CONSTANT CONTACT INC CTCT S
July 16, 2009 - 1:48pm EST by
chuplin1065
2009 2010
Price: 21.57 EPS $0.08 $0.50
Shares Out. (in M): 31 P/E 257.0x 44.0x
Market Cap (in $M): 668 P/FCF 200.0x 35.0x
Net Debt (in $M): -136 EBIT 0 0
TEV ($): 532 TEV/EBIT 50.0x 25.0x
Borrow Cost: NA

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Description

This is a short idea. I think Constant Contact has benefited from a relatively well known consumer brand in the internet space and has rocketed since November lows to sport a 600mm + market cap and 500mm EV which seems ridiculous- especially in the current market. I believe the business while growing very rapidly is extremely vulnerable to very very low barriers to entry and fierce price competition by competitors that will likely offer this product as  a valued add service for free. Many folks offer services in their portfolio for free right now (surveys by Survey Monkey).

 

What is the business?

The heart of what constant Contact does is offer individuals and small business a platform to run e-mail marketing campaigns and manage e-mail distribution lists. They let you create an e-mail that is rich in formatting and then launch it out to your list. There are dozens of these services. They manage the subscription process, various compliance issues and most importantly try to make sure that the e-mails don’t get caught in SPAM filters. They offer the service over the web through a tiered subscription model. But there is no sustainable advantage to their model, except being an early mover. The model has been replicated, with even better execution by others. Obama used a competitor’s service to execute his rapid fire e-mail campaign.

 

With relatively low costs, and a scalable platform it’s a good business that enjoys healthy gross margins.

 

    2008         2007            2006          2005         2004                                        

Revenue   $ 87,268     $ 50,495     $ 27,552     $ 14,658     $ 8,071  

COGS         24,251       13,031           7,801          3,747        2,211 

GM             63,017       37,464         19,751         10,911        5,860  

GM %              73%        74%                71%           74%          72%

 

They have an associated product that helps customers run and track surveys over the web. This follows a similar model and the product is very similar to survey monkey, but can be integrated tightly with e-mail campaigns.

 

Albeit a rocket of a growth on the topline they have achieved this by plowing almost all their surplus cash in into marketing. I think once they turn the marketing engine off their revenues will flat line or decrease. While the business seems scalable we certainly haven’t seen too much of that on the gross margin line with margins starting high and staying fairly constant. You would think headcount and SGA would scale but they have needed to plow tons into marketing to get the topline growth and the type of operational leverage we would hoped for hasn’t been exactly demonstrated yet.

 

They peg their customer acquisition cost at about $300 and get that back in revenue in about one year. Fully loaded I assume that on a net normalized EBITDA basis their ROIC is roughly 4 years on a customer. A good business but not worth anywhere near the current valuation.

 

Weak Moat:

This is about the simplest web business out there and if the market and growth are as big and easy to achieve as CTCT claims then it is a matter of web-time before many other start to chip away. I would say that this is even simpler than running an ISP, or e-mail hosting provider. If those two industries provide any indication this business will start to be stricken by price competition as folks just look to get incremental revenue on a fixed cost platform. The google factor is also around the corner. I have talked with various folks at Google Labs and  this is a real idea they have been bouncing around and working on.

 

Google has been slowly courting the small business customer with its Google Apps platform where a small (or big) organization can host e-mail, archiving and compliance solutions amongst other things. In fact we run our whole operation on Google and don’t even use Microsoft anymore. We went from paying $500 a month for e-mail archiving to $500 a year (through Google Postini). An offering like Constant Contact is a natural fit for Google or Microsoft and it’s too easy a business to create so I don’t think they would buy into it. Plus by building it from the ground up they can tightly integrate it into the existing Google infrastructure. As fast as the growth comes it can leave as well when folks like Google come on the scene.

 

Valuation:

Market Cap =   $668 mm (31 mm fully diluted shares * 21.57)

Net Cash 136 mm (3/31) (includes Option Proceeds)

Enterprise Value =  $ 532 mm  

 

EV/LTM Revenue = $532mm / 97mm  =  5.5 X

EV/EBITDA =  50 X (2009 estimates)

I think that while the underlying business seems very healthy and growing very fast I think the valuation is just crazy even if they ran the thing for cash flow and stopped the growth.

 

Risks:

 

 

  • Cash rich, high growth
  • Valuation could persist for a while.

 

Catalyst

Catalyst:

  • Constant Contact is a relatively recent IPO (Jan 08) and roughly 35-40% of the shares seem to be in the hands of VC firms. With the pain in the VC world we think that their will be heavy selling of the shares as the firms try to gain liquidity from one of their star performers.
  • Competition from Free Services
  • Announcement from Google that it is experimenting in the space.

 

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    Description

    This is a short idea. I think Constant Contact has benefited from a relatively well known consumer brand in the internet space and has rocketed since November lows to sport a 600mm + market cap and 500mm EV which seems ridiculous- especially in the current market. I believe the business while growing very rapidly is extremely vulnerable to very very low barriers to entry and fierce price competition by competitors that will likely offer this product as  a valued add service for free. Many folks offer services in their portfolio for free right now (surveys by Survey Monkey).

     

    What is the business?

    The heart of what constant Contact does is offer individuals and small business a platform to run e-mail marketing campaigns and manage e-mail distribution lists. They let you create an e-mail that is rich in formatting and then launch it out to your list. There are dozens of these services. They manage the subscription process, various compliance issues and most importantly try to make sure that the e-mails don’t get caught in SPAM filters. They offer the service over the web through a tiered subscription model. But there is no sustainable advantage to their model, except being an early mover. The model has been replicated, with even better execution by others. Obama used a competitor’s service to execute his rapid fire e-mail campaign.

     

    With relatively low costs, and a scalable platform it’s a good business that enjoys healthy gross margins.

     

        2008         2007            2006          2005         2004                                        

    Revenue   $ 87,268     $ 50,495     $ 27,552     $ 14,658     $ 8,071  

    COGS         24,251       13,031           7,801          3,747        2,211 

    GM             63,017       37,464         19,751         10,911        5,860  

    GM %              73%        74%                71%           74%          72%

     

    They have an associated product that helps customers run and track surveys over the web. This follows a similar model and the product is very similar to survey monkey, but can be integrated tightly with e-mail campaigns.

     

    Albeit a rocket of a growth on the topline they have achieved this by plowing almost all their surplus cash in into marketing. I think once they turn the marketing engine off their revenues will flat line or decrease. While the business seems scalable we certainly haven’t seen too much of that on the gross margin line with margins starting high and staying fairly constant. You would think headcount and SGA would scale but they have needed to plow tons into marketing to get the topline growth and the type of operational leverage we would hoped for hasn’t been exactly demonstrated yet.

     

    They peg their customer acquisition cost at about $300 and get that back in revenue in about one year. Fully loaded I assume that on a net normalized EBITDA basis their ROIC is roughly 4 years on a customer. A good business but not worth anywhere near the current valuation.

     

    Weak Moat:

    This is about the simplest web business out there and if the market and growth are as big and easy to achieve as CTCT claims then it is a matter of web-time before many other start to chip away. I would say that this is even simpler than running an ISP, or e-mail hosting provider. If those two industries provide any indication this business will start to be stricken by price competition as folks just look to get incremental revenue on a fixed cost platform. The google factor is also around the corner. I have talked with various folks at Google Labs and  this is a real idea they have been bouncing around and working on.

     

    Google has been slowly courting the small business customer with its Google Apps platform where a small (or big) organization can host e-mail, archiving and compliance solutions amongst other things. In fact we run our whole operation on Google and don’t even use Microsoft anymore. We went from paying $500 a month for e-mail archiving to $500 a year (through Google Postini). An offering like Constant Contact is a natural fit for Google or Microsoft and it’s too easy a business to create so I don’t think they would buy into it. Plus by building it from the ground up they can tightly integrate it into the existing Google infrastructure. As fast as the growth comes it can leave as well when folks like Google come on the scene.

     

    Valuation:

    Market Cap =   $668 mm (31 mm fully diluted shares * 21.57)

    Net Cash 136 mm (3/31) (includes Option Proceeds)

    Enterprise Value =  $ 532 mm  

     

    EV/LTM Revenue = $532mm / 97mm  =  5.5 X

    EV/EBITDA =  50 X (2009 estimates)

    I think that while the underlying business seems very healthy and growing very fast I think the valuation is just crazy even if they ran the thing for cash flow and stopped the growth.

     

    Risks:

     

     

     

    Catalyst

    Catalyst:

     

    Messages


    Subjectacquisition target?
    Entry07/17/2009 11:12 AM
    Membermiser861

    How do you get comfortable that this market leader (at least for now) will not be acquired by a Yahoo, Google, or Microsoft?


    SubjectRE: acquisition target?
    Entry07/17/2009 11:36 AM
    Memberchuplin1065

    I think it is certainly a risk. But at least google would probably only aquire for the technology to buy time not for the customer count. And if that was a case there are much smaller cheaper routes to go. Take that one step further and Yahoo doesn't seem to be in a position to do what would seem like a non-acretive aquisition (if they paid a premium).Microsoft does all sorts of hail mary...and they do have the cash and I have seen them do dumber things.

    Google has shown that in many cases they will develop things in-house, for example their are a dozen com[panies that provide to-do lists (Remember the milk for example)...Google just rolled one out and they built it in house. Plus the 100 mm in revenue doesn't move the needle for them and to introduce integration risk when they could build this in a month seems dumb.

    The technology is literally a class project for a CS student and there is no real star power (like You Tube) for constant Contact.

    The risk is definitely there for any high-tech high growth company but I really think it is low, and to the degree that it exisits I think you have 15% downside on that side. this works both ways if one of those companies did aquire a smaller comeptitor this thing would fall quickly.

    Other than a takeout I don't see the price moving too much higher as the VC selling should keep a decent lid on it.

    Also to note VistaPrint introduced a 4.99/month entry point for the service where as Constant contact starts at 15.00/month...the price wars are already starting. If you are worried about take out risk Vista trades at a stupid valuation as well and you could split the short between the two.


    SubjectRE: RE: Subscriber Specifics
    Entry07/21/2009 02:27 PM
    Memberfinn520

    To clarify, I believe that the 97% rate you cite refers to the monthly renewal rate.  While the company never gives an exact monthly number, you can back into the annual renewal rates from other information given, and those have been 69.9% in 2006, 74.0% in 2007, and 74.9% in 2008.  In 2009 Q1, I estimate monthly renewal rate was 97.6% and corresponding annual rate was 74.7.

    To put those numbers in context, assuming $35.13 monthly revenue, 72% gross margins, 74.7% annual renewal rate, lifetime customer revenue is $1,667 and gross profit is $1,200.  To echo your point, the math works great at these renewal rates, but if someone undercuts them on price and monthly renewal drops from 97% range to 95% range, lifetime gross profit falls in half and these guys get smoked.

     

    Any thoughts on what the nature of the new "mystery product #3" that these guys are planning to soon introduce?

    Thanks.


    SubjectRE: RE: RE: Subscriber Specifics
    Entry07/22/2009 05:03 PM
    Memberchuplin1065

    Thanks Finn for the clarification. Yes those were monthly renewals and the LTV is very levered to this number. I suspect that the $4.99 offering from Vista and possibly a free option will force Constant contact to have lower renewals and lower LT revenue if they start matching prices...and these will ultimately show into drastically bad economics for them as a whole

    In terms of a mystery product I'm not sure butI have heard rumors around something to do with Telephony, VoIP space but am purely speculating.


    Subjectstill following this????
    Entry03/22/2011 10:04 AM
    Memberjazz678
    chuplin - curious if you're still following this stock.  it's pretty ridiculous
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