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STMP > SEC Filings for STMP > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for STAMPS.COM INC

Form 10-K for STAMPS.COM INC


17-Mar-2014

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.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 ("USPS") mail classes, including First Class Mail®, Priority Mail®, Priority Mail Express®, Media Mail®, Parcel Select®, and others. Customers using our service receive discounted postage rates compared to USPS retail rates on certain mail pieces such as First Class letters and domestic and international Priority Mail and Priority Mail Express packages. 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.

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 acquired through our Core PC Postage marketing channels which include partnerships, online advertising, direct mail, direct sales, traditional media advertising and others.

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 online enhanced promotion marketing channel. In the online 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.

When we refer to our "PC Postage Revenue", we are referring to our service, product and insurance revenue generated by all of our PC Postage customers.

When we refer to our "Core PC Postage Revenue", we are referring to the portion of the service, product and insurance revenue that was generated by customers who were acquired through our Core PC Postage marketing channels.

When we refer to our "Non-Core PC Postage Revenue", we are referring to the portion of the service, product and insurance revenue that was generated by customers who were acquired through our online enhanced promotion marketing channel. Within our PC Postage business, we believe it is useful to discuss our Core PC Postage business separately from our Non-Core PC Postage business because each business targets and typically serves different customer segments and utilizes different marketing channels to acquire those customers. As a result of these differences, the Core and Non-Core PC Postage businesses typically experience different customer and financial metrics results and trends which are best discussed separately from each other.


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Results of Operations

Years Ended December 31, 2013 and 2012

Total revenue increased 11% to $127.8 million in 2013 from $115.7 million in 2012. PC Postage revenue, which includes service revenue, product revenue and insurance revenue, was $123.1 million in 2013, an increase of 12% from $110.0 million in 2012. PhotoStamps revenue decreased 17% to $4.7 million in 2013 from $5.7 million in 2012. Other revenue decreased 86% to $1,000 in 2013 from $7,000 in 2012.

The following table sets forth the breakdown of revenue for 2013 and 2012 and the resulting percent change (revenue in $000s):

                       2013          2012        % Change
Revenues
Service              $  99,013     $  88,173            12 %
Product                 16,580        14,710            13 %
Insurance                7,515         7,120             6 %
PC Postage Revenue     123,108       110,003            12 %
PhotoStamps              4,710         5,651           (17 %)
Other                        1             7           (86 %)
Total revenues         127,819       115,661            11 %

Core PC Postage revenue in 2013 was $120.2 million, an increase of 12% from $107.0 million in 2012. Non-Core PC Postage revenue in 2013 was $2.9 million, a decrease of 5% from $3.0 million in 2012.

The following table sets forth the breakdown of PC Postage revenue, which includes Core PC Postage revenue and Non-Core PC Postage revenue for 2013 and 2012 and the resulting percent change (revenue in $000s):

                                2013          2012         % Change

Core PC Postage Revenue       $ 120,232     $ 106,979             12 %
Non-Core PC Postage Revenue       2,876         3,024             (5 %)
PC Postage Revenue              123,108       110,003             12 %

The increase in Core PC Postage revenue was primarily attributable to an increase in paid customers. Annual average paid customers increased 11% to 466,000 in 2013 from 421,000 in 2012. The decrease in Non-Core PC Postage revenue was primarily attributable to lower marketing spend in the online enhanced promotion channel.

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         Third        Fourth        Annual
Year    Quarter       Quarter       Quarter       Quarter       Average

2013         465           467           464           468           466
2012         413           418           419           435           421

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

                                               2013          2012         % Change

Average paid customers for the year (000s)         466           421             11 %
Average annual revenue per paid customer     $     258     $     254              2 %
Core PC Postage Revenue (000s)               $ 120,232     $ 106,979             12 %


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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 2013 was $258 and $21.51 respectively, which increased by 2% compared to $254 and $21.18, respectively in 2012. The increase in average revenue per paid customer was primarily attributable to higher service revenue per paid customer from our high volume shipping and enterprise customers and higher store revenue per paid customer from increased sales of NetStamps labels; partially offset by a reduction in revenue per paid customer from our Amazon partnership.

Revenue by Product

The following table shows our components of revenue and their respective
percentages of total revenue for the periods indicated (in 000s except
percentage):

                                              2013          2012
Revenues
Service                                     $  99,013     $  88,173
Product                                        16,580        14,710
Insurance                                       7,515         7,120
PhotoStamps                                     4,710         5,651
Other                                               1             7
Total revenues                              $ 127,819     $ 115,661
Revenue as a percentage of total revenues
Service                                            77 %          76 %
Product                                            13 %          13 %
Insurance                                           6 %           6 %
PhotoStamps                                         4 %           5 %
Other                                               0 %           0 %
Total revenues                                    100 %         100 %

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

Service revenue increased 12% to $99.0 million in 2013 from $88.2 million in 2012. The 12% increase in service revenue in 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 5%. The 12% increase in our Core PC Postage service revenue consisted of an 11% increase in our annual average paid customers and a 2% increase in our annual average revenue per paid customer.

Product revenue increased 13% to $16.6 million in 2013 from $14.7 million in 2012. The increase was primarily attributable to the following: (1) increase in 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 in 2013 was $1.6 billion, a 36% increase from the $1.1 billion printed in 2012.

Insurance revenue increased 6% to $7.5 million in 2013 from $7.1 million in 2012. This increase was primarily attributable to increased insurance purchases by our high volume shippers, partially offset by a reduction in insurance revenue through our Amazon partnership.

We continued to reduce our PhotoStamps sales and marketing spending in 2013 compared with 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, although we believe that there may be potential opportunities to grow the business in a better economic environment. As a result of this decision PhotoStamps revenue decreased 17% to $4.7 million in 2013 from $5.7 million in 2012. Total PhotoStamps sheets shipped in 2013 decreased 20% to 255 thousand compared to 2012 and average revenue per PhotoStamps sheet shipped increased 4% to $18.50 in 2013 compared to 2012. The decrease in sheets shipped was primarily attributable to our lower marketing spend and the increase in average revenue per sheet shipped was primarily attributable to less discounting on custom negotiated pricing.


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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):

                                                 2013         2012
Cost of Revenues
Service                                        $ 15,422     $ 15,720
Product                                           5,694        5,435
Insurance                                         2,685        2,334
PhotoStamps                                       3,699        4,267
Total cost of revenues                         $ 27,500     $ 27,756
Cost as percentage of associated revenue
Service                                              16 %         18 %
Product                                              34 %         37 %
Insurance                                            36 %         33 %
PhotoStamps                                          79 %         76 %
Total cost as a percentage of total revenues         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 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 decreased 2% to $15.4 million in 2013 from $15.7 million in 2012. The decrease in cost of service revenue is primarily attributable to lower promotional expense as a result of a decrease in our coupon redemption rate, partially offset by higher system operating costs, credit card processing fees and customer service costs reflecting the growth in our business and our associated investments to support that growth. 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 32% to $2.4 million in 2013 from $3.5 million in 2012. The decrease in promotion expense is primarily attributable to fewer customers acquired and to lower coupon redemption rates.

Cost of product revenue increased 5% to $5.7 million in 2013 from $5.4 million in 2012. The increase in product costs was driven by increased product revenue. Cost of product revenue as a percentage of product revenue decreased from 37% in 2012 to 34% in 2013. The decrease was primarily attributable to decreased fulfillment costs and to an increase in NetStamps labels revenue which have a lower cost of revenue as compared to other products sold in our Supplies Store.

Cost of insurance revenue increased 15% to $2.7 million in 2013 from $2.3 million in 2012. 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 increased from 33% in 2012 to 36% in 2013. The increase was primarily attributable to the increased level and mix of discounted insurance rates for shippers.

Cost of PhotoStamps revenue decreased 13% to $3.7 million in 2013 from $4.3 million in 2012. Cost of PhotoStamps revenue as a percentage of PhotoStamps revenue increased from 76% in 2012 to 79% in 2013. The increase was primarily attributable to the decrease in PhotoStamps revenue resulting in less fixed cost leverage and an increase in the face value of the cost of postage by the USPS which we did not pass on to customers in the form of higher pricing.


Table of Contents
Operating Expenses

The following table outlines the components of our operating expense and their
respective percentages of total revenue for the periods indicated (in 000s
except percentage):

                                                         2013         2012
Operating Expenses:
Sales and marketing                                    $ 39,449     $ 38,755
Research and development                                 10,958       10,243
General and administrative                               15,794       14,750
Total operating expenses                               $ 66,201     $ 63,748
Operating expenses as a percentage of total revenue:
Sales and marketing                                          31 %         34 %
Research and development                                      9 %          9 %
General and administrative                                   12 %         13 %
Total operating expenses                                     52 %         55 %

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 2% to $39.5 million in 2013 from $38.8 million in 2012. The increase is primarily due to increased marketing spending to acquire customers in our Core PC Postage business while spending in our Non-Core PC Postage and PhotoStamps business both decreased compared to 2012. Ongoing marketing programs include the following: customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing, and traditional advertising. Sales and marketing expenses as a percent of total revenue decreased from 34% in 2012 to 31% in 2013 as revenue grew at a faster pace than sales and marketing expenses. The decrease is primarily attributable to sales and marketing spend not increasing as much as originally planned due to a more competitive environment in the traditional advertising and online marketing areas in 2013 as compared to 2012.

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 7% to $11.0 million in 2013 from $10.2 million in 2012. The increase is primarily due to an increase in headcount-related expenses to support our expanded offerings. Research and development expense as a percentage of revenue was consistent at 9% in both 2012 and 2013.

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 7% to $15.8 million in 2013 from $14.8 million in 2012. The increase is primarily due to increase in headcount and related expenses and infrastructure investments to support the growth in the business. General and administrative expense as a percentage of revenue decreased slightly from 13% in 2012 to 12% in 2013. The decrease was primarily attributable to fixed cost leverage associated with our revenue growth.

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 11% to $480,000 in 2013 from $541,000 in 2012. 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.


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Provision for Income Taxes

During 2013, 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.

The income tax benefit in 2013 was $9.6 million which was lower than the $13.9 million income tax benefit in 2012. The decrease was primarily attributable to a lower reduction of a portion of our valuation allowance in 2013 as compared to the reduction of a portion of our valuation allowance release in 2012.

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.

During the fourth quarter of 2013, we re-evaluated positive and negative evidence relating to our gross deferred tax assets and valuation allowance noting that there was no discrete event that occurred during 2013 year. During the fourth quarter of 2012, we updated our three year forecast of projected taxable income. Based on the updated forecast we recorded another release of a portion of our valuation allowance in the fourth quarter of 2013 totaling approximately $9.7 million.

As of December 31, 2013, we have recorded approximately $40 million of net deferred tax assets on the balance sheet, and we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets.

During 2013, we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $158,000. During 2012, we recorded current tax provision for corporate alternative minimum federal and state taxes of approximately $565,000. The decrease in current tax provision in 2013 compared to 2012 is primarily due to lower taxable income in 2013 as a result of a change in California state tax laws and additional temporary differences.

Expectations for 2014

We expect the following trends for 2014:

· We expect fiscal 2014 revenue to be in the range between $125 million and $140 million.

· We expect growth in 2014 Core PC Postage revenue to be up 5% to 10% compared to 2013. Our ability to grow our Core PC Postage revenue is dependent on our ability to increase our small business customer acquisition spending on marketing programs resulting in the addition of new customers and so to the extent we are not able to achieve our target increase in spending, as outlined below, this would negatively impact our 2014 Core PC Postage revenue growth expectations.


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· We expect Non-Core PC Postage revenue and PhotoStamps revenue will continue to be down in 2014 compared to 2013 as we expect to continue to minimize investments in these areas of our business.

· We are targeting small business customer acquisition spending on our Core PC Postage marketing channels to be up 5% - 10% in 2014 compared to 2013. We will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly.

· Customer acquisition spending is expensed in the period incurred while the revenue and profits associated with the acquired customer is earned over the customer's lifetime. As a result, increased customer acquisition spending in future periods could result in a reduction in operating profit and cash flow compared to past periods.

· We expect research and development expenses to be higher in 2014 as compared to 2013, primarily related to an expected increase in headcount costs to support the growth in our products and services.

· We expect general and administrative expenses to be higher in 2014 as compared to 2013, primarily related to an expected increase in costs to build and support the infrastructure necessary to grow the business.

· We expect capital expenditures for the business to be approximately $2.5 million.

As discussed above, our expectations are subject to substantial uncertainty and our results are subject to macro economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations. These expectations are "forward looking statements", are made only as of the date of this Report and are subject to the qualification and limitations on the forward-looking statements discussion on page 1 of Part I of this Report and the risks and other factors set forth in Item 1A "Risk Factors". As described in our forward-looking statements discussion, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

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 . . .

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