Nearly every week seems to mark the birth of atleast one new tech IPO star, but a close look at recent debutante Constant Contact ( CTCT) shows that not all areburgeoning with the same promise.

Constant Contact has spent years building up astrong business and market footing in anoverlooked sector. Its reliance on a Web-based, on-demandproduct seems to resonate among not-so-tech-savvyclients who want an easy way to keep in touch with their own customers.

Like iMergent ( IIG), whosestock has been volatile over the past couple of years,Constant Contact offers a hand-holding relationship to small companies, from wine stores to individual "power sellers" on eBay ( EBAY), allowing them to use a browser to send email updates and newsletters to contact loyal customers.

And that,combined with the popular on-demand model, seemed to beenough to drive the company's stock to $30 the day afterits debut last week, nearly double its offering priceof $16. It's only the latest in a host of tech companies to havegone public since August and see their stock rise morethan 50% on the first day.

The stock was trading recently at $26.19, off 2.8%.

But there are some factors that make thehigh post-IPO valuation seem puzzling: Despite itslengthy history, the company is still posting losses,and rather than benefiting from the economies of scalethat other on-demand companies are seeing, some costsare rising.

Revenue in the first six months of 2007 was up ahealthy 78% to $21.1 million. That rate was below the84% growth in customers, because of a dip in revenueper customer to $33.44 from $34.46 in the year-agoperiod.

That's not a huge drop in money per customer,but it's never good when this metric isn't trending higher.

Constant Contact's cost of revenue remained at28%, which was flat with the year-ago ratio, becauseof "an 84% increase in the number of average monthlyemail marketing customers which resulted in increasedhosting and operations expense and customer supportcosts."

This is notable, as Constant Contact has yet to seethe benefits of economies of scale created by other recenton-demand companies that have gone public. Athenahealth ( ATHN), for example, also focuses on small operations -- in itscase, doctors' offices and clinics -- but it's profitableand seeing margins rise.

Constant Contact is also seeing other expenseitems grow as a percentage of revenue. Sales andmarketing expenses notched up to 61% of revenue in thefirst half of 2007 from 60% of revenue in the firsthalf of 2006. This isn't surprising because thecompany relies on marketing to snag new customers.

But it also saw a rise in general andadministrative costs to 11% from 9% in the sameperiods as these costs surged 120% to $2.4 million.It's not clear why hiring is happening faster herethan in R&D or marketing. The company only says itneeds more administrators as its business gets biggerand more complex.

What's more, given the low barriers to entry inthis industry and the growing competition, the level ofcustomer discontent is a little worrying. Theprospectus lists an array of current and potentialcompetitors, from small players like VerticalResponse and Broadwick to bigger playerslike Acxiom ( ACXM) and Experian and potential entrants like Microsoft ( MSFT), Google ( GOOG) and Yahoo! ( YHOO).

Constant Contact says that fewer than 3% ofsubscribers cancel in a given month, so any discontenthas yet to manifest itself in significant churn. Thecompany spends $300 to acquire each customer (three ofevery five dollars it makes goes to marketing alone),so a customer has to stay with CTCT for ninemonths for them to break even.

Constant Contact takes great pains to avoid beingseen as an Internet spammer. Not only would such a designation tarnish thecompany's brand, it would cause Internet service providers to filter out itsemails. As it is, 97% of emails sent out from ConstantContact to its clients' own customers make their waythrough existing spam filters.

But keeping spammers away isn't easy, and ConstantContact's own message boards show some customerswondering what they did to be labeled spammers;other forums echo these complaints.

Of course, there are many positive commentsabout Constant Contact as well. But at least some ofthem are from people who work at Constant Contact.Some of those have in turn been bustedby bloggers who noticed that the raves were comingfrom IP addresses that were identical to thecompany's.

Investors might want to keep an eye on two thingsat Constant Contact: how long it will take for coststo come down, and whether these customer complaintsremain in the minority. It will be only too easy forcompetitors to lure them away.

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