Constant Contact Management Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Constant Contact, (CTCT)

Constant Contact (NASDAQ:CTCT)

Q1 2014 Earnings Call

May 01, 2014 5:00 pm ET

Executives

Jeremiah Sisitsky - Director of Investor Relations

Gail F. Goodman - Chairman of the Board, Chief Executive Officer and President

Harpreet S. Grewal - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Kyle Chen

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to Constant Contact First Quarter 2014 Earnings Results. [Operator Instructions] And as a reminder, this conference is being recorded. Now I'll turn the conference over to your host, Jerry Sisitsky, Vice President of Investor Relations. Please begin.

Jeremiah Sisitsky

Great. Thanks very much, Tyrone. I appreciate it. Good afternoon, everyone, and welcome to Constant Contact's investor conference call for the first quarter 2014 financial results ended March 31, 2014. With me on the call today is Gail Goodman, Chairman, President and CEO; and Harpreet Grewal, Chief Financial Officer.

During the course of this conference call, we'll make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-K and 10-Q on file with the SEC.

In addition, any forward-looking statements represent our views only as of today, May 1, 2014. While we may elect to update these forward-looking statements at some point in the future, we disclaim any obligation to do so, even if our views change.

During this call, we'll refer to certain non-GAAP financial measures. These financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is available in the press release announcing our first quarter 2014 financial results. This press release is available in the Investor Relations section of our website at www.constantcontact.com. Additionally, available for download on our IR website is an Investor Presentation, including screen shots and the differentiated packages of the recently released Toolkit offering and our historical financial and operating metrics.

With that, I'll now turn the call over to Gail.

Gail F. Goodman

Thanks, Jerry. We had a really strong quarter. We meaningfully accelerated revenue growth and delivered large gains in profits and cash flow. We closed the quarter with revenue of $78.9 million, representing an acceleration of year-on-year revenue growth to 15.6% and above the range we provided in our pre-announcement on April 8. Adjusted EBITDA of $11 million was up 60% year-over-year, representing an EBITDA margin of 13.9%, well ahead of guidance and the prior year.

The strength of our performance suggests a meaningful acceleration in 2014 revenue growth and expanded profitability. It also sets us up to deliver a future acceleration in revenue growth and profits in current -- in future years.

The introduction of Toolkit represents a major milestone in the evolution of Constant Contact from an email marketing company to a provider of a robust online marketing platform. In doing so, we are changing the marketing success formula for small business, transforming the competitive landscape, producing higher average invoices and, in turn, driving acceleration in our top line growth.

Toolkit is a game-changer and the future of Constant Contact. It levels the playing field for small businesses and nonprofits by offering them an all-in-one marketing platform that was only previously available to larger companies with much bigger marketing budgets. The benefits to small businesses are immediate and measurable. Not only is it more cost-effective than working with a variety of vendors, Toolkit makes it easy to use all of the campaigns that deliver the best results. Everything from email newsletters, events, local deals, social campaigns to trackable coupons and much more. 80% of small businesses are already using multiple types of marketing campaigns. However, most struggle to get appropriate returns on the time and money spent. Toolkit provides an easy way for small businesses and nonprofits to launch multiple campaign types across all the proven high-return marketing channels that matter: email, social, mobile and the Web. Toolkit makes it easier for our customers to discover, test and use Constant Contact's full range of marketing tools, simplifying small business marketing by bringing together the tools needed to drive repeat customers and reach new ones.

Toolkit allows us to better meet the varied needs of our customers and prospects. Within our more than 600,000 customers and millions of prospects, there are wide ranges of business needs and marketing sophistication. By offering packages with differing price points, product functionality and service levels, we have the ability to better meet the varied needs of customers and prospects. For Constant Contact, this should increase engagement, drive higher monthly invoices and improve retention rates.

Toolkit pricing starts with 3 different packages, Basic, Essential and Ultimate, and then is tiered by contact list within each package. This approach allows for differentiated bundles to meet the various needs of our customers and provides us with a 2-axis pricing model, with multiple ways in which we can drive ARPU.

The Basic package starts at $20 a month, mirroring our current pricing for Email Marketing. The Essential package starts at $45 a month, while the Ultimate package with a personal marketing coach starts at $195 a month. With increased list sizes, the price points for each package increase.

The initial package mix is still in flux as we optimize our funnel for Toolkit, but we're already seeing the Essential package penetration range between 50% and 60% for new customers. The Ultimate package penetration is in low single digits but improving as we grow more confident selling the higher-price-point and the services-based offering. The net result is an average invoice that is currently around $10 higher with Toolkit. This gives us confidence in our ability to drive ARPU to the $46 to $47 range by the end of the year.

We've just started planning the migration of our existing customer base to Toolkit. We expect that to begin later in 2014 and accelerate the migration over the course of 2015.

While it's still very early, this should be another meaningful growth lever as we encourage our existing customers to try our Essential and Ultimate packages as they migrate to Toolkit. As with everything we do at Constant Contact, we will test and learn our way into the migration of our installed base to be sure that we're creating a great customer experience while maximizing the opportunity and minimizing any potential risk.

Toolkit is the first of our multiyear initiatives designed to drive an acceleration of top line growth north of 20% sustainably. In addition to Toolkit, which should drive material growth over the coming years, we're excited by other growth investments, including building on the success of SinglePlatform, expanding outside the United States, accelerating our partner-led business, as well as complementing our do-it-yourself offerings with a do-it-for-me offering. These initiatives are all at different stages of testing and maturation, but each has the potential to be a $100 million-plus opportunity. We're confident all of them can contribute to accelerating our future growth.

2014 is shaping up to be a great year for Constant Contact, highlighted by a marked acceleration in both revenue growth and expanding margins.

With that, I'll turn it over to Harp to discuss the financial results for our quarter -- for our first quarter in more detail, as well as review the outlook for the second quarter and full year 2014.

Harpreet S. Grewal

Thank you, Gail. We are really pleased with our first quarter performance. The results validate our journey from an email marketing provider to a marketing platform for small businesses and nonprofits. In the quarter, we delivered a meaningful acceleration in top line growth, along with equally strong margin expansion, both of which exceeded the range we preannounced a few weeks back. Across the board, whether it was revenue growth, gross margins, profits or free cash flow, each showed solid year-over-year improvement.

Revenue for the quarter totaled $78.9 million, representing 15.6% year-over-year growth, led by record ARPU growth, new customer additions and customer retention. ARPU grew to a record $43.82. This is a more than $3 increase or almost 8% growth over last year, the largest year-over-year dollar or percentage increase in the history of the company.

Our top line performance was matched by accelerating profitability. Adjusted EBITDA margins increased from about 10% a year ago to almost 14% in the first quarter of this year. EBITDA for the quarter totaled $11 million, up 60% year-over-year and materially higher than our preliminary estimate. We continue to drive efficiency in sales and marketing as well. As a percent of revenue, sales and marketing costs fell from 45.2% in Q1 2013 to 41.6% this last quarter. We were particularly pleased that we delivered this efficiency in sales and marketing while accelerating revenue growth, and we expect further sales and marketing efficiencies throughout the year as we drive to our longer-term target of 30% to 33%.

We also drove improvements in customer lifetime value, led by gains in ARPU, retention and gross margins. At this point, we would expect customer lifetime value to grow to north of $1,100 in 2014, with a cost of acquisition just north of $600, ARPU exiting the year in the $46 to $47 range and improvements in gross margin and retention. The expected growth in customer lifetime value this year translates to more than $150 or 16% increase versus 2013.

Looking ahead to the balance of 2014, we expect to deliver revenue of approximately $330 million or more than 15.5% growth, up from our initial guidance of more than 13%. The revenue guidance represents a new baseline for Constant Contact, with opportunities for further gains over the course of 2014. The top line growth will be driven by ARPU gains, retention and customer additions. We expect to increase ARPU throughout the year, and as noted earlier, we expect to exit ARPU in the range of $46 to $47 at the end of 2014, which represents an increase of about 10% year-over-year growth.

We expect to add a similar amount of net new customers as we did in 2013, adding almost -- approximately 40,000 new customers for the year. And finally, we expect to see continued gains in retention rates.

We're driving top line growth while maintaining our disciplined approach to investing. We expect a meaningful expansion of profits and look to end the year with adjusted EBITDA margin of about 18.2%, up from about 16% last year. With capital expenditures of about 8% of revenue, free cash flow for the year should be north of $30 million, more than a 25% increase over 2013.

For the second quarter of 2014, we're providing revenue guidance in the range of $81 million to $81.3 million. Adjusted EBITDA is expected to be in the range of $12.1 million to $12.6 million and represents a margin of 15% to 15.6%.

In closing, we are extremely pleased with the first quarter results, which built up a strong momentum in 2013. These results underscore our ability to deliver on a powerful combination: being able to invest in the transformation of the company, accelerate revenue growth, expand profits and generate higher free cash flow. We believe we are setting ourselves to deliver sustainable revenue growth north of 20% coupled with margins also north of 20%, a combination that few other SaaS companies have delivered on.

I'll now turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Michael Nemeroff of Crédit Suisse.

Kyle Chen

This is Kyle Chen in for Michael Nemeroff. I was just going to ask in terms of your migration of your existing customer base to Toolkit, how should we think about that in the context of historical cross-sell versus migration? And what are the levers from a ARPU growth perspective versus retention rate?

Gail F. Goodman

So I think the migration feels very, very different than cross-sell because we can move customers. If you've been paying attention to the Toolkit packages, an Email Marketing customer with what was our MyLibrary Plus moves very smoothly and ARPU-neutrally to our Basic package. So the migration starts revenue-neutral, and every customer that we can encourage to Essential or Ultimate becomes ARPU upside. We'll test our way into that migration, so we think we will be able to very much minimize any attrition risk or disruption to that customer base. That's why we will go slowly. We'll test, we'll refine and we'll tune that process as we move folks over. So really be looking for this as mostly an ARPU growth opportunity, hopefully, with some retention improvement.

Kyle Chen

That's great. And if I could just ask quickly on your developing partner strategy, I guess in '14, as we sort of look forward, should we expect Constant Contact to use the partner channel a little bit more to leverage your overall customer acquisition cost?

Harpreet S. Grewal

I think we have over the course of 2013. I mean, we've been talking about our partner strategy, and our partner strategy has multiple components, which I won't go into detail here. But what we've seen is that over the last couple of years, the partner channel now contributes over 20% of our revenue and customer adds, whereas a couple of years ago, it used to be 15%. And that's accelerated over the course of 2013. And we do know that the partner channel on the whole has positive cost of acquisition relative to our overall business and was one of the reasons we're seeing some really nice gains in sales and marketing efficiencies, which you saw in Q1, which were almost 350 basis points year-on-year.

Operator

Our next question is from Steve Ashley of Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I would just actually like to ask a couple of questions on SinglePlatform, if that performed vis-à-vis your expectations in the period and how you're thinking about the installed base when they come up for renewal. Are they going to renew at the legacy price that they originally bought or kind of at the higher, new price of $79?

Gail F. Goodman

So I'll take the first one and then maybe pass the second one to Harp. So just to remind folks, we are expecting SinglePlatform to more than double in 2014, and they are off to a great start and well on track to those expectations.

Harpreet S. Grewal

Yes, on the base in terms of renewals, I think we're moving very carefully. So for the most part, at this point, as those annual renewals are coming up, we're renewing them at existing pricing that they were at. We are starting to protest [ph] the higher pricing, but once again, we want to move into that. The net impact of that is going to become more and more minimal, to be quite honest, because are growing so rapidly, and most of our new customers are coming on, on a monthly basis, so that annual base is going to get smaller and smaller in its overall impact on the business.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

That's terrific. And then just a question on the expansion of offering Toolkit. I believe you offered it to just a subset of new customers as you originally rolled it out. Here in the first quarter, you've expanded that. Have you seen kind of the attach rate or -- vis-à-vis buying just email, people buying Toolkit, has that remained consistent as you expanded it to that broader swath of new customers?

Gail F. Goodman

Yes, so April is when we turned the dial up closer -- to get to 100%, really, in the first 2 weeks of April. And as we did that, we obviously brought over a broader set of our sales coaches working with those new trialers. We've seen that new folks are actually yielding a slightly better penetration into Essential and Ultimate. So as we went to scale, I think, obviously, they had seen their testing peers go before them and were anxious to get their hands on Toolkit. It was very well anticipated on the sales floor, so -- went at it with enthusiasm and are seeing very good Essential and Ultimate penetration. I think that's a metric that will move around for a little while as we leave early excitement and get to steady state.

Operator

Our next question is from Peter Goldmacher of Cowen.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Gail, can you talk a little bit about the kind of work you guys did internally to get to Toolkit? What were the assumptions you made? How did you test it? How do you get comfortable that -- I mean, you're essentially talking about moving into a solution sale rather than a product sale. How do you get comfortable with the change? How did you get there, and how do you get comfortable with it?

Gail F. Goodman

Yes, thanks. It really started from understanding the kinds of things our customers were doing. So 80% of our customers do multiple campaign types, and honestly, it goes all the way back to our decisions to enter the events and survey and deals markets. We were seeing demand in the customer base, but we weren't seeing uptake mostly because getting small businesses to make individual decisions to try and buy, were creating too much friction. It was too much thought process. So the hypothesis going in was that if we radically reduce that friction by making it incredibly easy, first, for them to see all those campaigns. And if you look at the IR slide deck, you see how easy it is. We hit create, and it says, "What do you want to do today?" And all the campaign types are laid out there. It's interesting. In some of our very first usability work, people were like, "Oh, you guys have events? I want to try that." So that discovery process is tremendous. And then they can easily test out all the different campaign types. So then the next question came, what should go in, which package, and how do these bundles work. So I think we started from some ideas and instincts, and then we did very rigorous testing. So we did something called a card-sort analysis, where we asked people to group what they would do together. We did a full pricing and packaging sensitivity analysis in-market. And then we started building. We brought a first set of bundles to market in September and then ran 10 different iterations, where we tested both what was in the bundles and the price points and watched our full funnel metrics, visitor to trial to paying to which package they paid. But we also looked at engagement, how many of them are starting a campaign, are they starting Basic campaigns or Plus campaigns, what's happening kind of in-product, and did our usual rapid iteration on in-product experiences. So by the time we moved to full new-to-the-franchise Toolkit, we had 6 months under our belt and a lot of confidence in our results.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Can you help me understand, would any of this have been possible with your previous infrastructure?

Gail F. Goodman

So there are a couple of key elements that are bringing this together. Certainly, common contact management and the ability for all of the products to look at a common view of an individual contact absolutely could not have happened without the common contact management. And our integrated reporting infrastructure builds off of that common contact management. And then a little more subtle behind the scenes, as part of contacts, too, was a shared syndication platform, where all of the campaign types are kind of sending out the campaigns using common tools. So it was that infrastructure that enabled us to rapidly do the Toolkit work.

Operator

The next question is from Jeff Houston of Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

So it seems like a lot of the Toolkit work is behind you. I'm sure there's more still to come. But you have about $130 million in cash. Could you talk a bit about your appetite for M&A? What type of products are you -- would you be the most interested in, and how large of a deal would you consider?

Harpreet S. Grewal

Yes, I mean -- I'll start and have Gail jump in as well. So I think we have a high bar relative to engaging in M&A. But one thing we do appreciate is that there was a pace of innovation that's occurring in the marketplace. And relative to our aspirations of how to serve our customers well, I think we recognize that there will be opportunities that we should look at. At this time, there's no particular opportunity to talk to you, but we do see areas that are of interest to us, and we'll keep our eyes out. But there's nothing imminent to talk about, but I'll have Gail also jump in.

Gail F. Goodman

Yes, I think Toolkit gives us a platform to more easily bring new things to market. I think that will also be a platform that would allow us to bring new campaign types in and potentially bring them to market faster. So I think we have a platform where, particularly for small, tuck-in technology acquisitions, we could more rapidly and effectively bring them to market. And so we definitely have some appetite, but we'd do that all in the context of a Toolkit-based product solution.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Great. Maybe asking it a bit of a different way, could you talk about any trends that you're noticing or maybe types of products or solutions that smaller businesses are starting to use within their marketing suite that is an area of interest but maybe it's not something imminent that you're looking to launch or acquire currently?

Gail F. Goodman

So those are just the kinds of insights I hesitate to share in public forums. Not to be a little irascible about that, but it's exactly the kind of stuff that we prefer not to talk about until we're bringing it to market.

Operator

There are no further questions at this time. I'd like to turn the conference over to Gail Goodman for any closing remarks.

Gail F. Goodman

Thank you. To close, our results for the quarter reflect our commitment to delivering success to our customers, as well as our continued focus on improving the core drivers of our business and expanding margins. I'll just take a final moment to congratulate Jerry Sisitsky on his promotion to Vice President of Investor Relations. Thank you, guys.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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