Stamps.com Inc.
Q2 2008 Earnings Call Transcript

Published: 24 Jul 2008

[Operator:]

Welcome to the Stamps.com second quarter 2008 financial results conference call. (Operator Instructions) Now at this time, for opening remarks and introductions, I’ll turn the call over to Jeff Carvari.

[Jeff Carvari:]

On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda of today’s call is as follows, we will review the results of our second quarter and talk about the business outlook, and then we’ll discuss financial results and talk about our business outlook. But first, the Safe Harbor statements. The Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995, this release contains forward-looking statements such as our expectations and financial guidance that involves risks and uncertainties. Important factors include 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 the filings with the Securities Exchange Commission stated from time-to-time on Stamps.com, including its annual reports on Form 10-K for the first year, for the fiscal year ended December 31, 2007, quarterly reports on Form 10-Q and quarterly reports on Form 8-K. Stamps.com understates no obligation to update or make any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now, let me hand the call over to Ken McBride.

[Kenneth McBride:]

During the second quarter, we did $21.4 million in total revenue, just flat compared to the same quarter last year. PC Postage(NYSE

[Kyle Huebner:]

Q2 customer metrics, all PC postage metrics we will discuss in this section will exclude all estimated enhanced promotion activity. We will now review the PC Postage metrics for the quarter. Paid customers in the second quarter were 313,000, up 9,000 sequentially from the 305,000 paid customers in Q1 ’08, and up 43,000 or 16% year-over-year versus the 270,000 in paid customers in Q2 ’07. Paid customer number represents the unique number of customers successfully billed at least once during the quarter. Growth in the paid customers was driven by our increased investment in customer acquisition spend over the past year. The 314,000 paid customers represents our highest level of paid customers ever and continues to demonstrate the acceleration in paid customer growth we’ve seen over the past year, with Q2 growing at 16% year-over-year versus Q2 ’07 which grew at 3% year-over-year. The change in paid customers from Q1 ’08 to Q2 ’08 was composed of 48,000 new paid customers who were successfully billed for the first time during the quarter offset by 39,000 lost paid customers. Lost paid customers are defined as customers who were successfully billed in the previous quarter but not successfully billed in the current quarter less any recaptured paid customers from prior quarters. Subscriber revenue per customer, subscriber-related revenue which includes service fee, store and insurance revenue excluding enhanced promotion customers was $16.1 million in Q2, up 14% versus $14.1 million in Q2 ’07. Average monthly subscriber revenue per paid customer was $17.14 for Q2 compared with $17 for Q1 ’08 and down 2% from $17.44 for Q2 ’07. This metric is calculated as total subscriber-related revenue for the quarter divided by paid customers from the quarter divided by three months. The year-over-year decline was primarily attributable to lower store and insurance revenue per paid customer. 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 $5.6 million in Q2, up 37% versus $4.1 million in Q2 ’07. The increase in customer acquisition spend reflects year-over-year increases in all our channels including our direct mail channel. Small business cost per registered customer was $94 in Q2 versus $101 in Q1 ’08 and up 8% compared to $87 in Q2 ’07. Paid customer cancel rate was 3.7% in Q2 versus 3.4% in Q1 and versus 3.5% in Q2 ’07. Paid customer cancel rate is calculated as total lost paid customers in the quarter divided by the sum of prior quarter paid customers and current quarter new paid customers divided by three months. There are many factors that influence churn rates. They include the type of customer, the age of the customer, the levels of customer acquisition, the mix of customer acquisition channels, price and retention program offers, usability of the product and seasonality. As such, we expect to see some degree of normal fluctuations from quarter to quarter. Specifically, we believe the following factors related to churn during Q2. We have seen several quarters of sustained higher levels of customer acquisition which result in more customers in the early part of their customer life where we tend to see higher churn rates. So this puts some upward pressure on the weighted average turn metric that we report as we grow the business and grow customer acquisition. We increased our retention program efforts in Q2 which we believe had some short-term impact on our churn metric resulting from increased service fee waves. We would also note that we do typically experience higher churn rates in Q2 and that has been the case for each of the last three years. We will continue to focus on ways to reduce churn and optimize customer lifetime values. Total postage used by all customers was $77 million in Q2, up 20% from $65 million in Q2 ’07. Both postage printing continues to outpace growth in paid customers which we view as a positive indicator that we are increasing the quality of the customers we’re acquiring. In summary, we thought that our Q2 metrics and results continued to demonstrate solid fundamentals in the PC Postage business. We may potentially be seeing some impact on our metrics for macroeconomic factors although we do not believe that this has had a material impact on the overall Q2 results. We believe that the return on investment on our customer acquisition spend continues to be very attractive and we plan to continue our level of investment in the business during 2008. Now we will review our second quarter financial results. Non-GAAP to GAAP reconciliation, we presented our second quarter 2008 financial results today on both a GAAP and non-GAAP basis to adjust for the following items. First, we had a one-time $710,000 litigation charge relating to a lawsuit related to our iShip business which we divested in 2001. Second, we had $903,000 of stock-based compensation expense which was allocated as follows

[Operator:]

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

[Kevin Liu:]

Kyle, in terms of that promotional expense benefit of the subscription, I was just wondering if you could quantify how much that was and perhaps where we can expect that number to go as we move into the back half of the year?

[Kyle Huebner:]

Effectively, what happened is, our promotional costs per customer has come down. So our future expected liability for promotional items that customers will redeem in the future was reduced to reflect the stock. So that resulted in the reduction to the Q2 promotional expenses. It’s a little hard to quantify because some of the benefit of the reduced promotional expenses is really going to be an ongoing benefit going forward with lower promotional expenses. I don’t think it’s really all a one-time benefit in this quarter. I think the best guidance that you can have is if you look at last year, our promotional expenses were $385,000 so on a year-over-year basis the benefit of 266 was somewhere around $650,000 benefit. As I said, I think some of that reflects as an ongoing benefit that we’ll see in terms of the promotional expenses.

[Kevin Liu:]

In terms of your retention program, are you continuing to scale up either sales personnel or any training around that and I’m just curious to what we should expect in terms on investment around that?

[Kenneth McBride:]

I think we scaled it up quite a bit during the second quarter and so we’re probably more in a steady state mode now. We have added quite a few personnel to the retention process from the second quarter so we felt like we had saw some impact during the second quarter to both paid customers as well as service fees but net-net we’re excited about the retention program. We think it’s a very positive ROI investment and we plan to continue to run that program going forward.

[Kevin Liu:]

In that program, have you seen any trends in terms of increases in your ability to keep ties or are you seeing any change in the return on that?

[Kenneth McBride:]

No, not really, we’re continuing to experiment with the different formulas, the different types of offers to make and different circumstances with customers until we refine our approach. I think net-net we’re getting better at it but I think we’re seeing similar economics as what we’ve seen all along. It’s an extremely positive ROI when we make the retention offer and see the customers.

[Kevin Liu:]

Just briefly on the PhotoStamps division. How much money is your partners delivering as a percentage or if you could provide a number there? Also, it sounds like you are pretty committed to this business over the longer term even with the lower growth this year. I’m just wondering if you could update us on what possibilities you may have evaluated for this business.

[Kyle Huebner:]

Sure, on the partners, we haven’t really disclosed that in the past. For competitive reasons, I think we will remain fairly close to the chest. It is an area that you know from our prepared remarks; it is an area that we’re focusing on trying to scale up. The beauty of partnerships is the way you can structure a deal that is profitable and the customer on a rough share basis or a bounty basis is profitable with the customer immediately. It’s an area where we would like to continue to scale in the business going forward.

[Kenneth McBride:]

One other thing I would like to add, Kevin. When we were spending heavier on marketing, pre-Q4 of ’07, we were really using a very broad base consumer marketing push so we were doing things like a lot of traditional media, radio, TV, print. As we pull back on our marketing spend, we are more focused now on things like online, and partnerships, so those areas, I think, make up a bigger percentage of the spend today than they did a year ago when we were spending at a heavier level. What was the second part?

[Kevin Liu:]

The second part was just in terms of evaluating how attractive this business is over the longer term. I was just wondering if you evaluated or not if you wanted to continue to run this even given the lower growth in the possibility or just your thoughts at this juncture on the long-term.

[Kenneth McBride:]

I think we’re continuing to work on the business and planning to keep working on the economics in lots of different ways, ways we outlined during the plan and in the remarks. I think the alternatives that we examined at this point; we really focused on running the business, trying to make the business work. The way we’ve really structured it with the cutback in marketing, we’re not really seeing much of an impact in the bottom line on a negative basis. We feel that is giving us some additional time to continue working on the economics of the business.

[Kyle Huebner:]

Kevin, is this year, 2008, is really focused on rationalizing the business under the new profitability model. Beyond that, I think it comes down to whether we can effectively grow the business at our target rates under the new profitability threshold. I think that’s something we will have to evaluate as we move into 2009, but for this point, 2008, really the focus is on rationalizing the business.

[Operator:]

Your next question comes from George Sutton - Craig Hallum.

[George Sutton:]

I wanted to talk about a couple of statements that you made and to make sure I understand them. First on the macro, here before, you said the macro really wasn’t impacting you at all and now you’re saying you may see some macro impact. Can you just discuss what you’ve seen shift there? Also a corollary to that would be the direct marketing spends which I believe you had planned to be up 40% year-on-year, and now you’re talking 25% to 40%. I know it’s on the margin; I just wanted to see if you could address those in more detail.

[Kenneth McBride:]

We largely continue to believe that the impact of the economy on the PC Postage side of the business, we see positives and negatives. On the one side, small businesses that are struggling and going out of business could impact our existing base, could increase churn. On the flip side, in a down economy, you do see individuals tend to start small businesses more. Businesses also tend to focus on cutting costs and lone of our key value propositions versus the postage meter is that we are a lot less expensive. We may have seen some benefit from that. One of our marketing messages of avoiding the post office or don’t take a trip to the post office, is potentially resonating even more with the cost of gas as its skyrocketing. I think that we felt that during the second quarter, we did see some slight uptick in churn and there may have been some impact in that number from a weakening economy. Overall, we felt the metrics in Q2 were solid so it’s hard to say for sure that the economy may have impacted us, either in a positive or negative way.

[Kyle Huebner:]

I would add, if you would look at churn that I talked about. There are lots of factors that influence churn. I think it’s a little bit harder to isolate economic factors used specifically as a factor on the overall metric. I think as Ken said in general, churn picked up a little bit, that means, sequential growth in paid customers was 9,000 versus 11,000-12,000. I think the quarter was fundamentally sound but on the periphery, there may be some impact that we’re seeing from the economy but at this point, I think the metrics are good. We still can plan to continue that investment.

[George Sutton:]

With respect to the pricing, you are now talking about a higher price point which is intriguing. I’m curious, what really drove that decision and you mentioned you’ve done some testing, I’m just curious if you can give us a little bit more behind the scenes as why that decision was made.

[Kenneth McBride:]

We do a lot of testing behind the scenes and we typically don’t really talk about it publically until we have some results that merit some changes in our business model. We’ve been at the $15.99 price point as our primary price point now since 2000 when we first launched it. I think there’s certainly some room for increasing the price just from a historical perspective but we’ve been testing the price point, we launched the test about a year ago for new customers. Typically when we do these things, we monitor the churn for a very long period of time so we’re watching the results for about a year and that price test we launched about a year ago. We’ve also been continuing to look at the higher price point impact on new customer acquisition, particularly more recently in the first half of this year. Based on all those results, we feel that net-net we’ll see a higher lifetime value and the return on our investment will be higher at the $17.99 price point which is why we decided to move to that level.

[George Sutton:]

Lastly, I’m curious on your Avery-Dennison partnership and congrats to your business as a team on picking that up. I just want to make sure I have a sense over what time frame are you looking to evaluate the success of that program. What time frame are you expecting to see success in that program?

[Kenneth McBride:]

The program is kicking off during the third quarter and we’ll begin to see Avery getting behind the co-branding service from a marketing perspective immediately. It was structured to be a long-term multi-year deal so we’re expecting a long-term relationship with Avery. We’re really excited about the things that Avery can bring. As most people know, they’re one of the best-known brands in office products and they have a very, very large footprint in the retail channel especially in the office supply stores. So they’ll be marketing our service, the co-branded service through their retail relationships, through their retailed SKUs where it makes sense. We’re excited about the partnership and we’re looking forward to getting it kicked off here in the third quarter.

[Operator:]

It appears there are no further questions at this time.

[Kenneth McBride:]

Thanks so much for joining us and, as always, if you have follow-up questions, you know the contact number for the company and the investor relations line is 310-482-5830.