Stamps.com Inc.
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Good day and welcome to the Stamps.com fourth quarter 2007 financial results conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to [James Tragonza]. Please go ahead sir.

[[James Tragonza]:]

Good afternoon. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. Agenda for today’s call is as follows

[Kenneth McBride:]

Good afternoon. Thank you for joining us today. During the fourth quarter we did $24.1 million in total revenue which is down 4% from the same quarter last year. PC postage subscriber related revenue which includes service fee revenue, store revenue and insurance revenue was $17.6 million which is up 7% versus the subscriber related revenue in the fourth quarter of 2006. Total stamps revenue was $6.5 million which is down 19% versus the fourth quarter of 2006. We reduced our overall level of photo stamps, consumer focused marketing span by more than 35% versus the fourth quarter of 2006 as part of our program to increase profitability in the photo stamps business which we discussed last quarter and that resulted in the revenue decline this quarter. Our net income excluding the 123R related stock-based compensation was $3.1 million. Earnings per fully diluted share came in $0.16 excluding the 123R expense. We felt that our fourth quarter earnings were solid in light of continued heavy investment in our PC postage business. Total spending on PC postage customer acquisition excluding spend on the enhanced promotion channel was $5.7 million which was up 74% from the same quarter last year. On the call today we will talk about the PC postage business in detail then will talk about photo stamps and then we’ll discuss financial results and our business outlook. Today we’re introducing a new set of PC postage business metrics which we think are simpler and clearer depiction of our business. The customers that come in through our enhanced promotion channel behave much differently than those in our non-enhanced promotion channel. Enhanced promotion channel tends to attract a higher portion of lower lifetime value customers so it is characterized by higher fundamental churn than other channels. The lifetime value of a non-enhanced promotion customer may be five times higher or more than that of a enhanced promotion channel customer thus, we have decided that it does not make sense to continue to lump them together and to refer to them with the same set of metrics or to portray them as equally important to our business because they are not. Thus, going forward we plan to discuss our customer metrics only including paid customers that come from the non-enhanced promotion channels. This is where we are focused on building for the long term in our business. For the enhanced promotion channel we will provide total revenue and total customer acquisition spend but we will not provide any customer level metrics as we do not think it makes sense to do so. We plan to continue to generate a quarterly summary PDF document and to post it to our website in conjunction with each quarter’s earnings release. For today we’ve also posted all of our fiscal 2006 and fiscal 2007 quarterly business metrics under our old methodology that includes enhanced promotion in our overall customer metrics so that you may compare our old method versus our new method for the past two fiscal years. Note that Q4 2007 is the last quarter in which we will give business metrics under the old methodology. Both old and new metrics are available in two PDF documents right now at investor.stamps.com under the company metrics link on the left hand side of the page. We think that our new metrics represent an easier and clearer way for us to talk about our business, an easier way for you to model our financials and an easier way for you to follow our progress in the same way that we follow our own progress. Now we will begin a more detailed discussion of the PC postage business and then we will talk about our 2008 plan for that business. From this point forward in our call today we will only talk about our business using the new customer metrics which now exclude all enhanced promotion channel activity. During the fourth quarter we experienced a registered costumer acquisition cost of $88.00 versus $73.00 in the fourth quarter of 2006. We were very pleased to see the increase in our per customer acquisition cost so needed in light of the dramatic ramp up in customer acquisition spend that we did during Q4. We increased customer acquisition spending by 74% year-over-year and our cost per acquisition only increased by 20% year-over-year. In addition, we increased customer acquisition spending by 27% versus the third quarter of 2007 and the CPA in the fourth quarter versus the third quarter only increased by 4%. During the fourth quarter we experienced our largest quarterly growth acquisition level ever at 65,000 customers up 44% versus the same quarter last year and surpassing the previous record level we set in Q3 of this year at 53,000 customers. Our stepped up acquisition spend in 2007 is clearly driving an acceleration in our overall customer acquisition levels over the past several quarters. We’ve continued to realize the benefits of our increased spending during 2007 with the number of paid customers in the fourth quarter of 2007, increasing 12,000 versus the third quarter of 2007 and increasing 35,000 versus the fourth quarter of 2006. Again all the numbers we just gave excluded all enhanced promotion channel activity. Our mailing and shipping supply store revenue was up 5% versus the same quarter last year. We saw a bit of a slowing in Q4 growth, but was really a tough compare as store revenue was up 27% in the fourth quarter last year, when we first launched our new ecommerce store. Overall, for fiscal 2007 total store revenue was up 11%. In the enterprise PC postage area, we continued to make good progress during fourth quarter. Total fourth quarter enterprise revenue was up 225% versus the fourth quarter last year. Even though the growth was on a very small starting base, we are encouraged by our continued progress in the enterprise area. Now, let’s turn to the 2008 plan for PC postage; at a high level our plan for PC postage includes four major items. First, we plan to continue increasing and optimizing our investment in all of our small business marketing channels wherever we can. Based on our most recent analysis and most recent trends, we continue to believe that the life time value of a non-enhanced promotion customer is more than two times higher than the current cost of acquisition. Based on that outstanding return, we plan to continue increasing our investment in all of our profitable marketing channels in 2008. Note that the growth in this area represents long term investment in the business that will pay dividends for several years to come, further we plan to increase our spend disproportionately in the first quarter of 2008 as we feel it is a period of time that many small businesses are open to our marketing message. In order to continue increasing our marketing investment we plan to continue scaling our work horse direct mail channel but we also plan to increase and refine our acquisition through online advertising, affiliates, partners, tele-marketing, traditional media and other areas. As always we are also looking to expand our portfolio in customer acquisition strategies that we employee. We will continue testing new areas throughout the year. We will be focused on identifying channels that can bring in customers at a low cost per acquisition relative to the life time value of the customer. We also are focused on finding channels that allow us to scale the acquisition while maintaining the per customer acquisition economics. In total we expect to increase our PC postage acquisition spend excluding the enhanced promotion channel once again by approximately 35 to 40% in 2008 versus 2007 levels. We believe that long term growth of our customers and revenue will reflect our long term investment in the sales and marketing activity and we are working to build a long term high growth model. Note that the acquisition spend increase in 2007 measured on the same basis was 57%, so we do currently expect to grow acquisition spend a bit more modestly this year than we did last year. Second, in our 2008 plan we’re going to continue optimizing our business model around converting and serving small business and home office customers. We will continue optimizing our website and our registration process particularly because optimizations in these areas pay dividends across all of our marketing programs. We’ll also continue to focus on improving the initial experience the customer has with our products. We’ll also continue building more usable interfaces for accessing the power of our product on a ongoing basis. We recently completed and launched version 7.0 of our PC postage product which included a dramatically over hauled user interface and we have several additional usability enhancements also planned for 2008. Third, in our 2008 plan we’ve planned to aggressively market our recently launched multi-user capability. We recently completed this capability and launched it along with version 7.0 of our PC postage product. This new capability will allow multiple users to access a single account balance. The majority of our small business customers today are under five employees and the fact that we haven’t had this capability historically has limited our ability to successfully attract larger businesses. Based on data from international data corporation we estimate that the new capabilities in our multi-user service plus our new multi-location capabilities that are launching this quarter will increase our addressable market size by 33% versus our prior small business addressable market that was primarily one to five employees, small business and home offices. We also find that not having multi-user capability limits our ability to grow with our customers. We typically will lose a small business after they grow to a certain size. So we expect to see some improvements to life time value with our new user multi-capability as well. We have launched some base multi-user pricing at $24.99 and $34.99 per month for three user versions of our Pro and Premier plan or about $9.00 to $10.00 more per month for two additional users. However this may not be our final price as we are expecting to do some price optimization in the first quarter of 2008 to determine the optimal pricing for lifetime value. Fourth in our 2008 plan, we plan to continue ramping up our efforts around the enterprise area. We feel that we were successful in attracting a good number of enterprise users to our service over the past two years at a low cost per acquisition relative to the lifetime value of the customers. Customers continue to be attracted to us versus a postage meter based on our dramatically lower total cost of ownership and based on the great visibility in individual employee activity that is not available with a meter. In 2008 we plan to continue scaling up our enterprise sales and marketing effort in a cost effective manner. We, plan to increase our sales headcount throughout 2008 so long as the cost per acquisition continues to remain attractive relative to the lifetime value. We also plan to continue enhancing our enterprise product in 2008 and that will help our sales effort. Multi-user capability that we recently launched is a very important feature for the enterprise customers as well. We’ll also be adding more flexible payment methods for enterprise users during 2008. We’re also finalizing our enterprise version 1.0 system which will add more financial controls for enterprise users managing multiple locations and we expect to launch that capability this quarter and we plan to launch enterprise version 2.0 in the second half of the year which will include improved enterprise reporting and improved postage management tools. We feel that our 2008 PC postage plan is a very solid one. We feel that our opportunities to grow this business are very attractive and we plan to take advantage of them for the benefit of our long term share holders. Now let’s turn to a more detailed discussion of photo stamps. Today we announced that during the fourth quarter we shipped approximately 390,000 sheets of photo stamps for a total of approximately $6.5 million in fourth quarter photo stamps revenue. As you recall we saw the overall economics we face in this business get tougher throughout fiscal 2007 and as a result we decided to pull back and focus our marketing activity last quarter. There were several things that we believe contributed to the tougher environment. In general we continued to see a decline in the amount of PR that photo stamps has gotten over time as the store is no longer as new as it once was. The PR buzz that we saw in 2007 declined versus what we saw in 2006 which was also lower than what we saw in 2005. We also think the product has seen a long term decay of the word of mouth as the newness of it wore off. We also saw a high rate of cancellation of photo stamps in the mail stream by the postal service which we think was impacting the buyable aspect of the product. Note that we believe that we solved that issue later in the fourth quarter of 2007 and we expect to see many fewer cancellations within the US postal services network going forward. We have also seen increased intensity on the competitive front, including aggressive pricing promotions by one of our competitors throughout 2007. Thus given the more difficult business environment we decided to pair back our overall level of consumer focus marketing spend during the fourth quarter of 2007 and we reduced our spend by more than 35% versus the fourth quarter of 2006. As a result we experienced a decrease in revenue for the fourth quarter of 19% to $6.5 million versus the $8 million in revenue in the fourth quarter of 2006. We do continue to see a reasonable level of high volume business orders for photo stamps which helped offset the softness in consumer orders although the pace of growth here was not as brisk as we saw in the second and third quarter. During Q4 we estimated that approximately 15% of revenue was from our high volume sales channel down from 27% in Q3 and 23% in Q2. Of course consumer orders increased versus business orders during Q4 and that drove most of the difference. During Q4 our high volume sales channel orders were up 20% versus the same quarter last year. As a result of the lighter and more focused marketing spend in the fourth quarter photo stamps gross profit for the fourth quarter exceeded estimated total sales of marketing expenses directly related to photo stamps. This is the first time since we launched the second market test for photo stamps in late 2005 that we have seen a positive contribution from photo stamps in this way. We will now discuss the go forward for photo stamps in 2008. In 2008 we are going to continue our more focused direct to site photo stamps marketing spend with a goal of keeping overall cost per acquisition at a level that provides a good financial return. As we continue to drive fewer but more profitable orders to our website through our own consumer marketing activity. We will focus on three major areas to drive the overall business. First we plan to continue working and growing high volume business usage of photo stamps. Total orders through our high volume channel represent approximately $3.1 million for fiscal 2007 which is up 210% versus fiscal 20006. We will continue driving this area through our direct selling efforts. We will also pursue partnerships and distribution in this area. Second, we plan to continue to pursue consumer distribution partnerships like Adobe, HP Snapfish, Apple, Google Picasso and others for photo stamps. Partnerships provide a cost effective way to manage acquisition costs through a revenue share or bounty arrangement that aligns the interest of the partnership. Third, we will be looking at entirely new ways and new business models to grow the photo stamps business line. We expect the strategic changes we have made to improve profitability picture for photo stamps going forward. We do expect that as a result of this shift we will see lower reported revenue in the near term in the business model. However, we believe that it is important in this stage of the development of this business to move the model aggressively towards profitability even if it is at a lower growth rate. Now Kyle will discuss our more detailed financial results and our business outlook.

[Kyle Huebner:]

As Ken described earlier in the call we introduced changes to our customer metrics. All PC postage metrics we will discuss in this section and from this point forward exclude all estimated enhanced promotion activity. We will now review these PC postage metrics for the fourth quarter. Paid customers in the fourth quarter were 293,000 up 12,000 sequentially from the 281,000 paid customers in Q3 07 and up 34.5 thousand or 13% year-over-year versus the 258,000 paid customers in Q4 06. The paid customer number represents the unique number of customers successfully billed at least once during the quarter. Growth in paid customers was driven by our increased acquisition in 2007. The 293,000 paid customers represent our highest level of paid customers ever. The change in paid customers from Q3 07 to Q4 07 was composed of 45,000 new paid customers who were successfully billed for the first time during the quarter offset by 33,000 lost paid customers. Lost paid customers are defined as customers who were successfully billed in the previous quarter but not successfully billed in the current quarter less any recaptured paid customers from prior quarters. Subscriber revenue per customer - subscriber related revenue which includes service fee store and insurance revenue was $15.0 million up 8.5% versus the $13.8 million for Q4 06. Average monthly subscriber revenue per paid customer was $17.08 for Q4 compared with $17.03 for Q3 07 and $17.84 for Q4 06. This metric is calculated total subscriber related revenue for the quarter divided by paid customers in the quarter divided by three months. The year-over-year decline in the average subscriber revenue per paid customer was attributable to more customers on lower priced plans as compared to last year owing to our retention efforts and also to lower store sales per paid customer. For the full year 2007 the average monthly subscriber revenue per paid customer was $17.26 which is up slightly when compared with the $17.23 for 2006. Customer acquisition - PC postage customer acquisition spend which includes both sales and marketing spend on the PC postage business as well as promotional spend which is including cost of sales was $5.7 million in Q4 up 74% versus the $3.3 million in Q4 06. The increase in customer acquisition spend reflect year-over-year increases in all of our channels in particularly our direct mail channel. In addition, we experienced record levels of customer acquisition which increased our paid for performance marketing expense. Cost per gross new registered customer acquired was $88.00 for Q4 compared with $84.00 for Q3 07 and $73.00 for Q4 06. The increase in CPA relative to last year’s related the overall increased level of marketing spend and was consistent with our Q3 07 results. We were encouraged by the relatively small increase in CPA relative to the magnitude of our increase in sales and marketing spend at 74%. We continue to see a very good return at the Q4 level of CPA versus the expected life time value of those customers that are being acquired. Paid customers cancel rates - paid customer cancel rate was 3.4% in Q4 versus 3.0% in Q3 07 and versus 3.0% in Q4 06. Paid customer cancel rate is calculated as total loss paid customer in the quarter divided by the sum of prior quarter paid customers and current quarter new paid customers divided by three months. The increase in churn rates was not attributable to any one particular factor and we believe that churn in the 3.0 to 3.5% range is a normal level for our current business. The churn has consistently been between 3 and 3.5 % for the past five quarters and we do see some regular fluctuations from quarter-to-quarter. Customer usage - total postage use by all customers was $78 million in Q4 up 24% from $62 million in Q4 06. For 2007 total postage use by all customers was $272 million up 19% from the $229 million in 2006. We believe that growth in postage printed is a result of our increased customer acquisition and our targeting of higher quality customers that tend to use more postage per customer. Now I’ll review our fourth quarter financial results, fourth quarter 2007 GAAP financial results included approximately $700,075 of non-cash stock based compensation expense as result of adopting FAS B123R at the beginning of 2006. The $700,075 123R expense was allocated to departments based on individual employee costs and positions as follows

[Operator:]

(Operator Instructions) We will go to George Sutton at Craig-Hallum Capital Group.

[George Sutton:]

I wanted to specifically focus on a couple of things you said earlier in the call. On the multi-user capability you mentioned that you would begin to aggressively market that and on the enterprise business you mentioned that you were going to ramp efforts. Can you just quantify in terms of dollars or in terms of people involved how exactly you’re going to be focused on growing those segments.

[Kenneth McBride:]

Sure. In terms of multi-user, as we mentioned during the prepared remarks it’s really kind of a couple of things. One, is within our existing base to the extent that there’s multi-user candidates out there that are using the single-user capability, we’re obviously going to be out there marketing aggressively to get them to move up to the higher price point, more capable multi-user product. Traditionally, we haven’t had this capability so we believe that most of the customers that have come into our service and outgrown us from a user perspective have moved on so we’re not exactly sure how to quantify the possibility of the up sell. But, the second thing is just in terms of looking at the overall market size we do believe the multi-user single location, multi-location small businesses are a significant number that we haven’t been able to really address previously. If you kind of look at some of the market data we’ve sort of expressed that we thing there is sort of 18 going to 25 million in total locations out there that are now candidates versus what our previous capability offered.

[George Sutton:]

There was no sense in terms of number of sales people, quotas, anything like that you could provide?

[Kenneth McBride:]

Yeah. I mean on the enterprise, we’re working and continue to aggressively pursue on both the marketing as well as the sales front. We were pleased with our results in 2007 on how that worked and we’re going to be doing a lot of changes and improvements to the products here in 2008, we mentioned those during the prepared remarks. With version 1.0 coming out this quarter of enterprise where it’s really kind of our first true ability to provide a command and control system for an administrator for a enterprise situation. We’ll also be offering a lot of additional payment options that we don’t offer today and then more capabilities in the second half of the year scheduled with version 2.0 of enterprise. So, we have a lot of stuff coming out this year that we think will help lift the sales effort on enterprise overall.

[Kyle Huebner:]

On the multi-user to the extent that we’re targeting small businesses that are still less than 100 employees, it’s really going to be an allocation of our existing marketing spend for the non-enhanced promotion PC postage business. So, it will be through the mechanisms we’re currently using today such as direct mail but we’ll be allocating part of that spend to target some larger sized small businesses.

[George Sutton:]

Two other things if I could, just broadly obviously you’re selling to small businesses, I would say the market overall has been concerned about a macro slowdown, particularly with respect to small businesses. Any early indications now that we’re part of the way through Q1 have you seen any impacts to your business from that either in churn or in terms of response to direct mail? Then secondly, can you address the indicia situation? You mentioned increased litigation but it doesn’t sound like it’s specifically for that. That’s it for me.

[Kenneth McBride:]

Traditionally, when it comes to impact of our business from the economy, small business we kind of see it going both directions. Some small businesses may struggle more and as a result go under but, at the same time you may see more folks that are losing their jobs at big businesses going out and starting small businesses. So, we’ve never really been able to decide whether it’s a plus or a minus. Overall, since our share of the total number of small businesses out there is so small, we don’t really expect that any kind of macroeconomic factors are really going to play into the business.

[Kyle Huebner:]

We don’t comment on inter-quarter metrics but, through Q4 you can see that we kind of continued to grow the paid customers at a similar pace of Q3 so we didn’t see anything in Q4 that was materially different from what we had been seeing in Q3. In terms of the litigation spend our primary lawsuits right now are the two patent infringement lawsuits being Kara and Indicia so we really don’t break out specifics in terms of the details of the spend on the different lawsuits but, between the two lawsuits in general for the first half of the year which is when Kara is scheduled currently to go to trial we do expect the overall litigation costs to be increased.

[Operator:]

(Operator Instructions) Next we’ll go to Kevin Liu with B. Riley & Company.

[Kevin Liu:]

I just wanted to talk about photo stamps a little bit. In terms of just kind of the strategic initiatives you’re going to take in 08, I mean are you going to consider adjusting your price downwards to perhaps match some of your competitors better? And, in terms of focusing your marketing spend more, I mean is that primarily just saying that you’re going to focus more around the business side which we expect in terms of the consumer side of that aspect?

[Kenneth McBride:]

In terms of pricing, we did see some aggressive price cutting and promotions from one of our competitors through 2007 for several months. I don’t think we saw like a real meaningful impact in our business and we’ve continued to work on price testing with our current photo stamps product. However, we haven’t at this point found a price that we feel is better than the existing one so there isn’t currently a plan to change the price on our product at this point in time.

[Kevin Liu:]

Then relative to I guess potential pricing pressure on the business side of it, or the high volume orders, are you seeing your competitors get more aggressive there?

[Kenneth McBride:]

No. I mean, the main pressure last year was really on the consumer pricing. Business pricing is in general lower already than consumer pricing so we didn’t really see as much of an impact. In fact, if you remember, in Q2 and Q3 last year we saw some of our best growth in the business side of photo stamps during the promotional price test, price cuts that were happening in the market. So, we don’t necessarily expect to see as much of an impact on the business side and it is in area that we’re going to continue to focus on building. We were happy how 2007 overall looked with the revenue up 210% for the year.

[Kevin Liu:]

Then I guess, just the last thing on that, I mean, in terms of getting this segment much more profitable, I know you guys made some strides in Q4 but just curious kind of what your time frame is for getting a more consistent level of profitability there and whether or not you guys have considered other options either in terms of selling the segment or anything of the like?

[Kenneth McBride:]

Yeah, I mean we’re happy that in the fourth quarter that we saw for the first time a contribution from the photo stamps business and we are focused on driving profitability in the business as quickly as possible. It’s such a seasonal business, it’s hard to say exactly how the pattern may play out this year but that’s our primary focus to drive profitability in the business model even if it means lower growth in the near term.

[Kevin Liu:]

Then just in terms of the general on sales and marketing spend, I know you guys mentioned that in the near term it could have been much higher if you guys had kind of reduced that level back to Q4 levels but I’m just curious kind of what makes you think you’ll see much better leverage of that maybe beyond fiscal 08? Why should we expect that you won’t always need to continuously increase that sales and marketing line in order to attract new subscribers?

[Kenneth McBride:]

Kevin, it’s just basically the nature of the recurring revenue model as you invest in the business the payback happens over a significant period of time. So, we don’t think that our current quarter paid customers numbers really reflect all past prior actions and even actions that happen years and years ago and so our current actions in 07 and 08 will impact us for years to come and it’s just through consistent building of layer after layer that the recurring revenue model continues to really grow. So, we think the current lifetime value of the customer is more than two times the cost per acquisition and so we’re planning to continue to invest heavily in that great return until it no longer appears to be so.

[Kyle Huebner:]

The other thing I would point out is as Ken said in his comments, the full year spend was up 57% for the non-enhanced promotion PC postage acquisition spend and our plan this year is kind of 35 to 40%. So, I think we’re going to continue to grow the customer acquisition spend to grow the business over the long term but you’ll probably see more of a normalization over the course of time relative to this year where we had a very aggressive step up in 2007.

[Kevin Liu:]

Then just lastly, in terms of the share count assumed in your fiscal 08 guidance, I’m just wondering if that assumes all 1.2 million shares repurchased or if you haven’t assumed anything there?

[Kyle Huebner:]

It actually doesn’t assume anything. As the program becomes effective and depending on the results, we’ll incorporate it in the future guidance but as of today it doesn’t assume any share buyback.

[Operator:]

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation and have a nice day.