Stamps.com Inc.
Q1 2007 Earnings Call Transcript

Published: 20 Apr 2007

[Operator:]

Good day, and welcome to the Stamps.com First Quarter 2007 Financial 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 Mr. Jamie Harper. Please go ahead, sir.

[Jamie Harper:]

Thank you. With me on the call today is Ken McBride, CEO; and Kyle Huebner, CFO. The agenda for the call today is as follows; we will review the results of our first quarter and talk about the business outlook. Then we’ll discuss the financial results for the first 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, financial guidance that involve risks and uncertainties. Important factors, including the Company's ability to complete and ship its products, maintain desirable economics for its products and or maintain regulatory approval, which could cause actual results to differ materially from those in the 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, 2006, quarterly reports on Form 10-Q, and current reports on Form 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 the call over to Ken McBride, CEO.

[Ken McBride:]

Thank you for joining us today. During the first quarter, we did $20.0 million total revenue, which was down 3% from the same quarter last year. The PC Postage business was up 1%, while the PhotoStamps business was down 18% versus the first quarter last year. Within the PC Postage business service fees were up 2% and the mailing and shipping supplies store was down 1% versus last year. Our net income excluding the 123R-related stock-based compensation was $3.5 million. Earnings for fully diluted share came in at $0.16, excluding the 123R expense. We thought that earnings were very good in light of a very large increase in our Q1, PC Postage customer acquisition spend, which we increase by 23% versus the first quarter of last year, and by 32% versus the fourth quarter last year. On the call today, I’ll first talk about the PC Postage business in detail and then I’ll talk about PhotoStamps, before handing the call over to Kyle. Let me begin with the more detailed discussion of the PC Postage business and then give an update on the plan for the PC Postage business for fiscal 2007. During the first quarter, we added 55,000 new paid customers in the PC Postage business and we lost 50,000 paid customers, resulting in an increase during the quarter to our net paid customers by 5000. During the first quarter, we experienced a registered customers acquisition cost of $68 versus $51 in the same quarter last year. The increase year-over-year was primarily due to an increase in spend on direct mail in the first quarter. Our mailing and shipping supply store revenue was down 1% in the first quarter year-over-year. We had a very tough compare on the first quarter of last year where we saw a very large increase in revenue owing to the USPS rate increase in January 2006, which drove an unusually high sales levels for NetStamps levels in that quarter. In the enterprise PC Postage area, we continue to make good progress during the first quarter. The total number of enterprise seats successfully build, in the first quarter, grew by approximately 350% versus the first quarter of the prior year. Even though the growth was on a small starting base, we were encouraged by our continued progress in the enterprise area. Let me now turn to the 2007 plan for PC Postage and provide some updates in that area. We are on target with our initiatives this year as outlined on our call back in February. Let me review some of those initiatives now. First, we told you that we plan to increase our investments in all of our existing profitable marketing channels, wherever we can. Based on our analysis last year, we think the lifetime value of the direct mail customer, is more than two times higher than the cost of acquisition. Based on that outstanding return, we told you that we plan to increase our investment in this channel by 50% or more in 2007. We dropped a significant amount of direct mail in the first quarter. Note that the benefit of this direct mail spend will mostly hit future quarters. Early indications are that our cost per acquisition in direct mail continues to be very attractive even with the dramatic step-up in volume. Despite the short-time earnings depression in the first quarter and for 2007 as a whole, we feel that this increased investment level continues to be the right move for the long-term growth of our PC Postage business. For the enhanced promotion channel, we continue to see attractive returns and we plan to continue to run this channel until we no longer find the returns to be attractive. During the first quarter, we saw higher than expected acquisition in the enhanced promotion channel, which we were happy to see. Overall in first quarter, we increased our PC Postage customer acquisition spend by 23% versus the first quarter last year that also increased by 32% versus the fourth quarter last year. As we scale to spend, we continue to feel that the cost to acquire customer continue to be attractive relative to the expected lifetime value for all the channels. Second, in the 2007 plan, we told you that we plan to continue working on developing new acquisition channels. We started testing several new programs in first quarter, and plan to continue to test new acquisition programs throughout the year. We will be focused on identifying channels that can bring in customers at a low cost per acquisition relative to the lifetime value of the customer. We are also focused on finding channels that allow us to scale up the acquisition at attractive economics. Third, we told you that we are going to continue our focus on optimizing our conversion rate from prospective customer. Optimizations of our website and registration process pay dividends across all of our marketing programs. We are working on some optimizations that we expect to begin testing during the second quarter. Fourth, we told you that we are going to focus on improving our overall customer experience during 2007. This year, we are really investing less on future expansion and more on improving our overall product usability and overall customer experience. We've already begun working in this area and we expect to launch some new things in the first and second half of the year. Fifth, we told you that we plan to launch and market a multi-user capability in our service. This new capability will allow multiple users to access single account balance. We are now finishing the work on our multi-user product and we expect to launch it in the second half of the year. Once the multi-user capability launches, we will market it both to our existing base as well as to new prospects. Sixth, we told you that we plan to continue ramping up our efforts around the enterprise area. We felt that we are very successful in attracting a good number of enterprise users to our service in 2006 and momentum continued in the first quarter of 2007. Customers continue to be attracted to us versus the postage meter based on our dramatically lower total cost of ownership and based on the great visibility into employee activity that just isn't available with the meter. We ended the year with a headcount of two in our PC Postage enterprise sales area. And we recently hired two additional sales people for this area. We also plan to continue enhancing our enterprise product in 2007 and that will help our sale efforts. We feel that our 2007 PC Postage plan is a very solid. While the plan does create some near-term earnings pressure in the business for 2007, we feel that our opportunities to grow the business are very attractive. We plan to take advantage of them in 2007 for the benefit of the long-term business growth. Now, let me turn to a more detailed discussion on PhotoStamps. Today, we announced that during the first quarter we shipped approximately 189,000 sheets of PhotoStamps for a total of approximately $3.2 million in total first quarter PhotoStamps revenue. We experienced the decline of 18% versus the $3.9 million in revenue in the first quarter of 2006, driven primarily by a large decrease in our marketing spend levels in the quarter. As we came up the highest marketing spend quarter ever for PhotoStamps in the fourth quarter last year, we expected to see momentum from the spend carry over into the first quarter. Based on that expectation, we pulled back on our marketing spend level during the early part of the first quarter. But the momentum did not carry through in the business the way we had expected, and there are a few possible reasons for this. Generally, we do continue to see a decline in the amount of PR the product is getting over time as the story is no longer as new as it once us. As you recall, the fourth quarter of 2005 was the first ever holiday season for PhotoStamps, and the first quarter of 2006 are continuation of the holiday PR buzz, but we have experienced the decline in the level of PR every quarters since then. We also think the product may be seeing less word of mouth as the newness wears off. We are also concerned that a high level of cancellation of PhotoStamps in the mail stream may be impacting the viral growth of a product. We design the products so that it would not canceled but the USPS processing centers do not always protect PhotoStamps correctly. We are working with the postal service to try to reduce the number of cancellation of PhotoStamps in the mail stream. Later in the first quarter we did increase our PhotoStamps marketing spend rate, but owing to their early quarter pullback we ended up spending 29% less on PhotoStamps marketing than we did in the first quarter of 2006. However, despite the lower investment in the first quarter we continue to see a cost per acquisition that is attractive and that is in line with prior quarters. And we plan to continue ramping up our spend rate on PhotoStamps in the second quarter and beyond so long as the economics continue to work for us. Based on US Postal Service industry data and our own data we estimate that our product PhotoStamps represented approximately 77% of the total customized postage sold in the US during the first quarter. This was down incrementally from the 79% we previously estimated for the fourth quarter of 2006 for PhotoStamps. We call that we saw a new entry in the first quarter with the 2D launch of a website at www.yourstamps.com. in partnership with Pitney Bowes, and that may have contributed to the slight decline in percentage for PhotoStamps. Let me now turn to the 2007 plan for PhotoStamps and provide some updates in that area. We are currently on target with our initiative this year as outlined on our call back in February. Let me review some of those initiatives now. At high level we estimate that the ratio between life time value of PhotoStamps’ customer and the cost per new customer acquisition is reasonably good, but it is not as good as we experienced in our PC postage business. A lower ratio between lifetime value and customer acquisition cost resulted in a business model that moves into profitability more slowly and that is what we’ve experienced so far. Our sales and marketing expenses directly related to the PhotoStamps exceeded our gross profit last year and also in the first quarter of 2007. Our primary goal in 2007 is to increase the ratio of lifetime value the cost per acquisition while continuing to grow our marketing budget at a reasonable rate. We plan to work on this in three major ways. First, we are looking to increase the lifetime value of our PhotoStamps customers. In this area, we will pass the pricing in business model for the product and try to optimize it to achieve higher lifetime values. We have already started doing pricing test on our website, and are continuing to run more test in the second quarter. We will also be looking at additional ways to monetize our PhotoStamps’ traffic more effectively. Second, we are going to continue to expand our customer acquisition programs while working to keep our cost per acquisition low. We will continue running our traditional PhotoStamps marketing programs while testing new programs. We will also continue to pursue partnerships like our existing partnerships with Apple, Café Press, Google Picasa, HP Snapfish, Adobe and others. Third, we will continue to focus on growing our high-volume business orders. During the first quarter, we estimated that approximately 16% of the total dollar value of orders received via the website and from our sales channel were business related. This was up from an estimated level of 15% for Q4, but was down on a dollar basis. We believe the lack of presort discount rates continues to be a barrier to usage of the product by business. We are continuing to work on convincing the US Postal Service that it makes sense to add presort first class rates to our PhotoStamps capabilities, and we are cautiously optimistic that this may happen as soon as this may. We expect to continue to ramp our efforts in the business area in 2007, especially if the USPS authorizes some type of discounted rates. We feel that our plan for 2007 in PhotoStamps is a good plan and we remain optimistic on our ability to grow this business into a profitable business at a reasonable growth rate over the next few years. However we also remain cautious that growth for PhotoStamps this year might be more challenging then last year and then that contribute to our decision to lower our revenue guidance for fiscal 2007 to date. Now, with that, let me hand the call over to Kyle.

[Kyle Huebner:]

Thanks Ken. Q1 subscriber metrics. I will now review the quarterly business metrics for the first quarter. Paid customers. Paid customers in the first quarter were 323.9000, up 4.7,000 from the 319.2,000 paid customers in Q4, of ’06 and down 0.4000 versus the 324.3,000 paid customer in Q1, ’06. The paid customer number represents the unique number of successfully billed customers at least once during the quarter. The change in paid customers from Q4 '06 to Q1 ’07 was comprised of 51.1 -- 55.1,000 new paid customers who were successfully billed for the first time during the quarter, offset by 50.4,000 lost paid customers. Lost paid customers are customers who are successfully billed in the previous quarter, but not successfully billed in the current quarter, less any recaptured paid customers from prior periods. In order to give investors some insight into the magnitude of the enhanced promotion channel we may also periodically provide a percentage of paid customers that were acquired via that channel. We estimate that approximately 18% of paid customers for the first quarter were from the enhanced promotion channel, compared with an estimated 19% of paid customers for Q4 '06. Subscriber revenue per customer. Total subscriber revenue, which includes service fees, stores, and insurance revenue was $16.4 million for Q1, compared with $16.5 million for Q4 ‘06 and compared with $16.2 million in Q1 ‘06. Average monthly subscriber revenue per paid customer was $16.87 for Q1, compared with $17.20 for Q4 ’06, and compared with $16.68 for Q1 ‘06. This metric is calculated as total subscriber revenue for the quarter divided by paid customers in the quarter divided by three months. Customer acquisition. Total PC Postage customer acquisition spend, which includes both sales and marketing spend on the PC Postage business as well as promotion of spend, which is included in cost to sales, was $6.5 million in Q1 up 32% sequentially versus $4.9 million in Q4 ’06, and up 23% versus the $5.3 million in Q1 ‘06. The increase in customer acquisition spend was expected, as we significantly increased our direct mail spending, versus both Q4 ‘06 and Q1 ‘06. In addition, we experience higher than expected acquisition in the enhance promotion channel, which contributed to the increase spend. Cost per new gross new register customer acquired was $68 for Q1, compared with $57 for Q4 ’06, and $54 for Q1 ‘06. The increase in cost per gross new registered customer was primarily related to our increase in direct mail spend as those customers have a higher life time value, but are more expensive to acquire. Paid customer cancel rate, was 4.5% in Q1 versus 4.4% in Q4 ‘06 and versus 4.0% in Q1 ‘06. Paid customer cancel rate is calculated as total gross paid customers in the quarter, divided by the sum of prior quarter paid customers and current quarter new paid customers divided by three months. Customer usage. Postage printed by customers was $62.6 million in Q1, up 9% from the $57.3 million per net in Q1, ‘06. Now I will review our first quarter financial results. Our first quarter 2007 GAAP financial results include 461,000 of non-cash stock-based compensation expense, as a result of adopting FASB 123R at the beginning of 2006. The 461,000-123R expense is allocated to departments based on individual employee costs and positions as follows, $75,000 in cost to sales, $73,000 in sales and marketing, $150,000 in R&D and $162,000 in G&A. Our GAAP net income for Q1, ‘07 was $3.1 million or $0.14 per fully diluted share, and non-GAAP net income excluding the $461,000 and 123R expenses was $3.5 million or $0.16 per fully diluted share. Revenue was $20.0 million in Q1, which is down 3%, compared with Q1, ‘06. PhotoStamps revenue was $3.2 million in Q1, which is down 18%, compared with Q1, ‘06. The decline in PhotoStamps revenue is primarily attributable of the factors Ken mentioned earlier in the call, including a 29% decline in sales and PhotoStamps marketing spend versus Q1, ‘06. PC Postage business revenue was $16.8 million in Q1, which was up 1% from Q1, ‘06. Service fee revenue was $13.7 in Q1, which was up 2%, compared with Q1 ‘06. Service fee revenue growth was driven by a solid increase in the average service fee revenue per paid customer compared with Q1 '06. Online store revenue was $2.4 million in Q1, which was down 1% compared with Q1 '06. The lower revenue is primarily attributable with the tough comparison with Q1 '06 where an increase in the U.S. Postal rates to a one-time surge of store consumable purchases that we did not experience in Q1 '07. Q1 total revenue mix was 68% service fees, 12% stores, 16% PhotoStamps, and 4% insurance, licensing, and other. We will now provide all of the following financial results on a non-GAAP basis excluding only the 123R expenses. A more detailed reconciliation of our non-GAAP to GAAP measures is contained in our earnings release posted on our website. Total business gross margin excluding 123R expense was 74% for Q1 '07 compared with 72% for Q1 '06. The higher gross margin compared with Q1 last year was primarily attributable to the higher mix, higher margin, gross margin PC Postage revenue and a lower mix of a lower gross margin PhotoStamps revenue. For the PC Postage business, gross margin excluding 123R expense was approximately 81% in Q1 compared with 80% in Q1 '06. Cost to sales includes promotional expenses of approximately $408,000 in Q1 compared with $691,000 in Q1 '06. The higher PC Postage business gross margin in Q1 '07 versus Q1 '06 was primarily attributable to these lower promotional expenses related to coupon redemption for promotional items. For PhotoStamps business gross margin excluding 123R expense was approximately 34% in Q1 '07 compared with 37% in Q1 '06. The lower PhotoStamps gross margin was primarily due to lower revenue and a higher mix of high volume business orders, which are typically lower gross margin remainder with PhotoStamps. We recognized the postage face value in both the revenue and cost of sales, unlike our PC Postage subscription business, where postage face value is not part of revenue or cost of sale. The reason for the different treatment is that with PhotoStamps we take possession of the postage and resell it to customers, whereas in the PC Postage subscription business, postage purchases go directly from the customer to the USPS. Sales and marketing spend excluding 123R expense was $7.8 million in Q1, which was up 15% compared with Q1 '06. Sales and marketing spend was 39% of revenue in Q1 compared with 33% of revenue in Q1 '06. PC Postage sales and marketing spend was up significantly, compared with Q1 '06 where PhotoStamps sales and marketing was down significantly compared with Q1 '06. R&D spend excluding 123R expenses was $2.0 million in Q1, which was down 2% compared with Q1 '06. R&D spend was 10% of revenue in Q1, compared with 10% of revenue in Q1 '06. G&A spend excluding 123R expenses was $2.6 million in Q1, which is down 11% compared with Q1 '06. G&A spend was 13% of revenue in Q1, compared with 14% of revenue in Q1 '06. The decrease in G&A spend was primarily attributable to lower litigation spend compared with Q1 '06. Operating income, excluding 123R expenses was $2.4 million in Q1 compared with $3.1 million in Q1 ‘06. Operating margin was 12.0% in Q1 compared with 15.0% in Q1 ‘06. The decrease in operating margin was driven primarily by the increased sale and marketing spend, which increased from 33% of revenue to 39% of revenue. Interest income was $1.2 million in Q1, compared with $1.1 million in Q1 ‘06. The higher interest income compared with last year was primarily attributable at a higher interest rates. Net income excluding 123R expenses for Q1, was $3.5 million or $0.16 per fully diluted share based on $22.3 million fully diluted shares, compared with $4.2 million or $0.17 per fully diluted share, based on $24.4 million fully diluted shares in Q1 ‘06. Non-GAAP first quarter fully diluted earnings per share excluding 123R expense was down 8% versus the same quarter last year. A decrease in fully diluted shares is also primarily from our share repurchase program. Total estimated sales and marketing expenses directly related to PhotoStamps exceeded PhotoStamps gross profit for the first quarter. Free cash flow, defined as net income; excluding 123R expenses, plus D&A, less CapEx was positive $4.2 million for Q1. D&A for the quarter was approximately $787,000. CapEx for the quarter was approximately $146,000. We ended Q1 with approximately $104 million in cash and investments, compared with $106 million at the end of Q2 versus at the end of 2006. In calculating the total cash and investments, we are including cash, cash equivalents, long-term investments, short-term investments and restricted cash. Share buyback. During the quarter, the company repurchased approximately 370,000 shares for total amount of $5.3 million under the $20 million authorized November, 2006 share repurchase program. Now turning to guidance. 2007 updated financial guidance. We expect that fiscal 2007 revenue will be between $87, to $97 million. The change in revenue guidance is based on first quarter PhotoStamps results, and the potential for a more challenging PhotoStamps growth environment. We expect that fiscal 2007 GAAP EPS will be between $0.67 to $0.77 per fully diluted share. This includes an estimated $2.4 million of non-GAAP stock-based compensation expense related to the adoption of FASB-123R. Excluding the FASB-123R expenses we expect that non-GAAP fiscal 2007 EPS will be between $0.77 to $0.87 per fully diluted share. The EPS guidance change reflects the fact that we expect to continue to make the large investment in PC Postage marketing this year, consistent with our higher than our prior expectation. In addition, the EPS guidance also incorporates the impact of the where were expected PhotoStamps revenue. We note the following additional assumptions for the 2007 guidance. We assume that the USPS exercises its option to continue the current customized postage market test until May 2008. We assume a decline in our other revenue line owing to an expected end in Q2 ‘07, and one of our high margin patent licensing deals. We assume a continued high level of direct mail spend where the revenue is spread over a longer period of time, and where we incur a higher upfront loss at the time the customer is acquired. We expect to continue aggressively increasing our direct mail investment to drive long-term revenue growth. We assume an increase in legal expenses for the remainder of the year owing to an expected up-tick in activity on the legal front. We note that the timing of expenses in litigation are often unpredictable and highly veritable. We assume our 2007 effective tax rate will be between 2% to 2.5% of pre-tax income, representing the alternative minimum taxes, cash taxes not covered by use of our NOLs. With that, we will open up for questions.

[Operator:]

(Operator Instructions) We’ll take our first question from Justin Cable of B. Riley & Co. Please go ahead, sir.

[Justin Cable:]

Thank you. First question I have is just on the slightly reduced guidance. It sound’s like most of your assumption is behind just a lower expectation for the PhotoStamps business. I was curious to know what’s your assumptions are in terms of an EPS impact overall that business might have for the year? I think previously, we had sort of talked about a breakeven business for PhotoStamps. Is that still the case or are you assuming now a slight pause for the year?

[Kyle Huebner:]

Yes, Justin. In terms of the EPS guidance, I’d say we did change the range and I’d say in most, more of that related to the fact that we saw increased acquisition in Q1. And in particularly, we saw an increase in customer acquisition through the enhanced promotion channel. So rather than reduce our direct mail spend we choose to increase our total marketing spend. So that led to in expectation that we may, actually spend more, invest more at PC Postage business this year that’s to drive future revenue growth. In terms of PhotoStamps, you know there, with whatever revenue there is some impact on the bottom-line. You can see that gross margin historically varies with the level of revenue that there is some correlation. So, at this point, we don’t breakout the bottom-line. And so, it really depends how the full year shapes up, but I’d say it could contribute a modest, but still not very material loss for the full year.

[Justin Cable:]

Okay. In terms of the PC Postage business overall for Q1, in general was it about inline with your own expectation? And then a follow up is, your increased marketing spend in the direct mail channel, have you seen much attraction yet as a result of the increased spend?

[Ken McBride:]

Hey Justin, it’s Ken.

[Justin Cable:]

Hi, Ken.

[Ken McBride:]

So, I would say generally speaking PC Postage business in the first quarter was inline with what we expected. As far as direct mail goes, as we mention in our prepared remarks, we did increase our investment in that area as per our plan for the year. And it’s pretty early as the direct mail takes sometime to really flow through the mail system, get into the customer’s hands and result in a sign up. So, we just have preliminary result at this point, but we are optimistic that the results are generally in line with the types of cost per acquisitions we've seen in the past year. So, that also resulted and contributed to our decision to continue to really ramp up the investment in the business for this year.

[Justin Cable:]

Okay. And was the ramp up -- was it gradual throughout the quarter, or did you ramp up immediately ending of the quarter or towards the end of the quarter for PC Postage?

[Kyle Huebner:]

I think you really have to look at the two biggest channels we use our direct mail and the enhanced promotion. In direct mail it’s a fixed cost that we control, so that I would say was generally spread throughout the quarter fairly evenly. On the enhanced promotion side, I would say that we generally saw a little bit of an acceleration throughout the quarter.

[Justin Cable:]

Okay. And in terms of the PhotoStamps similar question, in terms of the increase marketing spend, it sound like towards the end of the quarter, do you typically see a quick response to these marketing programs and this marketing? Do you have kind of various strategies where you just book marketing channel like you do in the PC Postage?

[Ken McBride:]

Yeah, I mean, I think with the PhotoStamps, it tends to be more of a -- in general more immediate, certainly than the direct mail, which is probably one of the slowest response mechanisms out there. But it varies by the different programs we do, some take longer, some are more immediate. It also varies in terms of our ability to move by program to move up or down in terms of spend level. So that did contribute to some of the lower spend for the quarter.

[Justin Cable:]

Okay. Thanks.

[Operator:]

And at this time, we have one question remaining in the queue. (Operator Instructions) And we will take your next question from Mr. George Sutton of Craig-Hallum. Please go ahead.

[George Sutton:]

Hi guys. The one missing metric I guess would be the number of new trial customers and obviously that directly -- just trying to ask the direct question from the direct mail campaign, as to how successful it has been. Is there a way we can look around at that a little bit better to understand how it might start to influence Q2 and with respect to Q2 would we expect to see a net addition of customers?

[Ken McBride:]

So you are asking about the registered customer total?

[George Sutton:]

Yes. So I understand we are going to a trial period so they are not definitionally paid customers. But I am trying to get a sense to how, when should we start to see the results of the direct mail campaign? I would assume it would show up nicely in Q2.

[Ken McBride:]

Yes. I mean, from our existing metrics that we released I think it’s an easy calculation to come up with the total gross registered, just by taking the total spend and the acquisition cost we gave you.

[George Sutton:]

Right.

[Kyle Huebner:]

Yes, I think George there is several components to the way between the spend and when they become a paid customer in direct mail you, you incur the expense when the piece goes in the mail and then you have the time it takes for the customer to receive the piece. The time it takes for the customer to then sign up for the service and then the trial period before their first sale. So, I would say generally ones probably one to two quarter way out, before you really start to see the direct mail investment kick in. And I think, it’s really kind of 2008. I think it’s where you will really see the full benefit of the increase in direct mail, relative to if we have increased it.

[George Sutton:]

With respect to your business development on the PC postage side, we are pleased to see a small program of postage print this quarter, can you talk more broadly about efforts you are making to really enhance some of the distribution you are getting of the PC postage group channel partners?

[Jamie Harper:]

Sure. We do have an active business development group that’s out there on both behalf of PhotoStamps as well as PC Postage working on distribution opportunities. Of course, we can’t really mention things, but the types of partnerships we have done in the past, companies that market a small businesses like VistaPrint, Microsoft, EarthLink those are the places where we really like to be participants in their programs, where they are hitting the same customers that we’d like to attract to our service. So, I think we are actively working in that area and you will like to receive more stuff from us in the future on that.

[George Sutton:]

All right. I guess, to ask maybe a different way, is that an accelerated focus for you. I noticed in the past a lot of the business development focus had been on PhotoStamps more so than PC Postages, are you shifting that back a bit at this point?

[Jamie Harper:]

Yes, I think we are really -- we find partnerships to be really attractive on both businesses. So, I think the fact that PhotoStamps is a brand new product and so there was a flurry of activity in that product, probably similar to what you would have seen if you were in the industry in 1999 where there was a flurry of activity that biz out in the partnerships that some of which we still have from back in those days. So, I wouldn’t say we have shifted as much it’s just a difference in timing of the launch of the products.

[George Sutton:]

And then Ken lastly, can you discus what you were referring to cancellation of PhotoStamps at the Postal Service? I wasn’t clear what you meant with that.

[Ken McBride:]

Sure. In the same way that our postage stamps gets cancelled when it goes to the mail. PhotoStamps, we originally designed it to not get cancelled using a particular technology that the Postal Service processing standards are supposed to detect and bypass the cancellation process. Unfortunately, it hasn’t been totally accurate in terms of the actual detection. So we’ve been trying to work with the Postal Service in that area to decrease the cancellation rate and one of our concerns is that with the cancellation mark across the image, it kind of decreases the perception of the product by the end recipient and therefore, it potentially also decreases our viral marketing aspect?

[Kyle Huebner:]

The impact is really when it simplifies PhotoStamps and mails them out, we hope that the recipients who get that mail then are interested and become purchasers and so to the extent that the recipient receives the PhotoStamps and its got a cancellation mark on it that kind of reduces I think the attractiveness of the product. So that’s something we are working to try and reduce that.

[George Sutton:]

Understand. Okay. Thanks guys.

[Jamie Harper:]

Thanks.

[Operator:]

And we’ll take our final question from Kar Kwong of Needham & Company. Please go ahead.

[Kar Kwong:]

Hi guys. You guys had mentioned that you guys saw a better return on your enhanced channel kind of marketing spend and you guys subsequently ramped up that marketing spend. I was wondering what proportion of the acquisition spend at this quarter was from that enhanced channel versus the direct channel? And what you guys are targeting for the rest of the year?

[Kyle Huebner:]

Yeah, in that channel the way it typically works is that there is a lot of paper performance channels. So, it’s not necessarily something that we can consciously dial up and down the way we can make those decisions in direct mail. So what we saw in Q1 was an accelerated pace of acquisition that’s kind on a paper performance basis resulted in us paying more marketing spend because we had acquired more customers. That channel, historically that channel tends to be more of volatility or variability in terms of the increases and decreases, quarter-over-quarter that we see. So it’s something we at the end of the second half of 2006 we’ve saw some year-over-year declines in that channel. In Q1, that kind of reversed itself and we got higher then expected acquisitions, so we were happy with that. Going forward it’s a little hard to specifically predict, but we were happy with the Q1 results. In terms of the spend, we don’t actually break out the specific dollars that go to each channel, but direct mail and the enhanced promotion are the two largest channels and we experience more of the increase in the customer acquisitions than was related to the direct mail.

[Kar Kwong:]

Thank you.

[Operator:]

And we’ll take a follow up question from Mr. George Sutton of Craig-Hallum. Please go ahead.

[George Sutton:]

Just curious on your stock buyback program you were less aggressive this past quarter relative to being very aggressive in Q4. I am just curious what drives that thought process?

[Kyle Huebner:]

The share repurchase, yes there is a number faster that does go into it the prices, the stock, daily volume, process available for sale. Can’t really comment on kind of specific activity related to the buyback program, but as you feel that we over the last 12 months we have been very active and we do have $12 million left in the November plan and another $20 million in the February plan.

[George Sutton:]

Okay. Thanks guys.

[Operator:]

And it appears there are no further questions at this time. Gentlemen, I would like to turn the conference back over to you for any additional or closing remarks.

[Ken McBride:]

Well, thank you for joining us and as always if you have questions, you can reach us via our Investor Relations website at investor.stamps.com or you can contact our investor phone line at 310-482-5830. Thank you.

[Operator:]

That concludes today's Stamps.com first quarter 2007 results conference. We thank you for your participation. Have a wonderful day.