Constant Contact To Retain Its Growth Momentum In Q3 2014

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Constant Contact

Constant Contact (NASDAQ:CTCT), the digital marketing service provider for SMEs (Small and Medium Enterprises), will release its Q3 2014 earnings on October 23rd. In the first half of fiscal 2014, the company experienced 16% growth in revenue ($160 million) compared with the same period last year, driven by an expanding customer base and increasing average revenue per user (ARPU). With a customer base of 615,000 in the first half of FY 2014, the company has added nearly 10,000 gross new unique customers every quarter in 2014. The ARPU grew by 8% in the first half of 2014, as against 4% growth in the same period in 2013. The reasons behind such growth is the introduction of the Toolkit Platform and the improvement and expansion of its existing services.

Our price estimate of Constant Contact at $30.45 is at an approximate 10% premium to the current market price. We will update our valuation after the Q3 2014 earnings release.

See our complete coverage of Constant Contact

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Toolkit’s Introduction And Success Of Existing Offerings Drive Customer Addition and ARPU

A major reason for Constant Contact’s strong performance in 2014 was the introduction of Toolkit in Q1 2014. Toolkit helps to expand the campaign reach for SMEs beyond emails to mobile devices, social media, and the web, in the form of an integrated marketing suite. It comes with 3 levels of service and functionality tiered with three different price options. Hence, with Toolkit’s introduction, Constant Contact has broadened its scope of service offering beyond email marketing, and consequently attracted more customers and driven up the ARPU. Q2 2014 ARPU was $44.40 as against Q2 2013 figure of $41.06. The company plans to migrate its existing customer base into this platform gradually and the initial tests to this end have begun in Q3 2014.

The other offerings by Constant Contact are also growing. SinglePlatform, its digital listing service, was chosen by Facebook as the platform to display menus, specials and other information for restaurants in the US and Canada. Hence, millions of Facebook users in the US and Canada will access SinglePlatform in seeking the pages of restaurants in which they have an interest. Also, SinglePlatform gained 11 enterprise deals, each with above 100 locations in the second quarter.

In its Q1 2014 earnings call, the management claimed that each of these initiatives will provide the business with over $100 million growth opportunities in the future.

Healthy Margin Forecasts Point Towards Better Days To Come

Constant Contact reported EBITDA margin of 15% in Q2 2014. For Q3 2014, the company expects revenue in the range of $83.4 million to $83.7 million, with an adjusted EBITDA margin between 21% to 21.5%. In Q2 2014, the sales and marketing expense (which accounts for about 40% of revenue) is expected to have reached its peak in absolute terms. It was primarily spending on helping customers in the adoption of its new product offerings, particularly the Toolkit platform. The company’s monthly user retention rate is 98% in the second quarter with 10,000 new customers being added to its subscriber base every quarter since Q1 2013. This proves the increasing demand and stickiness for Constant Contact’s offerings. Thus, lower spending coupled with the fact that new product and services are strongly received, Constant Contact is set for an even better performance in Q3, than the first two quarters of 2014 .

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