Constant Contact Pre-Earnings: ARPU And Margin Expansion In Focus

Constant Contact (NASDAQ:CTCT) is scheduled to report its first quarter earnings on May 1. Earlier this month, the company reported better-than-expected preliminary results for Q1FY14. Revenues ranged between $78.7-$78.8 million, up from its previous guidance of $77.1–$77.5 million. The company posted adjusted EBITDA of $10.6–$10.8 million, up from the Q4FY13 guidance of $9.6–$10.3 million.

This strong operating performance on top line and adjusted EBITDA boosted Constant Contact’s adjusted EBITDA margin. The company expects Q1FY14 adjusted EBITDA margins in the range of 13.5%-13.7%, compared to the guidance of 12.5%–13.2%. In this pre-earnings note, we take a look at the key drivers that could lift Constant Contact’s valuation this quarter.

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Stronger ARPU Growth Should Lift Top Line

Constant Contact posted stronger growth in average revenue per user (ARPU) this quarter, boosted by greater adoption of its new product, SinglePlatform. This new offering is priced at $79 for a yearly subscription, and hence should boost the ARPU, going forward. But, more importantly, the ARPU expansion should continue in the long term primarily because all of Constant Contact’s products seamlessly integrate with each other to form a holistic marketing portfolio.

With offerings for email marketing, social media engagement and event management, Constant Contact’s latest offering should create more synergies across in its portfolio, thereby boosting bundle sales. However, growth in its customer base is expected to decelerate owing to a saturating market for small and medium enterprises (SMEs) in the U.S. Although the upside in customer base growth looks limited, our view is that Constant Contact has a strong opportunity to increase its ARPU through bundle sales in the years ahead.

Margin Performance In Focus

In addition to strong top line growth, Constant Contact has witnessed an expansion in margins through stringent cost control and effective management activities. According to our calculations, adjusted EBITDA for the company has expanded from approximately $4 million in 2008 to over $46 million last year. This growth of over 10x in EBITDA is reflected in the company’s margins, which have improved from 4.5% in FY08 to 16.1% in FY13.

The management’s ability to build a product portfolio that promotes bundle sales should drive margins, going forward. This is because sales through bundled offerings result in a lower cost structure, providing significant cost related synergies.

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