Here’s Why We Believe Constant Contact Is Worth $30

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Constant Contact

Constant Contact (NASDAQ:CTCT) has been a very weak performer in the month of September, declining almost 13% through the month. Comparatively, the broader NASDAQ index declined about 2% during the same period. Prior to September 2014, shares of Constant Contact have witnessed substantial volatility in the January to August 2014 period. In part, we believe this volatility is a result of investors cashing out on gains. Last fiscal year, shares of Constant Contact gained almost 128% compared to the NASDAQ’s 41%.

So far in FY14, the company’s quarterly results were better than consensus estimates. However, this outperformance from the company hasn’t been rewarded by the market, with gains reigned in by profit booking activity. Shares for the digital marketing service provider are down nearly 10% year-to-date.

In this article, we present our rationale for valuing Constant Contact at $30.

Relevant Articles
  1. Endurance Finalizes Constant Contact Acquisition, Lays Off 15% Of The Staff
  2. Constant Contact Earnings: Results Were Good Year-On-Year But Fell Short Of Guidance
  3. Constant Contact Pre-Earnings: Improved Marketing Strategies, Continued Alliances And ‘Galileo’ Could Drive Revenues
  4. Constant Contact: What Lies Ahead
  5. Constant Contact Performed Better Than The Previous Quarter, Though Customer Growth Yet To Recover
  6. Constant Contact Q2 Earnings Preview: Recovery Expected Post The Change In Brand Positioning

See our complete coverage of Constant Contact

Fundamentals Remain Healthy Despite Paltry Year-to-date Performance

As stated above, we believe the weakness in shares this fiscal year is more of a profit booking activity than concerns over company fundamentals. Constant Contact managed to accelerate its year-on-year revenue growth rate from 13.4% in H1FY13 to 15.7% in H1FY14. This acceleration was broad-based, with contributions from both its average revenue per user (ARPU) as well as number of subscribers. The company has been able to add nearly 50,000 gross new unique customers every quarter, with total unique customers at the end of Q2FY14 standing at 615,000. The company’s user retention rate stands at about 98%, depicting user stickiness for the company’s services.

In addition to customer growth, the company has been innovating consistently on its product portfolio. This innovation has resulted in strong growth in ARPU, from about $41.06 in Q2FY13 to $44.40 in Q2FY14. The company’s acquisition of SinglePlatform, a product for digital storefront placements, helped accelerate ARPU initially. SinglePlatform’s subscription charges begin at $79 for a monthly subscription or an effective amount of $58/month on an annual subscription, both of which are higher than Constant Contact’s own ARPU levels.

The company launched a new bundled offering called Toolkit that is priced using a twin-axle pricing structure. Toolkit is offered in three different bundled packages namely basic, essential and ultimate. Subscription prices for each of these packages start at $20/month, $45/month and $195/month respectively. In addition to the differential pricing on these base packages, the company also has a contact list-based pricing structure across all three packages that is priced upon the underlying base package. 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.

We believe the improving economic scenario in the domestic U.S. market could help small and medium enterprises build scale. Constant Contact caters primarily to the SME business space, and should be able to leverage the impending growth from the U.S. small and medium enterprise market to dynamically grow its own ARPU levels going forward.

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