Riding High On The Success Of Its Offerings, Constant Contact’s Q4 Performance Exceeds Expectations

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Digital marketing services provider Constant Contact (NASDAQ: CTCT) experienced growth above expectations in its fourth quarter earnings. In Q4 2014, Constant Contact posted 17.6% year-on-year growth in revenue, amounting to $88.1 million. Adjusted EBITDA was $18.2 million, compared to  $14.8 million for the comparable period in 2013. And the adjusted EBITDA margin was 20.7%, compared to 19.8% for the comparable period in 2013. [1]

The main drivers for the company’s impressive growth in Q4 2014  were a record addition of new customers and record growth in Average Revenue Per User (ARPU). The three revenue drivers for Constant Contact are: new customer additions, ARPU, and customer retention. With the addition of Toolkit and with SinglePlatform’s (Constant Contact’s digital listing service) continued success, Constant Contact performed well in terms of all three drivers. The company secured 55,000 gross new unique customer additions for Q4 2014, which was 5,000 more than the number attained in both Q4 2013 and Q3 2014. The customer base stood at 635,000 at the end of the fourth quarter of 2014 (~7% year-on-year growth). The ARPU for Q4 2014 increased to $46.59, displaying an 10% year-on-year growth. Customer retention stood at 97.8%. [1]

The company is executing multiple multiyear growth initiatives. According to the management, the initiatives that are paying dividends today and will deliver further growth in the future are Toolkit, the partner channel and SinglePlatform. Some of the other initiatives that are in the testing stage but hold future growth potential include international expansion and the “do it for me” offerings.

With the increasing success of its offerings, Constant Contact keeps striving to reach even higher goals. The company seems to understand that constantly differentiating its offerings and offering greater bang for the buck are important mantras to survive in an ever changing market place.

For FY 2014, Constant Contact experienced year-on-year revenue growth of 16.2% to $331.7 million, exceeding management expectation of $331.4 million. Adjusted EBITDA grew by around 32% year on year to $60.6 million and the adjusted EBITDA margin experienced around 220 basis point expansion to 18.3%. [1] Free cash flow for the company was above $30 million for FY 2014, or approximately $1.00 per share in free cash flow. [2]

We will shortly update our price estimate of  Constant Contact which is $30 per share.

See our complete coverage of Constant Contact

Toolkit: Game Changer For Small Businesses, Revenue Driver For Constant Contact

A major reason for Constant Contact’s strong performance in 2014 was the introduction of Toolkit in Q1 2014. Toolkit provides an easy way for SMEs and non-profit organizations to launch multiple campaign types across high-return marketing channels, such as email, social, mobile and web. This bundled offering has three different packages: basic, essential and ultimate. The base versions of these packages are priced at $20 a month, $45 a month and $195 a month respectively, and have limited contact list sizes. 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 above 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.

Toolkit  acted as a potential game changer for small enterprises by offering an exhaustive marketing platform to simplify their marketing efforts. The capabilities, which were erstwhile accessible only to larger companies, enable small businesses to reach repeat customers and simultaneously gain newer customers. Recently, the packages within Toolkit were renamed, from basic, essential and ultimate to email, email plus and personal marketer to better reflect the type of offerings. To drive the revenues coming from the Toolkit platform even further, Constant Contact is working on better product positioning, more effective selling and on-boarding, and improved product experience.

Currently the ’email’ package penetration stands at 60% to 70% range, ’email plus’ is at  30% to 40% range, and the ‘personal marketer’ package has a low single digit penetration. With the deeper penetration of features such as automation tools, management believes that the personal marketer package adoption is bound to rise. Package mix penetration is one of the growth levers for 2015. [2]

Constant Contact postponed its initial plan of migrating its entire user base onto the Toolkit platform, from early to mid-2015 to the latter half of 2015 to early 2016, after numerous discussions with the users.

Toolkit introduction has been a growth driver for Constant Contact so far, and we believe the company will reap its benefit in the future as well.

SinglePlatform: Achieving Scale And Boosting Profitability

Constant Contact’s digital listing service, SinglePlatform, retained its growth momentum by registering  greater than 100% top line growth year-on-year, with significant growth for all the revenue drivers. It has expanded its client base beyond the restaurant vertical to spas and salons, yoga studios, florists, pet care, etc.

SinglePlatform’s publisher network comprises the top business directories, search engines, ratings and review sites, and mobile discovery applications, which provide a wide reach to small businesses distributing content rich listing data.

In 2014, SinglePlatform generated nearly 400 million views for small businesses, displaying an over 20% year-on-year growth in views. Both the direct channel and enterprise channel contributed to new customer growth and overall revenue growth. [2]

The company is planning on enhancing SinglePlatform’s features which include enabling action buttons on listings allowing consumers to beyond discovery, to order, reserve, book or buy.

Future Growth Path

  • Though Constant Contact is focusing on the Canadian and Mexican markets, outside of the U.S., however, management believes that proper international expansion is a 2016-2017 opportunity rather than a 2015 plan. [2]
  • With its strong cash flow position (free cash flow of $33 million in 2014 and expected free cash flow for 2015 is $40 million), Constant Contact is contemplating merger and acquisition related activities during the course of 2015. This will help in expanding its global reach as well. [2]
  • Email marketing’s popularity was evident for Constant Contact recently, as it recorded its largest email send day on Cyber Monday 2014, when it sent more than 365,000,000 emails. Constant Contact’s typical customers are small businesses, which lack dedicated budgets marked for marketing initiatives. As opposed to traditional offline marketing solutions, online marketing tools provide businesses with immediate impact on a large scale at low prices. The prospects of gaining a wide reach with relatively low spending is driving growth for digital marketing among small enterprises. The growth of digital marketing in turn will continue boosting Constant Contact’s growth in sales and profitability.
  • The improving economy 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 upon the growth of the U.S. small and medium enterprise market, to dynamically grow its own ARPU levels going forward.

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Notes:
  1. Constant Contact Form 8-k, Constant Contact, January 29, 2014 [] [] []
  2. Constant Contact’s Q4 2014 Earnings Call Transcript, Seeking Alpha, January 29, 2015 [] [] [] [] []
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