by Kris_Tuttle on March 28, 2008
Constant Contact filed a statement to offer shares in a secondary yesterday. It may help sharpen the impact to the shares so they don’t end up in a longer-term slide. Yesterday the stock was off 10% to a little over $15.
The filed offering may help since the 5M shares offered is less than half of what could have been offered and serves to lock additional shares up for another 90 days.
Since we originally noted CTCT as a short on November 9, 2007 there have been several updates including a report that details our concerns on February 19th. (We’re not taking new subscribers at this moment but our individual reports are available at our website.)
We can’t be sure how effective the CTCT investor presentation will be for the secondary. It probably hasn’t changed much since the IPO and the company has executed just fine so far. No doubt management will have to fend off more questions about customer growth in times of economic weakness. (The will also no doubt say that in tough times successful marketing programs are even more critical. 
The question is what to do now. Our fund has remained short since our original post but we are tempted to cover part of it as the offering should be completed a clearing price fairly close to our $14 fair value estimate.
In an ideal world people would swallow the story all over again and the completion of the offer might catalyze the shares to higher price points again. This would provide another attractive entry point *and* more shares to borrow for short sales.
The essence of the story along with our concerns haven’t changed but the stock has declined from $24 to $16 and the secondary may limit further near-term declines. So it argues for trading around our short position in hopes for higher entry points off of a successful deal.
– Kris Tuttle
Tags: CTCT, Short Ideas
by Kris_Tuttle on March 14, 2008
We’ve been writing about our concerns surrounding the viability of the Constant Contact business from a profit generation and valuation standpoint for some time.
Our most recent entry on February 21, 2008 outlines the key points and provides a link to our full report.
Since that time yet another material concern has emerged on our radar screen. Our report highlights competition but now we see that many site and content management solutions are being extended to include built in email marketing functionality.
Investors should also be reminded as to just how easy it is to move from CTCT to something else. The model starts to break down rapidly if clients don’t stay on the system as long as expected and CTCT management currently expects that to be a long time.
The stock has traded down in what is a tough market with a lock-up that came off last week. It’s down from $24 to $17 but is still above our estimate of $10-12 fair value.
We have nothing against the solution or the company but only trying to find the truth with respect to fundamentals, expectations and valuation.)
– Kris Tuttle
(Research 2.0 Capital is short shares of CTCT.)
Tags: CTCT, email marketing, short ideas
by Kris_Tuttle on February 21, 2008
We released our fuller research report on Constant Contact (pdf) yesterday to extend our client-commentary more broadly. In summary the report highlights the risks to CTCT based on a few key facts:
1) Since the IPO the investor sentiment for this company has been nearly off-the-charts positive. Company presentations focused on gross profits and adjusted EBITDA rather than discuss profits. The long-term targets provided by management are far in excess of what anyone in the SaaS business would expect.
2) Costs are fairly high in that the company feels it must be a leader in the market and outspend everyone on sales and marketing to gain new customers. The economics of new customers is reasonable today but impossible to predict.
3) There are a wealth of competitors. Many appear in any search using "email marketing" as the term. Pricing is competitive and switching costs are low. Having a 40+ month customer duration expectation seems far too optimistic.
4) Millions of shares are coming off lockup on March 2nd which should find a home closer to a market clearing price of $10-12/share as instructed by our long-term valuation model.
5) Company manages for adjusted EBITDA but investors will eventually care about ROIC versus the cost of capital for the company and their economic value add which we expect to remain precarious.
More details and proof points for the summary above can be found in the full report.
– Kris Tuttle
Tags: CTCT, Short Ideas