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Executives

Jeff Carberry – Senior Director-Finance

Ken McBride – Chairman and Chief Executive Officer

Kyle Huebner – Co-President and Chief Financial Officer

Analysts

Sarkis Sherbetchyan – B. Riley & Co. LLC

George F. Sutton – Craig-Hallum Capital Group LLC

Jared D. Schramm – ROTH Capital Partners LLC

Bill Sutherland – Northland Capital

Stamps.com Inc. (STMP) Q4 2012 Earnings Call February 13, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Stamps.com Inc. Fourth Quarter 2012 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this program may be recorded.

I would now like to introduce your host for today’s program, Mr. Jeff Carberry, Senior Director of Finance. Please go ahead.

Jeff Carberry

Thanks very much, and good afternoon, everyone. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda for today’s call is as follows: we’ll review the results of our fourth quarter 2012, and then we’ll discuss financial results and talk about our business outlook, but first the Safe Harbor statement. The Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release contains the forward-looking statements, such as our expectations and financial guidance that involve risks and uncertainties. Important factors, including the Company’s ability to complete and ship its products, maintain desirable economics for its products and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K for the fiscal year-ended December 31, 2011, quarterly reports on Form 10-Q and current reports on Form 8-K.

Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now, I’ll hand the call over to Ken.

Kenneth McBride

Thank you for joining us today. Today, we announced another strong quarter. During the fourth quarter, we achieved a record number of paid customers at 435,000, which is up 13% year-over-year. The record number of enterprise paid locations, the record number of small business customers acquired the year-over-year reduction and churn from 3.4% to 3.1%, and a record level of postage printed by our customer base, which was up 19% to 401 million.

The fourth quarter capped off a very strong fiscal 2012 in which we achieved record core PC Postage revenue of $107 million with year-over-year growth of 19%. Our highest small business new customers are acquired at 314,000, which was 14% year-over-year. Our highest new enterprise locations added, which was up 80% year-over-year, record postage printed of 1.15 billion, which was up 71% year-over-year and represented the first time in our Company’s history, we printed over 1 billion in postage in the calendar year.

And finally record non-GAAP operating income of $28.6 million, record non-GAAP net income of $28.5 million and record non-GAAP fully diluted earnings per share of $1.70. On the call today, we’ll talk in more detail about PC Postage metrics and business, our plan for 2013, and our financial results ended.

Now let’s begin with a more detailed discussion of the PC Postage business. As per metrics, we discussed on this call, only for the core PC Postage business, which excludes all enhanced promotional channel activity. for more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metrics spreadsheet at investor.stamps.com.

Core PC Postage revenue including small business enterprise and high-volume shipping customer segments was $27.4 million in the fourth quarter, which is up 12% versus the fourth quarter of 2011. This was the ninth consecutive quarter in which we have generated double-digit year-over-year growth rate in our core PC Postage revenue. The increase in our core PC Postage revenue was primarily attributed to continued solid performance in our small business area. Note that we had a very tough compare with Q4 of last year, where our core PC Postage revenue was up 27%.

As we described on the last call, Amazon launched an additional USPS shipping options in their merchant marketplace during the fourth quarter. And this resulted in a decrease in revenue to our Amazon partnership integration. If there have been no change in our Amazon market integration, we believe our core PC Postage revenue growth would have been more generally consistent with prior trends we saw in the second and third quarter of this year.

During the fourth quarter, we acquired 89,000 gross small business customers, which is up 7% versus the fourth quarter 2011. This is the largest number of small business customers, acquired in any quarter in the history of the company. Our costs per new small business, customer acquired or CPA decreased to $104 in the fourth quarter, which is down 4% versus the $108 we saw in the fourth quarter of 2011.

Our average monthly churn during the fourth quarter was 3.1%, which was down 0.3% from the 3.4% churn we saw in the fourth quarter of 2011, and down 0.4% from the 3.5% churn we saw in the third quarter of 2012.

We’re very pleased to see our churn decreased on a year-over-year basis, reversing the trend we experienced in the second and third quarters. While we see quarter-to-quarter fluctuations in our churn rates, we believe that overall churn rates are benefiting from our growth in postage printed, lower churn rates in our enterprise and high-volume shipping customer segments, new product features, which contribute to increase usage of our service and continued success in our ongoing customer retention efforts.

Pay customers in the fourth quarter was 435,000, up 13% versus the fourth quarter of 2011 and up 16,000 sequentially versus the third quarter of 2012. The 16,000 sequential increase was the largest ever fourth quarter sequential increase in paid customers. Growth in paid customers benefited from both increased acquisition and reduced churn. Average subscriber revenue per paid customer for ARPU was $21.03 in the fourth quarter that was down 1% versus the $21.25 in the fourth quarter of 2011. The year-over-year decrease in ARPU was primarily attributed to the negative impact from the lost Amazon related revenue as described earlier on the call.

We also note that we had a tough comparison as ARPU grew 12% in the fourth quarter of 2011. Total postage used by all our customers was 401 million in the fourth quarter of 2012, and that was up 90% versus the fourth quarter of 2011. Since the highest growth that we have ever seen for total postage printed, and is now the seventh consecutive quarter where year-over-year growth in our quarterly postage usage has exceeded 50%. total postage printed in our high volume shipping segment was up 25% year-over-year. we did see a slowdown in postage printed growth in this segment as a result of the lost Amazon volume, and as we anniversaried some of our high volume partnerships from the fourth quarter of 2011.

We carefully monitor total postage usage as an indicator of the value customers drive from our service and its growth has been correlated with strength in our other business metrics. We continue to believe that the economic environment with respect to small business remains challenging, relative to previous recession levels and continues to affect our small business customer acquisition and churn.

However, we believe the sustained improvements in the small business economic environment from current levels could provide further lift to our small business efforts over the long term.

With that, now let’s turn to the 2013 plan for PC Postage. Again, the discussion is about the core PC postage business excluding enhanced promotion channel. In the small business area, we plan to continue scaling and optimizing our customer acquisition spend. We continue to experience a strong return on investment on our marketing spend with an estimated lifetime value that exceeds our current cost per acquisition by at least two times. We expect to continue increasing our small business customer acquisition spend, which was up 10% from the year, while simultaneously reducing the CPA, which was down 3% for the year, demonstrating continued efficiencies in scaling our marketing spend.

We plan to increase our 2013’s small business customer acquisition spend by 5% to 15%. We plan to continue utilizing a variety of marketing channels including direct mail, traditional media, online marketing and other areas. Across each of our marketing channels, we plan to continue to focus on scaling the total spent while keeping cost per acquisition at a reasonable level.

Also in the small business, we’re continuing to optimize our business model and our overall customer experience in many ways. We’re continuing to optimize our website, our registration process and our press registration customer interactions. We also continue to launch new features in our client product that make mailing and shipping easier for our customers.

We’re going to be particularly focused on e-commerce users in our recent releases including version 10.0 with added functionality such as the new user friendly batch playing tools and design enhancements, new features that make international customers more convenient, such as the ability to print forms of hidden postage and ability to use our thermal printer performance.

Support for Express mail flat rate, up padded on the rope for cost effective over night delivery, support for partial select service, which offers the lowest USPS rates for ground delivery.

Support for USPS Special services that included adult signature required, and hole for pick up services on packages, and many other features specifically targeting our e-commerce features.

In the enterprise area, we plan to continue scaling up our sales and marketing efforts. Customers continue to use our service as a great alternate to a postage meter based on the dramatically lower total cost of ownership. Customers also like the visibility available from our centralized reporting tool, where they can monitor posted spent across their entire network of users, a feature that is non-available with postage meters.

During 2012, we attracted a record number of new locations to our service and we grew enterprise revenue by 43% versus 2011. Our pipeline of opportunities continue to grow nicely in ’12 and we continue to see lower churn rates and higher ARPU and enterprise compared to our SOHO business.

Overall, we’re excited about the continued progress in enterprise and we feel that we’re seeing attractive returns on the investment we have been making in this area. We’re expecting to see continued strong growth out of this business line going forward.

In our high volume shipper area, we plan to continue to scale up our efforts in this area in 2013. We continue to attract high volume shippers such as warehouses, fulfillment houses, e-commerce shippers, large retailers and other types of high volume shippers to our service through our efforts in this area.

High volume shipping postage grew 66% in 2012, compared to 2011; 2013, where we’ll continue to focus on scaling this business area. We’ll continue to introduce improvements in the software, and features to further improve scalability of the product to the largest high volume customers. We’ll continue to add new shopping card integrations for easier data export and import from the tools that customers like to use. And we’ll continue to scale our marketing efforts and our sales efforts using our national sales force.

We’re excited about the progress we’re making in the high volume shipping area and we feel that it is an important part of our overall business over the next five years. We feel that our 2013 PC postage plan is a very solid one; we feel that our long-term opportunities to grow the business are very attractive. Despite a small business economic environment, that remains challenging, we plan to aggressively invest for the benefit of our long-term shareholders.

Now, we want to take a moment to provide an update on the Postal Reform. The USPS recently announced that it was moving forward with accelerated cost-cutting actions that included the elimination of Saturday mail delivery. We do not believe the elimination of Saturday mail delivery will have any real impact on our business. we are pleased that the USPS will continue to deliver packages on Saturday, which makes them a competitive solution versus private carriers to charge extra fee to do so.

The USPS continue to call on Congress to pass legislation that would allow them to better manage their costs and allow them more commercial flexibility. However, there is currently no timeframe for the Postal Reform in Congress and the uncertainty continues in this area. Our focus is on ensuring that we do everything possible that help create value for the USPS, and we feel that we are doing everything possible for growth in postage printed.

Now with that, Kyle will discuss our more detailed financial results and our business outlook.

Kyle Huebner

Thanks, Ken. Now we will review our fourth quarter financial results. We will discuss our fourth quarter financials on the non-GAAP basis, which excludes the following. Underneath, 815,000 of stock-based compensation expense and a non-cash income tax benefit of $2.5 million resulting from the reversal of the portion of the Company’s net deferred tax asset valuation allowance. The reconciliation of all non-GAAP to GAAP numbers is contained in the earnings release posted on our website. Total revenue was $30.1 million in Q4, up 10% compared with the fourth quarter of 2011. The fourth quarter growth was driven by your Core PC Postage business. Non-core PC Postage revenue from the enhanced promotion channel was 772,000 in Q4, down 1% compared with the Q4 of 2011.

PhotoStamps revenue was $1.9 million in Q4, down 1% compared with the fourth quarter of 2011. Core PC Postage revenue was $27.4 million in Q4, up 12% compared with the fourth quarter of 2011. The year-over-year increase in Core PC Postage revenue is a result of increased paid customers, partially offset by a decrease in ARPU as discussed by Ken in the metrics section.

Again, we would know, we faced one of the toughest compares we’ve ever had with 27% growth in Q4 2011 Core PC Postage revenue. PC Postage gross margin was 78.9% in Q4 compared with 77.9% in the fourth quarter of 2011.

Cost of sales included promotional expenses related to customer acquisition of 871,000 in Q4, compared with 984,000 in the fourth quarter of 2011. So, PC Postage gross margin excluding promotional expenses was 81.9% in Q4, which was comparable with the 81.8% in the fourth quarter of 2011.

PhotoStamps gross margin was 28.7% in Q4, compared with 30.2% in the fourth quarter of 2011. PhotoStamps gross margin declined primarily because of the reverse leverage we see from fixed costs with a decrease in revenue and from a higher mix of lower margin, high volume business or others as compared to fourth quarter last year.

Total sales and marketing spend was $9.8 million in Q4, which was up 5%, compared with the fourth quarter of 2011. The increase is primarily due to increased sales and marketing expenditures to acquire new customers and our Core PC Postage business. R&D spend was $2.2 million in Q4, which was up 2% compared with the fourth quarter of 2011. The increase was primarily related to increased headcount related expenses to support our expanded product offers.

G&A spend was $3.1 million in Q4, which was down 9% compared with the fourth quarter of 2011. The decrease was primarily due to the settlement of our litigation with Endicia in the first quarter of 2012. Non-GAAP operating income was $7.6 million in Q4, which was up 42% compared with the fourth quarter of 2011, and non-GAAP operating margin was 25.4% compared with 19.8% in the fourth quarter of 2011. The income growth in margin expansion were primarily attributable to revenue growth in our Core PC Postage business and leverage in our operating expense lines, which increased that rates less than our revenue increase.

Non-GAAP net income was $7.6 million, up 33% versus $5.7 million in Q4 2011. Non-GAAP net income per share was $0.47 based on $16.1 million fully diluted shares, which was up 36% compared with $0.35 per share, based on $16.6 million fully diluted shares in Q4 of 2011.

Non-GAAP adjusted EBITDA was $8.0 million in Q4, which was up 43%, compared with the fourth quarter of 2011. This metric is calculated as non-GAAP operating income plus 404,000 of G&A contained in operating expenses. Non-GAAP free cash flow generated by the business was $7.9 million for the fourth quarter. this metric is calculated as non-GAAP operating income, plus 404,000 of D&A contained in operating expenses less 156,000 of CapEx related to the business.

Note that this calculation excludes capital investments related to our new corporate headquarters as well as tenant related rental income and D&A. We ended Q4 with $47 million in cash and investments or $3.04 per ending balance sheet share, which was down $5 million from the $51 million in cash investments at the end of the third quarter. The decrease was primarily a result of our share repurchase program during the fourth quarter.

We’ll now review our 2012 financial results, which we will also discuss on the non-GAAP basis. A reconciliation of non-GAAP to GAAP for 2012 was also contained in today’s earnings release. In order to provide a more meaningful comparison with the prior year, all 2012 year-over-year growth rates exclude the initial application of PhotoStamps breakage accounting, which added $2.2 million in revenues and $1.7 million in impairment in the second quarter of 2011. 2012 total revenue was $115.7 million, up 16% versus 2011, which was comprised of the following.

Core PC Postage revenue was $107 million, up 19%. Non-core enhanced promotion PC Postage revenue was $3.0 million, down 5%. And non-core PhotoStamps revenue was $5.7 million, down 7%. 2012 PC Postage gross margin was 78.9%, which excluded or which included $3.5 million in promotional expenses. 2012 PC Postage gross margin excluding promotional expenses was 82.1%, compared with 81.5% in 2011. 2012 non-GAAP operating income was $28.6 million, up 51% versus 2011.

2012 non-GAAP operating margin was 24.7%, up compared with 19.0% in 2011. 2012 non-GAAP net income was $28.5 million, up 46% versus 2011. 2012 non-GAAP net income per fully diluted share was $1.70, which was up 32% versus $1.29 in 2011. 2012 free cash flow from the business was $28.4 million and 2012 adjusted EBITDA was $29.8 million, up 50% versus 2011.

Share repurchase; during the fourth quarter, we’ve repurchased 499,000 shares at a total cost of $11.9 million and for 2012; we’ve repurchased 1.5 million shares at a total cost of $31.7 million. On February 7, 2013, the Board of Directors approved a new share repurchase plan that replaces all prior repurchase plans and authorizes the Company to repurchase up to 1 million shares of Stamps.com stock during the next six months.

We’ve now returned to $290 million in excess cash to our shareholders since 2002 through very special dividends and share repurchase. NOL and DTA update, as of December 31, 2012, we had approximately $210 million on federal NOLs and $100 million in state NOLs, resulting in a gross deferred tax asset or DTA of approximately $72 million.

We have approximately $41 million valuation allowance against the gross DTA, resulting in a net DTA of approximately $31 million, which is on the balance sheet. We estimate that as of December 31, 2012, our Section 382 ownership shift was that an approximately 22% level, compared with a 50% level that would trigger an impairment, the potential impairment of the NOL asset. As part of our ongoing program to preserve future use of our NOL asset, we request that any shareholder contemplating earning more than 625,000 shares, contact the Company before doing so.

Now turning to guidance, we expect total 2013 revenue to be in a range between $120 million to $130 million. We expect 2013 GAAP EPS to be in a range between $1.40 to $1.60 per fully diluted share. GAAP numbers assume approximately 4.5 million of stock-based compensation expense. Excluding the stock-based compensation expense, we expect 2013 non-GAAP EPS to be in a range between $1.75 to $1.95 per fully diluted share. We expect approximately 10% to 15% growth in the 2013 Core PC Postage revenue. We expect Amazon will continue to be a headwind for the first, second and third quarters of 2013.

We expect enhanced promotion revenue and PhotoStamps revenue were both continue to be down in 2013, compared with 2012 as we continue to minimize investments in these areas. We expect 2013 small business PC Postage customer acquisition spend to be up between 5% to 15% compared with 2012.

We expect to increase our customer acquisition spend in Q1, compared to Q4, which as always negatively impacts Q1 EPS, but results in expected benefits and future quarters. We expect capital expenditures to be approximately $3.5 million for 2013. Our expected capital expenditures and EPS both reflect an increased level of investment in our technology platform and data centres to ensure the reliability and scalability of our solutions that handled a very large postage volume growth we are experiencing.

Summary, our Core PC postage business model with recurring revenue in high gross margins is demonstrating continued growth in operating margin expansion. We are seeing record-setting performance in many of our financial and customer metrics. We have a strong balance sheet, attractive return on equity, strong free cash flow generation, and a large deferred tax assets. We have demonstrated our commitment to enhancing shareholder value, including return in $290 million of excess cash to shareholders.

Since the 2008 economic downturn, we have been able to grow our Core PC Postage revenue at 17% compound annual growth rate from 2009 to 2012 and grow our adjusted EBITDA at a 42% compound annual growth rate during the same period, resulting in almost tripling of our adjusted EBITDA from $10.5 million in 2009 to $29.8 million in 2012. We believe we have a very attractive and sustainable business model, and are looking forward to delivering results over the next five years.

With that, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Sarkis Sherbetchyan from B. Riley. Your question, please?

Sarkis Sherbetchyan – B. Riley & Co. LLC

Hello, can you hear me?

Kyle Huebner

Yeah. Hi.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Hi. So how did customer acquisition spend ahead of this year’s postage rate increase compared with last year’s, and how do subscriber registrations following that rate increase compared with the same period last year? And I have a couple more.

Kyle Huebner

Yeah. I mean in general the USPS has moved to a model of increasing rates in January, and what we’ve seen historically is that customer acquisition tends to get a little bit of a lift in the period around the rate increase. And so we try and coordinate our marketing spend to take advantage of that to some degree.

So in general, I think we’ve seen a lift this year as well as last year, but we’re not talking about anymore specific details within this quarter.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay. And are there any significant shifts in the allocation of the marketing spend planned for this year between traditional media, direct mail and any other channels you might utilize?

Kyle Huebner

Yeah. I mean we’re constantly looking at all the different channels, and optimizing across them and trying to make sure that each of the individual channels, and actually down below the channel level, down into the individual segments of each channel are performing to levels. So it’s hard to predict going into the year exactly, how there maybe a shift between one area or another, it’s dependent on the performance, we may be seeing at that particular time. but it’s something that we actively allocate between the different areas all the time.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay. And with the change in the Amazon relationship announced last quarter, did revenues from their marketplace end up meeting your internal expectations in the quarter. And how does that change the impact of your view for the Core PC Postage growth this year and longer-term?

Kyle Huebner

Well, I think the one thing to point out is that the change in the marketplace was made in mid second or third week in October. So when we talked about it on the call in October, it was really right at the time that they had made the change. So I don’t think we had great data that’s based on exactly, how things would play out. We did kind of incorporate it into our guidance and obviously, we’re paying within the guidance we provided for that, but I think now that we’ve gone through the fourth quarter, we have a better sense of what the impact was and as Ken mentioned I think if you try and adjust for hypothetical, had it not happen, I think our results would have been generally more consistent with what we saw.

So I think we view that as a headwind that we will have to work through for Q4, which has happened, and then Q1, Q2 in Q3. I don’t think this necessarily changes anything related to our long-term look on the business, and the fundamentals of the business, you can see that our paid customers continued very strong. our churn rates were positive and really the one area that you saw was the ARPU. So I think, we view that as something that we’ll have to have the headwind for the next three quarters, but it doesn’t really change the fundamental prospects for the business over the next three to five years.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Okay, understood. And finally, there were some reports of service outages during the quarter. What were the issues identified, are they all resolved and are you confident that you can scale the business without more material investments, I know you did mention your CapEx guidance you’re going to bolster your data centers. but can you give some color on that?

Kyle Huebner

Yeah. I mean the reality on the performance, like that there were enough “outages”. It was really some period, some fairly short-periods of time where we encountered some slowness in our service. And I think the best way to kind of indicate what effect that had is that a point to the fact that our postage growth in the quarter was up 90% year-over-year, our highest growth we’ve ever seen it. Some of that was related to the fact that we were handling a higher volume, and scaling up faster than we had ever seen before. And in terms of like the impacts from the performance, on the customer base, what we just announced that we’ve always should make up the entire year and down 0.3% year-over-year. So I think the impact was pretty minimal in terms of overall issues there.

Ken McBride

In terms of the financials, obviously, we want to look ahead, doing everything we can and share that the service is reliable and scalable. and so, historically, our capital expenditures for the business have been in that kind of $1 million to $1.5 million range. And so I think the $3.5 million expected CapEx reflects that we are going to see for 2013 an increased investment kind of in this area both in terms of the capital expenditures as well as some headcount that’s budgeted for this area.

Sarkis Sherbetchyan – B. Riley & Co. LLC

Thank you, I’ll pass it on.

Ken McBride

Thank you.

Operator

Thank you. Our next question comes from the line of George Sutton from Craig-Hallum. Your question, please?

George F. Sutton – Craig-Hallum Capital Group LLC

Well, it’s close, it’s George Sutton. So relative to the Amazon relationship, I just want to make sure I understand some of the impacts a little better. You mentioned that churn may have been consistent with prior numbers, if you have had this Amazon impact. so sequentially you were down $0.59 in ARPU. is that what you’re adjusting was the impact and can you explain, because I was under the…

Ken McBride

You mean ARPU in that churn, right?

George F. Sutton – Craig-Hallum Capital Group LLC

I’m sorry, yes, ARPU. I do have a churn question.

Ken McBride

Yeah.

George F. Sutton – Craig-Hallum Capital Group LLC

But relative to the ARPU, is that $0.59 type impact is that what you’re referring to and is it really just the printing label piece of it or did it affect some of the customer relationships?

Ken McBride

Yeah. So I mean in terms of the ARPU, there is the seasonal aspect. So if you look at kind of the year-over-year change. in Q2, ARPU was up about 3.5% in Q3, it was up about 6.5%. In Q4, it was down negative 1%. So I think the primary area that we saw the Amazon impact was in the ARPU in terms of some of the transaction related revenue and the insurance revenue that we get through that integration partnership. So if you are tying again, kind of hypothetically adjust for Amazon, the ARPU instead of being down 1%, we believe it would have been more generally consistent with kind of what we saw in the Q2, Q3, year-over-year range.

George F. Sutton – Craig-Hallum Capital Group LLC

Okay, that’s helpful. And you still have the same ability to use that as a lead source within the Amazon, that’s correct?

Ken McBride

Yeah. I mean we’re still up there as an option for the higher volume users and for certain mail classes where they permit their solution isn’t available. And so we are still able to utilize that as a lead gen as you mentioned.

George F. Sutton – Craig-Hallum Capital Group LLC

Okay. Now normally seeing a 3.1% churn, we would be jumping up and down with joy. so I want to make sure I understand what drove that lower churn rate and did you do anything relative to your retention program that might have changed in the quarter to influence that?

Ken McBride

Yeah. I think when you look at the churn, what we do see quarter-to-quarter kind of fluctuations in terms of comparisons to the prior year. I think if you look at the kind of postage printed growth, the strong postage printed growth, that’s clearly something that I think was – we believe was a positive factor on the churn rates and there’s lots of factors that go into churn, the type of customary to the customer price point, economic environment, things like that. but I think we feel like Q4 benefitted from the growth in postage printed kind of the seasonality, strong seasonality in Q4, as it relates to enterprise and shipping customers having typically lower churn rates. The retention program, I think is more of an ongoing optimization mode. so I don’t think, it was anyone particular thing in terms of retention and that’s kind of been in optimizing that’s a key mode over the last couple of years.

George F. Sutton – Craig-Hallum Capital Group LLC

Right. And lastly, Ken question for you relative to Saturday delivery, we’ve talked a lot about this in the past and you’ve suggested, it may not have an impact. but let me pass the lead something on, we’ve talked about the great benefit that you would see if we started to see post offices close in effect, a Saturday closing of post offices is in effect like we’re closing our bunch of offices, but we’re still delivering packages. so can you start to build that into your marketing messages here that in effect you’ve got something that’s available 24x7 and the post office is now only open six days a week or five days a week, sorry?

Ken McBride

So what they specifically announced was that they were going to stop delivering mail and periodicals, so magazines and mails on Saturday. In actual holiday, the post offices, they did not announce that they will be closing the post offices. and so that wasn’t really part of it, I mean it’s very fluent right now. So we’re still waiting to kind of see how this shapes out, but it’s really more about mailman coming to your house and dropping off mail.

They’re still going to continue to deliver packages. and so we saw it is a real positive for our focus in the high volume shipping area, because the other carrier sort of premium for that and also and postal service could have a nice continued win in the Saturday delivery benefit. But we haven’t really seen them announce closures of post offices at any either a number of days or in general number locations. So that’s still kind of pending broader legislation in Congress.

George F. Sutton – Craig-Hallum Capital Group LLC

Understand, okay. Thanks, guys.

Ken McBride

Thank you.

Kyle Huebner

Thanks.

Operator

Thank you. Our next question comes from the line of Jared Schramm from Roth Capital Partners. Your question, please.

Jared D. Schramm – ROTH Capital Partners LLC

Good afternoon.

Ken McBride

Hi, Jared.

Jared D. Schramm – ROTH Capital Partners LLC

Most of my questions have been answered. Just two quick ones here. First, the enterprise side of the business, with growth still strong, does it make sense to more aggressively rent your sales effort there?

Ken McBride

Yeah. We’re constantly trying to find, strike a balance between ramping our sales effort and making sure, we’re covering all the opportunities, leads and finding ways to move customers through the pipeline, and finding ways to enhance the rollout of customers. I mean we’re planning to scale up incrementally this year in terms of our sales efforts, but not a dramatic number and I think it’s really just to reflect in that we feel that we’re covering the opportunity as well with our existing sales team.

Jared D. Schramm – ROTH Capital Partners LLC

And roughly speaking, how long does it take your sales person online in an efficient capacity?

Ken McBride

I think it’s a fairly long process, because of the length of the pipeline that we’ve talked about. When we look at some of our kind of similar larger customers taking as long as two years to come to provision, as you’re bringing the sales person up and training them. the evidence that they’re doing a good job in terms closing deals could take some fine time to develop. so it’s a fairly long process. We tried to focus on the fundamentals of the day-to-day activity and making sure that they’re taking care of business everyday and it tends to indicate success overtime.

Jared D. Schramm – ROTH Capital Partners LLC

Okay. And lastly here, just turning real quick to the PhotoStamps side of the business, first quarter in a while we saw year-over-year growth and the total number of PhotoStamps sheets printed. you mentioned that you’re in a continued diverting investment away from this side of the business, but is it possible, we’ve seen a bottom as far as the declines in the PhotoStamps revenue is concerned?

Ken McBride

Yeah. I mean, I guess the thing I would point out is, within PhotoStamps, we have kind of our consumer-oriented, coming from the PhotoStamps website and place an order, which is more driven by any marketing expenditures. We also have the kind of high volume business orders, corporations. those tend to be more variable, somewhat driven by referrals there or word of mouth. so I think in Q4, when you saw that the sheet shifting up, I think that was more a factor of the higher number of high volume sheets, which are in the lower kind of sales point, but at our pricing point, but I think it’s hard to kind of build a business around the high volumes, not just because that tends to be fairly fluctuating and variable in nature. And our view on the business really remains that as long as it’s contributing to the bottom line and it’s not diverting resources from the core PC Postage business. then there is an option value there, but we don’t feel like the economic environment, it’s strong enough at this point that we’re in, any sort of additional resources at the present time.

Jared D. Schramm – ROTH Capital Partners LLC

Okay, thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Bill Sutherland from Northland Capital. Your question, please?

Bill Sutherland – Northland Capital

Hey, thanks for taking the questions. I wanted to see on this Amazon marketplace impact rather in terms of ARPU whether it’s going to be linear for the next three quarters or is Amazon more of an impact in the – given what’s happened to the fourth quarter?

Ken McBride

Yeah. I think I was saying earlier, Bill that we try and look at the ARPU on a year-over-year basis to neutralize further seasonality. and so we would expect that, for Q1 through Q3 that our ARPU will be impacted on a year-over-year basis from Amazon relative to what it otherwise would have been.

Bill Sutherland – Northland Capital

That kind of same dimension that we saw in Q4?

Ken McBride

Yes. I mean it’s hard to say, we don’t comment on kind of metrics guidance at that specific level.

Bill Sutherland – Northland Capital

Well, just help maybe directionally on how we think about ARPU once you get passed the headwind. to what degree is, assuming the policy, remains in place? How much was this transaction insurance revenue et cetera? Adding to ARPU I mean is that I guess it is…

Ken McBride

Yeah. I mean I think the best way to think about ARPU is, as I was saying before, Q2 was up kind of 3.5%. ARPU in Q3 was up I think about 6.5%. So in kind of more normalized environment you are looking at kind of a let’s call that 3% to 5% or 6% kind of ARPU growth. So as you look in the long-term five-year model, to the extent that we continue to grow enterprise and shipping outside of Amazon. We would hope that we would be able to grow ARPU in that kind of range longer-term.

Bill Sutherland – Northland Capital

Okay. What was – just a number check here, did I hear high volume shipping postage printed was up 66% for the quarter or for the year?

Kyle Huebner

For the year, that was the full year number.

Bill Sutherland – Northland Capital

What was the quarter?

Kyle Huebner

25%.

Bill Sutherland – Northland Capital

So again, that’s just reflective of permit of not getting the permit mail.

Kyle Huebner

Yeah. I mean that was – we had kind of three quarters of Amazon growth than the full year number. and then one quarter of the decline and that business is growing and getting bigger as well. So Ken mentioned, we anniversary some of our kind of shipping partnerships from Q4 last year, but the overall shipping business, they continue to grow and the postage printed was up 25%.

Bill Sutherland – Northland Capital

Okay. And then just to get a sense in terms of the enterprise growth, does that revenue percentage growth kind of attract the customer growth or are you seeing some sort of split between new customers and same customer growth in that area?

Kyle Huebner

Yeah. I mean I think because of the long deployment cycles, what you typically see is that certain customers, the growth is fueled by adding locations to the existing pilot program or kind of initial deployment. In other cases, company or organization may roll out more aggressively and which is more driven by really new locations being added to our customers. So we tend to see both scenarios and the growth comes from kind of a mixture of penetration in existing customers as well as adding new customers.

Bill Sutherland – Northland Capital

One little housekeeping question, D&A can be kind of on the same trend as of 2012?

Kyle Huebner

No, I mean it will be higher because of the higher – I talked about the capital expenditures. Typically, we spend about $1 million to $1.5 million on CapEx for the business this year. It’s we’re expecting more in line with the $3.5 million. So a part of the D&A for the year will depend on the timing of those purchases, but we do expect to see a definite increase in the depreciation related to the increased planned CapEx.

William Sutherland – Northland Capital

Great, make sense.

Kyle Huebner

Thanks.

Ken McBride

Okay, thanks.

Operator

Thank you. (Operator Instructions) And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Mr. Ken McBride for any further remarks.

Ken McBride

Thank you for joining us and as always, if you have follow-up questions, please contact us at our Investor Relations website at investor.stamps.com or you can contact us at 310-482-5830. Thank you.

Kyle Huebner

Thank you.

Operator

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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