Stamps.com Inc.
Q2 2009 Earnings Call Transcript

Published: 31 Jul 2009

[Operator:]

Good afternoon ladies and gentlemen. Welcome everyone to the Stamps.com Second Quarter 2009 results call. (Operator Instructions) At this time I would like to turn the call over to Mr. Jeff Carvari. Please go ahead.

[Jeff Carvari:]

Thanks very much and good afternoon everyone. On the call today is our CEO, Ken McBride and our CFO, Kyle Huebner. The agenda for today’s call is as follows

[Ken McBride:]

Hi, good afternoon and thanks for joining us today. During the second quarter we did $20.2 million in total revenue. Total PC postage revenue including service fee revenue, store revenue and insurance revenue was $18.2 million which is down 2% versus revenue in the second quarter of last year. Excluding the enhanced promotion channel revenue was $16.6 million which was up 3% from the second quarter of 2008. PhotoStamps revenue was $2 million, $2.0 million down 31% versus the second quarter of 2008. We reduced our PhotoStamps sales and marketing by approximately 56% versus the second quarter of 2008 and that resulted in the decrease in revenue. Our non-GAAP income from operations for the second quarter was $2.1 million which is down 7% versus the second quarter of 2008. As you may recall, we had a 1x promotional expense benefit in the second quarter of 2008 that was approximately $725,000.00. Non-GAAP earnings per fully diluted share were $0.14. We were pleased with our earnings per share was $0.14. We were pleased with our earnings this quarter in light of the continued difficulty in the economic environment. On the call today we will talk about the PC Postage business in detail and we will talk about photo stamps and we will discuss financial results and our business outlook. Now we will begin with a more detailed discussion on the PC Postage business. As a reminder the customer metrics we discuss on this call exclude all enhanced promotion channel activity. During the second quarter we acquired approximately 54,000 gross customers which was up slightly from the first quarter this year. We believe the weak economy continues to have a negative impact on our acquisition trends, as small businesses may be less willing to take on new monthly expenses when they are struggling. Our cost per acquisition for the second quarter was $126.00 which was up slightly from the $122.00 in the first quarter of this year. Despite the small increase we continue to believe we are earning a very good ROI on our marketing investment. We continue to estimate that our lifetime value is at least 2x the cost of acquiring a customer. Our monthly churn during the second quarter was 4.4% versus 3.7% in the second quarter of 2008. The higher churn this quarter was a direct result of the large number of customers that we acquired from the USPS in December 2008 as a result of their website outage. Those customers have churned at a higher rate than our regular customers. We believe that our normalized pay customer churn continues to run between 3.5% and 4% during this tough economy period and we expect that our churn will return to that level next quarter. Pay customers in the second quarter of 2009 were at 317,000 an increase of 1% versus the second quarter of 2008, but down 4,000 sequentially from the 321,000 in the first quarter of 2009 going to the higher churn that we just discussed. Now let’s turn to the 2009 plan for PC Postage and talk about progress we’ve made against your plan to date. At a high level our plan for PC postage includes a focus in at least four major areas

[Kyle Huebner:]

Thanks Ken. Q2 customer metrics, all PC Postage metrics we will discuss in the section exclude all estimated enhanced promotion activity. We will now review the PC Postage metrics. Paid customers in Q2 were 317,000, down 4,000 from the 321,000 paid customers in Q1 ’09 and up 3,000 or 1% versus the 314,000 paid customers in Q2 ’08. The paid customer number represents the unique number of customers successfully billed at least once during the quarter. The change in paid customers from Q1 ’09 to Q2 ’09 was composed of 44,000 new paid customers who were successfully billed for the first time during the quarter offset by 48,000 lost paid customers. Lost paid customers are defined as customers who are successfully billed in the previous quarter, but not successfully billed in the current quarter less any recaptured paid customers from prior quarters. The sequential decrease in Q2 paid customers is primarily driven by the increase in lost paid customers which I will discuss further in a moment. Customer acquisition

[Operator:]

(Operator Instructions) Your first question comes from Kevin Liu from B. Riley & Co.

[Kevin Liu:]

I have a couple of questions on the churn. First, if we exclude some of these customers that were acquired via the USPS and just kind of look at the core customer base was there any sort of discernable trend in terms of how the churn rates progressed through out the quarter? Then I am also wondering as to your retention efforts, are they delivering kind of what you expect in terms of the number of customers who want to churn that you are able to retain?

[Kyle Huebner:]

Yes, Kevin on the first one there wasn’t a tracking mechanism in place during that period of time so it is hard to identify exactly which customers came from that source versus coming to our general Stamps.com website. So, it is hard to give an exact number If you look at it the churn rates were definitely lower than the reported rates. I think the important thing is at this point it has kind of worked itself out and so we expect it to be back in the 3.5% to 4% range.

[Ken McBride:]

On the retention efforts we are continuing to run the retention program. I think the program has kind of reached a steady state and it’s running at full scale now. As you know we are working with customers when they call in to try to understand their motivation for canceling and offering them various ways to remain a customer, more time, potentially a different price point, a different set of features and we do think the program is having positive impact on our churn rates and we are planning to continue it. At this point it is really running steady state and we feel it is kind of more of a permanent program for the company

[Kevin Liu:]

In terms of the customer acquisitions is it becoming easier at all to acquire customers towards the end of your quarter? Did you see a few more additions there or was it pretty consistent through out the quarter?

[Ken McBride:]

Yes, I think customer acquisition has continued to remain kind of one of the more difficult areas for us in this bad economy. We really kind of saw some of the difficulties with customer acquisitions start last summer and I don’t think we have really seen much change in that even through this quarter.

[Kevin Liu:]

I see and just one question on the churn if you were to look at the customers you have on the premier plan versus some of the lower priced plans has there been more customers churning off the higher priced plans versus the lower or has that not really made too much of a difference?

[Ken McBride:]

I think the premier plan relative to the overall paying customer base is still a relatively small percent, you know, less than 10%. So, I actually don’t have the data in front of me on the differential churn rates but I don’t think it would materially impact the overall reported churn number given the percent of the customer base that it makes up.

[Kevin Liu:]

Okay and one last question on the Enterprise side of the business. At this point when you are going in to meet with these customers are there features or functionalities that aren’t out yet that you might have provision to though, which would be kind of the sticking point before they are willing to sign on, or are you still getting pretty good traction and are you able to close some of these deals even in this environment?

[Ken McBride:]

I think you heard us say that the enterprise revenue was up 118% versus the same quarter last year and last year as a whole I think we were up 80% so we have seen some acceleration in the business. I think it is largely due to just improved processes and improved performance. The product has gotten better year after year, but we still feel like there is more things we need to do. Enterprise version 2.0 is coming out later this year does have, we think, a pretty big step forward in terms of just the overall sophistication of the product. The Enterprise reporting system, the front end reporting tool has real time data information, better management tools, just better overall financial and administrative controls and I think that will help the sales process, but we are being successful today already with our existing product which is already a very good product.

[Kyle Huebner:]

I would just add too that some of the things Ken talked about in terms of the feature improvements are things that will make it a smoother process for corporations that kind of deploy it in the pilot and then roll it out to their existing offices; so the stronger you can make the user experience after they have agreed to roll it out to a pilot, that improves your odds of making it past the pilot and then getting the full adoption in the organization.

[Operator:]

Your next question comes from Clayton Ripley with Bears Capital.

[Clayton Ripley:]

Could you guys shed some light on the discussion that you had with the board on the decision to repurchase shares versus maybe a special dividend or something else. Could you just talk about some of the thoughts that went through your head when you talked about repurchasing versus some other capital allocation decisions you could have made?

[Ken McBride:]

Yes, I think when you think about the share buy back the board looks at all of the alternative uses of cash and we look at those alternatives on a multi-year time frame, not just based on the current year. So I think given our levels of repurchases I think that shows that the board feels that the share repurchase is the best alternative use of cash at this point. And, I think if you think about it on a five-year horizon some of the turmoil in the stock market that we have seen I think does create a strong opportunity to repurchase the stock given the longer term five year outlook on the business.

[Clayton Ripley:]

Then on the Enterprise product you talked a little bit earlier about the sales process, but who exactly are you trying to reach and what are some of the hurdles with getting your foot in the door or getting some of these things rolled out?

[Ken McBride:]

The main target with the Enterprise solution is what we call kind of distributive corporate. The ideal candidate really has a lot of small offices distributed in a network geographically. So, our solution really does extremely well in small business as you know and when a business has a lot of these smaller offices then it is a solution that really resonates with them for several reasons. First is obviously we save a ton of money relative to a postage meter, 75% cheaper than a postage meter, so when you take that analysis and you apply it to 100 or 200 or 500 locations across your network the magnitude of the cost savings becomes extremely meaningful. The other thing is a lot of these enterprises with these far-flung operations with hundreds of locations don’t really have any visibility right now into the postage being spent. Postage meters don’t really have good information about that. They are largely stand-alone devices that don’t really network; so our ability to provide that information to a central decision maker to provide new visibility into the network and how much postage is being spent is really a dramatically better feature than they have ever seen before. So those are the two primary selling strategies that we use really pushing the cost savings as well as the visibility in the network.

[Clayton Ripley:]

Okay thanks and then my last question is on the PhotoStamps marketing spin slow downs, how far do you think you are going to take this marketing spending cut, maybe how low can it go for you guys?

[Kyle Huebner:]

Well I think the thing is that we made a strategic decision back in Q3 Q4 of ‘07that the expected returns we were seeing on the PhotoStamps business just weren’t nearly as attractive as the PC Postage business; so we had already started the process of kind of pulling back on the investment and reallocating it to PC Postage kind of before the economy really turned down and then I think what happened was when the economy turned down our threshold of what marketing programs met the acceptable ROIs got tighter so programs that might have worked even as we’d pulled back, but worked in a good economy, those programs in a down economy suddenly became unprofitable or the ROIs didn’t meet our threshold, so we kind of had to take an additional really lag of cutting the marketing spend given the down economy. At this point I think we feel we are running PhotoStamps with a neutral impact to the bottom line and to the extent the economy comes back I think some of those programs could potentially come back and especially things like the retail program that Ken talked about.

[Clayton Ripley:]

Okay thank you.

[Operator:]

Your next question comes from William Meyers with Miller Asset Management.

[William Meyers:]

I think I heard you say how much you spent on stock repurchases since the last plan, but I wasn’t sure if that was the same number as you would have spent in the second quarter?

[Kyle Huebner:]

No, the plan covered a six-month period. So during the February ’09 the current period that was the $7.1 million for 850,000 shares.

[William Meyers:]

Okay and is there a figure for just the second quarter?

[Kyle Huebner:]

Yes, in Q2 the repurchase did slow. It was $1.7 million for 208,000 shares.

[William Meyers:]

Okay and my other question was about the guidance which seems to have a fairly wide range. Would you attribute all of that to economic uncertainty or are there some other factors that would help us understand the top and bottom end of the guidance?

[Kyle Huebner:]

We set out guidance range in February of this year. I think our strategy is to provide the initial guidance range which we expect the full years revenue and earnings to come in based on the information we have. I think the wide range this year in particular reflects, one, there as in February when we set the guidance there was certainly a lot of uncertainty in the economy and how that would turn out for the year. The other factor which is more of a bottom line impact is our legal expenses. In litigation the ability to control or predict expenses is harder. A lot of times it is really driven by court schedules and how quickly or not judges make rulings and so we do have the [Inveshia] litigation is a major expense for us and the original schedule we had at the beginning of the year, we had the trial scheduled for 2009. So, the legal spend really forces us to contemplate a pretty wide range of spend depending on whether the litigation goes slowly or more quickly. I think those are some of the factors that went into the thinking.

[Operator:]

Your last question comes from George Sutton with Craig-Hallum Capital Group.

[George Sutton:]

I just want to understand a bit more the $126.00 to acquire the customer relative to your estimated value over a period of time, since we don’t have all of the things to come up with the variables that give you the conclusion that that is still profitable. You seem to be changing the definition a little bit and saying well it is the non-enhanced customer that returns 2x or are you suggesting that the enhanced channel doesn’t? And are you able to give us a variable cost per customer so we can try to calculate the customer value life?

[Kyle Huebner:]

Well the first one, George, when we talked about it historically being the 2x that was really focused on the non-enhanced promotion side, in the enhanced promotion I think there has been a lot more variability in the returns. The main thing that characterizes that channel is that it’s cheaper to acquire a customer, which is more like a lead gen, but they have much shorter lives and quicker paybacks. So, I think the 2x has been more consistent historically with the non-incentive. The enhanced promotion really that return is kind of ranged and there we have had to adjust what we are willing to pay for a customer down as we have seen changes in the environment and the expected lifetime values.

[George Sutton:]

I am trying to calculate a customer value life myself. One variable we don’t have, we can make some assumptions, but I am curious if you are able to offer it, and that is a variable cost per customer on a monthly basis?

[Kyle Huebner:]

What I can say, I mean the majority of the CTA is on discretionary spend as opposed to kind of fixed marketing overhead. But, with our public metrics you can do some calculations in terms of taking the churn rate and looking what the average life of a customer is and what the average revenue over the life at our gross margins to kind of get an estimated lifetime value based on our public metrics and then compare that to the CTA. I think, at least using the public metrics you can kind of get a ballpark to validate that the expected lifetime values are certainly a lot greater than the $126.00.

[George Sutton:]

Lastly, just to understand this churn increase in the quarter and I saw it as a great opportunity in a key part of the holiday season for the USPS site to go down and therefore drive a lot of traffic to your site and you are suggesting that those are the people that are churning out. I would assume you are disappointed that those customers aren’t seeing whatever value they need to see to stay. Is there anything in your focus groups as they have been leaving that have given you some information or some things that you can do differently with the business to keep those kinds of customers? Because I don’t know that we will see another opportunity like that.

[Kyle Huebner:]

I think what it mainly comes down to is click n ship customers we believe tend to be lower volume customers who are doing a shipping label at no mark up or no face value over postage and so click n ship is a more limited solution, but it works for some customers. So, compare to we have a fuller service offering, a much more complete offering, but you have to pay the service fee. So, I think the fact that they were previously click n ship customers and kind of lower volume, or consumers, and not used to paying a mark up was probably the primary factor in the fact that they churned out at a higher rate.

[George Sutton:]

Okay, thanks guys.

[Operator:]

At that we have no additional questions, so I would now like to turn the call back over to today’s presenters for any additional or closing comments.

[Ken McBride:]

Thank you very much and if you have any follow up questions you can contact us at investor.stamps.com or at 310-482-5830. Thank you.

[Operator:]

Thank you that does conclude today’s conference and thank you for your participation.