Constant Contact's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)

Feb.26.13 | About: Constant Contact, (CTCT)

Constant Contact, Inc. (NASDAQ:CTCT)

Morgan Stanley Technology, Media & Telecom Conference Call

February 26, 2013 7:25 pm ET

Executives

Gail F. Goodman – Chairman, President and Chief Executive Officer

Unidentified Analyst

Delighted to be here today with Gail Goodman, CEO of Constant Contact. And so for the next 30 or so minutes we will have a discussion around the business and take some questions. So welcome. One of you take a few minutes and just give people sort of a quick update on the story and just give them a little bit of a about the business the whole story. But how you communicate with value proposition.

Gail F. Goodman

Yes. So, for those of you who might be new to the story, I’ll just start with the first anchor of our story is who is our target market. We truly focused on small organization, small businesses, non-profit and associations. And what we helped on do is creating world customer relationship. But the beginning that was creating grow with email marketing, increasingly it’s a broader suite. Its email and social and event and probably the big news of last year was our acquisition of single platform, which helps the small business gets discovered, by getting very listing with pictures and menus and service listings of on over a 100 publishers across the internet. So our growth strategy is simple, lots of new customers and increasingly cross selling and up selling our broadening suite of product to our existing customer base, which numbers about 555,000.

Unidentified Analyst

Just talk a little bit about some of those products, what’s the average number of products per customer if other than email what they are next likely product that there consuming with you?

Gail F. Goodman

Yes. So email the ongoing product and certainly the vast majority of customers had email and we also have a few add-ons. So one of our add-ons is something we called MyLibraryPlus, which is well we host images, documents and other things they use in their email campaigns. We count that as a product and that’s probably got the biggest penetration and that’s over 50% penetration. So when we add up our average products per customer its 1.7, 1.8 or so and moving up slowly but steadily. Although honestly we’re pretty new with this cross sell thing and our product line has expanded very rapidly. So we entered 2012 with three products and exit with these. So those newer products, much last penetrated. So lots of room to go in terms of both learning out of cross sell and up-sell, which are exactly the right touch point in our customers selling and customers service model as well as when is the right time. So do you sell, do you try to sell multiple products at first touch or do you get him successful with product one and then start to learn how to teach him product two and product three.

Unidentified Company Representative

And to talk about that a little bit, your target market really is S of SMB.

Gail F. Goodman

It really is.

Unidentified Company Representative

It really, yes, and you’ve been quite vocal about your evangelism for the small business owner and your product suite is really designed to be a CMO in box almost, right to really help them pay one stock destination for marketing. So talk a little bit about the way that you approach these businesses and how you get them to consume ideally multiple products.

Gail F. Goodman

So one of the key differentiators for us is what we call coaching with a personal touch. So the average small business, again, 70% of our customers have less then 10 employees and half of them have less than that. So that generally means there is not a full-time marketer. Someone is doing part-time marketing. It’s literally owner/operator that’s doing part-time marketing or someone in their organization. So this idea that we put, give them a real-life human being, a named person that they can call and that there is conversation about their business objectives, what they’re doing in marketing today and how our products will fit. That gives us an opportunity to uncover more than maybe the need they came to us for. So maybe they came to us for email marketing or maybe they came to us because they’re running an even, they want event registration. That’s our opportunity to hear and uncover those opportunities and a walk fine line now between distracting them by talking about too much, when they have maybe have a mission, they’re trying to accomplish and we want to get them closed on one product, so that we have the opportunity to make sure every time. One of the other things about us is that we’re very testing and metric strip. So, we learn our way into this by trying differently.

Unidentified Analyst

You’ve talk about some of, on that basis, some of the things that have come out to be the testing or the metrics that you’ve just mentioned?

Gail F. Goodman

Yeah. So, I would say that our initial hypothesis going into 2012 was leave them alone until they completely finish first conversion and then start thinking about of selling and cross-selling. We’re actually learning their pretty open in their first 30 days, more open, then we thought on that. It doesn’t necessarily impact the conversion on the first product. And that will be an example of a test, you do them in small scale, you wait till you get strategically relevant and then if it works, you kind of roll with that.

Unidentified Analyst

Got it. And sales and pricing given that you’ve started this transition and it’s in the early stages of the multi-product evolution. Do you think about sales and pricing differently as it relates to multi product?

Gail F. Goodman

Well, I definitely think the (inaudible) with the personal touch sales model is the right model and so, less evolution on the sales model, but pricing and packaging, we think there is a lots room for opportunity. So, again as a nation multi-product company, we start with one product and then we’re sort of, what’s the next most logical product often by industry, highly differentiated in terms of what might be the next product.

Based on industry, based on things we can see in their product usage, they were trying to get smarter and smarter about that, but it may be easier to go from product one to bundle than from product one to product two to product three, we’re just testing our way into packaging bundle.

Unidentified Analyst

So, two questions, one is for the existing core customers. You have five roughly half a million of customers. How much more do you have to go, just in terms of customers you are not touching? And then secondly, how much more do you think you have with your existing customers in terms of more you could use…

Gail F. Goodman

But I think we have got a good growth on both trajectories. That’s addressable market. If you go to the small businesses in the U.S. $29 million. You add non-profit association, direct sellers call it $40 million. Then add in Canada and in the UK, where we’re directly active, and get up to roughly $50 million and you say how many other will more ever do on online marketing. Our typical gas station will probably never do online marketing some categories come out, right thing is $25 million, we need to say plenty of headroom from $555,000 to whatever.

So we look at our next our big milestone into the million customers. So we are very big at having internal rallying of price and key milestone. A million customers half a billion in revenue, kind of works side-by-side, we can see our way to $0.5 billion in revenue at 800,000 if you move the ARPU its like those are the two internal metrics that will really driving towards and there are very receivable. I mean they are receivable both of them and so some of that comes to what do we think the sustainable like common share wallet, can we get for meet to the small businesses.

And again we think there is lots of room there, the great news about our product is they directly tied revenue and its more visible than almost any of their others sales and marketing spend. So as long as we can continue to prove our ROI, we think we can take share particularly from offline marketing things like yellow pages add things like blue dark print, where they believe it or not they are still spending quite a bit not very measurably.

Unidentified Analyst

Yes. Let’s talk about competition a little bit, is it just the offline or traditional marketing or people who just aren’t marketing savvy or they’re using some of the other MailChimp and some of the S&D marketing automation products like hub, spot or others.

Gail F. Goodman

Yeah, so I would say that we’ve a wide range of competitions. And mostly smaller startup coming up from below in the individual product categories we compete in. I’m much less seeing people coming down, it is pretty hard if you change your pricing and sales model for thousands of dollars a month or hundreds of thousands of dollars a year to make money at $30 or $40 a month. Average customer pays that just over $40 a month now. I’m too really not seeing enterprise competition coming down. But, we’re seeing startups in every category in e-mail marketing, the notable ones are MailChimp, Vertical Response, iContact just got bought by Locus. They are starting to be part of a suite there, in Event Marketing, sometimes Eventbrite, Evite and others, and Surveymonkey and single platform at Widgix. So there is different stories and different categories.

Unidentified Analyst

And I assume then therefore the notion of single platform and some of the other acquisitions and just products that you have launched as to make it easier for that single point of contact inside a small business to do their marketing as supposed to going to Eventbrite and going to MailChimp and going into individual sources.

Gail F. Goodman

Yes, so we bringing these products together will make it both easier and more effective and easier because while today you could use multiple products here, taking your lesson out and kind of. It’s a lot more work to synchronize and also easier because of a common offering in content management system. So if I’ve described mainly, these are the simple things, I’ve a crisp description of my company whether I put that in e-mail, I put that on social or I put that here, having it more in place means I’m not cutting and pasting and synchronizing the crop. But we think it’s actually going to be more effective as well, more effective, because there is common visibility in reporting across these products. So I can suddenly instead of knowing – if I want to know about eyewear, I have to go into Constant Contact to see which emails he opened and survey a [monkey] to see how he answered the sat survey and Eventbrite to see if he attended the event. Now that record gets all together and extends over time.

So I actually get to start to have an essence of engagement by individual and their value to me. And that’s where we think as we bring these products together with its common context data base, we have a chance to really use the power of Big Data to make little businesses successful by really providing them actionable insights. They are never going to do their own analytics. That is not what this crowd is about, but we can do those analytics for them or else by looking at their individual success metrics, but also by comparing their success metrics, the 550,000 other small businesses and uncovering those opportunities for them to improve and then driving those actionable insights into our product experience to suggest the next marketing method.

Unidentified Analyst

So talk about ARPU a little bit and you mentioned data. That data help you drive ARPU and how important do you think that use of data will be to help you continue to drive ARPU?

Gail F. Goodman

Yeah. So we think data helps us from a lot of things. It certainly helps us with our own sales and marketing efficiency, conversion, retention, cross sell, when is the right time, when is the most effective time? We think it then also helps our customers as we harness that data for their benefit to suggest the next best market method. So we’re making big investments right now in Big Data, hired a Chief Analytics Officer and it’s really one of the places we think has opportunity to have leverage both for our business and for our customers.

Unidentified Analyst

And on that point, has data helped you with your customer acquisition cost or cost of customer acquisition and talk a little bit about customer lifetime value?

Gail F. Goodman

Yeah. So, data’s helped us both in cost of acquisitions and lifetime value. I’ll give you a simple example; we have, I would say modestly, world-class retention in the SMB space. So, one of the key problems with that small business base is attrition value rate itself is pretty high, small business, if you look at some of the other models in SMB, typically very high attrition, if you look at the paper click, advertising space and others, we average 2.2% monthly attrition, which is a world-class network, that gives us about a 45 month customer life and lesser than better than that in the last few quarters. And that’s all been data driven improvements, where we have actually created our own internal customer success metric that is a predictive metric of how likely is the customer say or inversely to a trick and when we see those indications that they are potentially at risk, we are learning to inter meet. The simplest example is that they serve with us in their first campaign has less than globally successful results, no open rate, low (inaudible) rate; probably we’ve call those low levels.

We now call them, coach them, make sure their next campaign is more successful, not only that more successful campaign means mobile phone keep them longer. That call is a well known. All right please be on paying this guy, $30 a month and they conquered they weren’t happy with my results, right, a surprising called obviously we know the economics of that problems a lot.

Unidentified Analyst

2.2% per month turn, and how low or how much lower do you think you can go?

Gail F. Goodman

Our target is 2%.

Unidentified Analyst

Okay.

Gail F. Goodman

Well get there and then see if we can get further.

Unidentified Analyst

Okay.

Gail F. Goodman

But there are some market, systemic market conditions that probably mean we won’t get much lower than that.

Unidentified Analyst

And so on that what is the primary sources of turn?

Gail F. Goodman

The top three are a small business success problems, out of business credit card field that we can’t reach you probably out of business. Stop marketing going to be out of business. Right so unfortunately those are the biggest. And when we were small, we didn’t really worked that hard on retention, because we can’t touch those, but now the secondary and third reasons, you know if the once that come after that are starting to be ones we can impact and the biggest ones are the once around successfully use of our product.

Unidentified Analyst

Right.

Gail F. Goodman

And typically if they’re not successfully using our products not because of our products it’s because of the kind of campaigns we’re running and we can really guide them to campaigns that will have a better called action that shows the more impact. And that’s what we tried it will be. Competitive is not a big attrition factor for us, its less than 5% of the 2.2%. So again a quite small, we really not think the competitive attrition as a big problem.

Unidentified Analyst

We have few minutes before questions. I wanted to talk a little bit about financials before we do. Can you talk about your perspectives on revenue growth and margin expansion and how you see that evolving effects?

Gail F. Goodman

So I’ll start with revenue growth and we believe that the markets we’re in. So both the size of the available customer market and the types of products we have the potential to be very high powers nor than 20% revenue growth. That is not when we delivered last year, while we got into this year. So this year we guided to 13% to 15% revenue growth. We’re kind of in this transition point from single product to multi product and really understanding how to get our newer products into accelerated mode. We won’t be happy if we don’t get back in some reasonable timeframe at 20% growing stage. On profitability much more of our consistent story of just executing our way to profit expansion. The exception being last year where we did a large scale acquisition mid-year kind of pulled margin back a little bit and now we’re steadily growing, look at a 100 basis points to 150 basis points a year of margin expansion, that there would be no exception.

Unidentified Analyst

And your long-term target at 30%, 33%?

Gail F. Goodman

Yeah.

Unidentified Analyst

What revenue scale do you think you need to get to be there?

Gail F. Goodman

You know that really is the growth revenue trade-off. If we can reaccelerate revenue, we get there sooner, but it’s a three to five year model to get it there.

Unidentified Analyst

Okay. And in terms of that margin, getting to that margin profile is there a number of products per customer metrics, I get you there or something that people can be thinking about?

Gail F. Goodman

Well, one of the ways we look at this is we focus a lot on customer lifetime value. We calculate that simply by the revenue of customer pays us per month by the way, plus gross margin minus cost of acquisitions and that has been pretty steady at $800 per customer.

We’ve moved the average revenue per customer and its life up by cost of acquisitions still moving up as well, holding steady at that $800. We are seeing a pretty clear path to 1,200 lifetime customer value. It starts at moving that average revenue from $40 to $45 and moving that retention from 97.8% to 98% and then moving gross margin from where did now, we’re on 71% to 74% which is just scale economics. So, we see our way to move to really 50% growth in lifetime customer value that gets us to that model back.

Unidentified Analyst

Got it and is it a consumption people would then need to be consuming on average north of two products, north of three products?

Gail F. Goodman

Yes, I think it’s a combination of growing their list in e-mail marketing and in their contact database that has that half cross-sell. So [I don’t know] the reverse math, but, yeah, we have to get better at cross-sell.

Unidentified Analyst

Got it. And as you think about the product road map for 2013 and beyond, are there other problems or issues that SMBs or small businesses are facing that you guys think you will address and how will that help you?

Gail F. Goodman

Yeah, I see these market opportunities more than kind of challenges, clearly mobile is changing is everything. It’s changing consumer behavior. So where a year ago, long ago for two or three years ago, most small businesses were finding business in a browser. They’re finding them on a mobile device. And I think there is a very large opportunity for small businesses to engage the consumer in store on their mobile device. Exactly what that looks like is still a kind of a big question mark. We think that really is loyalty and offers and we’re making some pretty big investments for that direction.

We also think that’s an opportunity to do more closed loops than ever before. So you send a consumer and email was an offer. They store that offer in Passbook on the iPhone or in CardStar on any Android device and now they’re actively regaining. It’s been pretty hard to get folks to closed loop or deem just about anything. We see that changing because it’s always been where do I store it, how do I keep it? I’m not going to, you know. Consumers really don’t print all that. With some rare exceptions, print out all those coupons and keep them in their purse, right. It’s too hard and they don’t do it.

That’s going to get really easy, particularly when those coupons become location of where and they start popping up as you’re walking close to a store that you engage with. So mobiles are bigger opportunity; socials are big opportunity they may end up obviously combined. We’re really looking at that on offer some loyalty.

Unidentified Analyst

Okay. One last question before we open up to the group. You’ve made acquisitions it’s become the process of building out a multi-products company, lessons learnt from the world thus far, things that you could think about that you’re now focused on addressing as you continue to move the business forward.

Gail F. Goodman

Integration takes longer than you think. Okay, that probably not a new lesson, but maybe one that we need to learn, which is probably more about doing expectations setting at the time of acquisitions, then do you do the acquisition. And, you know I think, we’re maturing as an organizational in terms of understanding how to integrate. It’s going to how fast to go on which different parts. And I think that’s just growing up. And but we do really think that will continue to be acquisition opportunities. Right now we are in digest mode, because we did a lot in 2012, but we definitely when we take a slightly longer than annual horizon I think it will be back in the – excuse me, M&A market. Particularly because lot of start ups are now trying to attack the SMB market. And learning that building a great product is actually step one. And step two there are five, are the sales and marketing economics and they are hot, and they require different skills in building a core product. So we’re seeing lots of interesting opportunities. So I even definitely think who wants to be an acquirer in the marketplace.

Unidentified Company Representative

Okay, we should probably open up to questions. Any questions from the audience.

Question-and-Answer Session

Unidentified Analyst

Great personal friend of your product by the way.

Gail F. Goodman

Yes.

Unidentified Analyst

12% or 13%, 15% growth. Is there any new customers in there, if you’re going to be increasing buyer cost, so you may take care of that low-double digit growth rate.

Gail F. Goodman

Yeah, so definitely customer growth is part of that and you maybe, it’s going to over estimating how much cost selling up-sell we have in the model. We’ve been consistently adding with some seasonality call it 40,000, 45,000 50,000 new customers a quarter, have been little closer to 40,000 and 45,000 and 50,000 through the last year. And we expect to continue to be able to do that and hopefully even accelerate that as we go through the year. And we definitely face the challenge that with a larger customer base even with improving churn, the absolute attrition number has grown. Right so, with 555,000 moving to the 2.2% a month really means we start down 11,000 to 12,000 a month.

Unidentified Analyst

Okay.

Gail F. Goodman

So the net add number gets a little harder to get too.

Unidentified Analyst

Got you.

Unidentified Analyst

Other questions?

Unidentified Analyst

Thanks. Can you talk about your decision to go into TV advertising this year having not done it last year, I think having done it prior-year.

Gail F. Goodman

Yes.

Unidentified Analyst

Have you seen any early indications going and why didn’t you do it last year?

Gail F. Goodman

Sure, so very long history with mass media, so we started using mass media, radio and then TV back as far as at 2005, tested our way into it regionally then nationally. I’m very successful with it as an acquisition channel. Good economics not our best economics but a real scale economic opportunity for us.

And so, we went national, stayed national for a few years and then reached a point where we had gotten to brand awareness and email marketing category awareness at the stage where we felt we had talked. And we actually were looking ahead and saying, we’re going multi-product. Maybe we shouldn’t reinforce ourselves as just being our marketing because the brand is kind of becoming synonymous with it and we took a part.

We thought at the time that we could really convert all the demand we had created by using radio as they called the action channel. Now TV has brought awareness, category and called the actions. With that we’ve done enough brand and we’ve certainly done enough category and email marketing. Let’s see if we can use radio, it’s just called the action channel. It was not as effective. And so, we literally saw a decline in customer growth and said, okay, that theory was wrong, not one that you can text in small quantities. You can’t be into the half-national. The economics get much less attractive when you buy spot advertising. And so, we went back into TV in the fall of 2012 and we saw the lift we expected.

Even if we went back in the fall, our plan was to stay in 2013 assuming we saw results. We saw the results we expected and so we are staying in. We’re balancing a little. So 75% of the advertising is email marketing, about 25% is multi- product. So I’m trying to make sure we don’t kind of get too locked in as just that email marketing company.

Unidentified Analyst

Other question?

Unidentified Analyst

There’s been a lot said about the demise of email marketing.

Gail F. Goodman

Yeah.

Unidentified Analyst

I saw the presentation recently at an ecommerce event where it was exact target let’s talked about how still prominent email is. So, you can talk a little bit about the importance of email and how long you see that being critically important?

Gail F. Goodman

Yes. I really do think we talk about email, social mobile. They’re all connected right.

Unidentified Analyst

Yes.

Gail F. Goodman

Right it’s not one or the other. In fact the best way to drive traffic to your Facebook page is email. Clearly Facebook is figured this of, because they send us a lot of emails telling us something interesting is happening on Facebook, we should get back to it right. You see LinkedIn doing it; you see the others doing it, because we’re really realizing that email is the best called action channel. We’ve seen as marketers in the last 50 years and it’s still it.

So, these other channels do different things, right? I’ll take social in particular. Social has an opportunity to do social visibility, social word amount. Right, so if I’m an IT consultant and I can get my customers to connect with me, it turns out the air and network is full of other IT consultant. So, if I can get them engaging in a way that visible to their channel, that’s a word (inaudible). The problem is the social channels are struggling to find marketing level engagement. And so we’re all sort of looking for what is going to be the secret thought and the lacks that. What we know is, if you think of email is, the pull, and then social will be the engagement. Even on mobile, right. The right way every small business not can have a mobile app that we’re all going to download, right.

It’s just not going to play through that way. What we’re going to see if people delivering mobile opportunities via email. And then you store that in a mobile apps like a past and then putting, and you store that in a mobile apps like a Passbook. So they are not separate, and e-mails still work. Take everyone in this room has checked their e-mails today. No you didn’t?

Unidentified Analyst

He has a question initially.

Unidentified Analyst

Just wondering, are you going to help all the small businesses to do more on their inbound marketing, I mean, I would consider e-mail an outbound marketing topic. Is there anything you’re going to – you’re offering thinking about going more on the inbound side for small companies?

Gail F. Goodman

Yes, so inbound is not a term they really use. But if you think about inbound as being found as sort of one of the big steps, that’s exactly what single platform is about. It’s about making sure that they’re accurate, you know they’re listing. Yes, but now I’m more in the beta side now. But if I’m a restaurant, yeah again – I did a survey of you guys are looking for a restaurant in San Francisco. Some of you might – you will stay out, some of you might be urban spoon fans, some of you might be trip advisor fans and you might go to Goggle and just hit the map. But ultimately, after we get path location in hours, the next thing you want to see, menu and atmosphere, pictures. What does the interior look like? Single platform helped the small business get that kind of information often distributed. If I’m a spa, it might be my spa services. If I’m a florist, it might be my top ten bouquets right. So it’s helping them get bound in all of the ways people are looking for them. Clearly but little less kind of content marketing, writing white papers and/or less employees, we are getting top for doing that and but we definitely see, we do great integration with blogging and that’s a sort of a natural e-mail, is a way to distribute the content you’re writing in other places. We are very supportive to that.

Unidentified Analyst

Great well I think, we’re out of time. Thank you very much. Gail, we appreciate you coming and spending time with us and thank you all.

Gail F. Goodman

Great. Thank you.

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