Constant Contact (NASDAQ:CTCT) stock price declined by approx. 25% after it released its third quarter earnings on 25th October. The company reported revenues of $64 million, a 17% y-o-y growth and was able to sustain its high gross margins of almost 70%. We believe that the market has been unfairly bearish on the company as it has a diversified product portfolio with which it can help approx. 28 million small firms in the U.S. with their marketing as they battle tight budgets in a struggling economy. However, the company’s inability to capitalize on its product portfolio in the recent past, and ballooning costs associated with it expanding its marketing and research teams, have led us to revise downward its fair value estimate to $17.
User-base growth slows down
The company added 35,000 new customers during Q3 and ended with 540,000 customers. Though retention improved during the quarter, the final figures were lower than our expectations. The company attributes the email side of the business for the slowdown in customer additions and expects to turn it around as its freshly hired corp of sales executives become more efficient. With the economic situation expected to improve over the coming quarters, the company will face intense competition from more traditional alternatives of marketing and this will slow its growth. We now estimate the company to have almost a million customers by the end of our forecast period.
Expenses expected to keep growing
The company’s operating expenses besides the acquisition costs grew by almost 21% y-o-y to $124 million in the first nine months of the year. The sharp growth in expenses was partly because of the acquisition of SinglePlatform’s team and partly because of the company hiring personnel to bolster its efforts to become a multi-product company. However, the growth in expenses was not commensurate with the growth in revenues.
The company expects to stem the decline in its operational performance over the coming quarters by ‘refining’ its compensation plans and ‘strengthening’ its sales team as the company puts it. It is working on improving user experience for several of its tools and will have to do so consistently in-order to stay competitive. We expect its research and development expenses to keep rising as it innovates and expands its product portfolio.
We believe that the market has been too harsh on the company. Its diversified product portfolio, a newly hired sales team which is expected to be more productive over the current and next quarters, the potential utility of the recently acquired SinglePlatform tool combined with aggressive promotion should see the company outperform market’s expectations and support our price estimate for the company.
We have revised our estimate for Constant Contact to $17 which is 40% above the current market price.
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