Stamps.com Inc.
Q2 2010 Earnings Call Transcript

Published: 30 Jul 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com second quarter 2010 financial results. (Operator Instructions) Now, I would now like to turn the conference over to your host for today, Jeff Carvari, Director of Finance.

[Jeff Carvari:]

Thanks very much and good afternoon everyone. On the call today is Ken McBride, our CEO; and Kyle Huebner, our CFO. The agenda for today's call is as follows. We will review the results of our second quarter 2010. Then we will discuss the financial results and talk about our business outlook. First, the Safe Harbor statement. 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, including the company's ability to compete 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 from time to time by Stamps.com, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2009, 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. Now let me hand the call over to Ken.

[Ken McBride:]

Thank you for joining us today. We were very pleased with our second quarter performance. The second quarter non-GAAP earnings per share was $0.20, which is up 43% versus last year. This is our highest quarterly non-GAAP earnings per share since 2006. Second quarter revenue for our core PC Postage business, which excludes the enhanced promotion channel, was up 9% versus the second quarter last year. We generated a sequential increase of 3,000 in our paid customer metric and a year-over-year increase of 21,000 paid customers. We continue to see strong results from our Enterprise business with second quarter revenue increasing by 62% versus the same quarter last year. And our high-volume shipper segment also continued to show good progress with Q2 postage printed by high-volume shippers growing 37% versus the second quarter last year. On the call today, we will talk about the PC Postage business in detail and then we'll talk about PhotoStamps, and then we'll discuss the financial results and our business outlook. Let me begin with a more detailed discussion of the PC Postage business. The customer metrics we discussed on the call exclude all enhanced promotion channel activity. For a more detail definition of how we calculate each of our metrics, you may refer to our quarterly investor metrics spreadsheet at investor.stamps.com. During the second quarter, we acquired approximately 52,000 gross small business customers, which is down 2% versus the same quarter last year. We believe the lower customer acquisition was partially attributable to the lack of postage rate increase, which is traditionally a driver of second quarter acquisition. We also believe that the challenging economic environment continues to impact our small business customer acquisition. Our cost per new small business customer acquired or CPA for the second quarter was $128, which was up 2% from $126 in the second quarter of 2009. The second quarter CPA reflects the lower acquisition levels during the seasonally-slower Q2. We continue to invest in customer acquisition as we are still earning a very good return on our market investment at the CPA levels. Our monthly churn during the second quarter was 3.6%, which compares to 4.4% in the second quarter of 2009. We were encouraged to see our year-over-year churn metric continue to decrease as our 2010 quarterly churn rates of 3.4% to 3.6% are running lower than our 2009 quarterly churn rates, which were in the range of 3.6% to 4.4%. We historically see an increase from Q1 to Q2 in our churn metric. So Q2 was consistent with this pattern. Paid customers in the second quarter were 338,000, which is up 3,000 sequentially versus the 336,000 paid customers in the first quarter of 2010 and was up 7% compared to the second quarter of 2009. We were pleased with the growth in paid customers this quarter despite the lack of postage rate increase and the slowdown in acquisition we experienced. Last year during the second quarter, we saw a sequential decline in paid customers by 4,000. So an increase during Q2 of this year was positive for the business. The ARPU, average revenue per unit, was $17.91 in Q2, which is up 2% versus the $17.50 we saw in the second quarter of last year. The increase in ARPU was partially attributable to an increase in the average store revenue per paid customer, driven by increased usage of our service, and partially attributable to having a large number of customers on higher-priced plans. We do see some normal quarter-to-quarter fluctuations in our ARPU metrics based on factors such as pricing plan tests, store promotions, seasonality and other factors. Our total postage used by all of our customers was 99 million in the second quarter, which is up 20% versus the second quarter of 2009. Our postage usage continues to grow at a faster rate than our paid customers, resulting in increased average usage per customer which demonstrates the value customers derive from our service. The increase is also a result of our increased focus on the high-volume shipping segment where our postage printed in Q2 by that segment grew by 37% year-over-year. Even the mailing customers outside of the shipping segment, we saw a solid 15% growth rate year-over-year in postage usage in that area. Now, let's turn to the plan for PC Postage for this year and talk about our progress we've made against the plan to date. In the small business and home office area or SOHO, we have continued to modestly increase our customer acquisition spend outside enhanced promotion channel. We continue to believe that the lifetime value of our non-enhanced promotion customers is at least two times higher than the current cost of acquisition. We may expect to increase our PC Postage small business acquisition spend outside the enhanced promotion channel by approximately 10% for the full year of fiscal 2010. We continue to experience positive performance in direct mail, traditional media, online marketing and other areas. Also in the SOHO area, we're continuing to work on optimizing our business model and our overall customer experience in several ways such as making our software installation process easier and more seamless, expanding our presence on social networking sites, expanding our customer web portal, expanding content and multimedia on our website and several planned product releases in 2010, including improvements to our batch capability, expansion of our e-commerce integrations and other general enhancements. The continued work we have done and particularly in improving our product has resulted in some awards for our efforts such as the prestigious American Business Award New Software of the Year we recently won versus other great products such as the latest Firefox version 3.6 browser. In the Enterprise area, for 2010, we're trying to continue to scale up our sales and marketing efforts. During the second quarter, we continued to make great progress in the Enterprise area with year-over-year revenue growth of 62%. We did some slowdown in the percentage of growth this quarter, which is a natural result as we increased the size of this business. Q2 last year was also a very strong quarter for Enterprise with 118% growth in that quarter. We continue to gain traction with new accounts and to increase penetration in existing accounts. We continue to see lower churn rates and higher ARPU in Enterprise than in our SOHO business. We continued building our sales team and improving our sales efficiency. We also successfully launched Enterprise 2.0 during the second quarter, which included several key advancements, including a dramatically improved web-based Enterprise reporting system with a sophisticated front-end reporting tool that features real-time data. Also included improved web-based postage management tools, enhanced web-based financial and administrative controls for central decision-makers. We are currently in the process of rolling out this new version throughout our customer base. In 2010, we plan to continue enhancing our Enterprise efforts. We are continuing to work on scaling our sales team headcount and our goal is to increase the team size by at least 25% during 2010, and we are currently on target to reach that goal. We also plan to continue improving the efficiency and quality of our sales team with continued investment of hiring and training top personnel. Overall, we're very excited about the continued progress we're making in the Enterprise area, and we feel that we are beginning to see good returns on the investments we have been making in this area. In the high-volume shipper area, we plan to continue scaling up our efforts in this area in 2010. Our goal in this area is to attract high-volume shippers such as fulfillment houses and e-commerce shippers, large retailers and other types of high-volume shippers. During the second quarter, we continued to see acceleration of our growth in this area. For instance, our Q2 postage printed in the high-volume shipping segment grew 37% versus the second quarter last year. And that compares to 30% growth we saw in Q1 and 25% growth we saw in Q4 of last year. During 2010, we will continue to invest in our shipping technology and our sales and marketing efforts. We'll continue to improve our batch capability with easier order management and order flow, plus singles in our product. We'll add additional shopping cart integrations for easier data export and import from the tool that customer like to use. We'll continue to drive new software integrations with sophisticated high-volume shipping solutions such as multi-carrier shipping software. And we'll continue to scale and drive our sales effort using our national sales force. Attracting high-volume shippers is a strategic focus for the company and is also one of the most important strategic initiatives of the U.S. Postal Service. They're our most important partner. We're focused on making them as successful as we can in this area. We believe that our 2010 PC Postage plan is a solid plan and that our long-term opportunities to grow this business are very attractive. Now, with that, let me turn to a more detailed discussion of the PhotoStamps business. During second quarter, we continued our program to increase profitability in the PhotoStamps area with a smaller, more focused marketing plan. We decreased our sales and marketing for PhotoStamps by 62% versus the second quarter of 2009. As a result of this decreased spend, total revenue for PhotoStamps was $1.1 million for the second quarter, which is down 9% versus the second quarter of 2009. The decrease in revenue during Q2 was expected, given the magnitude of our decrease in sales and marketing activity. During the second quarter, we estimate that the PhotoStamps business was profitable. During 2010, we plan to continue keeping the tightening in our marketing spend, and we expect that the PhotoStamps business will again be profitable for fiscal 2010 as a whole. Longer term, we do not expect to invest heavily in the PhotoStamps area until the economy improves, but we do continue to believe that there are opportunities to grow the business in a better economic environment. Now with that, let me turn it over to Kyle who will discuss more detailed financial results and our business outlook.

[Kyle Huebner:]

Thanks, Ken. We will now review our second quarter financial results. Today we are going to discuss our financials on a non-GAAP basis, which exclude the following items

[Operator:]

(Operator Instructions) Our first question comes from George Sutton with Craig-Hallum.

[George Sutton:]

On the Kara Technology settlement, I was most intrigued by the discussion on what that might mean with respect to your ownership of some of those patents and how that might influence the Endicia opportunity or litigation? Could you discuss that to the extent possible?

[Seth Weisberg:]

George, this is Seth Weisberg. I'm the Chief Legal Officer at Stamps.com. So the patents that we are acquiring out of this settlement are the patents that were sort of in this Kara Technology litigation. And the note that you saw with regards to the Endicia litigation is that Mr. Kara has agreed that he will assist Stamps.com in the prosecution and enforcement of patents that we actually already owned from our previous E-Stamp purchase and that we have sort of in the Endicia litigation. So that's what that note is about.

[Ken McBride:]

So in Kara with the inventor on the E-Stamp patents that we purchased and we're asserting some of those against Endicia in those litigations.

[George Sutton:]

With respect to the legal spending in the quarter, how much was that reduced by this settlement? And if you can give us a sense to what you've been spending on Kara specifically, because I know it heated up recently, that would be helpful.

[Ken McBride:]

Yes, so the settlement actually didn't have any impact on Q2 spend. This settlement actually occurred in July. And for the accounting rules, we needed to reflect it in our Q2 financials. But we effectively spent money on the litigation for all of Q2 and the month of July. So there was really no benefit in Q2 from the settlement from that perspective. That litigation was scheduled to go to trial in Q4. So during Q2 and in July, we were doing work to prepare for the litigation. So as we look forward now, that litigation spend goes away. And really the big again the impact was that we had budgeted for a trial to happen in Q4. And so berating the expense of a trial is obviously very beneficial from cost savings on the legal side.

[George Sutton:]

And then lastly with respect to some of your newer growth initiatives, the high-volume shipper opportunity and also Enterprise, is there going to be a point in time or at what point in time we start to share more of the metrics for those businesses?

[Ken McBride:]

At this point, the financial impact from those businesses in terms of the top-line is not yet material. So we've kind of settled on revenue growth for Enterprise and postage printed growth for high-value shipping as the metric that we would provide. It just depends over time, at what point in time those businesses become more material. There is obviously a competitive consideration in the high-volume shipping space. That's an area that indeed shipper gets those on. And in the Enterprise space, that's an area that Pitney focuses on. So I think we have to be more sensitive in terms of the competitive considerations. But over time, to the extent it becomes a material part of the business, we willl definitely work at breaking out more metrics.

[George Sutton:]

I'm very pleased to see the suspension of the protective measures on the NOL. Can you just discuss what precipitated that change?

[Ken McBride:]

Sure. We saw a very large shift in our ownership shift back in 2007. And the way the calculation works is that that stays due for three years and then it drops out of the calculation. So when we put the protective measures up for shareholder vote in 2008, it was our intention at that time that when the shift rolled back down in 2010, to the extent there was no risk to the tax asset, we would suspend it. And so if you look at the end of Q1, we were at 33%, and that declined to 24% in Q2. And assuming no other changes in our new 5% shareholders, that number would decrease to 21% at the end of Q3 and down to 16% at the end of Q1. So at this point, given the amount that has already decreased and the future expected decreases, the Board and the company stalled that. There wasn't an imminent kind of material risk to the tax asset and that the right thing for shareholders is to suspend those restrictions.

[Operator:]

Our next question comes from Sarkis Sherbetchyan with B. Riley & Company.

[Sarkis Sherbetchyan:]

Apart from the direct mail marketing, do you see any other areas for marketing spend that those were your high ROI criteria?

[Ken McBride:]

Direct mail marketing is our bread and butter main channel, but we do a lot of marketing outside of direct mail, do a lot of stuff online in terms of online advertising, banner ads, permission-based emails, other types of online advertising. And then we're doing a lot of traditional media as well. So we're constantly looking for ways to expand our portfolio of the types of marketing programs that we have at our disposal, and we're constantly testing new types of things all the time. So it's definitely our goal to continue to build the business on direct mail, but define and identify new high ROI channels outside of direct mail as well.

[Kyle Huebner:]

The other one I would add is our shipping integrations. While we are targeting high volume shippers, those integrations kind of do have a full range of lower-volume to higher-volume shippers. And so you've seen over the past six months we've focused our product features on shipping and are focusing some of our marketing and business efforts on shipping integrations.

[Sarkis Sherbetchyan:]

Do you see any trends in customer conversion from trial to pay?

[Ken McBride:]

If you look at the conversion, I think the best way to look at it is kind of over a trailing four-quarter period. Each quarter fluctuates, because the customers that sign up in the last month of the quarter, let's say in June, don't become paid customers after their trial until the next month. So you see some fluctuations quarter-to-quarter, but the trailing number over the past four quarters is about 77%. And so that trailing four-quarter average has been fairly consistent over the past two years.

[Sarkis Sherbetchyan:]

I have noticed that you made it easier for customers to use the software with the postage wizard. Do you think it reduced the level of trial churn?

[Ken McBride:]

We actually launched the wizard back in 2008. The evidence we have says that customers use it fairly heavily. So it does help particularly those newer customers, get introduced them to the complex rules (technical difficulty) step-by-step process. So we find it's a valuable way to help introduce customers to our service. That being said, we kind of launched the wizard right in the middle of the whole economic shift, the downturn in a way. At the same time that we launched that we saw increase in churn actually. So our belief is that it may have helped cushion the blow from the economy, but we don't have necessarily a direct correlation or evidence as to exactly what effect that had, because it was such a tumultuous time back then.

[Sarkis Sherbetchyan:]

When you ordered impairing the NOLs, did it impact the amount of stock that you are willing to repurchase?

[Ken McBride:]

Say the question again.

[Sarkis Sherbetchyan:]

When you had the NOL Protective Measures in place and you recently kind of suspended that, did it impact the amount of stock that you are willing to repurchase?

[Ken McBride:]

Does it impact our decision today? At this point, no. Again, the shift has declined enough and is expected to continue to decline. We feel that we could suspend the protective measures and continue to buy back stock without any immediate risk. But obviously, the shift is something we'll all continue to monitor over time. So that's something we'll always be watching. But at this point, it doesn't have any impact on our decision today to buy back stock.

[Kyle Huebner:]

In the past, if you look back over the last several years, there is an interplay between the NOL change of control and the amount of shares we repurchase. So as the Board of Directors looks at the level of repurchase activity, it's one of several factors they look at. There have been times historically where our NOL change of control percentage is such that we felt somewhat constrained in terms of how much stock we can repurchase. It's not the case anymore, because the percentage change has looped down so much over the last period of time, there has been times where that's the case.

[Sarkis Sherbetchyan:]

Would you consider a large Dutch tender auction now that you've suspended that measure?

[Ken McBride:]

I think if you look at our last three years, I think our approach has been just a very disciplined approach to buy shares on the open market consistently over a multiyear time period. So over the past two-and-a-half years, the average price of the repurchase is very cost effective. So at this point, paying the premium that you would have to pay for a tender offer I don't think was something we're going to immediately consider. We feel that kind of the discipline approach of continuously buying back on the open market and to the extent that we can find block trade like Kevin Douglas is, it is a more effective longer-term strategy and will create more long-term benefit for the shareholders.

[Operator:]

(Operator Instructions) Our next question comes from Graeme Rein with Bares Capital.

[Graeme Rein:]

Ken, in your remarks, you said that Enterprise customer has lower churn and higher APRU, which it suitably make sense. Can you provide any sort of order of magnitude or what that might look like just based on your experience so far?

[Ken McBride:]

We don't really disclose that information. And I think what we find is that the lifetime value of an Enterprise location compared to the lifetime value of a single small businesses, I would say, several multiples higher. And so it is a very attractive customer from a churn perspective. Both the lower churn as well as the higher ARPU impacts the calculation in terms of the total lifetime value. So we're seeing location values that are multiples higher than the lifetime value of the small business location. We've talked about in the past that the sales cycle we get into an account and kind of get the full deployment throughout the organization is a process that takes time. The benefit of that is that once you're in an organization and fully deployed, there it becomes a big switching cost to that company switching solutions. So typically what we've seen in the Enterprise is that with a given customer, they might shut down a few locations, and so the number of seats may go down. But that there have been somewhat very few customers where we've lost 100% of that customers locations.

[Graeme Rein:]

And how are the Enterprise customers reflected in the customer metrics you're putting out? If one customer has 100 locations, how is that reflected in your paying customer number?

[Ken McBride:]

It's the number of paying locations an enterprise has. So that's kind of a comparable metric to small business. If an enterprise has 50 locations and is paying revenue for those 50 locations, they would be counted as 50 paid customers, so that it's comparable metric to the small business paid customers.

[Graeme Rein:]

And then on the marketing, can you talk a little bit about the different channels you're pursuing? At what point, does the customer acquisition cost become so high where it's not a full use of their cash? I pretend you're probably not close to that point yet. But how do you think about that and what's sort of moving that number up quarter-to-quarter?

[Ken McBride:]

We do monitor the cost of acquisition. And how we think about that number is relative to the lifetime value. So we look at what we pay to get a small business customer and then what we get in terms of the stream of cash flows from that customer as we look at the revenue it mines per cost. And we constantly want to make sure that not just at the aggregate level, but also on the channel-by-channel level that we're pursuing a very strong ROI. We mentioned quarter-after-quarter that we're still giving a very good return and that we see lifetime values that are on the order 2x what we see in the CPA. The CPA number fluctuates from time-to-time and from quarter-to-quarter. And Q2 and Q3 traditionally is slower for us. And then Q4 and Q1 are traditionally stronger. So we kind of take a longer-term macro view of the total acquisition cost over a longer period of time. We try to calculate on a quarterly basis, but we're really looking at kind of a longer-term trend. And we did see some real positive CPAs over the last coupe of quarters, which were somewhat offset by the second quarter. But we have some differences this year that we didn't see repeated last year, which this year in particular we didn't have the rate increase by the Postal Service. And if we have the rate increase by the Postal Service, we find acquisition tends to go up, actually fairly significantly. O we saw one in Q2 of last year. We didn't see one in Q2 of this year. But next year, we're expecting one in Q1. So it will be an interesting trend to see how that plays out over the rest of the year and the beginning of next year.

[Graeme Rein:]

Have you guys purchased a material amount of shares since the quarter ended?

[Ken McBride:]

We've purchased some shares. When we file our 10-Q, you'll be able to see the share end as of July 31.

[Operator:]

I'm not showing any other questions in the queue at this time.

[Ken McBride:]

Okay. Well, we appreciate you joining us today. And if you have any follow-up questions, you can contact us via our website at investor.stamps.com or you can call 310-482-5830. Thanks so much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day. Copyright policy