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Constant Contact, Inc. (CTCT) Message Board

  • p.ravda p.ravda Aug 12, 2013 12:26 PM Flag

    Cost of acquiring a sub equals present value of the cash flows from a sub; i.e. no value is being created

    Based on the current, Q2'13, margin structure of the company (TTM gross margins, G&A and R&D) and using the company's official churn rate of 2.2% monthly (which translates into an average subscriber staying 45 months) and the most recent ARPU number, the net present value of cash flows under this scenario is ~$600 (assuming that there is tax paid).
    In terms of subscriber acquisition costs, the company has added ~178,000 subscribers (on a gross basis) during the past twelve months. During that same time, the company has spent $111.6MM on sales and marketing. The simple math would show that the company has spent ~$625 to acquire each subscriber.
    The company is trading dollars, not creating any real value. The company's presentation states a lifetime value of a sub at $900; impossible! Where is the flaw in the above math? They are spending the same about to acquire a subscriber as that subscriber generates in cash flow for the company (using the present value).
    Defenders of the story argue that margins have the ability to improve with scale. Five years ago (FY'08), cost of goods sold, R&D and G&A combined represented 56.0% of sales. In the trailing twelve months, the company was three times the size (based on sales); which should help with the scale of amortizing costs over more subs; however, the same three line items represented 57.9%. The company has made no progress, despite being so much larger, in improving their margins.

 
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