Growing Costs A Concern As Constant Contact Looks To Accelerate User Base Growth

Constant Contact (NASDAQ:CTCT) announced its earnings for Q1 2013 on April 25, with revenues increasing to $68 million, up 14% year-over-year. It was able to maintain its relatively high gross margin at around 71% and added nearly 10,000 net new customers during the quarter. The company also increased its expenditure towards sales and marketing with associated costs growing almost 20% to ~$31 million for the period.

The changes in its sales team were from the top with the addition of Lauren Chacón as Chief Sales Officer, from Monster Worldwide. The stock has declined from $16 in February to $12 in the past on the slow progress for higher expected growth. We believe that the experience of Ms. Chacón in leading sales teams could help Constant Contact target small and medium businesses.

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 Base Growth At Historical Levels

The company ended the quarter with 565,000 customers, adding 50,000 gross new customers or 10,000 net new customers. The growth was aided by the customer retention rates staying at historical levels and the company transitioning from a single product to a multi-product company. We expect the growth to accelerate in the near future as the full effects of the addition of Yelp as part of SinglePlatform’s publisher partner network, enhanced mobile features of EventSpot, the launch of CRM functionality and the strengthening of its sales team becomes more evident.

Selling, General and Administrative Expenses Grow

Constant Contact”s SG&A expenses grew ~23% y-o-y to $41 million in Q1. The major component of the growth was general and administrative expenses which grew 33% to ~$10 million. The growth was driven by an expansion of sales team over the previous year as the company expanded its product portfolio and TV advertising. We expect the expenses to remain high in the near future as the company accelerates the adoption of its existing services and new products besides attempting to improve the free trial to paid conversion rate. The increased expenses support our revised $13 Trefis price estimate for Constant Contact which is in line with its market price.

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