Factors Underlying Our Updated $21 Price Estimate For Constant Contact

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. We recently raised our price estimate for the company’s stock from $13 to $21, representing a change of around 60%. In this article, we explain some of the key factors that have contributed to this change.

Apart from raising the forecasts for top line and profitability, a change in methodology is also partly responsible for the big change in price estimate. We encourage our readers to modify these estimates and see the impact on the company’s valuation.

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Improvement In Metrics Including Customer Base And Monthly Revenue Per Customer Will Drive Revenue Growth

We expect Constant Contact’s customer base to expand at a healthy rate over our forecast period. Our estimate is based on the following factors:

  • With over 29 million registered small businesses and non-profits in the U.S., there is significant market potential for the company to expand its customer base. In addition, the company can also target markets outside the U.S. for enhancing its growth.
  • Moreover, we believe the company will expand its partner distribution channels to reach out to more customers.
  • As Constant Contact is rapidly evolving into a multi-product company, its initiatives to cross-sell its products will also help drive growth in its customer base.
  • We expect Constant Contact to maintain its healthy customer retention rate in the future. It recorded a monthly retention rate of unique paying customers at around 97.8% in 2012.
  • Constant Contact has made various acquisitions in the past of companies including SinglePlatform and CardStar to bolster its technology. We believe this will help the company differentiate against its competitors, and hence drive incremental demand for the company.

We believe Constant Contact’s monthly revenue per customer (ARPU) will grow at a slow rate over our forecast horizon. While the cross-selling of multiple products on an integrated platform will drive ARPU, the intense competition in the industry will negatively impact the growth rate of this metric.

Driven by an improvement in these metrics, we expect Constant Contact’s revenue to grow at over 10% annually for the next few years.

Year 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue ($ K) 252,154 285,489 324,686 367,610 414,168 458,214 499,820 535,108 570,050
Annual growth (%) 17.6% 13.2% 13.7% 13.2% 12.7% 10.6% 9.1% 7.1% 6.5%

Improvement In Profitability Is Expected In The Future

We expect marginal improvement in Constant Contact’s gross margin in the future, driven by an increase in ARPU and higher retention rates. Increased scale and efficiency will also contribute to an increase in profit margins.

Sales and marketing expenses, account for a significant portion of Constant Contact’s operating expenses. These expenses constituted around 40% of the revenues in 2012. While we expect these expenses to grow in absolute amount, sales and marketing expenses as a percentage of revenue could come down in the future as the revenue growth is expected to outpace growth in these expenses. In addition, we also expect a decrease in general and administrative expenses as a percentage of revenue in the future driven by increased efficiency and scale.

Change In Methodology

In our previous model, we were not subtracting the non-cash stock-based compensation expense in the calculation of EBIT. We now exclude stock-based compensation expenses while calculating EBIT, which significantly reduces the tax amount payable during the forecast period. Hence, the valuation is relatively higher in our updated model.

Our $21.15 price estimate for Constant Contact is approximately 20% below the current market price.

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