Constant Contact Inc's Shares Tank on Lower Guidance. Here's the Good News.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Constant Contact (CTCT.DL) fell as much as 28% on Friday after the company beat on earnings per share in the first quarter, but lowered its guidance on revenues and earnings per share for 2015.

Now what: Here's how the headline numbers shook out:

*Adjusted
Source: Thomson Financial Network, Constant Contact

The revised guidance for 2015 suggests management sees a deceleration in the second half of the year relative to initial expectations. Indeed, first-quarter numbers were in line with (above) consensus estimates with regard to revenues (earnings per share). Furthermore, the company actually raised guidance on revenues and EPS for the quarter in progress. The new range for full-year revenues of $371 million to $377 million is lower than previous guidance of $388 million. Guidance for EPS was established at $1.38; that's now the top end of the new range.

As CEO Gail Goodman explained on the earnings call:

In this quarter we experienced some unexpected dynamics that led to the shortfall in Q1 revenue and drove our reduction in full-year revenue guidance.

First, gross customer additions, while higher than last year, came in lower than what we had expected. That was affected by lower website conversion rates and lower than expected contributions from our solution provider channel. Second, attrition rates increased in the quarter as we experienced higher than expected rates of credit card failure driven by mass distribution of chip embedded credit cards in the quarter.

So what: While some sort of correction was to be expected given the lower guidance, the magnitude of today's stock price decline is a little surprising, at first glance. The company remains nicely profitable -- it expects to generate $40 million to $45 million in free cash flow this year, with $15 million banked in the first quarter -- and continues to grow at a healthy clip. Furthermore valued at 16.5 times forward earnings and just under 20 times cash flow (per research firm Morningstar), the shares don't look all that expensive, particularly relative to small-capitalization peers. I think existing shareholders ought to consider giving the company the benefit of the doubt, look past today's news and continue to hold the stock.