Higher ARPU And Customer Base Growth Prospects Boost Valuation To $31 For Constant Contact

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Constant Contact

First quarter results for Constant Contact (NASDAQ:CTCT) were better than guided on revenues and net income. Quarterly revenues stood 15.6% higher on a year-on-year basis, at $79 million. Compared to previous quarters on a sequential basis, the revenue growth rate in Q1’14 was higher. The company continued to add new customers every quarter, with overall unique new customers reaching 605,000 from 595,000 at the end of December 2013. Additionally, an acceleration in average revenue per user (ARPU) boosted sales this quarter. Q1’14 ARPU was close to $43.82, compared to $42.33 in Q4’13 and $40.60 in Q1’13. The acceleration in ARPU is a result of increased cross-selling activities from the company.

Gross margins expanded significantly for the quarter, reaching 72.5% compared to 70.8% in Q1’13. This expansion in gross margins is a result of an increase in cross-sales from the company, as well. Increased cross-sales typically result in margin expansion because costs remain the same for each additional sell. Moreover, the company reported a first quarter operating profit for the first time in the past three years. Q1’14 operating profit stood at $1.15 million, compared to a loss of $2.67 million in Q1’13. This operating profit also resulted in a net profit of approximately $0.85 million for the quarter despite a net tax expense of $1.18 million.

In this earnings note, we take a look at various drivers that have contributed to Constant Contact’s strong Q1 performance.

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Toolkit Should Drive ARPU And Unique Customers

Constant Contact introduced a new product offering called Toolkit that provides an easy way for small businesses and non-profit organizations to launch multiple campaign types across high-return marketing channels such as email, social, mobile and Web. This bundled offering has three different packages: basic, essential and ultimate. The basic versions of these packages are priced at $20 a month, $45 a month and $195 a month respectively, and have limited contact list sizes. [1] Pricing increases as the list size of the business increases across all packages.

This particular 2-axis pricing structure, that changes with the selected package as well as the list size of the business, provides a dynamic way to grow its ARPU. The company reports a penetration rate between 50-60% from new customers for its Essential package. [1] This penetration rate should expand further as bundled offerings provide businesses with a more holistic marketing product. Similarly, signing larger businesses for its toolkit offering should drive ARPU as larger businesses have bigger contact mailing lists. We believe such bundled offerings provide Constant Contact with an opportunity to boost ARPU as well as expand its customer base going forward.

For fiscal 2014, the company expects revenues of approximately $330 million, with ARPU ranging between $46-47. [1] We have revised our Trefis price estimate to $31 for Constant Contact to reflect better growth prospects in its customer base and ARPU beginning 2014.

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Notes:
  1. Constant Contact Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 [] [] []