Constant Contact: Expecting High Growth

| About: Constant Contact, (CTCT)

Everybody hates junk e-mails, a.k.a. spam. Yet facilitating their deployment can be profitable. Constant Contact (NASDAQ:CTCT) provides e-mail marketing and online survey products to small businesses and non-profit organizations. Customers include retailers, restaurants, legal practices, consultancies, religious organizations, and alumni associations. About two-thirds of its customers have less than 10 employees. CTCT offers several tools.

Campaign Creation Wizard allows customers to create, edit, and send email campaigns. It includes an array of professionally designed templates. Contact List Management enables customers to manage address lists. E-mail Tracking and Reporting helps customers analyze performance. Customers pay $15-150 per month depending on the size and frequency of mailings. Services such as e-mail archiving and image hosting are available for additional fees.

CTCT also offers an online survey product that allows customers to create and conduct surveys using pre-designed, customizable templates. Survey results allow customers to create new e-mail lists for more effective and better-targeted e-mail marketing campaigns. Customers are charged $15 plus additional fees for more options.

Because e-mail marketing is faster, cheaper, and more effective than traditional methods such as print and direct mail, it is especially attractive to small organizations that have limited budgets.

CTCT has boasted a minimum 97% monthly retention rate since January 2005 and has grown its customer base from 25,000 at the end of 2004 to 253,000 at the end of 2008. Q2 net sales jumped 49% year-over-year to $31 million.

The customer base grew 47% to 304,800. Average revenue per customer climbed marginally to $35.16. GAAP net income was $39,000 versus a $389,000 net loss in the prior year’s quarter. Adjusted for stock-based compensation expense, the pro forma EBITDA margin jumped to 10.1% from 4.3%. Pro forma net income soared to $1.28 million or 4 cents per share.

The company is testing an events-marketing product, which will enable customers to promote events, book registrations, and accept payments. It expects to launch this new product in Q4. Because approximately half of its existing customers put on events, this could prove to be a significant source of marginal revenues. Indeed, prospects hinge on continued revenue growth.

There is little to suggest that growth will slow in the near term. Even the economic recession has had little impact on business. Demand has remained robust thanks to the cost advantages e-mail marketing offers. One concern, however, is that the business is characterized by relatively low barriers to entry, which means new competitors could easily surface.

Nonetheless, we expect CTCT to be able to leverage growth into sustainable profitability. Management estimates there are 40 million potential customers in a market that only has 2% penetration. High expected growth rates make it difficult to accurately forecast revenues, especially for more than a quarter or two.

For Q3, management expects $33.3-33.5 million in revenues and 4-5 cents per share in pro forma earnings. This compares to $22.9 million in revenue and a penny per share in earnings for Q3 2008. For the full year, management is projecting $127.5-130 million in revenues and 7-8 cents per share in pro forma earnings.