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STMP > SEC Filings for STMP > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for STAMPS.COM INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. "Selected Financial Data" of this Report and our financial statements and the related notes thereto included in this Report. This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in Item 1A. "Risk Factors" of this Report. See the discussion of forward-looking statements on page 1 of Part I of this Report.

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.

Section 382 Update

We currently have federal and state NOL carry-forwards of approximately $210 million and $100 million, respectively, which when combined with our other tax credits and tax assets have a potential value of up to $72 million in tax savings over the next 19 years. Under Internal Revenue Code Section 382 rules, if a "change of ownership" is triggered, our NOL asset may be impaired. A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more "5% shareholders" within a three-year period. We estimate that as of December 31, 2012 we were at approximately a 22% level compared with the 50% level that would trigger impairment of our NOL asset.

Under our certificate of incorporation, any person or entity, including any company and investment firm, that wishes to become a "5% shareholder" (as defined in our certificate of incorporation) must first obtain a waiver from our board of directors. In addition, any person, including any company and investment firm, that is already a "5% shareholder" of ours cannot make any additional purchases of our stock without a waiver from our board of directors. The NOL Protective Measures contained in our certificate of incorporation are more specifically described in our Definitive Proxy Statement filed with the SEC on April 2, 2008.

On July 22, 2010, our Board of Directors suspended the NOL Protective Measures by approving a waiver from the NOL Protective Measures to all persons and entities, including companies and investment firms. As a result, our stockholders are now allowed to become "5% shareholders" and existing "5% shareholders" are allowed to make additional purchases of our stock each without having to comply with the restrictions contained in the NOL Protective Measures. This waiver may be revoked by our Board of Directors at any time if the Board deems the revocation necessary to protect against a Section 382 "change of ownership" that would limit our ability to utilize future NOLs. For complete details about this waiver from the NOL Protective Measures, please see our Form 8-K filed on July 28, 2010.

As of February 28, 2013, we had 15,319,433 shares outstanding, and therefore ownership of approximately 766,000 shares or more would currently constitute a "5% shareholder". We strongly urge that any stockholder contemplating becoming a 5% or more shareholder contact us before doing so.

PC Postage Business References

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.

When we refer to our "Core PC Postage business", we are referring to the portion of our PC Postage business targeting our small business, enterprise and high volume shipping customers. When we refer to our "Non-Core PC Postage business", we are referring to the portion of our PC Postage business that targets a more consumer oriented customer through the "enhanced promotion" marketing channel. 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 and we find that this channel attracts more consumer oriented customers.


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When we refer to our "Core PC Postage revenue," we are referring to revenues from service, product and insurance generated by customers in our Core PC Postage business and when we refer to our "Non-Core PC Postage revenue," we are referring to revenues from service, product and insurance generated by customers in our Non-Core PC Postage business. When we refer to our "Total PC Postage revenue," we are referring to both Core PC Postage and Non-Core PC Postage revenues generated from all service, product and insurance revenues.

When we refer to our "Core PC Postage marketing channels," we are referring to our marketing channels targeted at acquiring small business, enterprise and high volume shipping customers. These channels include partnerships, online advertising, affiliate channel, direct mail, traditional media advertising and others. When we refer to our "Non-Core PC Postage marketing channel," we are referring to the online enhanced promotion marketing channel.

Within our PC Postage business, we believe it is useful to discuss Core and Non-Core PC Postage because they target different customer types and as a result may represent differing trends. For example, Core PC Postage generally targets businesses and Non-Core PC Postage generally targets consumers.

Results of Operations

Years Ended December 31, 2012 and 2011

Total revenue increased 14% to $115.7 million in 2012 from $101.6 million in 2011. PC Postage revenue, including service revenue, product revenue and insurance revenue, in 2012 was $110.0 million, an increase of 18% compared to $93.3 million in 2011. Core PC Postage revenue increased 19% to $107.0 million in 2012 from $90.2 million in 2011. Non-Core PC Postage revenue decreased 5% to $3.0 million in 2012 from $3.2 million in 2011. PhotoStamps revenue decreased 32% to $5.7 million in 2012 from $8.3 million in 2011. Other revenue increased 9% to $7,000 in 2012 from $6,000 in 2011.

The following table sets forth the breakdown of revenue for 2012 and 2011 and the resulting percent change (revenue in $000s):

                       2012          2011        % Change
Revenues
Service              $  88,173     $  75,535            17 %
Product                 14,710        13,465             9 %
Insurance                7,120         4,321            65 %
PC Postage Revenue     110,003        93,321            18 %
PhotoStamps              5,651         8,258           (32 %)
Other                        7             6             9 %
Total revenues         115,661       101,585            14 %

The following table sets forth the breakdown of PC Postage revenue, which includes Core PC Postage revenue and Non-Core PC Postage revenue for 2012 and 2011 and the resulting percent change (revenue in $000s):

                                2012          2011        % Change

Core PC Postage Revenue       $ 106,979     $ 90,150             19 %
Non-Core PC Postage Revenue       3,024        3,171             (5 %)
PC Postage Revenue              110,003       93,321             18 %

The increase in Core PC Postage revenue was driven by both an increase in average revenue per paid customer and an increase in paid customers. Average revenue per paid customer increased 5% to $21.18 in 2012 from $20.20 in 2011. Annual average paid customers increased 13% to 421,000 in 2012 from 372,000 in 2011.


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We define paid customers for the quarter as ones from whom we successfully collected service fees at least once during that quarter, and we define average paid customers for the year as the average of the paid customers for each of the four quarters during the year.

The following table sets forth the number of paid customers (000s) in the period for our Core PC Postage business:

         First        Second                            Fourth        Annual
Year    Quarter       Quarter       Third Quarter       Quarter       Average

2012         413           418                 419           435           421
2011         360           368                 374           385           372

The following table sets forth the growth in paid customers and average annual revenue per paid customer for our Core PC Postage business:

Core PC Postage Business                       2012          2011        % Change

Average paid customers for the year (000s)         421          372             13 %
Average annual revenue per paid customer     $     254     $    242              5 %
Core PC Postage Revenue ($000s)              $ 106,979     $ 90,150             19 %

The increase in paid customers is primarily driven by an increased number of new customers acquired, which was driven by our increased spend in Core PC Postage marketing channels, while our lost customer churn rates remained at levels that were consistent with the prior year.

For our Core PC Postage Business, our average annual and monthly Core PC Postage revenue per paid customer in 2012 was $254 and $21.18 respectively, which increased by 5% compared to $242 and $20.20, respectively in 2011. The increase in average revenue per paid customer was primarily attributable to (1) higher service revenue from our high volume shipping and enterprise customer segments and (2) an increase in insurance revenue per paid customer driven by our focus on shipping and new insurance features.

Revenue by Product

The following table shows our revenue and revenue as a percentage of total
revenue for the periods indicated (in $000s except percentage):

                                              2012          2011
Revenues
Service                                     $  88,173     $  75,535
Product                                        14,710        13,465
Insurance                                       7,120         4,321
PhotoStamps                                     5,651         8,258
Other                                               7             6
Total revenues                              $ 115,661     $ 101,585
Revenue as a percentage of total revenues
Service                                            76 %          74 %
Product                                            13 %          13 %
Insurance                                           6 %           4 %
PhotoStamps                                         5 %           8 %
Other                                               0 %           0 %
Total revenues                                    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.


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Service revenue increased 17% to $88.2 million in 2012 from $75.5 million in 2011. The 17% increase in service revenue in 2012 consisted of an 18% increase in service revenue from our Core PC Postage business and a 5% decrease in service revenue from our Non-Core PC Postage business. The increase in our Core PC Postage service revenue is primarily attributable to the following (1) a 13% increase in paid customers driven by increased marketing spend to acquire new Core PC Postage customers and (2) a 4% increase in average service revenue per paid customer driven by higher service revenue per paid customer from our high volume shipping and enterprise customer segments. The decrease in our Non-Core PC Postage service revenue is primarily attributable to continued low levels of marketing spend resulting in a decline in Non-Core PC Postage paid customers.

Product revenue increased 9% to $14.7 million in 2012 from $13.5 million in 2011. The increase is 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 in 2012 was $1.1 billion, a 71% increase from the $672 million printed in 2011.

Insurance revenue increased 65% to $7.1 million in 2012 from $4.3 million in 2011. This increase is 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. Postage printed by our high volume shipping customers was up 66% in 2012 compared to 2011.

PhotoStamps revenue decreased 32% to $5.7 million in 2012 from $8.3 million in 2011. The decrease is primarily attributable to: (1) we continued to reduce our PhotoStamps sales and marketing spending in 2012 compared with 2011 to maintain or improve profitability in that business and (2) during the second quarter of 2011, we first applied breakage accounting to our PhotoStamps boxes sold through retail channels which resulted in an incremental $2.2 million of PhotoStamps revenue in 2011 which did not repeat in 2012. Please see Note 2 "Summary of Significant Accounting Policies-PhotoStamps Retail Boxes" in our Notes to Consolidated Financial Statements for further discussion. PhotoStamps sheets shipped decreased 5% to 319,000 in 2012 from 335,000 in 2011 primarily as a result of the reduced marketing spending. Average revenue per PhotoStamps sheet shipped decreased 3% to $17.71 in 2012 from $18.21 in 2011 as a result of an increase in high volume business orders which typically are typically sold at discounted price compared to consumer website orders.

Other revenue consisting of commissions from the advertising or sale of products by third party vendors to our customer increased 9% to $7,000 in 2012 from $6,000 in 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 (in $000s except
percentage):

                                                 2012         2011
Cost of Revenues
Service                                        $ 15,720       14,720
Product                                           5,435        4,910
Insurance                                         2,334        1,506
PhotoStamps                                       4,267        5,076
Total cost of revenues                         $ 27,756     $ 26,212
Cost as percentage of associated revenue
Service                                              18 %         19 %
Product                                              37 %         36 %
Insurance                                            33 %         35 %
PhotoStamps                                          76 %         61 %
Total cost as a percentage of total revenues         24 %         26 %


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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, customer service, image review costs, and printing and fulfillment costs.

Cost of service revenue increased 7% to $15.7 million in 2012 from $14.7 million in 2011. The increase in cost of service revenue is primarily attributable to higher customer service costs to support our growing customer base. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion, while the revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period. Promotional expense decreased 2% to $3.5 million in 2012 from $3.6 million in 2011. The decrease in promotion expense is primarily attributable to lower coupon redemption rates. As a result, cost of service revenue as a percentage of service revenue decreased slightly from 19% in 2011 to 18% in 2012.

Cost of product revenue increased 11% to $5.4 million in 2012 from $4.9 million in 2011. The increase in product costs was driven by increased product revenue. Cost of product revenue as a percentage of product revenue increased slightly from 36% in 2011 to 37% in 2012 as a result of higher fulfillment costs that were not passed on to customers.

Cost of insurance revenue increased 55% to $2.3 million in 2012 from $1.5 million in 2011. The increase is primarily attributable to increased insurance revenue resulting from increased activity by our high volume shipping customers. Cost of insurance revenue as a percentage of insurance revenue decreased slightly from 35% in 2011 to 33% in 2012 as a result of changes and mix shifts in insurance pricing and discounting to the end customers.

Cost of PhotoStamps revenue decreased 16% to $4.3 million in 2012 from $5.1 million in 2011. The decrease is primarily attributable to the decrease in PhotoStamps revenue and the decrease in cost of PhotoStamps revenue related to initial application of PhotoStamps retail box breakage in 2011 that did not repeat in 2012. Cost of PhotoStamps revenue increased from 61% in 2011 to 76% in 2012. This increase was primarily attributable to the initial application of PhotoStamps retail box breakage accounting in 2011 which was at a higher gross margin compared to the rest of the PhotoStamps business. As the initial application of PhotoStamps retail box breakage accounting did not repeat in 2012, Cost of PhotoStamps revenue as a percent of PhotoStamps revenue increased to levels more consistent with years prior to 2011.

Operating Expenses

The following table is our operating expense and operating expense as a
percentage of total revenue for the periods indicated (in $000s except
percentage):

                                                         2012         2011
Operating Expenses:
Sales and marketing                                    $ 38,755       34,569
Research and development                                 10,243        9,395
General and administrative                               14,750       14,181
Total operating expenses                               $ 63,748     $ 58,145
Operating expenses as a percentage of total revenue:
Sales and marketing                                          34 %         34 %
Research and development                                      9 %          9 %
General and administrative                                   13 %         14 %
Total operating expenses                                     55 %         57 %

Sales and Marketing

Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased 12% to $38.8 million in 2012 from $34.6 million in 2011. The increase is primarily due to increased marketing expenditures to acquire customers in our Core PC Postage business. Ongoing marketing programs include the following:
traditional advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail, and online advertising. Sales and marketing expenses as a percent of total revenue was consistent at 34% for both 2011 and 2012.


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Research and Development

Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software, and expenditures for consulting services and third party software. Research and development expense increased 9% to $10.2 million in 2012 from $9.4 million in 2011. The increase is primarily due to headcount-related expenses as we continued to invest in the development and enhancement of our PC Postage solution. Research and development expenses as a percent of total revenue was consistent at 9% for both 2011 and 2012.

General and Administrative

General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense increased 4% to $14.8 million in 2012 from $14.2 million in 2011. The increase is primarily due to the one-time relocation expense we incurred associated with the move to our new corporate headquarters and headcount related expenses. General and administrative expenses as a percent of total revenue decreased slightly from 14% in 2011 to 13% in 2012 as a result of lower litigation expenses in 2012 following the settlement of our patent infringement lawsuit with Endicia in the first quarter of 2012.

Interest and Other Income, Net

Interest and other income, net primarily consists of interest income from cash equivalents, short-term and long-term investments and rental income from our corporate headquarters in El Segundo, California. Interest and other income, net decreased 4% to $541,000 in 2012 from $562,000 in 2011. The decrease is primarily due to lower yields on our investment balances including certain investments in our portfolio that matured and were replaced with lower yield investments.

Provision for Income Taxes

Income tax benefit increased 64% to $13.9 million in 2012 from $8.5 million in 2011. During 2012, our income tax benefit consisted of a reduction of a portion of our valuation allowance on our deferred tax asset (as described below) and federal and state alternative minimum taxes. Our effective income tax rate differs from the statutory income tax rate primarily as a result of the reduction of a portion of our valuation allowance.

We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with Accounting Standards Codification ("ASC") 740 based on all available positive and negative evidence. On March 6, 2012, we entered into a binding agreement with PSI Systems, Inc. ("PSI") to resolve all outstanding patent litigation among the parties. Because the PSI litigation settlement occurred during the first quarter of 2012, we eliminated what had previously been negative evidence at that time. The litigation settlement then became positive evidence because (1) it eliminated the hard-to-predict fluctuations in litigation expenditures, which we expected to be material in future forecasts, (2) it eliminated the potential for a material negative financial judgment against us and (3) it eliminated the possibility of an injunction against us. We believed the other positive and negative evidence we evaluated was consistent (e.g., no material change had occurred) relative to our evaluation of this evidence in prior periods. Based on this discrete event, we extended our forecast of projected taxable income from two years to three years for the portion of our deferred tax asset for which it was more likely than not that a tax benefit would be realized under ASC 740 as of March 31, 2012. As a result, we released a portion of our valuation allowance totaling $11.9 million during the first quarter of 2012.

During the fourth quarter of 2012, we re-evaluated positive and negative evidence relating to our gross deferred tax assets and valuation allowance noting that there was no additional discrete event subsequent to the first quarter of 2012. During the fourth quarter of 2012, we updated our three year forecast of projected taxable income. Based on the updated forecast and a change in the California state tax laws, we recorded another release of a portion of our valuation allowance in the fourth quarter of 2012 totaling approximately $2.5 million. As of December 31, 2012, we recorded approximately $31 million of net deferred tax assets, and we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets.


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During 2012, we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $565,000. During 2011, we were in a taxable loss position for tax reporting purposes and as a result we did not incur any current tax provision.

Expectations for 2013

We expect the following trends for 2013:

· We expect total 2013 revenue to be in a range of between $120 million to $130 million.

· We expect 10% to 15% growth in Core PC Postage revenue for 2013 compared to 2012.

· We expect Non-Core PC Postage and PhotoStamps revenues to decrease in 2013 compared with 2012, as we expect to minimize investment in these areas of our business.

· In October 2012, Amazon.com launched an additional Marketplace USPS shipping solution as an alternative to our shipping solution and we expect this to have a negative impact on our 2013 revenue from this partnership.

· We expect to continue to increase customer acquisition spending on our Core PC Postage marketing channels by 5% - 15% in 2013 compared to 2012. We will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly.

· We expect research and development expenses to be higher in 2013 as compared to 2012, primarily related to expected increased headcount costs to support the growth in our products and services.

. . .

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