Constant Contact’s Future Outlook Supported By Growth In Key Metrics

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. It posted revenue of $70.2 million in Q2 2013, which represented a y-o-y increase of 13%. Its gross margin expanded slightly by 40 basis points annually to 70.7%. Its net income was recorded at $90,000, which showed improvement as compared to a net loss of $462,000 in Q2 2012.

We believe Constant Contact’s future growth will be driven by expansion in customer base, average monthly revenue per unique customer (ARPU) and profitability. Transitioning into a multi-product company represents a key goal for the company, and it will accelerate its efforts in this direction over the next few quarters. We expect higher cross selling activities to drive incremental demand for the company over the future.

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Improvement In Operating Metrics Seen In Q2 2013

Constant Contact saw an improvement in key operating metrics, such as new customer additions, ARPU and retention rate during the quarter. It witnessed 50,000 gross new unique customer additions in Q2 2013, to end the quarter with 575,000 unique customers. This compares to 565,000 unique customers at the end of Q1 2013.

ARPU rose to $41.79 in Q2 2013, as compared to $41.34 in the prior quarter and $39.98 in Q2 2012. We believe the increase in ARPU is being driven by the company’s efforts to cross sell its multiple products. We expect continued growth in ARPU over our forecast period, however, the growth rate could be slow on account of intense competition in the industry.

Retention rates also showed an improvement during the second quarter. The retention rates for email marketing were seen at more than 98% in June. [1] A higher customer retention rate is an encouraging sign as it supports growth in net customer count and indicates Constant Contact’s competitive edge over its peers. We believe Constant Contact’s customer base will expand at a healthy rate in the future driven by its strategy to cross sell its products and expansion in partner distributor channels.

The cost of customer acquisition declined to $556 in Q2 as compared to $616 in the previous quarter and $574 in Q2 2012. [1] This represents the first quarter since 2007 that the cost of customer acquisition has declined on sequential as well as on annual basis. We think this a positive trend as it indicates greater sales and marketing efficiency. However, we will keep a close track on this metric in the future to see if the company can continue this trend.

An improvement in the above metrics bodes well for Constant Contact’s outlook as it helps increase the customer lifetime value. The enhanced ARPU and lifetime value could result in better profitability in the future.

Will Accelerate Its Efforts To Transition Into A Multi-product Company

Constant Contact continues to make several efforts towards its goal of transitioning into a multi-product company. It is bundling its products on an integrated platform and merging its different sales forces as part of this strategy. The company recently introduced an upgraded contact management functionality, and it will accelerate customer migration towards this new platform in the second half of the year.

The company will test several pricing and packaging strategies for its integrated suite of products in the second half. While this strategy could have a short-term negative impact on sales, we believe success in this direction could add upside to the company’s outlook in 2014 and beyond.

Outlook for Q3 2013

- Revenue in the range of $71.8 million to 72.4 million, which represents an annual growth rate of 12% to 13%

- Adjusted EBITDA (a non-GAAP measure) to range from $13.3 million to $13.8 million

We are in the process of updating our price estimate for Constant Contact’s stock.

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Notes:
  1. Constant Contact Inc (CTCT) Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 25, 2013 [] []
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