Stamps.com Inc.
Q3 2009 Earnings Call Transcript

Published: 23 Oct 2009

[Operator:]

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

[Jeff Carvari:]

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

[Kenneth McBride:]

Thank you for joining us today. During the third quarter we did $20.2 million in total revenue. The non-enhanced promotion channel, PC Postage revenue, was $16.8 million, which was up 5% from the third quarter of 2008. This is now our fourth consecutive quarter of sequential revenue growth in our PC Postage business, excluding the enhanced promotion channel. We were pleased with the growth this quarter and over the past four quarters, particularly in light of the continued tough macroeconomic environment. Enhanced promotion channel PC Postage revenue was $1.6 million, which was down 27% from the third quarter of 2008, as we continued to cut our investment in this channel. Photo Stamps revenue was $1.9 million, down 6%, versus the third quarter of 2008, as we continue to reduce our sales and marketing spend in that area as well. Our non-GAAP earnings per fully diluted share were $0.17. This is the strongest earnings per share we have achieved in a year. On the call today, we will first talk about PC Postage business in detail, then we will talk about Photo Stamps, then we will discuss financial results and our business outlook. Now, we will begin a more detailed discussion of the PC Postage business. As a reminder, the customer metrics we discuss on this call exclude all enhanced promotion channel activity. During the third quarter we acquired approximately 53,000 gross small business customers, which was up 8% versus the same quarter last year. While the challenging economic environment continues to impact acquisition, we were pleased to achieve our first year-over-year increase in customer acquisition since the second quarter of 2008. Our cost per new customer acquired, or CPA, for the third quarter was $114, which was down 9% from the $126 in the second quarter of this year and down 1% versus the same quarter last year. During the tough economy we have experienced the biggest impact in our CPA metric, so we were pleased to see the decrease in CPA this quarter. We hope that perhaps this is the beginning of a trend and improvement in our CPA driven an improved economy. Our monthly churn during the third quarter was 3.8%, which was compared to 4.4% in the second quarter of this year, and 3.6% in the third quarter of last year. We were pleased to see the sequential decrease in churn. As we discussed last quarter, the higher churn in the second quarter was a direct result of the customers that we acquired from the U.S. Postal Service in December of 2008 as a result of their Web site outage. And those customers churned at a higher rate than our regular customers. As expected, the third quarter churn returned to a level that is within the range we have experienced during the challenging economy. Paid customers in the third quarter of 2009 were 315,000, an increase of 1% versus the third quarter of 2008. In the challenging economy, a higher CPA and a slightly elevated churn, have resulted in a flattish trend in paid customers. We expect that when the economy improves, we will be able to reinvigorate growth in our paid customer metrics. Now let's turn to the 2009 plan for PC Postage and talk about progress we have made against our plan to date. At a high level, our plan for PC Postage includes a focus in at least four major areas. First, we plan to continue to modestly ramp up our small business customer acquisition spend outside of the enhanced promotion channel. We continue to believe that the lifetime value non-enhanced promotion customer is at least two times higher than the current cost of acquisition. We feel the expected ROI on our marketing spend is still attractive and this field is important to continue to invest for the long-term growth of the business. We are spending at a more modest rate this year, reflecting the current state of the economy. In total, we still expect to increase our PC Postage small business acquisition spend outside of the enhanced promotion channel by approximately 5% to 10% in 2009 versus the 26% growth rate we did in 2008. Our goal is to maintain a reasonably strong investment in our acquisition channels during the economic downturn and to be well positioned when the economy improves to return to higher investment levels. Second in our 2009 plan, we are continuing to optimize our business model and our overall customer experience in several ways. We have already made several optimizations this year, such as improved welcome kits and emails, improved store experience, offering for USPS bulk supplies. During this quarter, the fourth quarter, we expect to experiment with other optimizations, such as chat during Web registration, and a promotional item offer as part of our Web registration process, in order to improve customer experience. We also continue to add significant new features to our product. In June we launched Version 8.0, which was the totally overhauled interface that allowed a customer to view their print history and use account tools from any Web browser. Then in September we launched Version 8.5 of our PC Postage software, which was focused on improved integrations with popular ecommerce sites. Using Version 8.5, ecommerce shippers can now pull in all the address and order information from eBay, PayPal stores, Yahoo stores, Google Checkout, and automatically and seamlessly. Then they can process their shipments in a single batch process. The shipping data, such as package tracking information, gets posted back to the ecommerce store automatically. Version 8.5 can also support common data formats such as XML or CSV for importing the data. We are working on some additional product capabilities for the remainder of the year as well. Third in our 2009 plan, we are continuing to focus on the enterprise area. 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 into individual employee activity that simply isn't available with a meter. In this economic environment we believe the desire to save costs has become a much bigger focus for business. During the third quarter we made a lot of great progress in the enterprise area. We grew enterprise revenue by 118% versus the same quarter last year. This is the second quarter where we have seen acceleration in our revenue growth rate versus the 80% growth rate we saw in 2008. We had the largest ever number of new customer locations added during the third quarter and our pipeline of opportunities continued to grow. We have also continued scaling up our successful marketing programs in areas such as print, direct mail, and telemarketing. And we continue to build our sales team and improve our sales efficiency. We also plan to continue enhancing our Enterprise product in 2009 and that will help our sales efforts as well. In the fourth quarter we plan to launch Enterprise Version 2.0, which will include a dramatically improved Web-based enterprise reporting system with a sophisticated front-end reporting tool with real-time data, improved Web-based postage management tools, enhanced Web-based financial and administrative controls for central decision makers. We would not that the expected length of the sales cycle and account roll out process will mean that our Enterprise effort will take several years to pay off. Overall, we are excited about the continued progress we are making in Enterprise. We feel that we are beginning to see returns on the investment we have been making in this area. We are expecting to see continued strong growth out of the business line going forward and we expect that it will be a great area for us in the long term. Fourth in our 2009 plan, we have been investing resources targeting the advanced shipper segment. We began a more aggressive push in this area during 2008 and have ramped up our efforts in this area throughout this year. We launched our Professional Shipper Solution last year to target advanced shippers such as fulfillment houses, small package ecommerce shippers, and larger retailers and enterprises. This year, we are continuing to invest in the product and the technology with the releases of Version 8.0 in June and Version 8.5 in September, which added many new shipping features and capabilities as we just discussed. We are also investing in sales and marketing to specifically target customers who do higher shipping volumes. Shipping is a big new strategic focus for our company. It is also one of the most important strategic initiatives of the U.S. Postal Service, and as our most important partner, we are focused on making them as successful as we can in this area. We feel that our 2009 PC Postage plan is a very solid one. We feel that our long-term opportunities to grow this business are very attractive, despite the challenging current economic environment. We plan to take advantage of them for the benefit of our long-term shareholders. Now let's turn to a more detailed discussion of Photo Stamps. During the third quarter, we continued our program to increase profitability in the Photo Stamps area with a smaller and more focused marketing plan. We decreased our total sales and marketing for Photo Stamps by 46% versus the third quarter of 2008. As a result of the decreased spend, total revenue was $1.9 million for the third quarter, which was down 6% versus the third quarter of 2008. The decrease in revenue during the third quarter was expected, given the magnitude of our decrease in sales and marketing activity. We also believe the broader economic slowdown continues to negatively impact Photo Stamps as it is more of a luxury item than a necessity. During the fourth quarter we plan to continue keeping a tight rein on our marketing spend. We also expect to pursue the Photo Stamps retail business model, in a modest fashion, with expected placements for Photo Stamps at nationwide post offices. Longer term, we do not expect to invest heavily in the Photo Stamps are until the economy improves, but we do continue to believe that there are opportunities to grow the business in a better economic environment. Now, Kyle will discuss our more detailed financial results and our business outlook.

[Kyle Huebner:]

Three key customer metrics. All three PC Postage metrics we will discuss in this section exclude all estimated enhanced promotion activity. We will now review the PC Postage metrics for the quarter. For a more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metrics spreadsheet at investor.stamps.com. Paid customers in Q3 were 315,000, down 2,000 from the 317,000 paid customers in Q2 2009 and up 3,000, or 1% versus the 312,000 paid customers in Q3 2008. The change in paid customers from Q2 2009 to Q3 2009 was composed of 39,000 new paid customers who were successfully billed for the first time during the quarter, offset by 40,000 lost paid customers. We are pleased that we have been able to maintain a consistent number of paid customers throughout the economic downturn. Customer acquisition. PC Postage small business customer acquisition spend, which includes both sales and marketing spend as well as promotional spend, which is included in cost of sales, was $6.0 million in Q3, which was up 7% versus $5.6 million in Q3 2008. Small business cost per new registered customer was $114 in Q3, which was down 9% versus $126 in Q2 2009 and down 1% versus $115 in Q3 2008. Subscriber revenue per customer. ARPU was $17.72 in Q3, which was up 4% versus $17.07 for Q3 2008. The increase in ARPU was the result of having a larger number of customers and higher priced plans, as well as in increase in the average store revenue per paid customer. We do see some normal quarter-to-quarter fluctuations in our ARPU metric based on factors such as pricing plan tests, store promotions, and seasonality. Paid customer cancel rates. Paid customer cancel rate was 3.8% in Q3 compared to 4.4% in Q2 and 3.6% in Q3 2008. As expected, our churn rate returned to lower levels during Q3, which were similar to what we have experienced in prior quarters during the economic downturn. We believe that efforts we have taken to reduce churn, such as our retention program and product usability and improvements, are helping to mitigate the impact of the economy on churn, and that our churn rates would be higher without those programs in place. Customer usage. Total postage used by all customers was $86.0 million in Q3, which was up 12% versus Q3 2008. We are pleased to see continued growth in postage usage, as it demonstrates the value customers are getting from our service. Now we will review our third quarter financial results. Today we are going to discuss our financials on a non-GAAP basis. A detailed reconciliation of non-GAAP to GAAP measures is contained in the earnings release posted on our Web site. Total revenue was $20.2 million in Q3, which was flat compared with Q3 2008. Non-enhanced promotion PC Postage revenue was $16.8 million in Q3, which was up 5% compared with Q3 2008. The $16.8 million was our highest ever quarterly non-enhanced promotion PC Postage revenue and as Ken mentioned, was our fourth consecutive quarter of sequential revenue growth in this area. Enhanced promotion PC Postage revenue was $1.6 million in Q3, which was down 27% compared with Q3 2008. The decline in the enhanced promotion revenue was primarily attributable to lower marketing spend, which was down 55% compared with Q3 2008 as we continue to reduce our investment in this segment of the business. Photo Stamps revenue was $1.9 million in Q3, which was down 6% compared with Q3 2008, largely as a result of pullback in marketing spend, which was down 46% year-over-year. Gross margin, excluding 123R expense, was 73.0% in Q3 compared with 75.4% in Q3 2008. PC Postage gross margin, excluding 123R expense, was 78.6% in Q3 compared with 80.8% in Q3 2008. Cost of sales includes promotional expense of $449,000 in Q3. The year-over-year decrease in PC Postage gross margin was primarily due to increased promotional expenses and increased costs associated with our customer retention program. For the Photo Stamps business, gross margin, excluding 123R expense, was 19.0% in Q3 compared with 26.7% in Q3 2008. A year-over-year decrease in Photo Stamps gross margin was attributable to a higher mix of lower margin retail gift card revenue, higher postage face value cost, and less fixed cost leverage with the revenue declines. Total sales and marketing, excluding 123R expenses, was $7.2 million in Q3, which was down 4% compared with $7.5 million in Q3 2008. PC Postage sales and marketing was flat compared with Q3 2008 and Photo Stamps sales and marketing decreased by 46% compared with Q3 2008. R&D spend, excluding 123R expense was $2.0 million in Q3, which was down 2% compared with Q3 2008. G&A spend, excluding 123R expenses, was $3.1 million in Q3, which was up 4% compared with $2.9 million in Q3 2008. The increase was primarily attributable to higher legal spend during the quarter. Non-GAAP operating income was $2.5 million in Q3. Interest income was $208,000 in Q3 2009, which was down 70% versus $697,000 in Q3 2008. The lower interest income compared with last year was attributable to lower interest rates and lower cash balances resulting from our stock repurchase program. Non-GAAP net income was $2.7 million, or $0.17 per fully diluted share, based on 16.2 million fully diluted shares, compared with $3.4 million, or $0.17 per fully diluted share, based on 19.7 million fully diluted shares in Q3 2008. Free cash flow, defined as non-GAAP net income plus D&A less capex was positive $3.0 million in Q3. For the quarter D&A was $286,000 and capex was $35,000. We ended Q3 with $70.0 million in cash and investments, which was equivalent to approximately $4.30 per ending balance sheet share. Calculating the total cash investments, we are including cash, cash equivalents, long-term investments, short-term investments, and restricted cash. Share repurchase. During the third quarter the company repurchased 451,000 shares for a total cost of $3.9 million. Net operating loss shareholder update. We have approximately $235.0 million in federal and $150.0 million in state NOLs, which could save us up to $95.0 million in taxes over the next 15 years. We estimate that as of September 30, 2009, the company was at an approximately 28% level compared with a 50% level that would trigger an impairment in our NOL asset. During the second quarter of 2008 we received shareholder approval to amend our articles of incorporation in order to protect our NOL asset, NOL protective measures, and those measures are in effect. Full details of the protective measures are covered in our 2008 proxy, but essentially any person, company, or investment firm who wishes to become a 5% shareholder of Stamps.com must first obtain a waiver from the NOL protective measures from the company's board of directors. We currently have approximately 15.8 million shares outstanding so ownership of approximately 780,000 shares or greater would currently constitute a 5% shareholder. Stamps.com strongly urges any shareholder contemplating owning more than 630,000 shares to contact the company before doing so. Now turning to guidance. 2009 financial guidance. We expect fiscal 2009 revenue to be between $80.0 million to $90.0 million. We expect 2009 GAAP EPS to be between $0.20 to $0.40 per fully diluted share. The GAAP number includes an estimated $3.0 million of 123R expense, $375,000 asset write off, and $500,000 to $1.0 million of expected additional taxes resulting from the temporary suspension of the company's ability to utilize its net operating losses for California income tax purposes. Excluding the FASB 123R expense, the asset write off and additional California income tax, we expect 2009 non-GAAP EPS will be between $0.40 to $0.60 per fully diluted share. We expect to see low- to mid-single-digit revenue growth for PC Postage subscription revenue, excluding the enhanced promotions channel, for 2009. The PC Postage enterprise and shipping businesses are currently in an investment phase that we expect to act as a drag on 2009 earnings, but with a high expected return over the next five years. We expect the enhanced promotion and Photo Stamps revenue and marketing spend to be down significantly in 2009 compared with 2008 as we continue to reduce our investments in those areas. We expect Photo Stamps revenue to be a tough comparison in this coming Q4 as we had a strong quarter for high volume Photo Stamps orders in Q4 2008 that we do not expect to match this year. We expect PC Postage customer acquisition spend in Q4 to be up sequentially from Q3 as we increase our marketing and coordination with a seasonally stronger Q4. We expect legal expenses to remain high in the fourth quarter of 2009, related to our patent infringement law suits. If the current schedule in the indicia litigation holds, we would see a significant increase in Q4 legal spend in Q4 versus Q3. In summary, despite the current short-term challenges related to the economy, we feel we have a solid business model and that the fundamentals of our long-term business prospects have not changed. Our PC Postage business model, with a recurring revenue and high gross margins, provides a high degree of stability and provides a measure of downside production during this economic downturn. Our business generates strong free cash flow, which has funded our share repurchase programs. We have a strong balance sheet with $70.0 million cash and investments, no debt, and a large $95.0 million deferred tax asset. With that, we will open it up for questions.

[Operator:]

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

[Kevin Liu:]

First off, on Photo Stamps, I know you have reduced some marketing spend pretty significantly there but the volumes actually look like they held up relatively well on a sequential basis. So I was wondering if there are any particular channels where you are seeing more of that strength? Whether it's coming out of your retail offering or some of the partnerships with the likes of Adobe and others.

[Kyle Huebner:]

Q3 is our seasonally slowest quarter in Photo Stamps. Most of the revenue in Q3 kind of came from just the Web site traffic and so I think some of what you saw is that we anniversaried the slowdown in 2008. Q3 was where we really a slowdown in our businesses. So I think the year-over-year revenue decline wasn't as pronounced as the first half of the year, as we kind of anniversaried that. But I would say we saw some stabilization in kind of the Web site revenue in Q3, but it is our slowest seasonal quarter.

[Kevin Liu:]

And as we look towards Q4 for Photo Stamps, would we expect to see the marketing start to pick back up in advance of the holiday season, or is the plan here still to try to maintain the profitability as much as possible?

[Kyle Huebner:]

The plan is still to maintain the profitability. I think we expect that the marketing spend to be up a little bit sequentially but as Ken talked about, we're really not going to invest heavily while the economy is still down. So I think we'll invest a little bit more in Q4 because it the seasonally strongest quarter, but not at the levels that you saw in the previous years.

[Kevin Liu:]

And two quick questions on the PC Postage segment. One, in terms of the ARPU for your subscribers, it seems like that has continued to tick up, so I'm wondering you guys are in terms of figuring out the appropriate pricing plan. And then secondly, on the Enterprise initiative, just wanted to get a sense of, perhaps on the pilots you have in the works right now, where these could turn out to be more significant roll outs in the coming year.

[Kyle Huebner:]

I will take the ARPU question. As you may recall back in the first half of 2008, we did a series of price tests and made the decision to increase our price to new customers at that time. Once the economy hit, we went back and kind of had spent the last year kind of retesting pricing points. So I think over the past year we have acquired new customers, really on 1599 all the way up through 1999 price point. At this point I think we are acquiring more of the customers on 1599 but we think when the economy does come back in a more neutral economic environment, that we can go back and support a higher price than the 1599 to the new customers.

[Kenneth McBride:]

On the Enterprise area, we mentioned that the revenue for the quarter was up 118% and we have seen acceleration now for several quarters versus like what we saw last year. The pipeline continues to grow and we do see lots of opportunities that we hope can really blossom into big accounts going forward. We don't really talk about specific accounts but we're please with both the growth we saw as well as the new customer locations. We saw a new record this quarter, in terms of the new locations added, after seeing a record last quarter as well. So we've seen a nice trend here in the second and the third quarter and we are real happy with how the business has done.

[Operator:]

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

[George Sutton:]

As you develop a budget for 2010, how do you view the marketing spend options relative to the last couple of years? Obviously you had focused heavily on direct mail. Are you seeing any areas of key improvement, such as the Enterprise or more focus on the new e-Bay program. I'm just trying to get a sense of how much we've learned and how we might spend dollars looking forward.

[Kenneth McBride:]

I think the improvement we saw in Q3 in terms of the CPA was really kind of across the board. And we have seen continued improvements really in all of the segments. So direct mail, as our workhorse channel, has really continued to show improvements. I expect that going into next year we will be looking to scale up everything that is working this year, in some reasonable manner. Obviously we will take into account what we expect from the economy, what Q4 looks like, what the trends look like, and that will kind of drive our decision in terms of what we think is the right level of investment for next year. We have seen progress in the Enterprise area that we are very happy with so we expect to continue to scale that as well next year, and the marketing programs that we're doing, such as print and direct mail and telemarketing, have all continued to bring in good leads, so we plan to continue scaling those up in the sales area. We have grown our sales team versus last year and we plan to continue growing the sales team next year at this point.

[Kyle Huebner:]

I would just add, I think as we head into next year, our strategic priorities will be generally consistent with this year, which is enterprise and shipping. Those businesses are in the investment phase and so we are going to continue to increase the investments in those businesses, which are more early stage. Photo Stamps, I would say unless we see a material improvement in the economy, the investment would continue to be modest. Similar with the enhanced promotion channel. I think that would be a more modest, or down, investment. And then the small business side, as Ken mentioned, I think we will continue to invest in the things that work and we will see how Q4 kind of shapes up here as we set our targets moving into 2010.

[George Sutton:]

With respect to the Enterprise, which is arguably the most intriguing part of the stock story right now, at what point do you expect to start to separate out some of the numbers for us so we can analyze that segment specifically?

[Kyle Huebner:]

At this point there is the enterprise segment, for competitive reasons, primarily driving the decision not to break it out, as well as the fact that it is still, relative to the overall financial picture, not material. So we will see how that business grows over the next couple of years, but I would say our bias is going to be on preserving our competitive kind of information in that space. I think if we get to a point where it starts to make up 5% to 10% of the business, that's the point at which we would consider it.

[George Sutton:]

And lastly, you had mentioned if the calendar matches up with what you expect today, indicia will force an increase in legal spend in Q4. Can you remind me, is that a case? Do you go to trial in Q4?

[Kyle Huebner:]

In the first indicia litigation that we have, where we are asserting the patents against them, right now the trial is scheduled for early February of 2010. So if that holds, then there will be a significant amount of pretrial work and preparation for the trial that will occur in Q4.

[Operator:]

Your next question comes from [Graham Green – Baer Capital].

[[Graham Green:]

In recent weeks there have been a lot of announcements about integration 8.5 PC Postage version with a lot of shipping management software providers. Have there been any sort of early success, or can you talk in a little bit more detail about what do you expect to see from some of those relationships?

[Kenneth McBride:]

Sure. We just launched a lot of those things in the last few weeks, as we've been announcing, so it's hard to really comment on any kind of early results. A lot of the announcements have been around Version 8.5 of the software, which allows us to integrate with e-Bay and Amazon and Yahoo and PayPal and Google Checkout. So that is a really convenient solution for ecommerce shippers where if they are running a service off of multiple platforms they can pull all that information in for their orders into our solution and process all their shipments in a single-batch process and then post all the information back automatically. So it's just a continued kind of focus on our move more into shipping area with those ecommerce providers. The other things we have announced in the last few weeks, some of the integrations with companies like Webgility, Auctane, Atandra, other integrations like True Ship. We are really focused on trying to integrate our shipping capabilities into the partners. These types of partners offer Web-based order management, multi-carrier capabilities, and we really just want to provide our solution out there as broadly as possible into that space. Those integrations really provide us a kind of new way to reach some of the higher volume shipping segment in the ecommerce area.

[[Graham Green:]

The gross margins on Photo Stamps seemed to have declined in the last couple of quarters. Is there something else going into cost of sales there that wasn't previously, or can you address that?

[Kyle Huebner:]

Yes, one of the things is the biggest cost of sale in Photo Stamps is the postage face value. You will remember, in our PC Postage business when customers buy postage that's just a past through, that's not part of our revenue or our cost of sales, whereas in Photo Stamps we're buying the postage and kind of effectively marking it up in the Photo Stamps format and reselling it. And so one of the things is the last two years we have had postal rate increases where the cost of the postage for a sheet of Photo Stamps is up about $0.60 or $0.80, but we felt that we didn't have the flexibility or the ability to raise prices further. So that is something that is the biggest component of our cost of sales is impacted us. And we had a rate increase in May, mid-May, so this is the first full quarter, post that increase, that we've had the margin. The second thing is, there are certain fixed costs in the business. There's an operations group, there's the printer that we have, and as the revenue kind of continues to trend down, you are getting less fixed cost leverage on the revenue side, with the revenue declines. So I think those are a couple of the factors that have gone into the decline in the Photo Stamps gross margin.

[[Graham Green:]

Two questions on the share buyback. Number one, has there been any sort of change in philosophy or strategy in implementing that? And number two, are there any restrictions, or are you running into any problems in terms of executing not as quickly as you would like?

[Kyle Huebner:]

On the share repurchase, if you recall, the board approved a new plan in August, so that plan runs from August 2009 through February 2010 so we are kind of in the midst of that previously approved plan. There has been no change in terms of the authorized plan since the last call. I think with the share repurchase, there are daily volume limitations and your ability to buy back shares is dependent on the trading volume and those limitations, so I would say that is a factor, and was a factor, during Q3 in terms of how much we were able to repurchase.

[[Graham Green:]

So when the volume is drawing up, it's going to be more difficult.

[Kyle Huebner:]

Yes, it's harder to get the same kind of volumes.

[Operator:]

Your next question comes from Nick Farwell – Arbor Group.

[Nick Farwell:]

I have a question to try to reconcile the cash burn, Kyle, in the quarter. I notice the cash balance was down roughly $200,000. Can you reconcile that for us?

[Kyle Huebner:]

Yes. If you look from Q2 to Q3, the cash in investment balance was down about $350,000. We repurchased $3.9 million of stock during the quarter, so we had about $3.0 of free cash flow and then there was somewhere around $600,000 to $700,000 positive change in networking capital, and then we repurchased the $3.9 million.

[Nick Farwell:]

And the second thing, I think, Ken, you mentioned, or maybe it was Kyle, that sales and marketing for PC Postage for the quarter was $6.0 million. Is that $6.0 million specifically only PC Postage and is the delta the $1.2 million associated with Photo Stamps?

[Kyle Huebner:]

The $6.0 million is specific to small business, PC Postage customer acquisition spend. So the delta is our enterprise shipping and Photo Stamps businesses, as well as the enhanced promotion marketing spend.

[Nick Farwell:]

Can you break that out in any further details on the $1.2 million?

[Kyle Huebner:]

If you look at our metrics, the PC Postage acquisition spend for the small business is $6.0 million, the enhanced promotion is about $565,000 and so the balance is those other factors, so we don't break out more specifically than through the metrics.

[Operator:]

There are no further questions in the queue.

[Kenneth McBride:]

Thank you for joining us and if you have follow-up questions you can contact us online, investor.stamps.com or at the telephone number 310-482-5830.

[Operator:]

This concludes today’s conference call.