The Two Scenarios That Can Impact Constant Contact’s Valuation In Opposite Ways

Constant Contact (NASDAQ: CTCT), the digital marketing service provider to SMEs (Small and Medium Enterprises), has been maintaining stable performance over the last few years. In this article, we discuss two scenarios that can impact Constant Contact in opposite ways. The company seems to have reached a growth plateau and needs to rev up its user base by targeting enterprise clients. We believe strategic acquisitions can help the company towards this end, and, in turn, increase Constant Contact’s valuation. Alternatively, Constant Contact’s Toolkit, an integrated marketing suite, might not be witnessing the same level of demand as its email marketing services through SinglePlatform. Hence, we show how declining demand for Toolkit, and the crowding of the market with email services providers, can hurt Constant Contact’s valuation.

Our  $34 price estimate for Constant Contact is around a 15% premium to the current market price.

See our complete coverage of Constant Contact

Constant Contact Acquires A Company To Diversify And Expand Its User Base (~20% Upside)

Constant Contact has been maintaining steady growth over the years. If we look into the past few years, its revenues are growing and its margins are more or less steady as well.

However, in order to propel its growth and rev up its growth trajectory, the company needs to make some strategic investments. Also, Constant Contact’s main business pertains to email marketing for small businesses. The company derived 80% and 84% of its revenues from email marketing, in 2014 and 2013, respectively. Though the company is trying to expand its business through Toolkit and several different services, it is still heavily reliant on email marketing. This market is highly competitive, has low entry barriers, and is highly fragmented. Some of its competitors include, MailChimp,  AWeber Systems, Inc., iContact Corporation, VistaPrint, etc. ^[1]

Constant Contact’s 2012 acquisition, Single Platform, has helped it grow in the past. SinglePlatform, Constant Contact’s digital listing service, registered over 100% year-on-year top line growth in 2014. The reason behind this success was its publisher network that is comprised of top business directories, search engines, ratings  and review sites, and mobile discovery applications. Consequently, this provides a wide reach for small businesses by distributing content-rich listing data. SinglePlatform generated nearly 400 million views for small businesses, displaying an over 20% year-on-year growth in views.

We feel Constant Contact can go ahead with another acquisition to give a boost to its performance. Constant Contact is contemplating mergers and acquisitions in 2015. The company’s strong cash position and cash generation (free cash flow of $33 million in 2014 and expected free cash flow for 2015 is $40 million) gives it a further avenue for expansion. The inorganic growth due to such acquisitions, coupled with an expanded global reach, can contribute to a profitable growth in 2015.

Also, if the acquisition helps in capturing enterprise clients alongside the small businesses, that is going to significantly expand its customer base. We’ve forecasted Constant Contact’s customer base to increase from around 600,000 in 2014 to 1 million by the end of our review period. In case of an acquisition and the expansion of customer base pertaining to wider segments, we assume its customer base to reach 1.3 million by the end of our review period. In that case, there can be around 20% upside to our Trefis price estimate of Constant Contact.

Toolkit Adoption Rate Doesn’t Grow As Per Expectation And Market For Email Marketing Slows Down (~10% Downside)

Constant Contact’s highlight for 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. Though Constant Contact reaped the benefit of Toolkit in 2014 (ARPU for 2014 increased to $44.94 per user, displaying a 9% year-on-year growth), 2015 didn’t begin so well.

Constant Contact was trying to position itself from an email marketing company to the provider of an integrated online marketing suite. This measure backfired for the company.

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 trials fell below expectations. This resulted in a lower number of customer additions. Constant Contact’s 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 company is trying to recreate its brand image through advertisements and messages focusing on its email marketing success and brand reputation to drive users back to its website. ^[2]

This brings us to the question that, what if users are happy with the email marketing option and the acceptance for Toolkit doesn’t increase significantly with time? Considering the company has invested significant capital and efforts to build Toolkit, in the event of Constant Contact being unable to gain a high return on its Toolkit investment, that can adversely impact the company’s valuation. We’ve forecasted Constant Contact’s monthly revenue per user to increase from $46.50 in 2014 to $57.50 by the end of our review period. In case the adoption rates fall, and also, if its email services demand reaches a plateau or slows down in the face of competition, and Constant Contact’s monthly revenue per user reaches only $51.50 by the end of our revenue period, then there can be an almost 10% downside to our Trefis price estimate for Constant Contact.

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1. Constant Contact Form 10-k, Constant Contact, February 25, 2015 [↩]
2. Constant Contact’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩]