10-Q 1 b69527cce10vq.htm CONSTANT CONTACT e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                         
Commission file number: 001-33707
 
CONSTANT CONTACT, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   04-3285398
 
 
(State or other jurisdiction of incorporation)   (I.R.S. Employer
    Identification No.)
     
1601 Trapelo Road, Suite 329  
Waltham, Massachusetts   02451
 
 
(Address of principal executive offices)   (Zip Code)
(781) 472-8100
 
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of May 8, 2008, there were                      shares of the registrant’s Common Stock, par value $.01 per share, outstanding.
 
 


 

CONSTANT CONTACT, INC.
INDEX
         
    PAGE
    NUMBER
       
 
       
    1  
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    11  
 
       
    17  
 
       
    17  
 
       
       
 
       
    17  
 
       
    17  
 
       
    31  
 
       
    32  
 
       
    33  
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification of CEO & CFO


Table of Contents

Part I. Financial Information
Item 1. Financial Statements
Constant Contact, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
                 
    March 31,     December 31,  
(In thousands, except share and per share data)   2008     2007  
Assets
               
Current assets
               
Cash and cash equivalents
  $ 100,477     $ 97,051  
Short-term marketable securities
    1,445       4,484  
Accounts receivable, net of allowance for doubtful accounts of $14 and $11 as of March 31, 2008 and December 31, 2007, respectively
    22       62  
Prepaid expenses and other current assets
    1,796       1,701  
 
           
 
               
Total current assets
    103,740       103,298  
Property and equipment, net
    10,301       7,986  
Restricted cash
    308       308  
Other assets
    201       253  
 
           
 
               
Total assets
  $ 114,550     $ 111,845  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable
  $ 2,770     $ 3,858  
Accrued expenses
    4,454       3,279  
Deferred revenue
    12,035       10,354  
 
           
 
               
Total current liabilities
    19,259       17,491  
 
           
 
               
Total liabilities
    19,259       17,491  
 
           
 
               
Commitments and contingencies (Note 7)
               
 
               
Stockholders’ equity
               
Preferred stock, $0.01 par value; 5,000,000 shares authorized at March 31, 2008 and December 31, 2007
           
Common stock, $0.01 par value; 100,000,000 shares authorized at March 31, 2008 and December 31, 2007; 27,672,749 and 27,617,014 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively
    277       276  
Additional paid-in capital
    137,432       136,832  
Accumulated other comprehensive income
          2  
Accumulated deficit
    (42,418 )     (42,756 )
 
           
 
               
Total stockholders’ equity
    95,291       94,354  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 114,550     $ 111,845  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Constant Contact, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
                 
    Three months ended  
    March 31,  
(In thousands, except per share data)   2008     2007  
Revenue
  $ 18,167     $ 9,713  
Cost of revenue
    4,783       2,731  
 
           
 
               
Gross profit
    13,384       6,982  
 
           
 
               
Operating expenses
               
Research and development
    3,329       2,169  
Sales and marketing
    8,668       6,121  
General and administrative
    2,025       1,082  
 
           
 
               
Total operating expenses
    14,022       9,372  
 
           
 
               
Loss from operations
    (638 )     (2,390 )
Interest income
    976       144  
Interest expense
          (15 )
Other expense
          (420 )
 
           
 
               
Net income (loss)
    338       (2,681 )
Accretion of redeemable convertible preferred stock
          (253 )
 
           
 
               
Net income (loss) attributable to common stockholders
  $ 338     $ (2,934 )
 
           
 
               
Net income (loss) attributable to common stockholders per share: basic
  $ 0.01     $ (0.79 )
Net income (loss) attributable to common stockholders per share: diluted
  $ 0.01     $ (0.79 )
Weighted average shares outstanding used in computing per share amounts: basic
    27,546       3,729  
Weighted average shares outstanding used in computing per share amounts: diluted
    29,067       3,729  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Constant Contact, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Three Months Ended  
    March 31,  
(In thousands)   2008     2007  
Cash flows from operating activities
               
Net income (loss)
  $ 338     $ (2,681 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
               
Depreciation and amortization
    882       532  
Accretion of discount on investments
    (13 )     (45 )
Stock-based compensation expense
    560       83  
Changes in fair value of redeemable convertible preferred stock warrant
          420  
Provision for bad debts
    3       1  
Changes in operating assets and liabilities
               
Accounts receivable
    37       (6 )
Prepaid expenses and other current assets
    259       (283 )
Other assets
    52        
Accounts payable
    (1,088 )     (975 )
Accrued expenses
    1,175       (233 )
Deferred revenue
    1,681       1,357  
 
           
 
               
Net cash provided by (used in) operating activities
    3,886       (1,830 )
 
           
 
               
Cash flows from investing activities
               
Purchases of short-term marketable securities
          (2,294 )
Proceeds from maturities of short-term marketable securities
    3,050       2,450  
Increase in restricted cash
          (92 )
Purchases of property and equipment
    (3,197 )     (985 )
 
           
 
               
Net cash used in investing activities
    (147 )     (921 )
 
           
 
               
Cash flows from financing activities
               
Proceeds from issuance of common stock pursuant to the exercise of stock options
    41       11  
Repayments of notes payable
          (137 )
Payments of issuance costs for public offering of common stock
    (354 )      
 
           
 
               
Net cash used in financing activities
    (313 )     (126 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    3,426       (2,877 )
Cash and cash equivalents, beginning of period
    97,051       8,786  
 
           
 
               
Cash and cash equivalents, end of period
  $ 100,477     $ 5,909  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Constant Contact, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
1. Nature of the Business
Constant Contact, Inc. (the “Company”) was incorporated as a Massachusetts corporation on August 25, 1995. The Company reincorporated in the State of Delaware in 2000. The Company is a leading provider of on-demand email marketing and online survey products to small organizations, including small businesses, associations and nonprofits located primarily in the U.S. The Company’s email marketing product allows customers to create, send and track email marketing campaigns. The Company’s online survey product enables customers to survey their customers, clients or members and analyze the responses. These products are designed and priced for small organizations and are marketed directly by the Company and through a wide variety of channel partners. The Company was originally incorporated under the name Roving Software Incorporated and subsequently began doing business under the trade name Constant Contact in 2004. In 2006, the Company changed its name to Constant Contact, Inc.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include those of the Company and its subsidiary, Constant Contact Securities Corporation, after elimination of all intercompany accounts and transactions. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated balance sheet at December 31, 2007 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K, File Number 001-33707, on file with the SEC.
In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2008 and consolidated results of operations for the three months ended March 31, 2008 and 2007 and consolidated cash flows for the three months ended March 31, 2008 and 2007, have been made. The condensed consolidated results of operations and cash flows for the three months ended March 31, 2008 are not necessarily indicative of the results of operations and cash flows that may be expected for the year ending December 31, 2008.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and assumptions. The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances as of the time they are made, including assumptions as to future events. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from these estimates.

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Revenue Recognition
The Company provides access to its products through month-to-month subscription arrangements whereby the customer is charged a fee. Subscription arrangements include access to use the Company’s software via the internet and support services such as telephone support. The Company follows the guidance of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force (“EITF”) Issue No. 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, which applies when customers do not have the right to take possession of the software and use it on another entity’s hardware. When there is evidence of an arrangement, the fee is fixed or determinable and collectibility is deemed probable, the Company recognizes revenue on a daily basis over the subscription term as the services are delivered.
Software and Web Site Development Costs
The Company follows the guidance of EITF Issue No. 00-2, Accounting for Website Development Costs and EITF Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. Based on the criteria set forth in these two pronouncements, the Company follows Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in accounting for the development costs of its on-demand solution and web site development costs. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use.
Redeemable Convertible Preferred Stock Warrant
The Company followed the guidance of Financial Accounting Standards Board (“FASB”) Staff Position 150-5, Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (“FSP 150-5”). FSP 150-5 affirms that warrants of this type are subject to the requirements in Statement of Financial Accounting Standards (“SFAS”) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”), regardless of the redemption price or the timing of the redemption feature. Therefore, under SFAS 150, the freestanding warrant to purchase the Company’s redeemable convertible preferred stock that was outstanding until its exercise in October 2007 was a liability to be recorded at fair value. Fair value was subject to remeasurement at each balance sheet date and changes in fair value (determined using the Black-Scholes option pricing model) were recognized as other expense.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss), as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale securities. The Company had gross unrealized gains and losses of $3 and ($1), respectively as of December 31, 2007. As of March 31, 2008, the Company had gross unrealized gains and losses of $2 and ($2), respectively. There were no realized gains or losses recorded to net income or loss for either of the three month periods ended March 31, 2008 and 2007.
Comprehensive income (loss) was as follows:
                 
    Three months ended  
    March 31,  
    2008     2007  
Net income (loss)
  $ 338     $ (2,681 )
Other comprehensive loss:
               
Unrealized losses on available-for-sale securities, net
    (2 )      
 
           
Comprehensive income (loss)
  $ 336     $ (2,681 )
 
           
Net Income (Loss) Attributable to Common Stockholders Per Share

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Basic net income (loss) attributable to common stockholders per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of unrestricted common shares outstanding for the period.
Diluted net income (loss) attributable to common stockholders per share is computed by dividing net income (loss) attributable to common stockholders by the sum of the weighted average number of unrestricted common shares outstanding during the period and the weighted average number of potential common shares from the assumed exercise of stock options and the vesting of shares of restricted common stock using the “treasury stock” method when the effect is not anti-dilutive.
The following is a summary of the shares used in computing basic and diluted net income (loss) per share:
                 
    Three months ended
    March 31,
    2008   2007
    (in thousands)   (in thousands)
Weighted average shares used in calculating basic net income (loss) per share
    27,546       3,729  
Stock options
    1,427        
Warrants
    1        
Restricted shares
    93        
 
               
 
               
Shares used in computing diluted net income (loss) per share
    29,067       3,729  
 
               
The following common stock equivalents were excluded from the computation of diluted net income (loss) per share attributable to common stockholders because they had an anti-dilutive impact, either because the Company had a net loss attributable to common stockholders or because the proceeds from the exercise of common stock equivalents under the treasury stock method were in excess of the average fair market value during the quarter:
                 
    March 31,
    2008   2007
    (in thousands)   (in thousands)
Options to purchase common stock
    456       1,672  
Warrants to purchase common stock or redeemable convertible preferred stock
          282  
Restricted shares
          132  
Redeemable convertible preferred stock
          17,147  
 
               
 
               
Total options, warrants, restricted shares and redeemable convertible preferred stock exercisable or convertible into common stock
    456       19,233  
 
               
Accounting for Stock-Based Compensation
The Company follows the guidance of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”) , a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) , and related interpretations. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. SFAS 123R requires all share-based compensation to employees and directors, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable service period. As required by the prospective transition method provisions of SFAS 123R, the Company accounts for only new awards or awards that are modified, repurchased or canceled after January 1, 2006, the effective date, under the provisions of SFAS 123R. Pursuant to the income tax provisions included in SFAS 123R,

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the Company applies the “short-cut method” of computing its hypothetical pool of additional paid-in capital that is available to absorb future tax benefit shortfalls.
Income Taxes
Income taxes are provided for tax effects of transactions reported in the condensed consolidated financial statements and consist of income taxes currently due plus deferred income taxes related to timing differences between the basis of certain assets and liabilities for financial and income tax reporting. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company applies the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision.
Segment Data
The Company manages its operations as a single segment for purposes of assessing performance and making operating decisions. Revenue is generated predominately in the U.S. and all significant assets are held in the U.S.
Recent Accounting Pronouncements
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“SFAS 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008 and for the period ended March 31, 2008, the Company has elected not to apply the fair value option to any of its financial assets or liabilities.
Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (“SFAS 157”), for financial assets and liabilities, which defines fair value, establishes a market-based hierarchy for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements. The SFAS 157 requirements for certain non-financial assets and liabilities have been deferred until the first quarter of 2009 in accordance with FASB Staff Position 157-2. The Company is currently assessing the impact of the adoption of SFAS 157 for non-financial assets and liabilities on its financial statements. The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our results of operations, financial position or cash flows. The Company’s cash equivalents and short-term marketable securities are carried at fair value based on quoted market prices which is a level 1 measurement in the hierarchy of fair value measurements defined by SFAS 157.

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3. Stockholders’ Equity
Warrants
In connection with a term loan, the proceeds of which were used to acquire property and equipment, the Company granted a warrant to purchase 520 shares of common stock at an exercise price of $0.38 per share. The warrant, originally due to expire in November 2007, was extended until March 2014. As of March 31, 2008, the warrant remains outstanding.
In connection with its Series B financing in 2002, the Company granted to a consultant a warrant to purchase 120,000 shares of Series B at a price of $0.50 per share. The Company accounted for the Series B warrant as a liability and reported it at fair value each reporting period until exercised. During the three months ended March 31, 2007, the Company recorded a charge to other expense of $420, relating to the changes in carrying value of the Series B warrant. The warrant was exercised in October 2007 in connection with the Company’s initial public offering.
4. Stock-Based Awards
Stock Incentive Plan
The Company’s 2007 Stock Incentive Plan (“2007 Plan”) was adopted by the board of directors and approved by its stockholders in September 2007. The 2007 Plan permits the Company to make grants of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. These awards may be granted to the Company’s employees, officers, directors, consultants, and advisors. As of March 31, 2008, 2,373,850 shares of common stock were available for issuance under the 2007 Plan.
Stock Purchase Plan
The Company’s 2007 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted by the board of directors and approved by its stockholders in September 2007 and became effective upon the completion of the initial public offering. Six-month offering periods begin on January 1 and July 1 of each year during which employees may elect to purchase shares of the Company’s common stock according to the terms of the offering. The first offering period began on January 1, 2008. The Company reserved a total of 350,000 shares of common stock for issuance to participating employees under the Purchase Plan.
Under the provisions of SFAS 123R, the Company recognized stock-based compensation expense on all employee awards in the following expense categories:
                 
    Three months ended
    March 31,
    2008   2007
Cost of revenue
  $ 71     $ 15  
Research and development
    147       21  
Sales and marketing
    136       11  
General and administrative
    206       36  
 
           
 
               
 
  $ 560     $ 83  
 
           
Restricted Stock
During the year ended December 31, 2005, the Company sold 192,010 shares of restricted stock to a certain employee. The vesting of this award is time-based and restrictions lapse over four years. The Company did not record compensation expense because the shares were sold at fair value. At March 31, 2008 and December 31, 2007 84,008 and 96,006 shares, respectively, remained unvested. No shares have been forfeited.

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5. Income Taxes
The Company did not provide for any income taxes in the three month periods ended March 31, 2008 and 2007.
The Company had gross deferred tax assets of $16,600 at December 31, 2007, which did not change significantly at March 31, 2008. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because at March 31, 2008 and December 31, 2007 it was not more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would be realized.
The Company has not recorded any amounts for unrecognized tax benefits as of March 31, 2008 or December 31, 2007. As of March 31, 2008 and December 31, 2007, the Company had no accrued interest or tax penalties recorded. The Company’s income tax return reporting periods since December 31, 2003 are open to income tax audit examination by the federal and state tax authorities. In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating loss generated in those years.
6. Accrued Expenses
                 
    March 31,     December 31,  
    2008     2007  
Payroll and payroll related
  $ 1,372     $ 1,114  
Licensed software and maintenance
    638       638  
Marketing programs
    509       344  
Other accrued expenses
    1,935       1,183  
 
           
 
               
 
  $ 4,454     $ 3,279  
 
           
7. Commitments and Contingencies
Operating Leases
The Company leases its office space under a noncancelable operating lease effectively signed in 2005 and amended at various points to modify the terms of the lease. The modified lease arrangement includes certain lease incentives, payment escalations and rent holidays, the net effect of which has been deferred and is being accreted as an adjustment to rent expense over the term of the lease. Total rent expense under operating leases was $483 and $223 for the three months ended March 31, 2008 and 2007, respectively.
As of March 31, 2008, future minimum lease payments under noncancelable operating leases for the years ending December 31 are as follows:
         
Remainder of 2008
  $ 1,663  
2009
    2,264  
2010
    1,719  
 
     
 
       
 
  $ 5,646  
 
     
In April 2008, the Company amended the lease to increase the amount of space through the remainder of the term of the lease. As a result, future minimum lease payments will increase by $72, $124 and $93 in 2008, 2009 and 2010, respectively.
Hosting Services
The Company has agreements with two vendors to provide specialized space and related services from which the Company hosts its software application. The agreements include payment commitments that expire at various dates through 2013. As of March 31, 2008, future minimum payments under the agreements for the years ended December 31 are as follows:
         
Remainder of 2008
  $ 1,305  
2009
    1,909  
2010
    1,581  
2011
    1,621  
2012
    1,661  
2013
    774  
 
     
 
  $ 8,851  
 
     

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Letters of Credit
As of March 31, 2008 and December 31, 2007, the Company maintained a letter of credit totaling $308 for the benefit of the holder of the Company’s facilities lease. The holder can draw against the letter of credit in the event of default by the Company. The Company was required to maintain a cash balance of at least $308 to secure the letter of credit. This amount was classified as restricted cash in the balance sheet at March 31, 2008 and December 31, 2007.
Indemnification Obligations
The Company enters into standard indemnification agreements with the Company’s channel partners and certain other third parties in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses incurred by the indemnified party in connection with certain intellectual property infringement and other claims by any third party with respect to the Company’s business and technology. Based on historical information and information known as of March 31, 2008, the Company does not expect to incur any significant liabilities under these obligations.
8. Related Parties
An executive of the Company served as a director of a channel partner and vendor to the Company from December 2003 through May 2007. In the three months ended March 31, 2008 and 2007, the Company’s aggregate payments to this channel partner and vendor for customer referrals and template design services were $13 and $43, respectively.
One of the Company’s directors is a general partner of a venture capital firm that owns, through affiliated investment entities, approximately 7% of the outstanding common stock of one of the Company’s vendors. Another of the general partners of that venture capital firm was a former member of the board of directors of that same vendor. In the three months ended March 31, 2008, the Company’s aggregate payments to this vendor were $9. The Company did not make any payments to this vendor in the three months ended March 31, 2007.
9. Subsequent Events
Public Offering
On April 30, 2008, the Company closed a public offering of 5,221,000 shares of common stock, of which 314,465 shares were sold by the Company and 4,906,535 shares were sold by existing stockholders, at a price to the public of $16.00 per share. Proceeds to the Company were approximately $4,130, net of underwriting discounts and estimated offering costs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2007 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 14, 2008. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this quarterly report on Form 10Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Constant Contact is a leading provider of on-demand email marketing and online survey solutions for small organizations, including small businesses, associations and non-profits. Our customers use our email marketing product to more effectively and efficiently create, send and track professional and affordable permission-based email marketing campaigns. With these campaigns, our customers can build stronger relationships with their customers, clients and members, increase sales and expand membership. Our email marketing product incorporates a wide range of customizable templates to assist in campaign creation, user-friendly tools to import and manage contact lists and intuitive reporting to track campaign effectiveness. In June 2007, we introduced an online survey product that complements our email marketing product and enables small organizations to easily create and send surveys and effectively analyze responses. We are committed to providing our customers with a high level of support, which we deliver via phone, chat, email and our website.
We provide our products on an on-demand basis through a standard web browser. This model enables us to deploy and maintain a secure and scalable application that is easy for our customers to implement at compelling prices. Our email marketing customers pay a monthly subscription fee that generally ranges between $15 per month and $150 per month based on the size of their contact lists and, in some cases, volume of mailings. Our survey product is similarly priced.
At March 31, 2008, we had 185,948 email marketing customers. We measure our customer base as the number of email marketing customers that we bill directly in the last month of a period. These customers include all types of small organizations including retailers, restaurants, day spas, law firms, consultants, non-profits, religious organizations, alumni associations and other small businesses and organizations. We acquire these customers through a variety of sources including online marketing through search engines and advertising on networks and other sites, offline marketing through radio advertising, local seminars and other marketing efforts, contractual relationships with over 2,300 active channel partners, referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of more than 700 million emails currently sent by our customers each month.
Our on-demand email marketing product was first offered commercially in 2000.
On October 9, 2007, we completed our initial public offering, in which we sold and issued 6,199,845 shares of common stock at a price of $16.00 per share. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs.
On April 30, 2008, we completed a secondary public offering of 5,221,000 shares of common stock, of which 314,465 shares were sold by us and 4,906,535 shares were sold by existing stockholders, at a price to the public of $16.00 per share. We raised approximately $4.1 million, net of underwriting discounts and estimated offering costs.
Sources of Revenue
We derive our revenue principally from subscription fees from our email marketing customers. Our revenue is driven primarily by the number of paying customers and the subscription fees for our products and is not concentrated within any one customer or group of customers. In 2007, our top 80 email marketing customers accounted for approximately 1% of our total email marketing revenue. We do not require our customers to commit to a contractual term; however, our customers are required to prepay for subscriptions on a monthly, semi-annual, or

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annual basis by providing a credit card or check form of payment. Fees are recorded initially as deferred revenue and then recognized as earned revenue on a daily basis over the prepaid subscription period.
We also generate a small amount of revenue from professional services which primarily consist of the creation of customized templates for our customers. Revenue generated from professional services accounted for less than 2% of gross revenue for each of the three months ended March 31, 2008 and 2007.
Cost of Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation of general office assets to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists primarily of wages and benefits for software operations and customer support personnel, credit card processing fees, and depreciation, maintenance and hosting of our software applications underlying our product offerings. We allocate a portion of customer support costs relating to assisting trial customers to sales and marketing expense.
The expenses related to our hosted software applications are affected by the number of customers who subscribe to our products and the complexity and redundancy of our software applications and hosting infrastructure. We expect cost of revenue to increase moderately as a percentage of revenue for the remainder of 2008 as we plan to expand our operations to include a second sales and support office and as we absorb the full impact to cost of our recently opened second third-party hosting facility. Over the longer term, we anticipate that these expenses will increase in absolute dollars but decrease as a percentage of revenue as we expect to continue to increase our number of customers over time.
Research and Development. Research and development expenses consist primarily of wages and benefits for product strategy and development personnel. We have focused our research and development efforts on both improving ease of use and functionality of our existing products as well as developing new offerings. We primarily expense research and development costs. The small percentage of direct development costs related to software enhancements which add functionality are capitalized and depreciated as a component of cost of revenue. We expect that on an annual basis research and development expenses will increase in absolute dollars, but decrease as a percentage of revenue, as we expect to continue to enhance and expand our product offerings.
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and promotional costs, wages and benefits for sales and marketing personnel, partner referral fees, and the portion of customer support costs that relate to assisting trial customers. Advertising costs consist primarily of pay-per-click payments to search engines, other online and offline advertising media, including radio and print advertisements, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships, and event costs. Our advertising and promotional expenditures have historically been highest in the fourth quarter of each year as this reflects a period of increased sales and marketing activity for many small organizations. In order to continue to grow our business and brand and category awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. As a result, we expect that on an annual basis sales and marketing expenses will increase in absolute dollars, but decrease as a percentage of revenue, as we anticipate that we will continue to grow.
General and Administrative. General and administrative expenses consist primarily of wages and benefits for administrative, human resources, legal, internal information technology support, finance and accounting personnel, professional fees, other taxes and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel in connection with the anticipated growth of our business and incur further costs related to operating as a public company. Therefore, we expect that our general and administrative expenses will increase in absolute dollars as we continue to grow and operate as a public company.

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Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our significant accounting policies, which are described in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC, the following accounting policies involve the most judgment and complexity:
  Revenue recognition
 
  Income taxes
 
  Software and website development costs
 
  Stock-based compensation
Accordingly, we believe the policies set forth above are critical to aid in fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.
There have been no material changes in our critical accounting policies since December 31, 2007. For further information please see the discussion of critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC.
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Revenue. Revenue for the three months ended March 31, 2008 was $18.2 million, an increase of $8.5 million, or 87%, over revenue of $9.7 million for the three months ended March 31, 2007. The increase in revenue resulted primarily from an 82% increase in the number of average monthly email marketing customers and an increase in average revenue per customer. Average monthly email marketing customers increased to 175,183 in the three months ended March 31, 2008 from 96,384 in the three months ended March 31, 2007, while average revenue per customer in the three months ended March 31, 2008 increased to $34.57 from $33.59 in the three months ended March 31, 2007. We expect our average revenue per customer to increase in 2008 as we expect to generate additional revenue from our email marketing customers for add-ons to the email marketing product and from our survey product.
Cost of Revenue. Cost of revenue for the three months ended March 31, 2008 was $4.8 million, an increase of $2.1 million, or 75%, over cost of revenue of $2.7 million for the three months ended March 31, 2007. As a percentage of revenue, cost of revenue was 26% for the three months ended March 31, 2008 and 28% for the three months ended March 31, 2007. The increase in absolute dollars primarily resulted from an 82% increase in the number of average monthly email marketing customers which resulted in increased hosting and operations expense and customer support costs. Of the increase in cost of revenue, $1.1 million resulted from increased personnel costs attributable to additional employees in our customer support and operations groups to support customer growth. Additionally, $602,000 resulted from increased depreciation, hosting and maintenance costs as a result of scaling and adding capacity to our hosting infrastructure, and $213,000 related to increased credit card fees due to a higher volume of billing transactions. We expect cost of revenue to increase modestly as a percentage of revenue for the remainder of 2008 as we expand our operations to include a second sales and support office and as we absorb the full impact to cost of our recently opened second third-party hosting facility.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2008 were $3.3 million, an increase of $1.1 million, or 54%, over research and development expenses of $2.2 million for the three months ended March 31, 2007. The increase was primarily due to additional personnel related

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costs of $1.0 million because we increased the number of research and development employees to further enhance our products. We expect research and development expenses to increase in absolute dollars but decrease as a percentage of revenue.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2008 were $8.7 million, an increase of $2.6 million, or 42%, over sales and marketing expenses of $6.1 million for the three months ended March 31, 2007. The increase was primarily due to increased advertising and promotional expenditures of $1.1 million due to continued expansion of our multi-channel marketing strategy. Additionally, personnel related costs increased by $871,000 because we added employees to accommodate the growth in sales leads. In addition, partner referral fees increased by $216,000 as the number of new customers generated from our channel partners increased. We expect sales and marketing expenses to increase in absolute dollars but decrease as a percentage of revenue.
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2008 were $2.0 million, an increase of $900,000, or 87%, over general and administrative expenses of $1.1 million for the three months ended March 31, 2007. The increase was primarily due to additional personnel related costs of $566,000 because we increased the number of general and administrative employees to support our overall growth, and to increased stock-based compensation expense due to the increase in the value of our common stock. We also incurred increased insurance and professional fees to support the reporting and regulatory requirements of a public company.
Interest and Other Income (Expense), Net. Interest and other income (expense), net for the three months ended March 31, 2008 was $976,000, an increase of $1.3 million from interest and other income (expense), net of ($291,000) for the three months ended March 31, 2007. The increase was primarily due to a $832,000 increase in interest income from investments in marketable securities and cash equivalents primarily due to an increase in the balance of investments and cash equivalents as a result of the proceeds we received in our initial public offering, which was completed in the fourth quarter of 2007. Additionally in 2007, we accounted for an outstanding redeemable convertible preferred stock warrant as a liability held at fair market with changes in value recorded as other expense. For the three months ended March 31, 2007, we recorded a charge of $420,000 relating to this warrant. As a result of the exercise of the warrant in the fourth quarter of 2007 we no longer record warrant related charges.
Liquidity and Capital Resources
At March 31, 2008, our principal sources of liquidity were cash and cash equivalents and marketable securities of $102 million.
Since our inception we have financed our operations primarily through the sale of redeemable convertible preferred stock, issuance of convertible promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from operations. On October 9, 2007, we completed our initial public offering, in which we issued and sold 6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. We used $2.6 million of proceeds to repay our outstanding principal and interest under our term loan facility. Subsequent to the end of our first quarter in 2008, we completed a secondary public offering in which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per share. We raised approximately $4.1 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering costs. In the future, we anticipate that our primary sources of liquidity will be cash generated from our operating activities.
Cash Provided By Operating Activities
Net cash provided by operating activities was $3.9 million for the three months ended March 31, 2008 as compared to net cash used in operating activities of $1.8 million for the three months ended March 31, 2007. Net cash provided by operating activities for the three months ended March 31, 2008 consisted of the contribution from net income of $338,000, working capital accounts of $2.1 million and non-cash charges of $1.4 million. The contribution from working capital accounts was primarily due to an increase in deferred revenue of $1.7 million and a decrease in prepaid expenses and other receivables of $259,000. Cash provided by an increase in accrued

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expenses of $1.2 million was mostly offset by a decrease in accounts payable of $1.1 million. The non-cash charges consisted primarily of depreciation and amortization of $882,000 and stock-based compensation expense of $560,000. Net cash used in operating activities for the three months ended March 31, 2007 of $1.8 million consisted of the net loss of $2.7 million and net change in working capital accounts of $140,000 partially offset by non-cash charges of $991,000. Working capital accounts used cash primarily due to an increase in prepaid expenses and other receivables of $289,000 and a decrease in accounts payable and accrued expense totaling $1.2 million partially offset by an increase in deferred revenue of $1.4 million. The non-cash charges consisted primarily of depreciation and amortization of $532,000 and the change in fair value of the redeemable convertible preferred stock warrant of $420,000.
Cash Used in Investing Activities
Net cash used in investing activities was $147,000 for the three months ended March 31, 2008 compared to $921,000 for the three months ended March 31, 2007. Net cash used in investing activities during the three months ended March 31, 2008 consisted primarily of cash paid to purchase property and equipment of $3.2 million partially offset by cash received from the maturities of marketable securities of $3.1 million. Property and equipment purchases consist of hardware and software to support our product infrastructure, capitalization of certain software development costs, computer equipment for our employees and equipment and leasehold improvements primarily related to additional office space. Net cash used in investing activities during the three months ended March 31, 2007 of $921,000 consisted primarily of net cash paid to purchase property and equipment of $985,000 and an increase in restricted cash due to an amendment to the Company’s operating lease partially offset by proceeds from the net change in short-term marketable securities.
Cash Used in Financing Activities
Net cash used by financing activities was $313,000 for the three months ended March 31, 2008 and was primarily due to the payments of issuance costs for our secondary public offering of common stock, which was completed in the second quarter of 2008. We capitalized issuance costs of $354,000 for our secondary public offering and as of March 31, 2008, these amounts were included in prepaid expenses and other current assets. This was partially offset by proceeds from the issuance of our common stock pursuant to the exercise of stock options. Net cash used in financing activities was $126,000 for the three months ended March 31, 2007 and consisted of repayment of outstanding borrowings under the term loan facility of $137,000 partially offset by proceeds from the issuance of our common stock pursuant to the exercise of stock options.
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2008 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
                                         
    Payments Due In  
            Less Than                     More Than  
    Total     1 Year     1 - 3 Years     3 - 5 Years     5 Years  
    (In thousands)  
Operating lease obligations (1)
    5,646       2,225       3,421       0       0  
Contractual commitments
    8,851       1,825       3,376     $ 3,070     $ 580  
 
                             
Total
  $ 14,497     $ 4,050     $ 6,797     $ 3,070     $ 580  
 
                             
 
(1)   In April 2008, we entered into an amendment to lease additional office space commencing immediately and terminating in September 2010 representing additional minimum lease obligations of $72,000, $124,000 and $93,000 in 2008, 2009 and 2010, respectively.
Our future capital requirements may vary materially from those now planned and will depend on many factors, including, but not limited to, development of new products, market acceptance of our products, the levels of advertising and promotion required to launch additional products and improve our competitive position in the marketplace, the expansion of our sales, support and marketing organizations, the establishment of additional offices in the United States and worldwide and the building of infrastructure necessary to support our anticipated growth, the response of competitors to our products and our relationships with suppliers and clients. Since the introduction of our on-demand email marketing product in 2000, we have experienced increases in our expenditures consistent

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with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase in the future.
We opened a second third-party hosting facility in the first quarter of 2008 to provide additional redundancy and increased scaleability for our product infrastructure. We made capital expenditures in 2007 and in early 2008 and plan to make additional capital expenditures in 2008 for capital equipment to be used in this facility. We also plan to open a second sales and support office in the second half of 2008. We anticipate making capital commitments in 2008 and 2009 associated with the build-out and outfitting of this office. Additionally we anticipate continuing investments in property and equipment to support the anticipated growth in our business. We believe that our current cash, cash equivalents and marketable securities and operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Thereafter, we may need to raise additional funds through public or private financings or borrowings to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Subsequent to the end of our first quarter in 2008, we completed a secondary public offering in which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per share. We raised approximately $4.1 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering costs.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.
Recent Accounting Pronouncements
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, or SFAS 159, which permits companies to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008 and for the period ended March 31, 2008, we elected not to apply the fair value option to any of our financial assets or liabilities.
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, or SFAS 157, for financial assets and liabilities, which defines fair value, establishes a market-based hierarchy for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements. The SFAS 157 requirements for certain non-financial assets and liabilities have been deferred until the first quarter of 2009 in accordance with FASB Staff Position 157-2. We are currently assessing the impact of the adoption of SFAS 157 for non-financial assets and liabilities on our financial statements. The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our results of operations, financial position or cash flows. Our cash equivalents and short-term marketable securities are carried at fair value based on quoted market prices which is a level 1 measurement in the hierarchy of fair value measurements as described in SFAS 157.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. We bill our customers in U.S. dollars and receive payment predominantly in U.S. dollars. Accordingly, our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates.
Interest Rate Sensitivity. Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our marketable securities, which are primarily short-term investment grade and government securities, we believe that there is no material risk of exposure.
Item 4T. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in our opinion, would have a would have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

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RISKS RELATED TO OUR BUSINESS AND INDUSTRY
If we are unable to attract new customers and retain existing customers on a cost-effective basis, our business and results of operations will be affected adversely.
To succeed, we must continue to attract and retain a large number of customers on a cost-effective basis, many of whom have not previously used an email marketing service. We rely on a variety of methods to attract new customers, such as paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website and including a link to our website in substantially all of our customers’ emails. In addition, we are committed to providing our customers with a high level of support. As a result, we believe many of our new customers are referred to us by existing customers. If we are unable to use any of our current marketing initiatives or the costs of such initiatives were to significantly increase or our efforts to satisfy our existing customers are not successful, we may not be able to attract new customers or retain existing customers on a cost-effective basis and, as a result, our revenue and results of operations would be affected adversely.
Our business is substantially dependent on the market for email marketing services for small organizations.
We derive, and expect to continue to derive, substantially all of our revenue from our email marketing product for small organizations, including small businesses, associations and non-profits. As a result, widespread acceptance of email marketing among small organizations is critical to our future growth and success. The overall market for email marketing and related services is relatively new and still evolving, and small organizations have generally been slower than larger organizations to adopt email marketing as part of their marketing mix. There is no certainty regarding how or whether this market will develop, or whether it will experience any significant contractions. Our ability to attract and retain customers will depend in part on our ability to make email marketing convenient, effective and affordable. If small organizations determine that email marketing does not sufficiently benefit them, existing customers may cancel their accounts and new customers may decide not to adopt email marketing. In addition, many small organizations lack the technical expertise to effectively send email marketing campaigns. As technology advances, however, small organizations may establish the capability to manage their own email marketing and therefore have no need for our email marketing product. If the market for email marketing services fails to grow or grows more slowly than we currently anticipate, demand for our services may decline and our revenue would suffer.
U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could minimize the effectiveness of our email marketing product, and establishes financial penalties for non-compliance, which could increase the costs of our business.
In December 2003, Congress enacted Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, which establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult or other harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing product. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs.

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If economic or other factors negatively affect the small business sector, our customers may become unwilling or unable to maintain accounts with us, which could cause our revenue to decline and impair our ability to operate profitably.
Our email marketing and survey products are designed specifically for small organizations, including small businesses, associations and non-profits that frequently have limited budgets and are more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may choose to spend the limited funds that they have on items other than our products. Moreover, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, which would negatively affect the overall demand for our products and could cause our revenue to decline. In addition, we have limited experience operating our business during an economic downturn. Accordingly, we do not know if our current business model will respond effectively to the challenges we may confront during an economic downturn.
Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process and use data necessary to conduct email marketing campaigns or to send surveys and analyze the results or may increase their costs, which could harm our business.
Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an Internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our products.
As Internet commerce develops, federal, state and foreign governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our business.
As Internet commerce continues to evolve, increased regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to email marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or via email. Such taxes could discourage the use of the Internet and email as a means of commercial marketing, which would adversely affect the viability of our products.
In the event we are unable to minimize our loss of existing customers or to grow our customer base by adding new customers, our operating results will be adversely affected.
Our growth strategy requires us to minimize the loss of our existing customers and grow our customer base by adding new customers. Customers cancel their accounts for many reasons, including a perception that they do not use our product effectively, the service is a poor value and they can manage their email campaigns without our product. In some cases, we terminate an account because the customer fails to comply with our standard terms and conditions. We must continually add new customers to replace customers whose accounts are cancelled or terminated, which may involve significantly higher marketing expenditures than we currently anticipate. If too many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results would be adversely affected.
As we expand our customer base through our marketing efforts, our new customers may use our products differently than our existing customers and, accordingly, our business model may not be as efficient at attracting and retaining new customers.
As we expand our customer base, our new customers may use our products differently than our existing customers. For example, a greater percentage of new customers may take advantage of the free trial period we offer but choose to use another form of marketing to reach their constituents. If our new customers are not as loyal as our existing customers, our attrition rate will increase and our customer referrals will decrease, which would have an adverse

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effect on our results of operations. In addition, as we seek to expand our customer base, we expect to increase our marketing spend in order to attract new customers, which will increase our operating costs. There can be no assurance that these marketing efforts will be successful.
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
The market for our products is competitive and rapidly changing, and the barriers to entry are relatively low. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. Our principal competitors include providers of email marketing products for small to medium size businesses such as Vertical Response, Inc., Broadwick Corporation (iContact, formerly Intellicontact), CoolerEmail, Inc., Emma, Inc., Got Corporation (Campaigner), Lyris Technologies, Inc. and Topica Inc., as well as the in-house information technology capabilities of prospective customers. Competition could result in reduced sales, reduced margins or the failure of our email marketing product to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, there are a number of other vendors that are focused on providing email marketing products for larger organizations, including Acxiom Digital (a division of Acxiom Corporation), Alterian Inc., Epsilon Data Management LLC (a subsidiary of Alliance Data Systems Corporation), ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited). While we do not compete currently with vendors serving larger customers, we may face future competition from these providers if they determine that our target market presents an opportunity for them. Finally, in the future, we may experience competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In addition, one or more of these ISPs or other businesses could decide to offer a competitive email marketing product at no cost or low cost in order to generate revenue as part of a larger product offering. Our survey product competes with similar offerings by Zoomerang (a division of Market Tools, Inc.) and Surveymonkey.com Corporation.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. Our potential competitors may have more extensive customer bases and broader customer relationships than we have. In addition, these companies may have longer operating histories and greater name recognition than we have. These competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. If we are unable to compete with such companies, the demand for our services could substantially decline.
If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be harmed, we may be exposed to liability and we may lose the ability to offer our customers a credit card payment option.
Our system stores our customers’ proprietary email distribution lists, credit card information and other critical data. Any accidental or willful security breaches or other unauthorized access to such data or information could expose us to liability for the loss of such information, time-consuming and expensive litigation and other possible liabilities as well as negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our customers’ data, our relationships with our customers will be severely damaged, and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states, including Massachusetts, have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data

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security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers.
If we fail to maintain compliance with the data protection policy documentation standards adopted by the major credit card issuers, we could be subject to fines and penalties and we could lose our ability to offer our customers a credit card payment option. Any loss of our ability to offer our customers a credit card payment option would make our products less attractive to many small organizations by negatively impacting our customer experience and significantly increasing our administrative costs related to customer payment processing.
If the delivery of our customers’ emails is limited or blocked, the fees we may be able to charge for our email marketing product may not be accepted by the market and customers may cancel their accounts.
ISPs can block emails from reaching their users. Recent releases of ISP software and the implementation of stringent new policies by ISPs make it more difficult to deliver our customers’ emails. We continually improve our own technology and work closely with ISPs to maintain our deliverability rates. If ISPs materially limit or halt the delivery of our customers’ emails, or if we fail to deliver our customers’ emails in a manner compatible with ISPs’ email handling or authentication technologies, then the fees we charge for our email marketing product may not be accepted by the market, and customers may cancel their accounts.
A majority of the internet protocol addresses associated with our email marketing product are owned and controlled by Internap Network Services Corporation, which operates one of our third party hosting facilities. In connection with the establishment of a second third party hosting facility, we are currently migrating to internet protocol addresses owned and controlled by us. If we experience difficulties with this migration, our deliverability rates could suffer and it could undermine the effectiveness of our customers’ email marketing campaigns. This, in turn, could harm our business and financial performance.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.
Competition for highly skilled technical and marketing personnel is extremely intense, and we continue to face difficulty identifying and hiring qualified personnel in many areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In particular, candidates making employment decisions, particularly in technology industries, often consider the value of any equity they may receive in connection with their employment. Any significant volatility in the price of our stock may adversely affect our ability to attract or retain highly skilled technical and marketing personnel.
In addition, we invest significant time and expense in training our employees, which increases their value to competitors and other employers who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect on our business.
If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.
We believe that developing and maintaining awareness of the Constant Contact brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future products and attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our industry increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness and affordability of our products for our target customer demographic. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur additional significant expenses. Such brand promotion activities may not yield increased revenue and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and

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maintain our brand, we may lose our existing customers to our competitors or be unable to attract new customers, which would cause our revenue to decrease.
We depend on search engines to attract a significant percentage of our customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers, which would adversely affect our business and results of operations.
Many of our customers located our website by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract a significant percentage of the customers we serve to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, this could result in fewer customers clicking through to our website, requiring us to resort to other costly resources to replace this traffic, which, in turn, could reduce our operating and net income or our revenue, harming our business. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. The cost of purchased search listing advertising is rapidly increasing as demand for these channels continues to grow quickly, and further increases could have negative effects on our financial results.
The success of our business depends on the continued growth and acceptance of email as a communications tool, and the related expansion and reliability of the Internet infrastructure. If consumers do not continue to use email, demand for our email marketing products may decline.
The future success of our business depends on the continued and widespread adoption of email as a primary means of communication. Security problems such as “viruses,” “worms” and other malicious programs or reliability issues arising from outages and damage to the Internet infrastructure could create the perception that email is not a safe and reliable means of communication, which would discourage consumers from using email. Consumers’ use of email also depends on the ability of ISPs to prevent unsolicited bulk email, or “spam,” from overwhelming consumers’ inboxes. In recent years, ISPs have developed new technologies to filter unwanted messages before they reach users’ inboxes. In response, spammers have employed more sophisticated techniques to reach consumers’ inboxes. Although companies in the anti-spam industry have started to address the techniques used by spammers, if security problems become widespread or frequent or if ISPs cannot effectively control spam, the use of email as a means of communication may decline as consumers find alternative ways to communicate. Any decrease in the use of email would reduce demand for our email marketing product and harm our business.
Various private spam blacklists have in the past interfered with, and may in the future interfere with, the effectiveness of our products and our ability to conduct business.
We depend on email to market to and communicate with our customers, and our customers rely on email to communicate with their constituents. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and Internet protocol addresses associated with those entities or individuals, that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s Internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.
Some of our Internet protocol addresses currently are listed with one or more blacklisting entities and, in the future, our Internet protocol addresses may also be listed with these and other blacklisting entities. There can be no guarantee that we will not continue to be blacklisted or that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our products and services and

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communicate with our customers and could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.
Any efforts we may make in the future to promote our services to market segments other than small organizations or to expand our product offerings beyond email marketing may not succeed.
To date, we have largely focused our business on providing our email marketing product for small organizations, but we may in the future seek to serve other market segments and expand our service offerings. During 2007, we introduced our survey product, which enables customers to create and send online surveys and analyze responses, and our add-on email archive service that enables our customers to archive their past email campaigns. Any efforts to expand beyond the small organization market or to introduce new products beyond our email marketing product, including our survey product, may not result in significant revenue growth, may divert management resources from our existing operations and require us to commit significant financial resources to an unproven product, which may harm our financial performance.
Our customers’ use of our products to transmit negative messages or website links to harmful applications could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via our products.
Our customers could use our email marketing product to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted material without permission, or report inaccurate or fraudulent data. Any such use of our products could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our email marketing product may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities would expose us to liability under these laws. Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
Our existing general liability insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage would increase our operating losses and reduce our net worth and working capital.
If we fail to enhance our existing products or develop new products, our products may become obsolete or less competitive and we could lose customers.
If we are unable to enhance our existing products or develop new products that keep pace with rapid technological developments and meet our customers’ needs, our business will be harmed. Creating and designing such enhancements and new products entail significant technical and business risks and require substantial expenditures and lead-time, and there is no guarantee that such enhancements and new products will be completed in a timely fashion. Nor is there any guarantee that any new product offerings will gain widespread acceptance among our email marketing customers or by the broader market. For example, our existing email marketing customers may not view any new product as complementary to our email product offerings and therefore decide not to purchase such product. If we cannot enhance our existing services or develop new products or if we are not successful in selling such enhancements and new products to our customers, we could lose customers or have difficulty attracting new customers, which would adversely impact our financial performance.
Our relationships with our channel partners may be terminated or may not continue to be beneficial in generating new email marketing customers, which could adversely affect our ability to increase our customer base.
We maintain a network of active channel partners, which include national small business service providers such as Network Solutions, LLC and American Express Company as well as local small business

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service providers such as web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotion to their customers. If we are unable to maintain our contractual relationships with existing channel partners or establish new contractual relationships with potential channel partners, we may experience delays and increased costs in adding customers, which could have a material adverse effect on us. The number of customers we are able to add through these marketing relationships is dependent on the marketing efforts of our partners over which we have limited influence, and a significant decrease in the number of gross customer additions generated through these relationships could adversely affect the size of our customer base and revenue.
Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage that growth, we may not be able to successfully implement our business plan.
We are currently experiencing a period of rapid growth in our headcount and operations, which has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting infrastructure.
Our success will depend in part on the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the anticipated growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems, which will include installing a new billing system. The expected addition of new employees and the capital investments that we believe will be necessary to manage our anticipated growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our anticipated growth, we will be unable to execute our business plan.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace. In particular, Gail F. Goodman, our Chairman, President and Chief Executive Officer, is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Ms. Goodman or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
Any significant disruption in service on our website or in our computer systems, or in our customer support services, could reduce the attractiveness of our products and result in a loss of customers.
The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new customers and retain existing customers. Our system hardware is co-located in two hosting facilities. The first, located in Somerville, Massachusetts, is owned and operated by Internap Network Services Corporation. The second, located in Bedford, Massachusetts, is owned and operated by Sentinel Properties-Bedford, LLC. Neither Internap nor Sentinel guarantees that our customers’ access to our products will be uninterrupted, error-free or secure. Our operations depend on Internap’s and Sentinel’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our arrangement with either Internap or Sentinel is terminated, or there is a lapse of service or damage to the Internap or Sentinel facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. In addition, our customer support services, which are currently located only at our headquarters, would experience interruptions as a result of any disruption of electrical, phone or any other similar facility support services. Any interruptions or delays in access to our products or

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customer support, whether as a result of Internap, Sentinel or other third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause customers to cancel their accounts, any of which could adversely affect our business, financial condition and results of operations.
Our disaster recovery system located at both our headquarters in Waltham, Massachusetts and the Sentinel facility does not provide real time backup, has not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage. In the event of a disaster in which either facility is irreparably damaged or destroyed, we would experience interruptions in access to our products. Moreover, our headquarters, the Internap facility and the Sentinel facility are located several miles from each other and may be equally or more affected by any regional disaster affecting the Internap or Sentinel facilities. Any or all of these events could cause our customers to lose access to our products.
We rely on third-party computer hardware and software that may be difficult to replace or that could cause errors or failures of our service.
We rely on computer hardware purchased and software licensed from third parties in order to offer our products, including hardware from such large vendors as International Business Machines Corporation, Dell Computer Corporation, Sun Microsystems, Inc. and EMC Corporation. This hardware and software may not continue to be available on commercially reasonable terms, or at all. If we lose the right to use any of this hardware or software or such hardware or software malfunctions, our customers could experience delays or be unable to access our services until we can obtain and integrate equivalent technology or repair the cause of the malfunctioning hardware or software. Any delays or failures associated with our services could upset our customers and harm our business.
If we are unable to protect the confidentiality of our unpatented proprietary information, processes and know-how and our trade secrets, the value of our technology and products could be adversely affected.
We rely upon unpatented proprietary technology, processes and know-how and trade secrets. Although we try to protect this information in part by executing confidentiality agreements with our employees, consultants and third parties, such agreements may offer only limited protection and may be breached. Any unauthorized disclosure or dissemination of our proprietary technology, processes and know-how or our trade secrets, whether by breach of a confidentiality agreement or otherwise, may cause irreparable harm to our business, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise be independently developed by our competitors or other third parties. If we are unable to protect the confidentiality of our proprietary information, processes and know-how or our trade secrets are disclosed, the value of our technology and services could be adversely affected, which could negatively impact our business, financial condition and results of operations.
Our use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we monitor our use of open source software closely, the terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event or in the event there is a significant change in the terms of open source licenses in general, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue sales of our products, or to release our software code under the terms of an open source license, any of which could materially adversely affect our business.
Given the nature of open source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs. The risks associated with intellectual property infringement claims are discussed immediately below.

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If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other forms of communication. These claims, whether or not successful, could:
    divert management’s attention;
 
    result in costly and time-consuming litigation;
 
    require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all;
 
    in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or
 
    require us to redesign our software and services to avoid infringement.
As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our agreements with our channel partners require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time. Finally, if a third party successfully asserts a claim that our products infringe their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all.
Providing our products to customers outside the United States exposes us to risks inherent in international business.
Customers in more than 110 countries and territories currently use our email marketing product, and we expect to expand our international operations in the future. Accordingly, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States. The risks and challenges associated with providing our products to customers outside the United States include:
    localization of our products, including translation into foreign languages and associated expenses;
 
    laws and business practices favoring local competitors;
 
    compliance with multiple, conflicting and changing governmental laws and regulations, including tax, email marketing, privacy and data protection laws and regulations;
 
    foreign currency fluctuations;
 
    different pricing environments;
 
    difficulties in staffing and maintaining foreign operations; and
 
    regional economic and political conditions.

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We have incurred net losses in the past and expect to incur net losses in the future.
Although we were profitable in the quarter ended March 31, 2008, we have incurred net losses in the past and we expect to incur net losses in the future. As of March 31, 2008, our accumulated deficit was $42.4 million. Our recent net losses were $7.8 million for the year ended December 31, 2006 and $8.3 million for the year ended December 31, 2007. Our net losses increased in 2007 as compared to 2006 because we increased our sales and marketing expense to promote the Constant Contact brand and encourage new customers to try our products. Prior to the quarter ended March 31, 2008, we had never been profitable and there is no guarantee we will be profitable in the future. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may never be profitable again. Our recent revenue growth may not be indicative of our future performance. In future periods, we may not have any revenue growth, or our revenue could decline.
We are incurring significant increased costs as a result of operating as a public company, and our management has been, and will continue to be, required to devote substantial time to compliance initiatives.
As a public company, we are incurring significantly more legal, accounting and other expenses than we incurred as a private company. The Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the SEC and the Nasdaq Stock Market, require public companies to meet certain corporate governance standards. Our management and other personnel are devoting a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for the year ending December 31, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. In order to comply with Section 404, we may incur substantial accounting expense, expend significant management time on compliance-related issues, and hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to use net operating loss carryforwards in the United States may be limited.
As of December 31, 2007, we had net operating loss carryforwards of $38 million for U.S. federal tax purposes and $25 million for state tax purposes. These loss carryforwards expire between 2008 and 2027. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. While we do not believe that our initial public offering and prior financings have resulted in ownership changes that would limit our ability to utilize net operating loss carryforwards, any subsequent ownership changes, including those resulting from our recent secondary public offering, could result in such a limitation. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could have a negative effect on our financial results.

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Our quarterly results may fluctuate and if we fail to meet the expectations of securities analysts or investors, our stock price could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:
    our ability to retain existing customers, attract new customers and satisfy our customers’ requirements;
 
    changes in our pricing policies;
 
    our ability to expand our business;
 
    the effectiveness of our personnel;
 
    new product and service introductions;
 
    technical difficulties or interruptions in our services;
 
    general economic conditions;
 
    the timing of additional investments in our hardware and software systems;
 
    regulatory compliance costs;
 
    costs associated with future acquisitions of technologies and businesses; and
 
    extraordinary expenses such as litigation or other dispute-related settlement payments.
Some of these factors are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not be relied upon as an indication of future performance.
We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.
We have historically relied on outside financing and cash from operations to fund our operations,
capital expenditures and expansion. We may require additional capital from equity or debt financing
in the future to:
    fund our operations;
 
    respond to competitive pressures;
 
    take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and
 
    develop new products or enhancements to existing products.
We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

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We may engage in future acquisitions that could disrupt our business, dilute stockholder value and harm our business, operating results or financial condition.
We have, from time to time, evaluated acquisition opportunities and may pursue acquisition opportunities in the future. We have not made any acquisitions to date and, therefore, our ability as an organization to make and integrate acquisitions is unproven. Moreover, acquisitions involve numerous risks, including:
    an inability to locate a suitable acquisition candidate or technology or acquire a desirable candidate or technology on favorable terms;
 
    difficulties in integrating personnel and operations from the acquired business or acquired technology with our existing technology and products and in retaining and motivating key personnel from the acquired business;
 
    disruptions in our ongoing operations and the diversion of our management’s attention from their day-to-day responsibilities associated with operating our business;
 
    increases in our expenses that adversely impact our business, operating results and financial condition;
 
    potential write-offs of acquired assets and increased amortization expense related to identifiable assets acquired; and
 
    potentially dilutive issuances of equity securities or the incurrence of debt.
If we do complete an acquisition, we may not ultimately strengthen our competitive position or achieve our goals, or such an acquisition may be viewed negatively by our customers, stockholders or the financial markets.
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
The market price of our common stock has been and may continue to be volatile.
Prior to the completion of our initial public offering in October 2007, there was no public market for shares of our common stock. The trading price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various factors. Some of the factors that may cause the market price of our common stock to fluctuate include:
    fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
 
    changes in estimates of our financial results or recommendations by securities analysts;
 
    failure of any of our products to achieve or maintain market acceptance;
 
    changes in market valuations of similar companies;
 
    success of competitive products;
 
    changes in our capital structure, such as future issuances of securities or the incurrence of debt;
 
    announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;
 
    regulatory developments in the United States, foreign countries or both;
 
    litigation involving our company, our general industry or both;
 
    additions or departures of key personnel;
 
    investors’ general perception of us; and

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    changes in general economic, industry and market conditions.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not control these analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Future sales of shares by certain of our stockholders could cause our stock price to decline.
If certain of our stockholders sell, or indicate their intention to sell, substantial amounts of our common stock in the public market after certain contractual lock-up agreements (as described below) expire, and other restrictions on resale lapse, the trading price of our common stock could decline. As of May 8, 2008, we had 28,030,375 shares of common stock outstanding. Of these shares, approximately 45% are subject to a 90-day contractual lock-up with the underwriters of our secondary public offering in April 2008. The lock-up agreements expire in July 2008, subject to extension in certain circumstances. Oppenheimer & Co., Inc. and Thomas Weisel Partners LLC, acting as representatives of the underwriters of our secondary public offering, may permit our officers, directors and other stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.
If we announce earnings results or other material news or a material event occurs during the last 17 days of the 90-day contractual lock-up period or, if prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, the 90-day lock-up period will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or event.
Some of our existing stockholders, including certain of those who are subject to the contractual lock-up agreements described above, have demand and incidental registration rights to require us to register with the SEC approximately 45% of our shares of outstanding common stock, as of May 8, 2008, subject to certain conditions. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market.
Insiders have substantial control over us and will be able to influence corporate matters.
As of May 8, 2008, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 25% of our outstanding common stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other investors to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an

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interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and second amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, our restated certificate of incorporation and second amended and restated bylaws:
    authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
 
    establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
 
    require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
 
    provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
 
    limit who may call special meetings of stockholders;
 
    prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
 
    require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and second amended and restated bylaws.
We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a return on an investment in our common stock will depend on appreciation in the price of our common stock.
We do not expect to pay cash dividends on our common stock. Any future dividend payments are within the absolute discretion of our board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 9, 2007, we completed our initial public offering, in which 7,705,000 shares of common stock were sold at a price to the public of $16.00 per share. We sold 6,199,845 shares of our common stock in the offering and the selling stockholders sold 1,505,155 of the shares of common stock in the offering. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-144381), which was declared effective by the SEC on October 2, 2007. The offering commenced as of October 3, 2007 and did not terminate before all of the securities registered in the registration statement were sold. CIBC World Markets Corp., Thomas Weisel Partners LLC, William Blair & Company, L.L.C., Cowen and Company, LLC and Needham & Company, LLC acted as representatives of the underwriters. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. None of the underwriting discounts and commissions or offering costs were incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. From the effective date of the registration statement through March 31, 2008, we used $2.6 million of the net proceeds to repay our outstanding principal and interest under our term loan facility with Silicon Valley Bank. We intend to use the remaining net proceeds for general corporate purposes, including financing our growth, developing new products, acquiring new customers, funding capital expenditures and, potentially, the acquisition of, or investment in, businesses, technologies, products or assets that complement our business. Pending these uses, we have invested the funds in a registered money market account and in short-term

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investment grade and U.S. government securities. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).
Item 6. Exhibits The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed (other than exhibit 32.1) as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    CONSTANT CONTACT, INC.    
 
           
Date: May 9, 2008
  By:   /s/ Gail F. Goodman    
 
           
    Gail F. Goodman    
    President and Chief Executive Officer    
    (Principal Executive Officer)    
 
           
Date: May 9, 2008
  By:   /s/ Steven R. Wasserman    
 
           
    Steven R. Wasserman    
    Vice President, Chief Financial Officer    
    (Principal Financial Officer)    

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EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
         
Exhibit No.   Description
  31.1    
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
       
 
  31.2    
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
       
 
  32.1  
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.
 
*   This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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