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STMP > SEC Filings for STMP > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for STAMPS.COM INC

Form 10-Q for STAMPS.COM INC


9-May-2014

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, 2013 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 ("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 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.

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. Typically, 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 mail classes. Customers can also add to their mail pieces USPS Special Services such as USPS Tracking 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 labels, such as Themed NetStamps labels and Photo NetStamps labels, which allow customers to add stock or custom designs to their postage label.

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 Mail or Priority Mail Express postage, the USPS compensates us directly and the customer can qualify to have their service fees waived or refunded. In addition, we also have plans with service fees less than $15.99 which offer more limited functionality and 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®.

We have an integration 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 per shipping label printed is charged to merchants who are not Stamps.com subscription customers. In October 2012, Amazon.com launched their own internally developed Marketplace USPS shipping solution 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 by merchants for the other mail classes. In addition, we continue to provide the integrated Amazon.com Marketplace solution to Stamps.com subscription customers.

We have an integration partnership with the USPS where we provide 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 Mail and Priority Mail 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 first quarter of 2014 was $33.3 million, an increase of 4% from $32.1 million in the first quarter of 2013. PC Postage revenue, which includes service revenue, product revenue and insurance revenue, in the first quarter of 2014 was $32.2 million, an increase of 4% from $31.1 million in the first quarter of 2013. PhotoStamps revenue was approximately $1.0 million in the first quarter of 2014 and 2013, respectively.

The following table sets forth the breakdown of revenue for the first quarters of 2014 and 2013 and the resulting percentage change (revenue in thousands):

                            Three months ended March 31,
                         2014             2013        % Change
Service revenue       $    25,643       $  24,848             3 %
Product revenue             4,613           4,476             3 %
Insurance revenue           1,993           1,746            14 %
PC postage revenue    $    32,249       $  31,070             4 %

PhotoStamps revenue   $     1,049       $   1,030             2 %
Other revenue                   -               1           (83 %)
Total revenue         $    33,298       $  32,101             4 %

Core PC Postage revenue in the first quarter of 2014 was $31.7 million, an increase of 5% from $30.3 million in the first quarter of 2013. Non-Core PC Postage revenue in the first quarter of 2014 was $573,000, a decrease of 27% from the $783,000 in the first quarter of 2013.


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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. 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.

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 March 31,
                                 2014             2013        % Change
Core PC Postage Revenue       $    31,676       $  30,287             5 %
Non-Core PC Postage Revenue           573             783           (27 %)
PC postage revenue            $    32,249       $  31,070             4 %

The increase in Core PC Postage revenue was driven by an increase in paid customers partially offset by a decrease in average revenue paid per customer. Paid customers in the first quarter of 2014 were approximately 492,000, an increase of 6% from 465,000 for the first quarter of 2013. The average monthly revenue per paid customer in the first quarter of 2014 was $21.45, a decrease of 1% compared from $21.71 in the first quarter of 2013. We define paid customers for the quarter as ones from whom we successfully collected service fees at least once during that quarter.

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

                                                             Three months ended March 31,
                                                        2014              2013          % Change
Paid customers for the quarter (000s)                        492               465               6 %
Average quarterly revenue per paid customer          $     64.35       $     65.14              (1 %)
Core PC postage revenue (000s)                       $    31,676       $    30,287               5 %

For our Core PC Postage Business, our average quarterly and monthly Core PC Postage revenue per paid customer in the first quarter of 2014 was $64.35 and $21.45 respectively, which decreased by 1% compared to $65.14 and $21.71, respectively in the first quarter of 2013.


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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
                                                    March 31,
                                                2014          2013
Total Revenues
Service                                      $   25,643     $ 24,848
Product                                           4,613        4,476
Insurance                                         1,993        1,746
PhotoStamps                                       1,049        1,030
Other                                                 -            1
Total revenues                               $   33,298     $ 32,101
Revenue as a  percentage of total revenues
Service                                              77 %         77 %
Product                                              14 %         14 %
Insurance                                             6 %          5 %
PhotoStamps                                           3 %          3 %
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.

Service revenue increased 3% to $25.6 million in the first quarter of 2014 from $24.8 million in the first quarter of 2013. The 3% increase in service revenue consisted of a 4% increase in service revenue from our Core PC Postage business while the service revenue from our Non-Core PC Postage business decreased 27%. The 4% increase in our Core PC Postage service revenue consisted of a 6% increase in paid customers and a 2% decrease in average service revenue per customer.

Product revenue increased 3% to $4.6 million in the first quarter of 2014 from $4.5 million in the first quarter of 2013. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) the postal rate increase in January 2014, 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 first quarter of 2014 was $392 million, a 4% increase from the $378 million printed during the first quarter of 2013.

Insurance revenue increased 14% to $2.0 million in the first quarter of 2014 from $1.7 million in the first quarter of 2013. This 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 purchases by other customers.

We continued to reduce our PhotoStamps sales and marketing spending in the first quarter of 2014 compared with the first quarter of 2013, 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 from orders placed through our website declined in the first quarter of 2014. This decline was offset by growth in high volume business PhotoStamps orders. As a result, PhotoStamps revenue increased by 2% to $1.0 million in the first quarter of 2014 compared to first quarter of 2013. Total PhotoStamps sheets shipped during the first quarter of 2014 was approximately 60,000, a 4% increase compared to 58,000 in the first quarter of 2013. Average revenue per sheet shipped in the first quarter of 2014 was $17.52 compared to $17.91 in the first quarter of 2013.


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Other revenue consists of commissions from the advertising or sale of products by third party vendors to our customer base was approximately $0 and $1,000 in the first quarter of 2014 and 2013, respectively. Commission revenue from the advertising or sale of products by third party vendors 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
                                                      March 31,
                                                  2014          2013
Cost of Revenues
Service                                        $    4,369      $ 4,555
Product                                             1,542        1,625
Insurance                                             688          641
PhotoStamps                                           846          831
Total cost of revenues                         $    7,445      $ 7,652
Cost as percentage of associated revenues
Service cost                                           17 %         18 %
Product cost                                           33 %         36 %
Insurance cost                                         35 %         37 %
PhotoStamps cost                                       81 %         81 %
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 4% to $4.4 million in the first quarter of 2014 from $4.6 million in the first quarter of 2013. The decrease 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 21% to $892,000 in the first quarter of 2014 from $1.1 million in the first quarter of 2013.

Cost of product revenue decreased 5% to $1.5 million in the first quarter of 2014 from $1.6 million in the first quarter of 2013. Cost of product revenue as a percentage of product revenue decreased from 36% in the first quarter of 2013 to 33% in the first quarter of 2014. The decrease in both cost of product revenue and cost of product revenue as a percentage of product revenue is primarily attributable to lower fulfillment costs.

Cost of insurance revenue increased 7% to $688,000 in the first quarter of 2014 from $641,000 in the first quarter of 2013. The increase is primarily attributable to increased insurance revenue. Cost of insurance revenue as a percentage of insurance revenue decreased from 37% in the first quarter of 2013 to 35% in the first quarter of 2014.

Cost of PhotoStamps revenue increased 2% to $846,000 in the first quarter of 2014 from $831,000 in the first quarter of 2013, which is consistent with the increase in PhotoStamps revenue.


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Operating Expenses

The following table is our operating expense and operating expense as a
percentage of total revenue for the periods indicated:
                                                      Three Months Ended
                                                           March 31,
                                                       2014          2013
Operating expenses:
Sales and marketing                                 $   11,370     $ 10,383
Research and development                                 2,916        2,625
General and administrative                               4,197        3,626
Total operating expenses                            $   18,483     $ 16,634
Operating expenses as a percent of total revenue:
Sales and marketing                                         34 %         32 %
Research and development                                     9 %          8 %
General and administrative                                  13 %         11 %
Total operating expenses                                    56 %         52 %

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 10% to $11.4 million in the first quarter of 2014 from $10.4 million in the first quarter of 2014. This increase is primarily due to increased marketing expenditures to acquire customers in our core PC Postage business while spending in our Non-Core PC Postage and PhotoStamps business both decreased compared to the first quarter of 2013. Ongoing marketing programs include the following: customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing, and traditional advertising.

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 11% to $2.9 million in the first quarter of 2014 from $2.6 million in the first quarter of 2013. The increase is primarily due to higher headcount related expenses to support our expanded product offering and technology infrastructure investments.

General and Administrative

. . .

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