We have been following Constant Contact (CTCT) since early 2011 because it’s a rapidly growing online marketing software and services company and we have had a strong interest in marketing and branding related concepts. We were impressed that it became a profitable company in 2010 and because it released its deferred tax asset valuation allowance in 2011, which will save it $13.8M in future cash payments on its corporate income tax expense. We were tempted to enter into a position in the company last year and early this year, even though the company has a high PE, because we figured that the company’s growth momentum would help keep pushing the shares higher and higher. It’s a good thing that we had been able to stall our organization from taking a stake in CTCT because its $11.93 share price as of October 26th is off 67% from its April 2011 highs of $36.33 – and this includes the impact of a 30% sell-off on Friday October 26th. Because CTCT’s share price has been slammed, we find it to be a more attractive potential opportunity now versus last year.
In the Q3 period, Constant Contact saw its revenues increase by 17.5% in Q3 2012 versus Q3 2011 and by 18.5% in the YTD 2012 versus the YTD 2011 period. While at first glance this is impressive (even for a small-cap company), we are mindful of the fact that Constant Contact has been spent $85M on acquisitions over the last 21 months and that is a significant amount relative to the company’s market cap of $254M as of October 26th. We would be interested in seeing what the company’s pro forma revenue and profit levels would be assuming the combination of CTCT and its acquisitions at the start of the prior fiscal year. That is probably the one thing that we miss about the pooling of interest accounting method because this way, we could see if a company was growing through organic operations growth or through acquisitions.
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