Constant Contact Performed Better Than The Previous Quarter, Though Customer Growth Yet To Recover

Constant Contact performed better than the management’s expectation in its Q2 2015 earnings. The credit card acceptance rates have improved over the second quarter and the partnership with Endurance helped in new customer additions in June. The company is on the path of eradicating the Toolkit brand name and instead focusing on a new service called Galileo. It expects to migrate all its customers to the Galileo platform by 2016.

Constant Contact’s revenues amounted to $91.5 million representing a 13% year-on-year growth. The company’s EBITDA grew by 26% year-on-year to reach $16.8 million, $2 million higher than management guidance. The company added 15,000 new customers in the first six months of 2015 and expects a similar addition for the second half to end up with around 30,000 customers for 2015. ^[1]

The ARPU for Q2 2015 was $47.12 having risen by around 6% year-on-year but it was still below expectation. Based on the current trends, the company expects ARPU to reach $49 by the end of 2015. The reason for the low ARPU was the company’s focus on the email marketing aspect, and hence the lowest priced Email marketing package receiving the maximum demand (almost 80% of new customers).

For full year 2015, the company expects revenues between $371 million to $373 million and EBITDA between $73 million to $75 million (12% to 13% year-on-year growth).

We are in the process of updating our $34 price estimate for Constant Contact.

See our complete coverage of Constant Contact

Changed Focus From Toolkit To Galileo

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 trialers fell below expectations.This resulted in a lower number of customer additions. The same thing carried on in Q2 2015, too. Let’s explore the reasons for the same.

• History

In an effort to evolve from an email marketing company to a provider of an integrated online marketing suite, 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.

Constant Contact embarked upon a brand repositioning drive in the Q1 2015 and that backfired. The company tried repositioning itself from an email marketing service provider to an integrated online marketing tool provider. Consequently, this created confusion in the minds of prospective users who primarily viewed it as an email marketing company. ^[2]

• Changes Made In Brand Image

As a rectifying measure, in Q2 2015,  advertisements were made to focus on the email marketing aspect of the company. The user experience on the website was also enhanced. In a drastic move, the company decided not to use the Toolkit naming convention on its marketing material and to replace it simply with Constant Contact. While Constant Contact’s focus of being an integrated marketing platform still remains, the Toolkit brand name will cease to exist going forwards. The company has instead introduced a next-generation offering platform, internally code named Galileo. Currently, 50,000 customers and free trialers are using it and it has received positive feedback, so far. Within the next few quarters, all new trialers are expected to be using Galileo and the company will gradually migrate its existing customers to the new platform by 2016. Galileo enhances the user experience by simplifying and aesthetically enhancing the creation of marketing campaigns. The company expects Galileo to provide it with a unique competitive advantage that will aid it in soaring above the competition. ^[3]

Successful Alliances Driving Customer Growth

Constant Contact’s strategic partnership with Endurance, forged in February 2015, progressed to the next phase in late May. Consequently, the performance in June has been very healthy and the company is optimistic that the partnership will bring more growth. Constant Contact’s first phase of partnership with Web.com was rolled out late in the second quarter, and the significant activities will be launched in the latter part of Q3 2015. Both the partnerships are expected to garner customer growth and in turn boost top line growth over time.

In the enterprise space, it signed Bloomin’ Brands as an enterprise customer for Single Platform. With over 1,400 restaurants including some notable brands under its belt, the partnership will further increase the reach of Single Platform and hence the appeal for Single Platform’s services in the enterprise markets.

Global Expansion Plans: Mexico In Focus

The company is looking forward to global expansion and is using customized approaches to test the demand for its products in different geographies. The biggest test currently is providing end-to-end services in the Spanish language, and that has received positive feedback, so far. The company is currently testing it in Mexico and all the stages including year-over-year gains, substantial gains, and visitors, trialers, customers, retention and revenue, have been successful.

Constant Contact plans to expand its efforts in Mexico towards the second half of 2015, and start its full operations in the country by 2016. It considers Mexico to be a crucial market for growth.

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1. Constant Contact Financial Results And Operating Metrics, Constant Contact, July 23, 2015 [↩]
2. Constant Contact’s Q1 2015 Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩]
3. Constant Contact’s Q2 2015 Earnings Call Transcript, Seeking Alpha, July 23, 2015 [↩]