Q1 Preliminary Results: ARPU Boost Gives Upside To Our $26 Valuation For Constant Contact

Constant Contact reported its preliminary Q1FY14 results on April 8, in the wake of which the stock surged approximately 31%. Revenues for the quarter are expected to range between $78.7 million – $78.8 million. These provisional revenue estimates stand higher than the $77.1 million – $77.5 million guidance provided during Q4FY13. The revenue beat was facilitated primarily by a rise in average revenue per user (ARPU) to $43.75 from $41.34 in Q1FY13 and $39.56 in Q1FY12.

The company also posted a beat on adjusted EBITDA and adjusted EBITDA margins during the quarter. Adjusted EBITDA for Q1FY14 is now expected to range between $10.6 million – $10.8 million compared to the Q4FY13 guidance of $9.6 million – $10.3 million. This revenue and adjusted EBITDA beat contributed to an expansion in margin expectations as well. The company expects Q1FY14 margins to be between 13.5% – 13.7%, compared to the guidance of 12.5% – 13.2%.

In this research note, we take a look at potential upside scenarios for Constant Contact’s stock. We have a $26 Trefis price estimate for Constant Contact, which will be revised once the company files its audited Q1FY14 results with the SEC on May 1, after the close of markets.

Check out our complete coverage of Constant Contact

Bundled Offerings Boost ARPU, Provide Diversification From Email Marketing

Constant Contact’s revenue growth rate has slowed down from 73% to 13% between 2008 and 2013 as its market penetration advanced.  To address the issue of customer saturation, the company broadened its product base to attract more small businesses into using the Constant Contact platform for their marketing needs. In addition to its original Email Marketing offering, Constant Contact’s new product portfolio included various social media and event marketing tools such as Social Campaign and EventSpot. Constant Contact’s average total customer base at the end of the first quarter stood at 605,000, which was a 4.5% increase over the prior quarter’s ending 575,000.

More importantly, these new offerings provided avenues to cross-sell its products for Constant Contact. By diversifying its product portfolio to include more engaging offerings in social media apart from the traditional email marketing suite, the company helped small businesses create effective end-to-end marketing campaigns on the social media front. Recently, the company acquired SinglePlatform, a start-up that helps local businesses manage their online presence. With the Digital Storefront offering from SinglePlatform, consumers can find businesses that meet their needs. These businesses in turn employ Constant Contact’s marketing tools to keep their customers updated on the latest deals. This way, the company plans to build a holistic experience for businesses and their customers.

Given these signs of improvement, we expect these bundled offerings to boost Constant Contact’s ARPU going forward. We have an average revenue per user estimate of $42.8 for FY2014 from Constant Contact, indicating a 3.6% growth over fiscal 2013. However, our forecast for ARPU in under review. , given that the ARPU for Q1FY14 stands at $43.75. We intend to gain more insights into the company’s ARPU trend from the earnings call scheduled for May 1, and will revisit this issue as we revise our model.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)