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STMP > SEC Filings for STMP > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for STAMPS.COM INC


8-Nov-2013

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, 2012 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.comÒ 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 (the "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 personal computer ("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 to their mail pieces 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. Our customers can print postage (1) on NetStamps® labels, which can be used just like regular stamps, (2) directly on envelopes, postcards or on 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 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. 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 their 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 domestic or international 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 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 internally developed Marketplace USPS shipping solution based on a permit mail system that resulted in a reduction in postage printed through our solution. Amazon's shipping solution is utilized by merchants for certain mail classes while our shipping solution is utilized for the other mail classes. In addition, we continue to provide the integrated Amazon.com Marketplace solution to Stamps.com subscription customers.

During the first quarter of 2011, we began providing 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 recommendations during the checkout process, product search capabilities, and same-day shipping of orders with expedited 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.

PhotoStamps

PhotoStamps is a patented form of postage that allows consumers to turn digital photos, designs or images into valid USPS approved postage. With this product, individuals or businesses can create customized USPS approved 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 U.S. Mail in 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 2013 was $31.2 million, an increase of 7% from $29.1 million in the third quarter of 2012. Total revenue during the nine months ended September 30, 2013 was $95.5 million, an increase of 12% from $85.6 million in the nine months ended September 30, 2012. PC Postage revenue, which includes service revenue, product revenue and insurance revenue, was $30.2 million in the third quarter of 2013, an increase of 8% from $27.9 million in the third quarter of 2012 and was $92.2 million in the nine months ended September 30, 2013, an increase of 13% from $81.8 million in the nine months ended September 30, 2012. PhotoStamps revenue in the third quarter of 2013 was $1.0 million, a decrease of 14% from $1.2 million in the third quarter of 2012 and was $3.3 million in the nine months ended September 30, 2013, a decrease of 14% from $3.8 million in the nine months ended September 30, 2012.

The following table sets forth the breakdown of revenue for the three and nine months ended September 30, 2013 and 2012 and the resulting percentage change (revenue in thousands):

                                  Three months ended September 30,                    Nine months ended September 30,
                               2013               2012          % Change           2013               2012          % Change
Service revenue            $     24,505       $     22,631              8 %    $     74,241       $     65,799             13 %
Product revenue                   3,885              3,495             11 %          12,436             10,876             14 %
Insurance revenue                 1,854              1,774              5 %           5,517              5,138              7 %
PC postage revenue               30,244             27,900              8 %          92,194             81,813             13 %

PhotoStamps revenue               1,001              1,170            (14 %)          3,260              3,771            (14 %)
Other revenue                         -                  1           (100 %)              1                  7            (86 %)
Total revenue              $     31,245       $     29,071              7 %    $     95,455       $     85,591             12 %

Core PC Postage (see definition below) revenue in the third quarter of 2013 was $29.5 million, an increase of 9% from $27.2 million in the third quarter of 2012. Core PC Postage revenue during the nine months ended September 30, 2013 was $90.0 million, an increase of 13% from $79.6 million during the nine months ended September 30, 2012. Non-Core PC Postage (see definition below) revenue in the third quarter of 2013 was $699,000, a decrease of 5% from $738,000 in the third quarter of 2012. Total Non-Core PC Postage revenue was $2.2 million during the nine months ended September 30, 2013, a decrease of 2% from $2.3 million during the nine months ended September 30, 2012.


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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, and "Core PC Postage revenue" is the revenue from our Core PC Postage business. 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 and "Non-Core Postage revenue" is the revenue from our Non-Core PC Postage business". In the "enhanced promotion" marketing 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.

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

                                Three months ended September 30,                       Nine months ended September 30,
                            2013                2012           % Change            2013               2012          % Change
Core PC Postage                                                         9 %                                                 13 %
Revenue                 $      29,546       $      27,162                      $     89,982       $     79,561
Non-Core PC Postage                                                    (5 %)                                                (2 %)
Revenue                           698                 738                             2,212              2,252
PC postage revenue      $      30,244       $      27,900               8 %    $     92,194       $     81,813              13 %

The increase in Core PC Postage revenue during the three months ended September 30, 2013 was mainly attributable to an increase in paid customers. Paid customers in the third quarter of 2013 were approximately 464,000, an increase of 11% compared to 419,000 in the third quarter of 2012. We define paid customers for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue from at least once during that quarter. The average monthly revenue per paid customer in the third quarter of 2013 was $21.24, a decrease of 2% from $21.62 in the third quarter of 2012.

The following table sets forth our paid customers and average quarterly revenue per paid customer for our Core PC Postage business:

                                                      Three months ended September 30,
                                                  2013                2012           % Change
Paid customers for the quarter (000s)                   464                 419              11 %
Average quarterly revenue per paid customer   $       63.72       $       64.87              (2 %)
Core PC postage revenue (000s)                $      29,546       $      27,162               9 %

The increase in paid customers was primarily driven by an increased number of new paid customers, which in turn was a result of new customers generated by our increased spending in our Core PC Postage marketing channels as well as lower churn rates as compared to the prior year.

For our Core PC Postage business, our average quarterly and monthly Core PC Postage revenue per paid customer in the third quarter of 2013 was $63.72 and $21.24, respectively, which decreased by 2% compared to $64.87 and $21.62, respectively, in the third quarter of 2012. The decrease in average revenue per paid customer for the three month ending September 30, 2013 was primarily attributable to lower service and insurance revenue per paid customer from lower Amazon related revenue.


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Revenue by Product

The following table shows our components of revenue and their respective
percentages of total revenue for the periods indicated:

                                               Three Months Ended           Nine Months Ended
                                                 September 30,                September 30,
                                               2013          2012           2013          2012
Total Revenues
Service                                     $   24,505     $  22,631     $   74,241     $  65,799
Product                                          3,885         3,495         12,436        10,876
Insurance                                        1,854         1,774          5,517         5,138
PhotoStamps                                      1,001         1,170          3,260         3,771
Other                                                -             1              1             7
Total revenues                              $   31,245     $  29,071     $   95,455     $  85,591
Revenue as a percentage of total revenues
Service                                             78 %          78 %           78 %          77 %
Product                                             12 %          12 %           13 %          13 %
Insurance                                            6 %           6 %            6 %           6 %
PhotoStamps                                          3 %           4 %            3 %           4 %
Other                                                -             -              -             -
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 8% to $24.5 million in the third quarter of 2013 from $22.6 million in the third quarter of 2012 and increased 13% to $74.2 million in the nine months ended September 30, 2013 from $65.8 million in the nine months ended September 30, 2012. The 8% increase in service revenue during the third quarter of 2013 consisted of a 9% increase in service revenue from our Core PC Postage business while the service revenue from our Non-Core PC Postage business decreased 6%. The 9% increase in our Core PC Postage service revenue consisted of an 11% increase in paid customers and a 2% decrease in average service revenue per customer. The 13% increase in service revenue during the nine months ended September 30, 2013 consisted of a 13% increase in service revenue from our Core PC Postage business while the service revenue from our Non-Core PC Postage business decreased 2%.

Product revenue increased 11% to $3.9 million in the third quarter of 2013 from $3.5 million in the third quarter of 2012 and increased 14% to $12.4 million in the nine months ended September 30, 2013 from $10.9 million in the nine months ended September 30, 2012. The increase was primarily attributable to the following: (1) increased NetStamps label sales; (2) growth in our paid customer base; (3) the postal rate increase in January 2013, which generated incremental label sales for the period of time around the rate increase, (4) marketing our Supplies Store to our existing customer base; and (5) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service increased 25% to $367 million during the third quarter of 2013 from $293 million printed during the third quarter of 2012 and increased 50% to $1.1 billion during the nine months ended September 30, 2013 from $747 million printed during the nine months ended September 30, 2012.

Insurance revenue increased 5% to $1.9 million in the third quarter of 2013 from $1.8 million in the third quarter of 2012 and increased 7% to $5.5 million in the nine months ended September 30, 2013 from $5.1 million in the nine months ended September 30, 2012. The increase was primarily attributable to the expansion of our existing package insurance offering to cover packages being shipped to international destinations and increased insurance purchases by high volume shippers, partially offset by a reduction in insurance revenue through our Amazon partnership.


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We continued to reduce our PhotoStamps sales and marketing spending in the third quarter of 2013 compared with the third quarter of 2012, and plan to continue to reduce our sales and marketing spending on PhotoStamps in future periods to maintain or improve profitability in that business. As a result of this decision PhotoStamps revenue decreased 14% to $1.0 million in the third quarter of 2013 from $1.2 million in the third quarter of 2012 and decreased 14% to $3.3 million in the nine months ended September 30, 2013 from $3.8 million in the nine months ended September 30, 2012. Total PhotoStamps sheets shipped was approximately 52,000 in the third quarter of 2013, a 7% decrease compared to 55,000 in the third quarter of 2012 and was 181,000 in the nine months ended September 30, 2013, a decrease of 10% compared to 200,000 in the nine months ended September 30, 2012. Average revenue per sheet shipped decreased 8% in the third quarter of 2013 to $19.4 from $21.2 in the third quarter of 2012 and decreased 4% in the nine months ended September 30, 2013 to $18.0 from $18.8 in the nine months ended September 30, 2012. The decrease was primarily attributable to a higher mix of high volume business orders which typically have a lower price per sheet.

Other revenue consists of commissions from the advertising or sale of products by third party vendors to our customer base. Other revenue is currently not material to our consolidated financial statements.

Cost of Revenues

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,
                                                  2013           2012           2013          2012
Cost of Revenues
Service                                        $    3,833      $   3,720     $   12,403     $  11,788
Product                                             1,315          1,271          4,322         4,009
Insurance                                             659            573          1,976         1,670
PhotoStamps                                           777            929          2,623         2,927
Total cost of revenues                         $    6,584      $   6,493     $   21,324     $  20,394
Cost as percentage of associated revenues
Service                                                16 %           16 %           17 %          18 %
Product                                                34 %           36 %           35 %          37 %
Insurance                                              36 %           32 %           36 %          33 %
PhotoStamps                                            78 %           79 %           80 %          78 %
Total cost as a percentage of total revenues           21 %           22 %           22 %          24 %

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 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 3% to $3.8 million in the third quarter of 2013 from $3.7 million in the third quarter of 2012 and increased 5% to $12.4 million in the nine months ended September 30, 2013 from $11.8 million in the . . .

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