A couple of years ago I was happily short Constant Contact in the mid-$20′s (Nasdaq: CTCT) and enjoyed some gains as investor enthusiasm immediately after the IPO wore off and the shares traded closer to my Intrinsic Value estimate (which was $14 at the time.)

The core of the short argument in the past was that CTCT had to rely on a fairly long contract period with a customer to recoup their high customer acquisition cost. The industry is also characterized by many players and low switching costs. When combined with a high valuation it was easy to identify as a good short. (Link to the old research note in PDF.)

The company has come a long way since then and has certainly grown into their early valuation excess. I’ve been neither long nor short these past two years but have spent some time taking a fresh look at the company including a visit to the company back in August. It’s interesting to note their revenue growth (and expectations for future growth) have declined considerably in the past two years.

Quite a few shares are sold short on CTCT, and the stock has moved up fairly sharply in the past few months and is now finally breaking out to a modest new high above $26. This sets the stage for a dénouement of sorts as a new strategy to additional services to existing customers is tested in the market.

More Customers or More Revenue per Customer?

I’d imagine the shorts are noting that the company has seen a few quarters where subscriber additions were lower than expected. At the same time, though, they have managed to get more revenue per customer by selling additional features (like event marketing, online surveys and social media tools) to existing subscribers.

This dynamic may make the stock price a tug of war between longs and shorts for the next few quarters. Generally speaking, our IV estimate would not be impacted by a small reduction in revenue with a corresponding increase in operating margins. However, there does come a point where if growth is slow enough the multiple might be revised down.

In the near-term, earnings growth is poised to be quite strong which isn’t going to help the shorts with a compression of the multiple if it comes through. CTCT is a well-followed stock with 14 analysts covering it and 12 of these having positive ratings on the shares. Ona GAAP basis, earnings per share are expected to go from 10c in 2010 to 34c in 2011 and 60c in 2012. Analysts and the company focus more on EBITDA and adjusted earnings per share because they are higher and this makes the shares look less expensive.

Is there a brand story here?

As a firm we don’t use Constant Contact and have never really liked it. We’ve tried several alternatives and have ended up liking MailChimp more. But it’s important to remember that there are a broad range of customer types out there.

Constant Contact makes no apologies about being targeted toward the small and technically limited business person out there. Their emphasis is on ease of use and support. It’s no secret that you can use a combination of MailChimp and Google Docs to do what Constant Contact charges $30/month for. Many people do just that. But for many, they prefer to pay a little for something that simply works and is well supported. They have a business to run, and costs for solutions like Constant Contact are generally a much better bargain than services like the Yellow Pages which can easily run from hundreds to even $1000/month.

I haven’t seen any rigorous reviews or studies yet, but Constant Contact seems to be positioned as basic email/online marketing with training wheels. There’s nothing wrong with that if it sticks and the company continues to deliver on it. There are about a dozen serious alternatives and they all have their boosters and detractors. Since email/online marketing is a general purpose tool that everyone needs, the end result may just be a growing but still fragmented market for many players.

Stock Conclusion

Unfortunately there isn’t much to do at this price in my view. The IV suggests a price of $25 which is about where the shares are trading. However, if I wanted to make a bet I’d think the stock may be in a position to squeeze shorts and see some near-term upside for two reasons:

1. The economy seems to be picking up and online activity keeps accelerating. This provides a backdrop against which CTCT numbers could come in better than expected due to a pickup in overall demand and willingness to spend.
2. If the “online social marketing platform” meme gets established and CTCT becomes one of those “anointed” situations where the market decides a theme and a stock go together, the IV won’t matter (at least for a while.) Look at what has happened to stocks like OpenTable (OPEN) and Motricity (MOTR.)

For the traders out there, a long position in CTCT would make sense to play the breakout and the potential short squeeze. We’re too focused on our IV methodology to play it but don’t want our conservatism to spoil the fun for anyone else.

[Disclosures: None]

Related articles

• Can (and Should) OpenTable Be Disrupted? (techcrunch.com)

Some of the launch energy of the iPad has ricocheted off Apple and hit Amazon.

Turns out that the iPad is another powerful channel for Amazon although in this case it’s just the Kindle reader software running on the Apple hardware. There are still many who say the Kindle is a better, lighter form-factor for books while iPad fans cite the joy of being able to do music, video and applications in addition to reading.

Either way Amazon comes out a winner. Apple is working hard to expand their titles but Amazon is far ahead in terms of selection. Apple gets to win too because all those applications make the iPad an another easy-to-buy product.

Books are still evolving into the online world. Not being able to share, lend, or resell online books come to mind right away. Of course being online brings important advantages like immediacy, portability and the ability to synthesize information from different books easily.

Many cite this as just another transition like the one we went through with online music. Most people really miss their compact discs or vinyl records. But of course in that transition we were able to import all our old content into the new system so there was little loss. Making incremental purchases of content in a purely digital form seemed okay at that point.

But owning a book today won’t get you a break (in most cases) on the digital edition. Some publishers like O’Reilly, have offered much more innovative approaches like the “bookshelf” concept, where you can pay a flat monthly fee for access to a set of books that you can configure and update as your needs and interests change. It’s very well suited to the non-fiction and technical realm in which they operate. There are newer innovations there too like “rough cuts” which allow access to material in pre-published form and “living editions” which get constantly updated to stay current with changes in subject matter.

There is something special about a book. In a year or two such a statement may seem very quaint. Maybe it’s me. My parents were both librarians and about the only physical possession I miss when moving or traveling are my books. I can’t imagine not owning a physical copy of the OED. It’s too much fun to take out a volume to look up a word. Having said that I realize this probably puts me in the same category as the people out there still cherishing their vinyl record collections and tube amplifiers that generate “real, true, rich” sound.

It’s been easy to resist the Kindle as being an impractical device since it’s limited to doing only one thing. The Apple iPad destroys those arguments since it can do many things like video, music, email, games and runs the Kindle reader software just fine.

In conclusion I think the Kindle paved the way for the iPad but now the iPad will accelerate the adoption of digital books in a major way. Before the iPad I would say “I don’t want to read a 1000 page book on World War I history on my laptop so I’ll order the book.” But now the iPad offers enough of a “laid back book-like” experience to change that decision to a click on the “Kindle edition.”

Good for Amazon, Good for Apple. Good for innovative publishers like O’Reilly.

[Disclosure: At the time of this writing the author owns shares of both Apple and Amazon. The R2 Model Portfolio holds a position in Apple.]

Microsoft (MSFT) said September 30 that it had introduced “Online” services and “Live” services to “deliver connected computing options for people and businesses.” I found the announcement one of the most confusing I ever received from a software supplier, from the odd Sunday timing, to the stark bifurcation the announcement made between “Live” and “Online,” to the sentence after the explanation of why a hard difference between Live and Online was important, which used both terms (“Office Live Workspace is among the first entries in the new wave of online services”). If Online services are something different than Live services, which is Workspace?

In the annual Research 2.0 review, I gave Microsoft high marks for understanding that people are people, whether or not they are in their personal or professional roles at one instant in time. The future for IT-enabled service providers is one of a single compute structure that supports us all as our roles change during the day—from looking for directions on the way to work, to our roles at work (be they individual contributor or manager), to paying the bills at home, to looking for entertainment before leaving work, to shopping online (hopefully not while working), and so forth. The principle applies over longer time periods as well. Scratch my favorable analysis.

In a Q&A session provided by Microsoft, where it both asks and answers the questions, I think I learned some of the reasons for this mixed message:
• The left hand at Microsoft does not know what the right hand is doing. This is a Business-division-only announcement, perhaps not even discussed with others in the company. Either it is all about company politics or top management does not really understand the importance of Software as a Service (SaaS) as well as I thought.
• The Microsoft PR people had an inch of space left on the press release. So just for good measure, Microsoft announced Dynamics CRM for the umpteenth time.
• Some of Microsoft’s product managers wondered what “scale” meant in enterprise computing. They therefore announced that “participating… high-scale environments where students, faculty, staff and alumni (in select universities and school districts) have unique requirements that blend digital work with digital life” can participate in a trial to see if they can figure out any thing useful to do with Exchange. Scale refers to a degree of pedigree, right; as in select universities and school districts are not pedestrian riff-raff universities and down-scale school districts? Couldn’t the Education group afford a separate press release?
• With the retirement of Doug Burghum from Microsoft, there is no one in top management who was involved in marketing to enterprises in the 1990s. Therefore Microsoft didn’t know that the following wording purporting to understand newness has been used once or twice before: “… this new generation of solutions can break through the boundaries between the isolated islands of information within many organizations, while also enabling people to connect easily and securely with partners and customers…” Talk about old news. Do I need an Online service or a Live service to get voted off these “islands of information?”

Oh well, with Microsoft it has always been two steps forward, one step back. This announcement was a step backwards.

–Dennis Byron

Tags: Software as a Service, SaaS, Office, Office Live, Windows Live

Sorry, SAP (SAP), I am a great admirer but Business ByDesign (codenamed A1S) has a few problems. The name is too long, the beta set of users is too small, the price is too high, the reference implementations and demos are too much old SAP, and the channel strategy is too 20th century. The name issue is no big deal; let’s just call it BBD. The others will require a lot of work to overcome because BBD is the linchpin of SAP’s objective of 100,000 users by the end of CY 2010. SAP doesn’t consider BBD to be in “volume availability” until 2008 so there are a few months left to work out the kinks.

SAP says the small/medium enterprise (SME) BBD solution is already helping “an inaugural group of 20 live customers” in the United States and Germany. I’ll have to dig out some old notes but I think SAP had more beta users when it brought Pandesic to the same market with the same delivery-model/channel strategy10 years ago. Given SAP’s estimate of 1.5 million prospects in the 100-500 employee market band (60,000 in the U.S. and Germany alone), 2000—not 20—is the reference threshold it needs to shoot for. SAP BBD is available today for selected early customers in the United States and Germany, with the “opportunity now opening for early customers in China, France and the United Kingdom.” Hopefully there is multiple-thousand-client business in that pipeline given the test marketing that has been ongoing this year. During 2008, BBD is planned for expansion to countries such as Australia, Canada, India, Italy, Mexico, the Netherlands, the Nordic region, South Africa and Spain.

There is good news in the fact that the solution was built from the ground up on SAP NetWeaver. Its host in the Software as a Service (SaaS) delivery model will reportedly use SAP’s own MaxDB open source software database and Unix. But do companies with 100-500 employees even have someone that can use SAP BBD Business Designer?

The indirect channel is of course key to the SME market and the eventual success or failure of BBD. That is not the same as saying it will be sold indirect (such as via telemarketing). SAP needs to and says it will “rely significantly on its partner ecosystem strategy” to drive the SAP BBD offering. The only ecosystem member announced or on SAP’s website as of noon ET 9/19 is ADP. Some of its All-in-One-brand partners were shown on videotape at the press event but that makes channel overlap (SAP used the word “cannibalization” in the Q and A session) a real concern.

And most important, a minimum $4000-5000 per month price tag just does not feel “affordable and easy to adopt.” I am not even sure per-user pricing is even the way to go but I need to do a little more research on that issue. I am guessing SAP’s current SME installed base might be part of the pricing equation. SAP has a lot of customers in the 100-500 employee market band, especially outside of the U.S. That base could be used to build the BBD reference base quickly. But what would extensive customer migration from All in One to BBD do to the revenue flow from those current customers?

As Research 2.0 has discussed in its annual review of SAP, SAP BBD complements the existing Business One, Business All-in-One and SAP Business Suite (nee R/3) solutions. Business One is designed for the small business segment, while SAP Business All-in-One is built “specifically for midsize companies that need deep industry-specific functionality,” what SAP calls microverticals (of which it has hundreds).

The offering puts SAP right up against offerings from its long-time partner Microsoft (MSFT) as well as Inuit (INTU), salesforce.com (CRM) and many others. It will not be just a matter of competing for customers, as SAP is used to. SAP will have to get its BBD ecosystem from Microsoft, Intuit, Lawson (LWSN), Infor, and so forth as well.

–Dennis Byron

Tags: SAP, midmarket, ERP, CRM, SaaS, NetWeaver

There will be a slew of updates and commentary on the BEA World announcements today and tomorrow after the financial analysts are briefed and put out their obligatory notes.

So to save the reading we’d say this:

It’s all fine.  More of the same.  Similar to an IBM.  Problem is the SOA/SaaS space is being more granular and looking for simpler solutions. BEA is a good company with strong products but they are just too much big iron.  We’ve said it for a year or more now but the big bang SOA stack is a non-starter in most places.

To their credit they have introduced the concept of their own microService Architecture (mSA) but it stands as a bit of a contradiction to the BEA SOA 360 degree platform.   As far as just how granular it gets and how well it will operate with other systems remains to be seen in the implementation.

BEA may get a a boost from the virtualization opportunity which is part of what they are positioning for.  It’s probably the best chance they have in the market right now and should be enough to keep them going.

At a minimum they probably can cut a better figure today next to IBM, Oracle or Microsoft versus where they were six months ago.

There were a few puzzlers in the mix including an alignment with Adobe on form processing and SOAAPPS with EnterConnect?!?  Do we really have to clutter up the press releases with sponsor-injected junk?

Tags: BEA, BEAWorld 2007, SOA, SaaS, Software

There are two key questions all the leading information technology (IT) providers are asking themselves in the current industry environment:

• Does the company want to be a technology provider or a services provider (using an auto industry analogy, does it want to make parts like Meridian, or does it want to assemble and sell cars wholesale like Toyota?)
• If a services provider, does it want to service IT departments or end-users?

Oracle had previously been inconsistent in its intentions relative to the technology provider vs. services provider question, but in my opinion Oracle President Chuck Phillips’ recent presentation (April 17 about “On Demand”) gave a strong tip as to where Oracle will come down. He said Oracle was already delivering database, middleware, and application products via Software as a Service (SaaS). Most analysis refers only of applications when it mentions SaaS. Oracle’s delivery via SaaS takes strong advantage of Oracle’s grid computing technology, which lets Oracle deliver multiple users (multi-tenant) support for multiple segregated databases (to avoid commingled data among tenants). Some of Oracle’s grid computing and database features let Oracle do that more efficiently and, presumably, more profitably than a services provider using other server-farm topologies and less parallelized databases. I take issue with Oracle’s claim that no one else can keep the data segregated but Oracle has a technical advantage. In addition, Oracle is making changes to its applications to permit them to be segregated as well. Currently we estimate that the On Demand portion of the business is fairly small and, because most of it stems from the Siebel acquisition, very little prior to this quarter was grid-based. The April 17 announcement signals a shift and should lead to a stronger future SaaS revenue flow. Another thing investors should watch for, in addition to the absolute growth in that revenue flow, is how the revenue is accounted for. As Oracle’s SaaS revenue flow grows, Oracle will go through a process, such as the one CA is just completing, where new-model revenue becomes a larger and larger percentage of Oracle’s revenue total. That new model will cause revenue flow to be smoothed out rather than recognized in the upfront manner that the supplier uses to account for “old-model” perpetual right to use license revenue. This will temporarily depress Oracle growth rates vs. what they otherwise would have been beginning as soon as its next fiscal year (which starts on June 1, 2007) given the same amount of sales activity. But analyzing that accounting issue is a good thing given that it means Oracle wants to make cars and not mufflers. A more detailed analysis of Oracle’s April 17 financial-analyst meeting is included in the Research 2.0 April monthly.  — Dennis Byron

Tags: Oracle, SaaS