Constant Contact Pre-Earnings: Trends We Are Watching

by Trefis Team
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Constant Contact (NASDAQ:CTCT) is a provider of engagement marketing tools including email marketing, social media marketing, event marketing, mobile storefronts, local deals and survey products for small businesses. The company will report its Q2 2013 results on July 25.

We expect continued growth for Constant Contact to be driven by higher average monthly revenue per unique customer (ARPU) and a growing customer base. Constant Contact is transitioning into a multi-product company and is leveraging this strategic advantage to cross-sell its products. We expect this strategy to drive incremental demand for the company over the future.   

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Recap of Q1 2013 Results

Constant Contact posted revenue of around $68 million in Q1 2013, which represented a y-o-y increase of about 14%. Its gross margin expanded slightly by 20 basis points annually to 70.8% in Q1 2013. However, the company’s operating margin declined to -3.9% in Q1 2013 from -0.7% in Q1 2012. A sharp increase in sales and marketing expenses as well as general and administrative costs which rose by 20% and 33% annually during the quarter contributed to the drop in profitability.

We believe the expenses could remain high over the near term as the company accelerates the adoption of its products and services, and makes efforts to enhance the free trial to paid conversion rate.

During the first quarter, Constant Contact witnessed 50,000 gross new unique customer additions, as compared to a figure of 45,000 in Q1 2012. And, the number of unique customers rose to 565,000 at the end of Q1, as compared to 555,000 at the end of Q4 2012. ARPU increased from $39.56 in Q1 2012 to $41.34 in Q1 2013.

Transitioning Into A Multi-Product Company Represents A Key Goal For The Company In 2013

While Constant Contact is highly dependent on email marketing, which contributes to around 85% of its total revenues, the company is undergoing a transition to evolve into a multi-product company. The company is undertaking various efforts to accomplish this goal, such as bundling its products on an integrated platform and merging its different sales forces. Recently, the company introduced a new enhanced contact management system, which will help the company in this move.

Increase in customer base will drive growth for Constant Contact

We believe Constant Contact’s customer base will expand at a healthy rate in the future, on account of the company’s move to transition into a multi-product company and the customer retention rates remaining at historical levels. Providing a broad range of products and services allows Constant Contact to gain a competitive advantage, as many of its competitors do not provide multiple products. Recent developments such as the addition of Yelp in SinglePlatform’s publisher partner network, enhanced features of EventSpot, the launch of CRM functionality, and the expansion of sales and marketing team will help the company in driving new customer acquisition.

Cross-selling Initiatives Could Drive ARPU Growth

We expect continued growth in Constant Contact’s ARPU over our forecast horizon as the company focuses on cross-selling its products and provides a package of products to its customers. However, we forecast a slow growth rate on account of the intense competition in the industry and strategies by rival firms to offer similar services at cheaper prices.

We will update our price estimate for Constant Contact’s stock after the earnings release.

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