Constant Contact’s Customer Base Growth Picks Up

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Constant Contact

Constant Contact (NASDAQ:CTCT) announced its earnings for FY 2012 on January 31, with revenues increasing 18% y-o-y to $252 million. It was able to maintain its relatively high gross margin at around 71%, and its customer base expanded to about 550,000 from 500,000 last year. The Average Revenue Per User (ARPU) also improved from $38 in 2011 to $39.80. The expansion of its product portfolio to twice its size in 2011 was the primary driver for growth. However, the increased focus on portfolio expansion also led to decline in conversions of free trials to paying customers. As a result, the growth in customer base was slightly lower than expected. We expect the company to continue focusing on a combination of new customer additions and ARPU, to drive top line revenue growth in 2013.

Constant Contact offers a complete set of online marketing tools, including email, event, social media and mobile marketing, and competes with the likes of Groupon (NASDAQ:GRPN), Living Social, Eventbrite, iContact, Surveymonkey as well as Salesforce.com (NASDAQ:CRM).

Check out our complete coverage of Constant Contact

Customer Growth Picks Up After Q3 Slowdown

Constant Contact added 45,000 new or 15,000 net new customer during the fourth quarter, an improvement from 35,000 new customers in Q3. The company ended the year with 550,000 customers. It believes that the lack of execution in converting trials to paying customers, resulted in the growth being below expectations, and plans to focus on customer retention to drive customer base growth in 2013. The primary driver behind the growth in customer base was the expansion of product portfolio. For example, the Social Campaigns tool which was launched about a year ago and helps businesses run promotions on social media, generated more than 120,000 users. However, the number of paying customers was below the company’s expectations. We believe that the focus on customer retention and a largely untapped market will help the company grow its customer base to about 1 million users by the end of our forecast period.

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Cross-Selling Initiatives Drive ARPU Growth

During Q4, cross selling initiatives saw the company register a good growth in ARPU. Also, the recently launched tools have been improving their free to pay conversion rate, which should help increase ARPU. The event marketing product, EventSpot, which was re-branded in August, delivered approximately 100% growth in revenue in 2012. [1] However, we expect the ARPU growth to slow down as the company faces intensifying competition on product pricing. Rival firms have begun offering similar services at discounted prices, and we expect the company to lower its prices to remain competitive. [2] A lowering of fee for the services is expected to result in the ARPU declining to $37.5 by the end of our forecast period.

Plans To Enter The Mobile Universe

Mobile devices are expected to drive traffic to small businesses in 2013. ((Constant Contact Pinpoints Five Marketing Trends That Will Impact Small Business in 2013, Constant Contact, November 2012)) The company acquired CardStar in January. The app allows consumers to easily manage loyalty reward and membership cards on a mobile phone. Since the acquisition, the CardStar app itself has grown to more than three million active users.

In 2013, the company plans to invest in and develop future mobile and loyalty marketing solutions. We believe that the company could help small business make the most of this trend, by promoting its Event Check-In app and launching the SinglePlatform tool on the mobile platform. SinglePlatform will make it easy for SMBs to distribute their information across the most popular apps and feature mobile-optimized websites. Restaurant businesses seems to have the lead on this front, according to the data released by the company. We will look forward for announcements or product launches leveraging the growing adoption of mobile devices in 2013.

We have a revised $18 Trefis price estimate for Constant Contact.

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Notes:
  1. Constant Contact’s CEO Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 2013 []
  2. Email marketing provider ReachMail targets rivals Constant Contact, iContact with ‘This Means More!’ campaign, PR News Channel, January 2013 []