Stamps.com Inc.
Q4 2005 Earnings Call Transcript

Published: 11 Feb 2006

[Operator:]

Good day everyone and welcome to the Stamps.com Fourth Quarter and Fiscal 2005 Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Director of Investor Relation Jamie Harper, Please go ahead.

[Jamie Harper:]

Thank you, welcome to the call today. With me on the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda for the call is as follows. We will review the results for our fourth quarter and talk about the business outlook. Then we will discuss financial results for the fourth quarter and talk about our guidance, but first the Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release contains forward-looking statements such as our expectations and financial guidance that involve risks and uncertainties. Important factors, including the Company's ability to complete its products and obtain regulatory approval, which could cause actual results to differ materially from those forward-looking statements, are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K for the fiscal year ended December 31st, 2004, quarterly reports on 10-Q and current reports on 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now let me hand over the call to Ken McBride, CEO.

[Ken McBride:]

Thank you for joining us today. Today we announced fourth-quarter results that we were very pleased with. We hit our highest total quarterly revenue ever at 20.6 million, which was up 76% versus the same quarter last year. We were very pleased with our fourth-quarter revenue growth, especially in light of the fact that we had a very tough comparative the fourth quarter last year, when as you recall, we saw total revenue growth of 83% in that quarter versus the previous year. Total fourth-quarter revenue included approximately 6 million of PhotoStamps revenue. This is now our 14th straight quarter in a row of sequential revenue growth in our 6th quarter of record profitability. Just a quick reminder to everyone that throughout the call and in general, when we refer to the core business we mean the PC postage business, excluding the PhotoStamps business line. During the fourth quarter, we acquired 85,000 gross new Power Plan customers in the core business. This was the highest quarterly level of Power Plan customer acquisition for us ever, and we were very happy with the performance of our marketing programs. Our acquisition in the fourth quarter last year was 79,000 customers, and then third quarter of this year was, this year being 2005 was 56,000 customers. So we saw nice increase both sequentially and year-over-year in those customer acquisition. We would know that also the Q4 has typically been a seasonal strongest quarter of the year. And we experience similar kind of this year. We also made some improvement to our online registration process, as we discussed on last quarter’s earnings call, and thus improvements helped us during the fourth quarter. Consistent with a high fourth quarter acquisition level, we experienced our lowest customer acquisition cost level in more than 3 years, at $51 per person acquired for the forth quarter. The lower acquisition cost was also consistent with an increase during the fourth quarter and enhanced promotion channel acquisition. As you know that channel has a lower than average acquisition cost versus other discussion in our market channels. We also continue to invest in Direct Mail, and we've acquired a similar number of customers in this channel, as we did during the third quarter of 2005. We continue to monitor and allocate budget on among our alternative marketing channels based on our expected return on investment, and we feel that the cost acquired customer continues to be attractive relative to the expected to the life time value, for all of our channels. Now let me turn to discussion of PhotoStamps performance for the fourth quarter. Today we announced during the fourth quarter we shift and collected on approximately 345, 000 sheets to PhotoStamps, and did approximately $6 million in total Q4 PhotoStamps revenue. This compares to a 105,000 sheets in the third quarter of this year. So we more than tripled our total sheets shift versus the prior quarter. In the first approximately 7 and 1 half months, since we began the second market test in mid may, 2005. We have shifted the total of approximately 520,000 sheets for a total of more than $10 million individual photo stamps. If you include the 138,000 sheets that we shift during the first market test 2004, we have now sold a total of more than 13 million individual PhotoStamps in the total of approximately of 9 months so we had marketing this product. During the fourth quarter, we had full strike with our marketing initiatives for PhotoStamps. And we ramped up several programs that we have been testing during the second and third quarter, and program that we start will very cost effective ways to drive orders for the business. We also rolled out and market hit the product to the several partnerships during 2005, such as Apple, Happy plus, Adobe, Wedding Channels, Mapbase and others. As everyone knows, we invented this product and we were the first and only company to launch a customized postage offering during 2004. But during 2005, two additional companies also begin offering a customized postage product. Based on US Postal Service industry data and our own data, we believe our product, PhotoStamps, represents approximately 81% of the total customized postage sold in the US during the fourth quarter. We think we have the best website, the best branding, the best product and the best overall customer experience in the industry. We are happy with the customers agree and continue to overwhelmingly choose our product over the other solutions in the market. The 81% was down slightly from the 88%, we saw during the third quarter, but we would note that the third quarter stats may have been a bit less accurate an indicator as one of the competitors didn’t launch it's product until several weeks into the third quarter. Our Image Screening capabilities scaled well during the holiday rush. We estimate that we screened over 175,000 images during the fourth quarter. In 71/2 months since mid May in 2005, we estimate that we've screened over one quarter of 1 million images without any images mischaracterization. We feel that we have really developed an expertise and high accuracy Image screening that is unmatched by any company. We are also pleased with other aspects of our operations, such as print and fulfillment. As we continue to consistently shift a high quality product in a timely manner to up the holiday rush. As a reminder, we are currently authorized to sell PhotoStamps in a one-year market test that began in May of 2005, and goes through May of 2006. We have begun the discussions with the postal service about the next steps for Photo Stamps and we encouraged by those discussions so far. We would note that there was a several positive public statements made about the customized Postal program by the upper management and the US Postal Service during its public board of governors meeting last month. We felt that that was a good sign for the longer-term outlook of the program. We would also note that US Postal Service mentioned in the customized Postage program that’s part of their 2006-2010 strategic transformation plan which was published during the third quarter last year, and we also thought that was part of the assignment program. We are hopeful that will have more to share about the future in programs. Now let me turn to the 2006 plan and provide some highlight of that plan. Our 2006, plan as a spending the majority of our 2006 technology development effort totally out an unifying our software platform for continued and future growth in all parts of our business. In order to achieve this new platform you will have to bring together integrate several new technology. First we plan to build a single web presentation and e-commerce system for all stamps.com products and services, by migrating our current homegrown technology under commercial software. This new platform will allow us to advantage of the rich benefit features in the software such as richer cost sales, more effective web cell, automated remarketing better squeeze cataloging and display and we will make these features available across all our products and services. The system will initially run Photo stamps a mailing and shipping supply store and the registration with aspects of our PC postal service, but we will also service the building blocks for our feature stamps.com e-commerce initiatives. As part of the migration to the system we will bring together our customer profile and customer logging systems that we will have a single unified system for our current future customers. We expect this to reduce customer confusion and to improve our ability to cost sales our products and services across all of our various initiatives. Second with the relation to our technology platform plan. We plan to implement highly flexible billing and unified payment processing system, and then integrate that system with our new e-commerce platform. This new technology will allow us to provide more flexible promotion in pricing structures to provide more flexible payment options for our customers hence enhance and optimize our customer collection process. Third in the technology platform plan we plan to add the capability of building multiple uses of access a single account balance in a single geographic location. This is the feature that we believe will be required for us to do about from our current small office, home office or still home offering into larger, small and medium enterprise opportunities. Fourth in our technology plan, we plan to continue to add onto our current enterprise point systems by enhancing features such as centralized administration and centralized control. Finally this part of the technology plan. We will release one major and two minor PC versus client releases during the year. The 2006 plan for the core SOHO sales and marketing area is to continue optimizing our current portfolio of acquisition channels will also working on new acquisition initiatives. We will continue to utilize our traditional channels such as direct mail, enhanced promotion, telemarketing, partnerships and general online advertising and we will continue to focus on optimizing the economics in each of these channels. On the SOHO pricing plan we will continue to approach that we began in 2005, which targets different customer segments with different service offerings that are differentiated based on product functionality. The Pro plan which we previously and now sometimes look all the Power Plan we are continued to be our entry-level pricing plan have $16 premier will be our up sale plan which provide the richer feature that at a higher price. Most customers will receive the Pro Plan as the first and the only plan presented during registration with a subsequent Premier upgrade offer, but we've also been testing Premier as the lead offer some of our channels. The 2006 plan also include the renewed and intensify sales and marketing focus to move upstream to address larger business. Moving to an allocation of managements resources in the Photo stamps initiatives we ended the year did behind on our original 2005 sales team hiring plan. But we will immediately step up our focus in that area. We plan to scale our corporate sales team to headcount 5 to 10 one more by year end. We will only scale the team as we proved that the economics make sense. We have also dedicated a high level marketing resource to this area. We moved our web based enterpriser point feature out of data and that’s service is now in use by several customers. We also plan to focus on the small medium enterprise segment once we have our multiple user product capability at place. Our 2006 plan for our mailing and shipping supplies business as to continue to invest continues in growth in that area in order to make our offering more convenient for our customers and to continue to grow revenue. We ended the year with the catalog around 160 queues up from around 75 queues at the end of 2004. And we plan to increase the total number of queues to more than 500 by yearend 2006. The new e-commerce platform mentioned earlier we will run the mailing and shipping supply store, and we will allow us to effectively market more excuse to our customers. Our 2006 plan in the Photostamps area is to continue investing heavily in growth throughout the year. We will continue to refine the existing marketing strategies and worked during 2005, where work on identifying and optimizing new marketing strategies. We also continue to focus on building the business, the partnerships, like we did during 2005. Also we recently announced that on January 5th president Bush signed a new law which has clarified in our catalog around advertising on US currency called 18 US code Section 475. The new law, amend Section 475 to clarify that the law does not apply to products that are officially proved by the US postal service. Going to the original law the postal service restricted our ability to accept business advertising, free usage on Photostamps during the second market test. The new amendment clears the way for the postal service through a new business restriction once they filled is appropriate. If and when they do remove the restriction, we will begin marketing the Photostamps product for business as well. With all these initiatives in our 2006 plan, we feel that we can continue to grow the core business, continue to grow the Photostamps business at a nice pace. And then we can meet our total top line and bottom line guidance for 2006. Now let me hand the call over to Kyle.

[Kyle Huebner:]

Thanks Ken. First I'll review the fourth quarter customer metrics. At the end of the fourth quarter, we purchased approximately 65,000 non paying customers from our system. After completing some of our 2005 collection initiatives, within these customers to be permanently uncollectible. Of the purge customers approximately 55,000 were Simple Plan customer, and 10,000 were Power Plan customers. The purge was consisted with the plan we had discussed on previous calls. This purge of non-paying customers did not have any impact on our financials as we do not recognize revenue for non-paying customers. Customer accounts, total registered customers ended the year at 349,000 down 33,000 from the 382,000 at the end of Q3, which includes the impact of the purge. Excluding the impact of the purge ending customers would have grown by 32,000 in Q4, and by 16% for the full year 2005. Ending Power Plan customers increase from approximately 284,000 at the end of Q3 to 328,000 at the end of Q4, an increase of 44,000. Excluding the purge Power Plan customers would have increased by 54,000, the Simple Plan conversion process contribute approximately of 11,000 to the growth in Power Plan customers, ending Simple Plan customers decreased from 98,000 at the end of Q3 to 21,000 at the end of Q4,.a decrease to 77,000. Excluding the current Simple Plan customers would have decreased by 22,000. We have most other away to the Simple Plan conversion process and expect to complete that process in Q1 '06 as original schedule. Power Plan customers that's accounted for 94% of ending Q4 customers. We are including Premier customers in the Power Plan numbers of that. We ended the year with approximately 9,000 Premier customers. We successfully billed approximately 300,000 unique customers during Q4. Customer acquisition, we fired 85,000 gross new registered customers in Q4 up strongly from 56,000 in Q3. Total customer acquisition's spend which includes both marketing spend on the core business as well as promotional spend which is included in cost to sales, was $4.3 million in Q4 compared with $4.5 million in Q3. Customer acquisition cost was $51 for Q4 compared with $80 for Q3. As Ken discussed, the increase in acquisition and decrease in acquisition costs were primarily driven by seasonality and the shift in marketing program mix. Customer churn, Average monthly trial churn, which represents the churn rate for customers leaving during the 29-day no-risk trial period, was 26.8% for Q4 compared with 26.4% for Q3. Average monthly base churn, which represents the churn rates for customers who stay past the trial period, was 3.2% for Q4 compared with 3.8% for Q3. Customer usage, Postage printed by customers was 53 million in Q4, up 21% compared with 44 million in Q4 last year. Total postage printed by customers for fiscal 2005 was approximately 190 million, up 23% versus 2004. Now, I will review our fourth-quarter financial results, which exceeded our expectations. We are very pleased to report our 6th consecutive quarter of record profits, which we believe continues to demonstrate the inherent financial leverage in our business model. Revenue was 22.6 million in Q4 compared with 15.3 million in Q3 and up 76% from $11.7 million in Q4 last year. PhotoStamps accounted for approximately 6 million in revenue and the core business accounted for approximately 14.7 million. Q4 total revenue mix was 58% service fees, 9% store, 29% PhotoStamps, and 4% insurance, licensing and other. Service fee revenue of $11.9 million was up 45% versus Q4 last year, driven by growth in the customer base and the increased mix of Power Plan customers. Online Store revenue of 1.9 was up 17% versus Q4 last year, driven by our continued growth in the customer base. Gross margin for Q4 was 70% compared with 73% for Q3. Cost of sales included promotional expenses of approximately 280,000 in Q4. Promotional expenses for the quarter included a one time reduction in expense approximately 250,000 related to cost reductions we achieved in the price of our promotional scales. Core business gross margins increased from approximately 78% in Q3 to 82% in Q4. Gross margins increased due to the continued operating leverage from our revenue growth and from the one time promotional expense reduction I mentioned. PhotoStamps gross margin increased from approximately 34% in Q3, to 41% in Q4. We achieved some scale economics in the gross margin line with the large Q4 revenue base compared with Q3. As a reminder, with PhotoStamps, we recognize the postage face value in both the revenue and cost of sales, unlike our core subscription business, where postage face value is not a part of revenue or cost of sales. The reason for the different treatment is that with PhotoStamps, we take possession of the postage market up and resell that the customers, whereas the core subscription business, postage purchases go directly from the customer to the USPS. Sales and marketing spend was 6.7 million in Q4 compared with 5 million in Q3. The increase in marketing was primarily driven by new marketing spend related to PhotoStamps. R&D spend was 1.8 million in Q4 which is comparable with 1.7 million in Q3. G&A spend was 2.3 million in Q4 which is also comparable with 2.4 million in Q3. Operating income for Q4 was 3.6 million, which represents an 18% operating margin. GAAP net income for Q4 was 4.1 million or $0.17 per fully diluted share based on a 24.0 million fully diluted shares outstanding compared with 2.6 million or $0.11 per fully diluted share in Q3. EPS grew by a 176% versus Q4 last year. Free cash flow, defined as net income plus D&A, less CapEx, was positive 4.4 million for Q4. D&A for the quarter was approximately 670,000. CapEx for the quarter was approximately 400,000. We ended Q4 with approximately 104 million in cash and investments. In calculating the total cash and investments and calculating the total cash and investments we are including cash, cash equivalence, long-term investments, short-term investments and restricted cash. The 2005 Financial result summary, total revenue for 2005 was $61.9 million, up 62% over the $38.1 million in 2004. Core business revenue was $53.9 million up 48% over the 35.8 million in 2004. Further sales revenue with $ 8.9 million up 283% over the 2.4 million in 2004. Total gross margin for 2005 was 72% versus 65% in 2004. Core business gross margin with 77% versus 67% in 2004 total sales gross margin with 38% versus 36% in 2004. GAAP net income for 2005 was $ 10.4 million or $0.44 per fully diluted share based on a $23.7 million fully diluted shares outstanding, compared with a loss of $ 4.7 million a $0.21 per weighted average share in 2004. Now turning to guidance, we see over revenue in EPS are the most important metrics for the company. We planned to optimize our investment across our business opportunity both core business and Photo Stamps, so as to maximize our long-term profit and bottom line growth, and such we will no longer be providing customer metric guidance on our calls. We will still be reporting historical customer information as appropriate. We expect that fiscal 2006 revenue will be between $75 million to $90 million this compares with previous guidance a $ 65 million to $ 75 million. Note, that in setting our revenue guidance, we consider the possible range of outcomes for PhotoStamps following the current market test. We expect that fiscal 2006 GAAP EPS will be between $0.53 to $0.63 per fully diluted share. This includes an estimated $ 3 million, a stock base compensation expense, related to the adoption FASB 123(NYSE

[Operator:]

Thank you, Ladies and Gentlemen now in order to ask a question today simply press "*" "1" on your touchtone telephone. Once again "*" "1" for your questions or comments at this time, we will pause for just a moment, some of the question queue. Okay I’ll take a first question from Mark Monane with Needham & Company

[Mark Monane:]

Okay, thanks a lot fabulous numbers let see. I ask several questions that company ask. I think I miss this CapEx was 400,000 on the quarter, did you give the cash flow from operations number. The other question, you mentioned, that you are no longer going to be giving since our customer metrics guidance, does that been that on the actual calls or you sees together as customers - actual numbers for the quarter, just want to clarify that and PhotoStamps margins obviously up quite a bit in the quarter. What should we expect going forward, I understand that you, it took a price, your cost increased obviously for that product in January, but you also raised your price to the consumer, I think more than that you going to get some margin boost from that, but just that on, do you use 41% as the base and move forward and, I could ask a follow up that would be great?

[Kyle Huebner:]

Okay. Let me start with that first one, in terms of the cash flow we typically give the metric of the pre cash flow as I defined it. In terms of the cash flow from operation, our working capital requirements are not that significant and those tend to fluctuate all of that much so, kind of free cash flow although it’s a good proxy for the operating cash flow.

[Mark Monane:]

And move with that number again I am sorry.

[Kyle Huebner:]

4.4 million.

[Mark Monane:]

Okay, thank you.

[Kyle Huebner:]

That D&A was 670,000 CapEx was 400,000.

[Mark Monane:]

Okay thank you.

[Kyle Huebner:]

If you look at the increase in cash in total investments that really that the difference between total increase and the pre cash flow was cash inflow from option exercises which was about 3.5 million for the quarter.

[Mark Monane:]

Okay thanks.

[Kyle Huebner:]

Second quarter in terms of the customer metric guidance we, as we go forward, we will continue to give customer metrics on a historical basis, as they make sense to represents the business so, we would expect to give our traditional customer metrics going forward on a new historical basis.

[Mark Monane:]

Great and then on the PhotoStamps margins.

[Kyle Huebner:]

Yes, at least if you look at Q4 one of the things in terms of the price increase on the new postage rate, we made those rate available as an option to the customer and agree at the exactly but in the beginning of September so, some of the Q4 PhotoStamps volume in our corporate business, some of the customers offset to get the $0.39 postage for the photo stamps, if you look at our revenue base you know tripled really from Q3 and Q4 so lot of the Photo Stamps coast are bearable but in tripling our revenue we obviously got some leverage out of that line, so what I would say looking forward is depending on the seasonality and revenue level 2006 I would say would be comparable grows margin to slightly up for the year but that the quarterly patterns may vary more as in our Q4 was clearly a very strong seasonal quarter.

[Mark Monane:]

And I guess you speaking of seasonality in that business, you probably generated quite a bit of new awareness for that product, you don’t have a lot of history with that, in January and the first week of February, what is been the consumption of that product view, or we going to see a severe seasonal downtick you thinking Q1 or might have not be as severe as you might think.

[Kyle Huebner:]

We typically don’t give out into quarter sort of numbers your metrics, what I can say is that we definitely incorporated the trend in the first five weeks in coming up with our guidance forecast. Qualitatively I might say that we do expect Photo Stamps revenue will be down sequentially but not down to the sort of levels freed holiday season.

[Mark Monane:]

Okay that would still be impressive, so question about some of the technology investments that we are making share which I were that was, the great backgrounds I appreciate that, just try to give us a sense of when some of those benefits will kick in what's the timing of that and store revenues have been relatively flat for few quarters, what sort of, what do you expect to the run rate in that business would be as we accept your could, do you think that you can double the revenue run rate in our business as a result of some of these improvements that we are making.

[Kenneth McBride:]

So I will take the first question may be on, okay I will take the second one again So we added technology platform its going to consume most of our effort for the whole year but we really bringing portions of it online throughout the year so there is some improvements that will hit the first half of the year and then some improvements of what hit the second half of the year so, we do feel that its going to be a great investment in the future of the company and it allow us to really simplify and improve a lot of our processes and whole together our user database and now make it for the customers can login to any of our properties from PC postage to PhotoStamps to the online store and mailing and shipping supply store in the other featured steps we have with the single, single sign on process, single customer profile.

[Mark Monane:]

Is it fair to say that the immediate benefit with some of that from the those changes in terms of immediate revenue would stored be for the first place we started actually see a director show up in that on P&L.

[Kyle Huebner:]

I mean I would say don’t expect anything benefits that really happen into and probably in third quarter realistically, but in terms of what kind of look at all the different business lines and the store we have talked about in past is certainly an area where we feel to discuss some limitation in our existing technology and we have talked past about moving of our homegrown product that’s really win 32 apple based inside our current client moving all that homegrown product onto more commercial software which is the same commercial software we used in the PhotoStamp size. So its really making our mailing and shipping supply store more like PhotoStamps, and when you look at the existing store it’s a top based to Win 32 structured that you can only really display a very limited number of squeeze. There is no great such capability either no good cataloging organization so really don’t feel like having more squeeze its going to really change sale a lot because of the limitation that stored until we get platform and then once we do you get proper with the on more effectively market to broader and per squeeze with my customer.

[Mark Monane:]

And if I could just ask one last question.

[Kyle Huebner:]

Actually Mark I could add what over that to, if you look at Q4 store revenue was up 17% year-over-year while the customer base which effectively up 16%. So however you are seeing is Q4 that the store revenue growth in the yearend the customer base growth I think generally speaking you know that should be the cases we move forward until we get the second half of the year, and then start to seeing some of the changes that the Ken is talked about. In terms of this, in that point then we would expect revenue growth to be in higher than the customer base growth. In terms of squeeze the majority of what we sell today are more proprietary squeeze. So as we go to add these additional squeeze were adding more non proprietary squeeze in the mailing and shipping supplied area. So I definitely think increases in the squeeze its going to help contribute to revenue despite it might be to lot of degree given where we are moving out into more non proprietary as squeeze areas. And then the other thing I would mention as we did see around the Postal rate increase would little bit bump in the store supplies, it is couragely due to, people meeting to print two cent Stamp meeting label supplies to do that so we did see in January little bit bum around the rate change.

[Mark Monane:]

Okay great and then if I could just ask one last question I was interact by your comment I think it was tends to comment about testing premier as main pricing plan. And I am just trying to get a sense of how this testing have gone and is the initial response we have seen not where can actually start to see another sort of another stage of increase in the business this year. I likely saw in the last 10 year so.

[Kenneth McBride:]

This is Ken, like I'll follow up, additional on that so we were like I can mentioned in the prepared remarks that the pro plan and what we used call Power Plan is still entry level pricing plan with vast majority probably over 90% of our acquisition. We are focusing on giving people end of the service that point not really providing choice of different plans and once again that service we start to tell them either there is breaking out more rich feature set that you can add some of these capabilities including ability to prints x-labels and certified mail faster prints pieces may be more appropriate for your office and other capability like that. And I am trying to get them to at that point move up into higher level. We found know that in some cases certain maybe certain verticals and another areas premier is the natural choice, because it's a potentially maybe a heavy user of Fed-Ex or heavy user of Certified Mail. And so that in those channels will go ahead and feature premiere as the main lead offer, with Pro has more of a dropped out at that point?

[Kyle Huebner:]

And I would, yes I would add more little bit in terms of that testing, the way we look at the business is really measuring that for the customer’s life time value, relative to the cost to acquire, and so, in the subscription model you really need to measure that turn rates over a period of time to come to, definitive sort of comfortable level that, what your testing is better than the existing, so, at this point I would still say, we typically, I should see 6 months to 9 months of turn data if you are feel really comfortable with the answer so, I would still characterize, I say, and being in the test age monitoring and turn levels, but it something that If that works certainly could be something that we utilized going forward.

[Kenneth McBride:]

Mark you are done?

[Mark:]

Yes, we could spend,

[Kenneth McBride:]

Okay, And list there, there are no other questions I’ll ask another one to, all your ending 21,000 simple plan customers at they all now paying, are there any trail and on paying customers?

[Kyle Huebner:]

Effectively, I would say, essentially all of them are paying, what I would note there is, we’ve essentially completed the process, and going forward their, they are always be some segments of customers on a price plan less than 1599, and primarily, simple plan customers that we, save through a, it have really dropped down offer during the conversion process. So, essentially, I would say essentially all of them are paying, and that’s we complete the process and we land up with some segments go on with the simple plan.

[Mark Monane:]

Okay. Thanks.

[Kyle Huebner:]

Thank you.

[Kenneth McBride:]

Next question I believe.

[Operator:]

With us now Justin Cable of B. Riley

[Justin Cabel:]

Thanks. On the PC Postal side service margins were pretty strong, but I know that, fairly talk about pricing on the scales. Is that continue going forward or is that kind of one time event or what was we, how should we think about the service margins going forward?

[Kyle Huebner:]

Specifically, the promotional part, essentially, the way our promotional offer works is, is new customers coming in, get a two binds sufficient routine being for free scaled base they test the trial period. That two bind is good for 12 months, so, what were essentially doing is the making an estimated the number of customers that will ultimately redeem the two bind, and we carry that as the essentially a liability, so that's the cost of the scale. So, when we achieve the cost savings we effectively re-value the expected cost of the redemption that the new scale price, so that component constituted here what I call, a one time adjustment. We will get the benefit of the way were scale price going forward. And in terms of looking forward, and they probably the best Proxy, as looked at the total promotional expense for 2005, here relative to the total customers acquired. The customers acquired really that number that drives that, and in that range of kind of $8 dollars per new customers acquired is the, I think is a good Proxy. So if you look at the service margins overall, we now excluding the promotional year end kind of 80% range. As we continue to grow the revenue, over the last couple of years, we have seen expansion and the service gross margin, and relative to that revenue growth. Looking forward as we expect to continue the revenue growth, for a revenue I think there is over some margins if expansions potential, but it would, I classified this kind of smaller and more incremental relative just sort of the games we’ve seen over the last 3 years.

[Justin Campbell:]

Okay, that’s helpful. And in terms of the ’06 guidance, so the low end and its basically assuming that Photo Stamps programs stops in may, just sort of underlying assumptions and then the higher end assumes that’s its continues with the full year?

[Kyle Huebner:]

Yeah, I would strictly characterize at that way, as I set, when we set the guidance, we worked as sort of a possible range of outcomes for further stamps, here and after that current market task. I wouldn’t though interpret the guidance range to be strictly, the well went to the range to be in the scenario, how much PhotoStamps that we continue, and high end of the range representing the scenario, and which it does continue. As we go through and get more clarification, what will optimize our marketing spend and our investments with business appropriately. So, it’s probably fair to say, it picked a midpoint in the range with PhotoStamps continues one thing at yield more towards the midpoint that above and, PhotoStamps doesn’t continue, it might likely be sort of midpoint and below.

[Justin Cable:]

Okay, thanks. In terms of the premiere customers that you have now, I believe all at last all of those customers were sort of on a trial basis, are they paying customers now?

[Kyle Huebner:]

So, the 9000 that we ended with, there is really a queue two buckets and for those customers, the first bucket is the existing customers that we converted over, all those cost customers here in proactively adopted, proactively opted into the Premiere plan and, are paying at the Premier price. The second bucket of customers are the new customers that were acquired on that originally on the Premier plan, we start at the testing kind of whether in Q4 or so, those customers signed up this Premier customers, lot of them were technically still in their trial period so, they technically haven’t been billed yet but, we would expect them to be paying at that 2499 price point and once they turned off before the trial ended.

[Justin Cable:]

But at least the first bucket they are paying at their higher?

[Kyle Huebner:]

Yes they are.

[Justin Cable:]

Okay. Last question I have just, use of cash in the mean time generating the high operating margin now with cash flow, cash will continuing to build any plans to use their cash?

[Kyle Huebner:]

Yes, I think when we look at it, we look at in evaluate or, the use of the cash, there are maximize shareholder value, we have a repurchase program in place. We also may consider investment that in additional business opportunities or, a strategic acquisitions down the road it will make sense so, I would say, we are generally, just looking at all the options there are maximize shareholder value but, we don’t have any sort of immediate plans for, anything that wouldn’t significant impact on the overall cash level.

[Justin Cable:]

Okay got it. Thank you

[Operator:]

We will go now to George Sutton with Craig-Hallum.

[George Sutton:]

Hi guys, you mentioned that you were now out of date on your enterprise offering, I wondered if you could give us any sense of what the experience of those paid at the customers was, any sense on sort of the size of those account from revenue per month prospected?

[Kenneth McBride:]

I will take the first question, question called the second. Yes it is. The core enterprise I think its really fair to characterize it is a feature more than a product, so its really, its really that’s something that we offer to the customers who have vast locations, did allows them from the web-based interface to get a log in and track the information across all the locations, so they can give a forth by purchase to best printed or, other various financial reports. So I think it was, its really it’s out of data, but its version 1 of where we planned to go so, its basically the just enough, we think to start the market capability to those types of opportunities going forward, I mentioned in the prepared marks that were looking at adding new capabilities into sort of the where we maybe you characterize as the centralized dashboard for a centralized decision maker where you can potentially add in and to track the user very eagerly you could set when the notation on users in terms of usage or in terms purchased, when that things like that so boozier type of things that working on this shares , no that kind of thing that we heard from our data customers will be, nice to have down the road and so that's what the, that's how we formulated part of our, what we're doing share in the plan

[George Sutton:]

And then kyle was I think I'm follow up but

[Kenneth McBride:]

Yeah kyle did you?

[Kyle Huebner:]

In term of revenue for customer , that really driven by primarily the number of location that , the customer has and so as we mentioned on the last call , we see in this space that , from a pricing perspective or lot of these will be, cost and negotiated feels based on the number of locations so that's it's not a metric , I going to a specific number for but conceptually you can thinks , whereas , the number of locations be invest the primary drivers of the revenue for that corporate customer

[George Sutton:]

Okay with respecting hinds marketing channel which take back at this quarter and obviously had been difficult the prior couple of quarter what changed in the quarter from your perspective

[Kenneth McBride:]

Well , I think there is some seasonality in that channel just like most of our other channel we mentioned that the , we mentioned on the last conference call and also in this conference call , that we to make a improvement in our registration process kind of stream line of process and made it simple for the customers and because they enhanced promotion channel is , is an online channels improvement to being able to get customers through our registration process recently help in terms of being able to increase the conversion and therefore increase the total acquisition though that channels Cale you have any additional sort of thought on that

[Kyle Huebner:]

Hey, I think that cover's that

[George Sutton:]

Okay I was surprised you will no longer provide customer metric guidance just, was curious, of that process behind that

[Kyle Huebner:]

I think that as I would say , now that we have multiple business opportunities were pursuing we're really looking , how did you optimize our investment across in those multiple opportunities and what you have as a result are , what I call different scenarios that can play out , that allow us to meet that , in those revenue and you can have objectives and so you know I think its something were we know wanted to get the situation were we giving guidance customer metrics guidance for one business and , that why we decide to shift the market expand to , a different business from the core business to photo stamps we feel that's the best thing for the overall business but that were , resulting and potentially metrics are being off from , the one specific ID's on the customer metrics so i think its just reflective the fact that as you pursue multiple business opportunities we won't have flexibility to optimize our marketing expanded in the area that generates the best or allied for the overall business

[George Sutton:]

Got you okay and then lastly with respect to the simple plan will that the effectively shut off at the end of Q1 or everyone have converted over I guess?

[Kyle Huebner:]

As I mentioned that by the end of Q1 sort of everybody will have been notify and effectively converted , effectively put out to the power plan with the exception there will still be a bucket of customers that , I'll talk simple plan but its essentially customers on a price points something less than 50,99 with those customers we are primarily people that we see it from share earnings through drop and offer million, that might have been lower price point will it 12 month commitment or something in that nature , so I think at the end of Q1 there is still will be a segment of customers that , that quote on a plan been last in the 50,99 price points

[George Sutton:]

Okay one last question with respect to the base trending down quarter-over-quarter obviously the direct mail out in the pervious quarters I assumed hope that number , how do we think about the enhance marketing channel picking up for that number going forward

[Kyle Huebner:]

Yes if you look at the Q4 number I think its two of the benefits that we saw where one is the seasonality aspect that’s our value proposition in Q4 is with all stronger with your longer way to hit the post office so there, some more lots of inclination that to charge and then as you mentioned that the previous spending on the direct mail I think benefit in Q4 terms of the enhanced promotion typically there is a lag impact between acquisition and when you see in the shown numbers so I think it is far to say that with the increase in the online acquisition during Q4, we would expect a somewhat higher shown rate in Q1.

[George Sutton:]

Right okay thanks guys.

[Kyle Huebner:]

Thanks George

[Operator:]

And ladies and gentlemen it is the time to shrink we will take our final question from Russell Hoss with Roth Capital Partners.

[Russell Hoss:]

Congrats can all hear

[Kyle Huebner:]

We are please

[Russell Hoss:]

On total stands is quickly, did you guys see any disable trends I guess between kind of self consumption or use sort of tense as gifts?

[Kyle Huebner:]

Yeah, we actually we just pat of our process with the postal service more talking about next steps where we are also trying to figure out the usage of the product so that we can better characterize and bucket new versus substitution revenue so to what extend our people taking Photostamps and putting them on. Mail that would been sent otherwise or sending the letter, sending email relative, versus electronic one or giving us the gesture or making at a collector item crap book so we did you some characterization and at the go estimate that we some more between 40% and 50% of USPS revenue which was about $4 million for 2005 that’s the phase value about 40% to 50% that was new revenue included that in that bucket is things like gifts collective items.

[Russell Hoss:]

Okay and can you comment on big part of the marketing revolves around partnerships, can you talk about specific channels where there was strength on the marketing side partners if you think some online advertising pictures such that

[Kyle Huebner:]

Yes, we did, we did with wide variety of things during the quarter including the partnerships that I mentioned in the prepared remarks, partnerships like snappers where, snappers is one of the leading names in sort of sharing and we basically been enjoying the marketing with them on the Photostamps to their Snappers customers where about a year now is been a very great partnership for us Hubbell and Cap-A brass in some of that I want mentioned have all been great partnerships, with that’s definitely a part of our strategy continuing to try to partnerships moving forward, I think it’s there national area for the product that to make sense given that fact that it works obviously with digital images so use of a digital camera and then photo sharing usage of user photo, photo, digital photo, software so with those types partnerships were nearly focused on, I am continuing to build relationships on the marketing fund I think we its kind of taken high level we continues to be lot of online and offline initiatives but for a competitive reasons to really haven't given a lot of detail about worst strings our weaknesses may be in the different areas of marketing.

[Russell Hoss:]

Okay and I would suspect as part of the business advertisement initiative is a big part of that going to be turn across so and are do you have to wait and tell your platform is fully integrated before you can do that?

[Kyle Huebner:]

You been cross over between PC postage.

[Russell Hoss:]

Right

[Kenneth McBride:]

No, I mean not necessarily it will certainly be better when it’s a mostly, most experience for the customer but for preferences today if you are busy postage customer and you want to buy Photostamps you have to essentially registered for you information and get a new username, password so not the best experience right now for trying to cross sell customers from PC postage over into Photostamps, although we have, we do feel that we been able to successfully do that to some degree and we'll continue to do that if and when the postal service kind of give us the ability to start accepting the business advertising. Post the kind of that the platform we talked about it will be easier because there will be a centralized user profile and centralized user authentication information that will be, you wont have to go to that re-registration process so it will be easier to cross with that point.

[Kyle Huebner:]

Now the other thing I would add, when you talking about larger Company we were, that’s more of a direct sales model so the direct selling to our capability unit has give you the ability that, that cross sale before the technology platform improvements been talked about.

[Russell Hoss:]

Okay thanks guys.

[Kenneth McBride:]

Thanks.

[Operator:]

And ladies and gentlemen that does concludes today's question and answer session. Gentlemen I will turn it back over to you if any additional or closing comments.

[Kenneth McBride Chief:]

Well thank you for joining us today and if you have any additional and follow up questions our investor relations line is 3104825830. Thank you.

[Kyle Huebner:]

Thank you.

[Operator:]

Thank you. Once again ladies and gentlemen that concludes today's call, thank you for your participation, you may disconnect at this time.