Stamps.com Inc. Q4 2008 Earnings Call Transcript

Stamps.com Inc. (STMP)

Q4 2008 Earnings Call

February 12, 2009 5:00 pm ET

Executives

Jeff Carvari – Investor Relations

Kenneth McBride – President, Chief Executive Officer

Kyle Huebner – Chief Financial Officer

Analysts

D.J. Collins – Craig-Hallum Capital

Kevin Liu - B. Riley & Company

Kar Kwong - Needham and Company

Inaudible Analyst - GFI Council

Graham Ryan - Bears Capital

Presentation

Operator

Good day everyone and welcome to the Stamps.com fourth quarter 2008 financial results conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Jeff Carvari. Please go ahead, sir.

Jeff Carvari

Thanks very much and good afternoon everyone. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda of today’s call is as follows: we will review the results from the fourth quarter and inclusion of [inaudible] and then we will discuss financial results and talk about the business outlook.

But first, the safe harbor statement. The safe harbor statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements such as our expectations and financial guidance that involve risks and uncertainties. Important factors include the company’s ability to complete and ship the products, maintain desirable economics of such products, and obtain and maintain regulatory approval which could cause actual results to differ materially from those in the forward-looking statements which are detailed in filings with the Securities and Exchange Commission stated from time to time by Stamps.com and its units and annual reports on 10-K issued on December 31, 2007, quarterly reports on 10-Q, and credit reports on Form 8-K. Stamps.com undertakes no obligation to make any revisions to any forward-looking statements to reflect events or circumstances after the date thereof or to reflect the occurrence of unanticipated events.

I will now turn the call over to Ken McBride.

Kenneth McBride

Thanks Jeff and thank you for joining us today. During the fourth quarter, we did $22.3 million in total revenue. Total PC Postage subscriber-related revenue which includes service fees, store revenue and insurance revenue was $18.3 million which was up 4% versus subscriber-related revenue in the fourth quarter of 2007. Excluding the enhanced promotion channels, subscriber-related revenue was $16.2 million which was up 8% in the fourth quarter of 2007 and specifically service fees were up 10% versus the fourth quarter of 2007.

PhotoStamps revenue was $4.0 million for the quarter, down 39% versus the fourth quarter of 2007. We reduced the PhotoStamps sales and marketing by approximately 64% versus the fourth quarter of 2007 as part of our continuing program to increase profitability in the PhotoStamps business and that resulted in the decrease of revenue.

Our non-GAAP income from operations for the fourth quarter was $2.4 million which was up 4% versus the fourth quarter of 2007. Non-GAAP earnings per fully diluted share came in at $0.16 which was inline with the fourth quarter of 2007.

In the current, tough macroeconomic environment, we were happy with the reasonably good performance in our PC Postage business this quarter. On the call today, we will talk about PC Postage business in detail and we will talk about PhotoStamps, and we’ll discuss financial results and our business outlook.

Now, let’s begin with a more detailed discussion of the PC Postage business and then we’ll talk about our 2009 plan for that business. As a reminder, the customer metrics we discuss on this call exclude all enhanced promotion channel activity.

During the third quarter conference call, we discussed our reduced customer acquisition spending target for the year of 25%-30% growth versus our prior target of 35%-40% growth versus the prior year. We reduced our target for the year previously owing to the weak economy. Our final investment in 2008 customer acquisition spend was up by 26% in 2008. Our acquisition spend for the fourth quarter grew at 9% year-over-year. Last year, during the fourth quarter, we increased spend by a large amount, 74% versus the same quarter in 2006. So this year’s fourth quarter increase was much stronger only to the large increase last year and in order to hit our lower overall spending target for the year.

During the fourth quarter, we acquired 66,000 gross customers which were up 1% versus the fourth quarter last year. The fourth quarter was typically our seasonally strongest quarter and we did see a rebound from the third quarter acquisition levels. We believe that the weak economy continues to have a negative impact on our acquisition trends as small business may be less willing to take on new monthly expenses when they are struggling but we were nevertheless happy to see the slight increase in customer acquisition versus last year. We would also note that the USPS did some additional marketing in PC Postage during the quarter which helped our Q4 customer acquisitions.

With the high customer acquisitions during Q4, we experienced a decrease in our cost per registered customer acquisition or CPA to $94 compared with $115 in the third quarter of this year. Our CPA for total acquisition spend in 2008 was $100 which we feel continues to provide very good expected return on marketing investment. Our 2008 CPA increased only 11% versus 2007 which we viewed as very positive in light of the 26% increase in spend and in light of the poor economy.

Our monthly churn during the fourth quarter was 3.8% versus 3.7% in the third quarter and 3.4% in the fourth quarter of 2007. We believe the weak economy and its impact on small business was the primary cause of this increase in churn. We’ve also seen a general trend upward in churn as more customers are in the early part of their lifetime with our increased investment in new customer acquisition since the beginning of 2007 and this is the natural result of our standard trend pattern.

The combined impact of the weak economy, lower marketing spend and incrementally higher churn resulted in slower year-over-year growth of all paid customers with paid customers in the fourth quarter 2008 ending at 311,000, an increase of 6% versus the fourth quarter of 2007. We did see a 2,000 customer decrease in paid customers versus the third quarter. Although we were not happy to see that outcome, we do feel good in light of what is going on in the world; we were able to maintain our customer base at a relatively consistent level quarter to quarter. Again, all the numbers we just gave excluded all enhanced promotion channel activity.

Our mailing and shipping supply store revenue was flat versus the same quarter last year. We believe that customers continue to purchase fewer supplies as the business activity slowed in the fourth quarter.

In the Enterprise PC Postage area, we continue to make good progress during the fourth quarter. Although it is a very small part of our overall business, we continue to be excited about our opportunity in Enterprise. Our new seat data for the fourth quarter was at its highest level ever as we believe our cost savings message continues to resonate well with potential customers, especially in this poor economy. We grew Enterprise revenue for fiscal 2008 by 80% versus 2007 and we believe that we had very good progress during 2008 in our understanding of this business area.

Now, let’s turn to the plan for 2009 for PC Postage. At a high level, our plan for PC Postage includes three major items. First, we plan to modestly increase our investment small business customer acquisition spend. We continue to estimate that the lifetime value of the non-enhanced promotion customer is more than 2x higher than the current cost of acquisition. We feel the expected ROI on our marketing spend is still attractive and that’s why we feel it is important to invest for the long-term growth of the business. We will however spend at a more modest rate in 2009 reflecting the current state of the economy. We will continue to evaluate our customer acquisition send throughout the year and make any necessary adjustments based on the results we see and we will continue to test new and scalable acquisition channels throughout the year.

In total, we expect to increase our PC Postage small business acquisition spend outside the enhanced promotion channel by approximately 10%-15% in 2009 versus the 26% growth we did in 2008. Our goal is to maintain very strong investment in our customer base during the economic downturn and be well-positioned when the economy improves and return to higher investment levels.

Second in our 2009 plan, we’re going to continue optimizing our business model and our overall customer experience in several ways. We plan to continue optimizing our website, our registration process, our software installation process, our initial product experience, our initial customer communication, and the customer welcome kit to make the initial experience the customer has with us as good as it can be. We plan to focus on improving the customer experience for our store by reducing delivery time and improving returns’ experience which will make it more attractive for customers to purchase non-proprietary skus from us. We’re adding the ability for customers to order about 20 different free USPS supplies from our store such as boxes and envelopes that will improve the convenience of our overall service for our customers. We plan to test and optimize our next stamps label sheet pricing to maximize our customer lifetime value. We are continuing to add new proprietary skus to our store to improve overall customer experience such as a new, more convenient line of certified mail envelopes and labels. We’re launching a new combination scale/label printer which will make our overall service easier to use for a segment of our customer base. We are also planning to add significant new features to our product in 2009 such as enhanced reporting with online reporting capabilities, new web-based postage tools that will improve our user experience, improved ability to integrate with third-party applications, and new shipping features.

Third in our 2009 plan, we’re going to continue ramping up our effort around the Enterprise area. Customers continue to be attracted to us for a simple postage meter base on our dramatically lower cost of ownership and based on the great visibility until individual employee activity that isn’t available with the postage meter. In this economic environment, we believe the desire to save costs has become a much bigger focus on businesses than it was a year ago. We plan to continue scaling up our Enterprise sales and marketing efforts in a cost-effective manner. We also plan to continue enhancing our Enterprise product in 2009 and that will help our sales efforts. During 2008, you’ll recall we added multi-user capability, more flexible payment methods, and we completed and launched our Enterprise Version 1.0 system which added financial control for Enterprise users managing multiple locations. During 2009, we plan to launch Enterprise Version 2.0 which will include a dramatically improved web-based Enterprise reporting system and a sophisticated front-end reporting tool with real-time data, improved web-based postage management tools and enhanced web-based financial administrative controls for central decision makers.

We feel that our 2009 PC Postage plan is a very solid one. We feel that our long-term opportunity to grow this business is very attractive despite the challenging short-term economic environment and we plan to take advantage of them for the benefit of our long-term shareholders.

Now, let’s turn to a more detailed discussion of PhotoStamps. During the fourth quarter, we continued our program to increase profitability in the PhotoStamps area with a smaller and more focused marketing plan and we decreased our total sales and marketing for PhotoStamps by 64% versus the fourth quarter of 2007. For the results of our decreased spend, total revenue was $4.0 million for the fourth quarter which was down 39% versus the fourth quarter of 2007. The decrease in revenue during the fourth quarter was expected given the magnitude of our decrease in sales and marketing activity. Hard volume business revenue was up year-over-year but consumer revenue was down significantly through the year.

We also believe the broader economic slowdown negatively impacted PhotoStamps as it is more of a luxury item than a necessity. Although we experienced a significant decline in PhotoStamps revenue in Q4 and in 2008 as a whole, we were successful in meeting our original goals of dramatically improving the bottom-line impact for PhotoStamps in 2008 compared to 2007.

For the PhotoStamps go-forward plan, we’re planning to continue our program with a more focused, direct-to-flight PhotoStamps marketing spend with a goal of keeping overall cost per acquisition at a level that provides a good financial return. We plan to continue to drive fewer but profitable orders to our website through our own consumer marketing activity and through our existing distribution partnerships like HP/Snapfish, Picassa.com, and Walgreens. Partnerships provide a great cost-effective way to manage acquisition through a revenue share arrangement that combines the interests of the partnership.

We also plan to continue to evolve the PhotoStamps retail business model. The model we are currently pursuing in retail is a box product that is about the size of a DVD case. Each box contains a CD-ROM with design software for the PC or Mac and contains credit for one sheet of PhotoStamps redeemable at our website. We felt we were successful in penetrating retail in 2008. Retailers that carried PhotoStamps in Q4 include Costco, Walgreens and the USPS retail post office. However, with Q4 being the worst holiday shopping season in 40 years, it was a tough time for us to begin moving into retail and sales of boxes did struggle like many other retail products. Despite this, we remain optimistic about the long-term outlook for PhotoStamps at retail and we plan to continue pursuing it.

While the majority of our corporate focus is on the PC Postage business, we plan to continue to pursue PhotoStamps in a modest fashion during the weak economy and continue to look for ways to optimize the PhotoStamps business.

Now finally, something about Kevin Douglas. We announced today that Kevin Douglas, a company director since July 2003, provided notice to the company of his resignation of service from the company’s Board of Directors on February 6, 2009 to be effective following the Board’s next regularly scheduled meeting on March 13, 2009. Kevin told us he decided to resign to focus on other activities as the Stamps.com Board requires significant time commitment. His notice of resignation was not related to any disagreement with company management, with other board members or with Stamps.com’s accounting or operating policies. Kevin has told us that he believes in our strategy and approaches to the business and he believes in the future of the company. We plan to remain in close contact with Kevin going forward as he remains a good friend of the company.

Now, with that, let me turn it over to Kyle to discuss more detailed financial results and our business outlook.

Kyle Huebner

Thanks, Ken.

Q4 customer metrics: All PC Postage metrics we will discuss in this section exclude all estimated enhanced-promotion activity.

We will now review the PC Postage metrics for the fourth quarter. Peak customers in the fourth quarter were 310.7 thousand, down 1.8 thousand from the 312.4 thousand in paid customers from Q3 and up 17.9 thousand or 6% versus the 292.8 thousand paid customers in Q4 ’07. The paid customer number represents the unique number of successfully billed customers at least once during the quarter. The change in paid customers from Q3 to Q4 was composed of 39,000 new paid customers who were successfully billed for the first time during the quarter offset by 41,000 lost paid customers. Lost paid customers are defined as customers who are successfully billed in the previous quarter but not successfully billed in the current quarter less any recaptured paid customers from prior quarters.

Customer acquisition: PC Postage small customer acquisition spend which includes both sales and marketing spend as well as promotional spend which is included in cost of sales, was $6.2 million in Q4, up 9% versus $5.7 million in Q4 ’07. We pulled back on customer acquisition spend in the second half of the year with 2008 total spend up 26% compared to our original goal of 35%-40% growth at the beginning of the year.

Small business cost per registered customer was $94 in Q4 versus $115 in Q3 ’08 and up 7% compared with $88 in Q4 ’07. We’re still having an attractive ROI in marketing spend so we plan to continue investing in the business for the long-term.

Subscriber-related revenue which includes service fees, store and insurance revenue excluding the enhanced promotion customers was $16.2 million in Q4 versus $16.0 million in Q3 ’08 and up 8% versus $15.0 million in fourth quarter of last year. Average monthly subscriber revenue per paid customer was $17.41 for Q4 versus $17.07 in Q3 ’08 and up 2% versus $17.08 for Q4 ’07. This metric is calculated at the total subscriber-related revenue for the quarter divided by paid customers in the quarter divided by three months. The increase in average monthly subscriber revenue per paid customer was primarily related to a higher mix of paid customers on the $17.99 price plan partially offset by a decline in the average store revenue per paid customer.

Paid customer cancel rate was 3.8% in Q4 versus 3.6% in Q3 and 3.4% in Q4 ’07. Paid customer cancel rate is calculated as total lost paid customers in the quarter divided by the sum of prior quarter paid customers and current quarter new paid customers divided by three months.

Many factors influenced churn rates including type of customer, age of the customer, levels of customer acquisition, mix of customer acquisition channels, pricing, retention program offers, usability of the product and the economy. As such, we expect to see some degree of fluctuation from quarter to quarter. Our churn rates have been between 3.6%-3.8% for the past three quarters compared with 3.0%-3.5% for the six quarters prior to that. We believe that this increase level of churn is primarily related to the macroeconomic factors and to a natural increase in churn with more customers in the early part of their lifecycle. We will continue to focus on ways to reduce churn and optimize lifetime values.

Customer usage: Total postage used by all customers was $87 million in Q4 ’08 which was up 12% versus Q4 ’07 and $319 million for 2008 which was up 17% versus 2007.

Now I will review our fourth quarter financial results. Non-GAAP to GAAP reconciliation: We presented our fourth quarter financial results today on both a GAAP and non-GAAP basis to adjust for the following items. First, we had a litigation charge of $250,000 representing an adjustment to the litigation charge which was previously included in the third quarter of 2008. Second, we had $782,000 of stock-based compensation expense which was allocated as follows, $61,000 in cost of sales, $202,000 in sales and marketing, $151,000 in R&D, and $369,000 in G&A. Third, we incurred approximately $173,000 in additional taxes resulting from the temporary suspension of the company’s ability to utilize its net operating losses for California income tax purposes based on new legislation in Q3 ’08 and affected for the tax years 2008 and 2009.

GAAP operating income was $1.3 million and non-GAAP operating income taking into account the three adjustments described above was $2.4 million. GAAP net income was $1.6 million or $0.09 per fully diluted share and non-GAAP net income taking into account these adjustments was $2.8 million or $0.16 per fully diluted share.

The rest of the financial results discussion will be based on the non-GAAP numbers. A more detailed reconciliation of non-GAAP to GAAP measures is contained on the earnings release posted on our website.

Revenue was $23.3 million in Q4 which is down 8% compared to Q4 ’07. PC Postage subscription revenue which includes service fees, store and insurance revenue and which also includes enhanced promotion channel was $18.3 million in Q4 which was up 4% compared to Q4 ’07. Subscription-related revenue excluding the enhanced promotion channel was $16.2 million in Q4 which was up 8% compared with Q4 ’07. Fiscal year subscription revenue excluding the enhanced promotion channel for 2008 was up 11% versus 2007 meeting our original goal of double-digit growth for the year despite the weak economic climate.

Subscription revenue from the enhanced promotion channel was $2.1 million in Q4 which was down 19% compared with Q4 ’07. The decline in revenue was primarily attributable to lower marketing spend which was down 24% compared to Q4 ’07 as we continue to reduce our investment in this segment of the business.

PhotoStamps revenue was $4 million in Q4 which was down 39% compared with Q4 ’07. This was largely the result from the pullback in marketing spend which was down 64% as Ken discussed. The past year economic environment clearly impacted consumer sales of PhotoStamps as well.

Gross margins excluding 123R expense was 70.8% in Q4 compared to 60.0% in Q4 ’07. The increase in gross margin was due to a higher mix of PC Postage revenue which carries a higher gross margin as compared to PhotoStamps revenue. The PC Postage subscription-related revenue gross margin excluding 123R expense was 79.8% in Q4 which was comparable with 80.1% in Q4 ’07. Cost of sales included promotional expenses at $305,000 for Q4 ’08.

For the PhotoStamps business, gross margin excluding 123R expense was 29.3% in Q4 compared with 35.5% in Q4 ’07. The year-over-year decrease in PhotoStamps gross margin was primarily attributable to the following factors: first, less fixed cost leverage associated with the current lower levels of PhotoStamps revenue, second the increased postage face value cost as postal rates increased in May ’08 but we did not raise our PhotoStamps prices, and third, business PhotoStamps sales which carry a lower gross margin made up a higher percent of revenue with the decline in consumer PhotoStamps sales.

Sales and marketing spend excluding 123R expense was $8.3 million in Q4 which was down 11% compared with $9.3 million in Q4 ’07. PC Postage sales and marketing including the enhanced promotion channel increased by 10% while PhotoStamps sales and marketing spend decreased by 64%. The increase in PC Postage sales and marketing spend was driven by increase investment in non-enhanced promotion channel marketing programs to grow feature subscription revenue. The decrease in PhotoStamps sales and marketing spend was part of our ongoing effort to improve profitability in the PhotoStamps business line through the lower and focused spend of higher return programs.

R&D spend excluding 123R expenses was $2.0 million in Q4 which was up 11% compared with $1.8 million in Q4 ’07. The year-over-year increase was primarily attributable to increases in personnel for the development team was below target headcount in Q4 ’07. R&D spend in Q4 ’08 was consistent with most of the other quarters in 2007 and 2008.

G&A spend excluding 123R expense and the $250,000 litigation charge was $3.1 million in Q4 which was up 2% compared with $3.1 million in Q4 ’07. We continue to have a heavy level of legal spend related to our patent infringement lawsuits which was up compared to Q4 ’07.

Non-GAAP operating income was $2.4 million in Q4 which was up 4% compared with $2.3 million in Q4 ’07. Interest income was $542,000 in Q4 ’08 which was down 47% versus $1 million in Q4 ’07. The lower interest income compared to last year was attributable to lower income yields in the lower interest rate environment and lower cash balances resulting from our stock repurchase program.

Non-GAAP net income was $2.8 million or $0.16 per fully diluted share based on 18 million fully diluted shares compared with $3.1 million or $0.16 per fully diluted share based on 20.1 million fully diluted shares in Q4 ’07. We were happy we were able to maintain a consistent level of EPS while still investing for the future of the business in a challenging economic environment.

Free cash flow defined as non-GAAP net income plus D&A minus CapEx was +$2.9 million in Q4. For the quarter, D&A was $354,000 and CapEx was $253,000. We entered Q4 with $74 million in cash and investments which is equivalent to approximately $4.30 per ending balance sheet share. In calculating the total cash investments, we are including cash, cash equivalents, long-term investments, short-term investments, and restricted cash.

Share buyback: During the fourth quarter, the company repurchased 1.9 million shares for a total cost of $19.5 million under the share repurchase plan jointly approved by the Board of Directors as of July 16, 2008. For the third quarter 2008 through today, the company has repurchased 2.5 million shares for a total cost of $24.8 million under the July 2008 plan. Also during 2008 as a whole, the company repurchased 2.7 million shares for a total profit of $26.9 million. On February 5, 2009, Stamps.com’s Board of Directors approved a new share repurchase program authorizing the company to repurchase up to 2.5 million shares of Stamps.com stock over the next six months as market and business conditions warrant.

Net operating loss shareholder update: We have approximately $240 million in federal NOLs and $150 million in state NOLs which could save us as much as $95 million in taxes over the next 15 years. Under IRS Code Section 382 Rules, “a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more 5% shareholders within a three-year period.” When a change of ownership under this definition is triggered, our ability to use our NOLs may be limited. We estimate as of December 31, 2008, the company was at an approximately 34% level compared to a 50% level that would trigger impairment of the NOL assets. During the second quarter of 2008, we received shareholder approval to mend our Articles of Incorporation in order to protect our NOL assets, the NOL protective measures. Those measures are now in effect. Under the NOL protective measure, there is no change to the way existing Stamps.com shares are held or traded but any person, company or investment firm who wishes to become a 5% shareholder of Stamps.com much first obtain a waiver from the NOL protective measures, from the company’s Board of Directors. In addition, any person, company or investment firm which is already a 5% shareholder of Stamps.com cannot make any additional purchases of Stamps.com stock without a waiver from the company’s Board of Directors.

We currently have approximately 17.0 million shares outstanding so ownership of approximately 850,000 shares or greater would currently constitute the 5% shareholder. Stamps.com strongly urges any shareholder contemplating owning more than 675,000 shares to contact the company first before doing so.

Now turning to guidance. We expect fiscal 2009 revenue to be between $80-$90 million. We expect fiscal 2009 GAAP EPS to be between $0.20-$0.40 per fully diluted share. The GAAP number includes an estimated $3 million of non-GAAP stock-based compensation expense related to FASB 123R. The GAAP number also includes an estimated $500,000-$1 million of expected additional taxes resulting from the temporary suspension of the company’s ability to utilize its net operating losses for California income tax purposes. Excluding the FASB 123R expenses and excluding the additional California income taxes, we expect 2009 non-GAAP EPS to be between $0.40-$0.60 per fully diluted share.

In light of the difficult economic environment, we expect to see low single-digit revenue growth in PC Postage subscription revenue excluding the enhanced promotion channel for 2009. We expect to continue investing in the PC Postage business for the long-term with an expected increase of 10%-15% in our customer acquisition spend outside the enhanced promotion channel. We expect enhanced promotion revenue and marketing spend to be down more significantly in 2009 compared with a decline from 2008 as we further reduce our investment in that channel.

The PC Postage Enterprise business is currently in an investment phase and we expect that to act as a drag on 2009 earnings but with a high expected return over the next five years. We expect PhotoStamps revenue and marketing spend to be down again in 2009. PhotoStamps revenue for the year will be partially dependent on the state of the economy in Q4 ’09 as the fourth quarter is approximately 35% of the total year revenue.

We note the following other factors related to our 2009 guidance. We are assuming our interest income will be down significantly in 2009 compared to 2008 due to the lower interest rate environment. Note that a 1% lower interest rate yield on our $74 million in cash and investments translates to approximately $0.04 lower EPS for the year. We do not assume any additional share repurchases. We assume continued heavy legal expenses in 2009 related to our patent infringement lawsuits. We note however the timing of expenses from the litigation area is often unpredictable and highly variable. We expect proforma cash taxes excluding the impact of the additional California taxes to be approximately 3% of proforma pre-tax income.

Although, we do not provide specific quarterly guidance, we wanted to highlight a few items related to our expectations for Q1. We believe the economy has deteriorated further in Q1 compared to Q4 which we expect will immutably impact our Q1 results. From a customer metric perspective, we have seen weaker trends so far in Q1 compared to Q4 ’08. Litigation in spend in Q1 ’08 was the lowest quarter of the year last year so we expect a tough year-over-year comparison in that area. We also historically tend to see higher overall costs in Q1 in such areas as payroll taxes and audit-related expenses that hit Q1 disproportionately. We expect interest income in Q1 to be down again from Q4 as the rate cuts we saw in Q4 will be fully reflected in the interest income in Q1.

Summary: Despite the short-term challenges related to the economy, we feel we have a solid business model and that the fundamentals of our long-term business prospects have not changed. Our PC Postage business model with recurring revenue and high gross margins provide a higher degree of stability and provide a measure of downside protection during the economic downturn. Our business generates strong cash flow which has funded our share repurchase programs. We have a strong balance sheet with $74 million cash investments; note that, and a large $95 million cash assets.

In summary, despite the difficult economic environment, we believe we have a solid business model, attractive market opportunity, fundamentally sound customer economics and a strong financial condition and we continue to be optimistic about the long-term prospects. With that, we will open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to George Sutton with Craig-Hallum.

D.J. Collins – Craig-Hallum Capital

This is D.J. Collins for George. I would like to ask about both the $15.99 and the $17.99 price points. Can you give us any specifics on the Enterprise business with the market strategy, like number of sales people or number of partners and in this difficult time, are you having those discussions?

Kenneth McBride

On your first question, yes, we continue to task various price points on our website. As you know, we’ve been testing $17.99 as well as our status quo price of $15.99 for some time. As we go back to look at the price points, we continue to go back and make sure they’re the right price points as the economies turn down. At this point, we’re continuing to kind of remain as we said before; we are considering the best ROI price point at this time.

Kyle Huebner

I would just like to add, it’s possible that the long-term price point is a different answer than the short-term price point. It can certainly continue to touch a range of prices to $15.99 up to $19.99 and continue to evaluate those results to see the answer that would be accommodating in the short-term and if it would be any different from what the long-term expectation might be.

Kenneth McBride

As far as Enterprise goes, we can tell you, like we mentioned in the prepared remarks, the revenue growth was up 80% in ’08 after being up 115% in 2007. We continue to believe it is an attractive opportunity for us over the next five years but it’s not material today, less than a few percent of our revenue. The number of customers and seats and revenue has been growing pretty rapidly. The base is still pretty small so to the extent that the business becomes more material at the time, we would break out the relevant metrics but at this point, it’s too small to really kind of break out much. Finally, you asked about the trial with Indesha. We’ve completed the discovery phase and we’re currently in the marketing phase in the Indesha trial, the one Indesha trial which is the one where we asserted eight patents against Indesha. The trial date is set for May of ’09. We do expect there’s a reasonable probability that they will slip past, potentially past ’09 into 2010.

Kyle Huebner

I would note that with the Indesha trial, it is scheduled for 2009. So looking at our guidance ranges, we can incorporate the scenario where we would incur the trial costs in 2009 but as we’ve seen historically, the scheduling with the courts, there’s a high degree of variability in that. So there are certainly a number of different scenarios that may play out in the timing when it will actually come to trial.

D.J. Collins – Craig-Hallum Capital

Are you planning to go into retail for Avery postage services?

Kenneth McBride

Yes, we are still working with Avery. We still have plans with Avery to market our service through using Avery’s retail relationships and inside existing Avery skus wherever it makes sense. Avery is also planning to market our service to its existing customer base. We’re working with Avery and they’re working with several office supply super stores to move things forward. We currently expect at least one office supply super store to get to selling our Stamps.com/Avery skus sometime in 2009. Avery’s already begun doing some insertions into their retail skus and we’ve started to see some limited acquisition from that effort. So we’re real excited about all of the opportunities that the partnership with Avery is going to mean to us.

D.J. Collins – Craig-Hallum Capital

Can we still expect that you are more focused to 5-day leads from 6-days? How would that affect you?

Kenneth McBride

I think it will probably be neutral and maybe slightly positive. I haven’t really thought about it but it seems that one of our core value propositions is to avoid the post office to the extent that the post office becomes less convenient, our service needs to become more convenient. But I don’t think it’s probably going to have a big impact. Certainly, we encourage things with the postal service that reduce cost because we really like to see their business doing well in the long run and they need to right-size their business for the tough economy and we’re supporting everything we need to do on that.

D.J. Collins – Craig-Hallum Capital

How do you estimate that you benefitted from the shutdown of the United States postal site during a few days in December?

Kenneth McBride

The post office, as we did mention, the USPS did add some additional marketing of our service during the quarter partly as a result of the shutdown that happened in December for their service, for Click and Ship service. We don’t really have a tracking mechanism so it is hard to really quantify the exact impact that it had on acquisition. We certainly believe that it was helpful. We would say though that in reality the acquisition we get from the USPS website, it happens on a continual basis and usually we get the highest new customers from the USPS in Q4 of each year and last year, also in Q4, we had a meaningful acquisition that came from the USPS marketing effort. I think we benefitted more in Q4 of this year than we did in Q4 of last year but we do get acquisition from them on an ongoing basis.

Operator

Next we have Kevin Liu with B. Riley & Company.

Kevin Liu - B. Riley & Company

First a question on the PhotoStamps business. What type of visibility do you guys have at this time into the higher volume customer orders? Do you have visibility out beyond a quarter or two or do you not even have that today?

Kenneth McBride

I wouldn’t say we have a ton of visibility into the high volume business orders. They tend to be lumpy. They tend to be somewhat unpredictable so we’ve seen quite a few ups and downs. We did see an increase year-over-year in Q4 of this year but I don’t think we really have a ton of visibility in exactly what we may be looking at for this year.

Kevin Liu - B. Riley & Company

I guess as a follow-up to that, do you have insight as to whether you can grow that business this year or given that the environment that we’re in, are you looking at any area to cut back on costs?

Kenneth McBride

Our strategy is to continue to be very focused on very high ROI programs. So I think we are likely to spend even less on marketing this year than we did last year, with this year being ’09. With that, I think we’re expecting to see a decline in PhotoStamps for the year. With PhotoStamps, it’s clearly a luxury item. It’s something that people don’t really need. It’s something they want and as the economy has turned down, it’s certainly taken more of a hit than the PC Postage business. So we’re hoping that the business will for the short-term will be something that’s a little bit more difficult to grow. We continue to believe in the business for the long-term particularly the retail aspect of the business. We’ve seen enough evidence that we believe that will work in the long run once we’re not facing the worst holiday/Christmas holiday period in 40 years. We have some expectations that the business will do better in the long run.

Kyle Huebner

I would just say, specific to the business, as Ken said, it tends to be fairly concentrated so it’s really hard to predict this year whether it will be up, flat or down. I think when orders materialize during the year then it can be something that is up. If those orders don’t materialize given the economy, then it’s certainly possible that business PhotoStamps are down as well.

Kevin Liu - B. Riley & Company

You made a comment earlier in the script that you guys hadn’t raised prices when postage rates increased. Now that postage rates are increasing, do you expect that, that it is a fair assumption that you guys will still hold the line on pricing?

Kenneth McBride

Without having tested it yet, my gut says probably so. In the economy and the state of descend, we don’t know. We certainly don’t feel like charging more for the product than we are charging right now. So we tend to test these things rather than just a guess but my estimate at this point would be yes, we would likely just hold the price steady.

Kevin Liu - B. Riley & Company

Turning to the PC Postage business, in terms of the churn rate, I am just wondering what you’ve seen from the customers that you acquired via direct mail, what their increased spend has been through 2008? Has that played out in the sense that you do have a higher lifetime value with them there that the churn rate has been lower? Can we get some more details on the churn?

Kenneth McBride

Yes, we continue to believe that the lifetime value for direct mail customers is higher than all of our other channels and that continues to be true with more recent data as well as with the older customers. It’s our best channel so it’s why we focus on it so much and why we continue to increase the spend in that area.

Kevin Liu - B. Riley & Company

Is there anything you guys feel like you could do differently to either increase investments with pricing adjustments that would improve that churn rate or is the increase rate over the early part of the year is just a part of the economy?

Kenneth McBride

I think that we will continue to focus on our retention program. We really reached more of a steady state with the program now and we’re running it at full scale but we do believe that it’s working well. It’s helping to have a positive impact on our churn rates. We do think that the economy is really, it has been an impact on the churn over this quarter certainly and maybe the last few quarters as we’ve seen in general with small businesses that are going out of business. So it’s certainly something that we believed would happen. We’re pleased that the churn really hasn’t gone up that much relative to what we saw in the last couple quarters. It’s certainly does seem to have some impact on the economy.

Kyle Huebner

The other thing that I would add is, you know, in terms of opportunity, it’s really improving the initial customer experience while in the early part of the churn of their life cycle. So it’s kind of that one to six-month time frame when they’re learning the service and making decisions about whether they’re going to stay long-term. Ken outlined several things in the plan that we do continue to focus on improving the initial customer experience to try to improve their retention in the early part of their life cycle.

Operator

We’ll go next to Kar Kwong with Needham and Company.

Kar Kwong - Needham and Company

I just wanted to talk about price increases for a sec. On previous calls, you had mentioned that the new customers would be under the $17.99 price point. I was wondering if that has changed under this policy.

Kenneth McBride

We are continuing to acquire customers from the time we talked about it originally all the way through the year, we continued to bring customers in at the $17.99 price point, but in light of the economy, we decided to go back and retest once again to see what the right price point might be between $15.99-$17.99 and actually $19.99, a higher price point, just to make sure we are doing the right things since the circumstances continue to change with the economy. At this point, we really haven’t made a conclusion as to what the right price point may be, but certainly in a tougher economy, it might make sense to consider a lower price point but we haven’t yet made that decision. We do believe that longer-term are price point will be close to $15.99 almost certainly.

Kyle Huebner

This is the default price plan for customers today, $17.99, so we’re testing other price points but the majority of customers as of today, are still coming in under $17.99.

Kar Kwong - Needham and Company

I just wondered if some of the new initiatives you mentioned are pre-packing materials, will those cause more use to the client.

Kenneth McBride

No, actually those are subsidized by the Postal Service in order to encourage shipping usage so that’s convenience we‘re bringing to our customers in conjunction with our partnership with the Postal Service.

Kar Kwong - Needham and Company

In terms of your R&D spend; it’s kind of held steady the past two quarters. I wonder what your plans are going forward for that.

Kyle Huebner

I think if you look at it for 2009, I would say that we probably expect a modest increase in the R&D spend. We do have, we are continuing to work on the Enterprise product as well as improvements to the PC Postage, and we’re essentially funding products for two different customer segments. I would say that we should probably expect it to be up modestly in ’09 versus ’08.

Kar Kwong - Needham and Company

In terms of guidance, how much litigation are you assuming in the guidance?

Kyle Huebner

We don’t break out specific numbers in the guidance. I can say that there is a wide range of scenarios that can play out. If we experience the waves in the court schedules, we can hit periods of time where there’s really not much activity and you’re waiting for the court to make a ruling. So it’s possible on one end of the spectrum that it can be lighter and actually down from last year. On the other end of the spectrum according to current schedules, things are moving fairly quickly so there is the possibility that in the first initial lawsuit, go all the way through the trial. We also have the costs related to the Icara P also. We don’t break out specific numbers but with our reduced share count of 17 million, smaller fluctuations and costs have a bigger impact on our EPS. So we have to consider the range in areas of our guidance.

Operator

We’ll go next to Inaudible Analyst with GFI Council.

Inaudible Analyst - GFI Council

I don’t mean to beat a dead horse but you mentioned that you were learning a lot regarding what your Enterprise customers are looking for. Can you expand on the type of things they are mentioning to you?

Kenneth McBride

I think we’re learning across the business in terms of understanding how to generate leads with marketing and understanding how to cost-effectively approach sales, understanding things that we need to add to the product, understanding what customers want on fronts. So it’s just us getting better and better and understanding how this business is going to work moving forward and how we’re going to grow it cost effectively in the future.

Inaudible Analyst - GFI Council

Two other quick questions. One is, there are two categories in the balance sheet, current assets and other assets and I noticed that year-over-year, the combined outlook is $6 million. If you could speak a bit to, what that comprises. The second question is do you keep a metric of the number of actual stamps printed? The reason I ask is we’re up in Canada and I don’t know if there is inflation in stamp prices but I do show the dollar value of stamps and I am curious of the actual volume of stamps themselves.

Kyle Huebner

On the balance sheet side, the current assets, I think, a lot of them are your traditional accounts receivable type accounting in certain of our businesses like in high-volume PhotoStamps, we may invoice the customer and have receivables. There’s certain pre-paid expenses. There’s also some of our store inventory that is included in those line items. The other area is when customers leave the service, when they have postage in their account, we will typically give the customers the postage refund and then get reimbursement from the USPS. So we typically carry the receivable in terms of getting reimbursed from the post office for things like the postage refund to customers as well as postage misprints, we may provide the customers with a credit to their accounts and submit that to the USPS for reimbursement. So I think a lot of the other current assets tend to be kind of USPS receivables and then the other accounts tend to be your more traditional AR inventory, pre-paid, things like that.

Kenneth McBride

On your second question, in terms of the total number of prints, you can take the number which is disclosed which we did $319 million in total postage printed by our customers last year and we run about approximately $0.80 per print. So I would say there’s about approximately 90 million transactions that we processed last year.

Inaudible Analyst - GFI Council

Do you know how that compares to a year ago? I guess what I’m trying to get at is I’d love to see customers getting for lack of a better term addicted to using your service. So if I saw for example that the amount of total customers was the same and if the volume was up, I’d be happy too. I would just say that the people were enjoying the service more and more. Do you keep any kind of a metric like that?

Kenneth McBride

The total postage printed for the year was up 17% and last year, the dollars per print was comparable to this year’s, so the transactions also grew 17% and you may note that the paid customer numbers grew about 6%. So there was an increase in transactions per customer for the year.

Operator

We’ll go next to Graham Ryan with Bears Capital.

Graham Ryan - Bears Capital

I just wanted to follow up a little bit on the Enterprise question that was just asked. How are you identifying your ideal Enterprise customer? How are you getting in front of them and once you get in front of them, what are their hurdles to making the purchase? Is it pricing? Is it functionality to the site? Is it locked into another solution? Can you just talk a little bit more specifically about that part of the business?

Kenneth McBride

Sure. We’re doing lots of things and we’re testing lots of things, just like as you know we do all the time in small business. We’re testing multiple different ways to market Enterprise from the tried and true direct mail approach to other approaches like traditional media and some other channels. So what we’re really focused on there is trying to generate marketing-driven leads that we can then set up of a demo and have our sales team kind of take over the process and do a demo to somebody typically in the finance organization, the purchasing group or the controller or the director of finance. Sometimes the operations group, it just depends on who’s responsible for making those types of decisions. We try to get a demo and then we try to get a trial, and then ultimately try to get a conversion and a contract and a rollout. What we find, I think, is certainly in most of these cases that these customers have existing postage meters and those meters tend to be under lease though there is always an issue of if they decide to work with us, they will have to work through their lease period. That does slow down our overall business in terms of rolling out to the customers even after they decide to go ahead with us. I think with customers where particularly when they have a lot of small offices in a network corporation, our solution makes a ton of sense. We have lots of customers that do the math and are just astounded at how much they can save by switching to our service because we are so much more cost-effective than a postage meter. We’re just continuing to learn how to market, how to sell, how to get in front of the customers, how to position the product, how to get past the challenges as the business starts to move.

Graham Ryan - Bears Capital

How many people within that sales and marketing team are dedicated towards kind of exclusively to Enterprise customers and how has that changed in the past year?

Kenneth McBride

We haven’t really been talking about those numbers specifically but we have grown our Enterprise team fairly dramatically over the past year. Like we said in the prepared remarks, it’s in investment phase right now. There is a drag on the net income on the bottom line but we think over the next five years, it’s going to be a great business for us.

Graham Ryan - Bears Capital

The last thing, Kyle, the cash that’s all lumped into cash and investments, can you walk through any sort of long-term investments or anything else that might be sort of connected to write-downs? Is there anything in that line item that is not liquid cash?

Kyle Huebner

Yes, in terms of our cash and investments, over about 75% of that is in bank cash, government money market, or government guarantees investment vehicles. I think we had a small portion of the portfolio where we’ve seen some unrealized losses, an increased minimized loss on those securities. It’s part of the audit process. You look at this for whether it’s an other than temporary impairment. We’ve evaluated those securities and deem that there’s no other than temporary impairment. At this point, we do have some securities with unrealized losses but we plan to continue to hold those so we at this point, don’t expect any write-downs that would flow through the P&L.

Operator

That concludes our question and answer session. I would like to turn things back to our speakers for any closing remarks.

Kenneth McBride

We appreciate you joining us this afternoon. If you have any follow-up questions, you can contact us at 310-482-5830. Thank you.

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Comments

[Tim Roller:]

I am the one. I am the one who PREDICTED (actually FORECASTED) the earnings per share obtained in 2008, 2 hours after the 2007 financials were published. I also forecasted the INTEREST INCOME to within $120,000. The management of Stamps.com was privy to my analysis, but refused to hire me. I am still available. I can not only forecast 2009, but can enhance earnings potential by elevating the expectations of management regarding the consumer market. Seriously guys, e-mail me at [e-mail] with an opportunity to join your team. -Tim

Feb 18 03:56 PM