Constant Contact: 2014 Year In Review

Constant Contact (NASDAQ:CTCT) provides digital marketing tool for SMEs (Small and Medium Enterprises), including non-profits. The company aims at enhancing its members’ business networks through its online marketing tools and programs including, Toolkit, Email Marketing, EventSpot, Social Campaigns, SaveLocal, SinglePlatform and Survey.

Constant Contact experienced significant growth in the first nine months of 2014 with revenue amounting to $243 million, displaying a 16% year-on-year growth. The company is evolving from an email marketing service provider to an exhaustive marketing platform for small and medium businesses. With the introduction of Toolkit in 2014, Constant Contact offers an “integrated online marketing suite” that can be customized to meet specific client requirements.

The three revenue drivers for Constant Contact are: new customer additions, Average Revenue Per User (ARPU), and customer retention. With the addition of Toolkit, Constant Contact performed well in terms of all three drivers. The company experienced 50,000 gross new unique customer additions for each of the first three quarters of 2014. The customer base stood at 625,000 at the end of the third quarter of 2014 (7% year-on-year growth). The ARPU for Q3 2014 increased to $44.89 displaying an 8% year-on-year growth. Customer retention stood at approximately 98%. ^[1]

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 value through its products are important mantras to survive in an ever changing market place.

Constant Contact has given a full year revenue guidance of $331 million to $331.4 million, with a 16% year-on-year growth. Adjusted EBITDA margin is expected to be at 18.2%, representing a 200 basis point increase year to year. For 2015, Constant Contact expects revenues and EBITDA margins to grow year on year by 17% and 150 basis points, respectively.

Our price estimate of Constant Contact at $30.45 is at around 19% discount to the current market price.

See our complete coverage of Constant Contact

Toolkit Was The Highlight For Constant Contact’s Business In 2014

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 small businesses 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 upon 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.

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. The ARPU for Q3 2014 increased to $44.89 displaying an 8% year-on-year growth. Constant Contact believes that, as per the trends observed in September and October, the company will deliver an ARPU within $46 to $47 in the fourth quarter. Management attributed the successful adoption of its Toolkit platform as a primary reason behind such an expectation. ^[2]

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. Such plans include renaming the basic package as the E-mail package to clarify that Toolkit can go beyond E-mail marketing and offer more value.  There are also plans to add advanced automation and market savvy features into different packages.

SinglePlatform Struck The Right Chord As Well

SinglePlatform, Constant Contact’s digital listing service, has retained its growth momentum by registering an above 100% top line growth year-on-year, with significant growth for all the revenue drivers. For the first nine months of 2014, its enterprise channel has accumulated over 4,000 customers. It has expanded its client base beyond the restaurant vertical to spas and salons, yoga studios, florists, pet care etc.

SinglePlatform was chosen by Facebook in Q2 2014 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.

Future Prospects

• Small Businesses Relying More On Email, Social Networking, and Mobile: This May Boost Constant Contact’s Future Growth
  

According to Constant Contact’s predictions for 2015, the merging of social networking with mobile channels will aid local business’ growth. Also, emails play a pivotal role in the growth of small business as there is an element which can be controlled by the sender, in terms of the intended recipients, the timing of the message and the content. 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. Mobile again assumes importance, as most of the emails are read via mobile devices. According to Gail Goodman, CEO of Constant Contact, mobile phones will be the primary tool through which small businesses will carry out their marketing initiatives  in 2015. The promptness of creating a campaign while on the move through the mobile device will appeal immensely to small businesses.

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.

• Significant Market Potential

There are more than 29 million registered small businesses and non-profits in the U.S., ^[3] and hence we believe there exists significant scope for the company to expand its customer base. Additionally, since the company derives only around 10% of its revenue from countries outside the U.S., hiring more regional development directors and opening more marketing offices internationally will help the drive the company’s customer base.

• Customer Retention Rate Is High

The company’s monthly retention rate of unique paying customers was seen at around 98% in 2014. We believe this percentage could rise in the future as the company continues to cross-sell its products and optimize its data analytic capabilities.

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1. Constant Contact Announces Third Quarter 2014 Financial Results, Constant Contact, October 2014 [↩]
2. Constant Contact’s Q3 2014 earnings call transcript, Seeking Alpha, October 2014 [↩]
3. Constant Contact’s Form 10-K [↩]