Stamps.com Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com Inc., Fourth Quarter 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Mr. Jeff Carberry, Vice President of Finance. Sir, you may begin.

[Jeff Carberry:]

Thanks, very much. Good afternoon everyone, and thanks for joining us. On the call today is Ken McBride, CEO; and Kyle Huebner, CFO. The agenda for today's call is as follows. We'll review the results of our fourth quarter 2014; then we'll discuss financial results and take a look at our business outlook; but first, the Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release includes forward-looking statements about our anticipated financial metrics and results that involve risks and uncertainties. Important factors, including 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 31, 2013, 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. As a reminder for today, the income and adjusted EBITDA results are discussed on the call are in a non-GAAP basis and [consist of] [ph] the following items

[Ken McBride:]

Thank you, Jeff. Thank you for joining us today. Today we announced the fourth quarter financial results. During the fourth quarter, we once again achieved record results across our entire business including record Core Mailing and Shipping revenue of $39.8 million that was up 32%. Record total revenue of $41.9 million that was up 29%; record total postage printed through Stamps.com of 1.8 billion in 2014; record paid customers of 514,000; record results in high volume shipping business and record results in the enterprise business. Record operating income of $11.9 million, which is up 20% and record net income of $11.7 million that was up 16%. And our earnings per fully diluted share were $0.72 and that was up 18% and also a record. So obviously, we are very extremely pleased with the results for the quarter and for the entire fiscal 2014. So now let's begin with a more detailed discussion of the Core Mailing and Shipping business. Core revenue was up 32% to $39.8 million in the fourth quarter. During the fourth quarter, small business customer acquisition spend was $10.9 million and we acquired 96,000 gross small business customers at a cost per new small business customer acquired or CPA of $114. Our customer acquisition spend was up 26% compared to Q4 last year. Small business customers acquired were up 22% compared to Q4 last year, while CPA was up 4% compared to Q4 last year. We were pleased to be able to accelerate the year-over-year growth of customers acquired while also holding CPAs in a consistent range during the fourth quarter. For 2014 small business customer acquisition spend was $39.4 million and we acquired 324,000 gross small business customers at a total CPA of $122. Our small business customer acquisitions spend was up 12% versus 2013, small business customers acquired were up [8-7%] [ph] versus 2013 and CPA was up 4% versus 2013. Our average monthly churn during the fourth quarter was 3.1% which was down versus the 3.2% we reported in the fourth quarter of 2013. We were pleased to see our fourth quarter churn rate down compared to the fourth quarter last year. Paid customers in the fourth quarter were 514,000 and that was up 10% versus the fourth quarter of 2013 and up 14,000 sequentially versus the third quarter of 2014. Typically to generate the majority of the paid customer growth in the seasonally strongest first and fourth quarters were smaller and sequential increases or decreases in paid customers during the second and third quarter and this year again followed that historical pattern. Average subscriber revenue per paid customer or ARPU was $25.84 in the fourth quarter that was up 20% versus the fourth quarter of 2013. The year-over-year ARPU growth this quarter benefited from growth in the Shipping segment including our recent acquisitions. USPS postage printed through our solutions was 613 million in the fourth quarter, which was up 37% versus the fourth quarter of 2013 and for fiscal 2014, total USPS postage printed was 1.8 billion which was up 13% versus 2015. We are very pleased of our metrics across the board and we are pleased with the benefits we have already seen from our recent acquisitions. With that, let's now discuss some more initiatives we are working on in our Core Mailing and Shipping business for 2015. In the small business area we plan to continue building and optimizing the customer acquisition activity as we continue to scale the spend we continue to see very strong ROI that is at least 2x greater than the cost to acquire a customer. As we plan to continue to increase our small business customer acquisition with a goal of increasing the acquisition spend in 2015 including the ShipStation and ShipWorks spend by a range of 10% to 20% for the year. We plan to continue to utilize the marketing channels we have used in the past including direct mail, traditional media, online marketing and other areas. Across each of our marketing channels, we plan to continue to focus on efficiently scaling the total spend while keeping cost per acquisition at a reasonable level. In Enterprise area, we plan to continue scaling up our sales and marketing efforts. Our Solutions continue to have a strong customer value proposition compared to postage meters with the dramatically lower total cost of ownership and our greater visibility and financial controls that are not readily available with postage meters. The fourth quarter Enterprise revenue was up 21% year-over-year and was up 16% for 2014. We're pleased with our continued progress in Enterprise and feel that we're achieving a very attractive return on the investment in this area and we'll continue to focus on growth in the area. In the high volume shipper area, we're continuing to ramp up our efforts as well. Stamps.com platforms offer great solutions for higher volume shippers such as warehouses, fulfillment houses, e-commerce shippers, larger retailers, and other types of high volume shippers. Fourth quarter USPS' postage printed by high volume shippers through our solutions was up 56% year-over-year and up 27% for 2014. For 2015, we will continue to focus on scaling the Stamps.com high-volume shipping solution. We will continue to introduce improvements in the software and features to further improve the efficiency and the scalability of the product to the largest high-volume customers. We will continue to add new shopping card integrations for easier data export and import from the tools that customers like to use. And we will continue to scale on marketing and sales efforts using the national sales force and while also continuing to optimize our sales and marketing lead generation. For our multi-carrier solution including ShipStation and ShipWorks, we continue to keep both subsidiaries independent, but are focusing on ways to optimize our efforts across all of our shipping solutions. The ShipStation and ShipWorks platforms offer great solutions for higher volume shippers such as warehouses, fulfillment houses and e-commerce shippers and other types of high volume shippers that may need more than just the USPS for their business. We believe there are significant ways where we will be able to realize synergies amongst all of our shipping solutions. In the marketing area, we have historically targeted many of the same e-commerce customers and we believe we have broad marketing expertise that we will be able to utilize – we will be able to utilize to increase the market penetration of our multi-carrier solutions. We bring capital to scale up the marketing efforts of these businesses. We have a national sales force who will be able to sell the combined suite of products and where we will now be armed with a more complete set of options to meet the needs of a broadest set of customers. We will be able to offer an effective upgrade path from the traditional Stamps.com single-carrier solution to a ShipWorks or ShipStation solution. Likewise the Stamps.com single-carrier solution may become an effective drop down solution for those customers whose needs may have decreased over time and who no longer need a full multi-carrier solution. We also believe that technology expertise in the various companies will be synergistic as ShipStations web-based expertise will complement the client-based expertise at Stamps.com and at ShipWorks. We are in the process of scaling up our efforts to maximize the synergies across the businesses and we will continue our efforts in this area throughout 2015. And with that let me hand the call to Kyle for the financial results.

[Kyle Huebner:]

Thanks Ken. We will now review our fourth quarter and 2014 financial results. Total revenue was $41.9 million in Q4 up 29% versus the fourth quarter of 2013 and was $147.3 million in 2014 up 15% versus 2013. Growth in total revenue continues to be driven by our Core Mailing and Shipping revenues. For the fourth quarter, core revenue was up 32% year-over-year as a result of a 10% year-over-year increase in paid customers and a 20% increase in ARPU. For fiscal 2014, core revenue was up 16% year-over-year driven by a 7% increase in paid customers and 8% increase in ARPU. Non-core revenue from the enhanced promotion channel was down 25% in Q4 versus the fourth quarter of 2013 and was down 26% in 2014 versus 2013 as a direct result of our continued decreased marketing spend in this area. PhotoStamps revenue was $1.5 million in Q4 up 4% versus the fourth quarter of 2013 and was $5.4 million in 2014 up 16% versus 2013. The increase in revenue was a result of increased high volume business orders which would become a higher percentage of PhotoStamps revenue otherwise predictable and thus cause quarter-to-quarter fluctuation in our PhotoStamps revenue numbers. Mailing and Shipping gross margin was 80.3% in Q4 versus 83.8% in the fourth quarter of 2013 and was 80.3% in 2014 versus 81.0% in 2013. Cost of sales includes promotional expenses related to customer acquisition which was an expense of $0.8 million in Q4 compared to a benefit of $0.1 million in the fourth quarter of 2013 and was an expense of $3.1 million in 2014 versus an expense of $2.4 million in 2013. In our reported investor metrics, our customer acquisition spend includes both promotional expenses as well as sales and marketing spend as we feel they are both cost directly related to acquiring customers. As such we feel that is more informative to look at the mailing and shipping gross margins excluding promotional expenses is a better indicator of the ongoing gross profit for the business. On that basis mailing and shipping gross margins excluding promotional expenses was 82.3% in Q4 versus 83.3% in the fourth quarter of 2013 and was 82.4% for 2014 versus 82.9% for 2013. PhotoStamps gross margin was 20.9% in Q4 versus 25.8% in the fourth quarter of 2013 and was 17.6% in 2014 versus 21.5% in 2013. The decrease in gross margin resulted from an increase in high volume business orders, which have a lower gross margin compared to Web site orders. We experienced year-over-year increases and our costs in sales and marketing, R&D and G&A related to the inclusion of ShipStation and ShipWorks in the fourth quarter of 2014 that were not included in the fourth quarter of 2013. We also increased headcount related expenses and infrastructure investments we have made throughout the year to support the growth in all of our businesses including expenses to support our expanded product offering and technology infrastructure investments. Sales and marketing spend was $11.6 million in Q4 up 16% versus the fourth quarter of 2013 and was $42.7 million in 2014 up 11% versus 2013. Sales and marketing as a percent of revenue was 28% in Q4 compared to 31% in Q4 last year and was 29% revenue in 2014 versus 30% in 2013. R&D spend was $3.5 million in Q4 up 35% versus the fourth quarter of 2013 and was $12.3 million in 2014 up 24% versus 2013. R&D as a percent of revenue was 8% in Q4 which was comparable 8% in Q4 2013 and was 8% of revenue in 2014, which is also comparable to 2013. G&A spend was $5.7 million in Q4 up 51% versus the fourth quarter of 2013 and was $18.7 million in 2014 up 38% versus 2013. Non-GAAP operating income was $11.9 million in Q4 up 20% versus the fourth quarter of 2013 and was $41.1 million in 2014 up 6% versus 2013. Non-GAAP operating margin was 28.5% in Q4 and 27.9% for 2014. We would note that we expect to see quarter-to-quarter fluctuations in operating margins depending on the level of customer acquisition spend incurred. Non-GAAP adjusted EBITDA was $12.8 million in Q4 up 21% versus the fourth quarter of 2013 and was $44.2 million in 2014 up from $40.8 million in 2013. This metric is calculated as non-GAAP operating income plus D&A contained in operating expenses of $864,000 in Q4 and $3.2 million in 2014. Non-GAAP net income was $11.7 million up 16% versus the fourth quarter of 2013 and was $40.6 million in 2014 up 4% versus 2013. Non-GAAP net income per fully diluted share was $0.72 in Q4 up 18% versus $0.61 per share in the fourth quarter of 2013 and was $2.47 in 2014 up 4% from $2.39 in 2013. Diluted shares used in the EPS calculation was $16.4 million for Q4 and $16.4 million for the full year. Capital expenditures for the business, excluding investments in our corporate headquarters was $55,000 in Q4 and $1.9 million in 2014. Our primary investments in this area are in our technology platforms to ensure the reliability and scalability of our solutions to handle the large growth in postage volumes we've been experiencing. Non-GAAP free cash flow generated by the business was $12.5 million in Q4 and $41.9 million in 2014. This metric is calculated as non-GAAP net income plus D&A contained in operating expenses less capital expenditures related to the business. This calculation excludes capital investments related to our corporate headquarters, as well as tenant-related D&A. We ended Q4 with $58 million in cash and investments, $3.50 per ending balance sheet share, which is up $13 million compared with Q3 of 2014. During the fourth quarter, we did not repurchase any shares, the company is currently authorized to repurchase $1 million shares of stock – customer stock during the next nine months. Taxes; we released the remaining valuation allowance reserve we had against our deferred tax assets or DTA during the fourth quarter. We now have approximately $54 million deferred tax asset in the balance sheet as of December 31, 2014 with no valuation allowance reserve against it. As a results starting in 2015, we expect to report GAAP tax expense, which will drive down against the DTA on the balance sheet. We currently expect to report GAAP tax expense at a tax rate of approximately 36%. However on a cash tax basis, we will continue to use our net operating losses and our other tax credits unless we expect to pay the alternative minimum cash taxes for 2015 consistent with prior years, which we expect would be approximately 2% to 3% of pretax income. Thus we expect the majority of our 2015 reported GAAP taxes will be at non-cash expense. Now turning to guidance. We expect fiscal 2015 revenue to be in a range between $160 million to $180 million. We expect fiscal 2015 non-GAAP EPS to be in a range between $2.50 and $2.90 per fully diluted share. Non-GAAP net income per fully diluted share excludes non-cash stock-based compensation expense which we expect to be approximately $11 million. Non-cash amortization of prior intangibles which we expect will be approximately $3 million. Non-cash change in contingent consideration charges; non-cash tax expenses and benefits impacted in non-recurring items. We would note, we are not providing GAAP EPS guidance because of the difficulty of forecasting some of the items sustained in contingent consideration which has been a part of future changes in our stock price. We expect 2015 Core Mailing and Shipping revenue to be up year-over-year versus 2014 and the mid-teens that were 20% range. We expect non-core revenue from the enhanced promotional channel continued to be down in 2015 compared with 2014 consistent with the trend we saw in the past few years, as we continue to minimize our investment in this area. We expect PhotoStamps revenue to be down in 2015 compared with 2014 possibly by as much as 25% as we expect to maybe challenging to repeat the same level of high volume business orders in 2015 that we saw in 2014. We are targeting small business customer acquisition spend including ShipStation and ShipWorks to be up 10% to 20% in 2015 compared to 2014. Based on the positive customer acquisition result achieved in the fourth quarter, we expect Q1 2015 customer acquisition spend to be significantly higher sequentially. We would expect that we expense customer acquisition spend in the quarter incurred, and earn very little revenue or profits that quarter which can cause a drag on short-term EPS, but we earned back the revenue and profits over the life of the customer and believe it's the best way to maximize shareholder value over the long-term. This expected trend is consistent with last year where we saw pro forma EPS decline from $0.61 in Q4 2013 to $0.50 in Q1 of 2014, because of the increased investment in the customer acquisition spend. We expect capital expenditures for the business in 2015 to be between $2 million to $3 million. The fully diluted shares will be approximately $17 million for 2015 reflecting our higher currently stock price and the affected issuance of approximately 190,000 shares under the ShipStation earned in the first half of 2015. In summary, our Core Mailing and Shipping business model with recurring revenue and high gross margin is very attractive and sustainable for business model. There is a significant opportunity in the fast growing e-commerce driven package market and we expect our ShipStation and ShipWorks acquisition to help us capitalize on those opportunities. We continue to see a very positive ROI from customer acquisition spend and we expect to continue to ramp up our investment. We have a strong free cash flow generation. We expect to continue to pay a minimal amount of cash taxes for several years to come. We have a strong balance sheet and an attractive return on equity and we have demonstrated our commitment to enhancing shareholder value including $307 million of excess cash returned to shareholders via special dividend in our share repurchase program. We are looking forward to delivering continued great results. And with that, we will open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of George Sutton of Craig-Hallum. Your line is now open.

[Jason Kreyer:]

Hey, good afternoon, guys. It’s Jason on for George, and congrats on a strong quarter.

[Kyle Huebner:]

Hi, Jason.

[Ken McBride:]

Hi, Jason.

[Jason Kreyer:]

Wondering if you can talk a little bit, so we've seen some news from UPS and FedEx that they have increased prices a little bit and they have instituted some dimensional pricing, and just wondering if you have seen any impact from that early in 2015 or if you really, if you see any opportunity stemming from this or if there is kind of just your general thoughts on the impact on your business?

[Ken McBride:]

Yes. I mean I think that generally speaking the FedEx and UPS rates have tended to go up sort of regularly each year with like around the first part of the year of January. The postal service kind of does rate changes that other sort of less predictable times. The last rate change was in the fall and actually the rates went down. So I think it's creating a more competitive solution to the post office in certain segments for sure with lighter packages rather than delivery and I think that the trend is good in terms of the post office [indiscernible] rates versus the competitive solutions out there.

[Jason Kreyer:]

Okay. Thank you. And it sounds like there is some technical difficulties, I think I made out most of what you are saying, but just so you know it's a little choppy. Second question from me…

[Ken McBride:]

Sorry.

[Jason Kreyer:]

No. That's okay. You've seem to have gained some efficiency on the sales and marketing spend in Q4 more so than we saw the first three quarters of the year. Just wondering if you're doing anything differently there, if you are trying some new channels or if it's just kind of the ebb and flows and things improved in Q4?

[Kyle Huebner:]

Yes. I mean I think Jason our customer acquisition spend was up more significantly in Q4 on a year-over-year basis than the prior quarter. Some of that is by design with Q4 and Q1 being the seasonally strongest quarters. And so that increase in spend and being able to maintain a CPA in a consistent range was really kind of what help drive the growth in the number of customers acquired. In terms of the actual spend I would characterize it as kind of more of a broad-based increase in spend as opposed to coming from any one particular program channel.

[Jason Kreyer:]

Okay. Thank you. And then last one for me, and I know it's early on this, but any thoughts on your efforts to cross-sell existing customers into ShipWorks or ShipStation solution or maybe any plans on pursuing those opportunities?

[Ken McBride:]

Yes. And I think that's definitely one of the clear areas where we want to really focus on our ability to look at solutions, look at strategies for upselling and cross-selling. So generally speaking our solution Stamps.com solution, we tend to onboard customers earlier in the lifecycle when they are smaller and USPS is only solution works for them. And then as customers grow and they get bigger, they start to look at adding additional carriers either UPS or FedEx or both, or DHL. So that's in the – that part of the lifecycle that's where we would really look at offering them an upsell into either ShipStation or ShipWorks. And then, I think longer term is also opportunities to move customers between those two products as well, as they tend to be a different type of customer that is attracted to one versus the other, the web-based solution with ShipStation versus the client-based solution of ShipWorks. And then, I think on the flip side, customers can go to the other direction which is, as a customer has grown and then perhaps their business declines, they may go to the opportunity direction in terms of meeting UPS and FedEx and look at doing a drop down into our solutions. So we kind of see the upgrade, downgrade path as a good long-term opportunity.

[Jason Kreyer:]

Okay. Thank you for your time and congrats again.

[Kyle Huebner:]

Thanks.

[Ken McBride:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Kevin Liu of B. Riley. Your line is now open.

[Kevin Liu:]

Hi. Good afternoon, guys, and congrats on a strong quarter as well.

[Kyle Huebner:]

Thanks.

[Ken McBride:]

Thank you, Kevin.

[Kevin Liu:]

The first question I had was just as you look – with all the customer metrics now kind of incorporating the two acquisitions, is there a way to help us flush out what that CPA looks like for the acquired solutions versus the core PC postage. Just wondering if they would all be kind of within a comfortable range, or if there is any significant variation for that metric?

[Kyle Huebner:]

Yes. I think Kevin, the first thing is that the majority of the spend at this point is still ongoing to the traditional Stamps.com marketing programs that have been, established, tested and scaled over the past 10 years. So that's the first thing, the other I think, key is really that CPA, and you know the CPA was up, 3.5%, 4% year-over-year. So I think it’s – the CPA has been in kind of a consistent range, so the inclusion of ShipStation and ShipWorks now did not kind of materially change the overall CPA relative to kind of where it had been in year-over-year basis and kind of the range for the year.

[Kevin Liu:]

Got it. And I think that might kind of have answered this next question, but as you guys look to that 10% to 20% increase in customer acquisition spend for this year. To what extent is some of that increase just having a full year worth of customer acquisition cost for the acquired solutions versus what you organically might have thought about increasing that rate at?

[Kyle Huebner:]

Yes. And it certainly - having the full year is going to increase that higher than otherwise would have. We're also independent of the current run rate, we will look to over the course of the year invest in the marketing of the – there is a multi-carrier solutions that was one of the strategic rationale. So I think if you look at it that 10% to 20% part of it is a result of the newly acquired entities. But I would say the range still would have reflected our growth targets and our goal to grow the spend in the traditional stamps channels. But we don't break it out specifically.

[Kevin Liu:]

All right. And then just lastly, I know what the new acquired solutions there is also kind of a volume-based component in some of those pricing plans. So for Q4, if we look at that service line, how much of a seasonal uptick is there that's just tied to any kind of overage fees for instance on some of those acquired services or other transaction items that might not recur in future periods. I guess what's kind of the run rate of your subscription revenues versus transaction?

[Kyle Huebner:]

Yes. I mean we – I mean the service is the combination of the subscription and transaction. I think the right way to think of it is that, it's really going to fluctuate more from seasonality as opposed to being non-recurring. As we’ve increased our investment in shipping space, the e-commerce shipping space the holiday season is, it's clearly the seasonally big part of the year for those merchants. So I think the increase in the service revenue from monetizing shipping volume is really related to seasonal. We would expect as we continue to grow the business that we would get that benefit in Q4 2015 as opposed to not getting it again.

[Kevin Liu:]

Understood. I just wanted to make sure that we kind of adjusted for that as we went into the first quarter here?

[Kyle Huebner:]

Yes. I mean it's typically Q4 is the seasonally strongest and then followed by Q1 and then Q2 and Q3 from a kind of mailing and shipping activity perspective tend to be the seasonally slower quarters.

[Kevin Liu:]

Okay. Thanks for taking the questions.

[Ken McBride:]

Thanks Kevin.

[Kyle Huebner:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Tim Klasell of Northland Securities. Your line is now open.

[Tim Klasell:]

Excuse me for that, yes, I just had a quick question on the acquisitions, you guys probably had some, I want to dig a little bit into that upgrade, downgrade as the year goes on and probably Q4 maybe more want to upgrade into maybe higher level shipping – volume shipping package. Have you seen that, since you probably had a fair amount of customer overlap? Have you guys maybe been able to do an analysis to be able to say, how much of that happens during any given quarter?

[Ken McBride:]

I think it's early in the process, but certainly we are aware of customers that have moved up into both solutions. And I think that real focus for us is trying to increase that number over time, trying to smooth the path, make it as simple as possible for doing the upgrade and also the downgrade by, more technology integrations that don't require you to redo a lot of configuration in the product and a coordinated effort on accounts. And so I think just trying to reduce the friction between the products, so that the upgrade downgrade path is a lot more seamless and simple for the customers. But I think it's really early, and we definitely see customers going both directions already and we’re hoping to kind of table that over time so the customers are released into the right solution for them.

[Tim Klasell:]

Okay, good. And then it seems like you guys are pretty happy with all the acquisitions are going so far, and as well as know this was the first two acquisitions that you've done, maybe ever in a long time. Are you feeling comfortable that another opportunity came along to do that or do you think you are short of bandwidth constraint right now trying to absorb the two companies?

[Kyle Huebner:]

Yes. We don't comment on potential acquisitions, other acquisitions, I think we are definitely happy with the acquisitions and the progress so far. We will continue to focus on maximizing the value in those acquisitions and we will evaluate any other opportunities as appropriate. But, we won't be able to comment on anything.

[Tim Klasell:]

Sure, enough. Thank you.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of Allen Klee of Sidoti. Your line is now open.

[Allen Klee:]

Yes. Good afternoon.

[Ken McBride:]

Hi, Allen.

[Allen Klee:]

When you think about your customer base that you can potentially upsell ShipStation and ShipWorks too. How do you think about kind of what the sweet spot of the 500,000 some customers, which one is most like – what percent or what's kind of the – I don't know if you can say the percent of the sweet spot that kind of would be the best fit for a potential upgrade?

[Ken McBride:]

Well, I think our current product Stamps.com has several, I guess you could call a tab for lack of a better word in the product and those different tabs provide different functionality like the mailing, printing envelopes, printing that stamps, printing single-shipping labels. And then we have a tab which we call batch and that tab is really to – that tab really caters to the single carrier because we are a single carrier USPS, but it caters to customers that need to send multiple packages all at the same time in a batch. And that product provides integrations with e-commerce sites, so the customers can pull in their orders and then allows them to process a lot of orders at the same time. So that is the candidate that we will look to customers that are using that tab. It's a very popular future of ours and largely what you get when you go to the higher end solutions is that functionality just more sophisticated and with additional carriers. So a lot of the same e-commerce shopping cards and marketplaces you can bring orders and write orders back, but they just become as customers get more and more sophisticated as you go from 10 packages a day to 100 packages a day to 500 a day, you just need more and more automation more capabilities more ability to process orders quickly. And so we can go watch the volume for the customers and we can kind of look for an opportunity to say this customer is probably ready for an upgrade offer.

[Allen Klee:]

Okay. That's very helpful. Thank you. And then on the Enterprise side, have you noticed any change in the competitive environment as your main competitor on the postal meters is kind of moved to a new marketing strategy?

[Ken McBride:]

Not anything really to note. I think that postage meter market has been around for 90 years. So it's a fairly slow moving. They come out with new ideas like in decades instead of years. And so the last thing we are aware of is the small business meter that Pitney Bowes launched probably 8 or 10 years ago. And I think there has been a lot of enhancement to that. We come up against that meter. We come against meters that are few steps above that. And nothing really changes that much. So it's still very much the same value proposition we offered to those customers, the total cost of ownership being able to get rid-off the meter, save the money ink, save a ton of money on the subscription fees, get better visibility and to your network of users across the country and then within each office. So it better controls the visibility that doesn't exist on postage meters for all practical purposes and nothing has really changed in history of our company actually really so.

[Allen Klee:]

Okay, great. Thank you. And then can you help us – help me understand a little better for ShipStation and ShipWorks kind of how they are positioned versus other companies that offer multi-shipping solutions. I received kind of questions from investors in terms of how many players there are – how big they are positioned and it's a little tricky for me to have figure that out. So I was wondering if you had any color on that.

[Ken McBride:]

Sure. There is a lot of companies out there that in this multi-carrier e-commerce shipping world. So it is a little bit overwhelming when you look at it. Almost all of them are very, very small single digit employee start-up kind of organizations that they kind of focus in this space, so I mean the reason why we went after these two products, these two companies is in the segment they are really the two best products. And each of them has more integrations, when you kind of count up the integrations the ShipStations has 70 -- over 70 integrations to various carrier shopping cards marketplaces. ShipWorks has 65, so they are basically and the next closest one probably as 20. So it's just – they are just way out ahead in terms of the integrations and for an e-commerce user as you grow you sell in more, more places. You are selling on Amazon. You are selling on eBay. You have your own shopping card. You may add a second shopping card. You may have one Web site, two Web Sites, five Web sites, so it's – as you grow you just need more selling channels, the more selling channels you have, the better it works. So that's why these companies do so well is because they have the most. They also have a lot of sophistication that's well beyond what other companies have. So when I was talking a few minutes ago about the automation customization. That's really like – as you reach a certain size you can't process 100 packages manually. You have to get growth engines and customization you have to be able to detect package sizes and create pack lists. And so that's really where these product shine as you get into those very large patches they really help the small – the e-commerce user process a lot of packages in a very simple manner with just a few clicks. So I think that they are both very well-positioned. I think one is Web and so some customers prefer that solution and one is Windows client, other people prefer that. So we kind of have the full gamut of things we can offer the customer.

[Allen Klee:]

That's very helpful. Thank you. And the last question and I may have heard it wrong, broke up a little bit, but I thought I heard you say that you are forecasting customer acquisition spend to be up 10% to 20% in 2015?

[Kyle Huebner:]

Yes.

[Allen Klee:]

Yes. Okay. And I think in 2014, you had said 5% to 15% and you actually end-up doing around a 11-ish. So what are the factors behind your pumping that up?

[Kyle Huebner:]

Well, so I mentioned in Q4 included with the first quarter we consolidated by the ShipStation and ShipWorks and all our metrics. So one part of it is that we will have a full year of ShipStation, ShipWorks marketing spend in that number. But the other part of it is, you know, we were very happy with our Q4 results. And so we are – our goal is to continue to grow that spend. The customer acquisitions spend is really our primary form of reinvestment back into business for the long-term growth. You invested today. You acquire the customer. You take the acquisition expense, but then you get the revenue and profits over the next three to four years. And that really drives the long-term growth in the business. And so obviously the marketing environment can change quarter-to-quarter, so it's something we continually monitor and adjust. But, going into the year half of Q4, our goal is to increase that investment in the business as much as we can while maintaining the customer economics.

[Allen Klee:]

That's very helpful. Thank you so much.

[Kyle Huebner:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Bill Sutherland of Emerging Growth Equities. Your line is now open.

[Bill Sutherland:]

Hi, there. Almost all got answered. There is one I have still left on the list here on ARPU, which moved up towards $26 in the fourth quarter. So is that kind of a level we should think about on a go forward basis?

[KenMcBride:]

Yes. I was saying earlier ARPU I think you want to think of more on a year-over-year growth basis or year-over-year change because of the seasonality. As we get more into shipping and e-commerce shipping, Q4 is the seasonal strong period, the holiday period for shipping which as we said the shipping area we have a better ability to monetize the volume not just in our service revenue but things like insurance transaction. So on an absolute dollar basis, I would expect Q4 to be seasonally higher EMEA and I think it's better to look at it on a year-over-year change to neutralize the seasonality. And with that said, I would know historically we had seen fluctuations from quarter-to-quarter and the ARPU kind of growth metric. But, at this point Q4, the strong growth in the shipping volume definitely was attributing factor for the positive ARPU.

[Bill Sutherland:]

Right, right and with some seasonality tied in of course. So looking at the third quarter which was up nicely for a seasonally slower quarter. Does that – I'm just trying to get into an order of magnitude Kyle, so was that was 23.80 again a meaningful step up from the prior quarter where there is no seasonality involved. So is that kind of like the place to level set or on a seasonal basis?

[Kyle Huebner:]

Yes. I mean I think the growth in the ARPU is – we see the impact of the ShipStation and ShipWorks acquisitions I would say to a greater degree in the ARPU versus the paid customer because there is typically just much larger customers with much larger volumes. Q3 was really where you started to see the results post our first acquisitions of ShipStations. So I think we are expecting that growth I talked about in the guidance for the core revenue to come from both paid customers and ARPU. And recognizing when we anniversary the acquisitions next year then the level of growth wouldn't be necessarily quite at the same level in terms of the growth.

[Bill Sutherland:]

That makes sense. All right. Thanks guys. Appreciate it.

[Kyle Huebner:]

Thanks.

[Operator:]

Thank you. I'm showing no further questions at this time. I would like to now turn the conference back over to Mr. Ken McBride for any closing remarks.

[Ken McBride:]

Thanks for joining us. We appreciate it. And if you have follow-up questions as always you can come to our investor Web site investor.stamps.com and you can contact our investor offline at 310-482-5830. Thanks so much.

[Kyle Huebner:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a great day everyone.