Digital marketing services provider Constant Contact (NASDAQ:CTCT) announced its Q1 2015 earnings on April 30th. The company posted 14.6% year-on-year growth in revenue, amounting to $90.4 million. This was slightly below the management’s expectation of revenues between $90.7 million and $91.3 million. Adjusted EBITDA was $14.7 million, compared to $11 million for the comparable period in 2014. And the adjusted EBITDA margin was 16.2%, compared to 13.9% in Q1 2014. 
The company secured 55,000 gross new unique customer additions for Q1 2015, which was the same as Q4 2014 and 5,000 higher than Q1 2014. The customer base stood at 645,000 at the end of the Q1 2015 (~7% year-on-year growth). The ARPU for Q1 2015 increased to $47.09, displaying 7.5% year-on-year growth. Customer retention stood at 97.8%. 
Though revenues grew on a year-to-year basis, customer additions were below the management’s expectations. The attrition rate was also quite high. The main reasons for this were Constant Contact’s brand repositioning that created confusion in the users’ minds and the surge of credit card payment failures on the company’s website. The company tried repositioning itself from an email marketing service provider to an integrated online marketing tool provider. The change was quick paced and it backfired. Going forward, the management has decided to take slow and measured steps in bringing about the transformation in brand positioning.
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Constant Contact has revised its revenue growth expectation for 2015 downwards, from 20% to a 12% to 14%, ranging from $371 million to $377 million.
We will shortly update our price estimate of Constant Contact which is currently $34 per share.
Confusing Brand Positioning Hindered Website Visitors From Converting Into Free-Trialers And Paid Users
Constant Contact markets its services by driving visitors to its website and then tries converting them to paying users after providing a free trial experience. In Q1 2015, while the number of visitors to the website was consistent with the management’s expectations, the number of conversions from visitors to free trailers fell below expectations. This resulted in a lower number of customer additions.
Constant Contact is trying to evolve from an email marketing company to a provider of an integrated online marketing suite. Towards this end, Constant Contact launched Toolkit in Q1 2014. Toolkit is an integrated marketing suite that provides an easy way for small businesses and non-profit organizations to launch multiple campaign types across high-return marketing channels, such as email, social, mobile and Web. Hence, with Toolkit’s introduction, Constant Contact has broadened its scope of service offerings beyond email and consequently attracted more customers and driven up the ARPU.
However, its marketing and branding effort, based on this changed image might have created confusion in the minds of visitors, who in turn were reluctant in trying out the company’s products. The integrated marketing suite is the ultimate positioning for the company, but now the management has decided that it will be introduced gradually to the users.
Constant Contact is currently trying to recreate its brand image through advertisements and messages and has hired Monica Sullivan in late January as the Vice President of Acquisition Marketing. The Acquisition Marketing team is striving to create the right experience for prospective customers through its brand messaging which will emphasize email marketing. The company hired Piyum Samaraweera as the Vice President of Product Management and Scott Goldberg as the Sales Leader for Single Platform. The company is currently trying to leverage its email marketing success and brand reputation to drive back users to its website. 
The company has shifted its mass media and website messaging to focus on the functionalities of Toolkit. Hence, the other aspects of the company were overshadowed. This confused users and website visitors who generally consider Constant Contact to be an email marketing company got mixed messages in the process. This dampened Constant Contact’s new user additions to its website. 
Credit Card Failures Led To An Attrition Problem
The customer attrition rate spiked due to credit card payment failures. The cumulative effect was a lowering of guidance from 17% to 14% revenue growth. Constant Contact has been riddled by the credit card failure problem for a long time. However, the management believed that the issue was overcome with the improvement in the credit card acceptance rates towards the end of 2014. In Q1 2015, the company witnessed a failure of its new credit card processor, and a higher than planned user attrition due to credit card failures. Management thinks that the recent trend of existing credit cards being replaced by chip-enabled cards was one of the primary reasons for the credit card failures. This problem is expected to persist for the rest of 2015. Recent trends reflect that Constant Contact is losing out on 3,500 to 4,000 incremental customers each year, as compared to the previous year due to the credit card failure rates. The cumulative impact of these lost customers over the course of the year is estimated to be around $4 million to $5 million. Notes:
- Constant Contact announces Q1 2015 Results, Constant Contact Investor Relations, January 30, 2015 [↩]
- Constant Contact Announces First Quarter 2015 Financial Results, Constant Contact, April 30, 2014 [↩]
- Constant Contact’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩] [↩] [↩]