Constant Contact Q2’14 Preview: Consolidation of Product Offerings Should Lift Revenue Growth and Margins

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Constant Contact

Constant Contact (NASDAQ:CTCT) is scheduled to report its second quarter results of fiscal 2014 Thursday, July 24. The digital marketing services provider, which has close to 575,000 small and medium enterprise (SME) customers on its rosters, posted better than guided figures last quarter. Constant Contact generates revenues by charging a subscription fee basing on the customer’s product suite on a monthly basis. Although the company has been able to add new unique customers every quarter, the pace of new customer acquisition slowed down considerably in 2013. However, the company successfully rekindled growth in revenues in Q1’14 through strategic attempts to cross sell its product offerings to customers and increase the average subscription fee (or average revenue per user (ARPU)). ARPU for Q1’14 was close to $43.82 compared to $42.33 in Q4’13 and $40.60 in Q1’13. This resulted in a 16% growth in revenues in Q1’14 compared to the 13% growth witnessed in Q1’13.

For the upcoming Q2’14, we expect Constant Contact to post strong financial results, driven primarily by its ability to cross-sell effectively and expand ARPU. Moreover, margins are likely to trend higher for the upcoming quarter. Last quarter’s operating profit of $1 million was the first time the company posted a profit in Q1. The profit last quarter was facilitated by strong top line growth despite the higher operating expenses related to developing and promoting its newest product offering, Toolkit. In Q2’14, margins are expected to gain support from accelerated demand for Toolkit.

We have a Trefis price estimate of $31 for Constant Contact which is approximately in line with its current market price.

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SME Customer Base Limits Risk from Digital Marketing Analytics

Prominent marketing research firm eMarketer estimates the total allocated budget for digital advertising for 2014 at approximately $138 billion. [1] Stabilizing economies across the globe and increasing customer buying potential are driving digital marketing budgets higher, with the 2014 estimate approximately 15% higher over 2013 levels of $120 billion. More importantly, technological advances into targeted marketing and digital marketing analytics has boosted the return on investment on ad dollars for marketers of large corporations. This in turn is causing greater inflow of investments into the marketing analytics space over traditional print and electronic advertising channels.

Although the industry shift from print and electronic advertising to targeted marketing on email and social media channels is being favored by large corporations, the SME market that Constant Contact targets, continues to be heavily reliant on email and content marketing as their preferred marketing channel. In most cases, SMEs lack the budgets to run a dedicated digital marketing analytics campaign to approach the customer in a targeted manner. The nature of its customer base limits its downside risk even as the economic recovery catalyzes the migration from print and electronic to digital ad spending for large corporations.

Contribution from Toolkit in Focus

Last quarter, Constant Contact launched a new marketing product called Toolkit that enables small businesses and non-profit organizations to launch multiple campaign types across high-return marketing channels such as email, social media, mobile and Web. According to CEO, Gail Goodman, the consolidated nature of this product marks its evolution from an email marketing company into a robust, online marketing platform for SMEs. [2]

Toolkit is offered in three different bundled packages namely basic, essential and ultimate. Subscription prices for each of these packages start at $20 a month, $45 a month and $195 a month respectively.  In addition to the differential pricing on packages, the company also has a contact list-based pricing structure across all three packages. For example, if the contact list for a business with the essential package increases beyond the standard contact list size provided, the company charges a higher subscription fee. This particular twin-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.

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Notes:
  1. Digital Ad Spending Worldwide to Hit $137.53 Billion in 2014, eMarketer, April 2014 []
  2. Constant Contact Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []