Constant Contact Is Worth $30 As New Tools Will Drive Long-Term Growth

CTCT: Constant Contact logo
Constant Contact

Constant Contact (NASDAQ:CTCT), a leading engagement marketing firm, helps small businesses create and grow customer relationships through its portfolio of email marketing, social media marketing, local deals, digital storefront and online survey tools. The company’s stock has suffered in the recent past, having dropped by almost 40% over the past six months from a high of $31 earlier in the year. We believe the drop can be attributed to the short-term costs associated with the acquisition of SinglePlatform and scaling up its operations. With almost 28 million small firms in the country struggling with tight marketing budgets due to a persisting weak economy, the company is well-positioned to help them with its diversified product portfolio. [1]

Check out our complete coverage of Constant Contact

Strong growth in second quarter

For the second quarter of the year, Constant Contact reported 18% y-o-y growth in revenues to $62 million, and 17% growth in gross profits to $44 million, in-line with historical trends. However, we expect slower growth in the coming quarters due to additional costs associated with the acquisition of SinglePlatform. Meanwhile, the number of paying customers grew to 525,000, a 3% jump over the first quarter and accounting for the customers acquired from SinglePlatform, the number is 535,000. The growth was helped by steady levels of customer retention over the past year. We expect the customer additions to increase on a year-over-year basis going forward as the company diversifies its tool portfolio and addresses specific needs of small businesses.

Below we take a look at the tools that we believe will drive future growth for the company.

Relevant Articles
  1. Endurance Finalizes Constant Contact Acquisition, Lays Off 15% Of The Staff
  2. Constant Contact Earnings: Results Were Good Year-On-Year But Fell Short Of Guidance
  3. Constant Contact Pre-Earnings: Improved Marketing Strategies, Continued Alliances And ‘Galileo’ Could Drive Revenues
  4. Constant Contact: What Lies Ahead
  5. Constant Contact Performed Better Than The Previous Quarter, Though Customer Growth Yet To Recover
  6. Constant Contact Q2 Earnings Preview: Recovery Expected Post The Change In Brand Positioning

SinglePlatform to drive future growth as it scales up its operations

SinglePlatform helps small businesses go beyond a basic listing and add customer-engaging information like products, services, menus, pricing, photos and videos. The tool enables companies to update their business information at one place and publish the content quickly on multiple sites like local review websites, search engines, online directories and social media networks instantly. Although its contribution to overall revenues in Q2 was little, the company expects it to add nearly $1 million by the year end and $10 million by next year. This is backed by the belief that small businesses need the solution to manage their online visibility. Constant Contact expects the tool to drive new customer acquisitions as well as generate cross-selling opportunities for its other products.

The team behind SinglePlatform is currently scaling up and expects to have roughly 75 salespeople by the year-end. With the average salesperson expected to be productive only two months after starting with the company, [2] we expect the increased G&A costs incurred to translate into increased revenues only over the next few quarters.

Also, the company will be spending considerably on marketing the product. Combined, the increase in overheads will negatively impact the margins in the coming quarters. We believe that as the SinglePlatform team leverages the Constant Contact’s brand, customer base and marketing expertise, the tool could overtake email marketing as the major contributor to revenues.

Social Campaign user base grows by 70% sequentially in Q2

Constant Contact’s Social Campaign product helps businesses better manage their social media presence on sites such as Facebook, Twitter, LinkedIn, etc. It creates landing pages which lead to offers if a customer ‘Likes’ the business’ web-page. During the second quarter, the number of users of the tool grew to 60,000, a jump of 70% from 35,000 at the end of the first quarter. The rapid growth is an indication of the tool’s utility and popularity. The company estimates that about 20% of the users of Social Campaign tool are first time users of its products.

The number of paying customers among the 60,000 users was only 2,000 in the second quarter. This represents a free-to-pay conversion rate of just over 3%. While the conversion rates vary widely across industries, a 10% rate is considered the best in class. This means there is a tremendous scope for growth for the company. We expect Constant Contact to increase its conversion rate in the coming quarters as well as add more users with the help of targeted marketing, pricing and added functionality.

Strong gains in monthly ARPU expected to continue

The monthly ARPU grew to $40 in the second quarter from $38 during the same period last year. The growth was a combined result of new products and popularity of event marketing and email marketing tools, revenues from which grew strongly in the second quarter.

We believe the multi-product strategy and cross selling will help the company increase its ARPU in the coming quarters. Combined, the strong results from email marketing and event marketing with early signs of success of the SaveLocal and Social Campaign tools and the acquisition of SinglePlatform could result in faster customer growth in the second half of the year, and the trend may continue into next year as well.

Good revenue growth and future growth prospects support our $30 estimate for Constant Contact, which is at a 70% premium to the current market price.

Submit a Post at Trefis Powered by Data and Interactive ChartsUnderstand What Drives a Stock at Trefis

  1. Moving America’s Small Business and Entrepreneurs Forward, U.S Small Business Administration, May 2012 []
  2. Constant Contact Management Discusses Q2 2012 Results, Seeking Alpha, July 2012 []