Constant Contact (NASDAQ:CTCT) helps more than half a million small organizations worldwide connect with their customers through a suite of online engagement marketing tools. The company will announce its earnings for the first quarter of 2013 on April 25.
It had a good year in 2012 with revenues growing by 17.5% to $252 million. However, net income declined from 11% of total revenues in 2011 to 5% in 2012. It was able to maintain its relatively high gross margin at around 71%, and its customer base expanded to about 550,000 from 500,000 last year.
The expansion of its product portfolio to twice its size in 2011 was the primary driver for growth. However, the increased focus on portfolio expansion also led to a decline in conversions of free trials to paying customers. As a result, the growth in customer base was slightly lower than expected. We expect conversions to be the driving factor behind revenue growth this year and will look for any improvements in the conversion ratio during Q1.
Constant Contact offers a complete set of online marketing tools, including email, event, social media and mobile marketing, and competes with the likes of Groupon (NASDAQ:GRPN), Living Social, Eventbrite, iContact, Surveymonkey as well as Salesforce.com (NASDAQ:CRM).
Conversion Of Free Trials To Paying Users To Drive Customer Growth
Constant Contact finished 2012 with a customer base of 550,000. Customer growth picked pace in the latter part of the year as the company added 45,000 new customers during the fourth quarter, an improvement over 35,000 new customers added in Q3. This growth was limited by the relative failure of its sales force in converting trials to paying customers. The trend was supported by the company launching multiple products over the year which reduced its focus on individual products. With no major launches in 2013 so far, we expect the conversion rate to improve which will drive customer growth. Constant Contact also plans to focus on customer retention to drive user base growth in 2013.
- Endurance Finalizes Constant Contact Acquisition, Lays Off 15% Of The Staff
- Constant Contact Earnings: Results Were Good Year-On-Year But Fell Short Of Guidance
- Constant Contact Pre-Earnings: Improved Marketing Strategies, Continued Alliances And ‘Galileo’ Could Drive Revenues
- Constant Contact: What Lies Ahead
- Constant Contact Performed Better Than The Previous Quarter, Though Customer Growth Yet To Recover
- Constant Contact Q2 Earnings Preview: Recovery Expected Post The Change In Brand Positioning
Cross-Selling Initiatives Drive ARPU Growth
The company registered healthy growth in 2012 on account of new product launches and successful cross selling. The trend was also helped by the company re-branding and re-launching some of its products. For example, the event marketing product EventSpot, which was re-branded in August delivered approximately 100% growth in revenue in 2012.  However, we expect the ARPU growth to slow down as Constant Contact faces stiff competition on product pricing. Rival firms have begun offering similar services at discounted prices, and we expect the company to lower its prices to remain competitive. 
We have a $18 estimate for Constant Contact, which is at a 45% premium to the current market price.Notes:
- Constant Contact’s CEO Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 2013 [↩]
- Email marketing provider ReachMail targets rivals Constant Contact, iContact with ‘This Means More!’ campaign, PR News Channel, January 2013 [↩]