What Will Drive Growth for This Email Marketing Company?

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Constant Contact’s (NASDAQ: CTCT) share had a good run after its first quarter FY13 results. The company's share price is up 28.5% in the last three months versus the NASDAQ return of 6.8%. The company performed better than the consensus estimates and added 10,000 net new customers during the quarter. The ARPU for the company increased to $41.34 from $41.12 q-o-q. The company has been investing to develop new product offerings that will help it cross-sell products to its customers. This will help increase its ARPU and revenue. The company also has plans to expand its operations internationally. With the recent acquisition of ExactTarget (NYSE: ET) by SalesForce.com, I believe that Constant Contact is also a potential candidate for a takeover. I will discuss some of these points in detail in this article.

Expansion in the U.S. to drive growth

According to a survey, there are around 29 million small businesses and non-profit organizations in the U.S. Currently, Constant Contact has around 565,000 customers using its products, which is around 1.8% of the total count. This presents the company with tremendous potential to add new customers to its portfolio.

<img alt="" src="http://g.fool.com/editorial/images/55639/1_large.png" />

Source: Company Reports

New Product offerings

According to the company reports, 85% of its revenue comes from email marketing. Constant Contact has been diversifying its product portfolio and adding new marketing tools to its kitty. The company has acquired SinglePlatform, which helps small businesses become more visible in web and mobile search results. The company is expecting revenue of $7 million in FY13 from the SinglePlatform acquisition. It also has plans to increase its product offerings in the social CRM mobile application. With new product offerings on track, I believe that the company will be able to retain its new customers and cross-sell products, thereby increasing APRU. 

Cross-selling to existing customers

The company has an excellent retention rate of 97.8%, with deviation of only 0.5%. I believe that the company can cross-sell its different offerings to existing customers and increase its ARPU. Cross-selling will help the company grow revenue and EBITDA, as the cost incurred in cross-selling is low compared to the cost of acquiring new customers.

<img alt="" src="http://g.fool.com/editorial/images/55639/2_large.png" />

Source: Company Reports

Geographic expansion in the new markets

Around 90% of the company’s total revenue comes from the U.S. and Canada. With a large untapped market available to the company, it can increase revenue from other geographical regions. Though Constant Contact has a presence in 180 countries, brand awareness is negligible in markets outside the U.S. and Canada (and, to some extent, the UK). With the rise in internet penetration in emerging markets, digital marketing is bound to increase in these countries. The company needs to increase its marketing efforts in other geographical regions to leverage the penetration of digital marketing in these emerging economies.

Peer analysis

Responsys (NASDAQ: MKTG) and ExactTarget are two other players in the online marketing sector, which caters to the needs of small and medium-sized businesses.

Responsys has been rated among the top companies in email marketing. The company’s stock had a good run after the release of its first-quarter results, partly due to the strong results and partly because of speculation that the company was a hot candidate for a takeover. Responsys posted revenue growth of 23% y-o-y during the first quarter. The company, which currently has a sales and marketing budget of 23%-24% of revenue, has plans to increase its sales and marketing budget to 28% of revenue in the coming quarter. It has also increased its R&D expenditure to accelerate new product launches, especially in the mobile segment. With the increase in marketing efforts, the company is now looking to expand its customer base to include small businesses. New products will help Responsys increase its revenue and ARPU. There is also speculation about the company’s takeover by a larger firm that has plans to expand its presence in SaaS-based solutions. 

ExactTarget showed a revenue increase of 38% y-o-y in the first quarter of FY13, but due to high sales and marketing expenses, the company registered a loss of $11 million, compared to the loss of $4.6 million in the same quarter last year. The company was acquired by SalesForce.com in May for a whopping $2.5 billion, at a premium of 56% of the stock price. The company has made selective acquisitions to build upon its product offerings, and has also increased its sales and marketing and R&D budgets to increase customers and new products. I believe this will help the company gain customers and increase its ARPU.

Conclusion

Given the huge number of small businesses and non-profit organizations in the U.S. alone, there is a tremendous opportunity for Constant Contact to acquire new customers in the U.S. The company is also looking to expand its services in the international market. The increase in the number of products will help the company cross-sell its products to existing customers, thereby increasing  ARPU. I believe that the stock is a good buy at current levels.

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