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STMP > SEC Filings for STMP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for STAMPS.COM INC

Form 10-Q for STAMPS.COM INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to expectations concerning matters that are not historical facts. You can find many (but not all) of these statements by looking for words such as "approximates," "believes," "expects," "seeks," "anticipates," "estimates," "intends," "plans," "would," "could," "should," "will," "may" or other similar expressions in this report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this report, or that we may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends and uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Please refer to the risk factors under "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2011 as well as those described elsewhere in our public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Stamps.com, NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the Stamps.com logo are our trademarks. This report also references trademarks of other entities.

Overview

Stamps.com Ň is the leading provider of Internet-based postage solutions. Our customers use our service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a wide range of United States Postal Service ("USPS") mail classes, including First Class Mail®, Priority Mail®, Express Mail®, Media Mail®, Parcel Post®, and others. Our customers include individuals, small businesses, home offices, medium-size businesses and large enterprises, and within these segments we target both mailers and shippers. We were the first ever USPS-licensed vendor to offer PC Postage® in a software-only business model in 1999.

Services and Products

PC Postage Business

Our PC Postage solutions enable our customers to buy and print USPS approved postage and services with just a PC, printer and Internet connection, right from their home or office.

We offer the following PC Postage products and services to our customers:

· PC Postage Services. After completing the registration process, customers can purchase and print postage 24 hours a day, seven days a week through our software or web interface. When a customer purchases postage for use through our service, the customer pays the face value of the postage, and the funds are transferred directly from the customer's account to the USPS's account. The customer then draws down their prepaid account balance as they print postage and repurchases postage as necessary. Customers typically pay a monthly subscription fee for access to our service.


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Our USPS-approved PC Postage service enables users to print "electronic stamps" directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. Our service currently supports a variety of USPS and international mail classes. Customers can also add USPS Special Services such as Delivery Confirmation TM, Signature Confirmation TM, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery to their mail pieces. Our customers can print postage (1) on NetStamps® labels, which can be used just like regular stamps,
(2) directly on envelopes, postcards or other types of mail or labels, in a single-step process that saves time and provides a professional look, (3) on plain 8.5" x 11" paper or on special labels for packages, and (4) on integrated customs forms for international mail and packages.

For added convenience, our PC Postage services incorporate address verification technology that verifies each destination address for mail sent using our service against a database of all known addresses in the United States. Our PC Postage service is also integrated with common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications. We also offer several different versions of NetStamps, such as Themed NetStamps and Photo NetStamps that allow customers to add stock or full custom designs to their mail while still providing the same NetStamps convenience of printing and using postage whenever it is needed.

We offer multiple PC Postage service plans with different features and capabilities targeted to meet different customer needs. Our Pro plan offers a basic set of Stamps.com mailing and shipping features with single-user capability. Our Premiere plan, typically targeted at larger small businesses, adds multiple-user functionality, automated Certified Mail forms, additional reference codes and higher allowable postage balances as compared to our Pro Plan feature set. Our Professional Shipper plan is typically targeted at higher volume shippers such as fulfillment houses, retailers and e-commerce merchants and features direct integration into a customer's order databases, faster label printing speed, the ability to customize and save shipping profiles, and integrations with many of the industry's leading shipping management systems. We have launched shipping integrations with several of these e-commerce focused companies over the past two years. Our Enterprise plan is typically targeted at organizations with multiple geographic locations and features enhanced reporting that allows a central location such as a corporate headquarters greater visibility and control over postage expenditures across its network of locations.

Customers typically pay us a monthly service fee ranging from $15.99 to $39.99 depending on the service plan. In certain circumstances, customers may be on a plan where they do not owe us any monthly service fees. We have an arrangement with the USPS under which if a customer or integration partner prints a certain amount of Priority or Express Mail postage, they can qualify to have their service fees waived or refunded and the USPS compensates us directly. In addition, we also have plans for less than $15.99 which offer more limited functionality that are targeted at retaining customers who print a lower volume of postage.

· PC Postage Integrations. As part of our PC Postage services, we offer back-end integration solutions where we provide the electronic postage for transactions to partners who manage the front-end process. Our software integrates directly into the most popular e-commerce platforms, allowing web store managers to completely automate their order fulfillment process by processing, managing, and shipping orders from virtually any e-commerce source through a single interface without manual data entry. Managers can retrieve order data and print complete shipping labels for all USPS mail classes, including First Class International®.

In July 2010, we launched a partnership with Amazon.com that makes our domestic and international shipping labels available to Amazon.com Marketplace users. The service allows customers to automatically pay for postage using their Marketplace Payments account, to set a default ship-from address so they do not have to type or write it for each shipment, and to automatically populate the ship-to address on the label. Domestic and international mail classes are supported, and Marketplace users may request carrier pickup from the USPS. A transaction fee of $0.07 per label is charged to non-subscription customers for each label printed. In October 2012, Amazon.com launched an additional Marketplace USPS shipping solution based on a permit mail system, and we expect this to have a negative impact on our future revenue from this partnership. Our shipping solution remains an option for Amazon.com Marketplace merchants, and we continue to provide the integrated Amazon.com Marketplace solution to our existing Stamps.com subscription customers.

In February 2011, we were awarded a contract from the USPS to provide the electronic postage for shipping transactions generated by Click-N-Ship®, a web-based service available at USPS.com that allows USPS customers to purchase and print shipping labels for domestic and international Priority and Express packages at no additional mark-up over the cost of postage.


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· Mailing & Shipping Supplies Store. Our Mailing & Shipping Supplies Store (our "Supplies Store") is available to our customers from within our PC Postage software and sells NetStamps labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies. Our Supplies Store features a store catalog, messaging regarding our free or discounted shipping promotions, cross-selling product recommendation during the checkout process, product search capabilities, and same day shipping of orders with expedited and rush shipping options.

· Branded Insurance. We offer Stamps.com branded insurance to our customers so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms. Our branded insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund. We also offer official USPS package insurance alongside our branded insurance product.

PhotoStamps

PhotoStamps is a patented form of postage that allows consumers to turn digital photos, designs or images into valid US postage. With this product, individuals or businesses can create customized US postage using pictures of their children, pets, vacations, celebrations, business logos and more. PhotoStamps can be used as regular postage to send letters, postcards or packages. The product is available via our separately-marketed website at www.photostamps.com. Customers upload a digital photograph or image file, customize the look and feel by choosing a border color to complement the photo, select the value of postage, and place the order online. Each sheet includes 20 individual PhotoStamps, and orders arrive via US Mail within a few business days.

When we refer to our PC Postage business, we are referring to our PC Postage Service and Integrations, Mailing & Shipping Supplies Store and Branded Insurance offering. We do not include our PhotoStamps business when we refer to our PC Postage business.

Results of Operations

Total revenue in the third quarter of 2012 was $29.1 million, an increase of 17% from $24.9 million in the third quarter of 2011. Total revenue during the nine months ended September 30, 2012 was $85.6 million, an increase of 15% from $74.4 million during the nine months ended September 30, 2011. PC Postage revenue, including service revenue, product revenue and insurance revenue from both the non-enhanced and enhanced promotion customers, in the third quarter of 2012 was $27.9 million, an increase of 19% from $23.5 million in the third quarter of 2011, and was $81.8 million in the nine months ended September 30, 2012, an increase of 20% from $68.0 million in the nine months ended September 30, 2011. PhotoStamps revenue in the third quarter of 2012 was $1.2 million, a decrease of 18% from $1.4 million in the third quarter of 2011, and was $3.8 million in the nine months ended September 30, 2012, a decrease of 41% from $6.4 million in the nine months ended September 30, 2011. The following table sets forth the breakdown of revenue for the three and nine months ended September 30, 2012 and 2011 and the resulting percentage change (revenue in thousands):

                               Three months ended September 30,                    Nine months ended September 30,
                            2012               2011          % Change           2012               2011          % Change
Service revenue         $     22,631       $     19,216             18 %    $     65,799       $     55,382             19 %
Product revenue                3,495              3,194              9 %          10,876              9,768             11 %
Insurance revenue              1,774              1,085             64 %           5,138              2,859             80 %
PC postage revenue      $     27,900       $     23,495             19 %    $     81,813       $     68,009             20 %

PhotoStamps revenue     $      1,170       $      1,422            (18 %)   $      3,771       $      6,351            (41 %)
Other revenue                      1                  1              -                 7                  5             40 %
Total revenue           $     29,071       $     24,918             17 %    $     85,591       $     74,365             15 %

We use several PC Postage marketing channels to acquire customers, including partnerships, online advertising, affiliate channel, direct mail, traditional media advertising and others. Beginning in 2007, we significantly increased our investment in our non-enhanced promotion marketing channels based on our estimated high return-on-investment in that area, and we continued to increase our investment in 2012 as our estimated return-on-investment continued to be attractive. Primarily as a result of these decisions, core PC Postage revenue for customers acquired through our non-enhanced promotion channels was $27.2 million in the third quarter of 2012, an increase of 20% from $22.7 million in the third quarter of 2011, and was $79.6 million in the nine months ended September 30, 2012, an increase of 21% from $65.6 million in the nine months ended September 30, 2011.


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In the enhanced promotion channel, we work with various companies to advertise our service in a variety of sites on the Internet. These companies typically offer an additional promotion (beyond what we typically offer) directly to the customer in order to get the customer to try our service. We have been reducing our investment in this area over the last few years, which reduced our revenue for customers acquired through this channel to $738,000 in the third quarter of 2012, a decrease of 6% from $787,000 in the third quarter of 2011, and $2.3 million in the nine months ended September 30, 2012, a decrease of 6% from $2.4 million in the nine months ended September 30, 2011.

The following table sets forth the breakdown of PC Postage revenue between customers acquired through our non-enhanced promotion channels and customers acquired through our enhanced promotion channels for the three and nine months ended September 30, 2012 and 2011 and the resulting percent change (revenue in thousands):

                                Three months ended September 30,                       Nine months ended September 30,
                            2012                2011           % Change            2012               2011          % Change
Non-enhanced
promotion revenue       $      27,162       $      22,708              20 %    $     79,561       $     65,615              21 %
Enhanced promotion
revenue                           738                 787              (6 %)          2,252              2,394              (6 %)
PC postage revenue      $      27,900       $      23,495              19 %    $     81,813       $     68,009              20 %

The increase in revenue from customers acquired through our non-enhanced promotion channels was driven by both an increase in paid customers and an increase in average monthly revenue per paid customer.

The number of paid customers originally acquired through our non-enhanced promotion channels during the third quarter of 2012 was approximately 419,000, an increase of 12% from 374,000 in the third quarter of 2011. We define paid customers for the quarter as those from whom we successfully collected service fees at least once during that quarter.

The increase in paid customers in the third quarter of 2012 was attributable to increased customer acquisition in these channels. We believe the increased customer acquisition was primarily attributable to increased customer acquisition spending. For customers originally acquired through our non-enhanced promotion channels, our average monthly revenue per paid customer for the third quarter of 2012 was $21.62, an increase of 7% compared to $20.25 for the third quarter of 2011. We believe the increase in average monthly revenue per paid customer was partially attributable to: (1) higher service fees per paid customer from our high volume shipping and enterprise customer segments, and (2) an increase in insurance purchases per paid customer driven by our focus on shipping and new insurance features.


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Revenue by Product

The following table shows our revenue and revenue as a percentage of total
revenue for the periods indicated:

                                               Three Months Ended           Nine Months Ended
                                                 September 30,                September 30,
                                               2012          2011           2012          2011
Total Revenues
Service                                     $   22,631     $  19,216     $   65,799     $  55,382
Product                                          3,495         3,194         10,876         9,768
Insurance                                        1,774         1,085          5,138         2,859
PhotoStamps                                      1,170         1,422          3,771         6,351
Other                                                1             1              7             5
Total revenues                              $   29,071     $  24,918     $   85,591     $  74,365
Revenue as a percentage of total revenues
Service                                             78 %          77 %           77 %          74 %
Product                                             12 %          13 %           13 %          13 %
Insurance                                            6 %           4 %            6 %           4 %
PhotoStamps                                          4 %           6 %            4 %           9 %
Other                                                0 %           0 %            0 %           0 %
Total revenues                                     100 %         100 %          100 %         100 %

Our revenue is derived primarily from five sources: (1) service and transaction fees related to our PC Postage service; (2) product revenue from the direct sale of consumables and supplies through our Supplies Store; (3) insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of advertising revenue derived from advertising programs with our existing customers.

Service revenue increased 18% to $22.6 million in the third quarter of 2012 from $19.2 million in the third quarter of 2011 and increased 19% to $65.8 million in the nine months ended September 30, 2012 from $55.4 million in the nine months ended September 30, 2011. The 18% increase in service revenue during the third quarter of 2012 consisted of a 19% increase in service revenue from customers acquired through our non-enhanced promotion channels and a 6% decrease in service revenue from customers acquired through our enhanced promotion channel. The 19% increase in service revenue from customers through the non-enhanced promotion channels consisted of a 12% increase in paid customers and a 6% increase in average service revenue per customer. The 19% increase in service revenue during the nine months ended September 30, 2012 consisted of a 20% increase in service revenue from customers acquired through our non-enhanced promotion channels and a 6% decrease in service revenue from customers acquired through our enhanced promotion channel.

Product revenue increased 9% to $3.5 million in the third quarter of 2012 from $3.2 million in the third quarter of 2011 and increased 11% to $10.9 million in the nine months ended September 30, 2012 from $9.8 million in the nine months ended September 30, 2011. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) the postal rate increase in January, 2012 which generated incremental label sales for the period of time around the rate increase; (3) marketing our Supplies Store to our existing customer base; and (4) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service during the third quarter of 2012 was $293 million, a 78% increase from the $165 million printed during the third quarter of 2011 and $747 million in the nine months ended September 30, 2012, a 62% increase from $461 million printed in the nine months ended September 30, 2011.

Insurance revenue increased 64% to $1.8 million in the third quarter of 2012 from $1.1 million in the third quarter of 2011 and increased 80% to $5.1 million in the nine months ended September 30, 2012 from $2.9 million in the nine months ended September 30, 2011. This increase was primarily attributable to: (1) the expansion of our existing package insurance offering to cover packages being shipped to international destinations; (2) insurance purchases resulting from our partnership with Amazon.com; and (3) increased insurance purchases by high volume shippers.


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We continued to reduce our PhotoStamps sales and marketing spending in the third quarter of 2012 compared with the third quarter of 2011, and plan to continue to reduce our sales and marketing spending on PhotoStamps in future periods to maintain or improve profitability in that business. Further, during the second quarter of 2011, we first applied breakage accounting to our PhotoStamps boxes sold through retail channels. This initial recognition of PhotoStamps retail box breakage resulted in an additional $2.2 million of PhotoStamps revenue. As a result of our decision to decrease PhotoStamps sales and marketing and the initial recognition of PhotoStamps retail box breakage in the second quarter of 2011, PhotoStamps revenue decreased 18% to $1.2 million in the third quarter of 2012 from $1.4 million in the third quarter of 2011 and decreased 41% to $3.8 million in the nine months ended September 30, 2012 from $6.4 million in the nine months ended September 30, 2011. As a result of the reduced marketing spend, total PhotoStamps sheets shipped was approximately 55,000 in the third quarter of 2012, a 27% decrease compared to 76,000 in the third quarter of 2011 and was 200,000 in the nine months ended September 30, 2012, a decrease of 12% compared to 227,000 in the nine months ended September 30, 2011.

Other revenue consisting of commissions from the advertising or sale of products by third party vendors to our customer base was approximately $1,000 in the third quarter of 2012 and 2011 and $7,000 in the nine months ended September 30, 2012 compared to $5,000 in the nine months ended September 30, 2011. Commission revenue from the advertising or sale of products by third party vendors is currently not material to our consolidated financial statements.

Cost of Revenue

The following table shows cost of revenues and cost of revenues as a percentage
of its associated revenue for the periods indicated:

                                                  Three Months Ended            Nine Months Ended
                                                     September 30,                September 30,
                                                  2012           2011           2012          2011
Cost of Revenues
Service                                        $    3,720      $   3,704     $   11,788     $  10,901
Product                                             1,271          1,146          4,009         3,586
Insurance                                             573            378          1,670           998
PhotoStamps                                           929          1,094          2,927         3,746
Total cost of revenues                         $    6,493      $   6,322     $   20,394     $  19,231
Cost as percentage of associated revenues
Service                                                16 %           19 %           18 %          20 %
Product                                                36 %           36 %           37 %          37 %
Insurance                                              32 %           35 %           33 %          35 %
PhotoStamps                                            79 %           77 %           78 %          59 %
Total cost as a percentage of total revenues           22 %           25 %           24 %          26 %

Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of the cost of products sold through our Mailing & Shipping Supplies Store and the related costs of shipping and handling. The cost of insurance revenue principally consists of parcel insurance offering costs. Cost of PhotoStamps revenue principally consists of the face value of postage, image review costs and printing and fulfillment costs.

Cost of service revenue was unchanged at $3.7 million in the third quarter of 2012 and 2011 and increased 8% to $11.8 million in the nine months ended September 30, 2012 from $10.9 million in the nine months ended September 30, 2011. Cost of service revenue remained the same in the third quarter of 2012 compared with the third quarter of 2011 primarily as a result of higher customer service costs to support our growing customer base, offset by the decrease in promotional expense as a result of lower actual redemptions. The increase in cost of service revenue during the nine months ended September 30, 2012 is . . .

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