marketing customer by nickels and dimes per quarter. We’re just going to continue to move it up.
Tom Roderick – Thomas Weisel Partners
You talked about opening up another development or another support center here in Colorado. Can you give us a little sense as to the capacity of your support department and how you want to ramp that in front of this big marketing spend in the back half of the year? Can you give a sense as to the number of heads we’ve got to look for in that group and any metrics you track that gives you comfort that you’ll have the capacity to support what would hopefully be an acceleration in net adds and gross adds in back half of the year and into next year?
The great news is that we are very good at forecasting our growth. In fact, we’re doing something new in the sales and marketing space. We have enough experience with it to be able to give ourselves a reasonable forecast of what we expect to experience in terms of customer volume and we are really good at backing from that into how many support reps we need available on the phone.
We definitely know how many calls per customer, per month that we’ve experienced over time. It’s one of the monthly metrics that we watch. We do target to have an average call answer time of 90 seconds. We will, it’s obviously built into the guidance staff up in advance of Q4 and in fact, we do this every year, our very best call wait times are in August because we have the team that’s there for the September push ready and waiting and practicing. August will be the best time to call us if you want really quick response time. All of the costs associated with that are built into the plan.
The other thing is the number of support reps, as Gail said, we’ve got it planned out, and we have the specifics. If our second half marketing plan blows us away and we get three ‘x’ number of customers we’d be able to support them but instead of answering the call in 90 seconds it may be 180 seconds until we can staff up and train people. We feel very comfortable that we have a handle on it and we do have all the costs already built into our forecast and the guidance that we gave you.
Your next question comes from Peter Goldmacher – Cowen and Company.
Peter Goldmacher – Cowen and Company
Can you talk a little bit about the competitive landscape? It seems like in the past year everybody and his brother is trying to do an e-mail marketing company like Constant Contact. Can you talk a little bit about how you view the competitive pressures and some of your specific plans to make sure that you keep these guys down and you’re able to continue to execute and grab share and grow the market?
We continue to see new competitive interests and I’ll talk in a minute about Microsoft’s reentry into the market. We see our competitors really doing two things. Imitating our sales and marketing plans at increasingly short cycle times. This is why we are being a little more circumspect about the September launch than we’d like to be.
The second is that we see them trying to compete, imitating our product line. If you’ve been watching the competitive landscape Vertical Response, our largest competitor introduced a survey product recently. I wonder where they got that idea. We do see others competing on features. What’s interesting is that our research shows that we are rarely in a head to head competition for a customer.
If we are executing our sales and marketing plan well and we are reaching them in their local market with regional development director or they’re hearing about us word of mouth from our customers or they’re seeing our customers great looking campaigns through our footers they come to our website, are compelled by our offer. Wow, I can try it free and it will be $15 a month. They do not at that point, wait, and let me go do some homework.
We really don’t feel like in the average scenario we’re actually competing. We watch the competition but we don’t spend a lot of time worrying about them. We spend more time worrying about how to reach and develop the market. That said there’s probably one notable change in the competitive landscape which is in Microsoft Office Live Solution which is very deceptively named because it has nothing to do with Microsoft Office Suite of products.
Microsoft Office Live is a website domain name hosting and internet marking application suite for small businesses. They have introduced an e-mail marketing paid add on to that service. At this point that product is expensive, has significant usability challenges compared to us and the other competitors in the small business market and they have not been marketing it aggressively. At this point we don’t see it as a significant threat but its worth noting and watching and we certainly are doing that.
The main thrust of that product suite is hosting and domain name registration. They just have a little e-mail piece that’s in there and another thing they actually charge for support also. As Gail said, we don’t believe its features are comparable to not only Constant Contact but any of the other of our direct smaller competitors.
Your next question comes from Richard Davis – Needham & Company.
Richard Davis – Needham & Company
An ancillary follow up to what Peter asked. Some private companies, I don’t frankly agree with it, some private companies say well to engage with your customers what you’re going to have to do is not only do the outbound e-mail marketing but have analytics, databases and all these other things basically an ECRM. This comes from guys that are in really niche spaces so maybe that’s why they have to do that. Do you ever envision your firm going from where you are today to further back in or is your customer base not really relevant to them.
I’ll start by reminding everyone about who our customers are. Seventy percent of our customers have nine or less employees and 50% of them have four or less. While they are very focused on building great customer relationships the number of customers they have and their level of marketing sophistication and appetite is not really at the level where some of these more sophisticated analytic tools would be particularly helpful to them.
That said, we are very committed to helping them have as rich as possible an understanding of who their customers are, what their customers currently are interested in and that they offer, that’s part of what survey is all about. We’d like to help these small businesses who don’t have ECRM tools enjoy some of the benefits of great customer relationships.
Our product road map definitely includes building out the ability for them to capture customer data as early in the contact cycle as possible, build a richer, richer understanding of who those customers are and drive more and more business from the customers that already know them that they found in their local market. I’m not sure I’m being very specific to your question.
What’s interesting is we do not get a lot of demand for enhanced analytics. In fact, the general response to the current analytic set in the product is, oh my goodness, this is so much data I’m not even sure all the things I can do with this. We are finding that our current analytic infrastructure is more than adequate for out customer base.
Richard Davis – Needham & Company
An architecture question, are you anywhere near a capacity limit with outburst e-mail in terms of as you go from 180,000 to 200,000 to 300,000. Is there any point where you have to do any kind of either architectural rework or is it just capacity with regard to your carriers.
Specifically in regard to the mailing farm, we have really unlimited scalability by adding servers to that farm. We do not see any break points and we’ve been able to scale our burst e-mail sending to really not run a significant queue at any time during the day for our customers now sending.
Your next question comes from Laura Lederman – William Blair.
Laura Lederman – William Blair
Following up on the competition thought, when you were going on the road and people where calling they called and said what about Vista Print if they come up with a product or what about Google. A little bit of thoughts on those vendors and whether you think they had a product they’d be able to compete and what their issues would be. Separately I was just perusing the websites of some of the competition and noticed that iContact mentioned that they had a very large customer base and was wondering if you see them at all.
Let me start with emerging competition from larger vendors. When we think about that we are appropriately paranoid about market entry from other folks. We worry a little bit more about people who have experience in the small to medium business market who understand that customer base need including their support need. We have found particularly for this product some touch is absolutely required to help small businesses be successful.
Small businesses would much rather pick up the phone than drop an e-mail for support. When we look at Microsoft, Google, we don’t see a business model that has welcomed phone calls from people paying them $30 or less a month. We expect that we could see an entry there but we don’t worry about that necessarily being successful as it might be coming from someone who as proven they’re willing to pick up the phone and help small businesses like our very good partner Vista Print who our basic strategy is make sure they have a really great offering through their partnership with us and hope that they’re never tempted to enter it directly.
In terms of iContact, they’re definitely a real competitor in the marketplace. I think they have roughly low 20,000 of customers. They also publish a user number which I assume is their free trial number for not their converted customer. Their total customers is around our net adds for the first quarter. We will continue at this pace to accelerate away from them. We don’t spend a lot of time worrying about them but they’re definitely a real competitor in the market.
iContact competes on features, RSS Blogs and when we surveyed our customers less than 5% had actually read a blog let alone use a blog. They’re just competing differently than we do. We’re competing on survey, east of use, etc. They’re competing on features. We just don’t believe that’s what our customer base wants.
Laura Lederman – William Blair
My final question is if you look at what happened in Q1 in terms of the customers looking at the archive product and the pent up demand for that. Does that make having and ASP increase sequentially more difficult because you mentioned you expect ASP increases as you move through the year. I was wondering how that happens when maybe some of the demand for archiving in the last quarter came from that pent up demand.
As long as we continue to get additional penetration the ASP will go up. We certainly don’t want to imply that archive is penetrated. As Gail mentioned we hope to get roughly in the range of our image hosting penetration which is in the 30%. The archive and the survey penetration are single digits.
We won’t get another $0.60 jump though. That is probably not repeatable, that’s why we said nickels and dimes per quarter.
Laura Lederman – William Blair
I have one quick follow up question which Intuit, I realize that relationship is new but any early thoughts on how that’s gone.
It is a new instance of our relationship with Intuit. We had that partnership with Intuit for years. It is going well. It looks very much like our other channel partners which is they will generate a nice volume of customers for us but not change the shape of our overall curve.
Your next question comes from Richard Baldry – Canaccord Adams.
Richard Baldry – Canaccord Adams
Can you talk of the segway on the partnership discussion about any thoughts on international whether that would be something you’d looked at via partnerships to try to minimize the risks associated with those kind of moves and them maybe about broadly in the domestic market about your thoughts on other partnerships types of companies that would be attractive to work with.
I’m going to start at the second half of that and talk about other types of partnerships that we’re developing. There are a few places where we are finding some really nice sweet spots. The number one place being the franchise market where we go to the franchisor they bring us to their franchisees. The fit here is typically with franchises that have less than 500 stores. You get much bigger than that and they’re building large internal IT platforms.
When you think about it their franchisees are really small businesses. The added benefit we have to a franchisor is that we have the ability to use our template architecture to have them actually create the monthly news letter content included and we can publish that down just into their franchisee account. The franchisee can come in, change a few things but mostly just upload their list and hit the send button. We take even one more step which is writing the content out of the mix.
Corporate gets to control the brands and the message, the franchisee gets to control their own list and their own sending time. It’s a great fit and we have been very active in recruiting franchisors and selling through with them to their franchisees. That’s a great opportunity for us and one that is actually growing faster than the base business today, although it is small in the overall scheme of things.
Gail talked about the franchisor which is a great market those are some of the larger resellers that we have over our 2,300 active channel partners the lions share of them are just small businesses with strong touch with their customers but limited reach. We are adding over 100 small channel partners each and every month. People can just go on, sign up on our website and become a channel partner and help us distribute the products.
We are still growing that area dramatically but again not at the same pace as our business but for, Gail said the franchisors.
Hoping back to international, we as a team keep evaluating that opportunity versus the near term opportunity in North America and making a decision to defer that opportunity for the future. Localizing the product will be the easier part of the challenge. For us, its considering how we provide local support and the kind of touch that we think is critical to the success of the model.
Per your suggestion it may make sense to examine partnerships for that we just have not even begun that kind of investigatory work yet.
Richard Baldry – Canaccord Adams
In terms of the balance sheet you now clearly have significant resources there. Are there any thoughts on how to best employ those? It doesn’t look like buying competitors would be a great idea because your costs of customer acquisition would imply that buying them wouldn’t probably be too attractive for a competitor you’d be better to put them out of business. Are there other ideas, other technologies perhaps that are proven in the market that might be valuable to purchase that you could then put into your channel and get better distribution more rapidly?
We are actively looking at acquisitions as a way to expand our product offering. For obvious competitive reasons, without getting into the specifics we did an exercise late last year where we did some fundamental primary research into the unmet needs of small business. We actually followed over 100 small businesses home and watched all the ways they touch customer data, what their activities with their customers are, saw which pieces were automated and which pieces weren’t, thought about what enterprise best practices we could bring down to them and laid out a road map of things we would love to be able to help them with.
Then began the process of for each of those is it a make or a buy. We definitely plan to use some of the cash to accelerate time to market. These will typically be small technology acquisitions, think of it as $10 million or less not best of business kinds of decisions but things that really build out our product road map with faster time to market.
There are currently no questions. Ladies and gentlemen that concludes today’s question and answer session. Let me turn it back to management for any closing remarks.
Thank you everyone for your time today.
Talk to you next quarter.
That concludes today’s teleconference thank you for joining us have a wonderful day.
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