UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission file number: 001-33707

 

CONSTANT CONTACT, INC.

(Exact name of registrant as specified in its charter)

Delaware		04-3285398
(State or other jurisdiction of incorporation)		(I.R.S. Employer
		Identification No.)
1601 Trapelo Road, Third Floor
Waltham, Massachusetts		02451
(Address of principal executive offices)		(Zip Code)

(781) 472-8100

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant 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 o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of October 31, 2011, there were 29,740,797 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

CONSTANT CONTACT, INC.

INDEX

		PAGE
		NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			1
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)			1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)			2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)			3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			27
ITEM 4. CONTROLS AND PROCEDURES			27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			28
ITEM 1A. RISK FACTORS			28
ITEM 6. EXHIBITS			41
SIGNATURES			42
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I. Financial Information

Item 1. Financial Statements

Constant Contact, Inc.

Condensed Consolidated Balance Sheets
(Unaudited)

		September 30,				December 31,
(In thousands, except share and per share data)		2011				2010
Assets
Current assets
Cash and cash equivalents		$	35,931			$	32,892
Marketable securities			91,771				91,461
Accounts receivable, net of allowance for doubtful accounts			52				44
Prepaid expenses and other current assets			5,670				5,562
Total current assets			133,424				129,959
Property and equipment, net			32,796				29,723
Restricted cash			750				750
Goodwill			18,448				5,248
Acquired intangible assets, net			2,339				781
Other assets			2,162				1,214
Total assets		$	189,919			$	167,675
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	4,386			$	7,444
Accrued expenses			11,465				6,724
Deferred revenue			28,375				25,103
Total current liabilities			44,226				39,271
Other long-term liabilities			2,317				2,282
Total liabilities			46,543				41,553
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 30, 2011 and December 31, 2010			—				—
Common stock, $0.01 par value; 100,000,000 shares authorized at September 30, 2011 and December 31, 2010; 29,721,576 and 29,337,333 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively			297				293
Additional paid-in capital			181,395				168,974
Accumulated other comprehensive income			58				13
Accumulated deficit			(38,374	)			(43,158	)
Total stockholders’ equity			143,376				126,122
Total liabilities and stockholders’ equity		$	189,919			$	167,675

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

Constant Contact, Inc.

Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands, except per share data)		2011				2010				2011				2010
Revenue		$	54,346			$	44,828			$	156,888			$	126,764
Cost of revenue			15,679				12,694				45,595				37,096
Gross profit			38,667				32,134				111,293				89,668
Operating expenses
Research and development			7,338				5,890				22,325				17,454
Sales and marketing			19,455				18,773				66,204				57,694
General and administrative			6,191				4,551				17,887				13,454
Total operating expenses			32,984				29,214				106,416				88,602
Income from operations			5,683				2,920				4,877				1,066
Interest and other income			80				81				264				249
Income before income taxes			5,763				3,001				5,141				1,315
Income tax expense			(410	)			(59	)			(357	)			(59	)
Net income		$	5,353			$	2,942			$	4,784			$	1,256
Net income per share:
Basic		$	0.18			$	0.10			$	0.16			$	0.04
Diluted		$	0.18			$	0.10			$	0.16			$	0.04
Weighted average shares outstanding used in computing per share amounts:
Basic			29,631				28,887				29,481				28,666
Diluted			30,399				29,937				30,679				29,820

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

Constant Contact, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended
		September 30,
(In thousands)		2011				2010
Cash flows from operating activities
Net income		$	4,784			$	1,256
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			10,567				8,595
Amortization of premium on investments			493				36
Stock-based compensation expense			8,643				5,810
Recovery of bad debts			(1	)			(1	)
Gain on sales of marketable securities			(13	)			—
Deferred income taxes			221				—
Taxes paid related to net share settlement of restricted stock			(154	)			—
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable			(7	)			6
Prepaid expenses and other current assets			(108	)			(1,148	)
Other assets			(948	)			(54	)
Accounts payable			(3,058	)			(113	)
Accrued expenses			4,741				2,781
Deferred revenue			3,272				4,109
Other long-term liabilities			(186	)			(827	)
Net cash provided by operating activities			28,246				20,450
Cash flows from investing activities
Purchases of marketable securities			(111,035	)			(84,261	)
Proceeds from maturities of marketable securities			28,563				72,695
Proceeds from sales of marketable securities			81,727				—
Payments for acquisitions, net of cash acquired			(15,000	)			(2,225	)
Acquisition of property and equipment, including costs capitalized for development of internal use software			(12,921	)			(11,917	)
Net cash used in investing activities			(28,666	)			(25,708	)
Cash flows from financing activities
Proceeds from issuance of common stock pursuant to the exercise of stock options			3,024				2,306
Proceeds from issuance of common stock pursuant to employee stock purchase plan			435				390
Net cash provided by financing activities			3,459				2,696
Net increase (decrease) in cash and cash equivalents			3,039				(2,562	)
Cash and cash equivalents, beginning of period			32,892				59,822
Cash and cash equivalents, end of period		$	35,931			$	57,260
Supplemental disclosure of noncash investing and financing activities:
Issuance of common stock in connection with the acquisition of Nutshell Mail, Inc.		$	—			$	3,603
Capitalization of stock-based compensation			477				204

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

Constant Contact, Inc.

Notes to Condensed 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 in 1995. The Company reincorporated in the State of Delaware in 2000. The Company is a leading provider of on-demand email marketing, social media marketing, event marketing and online survey products to small organizations, including small businesses, associations and non-profits. The Company’s email marketing product allows customers to create, send and track email marketing campaigns. The Company’s social media marketing features allow customers to easily manage and optimize their presence across multiple social media networks. 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. These products are designed and priced 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 condensed consolidated financial statements include those of the Company and its subsidiaries, Constant Contact Securities Corporation, a Massachusetts corporation, and Constant Contact (UK) Limited, a corporation, organized under the laws of England and Wales, 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”).

The condensed consolidated balance sheet at December 31, 2010 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, File Number 001-33707, on file with the SEC.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2011 and consolidated results of operations for the three and nine months ended September 30, 2011 and 2010 and consolidated cash flows for the nine months ended September 30, 2011 and 2010, have been made. The condensed consolidated results of operations for the three and nine months ended September 30, 2011 and cash flows for the nine months ended September 30, 2011 are not necessarily indicative of the results of operations and cash flows that may be expected for the year ending December 31, 2011.

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 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.

Revenue Recognition

The Company provides access to its products 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 also offers ancillary services to its customers related to its products such as custom services and training. Custom services and training revenue is accounted for separate from subscription revenue as those services have value on a standalone basis, do not involve a significant degree of risk or unique acceptance criteria and as the fair value of the Company’s subscription services is evidenced by their availability on a standalone basis. Custom services and training revenue is recognized as the services are performed.

Effective January 1, 2011, the Company adopted new guidance applicable to revenue arrangements with multiple deliverables. The adoption of this guidance did not have a material effect on the consolidated financial statements.

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 30 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.

Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. As the pattern of consumption of the economic benefits of the intangible assets cannot be reliably determined, the Company amortizes acquired intangible assets over their estimated useful lives on a straight-line basis.

Capitalization of Software and Web Site Development 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.

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 element of other comprehensive income is unrealized gains and losses on available-for-sale securities.

Comprehensive income was as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income		$	5,353			$	2,942			$	4,784			$	1,256
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net			11				9				58				(5	)
Reclassification adjustment for realized gains on available-for-sale securities included in net income			(1	)			—				(13	)			—
Comprehensive income		$	5,363			$	2,951			$	4,829			$	1,251

At September 30, 2011, marketable securities by security type consisted of:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury Bills and Notes		$	45,846				61			$	—			$	45,907
International Government Bonds			1,003				—				—				1,003
Corporate and Agency Bonds			42,865				10				(13	)			42,862
Commercial Paper			1,999				—				—				1,999
Total		$	91,713			$	71			$	(13	)		$	91,771

At September 30, 2011, marketable securities consisted of investments that mature within one year with the exception of U.S. Treasury Notes with a fair value of $13,032 and agency bonds with a fair value of $6,509, which have maturities within two years.

At December 31, 2010, marketable securities by security type consisted of:

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. Treasury Bills			40,191				21				(2	)			40,210
International Government Bond			510				—				(1	)			509
Corporate and Agency Bonds			47,304				6				(11	)			47,299
Commercial Paper			3,443				—				—				3,443
Total		$	91,448			$	27			$	(14	)		$	91,461

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.

The Company had cash equivalents of $11,523 and $23,488 at September 30, 2011 and December 31, 2010, respectively, which were invested in money market instruments at September 30, 2011 and in money market instruments and agency bonds at December 31, 2010. The Company carries its cash equivalents and marketable securities at fair value based on quoted market prices. Quoted market prices are a Level 1 measurement in the hierarchy of fair value measurements. The Company also considers receivables related to customer credit card purchases of $2,836 and $1,114 at September 30, 2011 and December 31, 2010, respectively, to be equivalent to cash.

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 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:

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
						(In thousands)
Weighted average shares used in calculating basic net income per share			29,631				28,887				29,481				28,666
Stock options			757				1,047				1,164				1,152
Warrants			1				1				1				1
Unvested restricted shares and restricted share units			10				2				33				1
Shares used in computing diluted net income per share			30,399				29,937				30,679				29,820

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
						(In thousands)
Options to purchase common stock			3,224				2,021				1,856				1,837
Restricted shares and restricted share units			116				—				39				—
Total options, restricted shares and restricted share units exercisable into or issuable by common stock			3,340				2,021				1,895				1,837

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.

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.

New Accounting Guidance

In June 2011, the Financial Accounting Standards Board issued new accounting guidance on the presentation of comprehensive income to provide companies with two options for presenting comprehensive income. Companies can present the 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. This guidance is effective for the Company on January 1, 2012. Early adoption is permitted. 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 will not have an effect on the Company’s consolidated financial statements.

3. Acquisition of Bantam Networks, LLC

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 operating expenses of Bantam Networks have been included in the consolidated financial statements beginning on the acquisition date and are not material to the consolidated results of the Company.

The Company allocated the purchase price as follows:

Purchased technology		$	1,800
Goodwill			13,200
Total assets acquired		$	15,000

The purchased technology was valued using the cost to replace method. The estimated economic life of the purchased technology is three years and amortization will commence once the software is ready for its intended 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 will be included within the Company’s one reporting unit and will be 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 condensed consolidated statements of operations of the Company and Bantam Networks for the nine month period ended September 30, 2011 and the three and nine month periods ended September 30, 2010, giving effect to the merger as if it occurred on January 1, 2010:

		Three months ended				Nine months ended
		September 30,				September 30,
		2010				2011				2010
Pro forma revenue		$	44,828			$	156,888			$	126,764
Pro forma net income		$	2,689				4,657			$	498
Pro forma net income per share:
Basic		$	0.09			$	0.16			$	0.02
Diluted		$	0.09			$	0.15			$	0.02

The pro forma net income and net income per share presented primarily include adjustments for revenue, 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.

4. Goodwill and Acquired Intangible Assets

The carrying amount of goodwill was $18,448 as of September 30, 2011. The change in the carrying amount of goodwill for the nine months ended September 30, 2011 was as follows:

Balance as of December 31, 2010		$	5,248
Goodwill related to the acquisition of Bantam Networks		$	13,200
Balance as of September 30, 2011		$	18,448

The Company’s goodwill resulted from the acquisition of Nutshell Mail, Inc. (“NutshellMail”) in May 2010 and the acquisition of substantially all of the assets of Bantam Networks in February 2011. 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 has not recorded an impairment charge to date.

Acquired intangible assets consist of developed technology and are stated at cost less accumulated amortization. Amortization is on a straight-line basis over the estimated economic life of three years commencing once the software is ready for its intended use. The gross and net carrying amount of acquired intangible assets was $2,770 and $2,339, respectively, at September 30, 2011. Future estimated amortization expense for the NutshellMail developed software is $81 for the remainder of 2011, $323 for 2012 and $135 for 2013. Amortization of the intangible asset related to developed technology acquired from Bantam Networks has not yet commenced as the software is not yet ready for its intended use.

5. Stock-Based Awards

Stock Incentive Plan

The Company’s 2007 Stock Incentive Plan (“2007 Plan”) permitted the Company to make grants of incentive stock options, non-statutory stock options, restricted stock, restricted stock units and other stock-based awards with a maximum term of ten years. In conjunction with the approval by stockholders of the 2011 Stock Incentive Plan, the board of directors voted that no further stock options or other equity-based awards shall be granted under the 2007 Plan.

In March 2011, the Board of Directors adopted the 2011 Stock Incentive Plan (“2011 Plan”). The 2011 Plan was approved by the stockholders in May 2011. 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 the issuance under the 2011 Plan. Additionally, per the terms of the 2011 Plan, shares of common stock previously reserved for issuance under the 2007 Plan as well shares reserved for outstanding awards under the 1999 Stock Option/Stock Issuance Plan and 2007 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 September 30, 2011, 4,367,581 shares of common stock were available for issuance under the 2011 Plan.

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 is equal to 85% of the closing market price of the Company’s common stock on the last day of the offering period. The first offering period of 2011 began on January 1, 2011 and was completed on June 30, 2011. The second offering period of 2011 began on July 1, 2011 and will be completed on December 31, 2011. As of September 30, 2011, 210,170 shares of common stock were available for issuance to participating employees under the Purchase Plan.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense on all awards in the following expense categories:

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
Cost of revenue		$	408			$	281			$	1,141			$	804
Research and development			831				586				2,360				1,559
Sales and marketing			478				473				1,934				1,347
General and administrative			1,075				754				3,208				2,100
		$	2,792			$	2,094			$	8,643			$	5,810

In 2011, the Company granted 190,000 options with a grant date fair value of $14.28 per share that had performance-based vesting criteria. The vesting of these options is determined by a two-tiered target. If either target is achieved, a corresponding number of options vest. If neither of the performance objectives is achieved by December 31, 2011, the options will be cancelled. For financial reporting purposes, the Company has assessed the probability of achieving either of the performance goals as not probable and, accordingly, has not recorded stock-based compensation expense associated with these options.

6. Income Taxes

For the three and nine months ended September 30, 2011, the Company recorded an income tax expense of $410 and $357, respectively. These amounts consisted of a current income tax expense of $347 and $136 for the three and nine months ended September 30, 2011, respectively, and a deferred income tax expense of $63 and $221 for the three and nine months ended September 30, 2011, respectively. The current income tax expense recorded for the three and nine months ended September 30, 2011 related to the Company’s income before taxes for the period multiplied by its estimated annual effective tax rate for 2011. The Company expects to generate federal and state taxable income for the full year 2011. The Company’s federal taxable income is expected to be fully offset by net operating loss carryforwards and other deferred tax attributes. However, the Company will be subject to state income taxes. The deferred income tax expense related to the amortization for tax purposes of goodwill from the Bantam Networks acquisition.

The Company recorded an income tax expense of $59 for the three and nine months ended September 30, 2010 related to the Company’s income before taxes for the period multiplied by its estimated annual effective tax rate for 2010.

The Company had gross deferred tax assets of $19,766 at December 31, 2010, which has not changed significantly at September 30, 2011 other than a reduction in net operating loss carryforwards as a result of taxable net income generated through September 30, 2011. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because, at September 30, 2011 and December 31, 2010, it was not more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would be realized.

The Company has not recorded any amounts for unrecognized tax benefits as of September 30, 2011 or December 31, 2010. As of September 30, 2011 and December 31, 2010, the Company had no accrued interest or tax penalties recorded. The Company’s income tax return reporting periods since December 31, 2008 are open to income tax audit examination by the federal and state tax authorities. In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating losses generated in those years.

7. Accrued Expenses

		September 30,				December 31,
		2011				2010
Payroll and payroll related		$	4,252			$	2,638
Licensed software and maintenance			1,197				1,216
Marketing programs			2,449				426
Other accrued expenses			3,567				2,444
		$	11,465			$	6,724

8. Commitments and Contingencies

Office Leases

In May 2009, the Company entered into a new lease (the “New Lease”) that superseded the original lease for its headquarters. The New Lease, effective through September 30, 2015 with one five-year extension option, includes the space under the original lease as well as additional space that will be made available to the Company at various points during the term of the New Lease. The New Lease also includes payment escalations and rent holidays. Under the New Lease, the landlord is responsible for making certain improvements to the leased space at an agreed upon cost to the landlord. If the landlord and the Company mutually agree to make improvements that cost in excess of the agreed upon landlord cost, the landlord bills that excess cost to the Company as additional rent. This additional rent is included in the net calculation of lease incentives, so that rent expense per square foot is recognized on a straight-line basis over the remaining term of occupancy. In September 2010, the Company amended the New Lease to include a small amount of additional space. All other terms and conditions of the amendment, inclusive of the landlord’s obligations to make certain improvements, are consistent with the New Lease.

The Company leases a sales and support office in Colorado under a lease agreement effective through April 2019 with three three-year extension options. The agreement contains certain lease incentives and payment escalations. The Company also leases small amounts of general office space in Florida, New York, California and the United Kingdom under lease agreements that expire at various dates through 2014.

Lease incentives, payment escalations and rent holidays specified in the lease agreements are accrued or deferred as appropriate such that rent expense per square foot is recognized on a straight-line basis over the terms of occupancy. At September 30, 2011 and December 31, 2010, the Company had both prepaid rent and accrued rent balances related to its office leases. The prepaid rent balance was $1,300 at September 30, 2011, of which $444 was included in prepaid expenses and other current assets and $856 was included in other assets. The accrued rent balance was $2,355 at September 30, 2011, of which $260 was included in accrued expenses and $2,095 was included in other long-term liabilities. The prepaid rent balance was $1,076 at December 31, 2010, of which $371 was included in prepaid expenses and other current assets and $705 was included in other assets. The accrued rent balance was $2,525 at December 31, 2010, of which $243 was included in accrued expenses and $2,282 was included in other long-term liabilities.

Total rent expense under office leases was $1,567 and $4,567 for the three and nine months ended September 30, 2011, respectively, and $1,265 and $3,611 for the three and nine months ended September 30, 2010, respectively.

As of September 30, 2011, future minimum lease payments under non-cancellable office leases are as follows:

Remainder of 2011		$	1,317
2012			5,567
2013			5,610
2014			5,631
2015			4,473
Thereafter			3,162
Total		$	25,760

Third-party Hosting Agreements

The Company has agreements with various vendors to provide specialized space and equipment and related services from which the Company hosts its software applications. In 2010, the Company signed a hosting facilities agreement in a new datacenter, which the Company began occupying in 2011. In the first quarter of 2011, the Company signed a new hosting facility agreement that superseded an existing hosting facilities agreement. The term was also extended for an additional three years from the original term.

Payment escalations and rent holidays specified in these agreements are accrued or deferred as appropriate such that rent expense per square foot is recognized on a straight-line basis over the terms of occupancy. At September 30, 2011, the Company had prepaid rent of $495, which was included in other assets.

The agreements include payment commitments that expire at various dates through mid-2017. As of September 30, 2011, future minimum payments under these non-cancellable agreements are as follows:

Remainder of 2011			1,005
2012			4,620
2013			3,385
2014			3,111
2015			3,204
Thereafter			4,076
Total		$	19,401

Vendor Commitments

As of September 30, 2011, the Company had issued both cancellable and non-cancellable purchase orders and entered into contractual commitments with various vendors totaling $7,032 related primarily to marketing programs and other non-marketing goods and services to be delivered over the next twelve months.

Letters of Credit and Restricted Cash

As of September 30, 2011 and December 31, 2010, the Company maintained a letter of credit totaling $750 for the benefit of the landlord of the Company’s corporate headquarters lease. The landlord can draw against the letter of credit in the event of default by the Company. The Company was required to maintain a cash balance of at least $750 as of September 30, 2011 and December 31, 2010, to secure the letter of credit. This amount was classified as restricted cash in the balance sheet at September 30, 2011 and December 31, 2010.

Indemnification Obligations

The Company enters into standard indemnification agreements with the Company’s channel partners and certain other third parties in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and

agrees to reimburse the indemnified party for losses incurred by the indemnified party in connection with certain intellectual property infringement and other claims by any third party with respect to the Company’s business and technology. Based on historical information and information known as of September 30, 2011, the Company does not expect it will incur any significant liabilities under these indemnification agreements.

Legal Matters

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that, in its opinion, would have a material adverse effect on the Company’s business, results of operations or financial condition.

9. 401(k) Savings Plan

The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Board of Directors. The Company elected to make matching contributions for the plan years ending December 31, 2011 and 2010 at a rate of 100% of each employee’s contribution up to a maximum matching contribution of 3% of the employee’s compensation and at a rate of 50% of each employee’s contribution in excess of 3% up to a maximum of 5% of the employee’s compensation.

Through September 30, 2011 and 2010, the Company made matching contributions of $1,450 and $1,275 for the plan years ended December 31, 2011 and 2010, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2010 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 9, 2011. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Executive Overview

We are a leading provider of online marketing solutions, including email marketing, social media marketing, event marketing and surveys, for small organizations, including small businesses, associations and non-profits. We seek to help our customers succeed by creating and growing their customer and member relationships. We are committed to helping small businesses succeed and have a long history of delivering cost effective, easy-to-use products, support, Knowhow and coaching with a personal touch, all of which allow our customers to create and grow their own 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 and other marketing efforts, 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 the emails sent by our customers.

Our on-demand email marketing product was first offered in 2000. Since that time we have experienced significant growth in revenue and number of customers. We ended 2010 with approximately 435,000 unique paying customers and had revenue for that year of $174 million. As of September 30, 2011, our unique paying customers increased to approximately 485,000 and we had revenue of $157 million through the third quarter of 2011.

Our business strategy focuses on expanding beyond email marketing to a multi-product strategy to drive higher customer lifetime value through gains in revenue per customer, retention and gross margin. 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 invest in acquiring new customers, cross-selling our products to our large and growing customer base and driving increased product usage by our customers. We will continue to invest in broadening our platform of solutions, which we believe will enable our customers to create and grow their customer and member relationships.

Accomplishments through the third quarter of 2011 that we believe will drive future growth include:

•

We opened and staffed our United Kingdom office during the third quarter, marking our first direct expansion outside of North America. We will continue to increase our international resources and

			plans to establish a market leadership position internationally as we have done domestically.
	•		Constant Contact Event Marketing surpassed 30,000 paying customers in the third quarter.
	•		In the second quarter we continued our investment in innovation, launching a number of new tools such as the social media Quickstarter, a completely free step-by-step guide that offers short tutorials for getting up and running and improving success with the most popular social media networks, and Simple Share™, which gives small businesses and non-profits the opportunity to share more of their content by creating it once and then spreading it across social networks simply, easily and effectively. We also launched a new SMS feature, Text-to-Join, which allows customers and prospects to sign up for subscriber lists right from their mobile phones and a free mobile application that provides event hosts with an easy, effective way to manage event check-ins directly from their mobile devices.
	•		We trained the 1,000th Constant Contact expert during the first quarter. Over 1,000 experts around the world are now trained on how to coach and teach small businesses about the power of email marketing and social media marketing.
	•		In the first quarter we acquired substantially all of the assets of Bantam Networks, LLC, or Bantam Networks, a pioneering contact management and social CRM provider, including the Bantam Live product and technology. Bantam Networks provides Constant Contact a social CRM platform and technology that will serve as the foundation for all of Constant Contact’s solutions, plus an experienced and talented team focused on developing products for small businesses.

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 strategy we pay particular attention to customer acquisition metrics, number of products per customer, average revenue per customer and retention rates. We also consider other operating metrics such as revenue, gross margin, expenses, cost of acquisition, trialer growth, conversion rates for our website visitors and our trialers, customer satisfaction rates, success in cross selling and growing customer list sizes, 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, minus interest and other income and adjusted for income taxes;
	•		“adjusted EBITDA margin,” which we define as adjusted EBITDA divided by revenue; and
	•		“free cash flow,” which we define as net cash flow from operating activities less cash paid for the acquisition of property and equipment.

We believe that these non-GAAP financial measures are useful to our board of directors, 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 Item 1A —“Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

	•		We continue to closely monitor current economic conditions, 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.
	•		We believe that given the size of our potential market and the relatively low barriers to entry, competition will continue to 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.
	•		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, 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.
	•		We continue to expand our product offerings and features, including our planned launch of our new Social Campaigns product. If we fail to develop new products and features or if we fail to launch them on our anticipated schedule or if our new products and features are not accepted by our customers and prospects our financial results and future growth could be adversely affected.

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 2010, our top 100 customers accounted for less than 1% of our total revenue. We do not require our customers to commit to a contractual term; however, our customers are required to prepay for subscriptions on a monthly, semi-annual, or 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.

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. 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. Additionally, as we transitioned to a new third-party hosting facility in California in the third quarter of 2011, our cost of revenue increased as a percentage of revenue during the quarter but we expect it to decrease over time as we gain efficiencies created by our expected revenue growth and cost savings resulting from this new

hosting facility. We allocate a portion of customer support costs relating to assisting trial customers to sales and marketing expense.

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 developing new 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 increase in absolute dollars as we continue to enhance and expand our product offerings and, in the shorter term, to also increase as a percentage of revenue. Over the longer term, however, we expect our research and development expenses to decline 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 and the portion of customer support costs that relate to assisting trial customers. Advertising costs consist primarily of pay-per-click advertising with search engines, other online and offline advertising media, including television, radio and print advertisements, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships and event costs. 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, in the short term, we expect that our general and administrative expenses will increase in absolute dollars, but remain generally consistent or decline slightly as a percentage of revenue as we expect to continue to grow our revenue at a similar rate. Over the long-term, we expect general and administrative expenses to decrease as a percentage of revenue as we expect to grow our revenue at a faster rate.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our significant accounting policies, which are described in the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC, the following accounting policies involve the most judgment and complexity:

•		Revenue recognition;
•		Income taxes;
•		Goodwill and acquired intangible assets;
•		Software and website development costs; and
•		Stock-based compensation.

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and

assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

There have been no material changes in our critical accounting policies since December 31, 2010. For further information please see the discussion of critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.

Results of Operations

Three Months Ended September 30, 2011 compared to Three Months Ended September 30, 2010

Revenue

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Revenue		$	54,346			$	44,828				21	%

Revenue increased by $9.5 million from 2010 to 2011. The increase resulted primarily from an approximately 18% increase in the number of average monthly customers and an approximately 3% increase in average revenue per customer. The increase in average revenue per customer was 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 and survey products. We expect our average revenue per customer to increase over time.

Cost of Revenue

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Cost of revenue		$	15,679			$	12,694				24	%
Percent of revenue			29	%			28	%

Cost of revenue increased by $3.0 million from 2010 to 2011. The increase resulted primarily from increased customer support personnel costs of $1.6 million to support our customer growth. Depreciation, hosting and maintenance costs increased by $716,000 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 $374,000 of expense related to customer incentives that we offered.

Research and Development

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Research and development		$	7,338			$	5,890				25	%
Percent of revenue			14	%			13	%

Research and development expenses increased by $1.4 million from 2010 to 2011. The increase was due primarily to additional personnel related costs as a result of our continued hiring of research and development employees to further develop and enhance our products.

Sales and Marketing

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Sales and marketing		$	19,455			$	18,773				4	%
Percent of revenue			36	%			42	%

Sales and marketing expenses increased by $682,000 from 2010 to 2011. The increase in absolute dollars was largerly due to increased personnel related costs of $1.6 million that resulted primarily from adding employees to focus on customer acquisition, cross-selling to our customer base and enabling increased usage and better retention. Partner referral fees increased by $484,000 as the number of new customers generated from our partners increased. These increases were partially offset by a decrease of $1.6 million of advertising and promotional expenditures due primarily to a change in the mix and timing of advertising campaigns.

General and Administrative

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
General and administrative		$	6,191			$	4,551				36	%
Percent of revenue			11	%			10	%

General and administrative expenses increased by $1.6 million from 2010 to 2011. The increase was due primarily to additional personnel related costs of $1.2 million largely 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.

Interest and other income

		Three Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Interest and other income		$	80			$	81				(1	)%

Interest and other income decreased by $1,000 from 2010 to 2011.

Income Taxes

For the three months ended September 30, 2011, we recorded an income tax expense of $410,000. This consisted of a current income tax expense of $347,000 and a deferred income tax expense of $63,000. The current income tax expense related to our income before taxes for the period multiplied by our estimated annual effective tax rate for 2011. We expect to generate federal and state taxable income for the full year 2011. Our federal taxable income is expected to be fully offset by net operating loss carryforwards and other deferred tax attributes. However, we will be subject to state income taxes. The deferred income tax expense related to the amortization for tax purposes of goodwill from the Bantam Networks acquisition.

We recorded an income tax expense of $59,000 for the three months ended September 30, 2010 related to our income before taxes multiplied by our estimated annual effective tax rate for 2010.

Nine Months Ended September 30, 2011 compared to Nine Months Ended September 30, 2010

Revenue

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Revenue		$	156,888			$	126,764				24	%

Revenue increased by $30.1 million from 2010 to 2011. The increase resulted primarily from an approximately 20% increase in the number of average monthly customers and an approximately 3% increase in average revenue per customer. The increase in average revenue per customer was 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 and survey products.

Cost of Revenue

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Cost of revenue		$	45,595			$	37,096				23	%
Percent of revenue			29	%			29	%

Cost of revenue increased by $8.5 million from 2010 to 2011. The increase in absolute dollars resulted primarily from increased customer support personnel costs of $4.2 million to support our customer growth. Depreciation, hosting and maintenance costs increased by $2.2 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 incurred an additional $731,000 of expense related to customer incentives that we offered. Approximately $723,000 of the increase related to higher credit card fees due to the higher volume of billing transactions.

Research and Development

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Research and development		$	22,325			$	17,454				28	%
Percent of revenue			14	%			14	%

Research and development expenses increased by $4.9 million from 2010 to 2011. The increase in absolute dollars was due primarily to additional personnel related costs as a result of our continued hiring of research and development employees to further develop and enhance our products.

Sales and Marketing

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Sales and marketing		$	66,204			$	57,694				15	%
Percent of revenue			42	%			46	%

Sales and marketing expenses increased by $8.5 million from 2010 to 2011. The increase in absolute dollars was largerly due to an increase in personnel related costs of $4.4 million that resulted primarily from adding employees to focus on customer acquisition, cross-selling to our customer base and enabling increased usage and better retention. Advertising and promotional expenditures also increased by of $1.8 million due to continued expansion of our multi-channel marketing strategy including our television and radio advertising campaigns. Partner referral fees also increased by $1.8 million as the number of new customers generated from our partners increased.

General and Administrative

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
General and administrative		$	17,887			$	13,454				33	%
Percent of revenue			11	%			11	%

General and administrative expenses increased by $4.4 million from 2010 to 2011. The increase in absolute dollars was primarily due to additional personnel related costs of $3.7 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 incurred increased professional services fees of $683,000, primarily due to transaction costs associated with our acquisition of substantially all of the assets of Bantam Networks in February 2011.

Interest and other income

		Nine Months Ended September 30,
		2011				2010				Change
						(Dollars in thousands)
Interest and other income		$	264			$	249				6	%

Interest and other income increased by $15,000 from 2010 to 2011.

Income Taxes

For the nine months ended September 30, 2011, we recorded an income tax expense of $357,000. This amount consisted of a current income tax expense of $136,000 and a deferred income tax expense of $221,000. The current income tax expense recorded for the nine months ended September 30, 2011 related to our income before taxes for the period multiplied by our estimated annual effective tax rate for 2011. We expect to generate federal and state taxable income for the full year 2011. Our federal taxable income is expected to be fully offset by net operating loss carryforwards and other deferred tax attributes. However, we will be subject to state income taxes. The deferred income tax expense related to the amortization for tax purposes of goodwill from the Bantam Networks acquisition.

We recorded an income tax expense of $59,000 for the nine months ended September 30, 2010 related to our income before taxes for the period multiplied by our estimated annual effective tax rate for 2010.

Liquidity and Capital Resources

At September 30, 2011, our principal sources of liquidity were cash and cash equivalents and marketable securities of $128 million.

From our inception through the time of our initial public offering, we financed our operations primarily through the sale of redeemable convertible preferred stock, issuance of convertible promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from operations. In 2007, we completed our initial public offering, in which we issued and sold 6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. We used $2.6 million of proceeds to repay our outstanding principal and interest under our term loan facility. In 2008, we completed a secondary public offering in which we issued and sold 314,465 shares of common stock at a price to the public of $16.00 per share. We raised $4.0 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. In the future, we anticipate that our primary source of liquidity will be cash generated from our operating activities.

Net cash provided by operating activities was $28.2 million and $20.5 million for the nine months ended September 30, 2011 and 2010, respectively. The improvement in cash flow in 2011 was due primarily to an increase in net income, increases in the add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation expense, partially offset by a smaller amount of cash generated from working capital accounts in the first nine months of 2011 as compared to the same period in 2010. Cash provided by operating activities has historically been affected by the amount of net income (loss), 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 $28.7 million and $25.7 million for the nine months ended September 30, 2011 and 2010, respectively. Net cash used in investing activities in the first nine months of 2011 consisted primarily of net cash paid to purchase marketable securities, partially offset by the sales and maturities of marketable securities as well as cash paid to purchase substantially all of the assets of Bantam Networks and to acquire property and equipment. In February 2011, we completed the acquisition of substantially all of the assets of Bantam Networks, excluding cash, for $15.0 million. Acquisition of property and equipment of $12.9 million and $11.9 million in the nine month periods ended September 30, 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 the fourth quarter of 2010, we signed a new agreement for hosting space in a datacenter which we began to occupy in 2011. We increased the amount of space we occupied under our corporate headquarters lease in 2010 and acquired property and equipment to outfit the additional space. During the nine months ended September 30, 2011 and 2010, we capitalized $3,309 and $2,738, respectively, of costs associated with the development of internal use software.

Net cash provided by financing activities was $3.5 million and $2.7 million for the nine months ended September 30, 2011 and 2010, respectively. Net cash provided by financing activities in the first nine months of both 2011 and 2010 consisted of proceeds from stock issued pursuant to the exercise of stock options and the purchase of stock pursuant to the employee stock purchase plan.

As of December 31, 2010, we had federal and state net operating loss carry-forwards of $45.5 million and $6.9 million, respectively, which may be available to offset potential payments of future federal and state income tax liabilities and which, if unused, expire at various dates through 2030 for both federal and state income tax purposes.

Contractual Obligations

We lease our headquarters under an operating lease that is effective through September 2015 with one five-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 2014.

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 mid-2017.

As of September 30, 2011, we had issued both cancellable and non-cancellable purchase orders and entered into contractual commitments with various vendors totaling $7.0 million. This amount relates primarily to marketing programs and other non-marketing related goods and services to be delivered over the next twelve months.

The following table summarizes our contractual obligations at September 30, 2011, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

		Payments Due In
						Less Tehan												More Than
		Total				1 Year				1 - 3 Years				3 - 5 Years				5 Years
		(In thousands)
Office lease obligations		$	25,760			$	5,476			$	11,238			$	6,579			$	2,467
Hosting facility agreements			19,401				4,453				6,885				6,457				1,606
Vendor commitments			7,032				7,032				—				—				—
Total		$	52,193			$	16,961			$	18,123			$	13,036			$	4,073

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.

New Accounting Guidance

In June 2011, the Financial Accounting Standards Board issued new accounting guidance on the presentation of comprehensive income to provide companies with two options for presenting comprehensive income. Companies can present the 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. This guidance is effective for us on January 1, 2012. Early adoption is permitted. 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 will not have an effect on our consolidated financial statements.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk. Our revenue and expenses are generally 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.

Interest Rate Sensitivity. We had cash and cash equivalents and marketable securities of $128 million at September 30, 2011, which consisted of cash, government securities, corporate and agency bonds, commercial paper and money market instruments. Interest income is sensitive to changes in the general level of U.S. 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.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in our opinion, would have a material adverse effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may 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 on a cost-effective basis, our business and results of operations will be affected adversely.

To succeed, we must continue to attract and retain a large number of customers on a cost-effective basis. We rely on a variety of methods to attract new customers, such as paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website, television and radio advertising 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. 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 revenue and results of operations would be affected adversely.

Our business is substantially dependent on the market for email marketing services for small organizations.

We derive, and expect to continue to derive, 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, 2010, our revenue from our email marketing product alone was approximately 90% 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. In addition, many small organizations lack the technical expertise to develop and manage email marketing campaigns effectively. As technology advances, however, small organizations may establish the capability to manage their own email marketing and therefore may have no need for our email marketing product. 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.

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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.

Our existing general liability insurance may not cover any, or only a portion of any potential claims 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 losses and reduce our net worth and working capital.

As Internet commerce develops, federal, state and foreign governments may adopt new laws to regulate Internet commerce, which may negatively affect our business.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to our products or our business. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or via email. Such taxes could discourage the use of the Internet and email as a means of commercial marketing, which would adversely affect the viability of our products.

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 Vertical Response, Inc., iContact Corporation, AWeber Systems, Inc., Protus, a subsidiary of j2 Global Communications, Inc. (Campaigner^®), Emma, Inc., The Rocket Science Group LLC (MailChimp^tm), Deluxe Corporation and VistaPrint N.V., as well as the in-house information technology capabilities of prospective

customers. Competition could result in reduced sales, reduced margins or the failure of our email marketing product to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, there are a number of other vendors that are focused on providing email marketing products for larger organizations, including Alterian Inc., ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc., StrongMail Systems, Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited). While we do not compete currently with vendors of email marketing products serving larger customers, we may face future competition from these providers if they determine that our target market presents an opportunity for them. Finally, in the future, our email marketing product may experience competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In addition, one or more of these 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. 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.), 123Signup AMS, Inc., Pingg Corp., Acteva.com, Punchbowl Software, Inc., BonaSource Inc. (Wild Apricot^tm) and with r.s.v.p offerings from some of our email marketing competitors. Our survey product competes with similar offerings by Zoomerang (a division of Market Tools, Inc.) and Surveymonkey.com Corporation and with similar offerings from many other entities, including some of our email marketing competitors.

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.

Any significant disruption in service on our website or in our computer systems, or in our customer support services, could reduce the attractiveness of our products and result in a loss of customers.

The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new customers and retain existing customers. 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.

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

We have largely focused our business on providing our email marketing product for small organizations, but in the last few years we have expanded our service 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 privately-held Nutshell Mail, Inc., or NutshellMail, which we completed in May 2010, we now provide a tool for small organizations to monitor and engage with social media networks. In late 2011, we plan to launch our Social Campaigns product which will allow small businesses the ability to run multi-step, results-oriented campaigns on their social networks. Our efforts to introduce new products beyond our email marketing product, including our event marketing and survey products and our social media marketing offerings, may not result in significant revenue growth, 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, which may harm our financial performance.

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.

If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.

We believe that developing and maintaining awareness of the Constant Contact brand in a cost-effective manner is critical to our goal of achieving widespread acceptance of our existing and future products and attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our industry increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness and affordability of our products for our target customer demographic. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur additional significant expenses. Such brand promotion activities may not yield increased revenue and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to promote and maintain our brand successfully, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing customers to our competitors or be unable to attract new customers, which would cause our revenue to decrease.

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