Stamps.com Inc.
Q1 2008 Earnings Call Transcript

Published: 28 Apr 2008

[Operator:]

Thanks very much for holding everyone. Welcome to the Stamps.com First Quarter 2008 Financial Results Conference Call. Just a reminder, today's conference is being recorded. Now the time for opening remarks and introductions, I will turn the call over to Mr. James [Truganza]. Please go ahead, sir.

[James Truganza:]

Good afternoon. On the call today is Ken McBride, CEO, and Kyle Huebner, CFO. Agenda for today's call is as follows; they will review the results of our first quarter and talk about the business outlook. Then we will discuss financial results and talk about our guidance. At first, the Safe Harbor Statement. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This release contains forward-looking statements of our expectations and financial guidance that involve risks and uncertainties. Important factors and the company's ability to complete and ship its products, maintain desirable economics for its products, and obtain 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 2007, 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. In addition, today's call is not a proxy statement or solicitation of proxies from the stockholders of Stamps.com and does not constitute an offer of any securities of Stamps.com for sale. Any solicitation of proxies will be made only by a definitive proxy statement mail by Stamps.com to all of its shareholders of record on the record date for its stockholders' meeting and filed with the Securities and Exchange Commission. Stamps.com stockholders are urged to read the definitive proxy statement because it contains important information about Stamps.com and the net operating loss proposal. The proxy statements and any other relevant materials as well as any other documents filed by Stamps.com with the SEC may be obtained free of charge at the company's website at investor.stamps.com/edgar/cfm. Now let me hand the call over to Ken McBride.

[Ken McBride:]

Thanks James. Thank you for joining us today. In the first quarter, we did $21.1 million total revenue, which is up 5% from the same quarter last year. PC Postage Subscriber related revenue, which includes service revenue, store revenue, and insurance revenue was $18.1 million, and that was up 10% versus the same measure in the first quarter of 2007. PhotoStamps revenue was $3.0 million, which is down 5% versus the first quarter of 2007. We reduced PhotoStamps sales and marketing by approximately 48% versus the first quarter of 2007, as part of our program to increase profitability in the PhotoStamps business and thus we experienced the decrease in revenue. We were encouraged to see the relatively small decrease in the revenue given the magnitude by which we cut our marketing activity level. Our first quarter non-GAAP net income excluding non-cash items was $2.8 million. Earnings per fully diluted share came in at $0.14 excluding the non-cash items. We felt our first quarter earnings were solid; especially, as we continue to make a strong investment in our PC Postage Business for the long term. Total spending on small business PC Postage customer acquisition, excluding spending on the enhanced promotion channel was $6.2 million, which is up 40% from the same quarter last year. On the call today, we will talk about the PC Postage Business in detail, then we'll talk about PhotoStamps, and then we will discuss financial results and our business outlook. Now, let's begin with a more detailed discussion of the PC Postage Business and then we will talk about progress we have made against our 2008 plan for that business. As a reminder, we will only talk about our business using the new customer metrics, which were introduced last quarter and that now exclude all enhanced promotion channel activity. During the first quarter, we experienced a small business cost per registered customer acquisition or CPA of $101.00 versus $103.00 in the first quarter of 2007. We increased small business customer acquisition spending by 40% year-over-year and CPA decreased by 1% year-over-year. In light of the large increase in customer acquisition spend we did during Q1 we were pleased to see the decrease in CPA, which indicated that our marketing programs are scaling up well at similar economics. We would note that in the first quarter each year we do tend to see a higher CPA than in the other quarters, owing to the annual step up in spend that happens in that quarter and the lag in response we find in some of our marketing channels. During the first quarter, we experience our second largest quarterly gross acquisition level ever at 62,000 customers, which is up 43% versus the same quarter last year. Note that Q4 last year was our highest quarter ever, so we did not exceeded this quarter. However, the fourth quarter always tend to be our top seasonal quarter for customer acquisition each year. We've also begun to realize the benefits of our increased spending last year, and this year, with paid customers in the first quarter of 2008 increasing 12,000 versus the fourth quarter of 2007. Our paid customers have now increased by 38,000 over the past four quarters. Again, all the numbers we just gave you all excluded all enhanced promotion channel activity. The mailing and shipping supply store revenue was up 5% versus the same quarter last year. Q1 store sales were a bit disappointing, driven by several factors, including a lack of new product releases in our themed NetStamps area. We expect to release some new, more exciting, full color themed NetStamps during the second quarter and that should help improve the growth rate in this area. The enterprise PC Postage area, we continue to make good progress during the first quarter. Our new seats added for the quarter was the highest ever. We also added additional senior management and began ramping up our sales team in this area. We continue to be excited about our opportunities in the enterprise. Now, let's turn to the 2008 plan for PC postage and talk about progress we have made against our plan today. At high level, our plan for PC postage includes 4 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 based on our most recent trends, we continue to find that the lifetime value of a non-enhanced promotion customer is more than 2 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 a long-term investment in the business that will pay dividends for several years to come. We spent heavily in the first quarter of 2008 and we plan to continue to spend heavily during the second quarter. During the second quarter, we have the May 12, US Postal Service rate increase which is always a good time for customer acquisition as it tend to focus attention on postage solutions that are alternatives to going to the post office for new stamps. During last year's rate case, we saw strong customer acquisition. We would also note that starting on May 12th; customers will also be able to ship items through Priority or Express at a discount through PC Postage versus USPS retail. And we expect the ability to get a discount to enhance our marketing message. The discount will be 3% for Express Mail and will range from 1% to 11% for Priority Mail, with an average discount of about 3.5% for Priority. In order to continue increasing our marketing and investment plan, we plan to continue scaling our workers direct mail channel that we also plan to increase and refine our acquisition through online advertising, affiliates, partners, telemarketing, traditional media, and other areas. As always, we are also looking to expand our portfolio of customer acquisition strategies that we employ. In total, we continue to expect to increase our PC Postage acquisition spends outside the enhanced promotion channel by approximately 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 acquisitions spend increased by 57% in 2007, so we do currently expect to grow acquisitions 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 offices and home office customers. We will continue optimizing our website and our registration process particularly because optimizations in this area pay dividends across all of our marketing programs. We will also continue focusing on improving the initial experience the customer has with our products. We will also continue building more usable interfaces for accessing the power of our product on an ongoing basis. We are currently finalizing Version 7.1 of our PC Postage Product and expect to release that new version at the beginning of May. The new software will include a new simplified system for printing postage that we call the Print Wizard, which we think will dramatically improve the usability of our overall service for new users. Third in our 2008 plan, we plan to market our new multi-user capability. 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 business. So far, we have only launched multi-user in a very limited fashion as we are continuing to do pricing optimization on a multi-user pricing plans. Once we complete our price tests in the second quarter of 2008, we plan the market our multi-user capability aggressively to our customer base, and to market it to new prospects as well. 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 the postage meter, based on our dramatically lower total cost of ownership, and based on the great visibility into individual employee activity that isn't available with the meter. In 2008, we plan to continue scaling up our enterprise sale and marketing efforts in a cost effective manner. We began increasing our sales and marketing activity and headcount during the first quarter, and we plan to continue to ramp it throughout 2008. So long as the cost per acquisition continues to remain attractive relative to our projected lifetime value. We also plan to continue enhancing our enterprise product in 2008; that will help our sales efforts. The multi-user capability that we have recently launched is a very important feature for many enterprise customers and we have rolled that out to our sales team and several enterprises have already adopted it. We will also be adding more flexible payment methods for enterprise users in 2008. We also recently completed 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 during the second quarter. And we plan to launch enterprise version 2.0 in the second half of the year, which will include improved enterprise reporting and improve 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 PhotoStamps. Today we announced that during the first quarter, we shipped approximately 178,000 sheets of PhotoStamps for a total of approximately $3.0 million in total first quarter Photo Stamps revenue. Consumer focus revenue was down year-over-year while high volume business revenue was up year-over-year. As you recall, we saw the overall economics we faced in this business get tougher throughout fiscal 2007, and as a result, we decided to pull back and focus our marketing activity during the second half of 2007. During the first quarter of 2008, we continued our program to increase profitability in the business line with a smaller and more focused marketing plan, and we decreased our total sales and marketing for Photo Stamps by 48% versus the first quarter of 2007. Given the large decrease in sales and marketing, we are encouraged to see that revenue only decreased by 5% versus the first quarter of 2007. As a result of the large decrease in sales and marketing spend, and the smaller decrease in revenue, the profitability picture continued to improve for the PhotoStamps business this quarter. We will now discuss the go forward plan for PhotoStamps and provide some updates on the plan. Throughout 2008, we are going to continue a more focused direct-to-site PhotoStamps 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 plan to focus on three major areas to drive the overall business. First, we plan to continue working on growing high volume business usage of PhotoStamps. Second, we plan to continue to pursue consumer distribution partnerships like Adobe, HP/ Snapfish, Apple, Google/Picassa, Costco, and American Idol. 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 PhotoStamps business line. We expect the strategic changes we have made to improve the profitability picture for PhotoStamps going forward. We do expect that as a result of this shift, we will continue to see lower reported revenue in the near term in the business model. However, we believe that it is important at this stage of the development of the business to move the model aggressively towards profitability, even if it is a lower growth rate. One final note on PhotoStamps is that we expect the USPS to extend the Phase IV market test for an additional year through May 16, 2009. We believe that this will be the final market test and that the next move for the USPS will be to move the product to permanent status. Now, Kyle will discuss more of our detailed financial results and our future outlook.

[Kyle Huebner:]

Thanks, Ken. Q1 Customer metrics, all PC Postage metrics we will discuss in this section exclude all estimated enhanced promotion activity. We will now review those metrics for the PC Postage business. Paid customers. Paid customers in the first quarter was 305,000, up 12,000 sequentially from the 293,000 paid customers in Q4, and up 38,000 or 14% year-over-year versus the 267,000 paid customers in Q1 '07. The paid customer number represents the unique number of customers successfully billed at least once during the quarter. Growth in paid customers has been driven by our increased investment in customer acquisition spend over the past year. The 305,000 paid customers represents our highest level of paid customers ever. The change in paid customers from Q4 '07 to Q1 '08 was composed of 47,000 new paid customers who were successfully billed for the first time during the quarter, offset by 35,000 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. Subscriber revenue per customer. Subscriber-related revenue which include service fee, store, and insurance revenue, excluding enhanced promotion customers was $15.6 million in Q1 '08, up 11% versus $14.0 million in Q1 '07. Average monthly subscriber revenue per paid customer was $17.00 for Q1 compared with $17.08 for Q4 '07 and down 3% versus $17.51 for Q1 '07. This metric is calculated as total subscriber related revenue for the quarter divided by paid customers in the quarter divided by three months. The year-over-year decline was attributable to lower store and insurance revenue per paid customers and to more customers on lower price plans as compared to last year. 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 to sales, was $6.2 million in Q1, up 40% versus $4.4 million in Q1 '07. The increase in customer acquisition spend reflects year-over-year increases in all our channels including direct mail. Small business cost per new registered customer was $101 in Q1, down 1% compared with $103 in Q1 '07. Paid customer cancel rate. The paid customer cancel rate was 3.4% per month in Q1, versus 3.4% in Q4 '07 and versus 3.1% in Q1 '07. Paid customer cancel rate is calculated as total lost paid customers in the quarter, divided by the sum of prior period paid customers and current quarter new paid customers divided by three months. The churn rate was consistent with Q4 '07 and is then what we consider a normal range for our current business. Note that as we ramp acquisition, you have more customers in the early months of their life cycle where we see higher churn rates, so this puts some natural upward pressure on the short-term on the weighted average churn metric that we report. We have been testing variations on our existing retention program during Q1, and plan to more aggressively scale our efforts in the retention area in Q2. Customer usage. Total postage used by all customers was $78 million in Q1 '08, up 25% from $63 million in Q1 '07. Growth in postage print out continues to outpace growth in paid customers which we view as a positive indicator that we are increasing the quality of the customers that we are acquiring. In summary, we were pleased with our Q1 '08 metrics as they were consistent with past results and continued to demonstrate growth in our paid customer base. At this point, we do not believe macroeconomic factors have had any material impact on our business. Now, I will review our first quarter financial results. We presented our first quarter 2008 financial results today on both the GAAP and non-GAAP basis to adjust for the following non-cash items. First, as previously discussed, we released part of our valuation allowance during Q1, which resulted in a non-cash income tax benefit of $3.7 million in the P&L, and a $3.0 million deferred tax asset on the balance sheet. We now have a total deferred tax asset of $97.5 million of which $3.7 million is recognized on the balance sheet and $93.8 million still has evaluation allowance against it. Our cash taxes for the quarter were $106,000. Second, we had a $445,000 asset write-off related to certain inventory of discontinued products. Third, we had $779,000 of stock based compensation expense, which was allocated as follows; $75,000 in cost of sales, $176,000 in sales and marketing, $152,000 in R&D and $376,000 in G&A. GAAP operating income was $694,000, and non-GAAP operating income, taking into account these adjustments was $1.9 million. GAAP net income was $5.2 million or $0.26 per fully diluted share, and non-GAAP net income, taking into account these adjustments was $2.75 million or $0.14 per fully diluted share. The rest of the financial results discussion will be based on the non-GAAP numbers. A more detailed reconciliation of non-GAAP to GAAP measures is contained in our earnings release posted on our website. Now turning to the Q1 financial results. Revenue was $21.1 million in Q1, which was up 5% compared with Q1 '07. PC Postage subscription revenue which includes service fee, store, and insurance revenue and which also included in the enhanced promotion channel was $18.1 million in Q1 which was up 10% compared with Q1 '07. The subscription revenue increase is attributable to the increase in paid customers resulting from the increased levels of acquisition spend. PhotoStamps revenue is $3.0 million in Q1 which was down 5% compared with Q1 '07. PhotoStamps revenue was down as expected, as Ken mentioned, due to lower PhotoStamps sales and marketing spend, which was down 48% year-over-year. We were pleased to see revenue only down 5% in light of the large reduction in marketing spend. Other revenue declined from $453,000 in Q1 '07 to $0 in Q1 '08 corresponding to the conclusion of Q2 '07 of one of our patent licensing deals. Gross margin and excluding 123R expense was 72.5% in Q1, compared with 73.6% in Q1 '07. For PC Postage, subscription related revenue, gross margin excluding 123R expense was 80% in Q1 compared with 81% in Q1 '07. Cost-to-sales included promotional expenses approximately $464,000 in Q1, compared with $408,000 in Q1 '07. For the PhotoStamps business, gross margin excluding 123R expense was 30% in Q1 compared with 35% in Q1 '07. The lower PhotoStamps gross margin was primarily due to a higher mix of high volume business orders which are typically lower gross margin compared with website orders. Sales and marketing spend excluding 123R expenses was $8.4 million in Q1, up 9% compared with Q1 '07. PC Postage sales and marketing including the enhanced promotion channel increased by 24%, while PhotoStamps sales and marketing decreased by 48%. The increase in PC Postage sales and marketing spend was driven by the increased investment in marketing programs to grow future subscription revenue. The decrease in PhotoStamps sales and marketing spend was part of our ongoing effort to improve the profitability in the PhotoStamps business through lower and more focused spend on higher return programs. R&D spending excluding 123R expenses was $1.8 million in Q1, down 10% versus Q1 '07. The decrease in R&D was attributable to the lower headcount related expenses. G&A spend excluding 123R expenses and excluding the asset write-off was $3.1 million in Q1 which was up 21% compared with Q1 '07. The increase in G&A spend was primarily due to the increased legal cost. Non-GAAP operating income was $1.9 million in Q1 compared to $2.4 million in Q1'07 as we continue to reinvest in the PC Postage non-enhanced promotion part of the business. Interest income was $918,000 in Q1, which was down 24% versus last year. The lower interest income compared with last year was attributable to both lower invested cash balances as a result of our share buyback activity and lower income yield from the lower interest rate environment. Non-GAAP net income was $2.8 million or $0.14 per fully diluted share based on $19.95 million fully diluted shares, compared with $3.5 million or $0.16 per fully diluted share based on $22.3 million fully diluted shares in Q1 '07. Note that the ending of our patent licensing deal accounted for $453,000 or $0.02 per fully diluted share, the difference in net income between Q1 '07 and Q1 '08. We continue to believe that the returns in the PC Postage business are attractive and that the best way to maximize long-term shareholder value is to reinvest the profits and cash flows to grow the business as opposed to maximizing short-term EPS. Free cash flow, defined as non-GAAP net income plus D&A, less CapEx, was positive $3.3 million in Q1. For the quarter, D&A was $723,000 and CapEx was $186,000. We ended Q1 with $90 million in cash and investments equivalent to $4.53 per fully diluted share. In calculating the total cash in investments, we are including cash, cash equivalents, long-term investments, short-term investments and restricted cash. Note that we do not have any auction-rate securities holdings in our investment portfolio. Share buyback. During Q1 '08, the company repurchased a combined total of 484,000 shares for a total cost of $4.5 million, leaving 716,000 shares available for repurchase under the existing 1.2 million share repurchase program authorized through August 6, 2008. Net operating loss shareholder notice. We have approximately $249 million in Federal NOLs and $146 million in state NOLs, which we expect could save us up to as much as $95 million in taxes over the next 15 years. As part of our ongoing program to preserve the future use of our NOLs and deferred tax asset, we request that all investors contact the company before allowing their ownership interest to reach the 5% level. Under IRS Code Section 382 Rule, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more 5% shareholder within a three-year period. When a change in ownership under this definition is triggered, the company's ability to use these NOLs may be limited. We estimate that as of March 31, 2008, we were at approximately 34% ownership shift compared with a 50% ownership shift that would trigger a possible impairment. Not all 5% shareholders are included in this calculation. So we request that any shareholder contemplating owning 800,000 shares or greater contact the company before approaching that level of ownership. The NOL protective measures. Owing to the large value of the NOL asset and the risk of possible impairment through a change of ownership under Internal Revenue Code Section 382 Rules, we have included a proposal in our definitive proxy filed on April 2, 2008 seeking shareholder approval during our May 22, 2008 annual meeting for additional measures to protect our NOL assets, to NOL protective measures. The proposal under proposed NOL protected measures include an amendment to the company's articles incorporation which would restrict transfers that would create new 5% shareholders or increase the position of existing 5% shareholders. Investors could request a waiver, other restriction from the company and the Stamps.com Board of Directors may grant a waiver if it is deemed to be in the best interest of shareholders. Despite our efforts at voluntary compliance, we estimate that we had approximately 20 percentage points of shift in ownership under section 382 as a result of transactions that occurred during 2007. Because the ownership shifts from these 2007 transactions will not roll off until various dates effect throughout 2010. If we were to experience additional ownership shifts in 2008 and 2009, similar to the 2007 level, we would expect to experience an ownership change. At our current stock price, the value of our NOLs could be significantly impaired unless we avoid potential transfers that individually or in the aggregate could trigger an ownership change under Section 382. Given the magnitude of the NOL asset and the potential risk in impairment, we strongly believe that the proposed NOL protective measures are in the best interest of the company and shareholders. If the NOL protective measures are approved by shareholders at the company's annual meeting, the company would enforce the restrictions to preserve future use of its NOL asset immediately thereafter. The company would expect to suspend enforcement of the NOL protective measures in 2010 when the 382 ownership shift level is expected to materially decrease. Now turning to guidance. We expect fiscal 2008 revenue to be between $80 million to $90 million. We expect fiscal 2008 GAAP net income to be between $0.58 to $0.68 per fully diluted share, which includes an estimated $3.6 million of 2008 123R expense and also includes the first quarter $445,000 asset write-off and the first quarter $3.7 million income tax benefit. Excluding the 123R expenses, the asset write-off and the income tax benefit, we expect non-GAAP 2008 net income to be between $0.60 to $0.70 per fully diluted share. We continue to target double-digit revenue growth in PC Postage subscription revenue excluding the enhanced promotion channel. We continue to expect PhotoStamps revenue to be down materially in 2008, as we continue to focus on profitability in the PhotoStamps business as discussed. We expect to continue investing in the PC Postage business with an expected increase of 40% in our small business customer acquisition spend outside the enhanced promotion channel and an expected decrease of approximately 15% to 20% in spend in the enhanced promotion channel. We assume an increase in legal expenses for 2008 due to an expected up tick in activity on the legal front relating to existing litigation. We assume our interest income will be down significantly in 2008 due to the lower interest rate environment we are currently seeing. We also assume the GAAP income taxes will return to the 2% to 3% of pretax income for the remaining quarters in 2008. While we do not provide specific numeric quarterly guidance, we wanted to highlight a few items related to our expectations for Q2. We expect PhotoStamps revenue will be a tougher compare in Q2 as we saw a large spike in high volume PhotoStamps orders in Q2 '07. We expect PC Postage customer acquisitions spend in Q2 to be up slightly from Q1 as we increase our marketing around the USPS rate change in May. We expect that the ramping of the retention program I described will result in some higher associated cost in Q2 with some potential of delaying revenue from Q2 into Q3. The current lawsuit is scheduled to go to trial in June, so we are expecting litigation spend in Q2 to be very heavy and up significantly from Q1 levels. We expect interest income in Q2 to be down significantly from Q1 as the Fed funds rate cuts we saw in Q1 will be fully reflected in the interest income yields in Q2. Our long-term growth rates will be driven by our ability to grow our sales and marketing investment at reasonable cost per customer acquisition levels in our PC Postage business, and we plan to grow the sales and marketing spend as fast as we can so long as our expected returns continue to be attractive. While our increased investment in 2008 will continue to impact earnings, we feel strongly it will enhance the long term revenue in earnings, and is the best thing for the long-term growth of the business. We continue to believe we can generate 15% to 20% annual revenue and earnings growth in our business over the long term. With that, we will open it up for questions.

[Operator:]

Thanks, gentlemen. (Operator Instructions) And we will take our first question today from Mr. George Sutton with Craig-Hallum

[George Sutton:]

Hi guys, nice quarter and a few questions. First, Ken, can you discuss the priority discount shipping in more detail? How much of a stimulus for new customers could that be?

[Ken McBride:]

Sure, we're really excited to see the rates discount, something we have been asking for some time; it really strengthens the value proposition and the marketing messaging will be enhanced. Obviously, one of the key messages we always said is the save money with our service and this one just kind of makes it a lot more clear. I think it is harder to really predict exactly how this will play into individual customer decisions, in terms of how it could impact churn, how it could impact acquisition. Numerically, the discounts are really primarily what we think really matters is the priority mail discount and the discount for a one-pound package is only about 1%, so the retail rates are going to be $4.80 per one-pound priority package whereas electronic rates are going to be $4.75. But two 2-packages are also significant and the rate discount for those is much higher, more like 4% so I think we are excited to see how it could help us in terms of the marketing message, and how it could help us in terms of just strengthening the value proposition.

[George Sutton:]

Great. Second, you mentioned a desire to market the multi-user capability "aggressively" in the back half of the year. Could you give us a sense of how you plan to do that?

[Ken McBride:]

Sure. As you know, we recently completed a multi-user technology; it is live within our customer base right now, we're not really pushing it so far. So, within the product you can navigate to it by going in and going to the place within the product where you can select different price plans and the multi-user plans they are available right now or our entire base. What we do typically when we want people to notice something is, we will put it front and center on the home page of the client. We will do a pop up typically within the client, we will send an email; so those are the kinds of things where once we decide what our sort of our final pricing is going to be, we will start hitting the customer base much more aggressively with the messaging to upgrade. And then in certain segments of our marketing, we may also feature the multi-user as one the key message points, it just depends on which segment we are going after.

[George Sutton:]

I understand. We were familiar with changes in the PhotoStamps related area from a competitive standpoint, have you seen any changes in the PC Postage related competitive environment?

[Ken McBride:]

Not really, I mean it is pretty much the same three vendors that we always talk about still offering their products at about the same price points. So as of the last reports that we got from USPS, we're still about 85% of all the subscription paying customers in the industry. We really haven't seen to what we could speak of an impact from any other things, let's say Dimoes, Done with Dimoes Stamps or other things that have happened in the market, it's been pretty much status quo.

[George Sutton:]

Okay, great, and then lastly, you did not change your guidance despite the upside in the quarter, how much discussion did you have about the potential for higher guidance?

[Kyle Huebner:]

George, we just had the last call in February, so we're really two months past that, and the results for the quarter came in kind of consistent with what we had been seeing and so, I outlined some things in Q2 that will impact the quarter, so I think as we get to midyear, and we're halfway through the year that's really the appropriate time to kind of see are things ahead of plan or on plan. But given where we are now with some the uncertainty I guess, and things like litigation spend and the interest income, it felt like the best thing to do is leave the guidance as is and then kind of revisit it midyear when you have a little more certainty in those areas I just mentioned.

[George Sutton:]

Understood, I appreciate the thoughts.

[Ken McBride:]

Thank you.

[Operator:]

(Operator Instructions) We go next now to Kevin Liu with B. Riley & Co.

[Kevin Liu:]

Hi, good afternoon, guys.

[Ken McBride:]

Kevin. Kevin Liu - B. Riley & Co. I guess in the past three quarters, you guys have kind of stepped up your customer retention efforts as customers might want to turn off, I'm just curious kind of what trends you saw, maybe during Q1 and even in the current environment, are you noticing that you'll have to either discount more plans or offer more free trial periods? I just want your sense on how those practices are trending?

[Ken McBride:]

Yeah. In Q2 of last year, if we will recall, we kind of really increased our level of effort around that and really it is driven by the number of reps that we have and our ability to take kind of excess rep capacity and spend time trying to retain the customer. So we saw a ramp in Q2 last year that I would say it kind of was at a little bit of a lower level in Q3 and Q4. And so in Q1 this year, there's kind of renewed focus on it and so we are really kind of increasing our rep capacity and allowing more of the customers to try and be retained. So I wouldn't say there's really a change in what we have had to do to retain customers in terms of drop down price or waving service fees, but we do expect to add an additional number of reps that allow more of the customers that call in, allow us more of an opportunity to retain them. Kevin Liu - B. Riley & Co. I see, and then the enhanced promotion marketing spend for Q1 was kind of consistent with Q4, but definitely lower than Q1 of last year, can you just talk a little bit about what the economics you are seeing from that channel are, maybe what factors are driving it to be lower than what we saw a year ago?

[Ken McBride:]

Yeah, so if you look on our investor metrics page, really, the two key things there are the revenue related to that channel, and then the marketing spend. And so if you look in the first half of 2007, we really saw deterioration in the economics in that channel. The number of customers being acquired went up but the quality of the customers was going down and so, as a result, the economics have deteriorated. In Q3 of last year, we took some steps really to work with the channel and improved the overall economics, and so in Q4, and then again in Q1, I think we were able to realize some improvements to those economics. I would say the Q1 was on par with Q4, if you look at the numbers with both of those quarters kind of reflecting better economics post some of the things we revamped in the channel in Q3. So it looks better in comparison with Q1 '07. Kevin Liu - B. Riley & Co. I see, and in terms of the legal cost during Q1, could you quantify those and maybe talk about how much more of an incremental spend we might see in Q2?

[Ken McBride:]

Yeah, we don't breakout the specific legal spend among the G&A. I think if you look at Q1 '08 relative to Q1 '07, as I mentioned a lot of the driver of that increase in levels was related to the legal expenses. As we move into Q2, the inducers lawsuit is in the heavy part of that case and then on top of that, we move in to the pretrial and trial for truss. So, I think, if the schedule holds Q2, I think would be the peak legal spend for the year, but as I mentioned schedules are always subject to change and delay, so it is as hard to predict with certain data timing at some of the expenses. Kevin Liu - B. Riley & Co. I see, and then just lastly, my two questions on PhotoStamps, one, what was the percentage contribution in terms of business customers during Q1? And then secondly, with the new announcement of American Idol partnership, I'm just curious if you guys have any sort of initial up tick in activity, when you guys announced that and what you might be expecting from that for Q2?

[Ken McBride:]

So basically on the American Idol stuff, we are excited about it. And as you know we created a joint promotion with American Idol where we created the limited edition postage featuring the six current and past winners. The primary thing we're doing with them is we're donating all of the net proceeds each week to support the Idol Gives Back Charitable Program. So, we don't really expect to see any kind of a short term financial impact from the program, but we have been mentioned on the show three times so far. So it is great exposure for the product and for the brand and the cost of goods as well. Kevin Liu - B. Riley & Co. And then the contribution from business customers during Q1?

[Ken McBride:]

For PhotoStamps?

[Kevin Liu:]

Yes, for PhotoStamps.

[Ken McBride:]

As a percentage? Kevin Liu - B. Riley & Co. Yeah.

[Kyle Huebner:]

Yeah, we didn't actually get that number, as the mix or as the marketing spend decreases the business orders are making up a higher contribution of the overall, and so we saw business orders grow whereas we saw website orders decline. The business orders tend to be, there are high volume orders, so there's more of a concentration, so you can see more fluctuations from quarter-to-quarter. So I actually don't have the specific number in front of me, but I think it was north of 25% to 30% of the orders were the high volume orders.

[Kevin Liu:]

All right, thank you.

[Operator:]

And we will take our next question now from Mike Crawford with Riley Investment Management.

[Mike Crawford:]

Thanks on the cost per gross new registered customer metrics, that is not excluding enterprise, but it's down year-over-year, but am I correct reading this it's up from quarters 2, 3, and 4?

[Ken McBride:]

Yeah, Mike, last year's numbers were 103 in Q1, 87, 84, and 88, and then 101 this quarter, so a couple of things. One, Q4 is the seasonally strongest quarter, so we typically see levels that are very good or lower than Q1 and Q4. And the other is as we ramp up spend, you don't get the full benefit in the quarter that you ramp the spent. So typically, if you see kind of a step function increase in the spent, then you see a higher acquisition number in that quarter. So I think we saw that in 2007, we kind of spent 4.4, 4.2, 4.4, and Q1 was 103 and then it came down in Q2 and Q3 on kind of a similar level of spend, and so I think it is really that the 101 number is a function of those three factors.

[Mike Crawford:]

So I mean, when you're thinking of the lifetime value of these customers have you refined your models to the extent that they're changed from a few months ago at all or is it still pretty consistent expectation given the churn looks pretty consistent.

[Ken McBride:]

What I would say is that the lifetime values of the customers excluding the acquisition spend had been relatively similar, and so I haven't seen any material change. Our CPAs are as you increase your marketing spend we do expect CPAs to trend upward on the heavier marketing spend, but the spread between the lifetime value and the acquisition cost is wide enough that we are certainly comfortable that the lifetime value is relative to the CPAs, where we are in Q1 and at the higher marketing spend levels earning a very attractive ROI.

[Mike Crawford:]

Right, turn the conference

[Ken McBride:]

Okay, thanks, Mike.

[Operator:]

And gentlemen, it appears we have no further questions this afternoon, I will turn the conference back to you for any closing or additional remarks.

[Ken McBride:]

Okay, I appreciate you joining us today, as always, if you have additional questions, our contact number is 310-482-5830. Thank you.

[Operator:]

Now we will conclude our conference call, we thank you all for joining us today and wish you all a great afternoon.