10-K 1 d442306d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

 

  ¨ 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 or organization)
  (I.R.S. Employer
Identification No.)
1601 Trapelo Road, Third Floor
Waltham, Massachusetts
  02451
(Address of principal executive offices)   (Zip code)

(781) 472-8100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class

 

Name of Exchange on Which Registered

Common Stock, $.01 par value   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ

  Accelerated filer  ¨           Non-accelerated filer  ¨   Smaller reporting company  ¨
                          (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  ¨    No  þ

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 29, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was $532,492,649 based upon the closing price reported for such date on the NASDAQ Global Select Market (assuming, for this purpose, that only the registrant’s directors and executive officers are deemed affiliates).

As of February 25, 2013, the registrant had 30,684,984 shares of Common Stock, $0.01 par value per share, outstanding.

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission for the registrant’s 2013 annual meeting of stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

CONSTANT CONTACT, INC.

INDEX

 

          Page
Number
 
PART I   

ITEM 1.

   BUSINESS      2   

ITEM 1A.

   RISK FACTORS      15   

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      30   

ITEM 2.

   PROPERTIES      30   

ITEM 3.

   LEGAL PROCEEDINGS      31   

ITEM 4.

   MINE SAFETY DISCLOSURES      31   
PART II   

ITEM 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      32   

ITEM 6.

   SELECTED FINANCIAL DATA      33   

ITEM 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      35   

ITEM 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      48   

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      49   

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      80   

ITEM 9A.

   CONTROLS AND PROCEDURES      80   

ITEM 9B.

   OTHER INFORMATION      81   
PART III   

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      81   

ITEM 11.

   EXECUTIVE COMPENSATION      81   

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      81   

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      81   

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      82   
PART IV   

ITEM 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      83   

SIGNATURES

     84   


Table of Contents

Forward-Looking Statements

Matters discussed in this Annual Report on Form 10-K relating to future events or our future performance, including any discussion, express or implied, of our anticipated growth, operating results, liabilities and obligations, future earnings per share, product plans, market opportunity, and other plans and objectives, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are often, but not always, identified by the words “believe”, “positioned”, “estimate”, “project”, “target”, “continue”, “intend”, “expect”, “future”, “anticipates”, “objectives”, and similar expressions that are not statements of historical fact. These statements are not guarantees of future events or future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Item 1A — “Risk Factors” and those included elsewhere in this Annual Report on Form 10-K and in our other public filings with the Securities and Exchange Commission. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that all forward-looking statements and the internal projections, judgments and beliefs upon which we base our expectations included in this Annual Report on Form 10-K, other periodic reports or otherwise are made only as of the date made and may change. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

References in this Annual Report on Form 10-K to “Constant Contact”, the “Company”, “we” or “us” mean Constant Contact, Inc. and our wholly-owned subsidiaries.


Table of Contents

PART I

 

ITEM 1. BUSINESS

Overview

Constant Contact is a leading provider of on-demand Engagement Marketingtools that are designed for small organizations, including small businesses, associations and non-profits. Our tools include our email marketing, social media marketing, event marketing, local deals and survey products. In June 2012, we began offering a mobile storefront tool following our acquisition of SinglePlatform, Corp., or SinglePlatform. We seek to help our customers succeed by creating and growing their customer and member relationships through our easy-to-use products combined with education, support, KnowHow® and coaching. Engagement marketing is marketing to current customers, clients and fans to create interest through an ongoing dialog. By enabling sharing, endorsement and engagement across all channels, we believe small organizations will generate new and repeat business. Our engagement marketing products enable our customers to launch and monitor marketing campaigns across multiple channels, including email, social media, events, local deals and surveys.

Our email marketing product allows small organizations to create, send and track professional and affordable permission-based email marketing campaigns. With these campaigns, we believe our customers build stronger relationships with their customers and members, expand their membership base and increase sales. We launched Social Campaigns™ in January 2012. Social Campaigns helps users create, publish, promote and run campaigns on Facebook® that offer promotions or content targeted toward those who “Like” them and to incent others to “Like” and share. EventSpotTM, our event marketing product, allows our customers to promote and manage events and create event homepages, track event registrations and collect online payments. During 2012, we also launched SaveLocalTM, an online tool that helps small businesses retain existing customers and attract new customers by offering local deals. In June 2012, we acquired SinglePlatform, a company that helps small businesses get discovered through web and mobile searches by providing a single place to update important business information, a “digital storefront”. SinglePlatform enables businesses to reach more than 200 million consumers across its extensive publishing network. Our online survey product enables our customers to easily create and send surveys and receive immediate and actionable feedback. We enable customers to expand the reach of their email and social campaigns, events, local deals and surveys by expanding their reach through Facebook, LinkedIn®, Twitter® and many other social platforms. NutshellMail™ is our free social media monitoring tool that allows our customers to receive and respond to updates on their social media networks. Through the acquisition of CardStar, Inc., or CardStar, in January 2012, we offer the CardStar® mobile phone application that allows consumers to easily manage loyalty, rewards and membership cards on a mobile phone.

As of December 31, 2012, we had approximately 555,000 unique paying customers. Our customers include various types of small organizations including retailers, restaurants, law and accounting firms, consultants, non-profits, religious organizations and alumni associations.

We market our products and acquire customers through a variety of sources including online advertising, partner relationships, television and radio advertising, regional (i.e., local) initiatives, referrals and brand awareness. Our online advertising includes search engine marketing, and advertising on online networks and other websites, including banner advertising. We have partner relationships with over 9,500 local and national small business service providers. These partners refer customers to us through links on their websites and outbound promotions to their customers or allow us to market to their customers directly. Our television and radio advertising is designed to educate potential customers about our marketing solutions and raise awareness of our brand. Our regional initiatives include local seminars and local online advertising. We employ 21 regional development directors across the U.S. and Canada and we have a marketing office in the United Kingdom. Additionally, we enhance our reach through approximately 275 specially trained independent experts that are integrated with our regional development directors and who are trained in both engagement marketing best practices and our products. Together, our regional directors and local experts presented to approximately 165,000 small businesses and organizations in 2012. A significant number of our new customers come to us from word-of-mouth referrals

 

2


Table of Contents

from our existing customers and from the inclusion of a link to our website in the footer of substantially all of the over 45 billion emails sent by our customers in 2012. We also believe our general brand awareness, press and thought leadership initiatives and overall visibility generate interest in our products.

We were incorporated in Massachusetts in 1995 under the name Roving Software Incorporated. We reincorporated in Delaware in 2000 and changed our name to Constant Contact, Inc. in 2006. Our on-demand email marketing product was first offered in 2000.

Our principal executive offices are located at 1601 Trapelo Road, Waltham, Massachusetts 02451. Our telephone number is (781) 472-8100. Our website address is www.constantcontact.com. We are not including the information contained on our website or any information that may be accessed by links on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. Through a link on the Investor Relations section of our website, we make available our filings with the Securities and Exchange Commission, or SEC, after they are electronically filed with or furnished to the SEC. All such filings are available free of charge. These filings are also available, free of charge, at www.sec.gov or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.

Market Opportunity

We believe our engagement marketing tools, including our on-demand email marketing, social media marketing, event marketing, local deals, mobile storefronts and online survey products, provide significant benefits for small organizations. We believe online marketing is an effective way for smaller organizations to create new relationships and maintain and grow existing relationships.

Small organizations represent a large market opportunity both in the U.S and abroad. According to the most recently available estimates from the Small Business Administration and the National Center for Charitable Statistics, there are over 29 million registered small businesses and non-profits in the United States. We believe our products could potentially address the needs of these small organizations. We also believe opportunities exist to more aggressively market our products outside the U.S. Finally, small organizations face unique challenges when adopting online marketing, including unfamiliarity with online marketing tools, uncertainty with respect to the benefits of online marketing, lack of technical and marketing expertise and limited budgets and time constraints. These constraints are highlighted during times of economic uncertainty. We have designed our engagement marketing platform and our approach to education, support and coaching to address these challenges.

Business Strengths

We believe that the following business strengths differentiate us from our competitors and contribute to our success:

 

   

Brand Recognition and Reach.    We believe the Constant Contact brand is widely recognized in the small business community. A 2012 survey by The Business Journals of small to medium-sized businesses ranked our brand within the top five of business service brands. We have approximately 555,000 customers in more than 180 countries and territories.

 

   

Solutions Tailored to Meet the Needs of Small Organizations.    With millions of customer interactions each year by way of personal coaching and support, seminars, online tutorials, ongoing market research and customer surveys, we believe we have unique insights into the motivations and challenges facing small organizations. Our easy-to-use and affordable integrated suite of online marketing products, education, support, KnowHow and coaching are designed to help our customers succeed.

 

   

Integrated Engagement Marketing Product Offerings.    Since launching our email marketing product in 2000, we have continued to expand our product offerings. We now offer social media marketing, event

 

3


Table of Contents
 

marketing, local deals, mobile storefronts and online survey products as well as NutshellMail, a free social media monitoring tool designed for small organizations, and a mobile application that extends the use of loyalty, rewards and membership cards and mobile coupons among consumers. When used in combination, we believe our integrated products provide customers with a unified engagement marketing platform that enhances their ability to create, build and strengthen customer relationships.

 

   

Significant Base of Recurring Revenue.    We benefit from a high level of customer loyalty. Our monthly retention rate of unique paying customers remains in our historical range of 97.8%, plus or minus 0.5%. We believe this represents a strong level of engagement and provides us with a significant base of recurring revenue and visibility into future performance.

 

   

Attractive Life-Time Value Model.    Based on our historical average retention rate and revenue per unique customer, we estimate a lifetime revenue of approximately $2,000 per unique customer.

 

   

Commitment to Delighting our Customers.    We seek to delight our customers whenever possible. We do so through easy-to-use products, free unlimited support, KnowHow, coaching and education in the form of local seminars, webinars and tutorials. We believe that our commitment to delighting our customers and prospects drives our success.

 

   

Deliver success     According to a 2011 Aberdeen Group study, our customers have a 36% higher open rate, 60% better click-through rate and generate 29% more revenue as compared to users of other email marketing solutions.

 

   

Software-as-a-Service (SaaS).    We provide our products on an on-demand basis, meaning that our customers can access and use our products through a standard web browser. This enables our customers to quickly begin using our products with minimal up-front costs and limited technical expertise. It also allows us to deploy new applications and upgrades quickly and efficiently to our entire customer base.

Growth Strategy

Our growth strategy is driven by the following:

 

   

Acquire New Customers.    We aggressively seek to continue to attract new customers by promoting the Constant Contact brand and educating prospects on the benefits of our engagement marketing tools.

 

   

Increase Revenue Per Customer.    We believe our large and growing paying customer base provides significant cross-sell opportunities. Additionally, by providing tools, best practices, education, KnowHow, coaching and support, we help our customers increase the size of their contact list, expand their following on social networks, get discovered through web and mobile searches and increase the number and frequency of times they hold events, survey their customers and conduct online deals. As a result of our initiatives to cross-sell our products and drive usage of our products, we seek to increase total revenue from each customer.

 

   

Retain our Customers.    We continuously seek to improve customer retention rates. We study the attributes of customers we have retained and analyze reasons why customers leave us to provide a continuous feedback loop and help us to improve our ability to retain customers.

 

   

Multi-Product Offering.    We believe there is significant opportunity in bundling and packaging our products on a common platform. We are committed to enhancing our existing products and launching new products to strengthen our multi-product focus and to grow our leadership position in engagement marketing.

 

   

Expand our Partner Distribution Channel.    We currently have partner relationships with over 9,500 local and national small business service providers. We believe that opportunities exist to expand the number of partners and increase the effectiveness of our partners.

 

   

Pursue Complementary Acquisitions.    We have made complementary acquisitions in the past and we intend to continue to evaluate potential acquisitions of additional technologies or businesses to enhance our technology and our product offerings and to access new customers and markets.

 

4


Table of Contents
   

Expand Internationally.    We currently sell our products to customers in over 180 countries and territories, despite limited marketing efforts outside of the U.S. We have two regional development directors in Canada and a marketing office in the United Kingdom. We also offer certain customer support services in Spanish, including email marketing templates and webinars. We believe that opportunities exist to expand our presence outside the U.S.

Our Products and Services

Email Marketing

Our email marketing product allows customers to easily create, send and track professional-looking email campaigns. Our email marketing product provides customers with the following features:

 

   

Campaign Creation Wizard.    This comprehensive, easy-to-use interface enables our customers to create and edit email campaigns. Customers can readily change colors, fonts, borders and backgrounds and insert images and logos to help ensure that their emails appear professional.

 

   

Professionally Developed Templates.    Over 400 pre-designed email campaign templates help customers quickly create attractive and professional looking campaigns. These templates reflect a wide variety of themes and styles including newsletters, business letters, promotions and announcements and can be refined by varying color and formats. Our editing functionality enables customers to easily modify the templates. We also provide templates designed to appeal to specific vertical markets.

 

   

Contact List Growth and Management.    These tools help our customers build and manage their email contact lists. Our contact list building tools include file and spreadsheet import functionality as well as software plug-ins to import contact lists maintained in Microsoft® Outlook®, Intuit® QuickBooks®, ACT!® by Sage Software and Salesforce®. We also offer market leading free tools and applications that allow customers to add and update contacts. These include adding contacts directly from a computer or point of sale device, an iPhone® application with list building features, a “Join My Mailing List” application for a customer’s website, blog and Facebook page, and “text to join” and “scan to join” offerings for mobile devices.

 

   

Email Tracking and Reporting.    These features enable our customers to review and analyze the overall effectiveness of a campaign by tracking and reporting aggregate information, including how many emails were delivered, how many were opened and which links were clicked on. These features also enable our customers to identify on an individual basis which contacts received an email, opened an email and clicked on particular links within the communication.

 

   

Social Media Integrations.    Email campaigns can be easily shared across multiple social media networks using Simple Share™. In addition, our customers may add social media links, such as links to Facebook pages and Twitter feeds, as well as “Share” and “Like” buttons, to their emails to encourage recipients to share and connect on social networks.

 

   

Email Delivery Management.    Delivery management tools are incorporated throughout our product and are designed to maintain our high deliverability rates. Some of these tools are readily apparent to our customers, such as delivery tracking. Others are delivered through back-office processes, such as a spam content check and address validation. To improve the percentage of emails delivered, we work closely with Internet service providers, or ISPs, on spam prevention issues. According to data measured by an independent third party, over 97% of our customers’ emails were delivered past spam filters to their targeted email inbox in the United States during 2012. In addition, unsubscribe requests are automatically processed to help ensure ongoing compliance with government regulations and email marketing best practices.

 

   

MyLibrary and MyLibraryPlus.    With MyLibrary, we enable customers to store up to five images and five documents for free. Stored images may be edited and resized as necessary for use in email

 

5


Table of Contents
 

campaigns. Our customers can also purchase MyLibraryPlus, our premium image and document hosting service. MyLibraryPlus provides access to our stock image gallery of thousands of images and up to 50 megabytes of document and image storage.

 

   

Email Archive.    We offer our customers the ability to create a hosted version of current and past email campaigns on our system and make them readily available to their constituents via a link on a customer’s website or on Facebook or Twitter. Archive provides our customers an ability to showcase on their website and social media sites the extent and breadth of their communication efforts.

For the year ended December 31, 2012, revenue from our email marketing product alone was approximately 85% of our total revenue.

Social Media

Social Campaigns

We launched Social Campaigns in January 2012. Social Campaigns allows users to create, publish, promote and run campaigns on Facebook that offer promotions or content targeted toward those who “Like” them and to incent others to “Like” and share them. Social Campaigns can be promoted to a customer’s email list, to existing Facebook fans, on LinkedIn and to Twitter followers. Social Campaigns enables small organizations to create professional looking pages on Facebook and drive social media engagement through campaigns designed to help grow their fan base, spark conversation and generate social word of mouth.

Social Media Marketing

We have incorporated social media marketing features into all of our products. These features enable our customers to extend the reach of their email campaigns, events and surveys beyond their own contacts using our Simple Share and Tweet this Email and Tweet this Event tools. In addition, customers may add social media links as well as “Share” and “Like” buttons to their emails and events. The Social Stats feature provides easy access to social media analytics and our Social Share feature lets our customers publish their content to Facebook, Twitter, LinkedIn and other social networks.

Social Media Monitoring

NutshellMail, our free social media monitoring tool, aggregates updates from most of the popular social media networking sites in an email that is sent to our customers at specified intervals. Supported sites include Facebook, Twitter, LinkedIn, Yelp®, MySpace®, YouTube®, foursquare® and Citysearch®.

Social Media Learning Tools

Our Social Media Quickstarter is a collection of simple guides to help our customers learn how to build online social connections in a fast and easy manner. Topics include a social media primer, sections dedicated to specific social network sites such as Facebook, Twitter, LinkedIn and YouTube, as well as topics on ratings and reviews, location based services, QR codes and integrating email and social media marketing.

EventSpot

Our event marketing product allows our customers to promote and manage events, communicate with invitees and registrants, capture and track registrations and collect online payments. Our event marketing product provides customers with the following features:

 

   

Event Registrations.    We make online registration quick and easy by offering convenient, customizable forms to capture names and email addresses and other company or personal information. Our customers

 

6


Table of Contents
 

can offer registrants the option of registering one or more guests, which assists customers with accurately planning event attendance. Options for guest registration include limits on the number of guests each registrant can bring, different event fees for member and non-member guests and an option for registrants to pay for their guests during the registration process. Customers can also collect information for each registered guest to help track new business leads and grow their existing contact list.

 

   

Email Invitations and Reminders.    Our easily customizable templates enable our customers to send professional looking communications such as invitations, reminders, updates and confirmations. Our event marketing product includes an event creation wizard, over 140 preformatted and customizable event templates and list management capabilities.

 

   

Hosted Event Homepage.    Our customers can create an event homepage that includes event details such as images, special guests and integrated online maps. Links on the homepage bring visitors to the registration page. The homepage can also be used to share post-event photos, materials and presentations.

 

   

Promote Events.    Our customers can promote their event on any website, blog or social media network, allowing small businesses and organizations to reach potential event attendees who do not subscribe to their email list. Our Tweet My Event feature automatically shortens the homepage or registration page URL and sends a tweet from the user’s Twitter account. An event link can be included on any website or social media site such as Facebook, Twitter, YouTube, Flickr® and LinkedIn.

 

   

Collect Payments and Issue Tickets.    When setting up an event, customers can select the preferred currency for the event or make the event free. The correct currency symbol will display to registrants and, if credit card payment is enabled, the correct currency will be processed via PayPal® or Google CheckOut or through the customer’s merchant account or a customer can create a new merchant account through our relationship with ProPay®. Customers have the option to create and distribute tickets to their events which registered attendees can print.

 

   

Mobile Capabilities.    Event Check-in, available for iPhone and Android® mobile devices, allows event sponsors to access registrant information, identify participants as checked-in and email registrants by tapping an address on their smartphones. Event tickets are now available on Apple® Passbook®.

SaveLocal

SaveLocal makes it quick and easy for our customers to retain existing customers and attract new customers by creating, running and managing local deals, and provides them with end-to-end control over their deals at an affordable price. Our customers control their deal structure by deciding what they want to offer, how many coupons they want to sell and how long they want their deal to run. Our customers can generate new customers from their existing customers, who are given a bonus coupon for both buying the deal and sharing it on their social networks.

SinglePlatform

SinglePlatform provides our customers the power to manage all of their key online listings from one place by helping them to create a content rich digital storefront which can include digital menus, photos, services, and featured products. Content is distributed across our network of over 100 publishers; increasing reach and helping small businesses get found online and via mobile sites. Digital menus can be posted on a customer’s Facebook page or website and announcements can be sent to fans and followers about special offers and events. We acquired SinglePlatform in June 2012. For a description of the acquisition and related risks, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties” and Note 4, Acquisitions, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Survey

Our online survey product enables our customers to survey their customers or members and analyze responses. By selecting one of our customizable templates and editing our template questions or entering their own questions, our customers can easily create a professionally formatted survey. Our survey product includes a survey creation wizard, over 90 different preformatted and customizable survey templates and list management capabilities. Our Social Share feature makes it easy for our customers to post surveys to Facebook, Twitter, LinkedIn and other social networking sites.

 

7


Table of Contents

By incorporating a real-time reporting function, our survey product enables customers to analyze overall survey results and specific answers submitted by individual respondents. Our survey product includes analytic features that enable our customers to segment results based on survey responses, easily edit filters for “slice and dice” analysis and view the results in intuitive, easy-to-understand graphical and data formats. Results can be exported to a Microsoft® Excel® file for additional analysis. In addition, we offer an online polling feature that enables our customers to create online polls for use on their websites and to view responses immediately.

CardStar

In January 2012, we acquired CardStar, a leading developer of mobile applications that extend the use of loyalty, rewards and membership cards and mobile coupons among consumers. The CardStar application consolidates loyalty, rewards and membership cards on smartphones, letting consumers use a single application rather than a series of physical cards. CardStar’s free mobile loyalty application currently has over three million registered users and is available on major mobile platforms, including iPhone, Android, and Blackberry®.

Customer Support

We provide free unlimited customer support to all customers and trialers of our products via phone, chat, email and social media. In the fourth quarter of 2012, our customer support employees engaged with our customers and trialers through approximately 4,000 calls, chats, emails and social media interactions per day. Our support teams are located at our headquarters in Waltham, Massachusetts and at our sales and support call center in Loveland, Colorado. We complement our customer support with free daily product tours offered via our website, a knowledge base of frequently asked questions and webinars that explain the benefits of engagement marketing.

We believe our customer support philosophy is best described as coaching with a personal touch. Our customer support representatives are trained to not just answer our customers’ questions but to understand the nature of the question and what the customer is trying to accomplish. By actively listening and engaging with the customer, we believe our support team not only provides assistance with troubleshooting but delivers incrementally more value to help our customers be successful.

Our compliance group is responsible for enforcing our permission and prohibited content policies. We work closely with customers who have higher than average spam complaint rates or bounced emails, and with customers whose emails are flagged by our system as possibly including prohibited content or spam, to assist them in complying with our policies. If we cannot resolve outstanding concerns, we terminate our agreement with the customer.

As of December 31, 2012, we had 433 employees working in our customer support organization. Our customer support organization includes customer support, customer operations, training and compliance.

Other Services

We also offer our customers the following services:

Custom Services.    Although the majority of our customers select the “do-it-yourself” approach, we also offer custom services to customers who would like their email campaigns, event promotions or surveys prepared for them. Our custom service offerings range from a low-cost getting started service to custom campaign creation.

Training Programs.    Our regional development directors and authorized local experts deliver free marketing best practices seminars with the goal of providing small businesses, non-profits and small organizations the confidence they need to use our products. We also offer a one-day paid workshop that provides attendees with comprehensive training emphasizing the use of our products.

 

8


Table of Contents

Customers

We have maintained a consistent focus on small organizations. As of December 31, 2012, we served a large and diverse group of approximately 555,000 unique customers. This customer base is comprised of business-to-business users, business-to-consumer users and non-profits and associations. We serve a wide range of business-to-business customers, including law firms, accountants, marketing and public relations firms, recruiters, industrial products suppliers and independent consultants. They typically use our products to showcase their subject matter knowledge and educate their audiences by sending informational newsletters and announcements about their company or industry. We also serve a diverse base of business-to-consumer customers, including but not limited to on-and off-line retailers, restaurants, realtors, travel and tourism businesses, yoga studios and day spas. These customers typically use our products to promote their offerings with the intent of generating regular, repeat business from their customers and prospects. Finally, we serve a variety of non-profits and associations, including religious organizations, charities, trade associations, alumni associations and other non-profits. They typically use our products to maintain regular communications with their members and inform them about news and events pertaining to their groups, as well as to drive event attendance, volunteer participation and fundraising efforts. We estimate that approximately two-thirds of our customers have fewer than ten employees. For the year ended December 31, 2012, our average monthly revenue per customer was $40.22. We have low customer concentration as our top 100 customers in 2012 accounted for less than 1% of our total revenue. Customers in more than 180 countries and territories currently use our products. During 2012, we generated approximately 10% of our revenue from countries outside of the U.S.; however significantly all of our long-lived assets were held in the U.S.

We measure customer satisfaction on a monthly basis by surveying our customers. Based on these surveys and our low customer attrition rate, we believe that our overall customer satisfaction is strong.

Sales and Marketing

Our sales and marketing efforts are designed to attract potential customers to our website, enroll them in a free trial, encourage them to engage with our products, convert them to paying customers, introduce and cross-sell our multiple integrated products and add-ons, encourage them to use our products effectively and retain them as ongoing customers. We employ sophisticated strategies to acquire our customers by using a variety of sources, including but not limited to, online advertising, partner relationships, television and radio advertising, regional initiatives, referrals and general brand awareness. We also invest in public relations and thought leadership to build our overall brand and visibility.

Customer Acquisition Sources

Television and Radio Advertising.    Our television and radio advertising campaigns are designed to build awareness and distinguish the value of the Constant Contact brand and drive market awareness of our products.

Online Advertising.    We advertise online through pay-per-click advertising with search engines, including Google, Yahoo! and Bing®, and banner advertising with online advertising networks and other websites likely to be frequented by small organizations.

Partners.    We have relationships with over 9,500 active partners who refer customers to us through links on their websites and outbound promotions to their customers. Our partners include solution providers, franchisors and other distribution partners, AppConnect® partners, strategic partners and affiliate partners. Solution providers, which include web developers, small business consultants, marketing consultants and social media consultants, are typically small business influencers who sell our products, provide implementation services and refer us to their customers. Franchisors and other distribution partners are typically larger organizations that want their affiliates (franchisees in the case of franchises) to use our products. AppConnect partners, which include companies offering software applications, point of sale solutions, web applications and small business accounting solutions, have software or technical solutions that are integrated with our products. We typically market our

 

9


Table of Contents

products to their base of customers. Strategic partners are major companies who want to provide their customers with access to our products. Affiliate partners provide links to our website from their website. Most of our partners either share a percentage of the revenue received by us, receive a discount on their customer accounts or receive a one-time referral fee. We promote many of our solution providers and AppConnect partners in our Constant Contact MarketPlace.

Word-of-Mouth Referrals.    New customers frequently indicate that they learn about us from a current customer. We also offer our paying customers a referral incentive consisting of a $30 credit for them and for any customer they refer. The majority of referral customers do not use the incentive program.

Footer Click-Throughs.    New customers also come to us by clicking on the Constant Contact link included in the footer of substantially all of the emails sent by our customers. In 2012, our customers sent over 45 billion emails.

Sales Efforts

Customer Marketing Coaches.    As of December 31, 2012, we employed a team of 151 phone-based sales professionals who call U.S.-, Canadian- and United Kingdom-based trial customers to assist them in their initial use of our products and encourage conversion to a paid subscription. Our specialists have a deep understanding of the marketing goals, best practices and types of campaigns and offers that generate positive results. In addition to product knowledge, we offer our customers specialized advice to help make their campaigns successful.

Local Initiatives.    As of December 31, 2012, we employed a team of 21 regional development directors who focus on educating small organizations on the benefits of our products in their local markets. These employees are located across the United States and in Canada and typically provide free local seminars to chambers of commerce and other small business groups about engagement marketing. We also enhance our local reach through approximately 275 authorized local experts that deliver seminars on our behalf.

Distance Learning.    We offer free online webinars to prospects and customers on a wide variety of topics designed to educate them about the benefits of engagement marketing and guide them in the use of our products.

Other Initiatives

Press Relations and Thought Leadership.    We survey our customer base on a periodic basis to assess small business expectations, attitudes and challenges. We publish the results and seek to get print and radio coverage of our results. We also publish engagement marketing, email marketing, social media marketing, event marketing and survey best practices and advice through our Hints & Tips newsletters and on our blog. In addition, in 2012, our CEO authored Engagement Marketing: How Small Business Wins in a Socially Connected World, which was published by Wiley Publishing. These efforts enhance our brand awareness and industry leadership.

Customer Cross-Sell.    We work to understand the best time and methods to introduce our multiple products to our customers. These methods include in-product promotions, website promotions, email promotions, personal coaching and other methods. We target these cross promotions based upon trends, product usage patterns, industry and other factors.

Customer Retention.    We analyze the reasons why customers leave us and attempt to identify customers that are at risk. We coach our customers on the effective use of our products. In addition, our research has shown that customers who use more than one product have higher retention rates; therefore, we encourage our customers to consider additional products and add-ons.

Vertical Marketing.    We specifically develop marketing programs and target public relations efforts at certain vertical markets that have demonstrated an affinity for our products. We adjust our target vertical markets based on our existing customer base, market opportunity and overall value to our business.

 

10


Table of Contents

Community.    We maintain an online user community for both trial and paying customers with discussion boards, a resource center, member spotlights and other features.

Constant Contact Marketplace.    The Constant Contact Marketplace offers one of the largest collections of apps, integrations, and marketing experts specifically to help small businesses and non-profits maximize their marketing efforts and is the only free, online resource exclusively focused on small businesses and non-profits looking for marketing tools and services. More than 100,000 small organizations have discovered mobile apps and social integrations through the Constant Contact Marketplace.

Small Business Organization Initiatives.    We partner with chambers of commerce, small business development centers and SCORE chapters to offer our products, educational resources and knowledge base to their members. We typically offer the chamber, center or chapter a free account and discounts to their members.

In the years ended December 31, 2012, 2011 and 2010, we spent approximately $104.5 million, $89.2 million and $78.9 million, respectively, on sales and marketing. Our sales and marketing expense as a percentage of revenue for the years ended December 31, 2012, 2011 and 2010 was 42%, 42% and 45%, respectively. As of December 31, 2012, we had 306 employees working in our sales and marketing organization.

Technology and Operations

Our on-demand products use a central application and a single software code base with unique accounts for each customer. As a result, we are able to spread the cost of providing our products across our entire customer base. In addition, because we have one central application, we believe we are able to scale our business to meet increases in demand for our products. Scalability is achieved through advanced use of application partitioning to allow for horizontal scaling across multiple sets of applications. This structure enables individual application subsystems to scale independently as required by volume and usage.

Our production system hardware and the disaster recovery hardware for our production system, with the exception of SinglePlatform, are each co-located in third-party hosting facilities. One facility is located in Bedford Massachusetts, owned and operated by Digital 55 Middlesex, LLC, an affiliate of Digital Realty Trust, Inc., and it provides services to us under an agreement that will expire in December 2016 with two five-year extension options. The second facility is located in Santa Clara, California and owned by Digital Alfred, LLC, also an affiliate of Digital Realty Trust, Inc. The term of the agreement commenced in May 2011 for a period of six years with two four-year extension options. Both hosting facilities provide around-the-clock security personnel, video surveillance and access controls, and are serviced by onsite electrical generators and fire detection and suppression systems. Both facilities also have multiple Tier 1 interconnects to the Internet.

We own all of the hardware deployed in support of our platform. We continuously monitor the performance and availability of our products. We have a highly available, scalable infrastructure that utilizes load-balanced web server pools, redundant interconnected network switches and firewalls, replicated databases, and fault-tolerant storage devices. Production data is backed up on a daily basis and stored in multiple locations to ensure transactional integrity and restoration capability.

We protect our customers’ data using security practices and technology solutions that are often unavailable to small organizations. We do not use our customers’ confidential information, including their contact lists, except in the delivery of our product, nor do we sell or rent this information.

Changes to our production environment are tracked and managed through a formal maintenance request process. Production hardware changes are handled in the same manner as software product releases and are first tested on a quality system, then verified in a staging environment, and finally deployed to the production system, which we generally seek to accomplish without system downtime. As of December 31, 2012, we had 48 employees working in our operations organization.

 

11


Table of Contents

Research and Development

We have made substantial investments in research and development as a part of our strategy to continually improve the ease of use and technological scalability of our existing products as well as to develop new features and product offerings. Our engineering team adheres to a well-defined and managed software development lifecycle model. This model, which emphasizes the use of agile development practices, defines how we envision, plan, develop and test our products. Engineering is responsible for defining our technology and operations vision and executing on our product roadmaps. Our product strategy organization includes market analysts, product managers and user interface designers. This group also performs competitive and market analysis and oversees product pricing as well as systematic product usability testing. Engineering and product strategy work cooperatively to prioritize our research and development efforts by balancing our need for product enhancements, security and scalability.

Our research and development expense totaled approximately $38.8 million for 2012, $29.5 million for 2011 and $24.0 million for 2010. Our research and development expense as a percentage of revenue for each of the years ended December 31, 2012, 2011 and 2010 was 15%, 14% and 14%, respectively. As of December 31, 2012, we had 240 employees working in our engineering and product strategy organizations.

Competition

The market for vendors offering online marketing tools is fragmented, competitive and evolving. Few competitors offer multiple products and none offer our complete suite of engagement marketing tools for small organizations. We believe the following are the principal competitive factors in this market:

 

   

brand;

 

   

ease of use and effectiveness;

 

   

integrated solutions;

 

   

product functionality, performance and reliability;

 

   

customer support, coaching and education;

 

   

affordability; and

 

   

product scalability.

Our email marketing product primarily competes with vendors focused on the small and medium-size business market, or SMB market. Some of the vendors who are focused on the SMB email market include: AWeber Systems, Inc., iContact Corporation, a subsidiary of Vocus, Inc., Protus, a subsidiary of j2 Global Communications, Inc. (Campaigner®), The Rocket Science Group LLC (MailChimp®), Vertical Response, Inc. and VistaPrint N.V. These vendors typically charge a low monthly entry fee or a low fee per number of emails sent and, in some cases, they have a free offering. While we generally do not compete with vendors focusing on enterprise or larger customers, we may compete with them in the future. We may also face future competition in the email marketing market from new companies entering our market, which may include large, established companies. Our event marketing product competes with offerings by Eventbrite, Inc., Evite, LLC a wholly-owned, operating business of IAC/InterActiveCorp, Regonline, a division of The Active Network, Inc., and Cvent, Inc. Our Social Campaigns product competes with offerings by Offerpop Corporation, Pagemodo, a subsidiary of VistaPrint N.V., Vocus Social Media LLC doing business as North Social® and Wildfire Interactive, Inc. Our SaveLocal product competes with offerings by Groupon, Inc., LivingSocial, Inc., Amazon Local™ and Googleoffers™. Our SinglePlatform product competes with offerings by Yext, Inc. and Locu, Inc. Our survey product competes with offerings by Surveymonkey.com Corporation and Widgix, LLC doing business as SurveyGizmo®.

 

12


Table of Contents

Barriers to entry in delivering online marketing point solutions for small organizations are relatively low, which allows new entrants to enter the market without significant impediments and larger, established companies to develop their own competitive products or acquire or establish cooperative relationships with our competitors. In addition, some of these companies may have significantly greater 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. These potential competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. These competitors may have more extensive customer bases and broader customer relationships that they could leverage to obtain a significant portion of the market. In addition, these competitors may have longer operating histories and greater name recognition than we do. Moreover, if one or more of our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively. Finally, one or more of these businesses could decide to offer competitive products at no cost or low cost in order to generate revenue as part of a larger product offering.

We believe our easy-to-use, affordable and integrated products, education, KnowHow and coaching differentiate us from the competition.

Government Regulation

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes requirements for commercial email and specifies penalties for commercial email that violates the CAN-SPAM Act. In addition, the CAN-SPAM Act gives consumers the right to require emailers to stop sending them commercial email.

The CAN-SPAM Act covers email sent for the primary purpose of advertising or promoting a commercial product, service, or Internet website. The U.S. Federal Trade Commission, or the FTC, a federal consumer protection agency, is primarily responsible for enforcing the CAN-SPAM Act, and the U.S. Department of Justice, other federal agencies, State Attorneys General, and ISPs also have authority to enforce certain of its provisions.

The CAN-SPAM Act’s main provisions include:

 

   

prohibiting false or misleading email header information;

 

   

prohibiting the use of deceptive subject lines;

 

   

ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request;

 

   

requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively assented to receiving the message; and

 

   

requiring that the sender include a valid postal address in the email message.

The CAN-SPAM Act also prohibits unlawful acquisition of email addresses, such as through directory harvesting, and transmission of commercial emails by unauthorized means, such as through relaying messages with the intent to deceive recipients as to the origin of such messages.

Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial emailers who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.

 

13


Table of Contents

The CAN-SPAM Act acknowledges that the Internet offers unique opportunities for the development and growth of frictionless commerce, and the CAN-SPAM Act was passed, in part, to enhance the likelihood that wanted commercial email messages would be received. We believe we are a leader in developing policies and practices affecting our industry and that our permission-based email marketing model and our anti-spam policy are compatible with current CAN-SPAM Act regulatory requirements. We are a founding member of the Email Sender and Provider Coalition, or ESPC, a cooperative industry organization founded to develop and implement industry-wide improvements in spam protection and solutions to prevent inadvertent blocking of legitimate commercial email. We maintain high standards that apply to all of our customers, including non-profits and political organizations, whether or not they are covered by the CAN-SPAM Act.

The CAN-SPAM Act preempts most state laws specific to email, except for common law trespass, contract, or tort laws, state laws specifically prohibiting falsity or deception in commercial email and state laws relating to fraud and computer crime. The scope of these exceptions, however, is not settled, and some states have adopted email regulations that, if upheld, could impose liabilities and compliance burdens on us and on our customers in addition to those imposed by the CAN-SPAM Act.

In addition, we may be subject to regulation by the FTC and each of the states under general consumer protection statutes prohibiting unfair or deceptive acts and practices. Certain areas of marketing activity, including email marketing and online advertising, are subject to specific statutes such as the CAN-SPAM Act discussed above. These federal or state statutes and rules also effectively regulate online user’s privacy and data security, particularly in the e-commerce area where the FTC and state attorneys general actively investigate the policies and practices of online companies regarding the protection, sharing or use of personal information furnished by customers to the websites. To the extent our customers are small businesses or individuals, we may be subject to regulation and enforcement oversight in these areas.

Moreover, some foreign countries, including the countries of the European Union, Israel and Canada, have regulated or are in the process of regulating the distribution of commercial email and the online collection and disclosure of personal information. To the extent we conduct business operations in certain foreign countries, such as the United Kingdom and Canada, we may be subject directly to the laws in these countries. In addition, foreign governments may attempt to apply their laws extraterritorially or through treaties or other arrangements with U.S. governmental entities.

Our customers may be subject to the requirements of the CAN-SPAM Act, and/or other applicable state or foreign laws and regulations affecting email marketing. If our customers’ email campaigns are alleged to violate applicable email laws or regulations and we are deemed to be responsible for such violations, or if we were deemed to be directly subject to and in violation of these requirements, we could be exposed to liability.

Intellectual Property

Our intellectual property rights are important to our business. We rely on a combination of copyright, trade secret, trademark, patent and other rights in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property.

Others may develop products that are similar to our technology. We enter into confidentiality and other written agreements with our employees, consultants, partners and vendors, and through these and other written agreements, we attempt to control access to and distribution of our software, documentation and other proprietary technology and other information. These confidentiality and other written agreements, however, offer only limited protection, and we may not be able to enforce our rights under such agreements. Despite our efforts to protect our proprietary rights, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our product. Policing unauthorized use of our products and intellectual property rights is difficult and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have

 

14


Table of Contents

taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.

“Constant Contact®” is a registered trademark in the United States, Canada and in the European Union. We also hold trademarks and service marks identifying certain of our products or features of our products. We currently hold one issued U.S. patent and have two patent applications pending in the U.S. Patent and Trademark office.

Employees

As of December 31, 2012, we had 1,162 employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and believe that our relations with our employees are good.

Facilities

Our corporate headquarters, including our principal administrative, marketing, sales and support and research and development organizations, is located in Waltham, Massachusetts. We currently lease approximately 145,000 square feet in this facility under a lease agreement, as amended, that expires in September 2022 with one ten-year extension option. We expect to occupy approximately 106,000 additional square feet in this facility over the next three years. As of December 31, 2012, 694 of our employees were based in this facility. We also lease approximately 50,000 square feet of office space in Loveland, Colorado under a lease agreement that will expire in April 2019 with three three-year extension options. This facility is used for sales and support personnel and, as of December 31, 2012, 316 employees were based in this location. We lease a small amount of general office space in Delray, Florida, San Francisco, California, New York, New York (two facilities) and London, England under lease agreements that expire at varying dates through 2017. The facilities in California and Florida and one of the New York locations are used for research and development personnel. The other New York facility houses SinglePlatform and our London facility houses marketing personnel. As of December 31, 2012, five employees were based in Florida, 19 employees were based in California, 90 employees were based in New York and three employees were based in London. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms.

 

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 Annual Report on Form 10-K 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 vary 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.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

If we are unable to attract new customers and retain existing customers, our business and results of operations will be affected adversely.

To succeed, we must continue to attract and retain a large number of customers. Over the last few years, there has been a decline in the number of new customers we have added on an annual basis. In 2011, we added fewer new customers than we added in 2010 and in 2012 we added fewer new customers then we added in either 2010 or 2011. We rely on a variety of methods to attract new customers, such as paying providers of online services,

 

15


Table of Contents

search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website, television and radio advertising, the efforts of our partners and the inclusion of 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. However, customers cancel their accounts for many reasons, including economic concerns, business failure or a perception that they do not use our product effectively, the service is not a good value and that they can manage their online marketing efforts without our products. In some cases, we terminate an account because the customer fails to comply with our standard terms and conditions. As our customer base continues to grow, even if our customer retention rates remain the same on a percentage basis, the absolute number of customers we lose each month will increase. 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 we are unable to use any of our current marketing initiatives or the cost of such initiatives were to significantly increase or such initiatives 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 business 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, a substantial portion of our revenue from our email marketing product for small organizations, including small businesses, associations and non-profits. For the year ended December 31, 2012, our revenue from our email marketing product alone was approximately 85% of our total revenue. Widespread acceptance of email marketing among small organizations will continue to be critical to our future growth and success. There is no certainty regarding how the market for email marketing will continue to 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 or utilize alternative or new electronic methods of communicating with their customers, existing customers may cancel their accounts and potential customers may decide not to adopt email marketing. If the market for email marketing services fails to continue to grow or grows more slowly than we currently anticipate, demand for our services may decline and our revenue would suffer.

Our growth strategy requires us to expand our product offerings beyond email marketing and this expansion may not be successful.

We have traditionally focused our business on providing our email marketing product for small organizations, but in the last few years we have expanded our product offerings. In 2007, we introduced our survey product and our add-on email archive service that enables our customers to archive their past email campaigns. In 2009, we launched our event marketing product. Through our acquisition of Nutshell Mail, Inc., which we completed in May 2010, we now provide a tool for small organizations to monitor and engage with social media networks. In January 2012, we launched our Social Campaigns product which allows small businesses the ability to run multi-step, results-oriented campaigns on their social networks. Also, in January 2012, we announced the acquisition of CardStar, a leading developer of mobile applications that extend the use of loyalty, rewards and membership cards and mobile coupons among consumers. In February 2012, we announced the introduction of our new SaveLocal product, which makes it quick and easy for our customers to create, run and manage local deals. In June 2012, we acquired SinglePlatform, a company that helps small business get discovered through web and mobile searches by providing a single place to update relevant business information. Our efforts to introduce new products beyond our email marketing product or to offer a bundled offering of two or more of our products may not result in significant revenue growth, may not be complementary to our email marketing product, may not be timely, may divert management resources from our existing operations and require us to commit significant financial resources to an unproven business or product, any of which may harm our financial performance and impede our long-term growth strategy.

 

16


Table of Contents

U.S. federal legislation and the laws of many foreign countries impose certain obligations on the senders of commercial emails, which could minimize the effectiveness of our products, particularly our email marketing product, and establish financial penalties for non-compliance, which could increase the costs of our business.

The CAN-SPAM Act 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 products. 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 such as the laws of Canada and the United Kingdom, 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 business, and our reputation would suffer. 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 could increase our operating costs.

If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be severely 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 could expose us to liability for the loss of such information, adverse regulatory action by federal and state governments, time-consuming and expensive litigation and other possible liabilities as well as negative publicity, which could severely damage our reputation. 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, as we continue to grow our customer base and our brand becomes more widely known and recognized, we may become a more inviting target for third parties seeking to compromise our security systems.

Many states, including Massachusetts, have enacted laws requiring companies to notify individuals of data security breaches involving certain types of 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 security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers and fail to acquire new customers. In addition, if we fail to maintain our compliance with the data protection policy standards adopted by the major credit card issuers, 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 harm our reputation and 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.

 

17


Table of Contents

Our existing general liability insurance may not cover any, or cover only a portion of any, potential claims related to security breaches to which we are exposed or may not be adequate to indemnify us for all or any portion of 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 expenses and reduce our net income.

The market in which we participate is highly competitive and, if we do not compete effectively, our operating results could be harmed.

The market for our products is highly 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, limit customer attrition and maintain our prices.

Our principal email marketing competitors include providers of email marketing products for small to medium size businesses such as AWeber Systems, Inc., iContact Corporation, a subsidiary of Vocus, Inc., Protus, a subsidiary of j2 Global Communications, Inc. (Campaigner), The Rocket Science Group LLC (MailChimp), Vertical Response, Inc. and Vistaprint N.V. These vendors typically charge a low monthly entry fee or a low fee per number of emails sent and, in some cases, they have a free offering. 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 Alterian Inc., CheetahMail, Inc., a subsidiary of Experian Group Limited, ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc., Eloqua Limited, a subsidiary of Oracle Corporation, and StrongMail Systems, Inc. While we do not compete currently with vendors of email marketing products serving larger customers, we may compete with these providers in the future. Finally, in the future, our email marketing product may experience competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and other large established businesses, 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 entities 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 other products also face intense competition. EventSpot, our event marketing product, competes with offerings by Eventbrite, Inc., Evite, LLC, a wholly-owned, operating business of IAC/InterActiveCorp, Regonline, a division of The Active Network, Inc., and Cvent, Inc. Our Social Campaigns product competes with offerings by Offerpop Corporation, Pagemodo, a subsidiary of VistaPrint N.V., Vocus Social Media LLC doing business as North Social and Wildfire Interactive, Inc. Our survey product competes with similar offerings by Surveymonkey.com Corporation and Widgix, LLC doing business as SurveyGizmo. Our SaveLocal product competes with offerings by Groupon, Inc., LivingSocial, Inc., Amazon Local and Googleoffers. Our SinglePlatform product competes with offerings by Yext, Inc. and Locu, Inc.

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 current and 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 and may be able to bundle email marketing, event marketing or survey products with other products that have already gained widespread market acceptance and offer them at no cost or low cost. 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 products could substantially decline.

 

18


Table of Contents

Current economic conditions may further negatively affect the small business sector, which may cause our customers to terminate existing accounts with us or cause potential customers to fail to purchase our products, resulting in a decrease in our revenue and impairing our ability to operate profitably.

Our products are designed specifically for small organizations. These organizations frequently have limited budgets and are often resource and time-constrained and, as a result, may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. We believe that small organizations continue to experience some amount of economic hardship. As a result, small organizations may choose to spend the limited funds that they have on items other than our products and may experience higher failure rates. Moreover, if small organizations experience economic distress, they may be unwilling or unable to expend time and financial resources on marketing, which would negatively affect the overall demand for our products, increase customer attrition and could cause our revenue to decline. There can be no assurance, therefore, that current economic conditions or worsening economic conditions, or a recurring recession, will not have a significant adverse impact on our operating and financial results.

Any significant disruption in service on our website or in our computer systems, or in our customer support services, could 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. In providing our services, we rely on third-party hosting facilities, bandwidth providers, ISPs and mobile networks. Our production system hardware and the disaster recovery operations for our production system hardware are co-located in third-party hosting facilities. These facilities do not guarantee that our customers’ access to our products will be uninterrupted, error-free or secure. Our operations also depend on the ability of our third-party hosting facilities to protect their and our systems 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 third-party hosting arrangements are terminated, or there is a lapse of service or damage to these 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 located at our headquarters in Waltham, Massachusetts and at our sales and support office in Loveland, Colorado, 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 customer support, whether as a result of third-party error, our own error, natural disasters, security breaches or malicious actions, such as denial-of-service or similar attacks, 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 production disaster recovery system is located at one of our third-party hosting facilities. Our corporate disaster recovery system is located at our headquarters in Waltham, Massachusetts. Neither system provides real-time backup or has been tested under actual disaster conditions and neither system may have sufficient capacity to recover all data and services in the event of an outage. In the event of a disaster in which our production system hardware and the disaster recovery operations for our production system hardware are irreparably damaged or destroyed, we would experience interruptions in access to our products. Moreover, our headquarters and our production system hardware are located within several miles of each other. As a result, any regional disaster could affect these locations equally. Any or all of these events could cause our customers to lose access to our products, which will harm our business and results of operations.

 

19


Table of Contents

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, including so-called non-practicing entities, which are entities that have no operating business but exist purely as collectors of patents, 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 partners and others 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 party’s 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 its proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all and we may be required to pay significant monetary damages to such third party.

We may be subject to time-consuming and costly litigation.

From time to time, we may be subject to various claims and lawsuits by partners, customers, or other parties arising in the ordinary course of business, including lawsuits alleging patent infringement. We are currently a party to the actions that are described in Part I, Item 3 “Legal Proceedings” included elsewhere in this Annual Report on Form 10-K. These matters can be time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our operating results.

If the delivery of our customers’ emails is limited or blocked, customers may cancel their accounts.

ISPs can block emails from reaching their users. The implementation of new or more restrictive policies by ISPs may 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 or other policies, then the fees we charge for our email marketing product may not be accepted by the market, and customers may cancel their accounts. This, in turn, could harm our business and financial performance.

 

20


Table of Contents

If we fail to promote and maintain our brands 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 brands in a cost-effective manner is critical to our goal of achieving widespread acceptance of our engagement marketing platform 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 brands 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 brands 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 brands. If we fail to promote and maintain our brands successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, 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®, Yahoo® and Bing. 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 potential customers clicking through to our website, requiring us to resort to other costly resources to attempt to replace this traffic, which, in turn, could reduce our revenue and negatively impact our operating results, 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 fluctuates and may increase as demand for these channels grows, and any such increases could negatively affect 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 or alternative communications tools gain popularity, such as social media or text messaging, demand for our email marketing product 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 businesses and consumers from using email. Use of email by businesses and consumers 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. In addition, if alternative communications tools, such as social media or text messaging, gain widespread acceptance, the need for email may lessen. Any decrease in the use of email would reduce demand for our email marketing product and harm our business.

 

21


Table of Contents

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 customers and members. 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 other 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 communicate with our customers and could undermine the effectiveness of our customers’ marketing campaigns, all of which could have a material negative impact on our business and results of operations.

Our customers’ use of our products and website to transmit negative messages or website links to harmful applications in violation of our policies or otherwise could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via our products.

Our customers could use our products or website to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted material or the trademarks of others without permission, or report inaccurate or fraudulent data or information. 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 products 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 customers’ use of our SaveLocal product may negatively impact our reputation and could subject us to legal and regulatory risks, each of which could harm our business and results of operations.

Our brand and reputation may be harmed by our customers’ use of our SaveLocal product. Any shortcomings of one or more of our SaveLocal customers, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold or such customer’s fraudulent or deceptive conduct, may be attributed to us, potentially damaging our reputation and brand value, reducing our ability to attract new customers or retain our current customers and subjecting us to potential liability, thereby negatively affecting our results of operations.

The application of certain U.S. and international laws and regulations to SaveLocal deals and to our role in facilitating our customers’ offer of SaveLocal deals is uncertain. These include laws and regulations such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, the laws of most states, which contain provisions governing product terms and conditions of gift cards, gift certificates, stored value or pre-paid cards or coupons and unclaimed and abandoned property laws. These laws may include provisions prohibiting or limiting the use of expiration dates on gift cards or the amount of fees charged in connection with gift cards or requiring specific disclosures on or in connection with gift cards and the imposition of certain fees.

 

22


Table of Contents

If we are required to alter our business practices as a result of any laws or regulations, our revenue could decrease, our costs could increase and our business could otherwise be harmed. In addition, the costs and expenses associated with defending any actions related to such additional laws and regulations and any payments of related penalties, judgments or settlements could adversely impact our financial results.

In addition, if any laws or regulations require that the face value of SaveLocal coupons have a minimum expiration period beyond the period desired by our SaveLocal customers for their promotional programs, or no expiration period, this may affect the willingness of our customers to use our SaveLocal product in jurisdictions where these laws apply.

Our business may be negatively impacted by seasonal trends.

Sales of our products are impacted by seasonality. The third calendar quarter has typically been our slowest quarter for customer growth because our prospective customers typically do not engage as much with their customers during the slower summer months. We typically increase our sales and marketing activities at the end of the third quarter and during the fourth quarter in anticipation of the holiday season. If these seasonality trends change materially, our financial and operating results for any given quarter may be negatively impacted and may differ materially from results in prior quarterly periods. In addition, our recent acquisition of SinglePlatform may impact our historical seasonality trends.

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 successfully, including our current plans to update our editing environment and improve our contact management functionality, 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 entails significant technical and business risks and requires 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 anticipate our customer’s needs or gain acceptance among our customers or in the broader market. In addition, such enhancements and new products may not be profitable for a number of years, if at all, and even if they are profitable, operating margins for new products may not be as high as the margins we have experienced historically. Our existing customers and prospective new customers may be dissatisfied with our enhancements to our existing products and may leave us or choose competing providers, or may not view any new product as complementary to our other product offerings and not purchase such additional products.

If we cannot successfully enhance our existing services or develop new products or if we are not successful in implementing such enhancements and selling 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 partners may not be as successful in generating new customers as we anticipate, which could adversely affect our ability to increase our customer base.

We maintain a network of different types of partners, some of whom refer customers to us through links on their websites and outbound promotion to their customers, resell our products and create integrations with our products. We have invested and will continue to invest in programs to enhance our partners’ effectiveness; however, these programs could require substantial investment while providing no assurance of return or incremental revenue. We also rely on some of our partners to create integrations with third-party applications and platforms used by our customers. If we fail to encourage our partners to create such integrations, demand for our products could decrease, which would harm our business and operating results. If we are unable to maintain our contractual relationships with existing partners or establish new contractual relationships with potential 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 relationships is dependent on the marketing

 

23


Table of Contents

efforts of our partners over which we exercise very little control, and a significant decrease in the number of new customers generated through these relationships or failure of our investment in partner programs to be effective could adversely affect the size of our customer base and revenue.

Competition for employees in our industry 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 engineering and marketing personnel is intense and we continue to face difficulty identifying and hiring qualified personnel in certain areas of our business and in certain locations. 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 high-technology industries, often consider the value of any equity they may receive in connection with their employment. As a result, any significant volatility in the price of our stock, including the recent decline in share value, may adversely affect our ability to attract or retain highly skilled engineering and marketing personnel.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors 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.

The success of our SinglePlatform offering is based, in part, on the quality of the content provided by our SinglePlatform customers and our ability to maintain a strong network of publishers.

Our SinglePlatform customers provide us with current information about their business that we, in turn, provide to our network of electronic publishers, such as foursquare, YP.com and Urbanspoon®. The success of the SinglePlatform offering depends, in part, on our ability to provide these publishers and their consumers with the information they seek, which in turn depends on the quantity and quality of the content provided by our SinglePlatform customers. For example, we may be unable to provide these publishers and their consumers with the information they seek if our customers do not contribute content that is helpful, reliable and up-to-date, or if they remove content they previously submitted. If our SinglePlatform product does not provide content that is helpful, reliable and up-to-date, our ability to maintain our current network of electronic publishers and sign up new publishers could be harmed. If we are unable to provide our electronic publishers and their consumers with the information they seek, or if they can find equivalent content on other services, they may stop or reduce their use of our product, which could negatively impact our ability to retain existing customers and obtain new customers and our business would be harmed.

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 and marketing 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, may take longer than anticipated and may significantly delay or prevent the achievement of our business objectives.

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 and that requires us to closely monitor our usage to ensure that we remain in compliance with any applicable licensing requirements.

We rely on computer hardware purchased and software licensed from third parties in order to offer our products, including hardware and software from such large vendors as International Business Machines Corporation, Dell

 

24


Table of Contents

Computer Corporation, 3PAR Inc., a division of the Hewlett-Packard Company, Oracle Corporation, Juniper Networks, Inc., Cisco Systems, Inc., Ciena Corporation 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 malfunctioning hardware or software. Any delays or failures associated with our services could upset our customers and harm our business. In addition, if we fail to remain in compliance with the licensing requirements related to any third-party computer hardware and software we use, we may be subject to unanticipated expenses, auditing costs, penalties and the loss of such hardware and software, all of which could have a material adverse effect on our financial condition and results of operations.

If we are unable to protect the confidentiality of our unpatented proprietary information, processes and know-how and trade secrets, the value of our technology and products could be adversely affected.

We rely heavily 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, 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.

Our anticipated growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our anticipated growth, we may not be able to implement our business plan successfully.

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 this expected growth effectively. To do so, we believe we will need to 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 expected 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. The expected addition of new employees and the capital investments that we anticipate will be necessary to manage our anticipated growth will increase our cost base,

 

25


Table of Contents

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 manage our anticipated growth successfully, we will be unable to execute our business plan successfully.

Providing our products to customers outside the United States exposes us to risks inherent in international business.

Customers in more than 180 countries and territories currently use our products. In 2011, we opened a marketing office in the United Kingdom and we may continue 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 those relating to tax, email, privacy and data protection;

 

   

foreign currency fluctuations;

 

   

different pricing environments;

 

   

difficulties in staffing and maintaining foreign operations; and

 

   

regional economic and political conditions.

If we fail to meet these risks and challenges, we will be unable to execute our business plan and may be subject to fines and regulatory actions.

We have incurred net losses in the past and expect to incur net losses on a quarterly basis in the future.

We have incurred net losses in the past and expect to incur net losses on a quarterly basis in the future. We reported net income for 2012, 2011 and 2010, however, we experienced net losses in prior years and a net loss for the second quarter of 2012. While we expect to generate future profitability, we may experience net losses in future periods, particularly quarterly periods. In addition, we expect our operating expenses to increase as we continue to expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely affected.

Failure to maintain effective internal control over financial reporting and disclosure controls and procedures would have a material adverse effect on our business.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In order to comply with Section 404 of the Sarbanes-Oxley Act’s requirements relating to internal control over financial reporting, we incur substantial accounting expense and expend significant management time on compliance-related issues. We expect to continue to incur such expenses and expend such time in the future. If in the future 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 carry-forwards in the United States may be limited.

As of December 31, 2012, we had net operating loss carry-forwards of $42.9 million for U.S. federal tax purposes and $1.1 million for state tax purposes. These loss carry-forwards expire at varying dates between 2013

 

26


Table of Contents

and 2032. To the extent available, we intend to use these net operating loss carry-forwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carry-forwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. While our analysis shows that our public stock offerings and prior private financings have not resulted in ownership changes that would limit our ability to utilize net operating loss carry-forwards, any subsequent ownership changes could result in such a limitation. To the extent our use of net operating loss carry-forwards 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 carry-forwards, which could have a negative effect on our financial results.

Our quarterly results may fluctuate and if we fail to meet the expectations of 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 attract new customers, retain existing customers and satisfy our customers’ requirements;

 

   

general economic conditions;

 

   

average revenue per customer;

 

   

changes in our pricing policies;

 

   

our ability to expand our business;

 

   

our ability to execute successfully on our strategy;

 

   

new product and service introductions;

 

   

technical difficulties or interruptions in our services as a result of our actions or those of third parties;

 

   

the timing of additional investments in our hardware and software systems;

 

   

the seasonal trends in our business;

 

   

regulatory compliance costs;

 

   

costs associated with future acquisitions of technologies and businesses and our ability to successfully integrate these acquisitions; 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 the ownership of our existing stockholders.

We have historically relied on outside financing and cash from operations to fund our operations, capital expenditures and growth. 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.

 

27


Table of Contents

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, 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.

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 completed four acquisitions in the past three years, including our most recent acquisition of SinglePlatform in June 2012. We have, from time to time, evaluated other acquisition opportunities and may pursue acquisition opportunities in the future. 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.

In addition, any acquisitions we complete 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.

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;

 

   

quarterly unique customer additions and customer retention rates;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

changes in general economic, industry and market conditions;

 

   

failure of any of our products to achieve or maintain market acceptance;

 

   

changes in market valuations of similar companies;

 

   

success of competitive products;

 

   

our ability to successfully integrate acquisitions;

 

   

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;

 

28


Table of Contents
   

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

 

   

the total number of shares of our common stock that have been sold short.

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.

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 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 impede or delay 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.

 

29


Table of Contents

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 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We conduct our operations in leased facilities. We currently lease approximately 145,000 square feet of office space in Waltham, Massachusetts pursuant to a lease agreement, as amended, that expires in September 2022 with one ten-year extension option. This facility serves as our corporate headquarters. The functions performed at our headquarters include finance, human resources, legal, marketing, sales, customer support, operations, product strategy and research and development. We expect to occupy approximately 106,000 additional square feet of space in this facility over the next three years.

In Loveland, Colorado, we lease approximately 50,000 square feet of office space under a lease agreement that will expire in April 2019 with three three-year extension options. This facility is used for sales and support personnel. We lease approximately 8,000 and 2,000 square feet of office space in San Francisco, California and Delray, Florida, respectively, pursuant to lease agreements that expire in 2017 and 2016, respectively, and approximately 14,000 square feet of office space in two facilities in New York, New York pursuant to lease agreements that expire in 2014 and 2016. The facilities in California and Florida and one of the New York locations are used for research and development personnel. The other New York facility houses SinglePlatform. We also lease a small amount of office space in London pursuant to a lease agreement that expires in 2013, which is used to house marketing personnel.

Our production system hardware and the disaster recovery hardware for our production system, with the exception of SinglePlatform, are currently co-located in third-party hosting facilities. One facility, located in Bedford, Massachusetts, is owned and operated by Digital 55 Middlesex, LLC, an affiliate of Digital Realty Trust, Inc., which provides services to us under an agreement that expires in December 2016 with two five-year extension options. The other facility, located in Santa Clara, California, is owned and operated by Digital Alfred, LLC, also an affiliate of Digital Realty Trust. The agreement for the facility in Santa Clara commenced in May 2011 and has an initial term of six years with two four-year extension options.

We believe that the total space available to us in the facilities under our current leases and third-party hosting arrangements or obtainable by us on commercially reasonable terms, will meet our needs for the foreseeable future.

For more information about our lease and third-party hosting commitments, see also Note 10, Commitments and Contingencies, of the Notes to our Consolidated Financial Statements, included elsewhere in this Annual Report on Form 10-K.

 

30


Table of Contents
ITEM 3. LEGAL PROCEEDINGS

On August 7, 2012, two former employees, on behalf of themselves and all other similarly situated individuals, or collectively, the FLSA Plaintiffs, filed a complaint in the U.S. District Court for the District of Massachusetts that named us as a defendant in a lawsuit. The complaint, which was served on us on August 9, 2012, alleges that we violated the Fair Labor Standards Act and the Massachusetts overtime law with respect to certain of our current and former sales employees. The FLSA Plaintiffs’ complaint seeks an award for damages in an unspecified amount. A court-sanctioned mediation session with an independent mediator is scheduled to occur in March 2013. This litigation is in its very early stages. As a result, neither the ultimate outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses can be assessed at this time. Nevertheless, we believe we have meritorious defenses and intend to defend the lawsuit vigorously.

On September 24, 2012, RPost Holdings, Inc., RPost Communications Limited and RMail Limited, or collectively, RPost, filed a complaint in the U.S. District Court for the Eastern District of Texas that named us as a defendant in a lawsuit. The complaint, which was served on us on December 26, 2012, alleges that certain elements of our email marketing technology infringe five patents held by RPost. RPost seeks an award for damages in an unspecified amount and injunctive relief. On February 11, 2013, RPost amended its complaint to name five of our partners as defendants. Under our contractual agreements with these partners, we are obligated to indemnify them for claims related to patent infringement. This litigation is in its very early stages. As a result, neither the ultimate outcome of this litigation nor an estimate of a probable loss or any reasonably possible losses can be assessed at this time. Nevertheless, we believe we have meritorious defenses to any claim of infringement and intend to defend the lawsuit vigorously.

On November 14, 2012, we filed a complaint in the U.S. District Court for the District of Delaware against Umbanet, Inc., or Umbanet, seeking a declaratory judgment that two patents held by Umbanet, or collectively, the Umbanet Patents, are not infringed by a customer’s use of our email marketing product and that such patents are invalid. We refer to this matter as the Delaware Case. We filed the Delaware Case in response to a complaint filed by Umbanet in the U.S. District Court for the District of New Jersey against one of our customers alleging that the customer’s use of our email marketing product infringed the Umbanet Patents. We refer to this matter as the New Jersey Case. Umbanet has filed a motion in the Delaware Case seeking to dismiss the complaint or, in the alternative, stay the case pending resolution of the New Jersey Case. We have filed a motion in the New Jersey Case seeking to stay the case pending resolution of the Delaware Case. These litigation matters are in a very early stage. As a result, neither the ultimate outcome of these matters nor an estimate of a probable loss or any reasonably possible losses can be assessed at this time. We believe that we have meritorious defenses to any claim of infringement and intend to pursue these matters vigorously.

From time to time we may become subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of our business. While the outcome of these other claims cannot be predicted with certainty, we do not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s results of operations or financial condition.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

31


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Certain Information Regarding the Trading of Our Common Stock

Our common stock trades under the symbol “CTCT” on the NASDAQ Global Select Market. The following table sets forth, for the periods indicated, the high and low sale price per share of our common stock on the NASDAQ Global Select Market:

 

     High      Low  

2011:

     

First Quarter

   $ 36.13       $ 26.25   

Second Quarter

   $ 36.33       $ 21.59   

Third Quarter

   $ 25.97       $ 14.46   

Fourth Quarter

   $ 25.62       $ 15.85   

2012:

     

First Quarter

   $ 32.18       $ 21.49   

Second Quarter

   $ 30.88       $ 15.71   

Third Quarter

   $ 21.22       $ 15.66   

Fourth Quarter

   $ 18.56       $ 11.50   

2013:

     

First Quarter (through February 25, 2013)

   $ 16.06       $ 13.09   

Holders of Our Common Stock

As of February 25, 2013, there were 48 holders of record of shares of our common stock. This number does not include stockholders for whom shares are held in “nominee” or “street” name.

Dividends; Equity Repurchases

We have never paid or declared any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation of our business. Neither we nor any affiliated purchaser or anyone acting on behalf of us made any purchases of shares of our common stock in the fourth quarter of 2012.

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the year ended December 31, 2012.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding our equity compensation plans and the securities authorized for issuance thereunder is set forth herein under Part III, Item 12 below.

Stock Performance Graph

The following stock performance graph compares the cumulative total return to stockholders for our common stock for the period from December 31, 2007 through December 31, 2012 against the cumulative total return of the NASDAQ Composite Index and the NASDAQ Computer and Data Processing Index.

 

32


Table of Contents

The comparison assumes $100.00 was invested in our common stock, the NASDAQ Composite Index and the NASDAQ Computer and Data Processing Index and assumes reinvestment of dividends, if any. The stock performance shown on the graph below is not necessarily indicative of future price performance.

Cumulative Total Return for Periods Presented

Among Constant Contact, Inc., the NASDAQ Composite Index

and the NASDAQ Computer and Data Processing Index

 

LOGO

Chart is prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2013

 

* Copyright NASDAQ OMX, Inc. Used with permission. All rights reserved.

 

**

Calculated (or Derived) based from CRSP NASDAQ Computer and Data Processing, Center for Research in Security Prices (CRSP®), Graduate School of Business, The University of Chicago. Copyright 2013. Used with permission. All rights reserved.

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or incorporated by reference into any filing of under the Securities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forth by specific reference in such filing.

 

ITEM 6. SELECTED FINANCIAL DATA

The selected statements of operations data for the years ended December 31, 2012, 2011 and 2010 and the balance sheet data as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected statements of operations data for the years ended December 31, 2009 and 2008 and the balance sheet data as of December 31, 2010, 2009 and 2008 have been derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. The selected financial data set forth below should be read in

 

33


Table of Contents

conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.

 

     Years Ended December 31,  
     2012     2011      2010      2009     2008  
     (In thousands, except per share and customer data)  

Statements of Operations Data:

            

Revenue

   $ 252,154      $ 214,420       $ 174,231       $ 129,061      $ 87,268   

Cost of revenue(1)

     73,547        61,491         50,825         37,692        24,251   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     178,607        152,929         123,406         91,369        63,017   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses(1):

            

Research and development

     38,787        29,478         23,985         18,367        15,123   

Sales and marketing

     104,527        89,211         78,881         61,023        42,851   

General and administrative

     31,132        23,979         17,625         13,749        9,508   

Acquisition costs and other related charges

     (11,355     264         403                  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     163,091        142,932         120,894         93,139        67,482   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     15,516        9,997         2,512         (1,770     (4,465

Interest and other income (expense), net

     231        262         341         510        2,409   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     15,747        10,259         2,853         (1,260     (2,056

Income tax (expense) benefit

     (2,991     13,420         61                  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

     12,756        23,679         2,914         (1,260     (2,056
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) per share:

            

Basic

   $ 0.42      $ 0.80       $ 0.10       $ (0.04   $ (0.07

Diluted

   $ 0.41      $ 0.77       $ 0.10       $ (0.04   $ (0.07

Weighted average shares outstanding used in computing per share amounts:

            

Basic

     30,386        29,566         28,765         28,253        27,879   

Diluted

     31,003        30,671         29,945         28,253        27,879   

Other Operating Data:

            

End of period number of unique customers(2)

     555,000        500,000         435,000         350,000        255,000   

 

(1) Amounts include stock-based compensation expense, as follows:

 

     Years Ended December 31,  
          2012                2011                2010                2009                2008       
     (In thousands)  

Cost of revenue

   $ 1,758       $ 1,542       $ 1,124       $ 706       $ 354   

Research and development

     3,733         3,221         2,491         1,150         737   

Sales and marketing

     3,187         2,588         1,911         1,134         648   

General and administrative

     5,596         4,357         3,026         2,094         1,117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,274       $ 11,708       $ 8,552       $ 5,084       $ 2,856   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) We define our end of period number of unique customers as the number of customers that we invoiced for one or more of our products during the last month of the period rounded to the nearest 5,000.

 

34


Table of Contents
     As of December 31,  
     2012      2011      2010      2009      2008  
     (In thousands)  

Balance Sheet Data:

              

Cash, cash equivalents and marketable securities

   $ 93,507       $ 140,112       $ 124,353       $ 113,102       $ 107,175   

Total assets

     257,262         221,378         167,675         141,488         127,142   

Deferred revenue

     32,700         28,983         25,103         20,341         15,052   

Total stockholders’ equity

     203,582         170,922         126,122         104,968         99,990   

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Executive Overview

We are a leading provider of on-demand engagement marketing tools, including email marketing, social media marketing, event marketing and surveys, for small organizations, including small businesses, associations and non-profits. We also now offer a mobile storefront offering through the acquisition of SinglePlatform. We seek to help our customers succeed and have a long history of delivering affordable, easy-to-use products, support, KnowHow and coaching , all of which allow our customers to create and grow their customer relationships.

We market our products and acquire our customers through a variety of sources including online marketing, including search engines and advertising on online networks and other websites, offline marketing through television and radio advertising, local seminars, relationships with our partners, referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of substantially all of the emails sent by our customers.

We have grown rapidly since launching our first on-demand product in 2000. We ended 2012 with approximately 555,000 unique paying customers and had revenue for that year of $252 million.

Our business strategy focuses on expanding beyond email marketing to support a multi-product strategy to drive high customer lifetime value. We believe increasing our customer’s lifetime value will be a key contributor to our continued success. To drive lifetime value we will continue to focus on acquiring customers in a cost-effective manner, increasing average revenue per customer through cross-selling and increased product usage and improving customer retention rates.

During 2012, we significantly expanded our product suite from three products to six. We now have a suite of online marketing tools for small organizations including the following new products:

 

   

We launched Social Campaigns in January 2012. Social Campaigns allows users to create, publish, promote and run campaigns on Facebook that offer promotions or content targeted toward those who “Like” them and to incent others to “Like” and share them.

 

   

In January 2012, we acquired CardStar, Inc., a leading developer of mobile applications that extend the use of loyalty, rewards and membership cards and mobile coupons among consumers. The CardStar application

 

35


Table of Contents
 

consolidates membership and rewards cards on smartphones, letting consumers use a single application rather than a series of physical cards. See also Note 4, Acquisitions, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

   

In February 2012, we launched SaveLocal to our existing customers. SaveLocal, is an online tool that helps small businesses run local deals, gives merchants control of the deal and allows small businesses to incentivize social sharing to attract qualified new customers, and drive repeat business at an affordable price. In June 2012, we began offering SaveLocal to the broader market.

 

   

In June 2012, we acquired SinglePlatform, a company that helps small businesses get discovered through web and mobile searches by providing a single place to update important business information. SinglePlatform enables businesses to reach more than 200 million consumers across its extensive publishing network. See also Note 4, Acquisitions, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Our products achieved the following milestones in 2012:

 

   

Our email marketing product sent out more than 45 billion emails on behalf of more than 500,000 email marketing customers;

 

   

Our EventSpot product managed more than 315,000 events for more than five million event registrants;

 

   

Our SinglePlatform digital storefronts had more than 100 million consumer views, with monthly views surpassing 20 million in December;

 

   

Our Social Campaigns product generated more than 120,000 users since its launch in February 2012; and

 

   

Our SaveLocal product launched more than 9,500 deals in 2012, with more than 20% of the deals purchased by new consumers.

Key Financial and Operating Metrics

In connection with the ongoing operation of our business, our management regularly reviews key financial and operating metrics. Given our growth strategy, we pay particular attention to customer life-time value, customer acquisition metrics, trialer growth, customer attrition, success in cross selling and growing customer list sizes, number of products per customer and average revenue per customer. We also consider other financial and operating metrics such as revenue, gross margin, expenses, customer satisfaction rates, average speed of answer for customer support calls, email deliverability rates and capital expenditures, among others. Management considers these financial and operating metrics critical to understanding and improving our business, reviewing our historical performance, benchmarking our performance versus other companies and identifying current and future trends, and for planning purposes.

In addition, we consider the following non-GAAP financial measures to be key indicators of our financial performance:

 

   

“adjusted EBITDA,” which we define as GAAP net income (loss) plus depreciation and amortization and stock-based compensation, and adjusted for contingent consideration adjustment and interest and other income (expense) and income taxes;

 

   

“adjusted EBITDA margin,” which we define as adjusted EBITDA divided by revenue;

 

   

“non-GAAP net income,” which we define as GAAP net income (loss) plus stock-based compensation and adjusted for contingent consideration adjustment and the non-cash portion of income taxes; and

 

   

“free cash flow,” which we define as net cash flow from operating activities less acquisition of property and equipment.

 

36


Table of Contents

We believe that these non-GAAP financial measures are useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations. These non-GAAP financial measures, however, are not a measure of financial performance under accounting principles generally accepted in the United States of America, or GAAP, and should not be considered a substitute for GAAP financial measures, including but not limited to net income (loss) or cash flows from operating, investing and financing activities and may not be comparable to similarly titled measures reported by other companies.

Certain Trends and Uncertainties

The following represents a summary of certain trends and uncertainties, which could have a significant impact on our financial condition and results of operations. This summary is not intended to be a complete list of potential trends and uncertainties that could impact our business in the long or short term. The summary should be considered along with the factors set forth under Part I, Item 1A—“Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

   

We continue to closely monitor current economic conditions both in the U.S. and abroad, particularly as they impact small businesses, associations and non-profits. We believe that small organizations continue to experience some amount of economic hardship. If this economic hardship continues or worsens, our financial results could be adversely impacted.

 

   

Our long term strategy is substantially dependent on our ability to continue to generate interest in our existing products and to enhance and expand our product offerings to serve the online marketing needs of small businesses, associations and non-profits. If we fail, our financial results could be adversely impacted.

 

   

In connection with our acquisition of SinglePlatform, we incurred an obligation to the former shareholders of SinglePlatform to pay additional cash consideration of up to $30.0 million, contingent on the achievement of certain revenue targets from July 2012 through June 2014, measured in six month intervals. Based on certain assumptions and estimates, we recorded an estimated liability of $12.2 million as of the acquisition date. We subsequently decreased the amount recorded for this estimated liability in the third and fourth quarters of 2012 so that the liability was $0 at December 31, 2012 based on a change of estimate in the achievement of the revenue goals. We will continue to assess these assumptions and estimates on a quarterly basis. Changes in the estimated liability related to updated assumptions and estimates and to the actual revenue achievement will be recognized within the consolidated statements of operations. If our assumptions and estimates change significantly or if actual revenue achievement is significantly different than our estimates, our results of operations and cash flows could be materially affected. See also Note 4, Acquisitions, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. In addition, our operating results could be adversely impacted if we fail to successfully integrate SinglePlatform, if we fail to continue to successfully sell SinglePlatform’s product or if the acquisition significantly disrupts our ongoing operations.

 

   

We believe that given the size of our potential market and the relatively low barriers to entry, competition may increase. Increased competition could result from existing competitors or new competitors that enter the market because of the potential opportunity. We will continue to closely monitor competitive activity and respond accordingly. Increased competition could have an adverse effect on our financial condition and results of operations.

 

   

From time to time, we may be subject to various claims and lawsuits by partners, customers, or other parties arising in the ordinary course of business, including lawsuits alleging patent infringement. We are currently a party to actions that are described in Part I, Item 3 “Legal Proceedings” included elsewhere in this Annual Report on Form 10-K. These matters can be time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our operating results.

 

37


Table of Contents
   

We believe that as we continue to grow revenue at expected rates, our cost of revenue and operating expenses, including sales and marketing, research and development and general and administrative expenses, while expected to decline on a percentage of revenue basis, will increase in absolute dollar amounts. For a description of the general trends we anticipate in various expense categories, see “Cost of Revenue and Operating Expenses” below.

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 the estimates, assumptions and judgments involved in the accounting policies described below may have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See also Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description of our other significant accounting policies.

Revenue Recognition.    We provide access to our products primarily through subscription arrangements whereby the customer is charged a fee for access for a defined term. Subscription arrangements include access to use our software via the Internet and support services, such as telephone, email and chat support. When there is evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured, we recognize revenue on a daily basis over the subscription period as the services are delivered. Delivery is considered to have commenced at the time the customer has paid for the products and has access to the account via a log-in and password. We also generate a small amount of revenue from our SaveLocal product by charging a fee to our customers based on the number of deals sold by our customers and the value of the successful deal. We recognize revenue from the fee charged when there is evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. We also offer ancillary services to our customers related to our subscription-based products such as custom services and training. When sold together, revenue from custom services, training and our subscription products are accounted for separately based on vendor specific objective evidence of fair value of each of the services as those services have value on a standalone basis and do not involve a significant degree of risk or unique acceptance criteria. Revenue from custom services and training is recognized as the services are performed.

Income Taxes.    Income taxes are provided for tax effects of transactions reported in the 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 statement and income tax reporting purposes. 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.

We account for uncertainty in income taxes recognized in our financial statements by applying 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.

Goodwill and Acquired Intangible Assets.    We record goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances

 

38


Table of Contents

warrant a review. We perform our assessment for impairment of goodwill on an annual basis and we have determined that there is a single reporting unit for the purpose of conducting this annual goodwill impairment assessment. For purposes of assessing potential impairment, we annually estimate the fair value of the reporting unit (based on our market capitalization) and compare this amount to the carrying value of the reporting unit (as reflected by our total stockholders’ equity). If we determine that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. We completed our annual impairment test of goodwill on November 30, 2012. Based upon that evaluation, we determined that our goodwill was not impaired.

Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

Software and Website Development Costs.    Relative to development costs of our on-demand products and website, we capitalize certain direct costs to develop functionality as well as certain upgrades and enhancements that are probable to result in additional functionality. 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 as part of property and equipment until the software is substantially complete and ready for its intended use. Once placed in use, capitalized software is amortized over a three-year period in the expense category to which the software relates.

Stock-Based Compensation.    We value all stock-based compensation, including grants of stock options, restricted stock and restricted stock units, at fair value on the date of grant, and expense the fair value over the applicable service period. The straight-line method is applied to all awards with service and market conditions, while the graded vesting method is applied to all awards with both service and performance conditions.

We base the fair value of common stock on the quoted market price of our stock. The fair value of restricted stock and restricted stock units for awards with time-based and performance-based vesting conditions are based on the fair value of common stock on the date of grant. We value restricted stock units with market-based vesting criteria using a Monte Carlo simulation model. The number of awards expected to be earned, based on achievement of the market condition, is factored into the grant date Monte Carlo valuation for the awards. The grant date fair value is not subsequently adjusted regardless of the eventual number of awards that are earned based on the market condition.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected term assumption is based on the “simplified method” for estimating the expected term for awards that qualify as “plain-vanilla” options. Expected volatility is based on historical volatility of the publicly traded stocks of a peer group of companies, inclusive of us, commencing October 2007. The risk-free interest rate is determined by reference to U.S. Treasury bond yields at or near the time of grant for time periods similar to the expected term of the award. The relevant data used to determine the value of the stock option grants is as follows:

 

     Years Ended December 31,  
     2012     2011     2010  

Weighted average risk-free interest rate

     0.81     1.82     2.41

Expected term (in years)

     4.6        5.5        6.1   

Weighted average expected volatility

     53.58     52.15     52.17

Expected dividends

     0     0     0

These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. Authoritative guidance requires that we recognize compensation expense for only the portion of awards that are expected to vest. In developing a

 

39


Table of Contents

forfeiture rate estimate, we have considered our historical experience to estimate pre-vesting forfeitures for awards with service conditions. For awards with performance conditions we estimate the probability that the performance condition will be met. If our actual forfeiture rate is materially different from the estimate, our stock-based compensation expense could be significantly different from what we have recorded in the current period. As of December 31, 2012, we had $30.2 million of unrecognized compensation expense associated with outstanding equity awards, which is expected to be recognized over a weighted-average period of 2.51 years.

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, are used to measure fair value:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Unobservable inputs are developed based on the best information available, which might include our own data.

Sources of Revenue

We derive our revenue principally from subscription fees from our 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 2012, our top 100 customers accounted for less than 1% of our total revenue. We generally 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 annual basis by providing a credit card or bank check. Fees are recorded initially as deferred revenue and then recognized as revenue on a daily basis over the prepaid subscription period. In February 2012, we launched our SaveLocal product for which we charge a fee based on the number of deals sold by our customers and the value of the successful deal. We have not yet generated significant revenue from this product.

We also generate a small amount of revenue from ancillary services related to our products, which primarily consist of custom services and training through our experts program. Revenue generated from professional services and training accounted for approximately 1% of gross revenue for each of the years ended December 31, 2012, 2011 and 2010.

Cost of Revenue and Operating Expenses

We allocate certain occupancy and general office related 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 occupancy expense allocation is reflected as personnel related costs 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 and amortization, 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.

 

40


Table of Contents

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 in absolute dollars as we expect to increase our number of customers but to decrease as a percentage of revenue over time as we gain efficiencies created by our expected revenue growth and cost savings.

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 improving ease of use, functionality and technological scalability of our existing products as well as on the development of new product offerings. We primarily expense research and development costs. However, direct development costs related to software enhancements that add functionality are capitalized and amortized over their useful life. We expect that on an annual basis research and development expenses will continue to increase both in absolute dollars and as a percentage of revenue due to our expanded investment in our product roadmap over the next twelve months. Over the longer term we expect our research and development expenses to increase in absolute dollars but decrease as a percentage of revenue as we expect to grow our revenue at a faster rate.

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, the portion of customer support costs that relate to assisting trial customers and amortization of sales and marketing relating intangible assets. Advertising costs consist primarily of pay-per-click advertising with search engines, other online and offline advertising media, including television and radio 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. 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 expect to continue to grow our revenue at a faster rate.

General and Administrative.    General and administrative expenses consist primarily of wages and benefits for administrative, human resources, internal information technology support, finance and accounting personnel, professional fees, board compensation and expenses, certain 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 costs related to operating as a public company. Therefore, we expect that our general and administrative expenses will increase in absolute dollars, but remain flat as a percentage of revenue over the next year. Over the longer term we expect our general and administrative expenses to decline as a percentage of revenue as we expect to continue to grow our revenue at a faster rate.

Acquisition Costs and Other Related Charges.    Acquisition costs and other related charges include expenses associated with third-party professional services we utilize related to the evaluation and execution of successful acquisitions. Acquisition costs and other related charges in 2012 also includes changes in the fair value of a contingent consideration liability recorded as the result of the SinglePlatform acquisition. This liability was measured at fair value on the acquisition date, and until the liability is settled, it must be remeasured to fair value at each reporting period, with the changes included in our results of operations. We expect to evaluate quarterly remeasurements of the fair value of this liability until it is settled at six-month intervals through June 2014. We may also continue to incur acquisition costs and other related charges in future periods if we complete additional acquisitions.

 

41


Table of Contents

Results of Operations

The following table sets forth selected statements of operations data for each of the periods indicated as a percentage of total revenue.

 

     Years Ended
December 31,
 
     2012     2011     2010  

Revenue

     100     100     100

Cost of revenue

     29        29        29   
  

 

 

   

 

 

   

 

 

 

Gross profit

     71        71        71   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     15        14        14   

Sales and marketing

     42        42        45   

General and administrative

     12        11        10   

Acquisition costs and other related charges

     (4     —         —    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     65        67        69   
  

 

 

   

 

 

   

 

 

 

Income from operations

     6        4        2   

Interest and other income (expense), net

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     6        4        2   

Income tax (expense) benefit

     (1     6        —    
  

 

 

   

 

 

   

 

 

 

Net income

     5     10     2
  

 

 

   

 

 

   

 

 

 

Years Ended December 31, 2012, 2011 and 2010

Revenue

 

     Years Ended December 31,      2012-2011
% Change
    2011-2010
% Change
 
     2012      2011      2010       
     (dollars in thousands)               

Revenue

   $ 252,154       $ 214,420       $ 174,231         18     23

Revenue increased by $37.7 million from 2011 to 2012. The increase resulted primarily from an approximately 12% increase in the number of average monthly customers and an approximately 5% increase in average revenue per customer. The increase in average revenue per customer was primarily due to an increase in average customer list size and additional revenue from add-ons to our email marketing product and from our event marketing product. The increase in revenue from our event marketing product was primarily driven by a price increase implemented in September 2011 as well as an increase in the number of event marketing customers in 2012. We expect our average revenue per customer to increase over time.

Revenue increased by $40.2 million from 2010 to 2011. The increase resulted primarily from an approximately 19% increase in the number of average monthly customers and an approximately 4% increase in average revenue per customer. The increase in average revenue per customer was primarily due to an increase in average customer list size and additional revenue from add-ons to our email marketing product and from our event marketing product. The increase in revenue from our event marketing product was due to a price increase implemented in September 2011 as well as an increase in the number of event marketing customers in 2011.

 

42


Table of Contents

Cost of Revenue

 

     Years Ended December 31,     2012-2011
% Change
    2011-2010
% Change
 
     2012     2011     2010      
     (dollars in thousands)              

Cost of revenue

   $ 73,547      $ 61,491      $ 50,825        20     21

Percent of revenue

     29     29     29    

Cost of revenue increased by $12.1 million from 2011 to 2012 and was 29% of revenue for both years. The increase in absolute dollars resulted primarily from increased customer support personnel costs of $5.6 million to support our customer growth and increased number of products and increased personnel costs of $1.4 million in our operations group to manage our technology infrastructure. Depreciation, hosting and maintenance costs increased by $3.9 million as a result of scaling and adding capacity to our hosting infrastructure inclusive of the effects of transitioning to a new third-party hosting facility in California in the third quarter of 2011.

Cost of revenue increased by $10.7 million from 2010 to 2011 and was 29% of revenue for both years. The increase in absolute dollars resulted primarily from increased customer support personnel costs of $5.7 million to support our customer growth. Depreciation, hosting and maintenance costs increased by $2.6 million as a result of scaling and adding capacity to our hosting infrastructure inclusive of the effects of transitioning to a new third-party hosting facility in California in the third quarter of 2011. We also incurred an additional $942,000 of expense related to customer promotional incentives that we offered and an additional $720,000 of expense related to higher credit card fees due to the higher volume of billing transactions.

Research and Development Expenses

 

     Years Ended December 31,     2012-2011
% Change
    2011-2010
% Change
 
     2012     2011     2010      
     (dollars in thousands)              

Research and development expenses

   $ 38,787      $ 29,478      $ 23,985        32     23

Percent of revenue

     15     14     14    

Research and development expenses increased by $9.3 million from 2011 to 2012. The increase in absolute dollars was primarily due to additional personnel related costs of $8.1 million and additional consulting costs of $925,000 as a result of our continued hiring of research and development employees and use of contractors, both to further develop and enhance our product offerings.

Research and development expenses increased by $5.5 million from 2010 to 2011. The increase in absolute dollars was primarily due to additional personnel related costs of $5.2 million and additional consulting costs of $311,000 as a result of our continued hiring of research and development employees and use of contractors to further develop and enhance our product offerings.

Sales and Marketing Expenses

 

     Years Ended December 31,     2012-2011
% Change
    2011-2010
% Change
 
     2012     2011     2010      
     (dollars in thousands)              

Sales and marketing expenses

   $ 104,527      $ 89,211      $ 78,881        17     13

Percent of revenue

     42     42     45    

Sales and marketing expenses increased by $15.3 million from 2011 to 2012. The increase in absolute dollars was largely due to increased personnel related costs of $10.8 million that resulted primarily from adding

 

43


Table of Contents

employees and increased consulting fees of $929,000, both to focus on customer acquisition, cross-selling to our customer base, partner efforts and enabling increased usage and better retention. SinglePlatform personnel accounted for $2.7 million of the increase in personnel related costs. Partner referral fees increased by $2.1 million as the number of new customers generated from our partners increased. We also incurred an increase in amortization of $833,000 related to the amortization of sales and marketing related intangibles resulting from our acquisitions.

Sales and marketing expenses increased by $10.3 million from 2010 to 2011. The increase in absolute dollars was largely due to increased personnel related costs of $5.9 million that resulted primarily from adding employees to focus on customer acquisition, cross-selling to our customer base, partner efforts and enabling increased usage and better retention. Partner referral fees increased by $2.3 million as the number of new customers generated from our partners increased. Additionally, advertising and promotional expenditures increased by $1.4 million.

General and Administrative Expenses

 

     Years Ended December 31,     2012-2011
% Change
    2011-2010
% Change
 
     2012     2011     2010      
     (dollars in thousands)              

General and administrative expenses

   $ 31,132      $ 23,979      $ 17,625        30     36

Percent of revenue

     12     11     10    

General and administrative expenses increased by $7.2 million from 2011 to 2012. The increase in absolute dollars was primarily due to additional personnel related costs of $5.8 million as a result of increasing the number of general and administrative employees to support our overall growth and additional stock-based compensation expense resulting from an increase in equity awards and their related valuations. We also incurred an increase of approximately $1.5 million in consulting and professional services fees associated with the growth of our business.

General and administrative expenses increased by $6.4 million from 2010 to 2011. The increase in absolute dollars was primarily due to additional personnel related costs of $5.0 million as a result of increasing the number of general and administrative employees to support our overall growth and additional stock-based compensation expense resulting from an increase in equity awards and their related valuations. We also incurred an increase of approximately $1.0 million in consulting and professional services fees associated with the growth of our business.

Acquisition Costs and Other Related Charges

 

     Years Ended December 31,      2012-2011
% Change
    2011-2010
% Change
 
     2012     2011      2010       
     (dollars in thousands)               

Acquisition Costs and Other Related Charges

   $ (11,355   $ 264       $ 403         (4401 )%      (34 )% 

Acquisition costs and other related charges resulted in income of $11.4 million for 2012 and expenses of $264,000 for 2011. Transaction costs during 2012 were $797,000 related to the CardStar and SinglePlatform acquisitions. We also recorded an adjustment to decrease the fair value of the contingent consideration liability by $12.2 million in 2012 due to the remeasurement of the fair value of our contingent consideration liability. As of December 31, 2012, the first target date, the target had not been met and no amounts were paid. The decrease in the fair value of the liability resulted from reductions to the SinglePlatform revenue forecast scenarios. These forecast scenarios were decreased due to SinglePlatform’s actual operating results and productivity of its sales organization.

 

44


Table of Contents

Acquisition costs and other related charges of $264,000 for 2011 and $403,000 for 2010 related to our acquisition of Bantam Networks, LLC, or Bantam Networks, in 2011 and NutshellMail, Inc., or NSM in 2010.

Interest and Other Income (expense), net

 

     Years Ended December 31,      2012-2011
% Change
    2011-2010
% Change
 
     2012      2011      2010       
     (dollars in thousands)               

Interest and other income (expense), net

   $ 231       $ 262       $ 341         (12 )%      (23 )% 

Interest and other income (expense), net decreased by $31,000 from 2011 to 2012 due primarily to a decrease in interest earned on our investment portfolio as a result of lower balances and lower interest rates.

Interest and other income (expense), net decreased by $79,000 from 2010 to 2011 due primarily to the loss on the sale of equipment.

Income Tax (Expense) Benefit

 

     Years Ended December 31,  
     2012     2011     2010  
     (dollars in thousands)  

Income Tax (Expense) Benefit

   $ (2,991   $ 13,420      $ 61   

Percent of income before income taxes

     (19 )%      131     2

We recorded an income tax expense of $3.0 million in 2012 based on our net income multiplied by our effective tax rate. Our effective tax rate varied from the statutory tax rate primarily due to the book expense related to incentive stock options, which is non-deductible for tax purposes, offset by the change in fair value of contingent consideration liability which was treated as a discrete item and state research and development credits, both of which reduced our tax expense.

The American Taxpayer Relief Act of 2012, or the Act, was enacted on January 2, 2013. The Act retroactively reinstates the federal research and development credit from January 1, 2012, through December 31, 2013. The effect of the change in the tax law related to 2012 is estimated to be $1.3 million, which will be recognized as a benefit to income tax expense in the first quarter of 2013, the quarter in which the law was enacted.

We recorded an income tax benefit of $13.4 million in 2011, primarily related to the release of our valuation allowance partially offset by state income tax expense. As of December 31, 2010, we provided a full valuation allowance related to our net deferred tax assets as we believed the objective and verifiable evidence of our historical pre-tax net losses outweighed the existing positive evidence regarding our ability to realize our deferred tax assets. During 2011, we reassessed the need for a valuation allowance against our net deferred tax assets and concluded that it was more likely than not that we would be able to realize our deferred tax assets primarily as a result of continued profitability and forecasted future results. Accordingly, in the fourth quarter of 2011, we released our valuation allowance related to our net deferred tax assets.

As a result of the release of our valuation allowance we expect our tax rate will increase in the future. However, we intend to use our net operating loss carry-forwards and tax credits, to the extent available, to reduce the corporate income tax liability associated with our operations.

We recorded an income tax benefit of $61,000 in 2010, primarily related to the partial release of our valuation allowance as a result of recording intangible assets related to the NSM acquisition partially offset by state income tax expense.

 

45


Table of Contents

Liquidity and Capital Resources

During 2012, 2011 and 2010, we funded our operations with cash flows generated from operations. At December 31, 2012, our principal sources of liquidity were cash and cash equivalents and marketable securities of $93.5 million.

Net cash provided by operating activities was $38.7 million, $41.7 million and $25.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Income before income taxes increased by $5.5 million in 2012 as compared to 2011. However, the non-cash adjustments to net income resulted in a decrease of $5.2 million in 2012, primarily as a result of the change in the contingent consideration liability which generated non-cash income of $12.2 million partially offset by increases in non-cash expense items such as depreciation and amortization and stock based compensation. Additionally, the changes in working capital accounts generated only $2.4 million of cash in 2012 as compared to $5.3 million in 2011. The improvement in cash flow from operations in 2011 as compared to 2010 was due primarily to income before income taxes of $10.3 million in 2011 as compared to income before income taxes of $2.9 million in 2010, an increase in the add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation expense and a larger amount of cash generated from working capital accounts in 2011 as compared to 2010. Cash provided by operating activities has historically been affected by the amount of income before income taxes as we have historically not been a significant taxpayer, growth in prepaid subscriptions, changes in working capital accounts and the timing of rent payment and add-backs of non-cash expense items such as depreciation and amortization and the expense associated with stock-based awards.

Net cash used in investing activities was $26.0 million, $34.0 million and $57.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. Net cash used in investing activities consisted primarily of net cash paid to purchase property and equipment as well as cash paid to acquire businesses and intangible assets. Net cash used in investing activities is also affected by net settlements of marketable securities. In 2012 and 2011, we generated net proceeds of $64.2 million and $338,000, respectively, as a result of the proceeds from sales and maturities of marketable securities being greater than cash used to purchase marketable securities. In 2010, we used cash of $38.3 million as a result of the purchases of marketable securities partially offset by proceeds from the sale and maturities of marketable securities. In 2012, we made two acquisitions. We acquired CardStar in January 2012 for a cash purchase price of $5.8 million and SinglePlatform in June 2012 for a cash payment of $62.5 million, net of cash acquired. In 2011, we completed the acquisition of substantially all of the assets of Bantam Networks for a cash payment of $15 million. We also used cash to purchase a small business and certain intangible assets. In 2010, we completed the acquisition of NSM, which included a payment of $2.2 million, net of cash received. Acquisition of property and equipment of $21.9 million, $18.1 million and $17.2 million in 2012, 2011 and 2010, respectively, consisted of the purchase of computer equipment for our operations and employees, equipment, furniture and leasehold improvements and the capitalization of certain software development costs. In 2011, we transitioned to a new third-party hosting facility in California. We made capital expenditures in all three years for equipment to be used in the new facility. In 2009, we signed a new lease for our corporate headquarters that increased the square footage throughout the duration of the lease. We increased the amount of space we occupied in 2012 and 2010 and acquired property and equipment to outfit the additional space. We made additional capital expenditures in 2012, 2011 and 2010 for equipment used in our hosting infrastructure. During 2012, 2011 and 2010, we capitalized $6.7 million, $4.8 million and $3.5 million, respectively, of costs associated with the development of internal use software.

Net cash provided by financing activities was $5.5 million, $9.0 million and $5.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. Net cash provided by financing activities for 2012, 2011 and 2010 consisted primarily of proceeds from stock issued pursuant to the exercise of stock options, proceeds received in connection with our employee stock purchase plan and to a lesser extent, in 2011 and 2012 from the income tax benefit related to the exercise of stock options.

As of December 31, 2012, we had federal and state net operating loss carry-forwards of $42.9 million and $1.1 million, respectively, which we intend to use to the extent available to offset payments of future federal and state income tax liabilities. If unused, our net operating loss carry-forwards expire at various dates through 2032 for federal and 2017 for state income tax purposes.

 

46


Table of Contents

In 2013, we anticipate capital expenditures of approximately 8% to 9% of revenue to support our future growth, which will consist primarily of hardware and software purchases, capitalization of internal use software and furniture and leasehold improvements related to additional office space.

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 with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase on an absolute dollar basis in the future.

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 fund our operations, 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, or 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 or we may be subject to covenants that restrict how we conduct our business. 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. We are unable to predict whether inflation or changing prices will materially affect our business in the foreseeable future.

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.

Contractual Obligations

We lease our headquarters under an operating lease that is effective through September 2022 with one ten-year extension option. The lease includes the space we are occupying now as well as additional space that will be made available to us through the term of the lease. We lease office space in Colorado for a sales and support office under an operating lease that expires in April 2019 with three three-year extension options. We also lease small amounts of general office space in Florida, New York, California and the United Kingdom under lease agreements that expire at various dates through 2017.

We have agreements with various vendors to provide specialized space and equipment and related services from which we host our software application. The agreements include payment commitments that expire at various dates through early 2017.

As of December 31, 2012, we had issued both cancellable and non-cancellable purchase orders and entered into contractual commitments with various vendors totaling $15.8 million. This amount relates primarily to marketing programs and other non-marketing related goods and services to be delivered over the next twelve months.

 

47


Table of Contents

The following table summarizes our contractual obligations at December 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

 

     Total      Less than
1 Year
     1-3 Years      3-5 Years      More
than
5 Years
 
     (In thousands)  

Office lease obligations

   $ 82,123       $ 6,571       $ 16,341       $ 19,124       $ 40,087   

Third-party hosting agreements

     15,819         3,841         7,358         4,620           

Vendor commitments

     15,791         15,791                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(1)

   $ 113,733       $ 26,203       $ 23,699       $ 23,744       $ 40,087   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) As of December 31, 2012, we had an obligation to the former shareholders of SinglePlatform under which we are obligated to pay cash consideration of up to $30.0 million, which is contingent on the achievement by SinglePlatform of certain revenue targets during the period from July 1, 2012 to June 30, 2014, measured in six month intervals. As of December 31, 2012, the first target date, the targets had not been met and no amounts were paid. Based on our estimates of future revenue, we reduced our liability (a level 3 fair value measurement) to $0 as of December 31, 2012 as none of the forecasted revenue scenarios met the payout criteria. We have not paid any of this consideration through December 31, 2012 and do not expect to pay any of the consideration based on our current revenue forecasts. We will assess our forecasts and assumptions on a quarterly basis as additional data impacting the assumptions is obtained.  

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk.    Significantly all of our revenue and expenses are denominated in U.S. dollars. Accordingly, our results of operations and cash flows are not subject to material fluctuations due to changes in foreign currency exchange rates. However, as we increase our operations in international markets we will become increasingly exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.

Interest Rate Sensitivity.    We had cash and cash equivalents and marketable securities of $93.5 million at December 31, 2012, which consisted of cash, government securities, corporate and agency bonds, certificates of deposit, commercial paper and money market instruments. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

 

48


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Constant Contact, Inc.

Index to Consolidated Financial Statements

 

     Page(s)  

Report of Independent Registered Public Accounting Firm

     50   

Consolidated Balance Sheets

     51   

Consolidated Statements of Operations

     52   

Consolidated Statements of Comprehensive Income

     53   

Consolidated Statements of Changes in Stockholders’ Equity

     54   

Consolidated Statements of Cash Flows

     55   

Notes to Consolidated Financial Statements

     56   

 

49


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Constant Contact, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Constant Contact, Inc. and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 28, 2013

 

50


Table of Contents

Constant Contact, Inc.

Consolidated Balance Sheets

 

     December 31,  
     2012     2011  
     (In thousands, except
share and per share data)
 
ASSETS   

Current assets

    

Cash and cash equivalents

   $ 67,775      $ 49,589   

Marketable securities

     25,732        90,523   

Accounts receivable, net of allowance for doubtful accounts

     92        58   

Prepaid expenses and other current assets

     6,513        8,891   
  

 

 

   

 

 

 

Total current assets

     100,112        149,061   

Property and equipment, net

     39,653        34,263   

Restricted cash

     750        750   

Goodwill

     95,505        18,935   

Acquired intangible assets, net

     6,758        3,046   

Deferred taxes

     11,377        12,960   

Other assets

     3,107        2,363   
  

 

 

   

 

 

 

Total assets

   $ 257,262      $ 221,378   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities

    

Accounts payable

   $ 8,167      $ 8,906   

Accrued expenses

     10,803        10,515   

Deferred revenue

     32,700        28,983   
  

 

 

   

 

 

 

Total current liabilities

     51,670        48,404   

Other long-term liabilities

     2,010        2,052   
  

 

 

   

 

 

 

Total liabilities

     53,680        50,456   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity

    

Preferred stock; $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at December 31, 2012 and 2011

              

Common stock; $0.01 par value; 100,000,000 shares authorized at December 31, 2012 and 2011; 30,651,375 and 30,110,895 shares issued and outstanding at December 31, 2012 and 2011, respectively

     307        301   

Additional paid-in capital

     209,987        190,039   

Accumulated other comprehensive income

     11        61   

Accumulated deficit

     (6,723     (19,479
  

 

 

   

 

 

 

Total stockholders’ equity

     203,582        170,922   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 257,262      $ 221,378   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

51


Table of Contents

Constant Contact, Inc.

Consolidated Statements of Operations

 

     Years Ended December 31,  
     2012     2011     2010  
     (In thousands, except per share data)  

Revenue

   $ 252,154      $ 214,420      $ 174,231   

Cost of revenue

     73,547        61,491        50,825   
  

 

 

   

 

 

   

 

 

 

Gross profit

     178,607        152,929        123,406   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     38,787        29,478        23,985   

Sales and marketing

     104,527        89,211        78,881   

General and administrative

     31,132        23,979        17,625   

Acquisition costs and other related charges

     (11,355     264        403   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     163,091        142,932        120,894   
  

 

 

   

 

 

   

 

 

 

Income from operations

     15,516        9,997        2,512   

Interest income

     224        346        341   

Other income (expense)

     7        (84       
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,747        10,259        2,853   

Income tax (expense) benefit

     (2,991     13,420        61   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 12,756      $ 23,679      $ 2,914   
  

 

 

   

 

 

   

 

 

 

Net income per share:

      

Basic

   $ 0.42      $ 0.80      $ 0.10   

Diluted

   $ 0.41      $ 0.77      $ 0.10   

Weighted average shares outstanding used in computing per share amounts:

      

Basic

     30,386        29,566        28,765   

Diluted

     31,003        30,671        29,945   

 

The accompanying notes are an integral part of these consolidated financial statements.

 

52


Table of Contents

Constant Contact, Inc.

Consolidated Statements of Comprehensive Income

 

     Years Ended December 31,  
     2012     2011     2010  
     (In thousands)  

Net income

   $ 12,756      $ 23,679      $ 2,914   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

      

Net unrealized (losses) gains on marketable securities, net of tax

     (51     60        (16

Reclassification adjustment for realized gains on available-for-sale securities included in net income

           (13     (11

Translation adjustment

     1        1         
  

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (50     48        (27
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 12,706      $ 23,727      $ 2,887   
  

 

 

   

 

 

   

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

53


Table of Contents

Constant Contact, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

 

     Common Stock      Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
     Shares      Amount           

Balance at December 31, 2009

     28,403,673         284         150,716        40        (46,072     104,968   

Issuance of common stock in connection with stock option exercises

     619,210         6         4,952            4,958   

Issuance of common stock in connection with acquisition of Nutshell Mail, Inc.

     165,523         2         3,601            3,603   

Issuance of restricted stock

     112,887         1         (1           

Issuance of common stock in connection with employee stock purchase plan

     36,040                 772            772   

Stock-based compensation expense

           8,934            8,934   

Unrealized loss on available-for-sale securities

             (16       (16

Reclassification adjustment for realized gains on available-for-sale securities included in net income

             (11       (11

Net income

               2,914        2,914   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     29,337,333       $ 293       $ 168,974      $ 13      $ (43,158   $ 126,122   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock in connection with stock option exercises

     717,397         7         7,919            7,926   

Issuance of common stock pursuant to vesting of restricted stock units

     14,488                 (319         (319

Issuance of common stock in connection with employee stock purchase plan

     41,677         1         858            859   

Stock-based compensation expense

           12,378            12,378   

Income tax benefit from the exercise of stock options

           229            229   

Unrealized gain on available-for-sale securities

             60          60   

Reclassification adjustment for realized gains on available-for-sale securities included in net income

             (13       (13

Translation adjustment

             1          1   

Net income

               23,679        23,679   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     30,110,895       $ 301       $ 190,039      $ 61      $ (19,479   $ 170,922   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock in connection with stock option exercises

     415,136         4         4,351            4,355   

Issuance of common stock pursuant to vesting of restricted stock units

     47,263         1         (598         (597

Issuance of common stock in connection with employee stock purchase plan

     78,081         1         1,052            1,053   

Stock-based compensation expense

           15,059            15,059   

Income tax benefit from the exercise of stock options

           84            84   

Unrealized loss on available-for-sale securities

             (51       (51

Translation adjustment

             1          1   

Net income

               12,756        12,756   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     30,651,375       $ 307       $ 209,987      $ 11      $ (6,723   $ 203,582   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

54


Table of Contents

Constant Contact, Inc.

Consolidated Statements of Cash Flows

 

     Years Ended December 31,  
     2012     2011     2010  
     (In thousands)  

Cash flows from operating activities

      

Net income

   $ 12,756      $ 23,679      $ 2,914   

Adjustments to reconcile net income to net cash provided by operating activities

      

Depreciation and amortization

     19,003        14,409        11,897   

Amortization of premium on investments

     539        660        128   

Stock-based compensation expense

     14,274        11,708        8,552   

Provision for (Recovery of) bad debts

     11        3        (2

Gain on sales of marketable securities

            (13     (11

Loss on sale of equipment

            79          

Deferred taxes

     2,465        (13,827     (180

Contingent consideration adjustment

     (12,152              

Taxes paid related to net share settlement of restricted stock units

     (598     (319       

Changes in operating assets and liabilities, net of effects from acquisition:

      

Accounts receivable

     3        (17     11   

Prepaid expenses and other current assets

     2,169        (2,462     (2,130

Other assets

     (653     (1,149     (942

Accounts payable

     (787     1,462        1,638   

Accrued expenses

     (1,398     3,791        (709

Deferred revenue

     3,107        3,880        4,762   

Other long-term liabilities

     (42     (230     (880
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     38,697        41,654        25,048   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Purchases of marketable securities

     (40,254     (130,702     (147,525

Proceeds from maturities of marketable securities

     59,867        46,313        87,195   

Proceeds from sales of marketable securities

     44,600        84,727        22,005   

Acquisition of businesses, net of cash acquired

     (68,296     (15,600     (2,225

Proceeds from sale of equipment

            81          

Purchases of intangible assets

            (685       

Acquisition of property and equipment, including costs capitalized for development of internal use software

     (21,922     (18,106     (17,158
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (26,005     (33,972     (57,708
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Proceeds from issuance of common stock pursuant to exercise of stock options

     4,356        7,926        4,958   

Income tax benefit from the exercise of stock options

     84        229          

Proceeds from issuance of common stock pursuant to employee stock purchase plan

     1,053        859        772   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     5,493        9,014        5,730   
  

 

 

   

 

 

   

 

 

 

Effects of exchange rates on cash

     1        1          
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     18,186        16,697        (26,930

Cash and cash equivalents, beginning of year

     49,589        32,892        59,822   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 67,775      $ 49,589      $ 32,892   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

      

Cash paid for income taxes

   $ 61      $ 324      $ 36   

Supplemental disclosure of noncash investing and financing activities:

      

Issuance of common stock in connection with the acquisition of NutshellMail, Inc.

   $      $      $ 3,603   

Capitalization of stock-based compensation

   $ 785      $ 670      $ 382   

Fair value of contingent consideration recorded at the time of acquisition in accrued expenses and other long-term liabilities

   $ 12,152      $      $   

The accompanying notes are an integral part of these consolidated financial statements.

 

55


Table of Contents

Constant Contact, Inc.

Notes to Consolidated Financial Statements

(amounts 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 provides on-demand email marketing, social media marketing, event marketing, local deals, a digital web and mobile storefront, and online survey products to small organizations, including small businesses, associations and non-profits primarily in the U.S. The Company’s email marketing product allows customers to create, send and track email marketing campaigns. The Company’s Social Campaigns™ product allows customers to create, publish, promote and run campaigns on Facebook®. EventSpotTM, the Company’s event marketing product, enables customers to promote and manage events, track event registrations and collect online payments. The Company’s online survey product enables customers to create and send surveys and analyze the responses. The Company’s SaveLocalTM product makes it quick and easy for customers to create, run and manage local deals. Social media marketing features in all of the Company’s products allow customers to easily manage and optimize their presence across multiple social media networks. Through the acquisition of CardStar, Inc (“CardStar”), in January 2012, the Company now offers a mobile phone application which allows consumers to easily manage loyalty, rewards and membership cards on a mobile phone. In June 2012, the Company acquired SinglePlatform, Corp. (“SinglePlatform”), a company that helps small businesses get discovered through web and mobile searches by providing a single place to update relevant business information. These products are designed for small organizations and are marketed directly by the Company and through a wide variety of partners.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include those of the Company and its subsidiaries, after elimination of all intercompany accounts and transactions. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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, judgments and assumptions, including those related to revenue recognition, stock-based compensation, goodwill and acquired intangible assets, capitalization of software and website development costs, contingent consideration liability and income taxes. 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, including assumptions as to future events. These estimates 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.

Fair Value of Financial Instruments

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

56


Table of Contents

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, are used to measure fair value:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Effective January 1, 2012, the Company adopted new guidance applicable to fair value measurements. This accounting guidance clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. Adoption of the new guidance did not have an effect on the Company’s consolidated financial statements.

During the years ended December 31, 2012, 2011 and 2010, there were no transfers between Level 1, Level 2 and Level 3.

The following tables present the Company’s fair value hierarchy for its assets which are measured at fair value on a recurring basis as of December 31, 2012 and 2011:

 

     Fair Value Measurements at December 31, 2012 Using  
         Level 1              Level 2              Level 3              Total      

Financial Assets:

           

Money Market Instruments

   $ 38,320       $      $      $ 38,320   

U.S. Treasury Notes

     10,158                       10,158   

Corporate and Agency Bonds

            12,676                12,676   

Certificates of Deposit

            1,000                1,000   

Commercial Paper

            1,898                1,898   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 48,478       $ 15,574       $      $ 64,052   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at December 31, 2011 Using  
     Level 1      Level 2      Level 3      Total  

Financial Assets:

           

Money Market Instruments

   $ 12,778       $      $      $ 12,778   

U.S. Treasury Notes

     32,086                       32,086   

Corporate and Agency Bonds

            55,440                55,440   

Certificates of Deposit

            999                999   

Commercial Paper

            1,998                1,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,864       $ 58,437       $      $ 103,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has revised its classification of certain marketable securities with a fair value of $58,437 as of December 31, 2011, from Level 1 measurements to Level 2 measurements to reflect the inputs used to price these securities as described above. The Company has concluded that this misclassification is immaterial to the Company’s financial statements for all prior periods presented.

 

57


Table of Contents

The Company has a contingent consideration liability associated with the acquisition of SinglePlatform, which has been assessed at $0 as of December 31, 2012 (see Note 4). Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of the contingent consideration liability uses assumptions and estimates to forecast a range of outcomes for the contingent consideration. The Company assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Changes in the fair value of the contingent consideration liability related to updated assumptions and estimates are recognized within the consolidated statements of operations.

The significant unobservable inputs used in the fair value measurement of contingent consideration are the probabilities of successful achievement of the targeted revenues, the six month periods in which the revenues are expected to be achieved and the discount rate. Increases or decreases in any of the forecasted scenarios or probabilities of success would result in a higher or lower fair value measurement, respectively. Increases or decreases in the actual achievement of milestones in the relevant period as compared to the estimated achievement would result in a higher or lower fair value measurement, respectively.

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs as of the acquisition date of June 12, 2012:

 

Liability

   Fair Value     

Valuation Technique

  

Unobservable Inputs

   Weighted
Average
 

Contingent consideration

   $ 12,152      

Income approach—

discounted cash flow

   Revenue earn-out—probability of low case (scenario) for total revenue.      7.5 %
         Revenue earn-out—probability of base case (scenario) for total revenue.      30
         Revenue earn-out—probability of target case (scenario) for total revenue.      62.5 %
         Discount rate for revenue earn-out      5.3 %

As of December 31, 2012, the Company had revised its revenue forecasts inclusive of the three scenarios and none of the three revised revenue scenarios met the payout targets. Therefore, the fair value of the contingent consideration liability was estimated at $0.

Changes in the fair value of the Level 3 contingent consideration liability associated with the acquisition were as follows:

 

     Contingent Consideration
Liability
 

Balance at December 31, 2011

   $  

Acquisition of SinglePlatform

     12,152   

Change in fair value of contingent consideration liability, included in acquisition costs and other related charges

     (12,152
  

 

 

 

Balance at December 31, 2012

   $   
  

 

 

 

The change in the fair value of the contingent consideration liability from the date of acquisition through December 31, 2012 resulted from reductions to the SinglePlatform revenue forecast scenarios. The revenue forecast scenarios were decreased due to SinglePlatform’s actual operating results and reduced productivity of its sales organization. As a result, the Company adjusted the fair value of the contingent consideration liability to $0 at December 31, 2012.

Fair Value Option for Financial Assets and Financial Liabilities

Authoritative guidance allows companies to choose to measure many financial instruments and certain other items at fair value. The Company has elected not to apply the fair value option to any of its financial assets or liabilities.

 

58


Table of Contents

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of acquisition to be cash equivalents. The Company also considers receivables related to customer credit card purchases of $2,509 and $3,916 at December 31, 2012 and 2011, respectively, to be equivalent to cash. Cash equivalents are stated at fair value.

Marketable Securities

The Company’s marketable securities are classified as available-for-sale and are carried at fair value with the unrealized gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of interest and other income based on the specific identification method. Fair value is determined based on quoted market prices.

At December 31, 2012, marketable securities by security type consisted of:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

U.S. Treasury Notes

   $ 10,138         20       $       $ 10,158   

Corporate and Agency Bonds

     12,675         1                 12,676   

Certificates of Deposit

     1,000                         1,000   

Commercial Paper

     1,898                         1,898   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,711       $ 21       $       $ 25,732   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2012, marketable securities consisted of investments that mature within one year with the exception of government and agency bonds with a fair value of $14,160, which have maturities within two years.

At December 31, 2011, marketable securities by security type consisted of:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

U.S. Treasury Notes

   $ 32,037         49       $      $ 32,086   

Corporate and Agency Bonds

     55,428         13         (1     55,440   

Certificates of Deposit

     1,000                 (1     999   

Commercial Paper

     1,998                        1,998   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 90,463       $ 62       $ (2   $ 90,523   
  

 

 

    

 

 

    

 

 

   

 

 

 

Accounts Receivable

Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.

Concentration of Credit Risk and Significant Products and Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. At December 31, 2012 and 2011, the Company had substantially all cash balances at certain financial institutions without or in excess of federally insured limits,

 

59


Table of Contents

however, the Company maintains its cash balances and custody of its marketable securities with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

For the years ended December 31, 2012, 2011 and 2010, revenue from the Company’s email marketing product alone as a percentage of total revenue was approximately 85%, 88% and 89%, respectively. No customer accounted for more than 10% of total revenue during these years.

Goodwill and Acquired Intangible Assets

The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company performs its annual assessment for impairment of goodwill on November 30th of each year and has determined that there is a single reporting unit for the purpose of conducting this annual goodwill impairment assessment. For purposes of assessing potential impairment, the Company annually estimates the fair value of the reporting unit (based on the Company’s market capitalization) and compares this amount to the carrying value of the reporting unit (as reflected by the Company’s total stockholders’ equity). If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required.

Effective January 1, 2012, the Company adopted new guidance that simplifies the goodwill impairment test. The amendment permits the Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the goodwill accounting standard. Adoption of the new guidance did not have an effect on the Company’s consolidated financial statements.

Intangible assets are recorded at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets or, where applicable and if shorter, over the lease term. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to the statement of operations. Repairs and maintenance costs are expensed as incurred.

Estimated useful lives of assets are as follows:

 

Computer equipment

   3 years

Software

   3 years

Furniture and fixtures

   5 years

Leasehold improvements

   Shorter of life of lease or

estimated useful life

Long-Lived Assets

The Company reviews the carrying values of its long-lived assets for possible impairment when events or changes in circumstance indicate that the related carrying amount may not be recoverable. Undiscounted cash flows are compared to the carrying value and when required, impairment losses on assets to be held and used are recognized based on the excess of the asset’s carrying amount over the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

 

60


Table of Contents

Revenue Recognition

The Company provides access to its products primarily through subscription arrangements whereby the customer is charged a fee for access for a defined term. Subscription arrangements include access to use the Company’s software via the Internet and support services, such as telephone, email and chat support. When there is evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured, the Company recognizes revenue on a daily basis over the subscription period as the services are delivered. Delivery is considered to have commenced at the time the customer has paid for the products and has access to the account via a log-in and password. The Company generates revenue from its SaveLocal product by charging a fee to its customers based on the number of deals sold by its customers and the value of the successful deal. The Company recognizes revenue from the fee charged when there is evidence of an arrangement, the fee is fixed or determinable and collectability is deemed reasonably assured. The Company also offers ancillary services to its customers related to its subscription-based products such as custom services and training. When sold together, revenue from custom services, training and subscription products are accounted for separately based on vendor specific objective evidence of fair value of each of the services as those services have value on a standalone basis and do not involve a significant degree of risk or unique acceptance criteria. Revenue from custom services and training is recognized as the services are performed.

Deferred Revenue

Deferred revenue consists of payments received in advance of delivery of the Company’s on-demand products described above and is recognized as the revenue recognition criteria are met. The Company’s customers pay for services in advance on a monthly, semiannual or annual basis.

Software and Website Development Costs

Research and development costs are expensed as incurred and primarily include salaries, fees to consultants, and other related costs. Relative to development costs of its on-demand products and website, the Company capitalizes certain direct costs to develop functionality as well as certain upgrades and enhancements that are probable to result in additional functionality. 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 as part of property and equipment until the software is substantially complete and ready for its intended use. Capitalized software is amortized over a three-year period in the expense category to which the software relates.

Foreign Currency Translation

The functional currency of the Company’s UK operations is deemed to be the British pound. Accordingly, the assets and liabilities of the Company’s UK subsidiary are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are charged to Other income (expense) and were not material to the Company’s operations.

Comprehensive Income

Comprehensive income includes net income, as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. The Company’s only elements of other comprehensive income (loss) are unrealized gains and losses on available-for-sale securities and translation adjustments.

Effective January 1, 2012, the Company adopted new guidance applicable to comprehensive income. Under this guidance the Company has two options for presenting comprehensive income. The Company can present the

 

61


Table of Contents

total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. As the new guidance relates only to how comprehensive income is disclosed and does not change the items that must be reported as comprehensive income, adoption of the new guidance did not have an effect on the Company’s consolidated financial statements.

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.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of unrestricted common shares outstanding for the period.

Diluted net income per share is computed by dividing net income 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 and restricted stock units using the “treasury stock” method when the effect is not anti-dilutive.

The following is a summary of the shares used in computing diluted net income per share:

 

     Years ended December 31,  
     2012      2011      2010  
     (in thousands)  

Weighted average shares used in calculating basic net income per share

     30,386         29,566         28,765   

Stock options

     581         1,075         1,167   

Warrants

     1         1         1   

Unvested restricted shares and restricted share units

     35         29         12   
  

 

 

    

 

 

    

 

 

 

Shares used in computing diluted net income per share

     31,003         30,671         29,945   
  

 

 

    

 

 

    

 

 

 

The Company excluded the following common stock equivalents from the computation of diluted net income per share because they had an anti-dilutive impact because the proceeds under the treasury stock method were in excess of the average fair market value for the period:

 

     Years ended December 31,  
     2012      2011      2010  
     (in thousands)  

Options to purchase common stock

     3,342         2,145         1,833   

Unvested restricted stock and restricted stock units

     110         37         6   
  

 

 

    

 

 

    

 

 

 

Total options exercisable into common stock, restricted stock units issuable in common stock and restricted stock

     3,452         2,182         1,839   
  

 

 

    

 

 

    

 

 

 

Advertising Expense

The Company expenses advertising as incurred. Advertising expense was $35,350, $36,437 and $39,214 during the years ended December 31, 2012, 2011 and 2010, respectively.

 

62


Table of Contents

Accounting for Stock-Based Compensation

The Company values all stock-based compensation, including grants of stock options, restricted stock and restricted stock units, at fair value on the date of grant, and expenses the fair value over the applicable service period. The straight-line method is applied to all grants with service conditions, while the graded vesting method is applied to all grants with both service and performance conditions.

Income Taxes

Income taxes are provided for tax effects of transactions reported in the 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 statement and income tax reporting purposes. 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 accounts for uncertainty in income taxes recognized in the financial statements by applying 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.

Reclassifications

Prior year transactions costs related to successful acquisitions have been reclassified from general and administrative expenses to acquisition costs and other related charges to conform to current period presentation. These reclassifications did not have an effect on the Company’s earnings.

3.    Property and Equipment

Property and equipment consisted of the following:

 

     December 31,  
     2012      2011  

Computer equipment

   $ 44,794       $ 34,540   

Software

     35,011         25,251   

Furniture and fixtures

     7,499         6,368   

Leasehold improvements

     9,015         7,439   
  

 

 

    

 

 

 

Total property and equipment

     96,319         73,598   

Less: Accumulated depreciation and amortization

     56,666         39,335   
  

 

 

    

 

 

 

Property and equipment, net

   $ 39,653       $ 34,263   
  

 

 

    

 

 

 

Depreciation and amortization expense was $17,331, $14,076 and $11,708 for the years ended December 31, 2012, 2011 and 2010, respectively. During 2011, the Company disposed of and sold assets that had a gross book value of $5,019 and a net book value of $160 for proceeds of $81 for which the Company recognized a loss of $79. During 2010, the Company retired assets that had a gross book value of $1,827 and no net book value.

The Company capitalized costs associated with the development of internal use software of $6,673, $4,790 and $3,516 included in Software above and recorded related amortization expense of $3,383, $2,477 and $1,885

 

63


Table of Contents

(included in depreciation and amortization expense) during the years ended December 31, 2012, 2011 and 2010, respectively. The remaining net book value of capitalized software costs was $11,260 and $7,970 as of December 31, 2012 and 2011, respectively.

4.    Acquisitions

NutshellMail

On May 21, 2010, the Company acquired by merger all of the outstanding capital stock of Nutshell Mail, Inc., a Delaware corporation (“NutshellMail”), in order to broaden the Company’s offerings related to social media. NutshellMail offers a free service that collects and organizes the latest messages and activity from social networks into an interactive email.

The aggregate purchase price was $5,972 including $2,369 of cash and 165,523 shares of common stock valued at $3,603. For financial reporting purposes, the fair value of the common stock issued was based on the closing market price of the Company’s common stock on May 21, 2010, the closing date of the acquisition.

The Company allocated the purchase price as follows:

 

Current assets, including cash of $144

   $ 156   

Developed technology

     970   

Goodwill

     5,248   
  

 

 

 

Total assets acquired

     6,374   

Fair value of liabilities assumed

     402   
  

 

 

 

Net assets acquired

   $ 5,972   
  

 

 

 

The developed technology was valued using the cost-to-replace method. The estimated economic life of the developed technology is three years.

Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. Goodwill is primarily attributable to NutshellMail’s knowledge of social media and expertise in working with social media tools. Goodwill from the NutshellMail acquisition is included within the Company’s one reporting unit and included in the Company’s enterprise level annual review for impairment. Goodwill resulting from the acquisition of NutshellMail is not deductible for tax purposes.

Bantam Networks

On February 15, 2011, the Company acquired substantially all of the assets, excluding cash, of Bantam Networks, LLC, a Delaware limited liability company (“Bantam Networks”), for a cash purchase price of $15,000. Bantam Networks is a contact management and social customer relationship management (“CRM”) software provider. The Company purchased the assets of Bantam Networks in order to expand the CRM functionality of its products.

The Company allocated the purchase price as follows:

 

Developed technology

   $ 1,800   

Goodwill

     13,200   
  

 

 

 

Total assets acquired

   $ 15,000   
  

 

 

 

The developed technology was valued using the cost to replace method. The estimated economic life of the developed technology is three years and amortization will commence once the software is ready for its intended

 

64


Table of Contents

use. Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill is primarily attributable to Bantam Networks’ knowledge of CRM and expertise in working with contact management software. Goodwill from the Bantam Networks’ acquisition is included within the Company’s one reporting unit and is included in the Company’s enterprise-level annual review for impairment. Goodwill resulting from the acquisition of Bantam Networks is deductible for tax purposes.

The following table presents the pro forma results of the historical consolidated statements of operations of the Company and Bantam Networks for the years ended December 31, 2011 and 2010, giving effect to the merger as if it occurred on January 1, 2010:

 

     Years ended
December 31,
 
     2011      2010  

Pro forma revenue

   $ 214,420       $ 174,231   

Pro forma net income

   $ 23,552       $ 1,904   

The pro forma net income presented primarily includes adjustments to eliminate Bantam revenue and adjustments for amortization, interest income and income taxes. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed date, or which may be realized in the future.

Coupon Redemption Technology

During the fourth quarter of 2011, the Company acquired substantially all of the assets of a small business engaged in the back-end administration of coupon redemptions in order to expand its product offerings and enhance its technology base. The total consideration for this acquisition was $600, paid in cash. In allocating the total purchase consideration for this acquisition based on estimated fair values, the Company recorded goodwill of $487 and identifiable intangible assets of $113. Goodwill is primarily attributable to the acquired business knowledge of coupon redemption and contact management and expertise in working in the small business market. Intangible assets acquired consisted of core and completed technology that was valued using the cost-to-replace method and has a useful life of three years. The acquisition was an asset acquisition and the goodwill resulting from this transaction is deductible for tax purposes.

CardStar

On January 13, 2012, the Company acquired by merger all of the outstanding capital stock of CardStar for a cash purchase price of $5,750. CardStar is a leading developer of mobile applications that extend the use of loyalty, rewards and membership cards and mobile coupons among consumers. The Company purchased CardStar in order to accelerate its entrance into the mobile marketing and loyalty space.

The Company allocated the purchase price as follows:

 

Developed technology

   $ 624   

Net deferred tax assets

     553   

Goodwill

     4,573   
  

 

 

 

Total assets acquired

   $ 5,750   
  

 

 

 

The developed technology was valued using the cost to replace method and has an estimated economic life of three years.

Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill is primarily attributable to CardStar’s knowledge of mobile applications and coupons and loyalty, rewards and

 

65


Table of Contents

membership cards. Goodwill from the CardStar acquisition is included within the Company’s one reporting unit and is included in the Company’s enterprise-level annual review for impairment. Goodwill resulting from the acquisition of CardStar is not deductible for tax purposes.

SinglePlatform

On June 12, 2012, the Company acquired by merger all of the outstanding capital stock of SinglePlatform. SinglePlatform provides small businesses a single place to update their business information and delivers that information across its publishing network. The Company purchased SinglePlatform in order to expand its product offerings and allow small organizations to engage their customers earlier in the customer lifecycle. The purchase price of $75,009 reflected a cash payment of $62,857 and a liability of $12,152 representing the fair value of contingent consideration of up to $30,000 payable to the former shareholders of SinglePlatform upon achievement by SinglePlatform of certain revenue targets. These revenue targets are measured in six month intervals from July 1, 2012 to June 30, 2014. If such targets are achieved, the consideration is payable in cash. Using a discounted cash flow method and a probability weighted estimate of future revenue, the Company recorded an estimated liability of $12,152 as of the acquisition date. The estimated undiscounted range of outcomes for the contingent consideration was $0 to $21,095 at the acquisition date. The first revenue target, assessed at December 31, 2012 was not met. Based on actual performance, the Company revised its revenue forecasts. Under the revised forecasts, no contingent consideration payments will be made. Accordingly, the Company recorded a reduction to expenses of $12,152 relating to this remeasurement of the fair value of the contingent liability. The reduction is included in acquisition costs and other related charges in the Company’s consolidated statement of operations for the year ended December 31, 2012. The Company will continue to assess the probability that the remaining revenue targets will be met and at what level, and any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled.

The following table summarizes the purchase price for SinglePlatform and the allocation of the purchase price:

 

Purchase consideration:

  

Total cash paid, net of cash acquired

   $ 62,546   

Cash acquired

     311   

Fair value of contingent consideration

     12,152   
  

 

 

 

Total purchase price consideration

   $ 75,009   
  

 

 

 

 

Assets acquired and liabilities assumed:

  

Cash

   $ 311   

Accounts receivable

     48   

Prepaid expenses and other current assets

     60   

Property and equipment

     14   

Identifiable intangible assets

     4,760   

Other assets

     91   

Net deferred tax assets

     72   

Goodwill

     71,997   
  

 

 

 

Total assets acquired

     77,353   
  

 

 

 

Accounts payable, accrued expenses and other current liabilities

     (1,734

Deferred revenue

     (610
  

 

 

 

Total liabilities assumed

     (2,344
  

 

 

 

Total allocation of purchase price consideration

   $ 75,009   
  

 

 

 

The developed technology and the customer and publisher relationships were valued using the cost to replace method. The trade name was valued using the relief from royalty method. Acquired intangible assets are

 

66


Table of Contents

amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. The following table presents the estimated fair values and useful lives of identifiable intangible assets acquired:

 

     Amount      Weighted Average Useful
Life
 
            (in years)  

Developed technology

   $ 850         3   

Customer relationships

     2,630         3.75   

Publisher relationships

     710         5   

Trade name

     570         5   
  

 

 

    

Total identifiable intangible assets

   $ 4,760         3.95   
  

 

 

    

Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. Goodwill is primarily attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and the expected synergistic benefits of being able to market SinglePlatform’s product to the Company’s customer base and being able to market the Company’s products to SinglePlatform’s customer base. Goodwill from the SinglePlatform acquisition is included within the Company’s one reporting unit and is included in the Company’s enterprise-level annual review for impairment. Goodwill resulting from the acquisition of SinglePlatform is not deductible for tax purposes.

The following table presents the pro forma results of the historical consolidated statements of operations of the Company and SinglePlatform for the years ended December 31, 2012 and 2011, giving effect to the merger as if it occurred on January 1, 2011:

 

      Years ended
December 31,
 
     2012      2011  

Pro forma revenue

   $ 252,618       $ 214,839   

Pro forma net income

     11,173       $ 21,039   

The pro forma net income presented primarily includes adjustments for amortization, elimination of transaction costs, interest income and income taxes. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed date, or which may be realized in the future.

Transaction costs related to the acquisitions were $797, $264 and $403 for the years ended December 31, 2012, 2011 and 2010, respectively, which the Company recorded as acquisition costs and other related charges. The operating expenses of the acquired entities have been included in the consolidated financial statements beginning on their respective acquisition dates but have not been disclosed as the Company does not account for the results of the acquired entities separate from its own results. The operations of CardStar prior to the acquisition were not material to the consolidated results of the Company.

5.     Goodwill and Acquired Intangible Assets

The carrying amount of goodwill was $95,505 and $18,935 as of December 31, 2012 and 2011, respectively. Changes in goodwill related only to additional goodwill from the Company’s acquisition of businesses.

 

67


Table of Contents

Changes in goodwill are as follows:

 

Balance, December 31, 2010

   $ 5,248   

Goodwill acquired during the year

     13,687   
  

 

 

 

Balance, December 31, 2011

     18,935   

Goodwill acquired during the year

     76,570   
  

 

 

 

Balance, December 31, 2012

   $ 95,505   
  

 

 

 

Goodwill is not amortized, but instead is reviewed for impairment at least annually in the fourth quarter or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Company considers its business to be one reporting unit for purposes of performing its goodwill impairment analysis. The Company completed its annual impairment test of goodwill on November 30, 2012. To date, the Company has had no impairments to goodwill.

Intangible assets consist of the following:

 

     Estimated
Useful Life
     December 31, 2012      December 31, 2011  
        Gross
Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Amount
 

Developed technology

     3 years       $ 4,357       $ 1,222       $ 3,135       $ 2,883       $ 513       $ 2,370   

Customer relationships

     3.75 years         3,315         822         2,493         685         9         676   

Publisher relationships

     5 years         710         83         627                           

Trade name

     5 years         570         67         503                           
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
      $ 8,952       $ 2,194       $ 6,758       $ 3,568       $ 522       $ 3,046   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company amortizes the intangible assets over the estimated useful lives noted above. For the developed technology and publisher relationship assets, as the pattern of consumption of the economic benefits of the intangible assets cannot be reliably determined, the Company amortizes these acquired intangible assets over their estimated useful lives on a straight-line basis. The Company also amortizes the trade name asset over its estimated useful life on a straight-line basis as the straight-line basis is not materially different than the pattern of consumption of economic benefit basis. Customer relationships are amortized over their useful life based on the pattern of consumption of economic benefit of the asset. Amortization commences once the asset has been placed in service.

Amortization expense for intangible assets was $1,672, $333 and $189 for the years ended December 31, 2012, 2011 and 2010, respectively. Amortization of developed technology and publisher relationships is recorded within cost of revenue and the amortization of customer relationships and trade name is recorded within sales and marketing expense. Future estimated amortization expense for assets placed in service as of December 31, 2012 is as follows:

 

2013

   $ 1,953   

2014

     1,596   

2015

     983   

2016

     320   

2017

     106   
  

 

 

 

Total

   $ 4,958   
  

 

 

 

 

68


Table of Contents

Amortization of developed technology totaling $1,800 as of December 31, 2012 has not yet commenced as the software is not yet ready for its intended use.

6.    Stockholders’ Equity and Stock-Based Awards

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, par value $0.01 per share, all of which is undesignated.

Common Stock

The Company has authorized 100,000,000 shares of common stock, par value $0.01 per share. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of holders of all classes of preferred stock outstanding.

Stock-Based Awards

Stock Incentive Plan

The Company’s 2011 Stock Incentive Plan (the “2011 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 with a maximum term of seven years. These awards may be granted to the Company’s employees, officers, directors, consultants, and advisors. The Company reserved 4,200,000 shares of its common stock for issuance under the 2011 Plan. Additionally, per the terms of the 2011 Plan, shares of common stock previously reserved for issuance under the 2007 Stock Incentive Plan as well as shares reserved for outstanding awards under the 1999 Stock Option/Stock Issuance Plan for which the awards are cancelled, forfeited, repurchased or otherwise result in common stock not being issued will be added to the number of shares available for issuance under the 2011 Plan. Awards that are granted with a per share or per unit purchase price less than 100% of fair market value as of the date of grant (e.g., restricted stock and restricted stock unit awards) shall count towards the total number of shares reserved for issuance under the 2011 Plan on a two-for-one basis. As of December 31, 2012, 1,781,768 shares of common stock were available for issuance under the 2011 Plan.

Inducement Award Plan

In June 2012, the Compensation Committee of the Board of Directors adopted the Constant Contact, Inc. 2012 Inducement Award Plan (the “2012 Inducement Plan”). The 2012 Inducement Plan provides for the grant of nonstatutory stock options and restricted stock unit awards as an inducement to an individual’s entering into employment with Constant Contact or in connection with an acquisition. The Company may issue up to an aggregate of 257,780 shares of common stock pursuant to the 2012 Inducement Plan, subject to adjustment in the event of stock splits and other similar events. Shares issued under the 2012 Inducement Plan may consist in whole or in part of authorized but unissued shares or may be issued shares that the Company has reacquired (provided that open market purchases of shares using the proceeds from the exercise of awards do not increase the number of shares available for future grants). Options granted under the 2012 Inducement Plan must be granted at an exercise price that is not less than 100% of the fair market value of the common stock on the date of grant and may not be granted for a term in excess of seven years.

If an award granted under the 2012 Inducement Plan expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of common stock subject to such award being repurchased by the Company) or otherwise results in any common stock not being issued, the unused common stock covered by such award will become available for issuance pursuant to a new award under the 2012 Inducement Plan. As of December 31, 2012, there were 8,300 shares of common stock available for issuance under the 2012 Inducement Plan.

 

69


Table of Contents

The Company applies the fair value recognition provisions for all stock-based awards granted or modified in accordance with authoritative guidance. Under this guidance the Company records compensation costs over the requisite service period of the award based on the grant-date fair value. The straight-line method is applied to all grants with service conditions, while the graded vesting method is applied to all grants with both service and performance conditions.

Stock Options

During the years ended December 31, 2012, 2011 and 2010, the Company granted 1,549,932, 1,787,525 and 1,313,350 stock options, respectively, to certain employees and directors. The vesting of most of these awards is time-based and the restrictions typically lapse 25% after one year and quarterly thereafter for the next 36 months in the case of employees and 33% after one year and quarterly thereafter for the next 24 months in the case of directors.

Through December 31, 2012, stock options were granted with exercise prices equal to the fair value of the Company’s common stock on the date of grant. The Company bases fair value of common stock on the quoted market price.

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Because the Company has a limited history of operating as a public company, the expected term assumption was based on the “simplified method” for estimating expected term for awards that qualify as “plain-vanilla” options. Expected volatility was based on historical volatility of the publicly traded stock of a peer group of companies, inclusive of the Company, commencing October 2007. The risk-free interest rate was determined by reference to U.S. Treasury bond yields at or near the time of grant for time periods similar to the expected term of the award. The relevant data used to determine the value of the stock option grants is as follows:

 

     Year Ended
December 31,
2012
    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
 

Weighted average risk-free interest rate

     0.81     1.82     2.41

Expected term (in years)

     4.6        5.5        6.1   

Weighted average expected volatility

     53.58     52.15     52.17

Expected dividends

     0     0     0

A summary of stock option activity is as follows:

 

     Number of
Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(In Years)
     Aggregate
Intrinsic
Value
 

Balance at December 31, 2011

     4,902,915      $ 18.95         7.85       $ 26,599   

Granted

     1,549,932        21.37         

Exercised

     (415,136     10.49         

Forfeited

     (527,457     23.45         
  

 

 

         

Balance at December 31, 2012

     5,510,254      $ 19.84         6.35       $ 5,730   
  

 

 

         

Vested and expected to vest at December 31, 2012

     5,021,234      $ 19.58         6.07       $ 5,649   

Exercisable at December 31, 2012

     2,706,418      $ 17.22         6.03       $ 5,258   

The aggregate intrinsic value was calculated based on the positive differences between the market value of the Company’s common stock on December 31, 2011 and 2012, of $23.21 and $14.21 per share, respectively, and the exercise prices of the options.

 

70


Table of Contents

The weighted average grant-date fair value of grants of stock options was $9.55, $12.08 and $11.84 per share for the years ended December 31, 2012, 2011 and 2010, respectively.

The total intrinsic value of stock options exercised was $6,530, $10,014 and $9,529 for the years ended December 31, 2012, 2011 and 2010, respectively.

Restricted Stock

The Company’s stock incentive plans provide for the award of restricted stock and restricted stock units. The Company has granted restricted stock and restricted stock units that contain time-based and performance based vesting.

During 2010, the Company granted 112,887 shares of restricted stock that contained both time-based and performance-based vesting conditions. Time-based restrictions lapse over three years while the performance criterion was a two part performance goal, one of which was met in 2010 and the second of which has not yet been met.

The table below summarizes activity relating to restricted stock for 2012:

 

     Shares     Weighted
Average Grant
Date Fair Value
 

Unvested shares as of December 31, 2011

     60,508      $ 21.17   

Restricted shares vested

     (11,838     21.17   

Restricted shares forfeited/cancelled

              
  

 

 

   

Unvested shares as of December 31, 2012

     48,670      $ 21.17   
  

 

 

   

Restricted Stock Units

During 2012, 2011 and 2010, the Company granted 718,930, 181,677 and 157,669 restricted stock units with a weighted average grant-date fair value of $16.73, $25.86 and $22.60, respectively. Upon vesting, the restricted stock units entitle the holder to one share of common stock for each restricted stock unit. All restricted stock units currently granted have been classified as equity instruments as their terms require settlement in shares. The aggregate intrinsic value of restricted stock units vested in 2012 and 2011 was $1,485 and $794, respectively. No units vested in 2010. Of the unvested restricted share units outstanding as of December 31, 2012, 595,958 are subject to time-based vesting, 194,302 are subject to performance based vesting and 95,188 are subject to market-based conditions. As of December 31, 2012, the Company estimates that 715,398 shares of restricted stock units with an intrinsic value of $7,575 and a weighted average remaining contractual term of 1.54 years will ultimately vest. A description of restricted stock units and the valuation methodologies used to value them are described below:

Restricted stock units with time-based vesting conditions

Time-based vesting restrictions lapse over either a two- or four-year period. Restricted stock units with time-based vesting conditions are valued on the grant date using the grant date market price of the underlying shares.

Restricted stock units with performance-based vesting conditions

In December 2012, the Company granted 152,302 restricted stock units which vest upon the achievement of at least two years of service and a targeted revenue run rate of $500,000 (the “Revenue RSUs”). The Revenue RSUs will vest upon the achievement of both (i) a performance condition and (ii) a service condition. The performance condition will be satisfied if the Company achieves a specified quarterly revenue target over a specified measurement period. To satisfy the service condition, the employee must remain employed by the Company until the later of the applicable performance determination date and the second anniversary of the date of grant. The

 

71


Table of Contents

number of Revenue RSUs that will vest upon the achievement of the performance condition and the service condition will vary based on when the performance condition is satisfied, from a maximum of 100% of the number of target shares to a threshold of 25% of the number of target shares with no vesting, absent certain circumstances in a change of control of the Company, if the threshold is not achieved. If the revenue targets are not achieved by March 31, 2017, the Revenue RSUs will expire unvested. Restricted stock units with performance-based vesting conditions are valued on the grant date using the grant date market price of the underlying shares.

At December 31, 2012, all of the Revenue RSUs granted in 2012 remain outstanding. At December 31, 2012, the Company also had outstanding 42,000 restricted stock units granted in prior years that contain performance based vesting criteria.

Restricted stock units with market-based vesting conditions

In December 2012, the Company granted 95,188 restricted stock units which vest upon achievement of a Total Shareholder Return target (the “TSR units”) measured over a three-year period that commenced December 4, 2012. The number of TSR units that will vest upon achievement of the Total Shareholder Return target will vary based on the level of achievement from a maximum of 125% of the target shares, or 118,982, to a threshold of 50% of the target shares, or 47,594, with no vesting, absent certain circumstances in a change of control of the Company, if the threshold requirement is not achieved or the employee is no longer with the Company at the end of the three-year period. The TSR units are valued using a Monte Carlo simulation model. The number of awards expected to be earned, based on achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation for the TSR unit. Compensation cost is recognized regardless of the eventual number of awards that are earned based on the market condition. Expected volatility was based on historical volatility of the publicly traded stock of a peer group of companies, inclusive of the Company over the last three years. The risk-free interest rate was determined by reference to U.S. Treasury bond yields at or near the time of grant for three years. The relevant assumptions used in the Monte Carlo simulation model include (but are not limited to) the following:

 

     2012  

Monte Carlo assumptions

  

Risk-free interest rate

     0.34

Volatility

     27.64% – 62.45

Compensation cost is recognized on a straight-line basis over the requisite service period. At December 31, 2012, all of the TSR units granted in 2012 remain outstanding.

The table below summarizes activity relating to all restricted stock units:

 

     Number of Shares
Underlying
Restricted Units
    Weighted
Average Grant
Date Fair Value
 

Unvested as of December 31, 2011

     278,653      $ 24.28   

Restricted units granted

     718,930        16.73   

Restricted units vested

     (77,995     22.91   

Restricted units forfeited/cancelled

     (34,140     24.01   
  

 

 

   

Unvested as of December 31, 2012

     885,448      $ 17.40   
  

 

 

   

 

72


Table of Contents

Stock Purchase Plan

The Company’s 2007 Employee Stock Purchase Plan, as amended (the “Purchase Plan”), became effective upon the completion of the Company’s 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 per share purchase price for offerings during 2010, 2011 and 2012 was equal to 85% of the closing market price of the Company’s common stock at the end of the offering period. Stock based compensation was determined based on the discount of 15% from the per share market price on the last day of the purchase period. During 2010, 36,040 shares of common stock were purchased for total proceeds to the Company of $772. During 2011, 41,677 shares of common stock were purchased for total proceeds to the Company of $859. During 2012, 78,081 shares of common stock were purchased for total proceeds to the Company of $1,053. As of December 31, 2012, 110,591 shares of common stock were available for issuance to participating employees under the Purchase Plan.

Stock-Based Compensation

The Company recognized stock-based compensation expense on all awards in cost of revenue and operating expense categories as follows:

 

     Years Ended
December 31,
 
     2012      2011      2010  

Cost of revenue

   $ 1,758       $ 1,542       $ 1,124   

Research and development

     3,733         3,221         2,491   

Sales and marketing

     3,187         2,588         1,911   

General and administrative

     5,596         4,357         3,026   
  

 

 

    

 

 

    

 

 

 
   $ 14,274       $ 11,708       $ 8,552   
  

 

 

    

 

 

    

 

 

 

The unrecognized compensation expense associated with outstanding stock options, restricted stock and restricted stock units at December 31, 2012 was $30,230, which is expected to be recognized over a weighted-average period of 2.51 years.

For the years ended December 31, 2012, 2011 and 2010, the Company recognized income tax benefits related to stock-based compensation expense of $5,354, $4,386 and $0, respectively, as a component in calculating its provision for income taxes.

Additionally, the Company capitalized $785, $670 and $382 of stock-based compensation expense related to the development of internal use software included in Property and equipment for the years ended December 31, 2012, 2011 and 2010, respectively.

7.    Income Taxes

The components of income tax expense (benefit) consisted of the following:

 

     Years Ended
December 31,
 
     2012     2011     2010  
     (in thousands)  

Current income tax expense

      

Federal

   $ 52      $      $   

State

     474        406        119   
  

 

 

   

 

 

   

 

 

 

Total current income tax expense

     526        406        119   
  

 

 

   

 

 

   

 

 

 

Deferred income tax expense (benefit)

      

Federal

     3,119        (8,603     (154

State

     (654     (5,223     (26
  

 

 

   

 

 

   

 

 

 

Total deferred income tax expense (benefit)

     2,465        (13,826     (180
  

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

   $ 2,991      $ (13,420   $ (61

 

73


Table of Contents

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

 

     Years Ended
December 31,
 
     2012     2011     2010  

Statutory rate

     35     35     34

(Decrease) increase in deferred tax asset valuation allowance

            (154     (36

State taxes, net of federal benefit

     2        5        3   

Impact of permanent differences

     3        2        3   

Stock options

     10        13        33   

Tax credits

     (5     (17     (39

Impact of change in effective state tax rates

            (3       

Provision to return adjustments

     2        (8       

Change in the fair value of contingent consideration liability

     (27              

Other

     (1     (4       
  

 

 

   

 

 

   

 

 

 
     19     (131 )%      (2 )% 
  

 

 

   

 

 

   

 

 

 

The Company had net deferred tax assets related to temporary differences and operating loss carry-forwards as follows:

 

     December 31,  
     2012     2011  

Deferred tax assets

    

Current:

    

Accrued expenses

   $ 609      $ 867   
  

 

 

   

 

 

 

Total current

     609        867   
  

 

 

   

 

 

 

Noncurrent:

    

Net operating loss carry-forwards

     6,235        9,526   

Research and development credit carry-forwards

     8,068        7,529   

Stock options

     6,121        4,023   

Other

     39          
  

 

 

   

 

 

 

Total noncurrent

     20,463        21,078   
  

 

 

   

 

 

 

Total deferred tax assets

     21,072        21,945   
  

 

 

   

 

 

 

Deferred tax liabilities-non-current

    

Capitalized research and development

     (5,663     (3,767

Fixed assets

     (1,304     (3,989

Intangible assets

     (2,120     (362