Constant Contact (NASDAQ:CTCT) reported fourth quarter and fiscal 2013 results on January 30 after markets close. On a year-on-year basis, fourth quarter and fiscal 2013 revenues increased 13% to reach $75 million and $285 million respectively. However, slower growth in Constant Contact’s customer base continued to lead to a deceleration in top line growth. Gross margins expanded 60 basis points over 2012, driven by an improvement in customer support and operational efficiencies.
Operating profit margin benefited from reduced sales, marketing, and general and administrative expenses. As a percentage of revenue, SG&A expenses decreased 1.5% over 2012 to reach 52.5% in fiscal 2013. However, R&D expenses as percentage of revenue increased 60 basis points. This trend of expanding R&D budgets is expected to continue in the near term due to increased competition in the digital marketing industry. However, the company guides further reduction in SG&A expenses to offset increased R&D spending, to boost profitability going forward.
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ARPU Expansion Drives Top Line As Customer Base Growth Continues To Decelerate
Constant Contact’s average revenue per user (ARPU) continued to grow consistently, reaching $41.4 during the overall fiscal 2013 period. In comparison, ARPU was approximately $39.8 during fiscal 2012. This continuous increase in ARPU despite slower customer base expansion has been the driving factor for Constant Contact’s revenues. On an average basis, the company’s total customer base reached 575,000 in 2013, up from 527,500 in 2012, indicating a 9% growth rate. Comparatively, this customer base growth rate was 13% in 2012 and 19% in 2011.
Going forward, the company expects to accelerate growth by expanding its ARPU using bundled product sales and launching higher priced products. The company’s latest product, SinglePlatform was a key driver in the company’s ARPU expansion in 2013 and management expects benefits from the product to continue into fiscal 2014.  Additionally, Constant Contact expects to hike its pricing for new users from $49 to $79 , which should boost ARPU. The company stated its ARPU target north of $50 in the coming years, which we expect is a target for 2019 according to our forecasts.  Should the company reach this target sooner, we could see an upside to our price estimate.
Despite the positives from ARPU acceleration, a slowdown in customer base continues to negatively impact top line growth. The average customer life cycle, which is the average duration of a customer with the company, increased from 45 months to 50 months in 2013, indicating a 10% increase in retention rate. In terms of customer lifetime value, which is the average bottom line generated from a customer, Constant Contact expects to increase customer lifetime value from $950 in 2013 to over $1,600 in the next few years.  This increase in customer lifetime value is expected to be driven by various factors such as higher ARPU, lower acquisition cost and higher retention rate. However, we are unclear on the extent of top line acceleration that could be achieved through these changes.
We have updated our price estimate to $26 for Constant Contact to reflect its fiscal 2013 earnings. We are still cautious on the company’s top line growth prospects which is why our valuation stands at a 17% discount to its current market price of $30.Notes: