Stamps.com Inc. Q1 2009 Earnings Call Transcript

Stamps.com Inc. (STMP)

Q1 2009 Earnings Call

April 23, 2009 5:00 pm ET

Executives

Kenneth McBride - President, Chief Executive Officer

Kyle Huebner - Chief Financial Officer

Jeff Carvari - Investor Relations

Analysts

Kar Kwong - Needham & Company

George Sutton - Craig-Hallum Capital Group

Kevin Liu - B. Riley & Company

Graham Ryan - Bears Capital

Presentation

Operator

Good day everyone and welcome to the Stamps.com first quarter 2009 results call. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Jeff Carvari. Please go ahead.

Jeff Carvari

Thanks very much. Good afternoon everyone. On the call today is our CEO, Ken McBride and our CFO, Kyle Huebner. The agenda for today’s call is as follows: We will review the results for first quarter 2009 then we will discuss the financial results and talk about our business outlook, but first the Safe Harbor Statement.

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 including the Company’s ability to achieve, 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.

Included under its report on Form 10-K for the fiscal year ended December 31, 2008, quarterly reports on 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, let me hand it over to our CEO, Ken McBride.

Kenneth McBride

Thank you, Jeff. Thank you for joining us today. During the first quarter, we did $20.0 million in total revenue. Total PC Postage revenue including services revenue, store revenue and insurance revenue was $18.3 million, up 1% versus revenue in the first quarter of 2008. Excluding the enhanced promotion channel, revenue was $16.6 million which is up 6% from the first quarter of 2008 and specifically service fees were up 7% versus the first quarter of 2008.

Given the difficulty of the economic environment, we were happy to see this growth in this area to our primary area strategic focus. PhotoStamps revenue was $1.7 million which is down 43% versus the first quarter of 2008. We reduced PhotoStamps sales and marketing by approximately 41% versus the first quarter of 2008 as part of our continuing focus on improving profitability in the PhotoStamps business and that resulted in the decreasing revenue.

Our non-GAAP income from operations for the first quarter was $1.9 million in line with the first quarter of 2008. Non-GAAP earnings per fully diluted share were $0.13. We were happy with the overall 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 then we will discuss the financial results and our business outlook. Now, we will begin a more detailed discussion in the PC Postage business. As a reminder, the customer metrics we are discussing on this call today exclude all enhanced promotion channel activity.

During the first quarter, we acquired 53,000 gross customers. We believe the weak economy continues to have a negative impact on our acquisition trends as small businesses maybe less willing to take on new more expenses when they are struggling. We would note that there has been a complete decay in small business optimism level during the first quarter. One measure we look at is the national federation of independent businesses monthly survey. With the lower customer acquisition during Q1, we experienced an increase in our cost per registry customer acquisition or CPA to $122 compared to $101 in first quarter of last year.

Despite the increase, we continue to believe we are earning a very good expected return on our marketing investment. Our monthly churn during the first quarter was 3.6% versus 3.8% in the fourth quarter of 2008. We are happy to see the decline in churn during the first quarter although we do believe that churn in general in our business remains at an elevated level going to the economy and the higher likelihood of the small business to decline or fail in this environment.

Big customers in the first quarter of 2009 were 321,000 which is an increase of 5% versus the first quarter of 2008 and were up 11,000 customers sequentially from the 310,000 in the fourth quarter of 2008. We were pleased with the growth in paid customers this quarter which is driven by the strong customer acquisition we saw during the fourth quarter last year. Again, all the numbers we just gave excluded all enhanced promotion channel activity.

Now, let us turn to the 2009 plan for PC Postage and talk about progress we have made against our plan today. At high level, our plan for PC Postage includes the focus in at least four major areas. First, we plan to modestly ramp up our small business customer acquisitions spend outside the enhanced promotion channel. We continued to believe that the lifetime value of the non-enhanced promotion customers is more than two times higher than the current cost of acquisition. We feel the expected return investment on our marketing spend is very attractive and thus feel it is important to continue 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 spend throughout the year and make any necessary adjustments based on the results we see and we will continue to testing new and scaleable 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 5% to 10% in 2009 compared to the 26% growth we did in 2008. Our goal is to maintain a reasonably strong investment in our customer base during the economic downturn and be well positioned when the economy improves to return to higher investment levels.

Second in our 2009 plan, we are going to continue optimizing our business model and our overall customer experience in several ways. So far this year, we launched a new customer welcome kit and welcome email which will improve the initial customer experience. We improve the customer experience for our store customers but with reduced delivery times by bringing a second fulfillment location online. We launched the new feature which allows customers to order about 20 different free USPS supplies from our store, this is boxes and envelops that will improve the convenience of our overall service to our customers. We begin to test of our NetStamps Label Sheets pricing to maximize our customer lifetime value.

During Q2, we are 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 continuing to add significant new features to our product including the launch of version 8.0 scheduled in May and version 8.5 scheduled in July. Together, those two products will add several important new capabilities including enhanced reporting with online reporting capabilities, new web-based postage tool that will improve our user experience, improve ability to integrate with third-party applications and new shipping features which we will discuss in a moment.

Third in our 2009 plan, we are going to continue ramping up our efforts around the enterprise area. Customers continue to be attracted to us first as a postage meter based on our dramatically lower total cost of ownership and based on a great visibility into individual and poly activity that is not available with them here. In this economic environment, we believe the desire to save cost has become a much bigger focus for businesses than it was a year ago.

We plan to continue scaling up our enterprise sales and marketing efforts in a cost effective manner. With our continued experience marketing our enterprise solution, we feel we now have a better understanding of the normal sales process we expect to encounter and we like to share some insights into that area with you today. First, we start the normal sales process focused on understanding the customer needs and educating a prospect on our solution. Once the prospect decides to move forward, there will often be a pilot test with a limited number of locations and that can take several months and has lasted in some cases more than a year. Then once the customer has decided to rollout the solution more boldly, it may frequently be done on a rolling cycle over a year or longer period in conjunction with the roll off the mid releases of their existing postage meters.

Since our revenue model was based on a number of locations, it may take several years after the initial sales contact to reach the full revenue potential of an account. As an example, our largest customer first contacted us in mid 2006. First began the trial in the fall of 2006, first became a billable customer in January of 2007. Since then, they had continued to increasing their number of locations every quarter and we believe that they finally reached their full rollout potential during the first quarter of 2009.

Overall, the process from initial contact to full rollout took almost three years. Thus, you can see that the length of the sale cycle and the account rollout process will mean that our enterprise effort will likely take several years to pay off but we do expect that it will be a great area for us in the long term.

With that being said, we do believe we are making a lot of great immediate progress in the enterprise area. We grew enterprise revenue during the first quarter by 84% versus the same quarter last year and this was acceleration in our growth rate versus the 67% year-over-year growth we saw during the fourth quarter of last year. Our pipeline of prospects continues to grow and our new seats added for the first quarter showed continued strength. We also continued scaling up our sales team and driving better processes and improve performance in that area. We have also continued scaling up in the marketing area with several initiatives across traditional marketing areas such as print, direct mail and telemarketing.

We also plan to continue enhancing our enterprise product during 2009 and that will help our sales efforts. In early Q3 of this year, we plan to launch enterprise version 2.0 which will include a dramatically improved web based enterprise reporting system with a sophisticated front end reporting tool with real time data, improved web based postage management tools and enhanced web based financial and administrative controls versus central decision makers.

Overall, we are excited about the progress we have made in enterprise. We feel that we are beginning to see returns on the investments that we have been making in this area and we are expecting to see strong growth out of this business line going forward.

Fourth in our 2009 plan, we have been investing resources targeting the advanced shipper segment of the market. We began a more aggressive push in this area during 2008 and plan to ramp our efforts in this area throughout 2009. We launched our professional shipper solution last year to target advance shippers such as fulfillment houses, small package ecommerce shippers and larger retailers and enterprisers. This year, we are continuing to invest in a product and technology as part of our releases of version 8.0 in May and version 8.5 in July. The enhancements include improve bad shipping, improve integration with ecommerce with ecommerce website, improve email customization, improve address cleansing and support for additional high volume hardware peripherals.

We are also investing in sales and marketing to specifically target customers who do higher shipping volumes. Shipping is a new strategic focus for our Company. It is also one of the most important strategic initiatives of the US Postage service and as our most important partner; we are focused on making them as successful as we can in this area. We feel that our 2009 PC Postage plan is a very solid one. We feel that our long-term opportunities to grow this business are very attractive despite a challenging short term economic environment and we plan to take advantage of them for the benefit of our long-term shareholders.

With that, now let us turn to a more detailed discussion of PhotoStamps. During the first quarter, we continued our program to increase profitability in the PhotoStamps area with the smaller and more focused marketing plan and will decrease our total sales and marketing for PhotoStamps by 41% versus the first quarter of 2008. As a result of our decreased spent, total revenue was $1.7 million for the first quarter which is down 43% versus the first quarter of 2008. The decrease in revenue during Q1 was expected given the magnitude of our decrease in sales and marketing activity.

We also had our largest high volume order ever in Q1 of 2008 which did not repeat and contributed to a decline in a high volume PhotoStamps sale. We also believe the broader economic slowdown continues to negatively impact PhotoStamps as it is more of a luxury item than a necessity. Although we experience the significant decline of PhotoStamps revenue in Q1 as a whole, we continue to be successful in meeting our original goal of improving the bottom line impact for that business.

For the PhotoStamps go-forward plan, we are planning to continue our programs of a more focused direct to site 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 add fewer but more profitable orders to our website to our own consumer marketing activity and to our existing distribution partnerships like HP/Snapfish, Picassa.com and Walgreens.

We plan to continue to evolve the PhotoStamps retail business model. The model we are 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 were successful in penetrating retail during 2008 with this model. However, with the worst holiday shopping season in 40 years, it was a tough time for us to begin moving into retail. We do not expect that 2009 will be much better for the retail environment and as a result, our investment in this area this year will be modest. We do remain optimistic about the long-term outlook for PhotoStamps at retail and we plan to continue pursuing it long term as key strategic initiative for PhotoStamps.

With that, now Kyle will discuss our more detailed financial results and our business outlook.

Kyle Huebner

Thanks, Ken. Q1 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. Peak customers in the first quarter were 321,400, up 10,700 from the 310,700 paid customers in Q4 2008 and up 16,000 or 5% versus the 305,000 paid customers in Q1 2008. The paid customer number represents the unique number of customers successfully billed at least once during the quarter. The change in paid customers from Q4 2008 to Q1 2009 was composed of 50,000 new paid customers who were successfully billed for the first time during the quarter offset by 39,000 lost paid customers. Lost paid customers are defined as customers who were successfully billed in the previous quarter but not successfully billed in the current quarter less any recaptured paid customers from prior quarters.

The sequential increase in paid customers was primarily driven by the increase in customers acquired in Q4 2008 who were first billed in Q1 2009. Because of the trial period, the current quarter's customer acquisition has an impact on the following quarter's paid customer metric: Customer acquisition, PC Postage small business customer acquisition spend which includes both sales and marketing spend as well as promotional spend which is included in cost of sales, was $6.4 million in Q1, which is up 2% versus $6.2 million in Q1 2008. Small business cost per new registered customer was $122 in Q1 which was up 21% compared with $101 in Q1 2008. While we experienced an increase in CPA during the first quarter, we still believe we are earning an attractive ROI in the marketing spend and plan to continue investing in the business for the long term.

We have lowered our expected small business acquisition spend for 2009 from 10% to 15% increase in the last call to our current expectation of 5% to 10% increase and we will continue to monitor the acquisition trends and expected returns throughout the year and adjust accordingly.

Subscriber revenue per customer: PC Postage revenue which includes service fees, store and insurance revenue exclude in the enhanced promotion customers was $16.6 million in Q1 which was up sequentially versus $16.2 million in Q4 2008 and up 6% versus $15.6 million in Q1 2008. ARPU was $17.18 for Q1 which was up 1% versus $17 even for Q1 2008. This metric is calculated as PC Postage revenue for the quarter divided by paid customers in the quarter divided by three months. We continue to test the range of price point to our new customers and this causes some quarter-to-quarter fluctuations in our ARPU metric.

Paid customer cancel rates: Paid customer cancel rate was 3.6% in Q1 versus 3.8% in Q4 and 3.4% in Q1 2008. 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. There are many factors influenced churn rates including the type of customer, the age of the customer, levels of customer acquisition, mix of customer acquisition channels, pricing, retention program offers, usability of the product and the economy and as such, we expect to see some degree of fluctuation from quarter to quarter.

Our churn rates had been between 3.6% to 3.8% for the past four quarters compared with 3.0% to 3.5% for the four quarters prior to that and we believe 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 continue to focus on ways to reduce churn and optimize lifetime values.

Customer usage: Total postage used by all customers was $85 million in Q1 2009, up 9% versus Q1 2008.

Now, we will review our first quarter financial results in more detail. Today, we are going to discuss our financials on a non-GAAP basis. A detailed reconciliation of non-GAAP to GAAP measures is contained in the earnings release posted on our website.

Revenue was $20.0 million in Q1 which is down 5% compared with Q1 2008. PC Postage subscription revenue which include service fees, storage and insurance revenue and which also include the enhanced promotion channel was $18.3 million in Q1, up 1% compared with Q1 2008. Subscription revenue excluding the enhanced promotion channel was $16.6 million in Q1 which was up 6% compared with Q1 2008.

Subscription revenue from the enhanced promotion channel was $1.8 million in Q1 which was down 29% compared with Q1 2008. The decline in enhanced promotion revenue is primarily attributable below our marketing spend which was down 46% compared to Q1 2008 as we continue to reduce our investment in this segment of the PC Postage business.

PhotoStamps was $1.7 million in Q1 which was down 43% compared with Q1 2008 as the result of a pullback in marketing spend which was down 41% year-over-year. Tougher economic environment continue to negatively impact consumer sales of PhotoStamps. In addition, our high volume PhotoStamps orders were down year-over-year as we had a very large order in Q1 2008 that did not repeat.

Gross margin excluding 123R expense was 73.5% in Q1 compared with 72.5% in Q1 2008. The increase in the overall gross margin was due to a higher mix of PC Postage revenue which carries the higher gross margin as compared to PhotoStamps revenue. PC Postage gross margin excluding 123R expense was 78.1% in Q1 compared with 79.6% in Q1 2008. Cost to sales included promotional expenses of $361,000 for Q1 2009. The decrease in PC Postage gross margin versus Q1 2008 was primarily due to increased levels of our retention program as we started to ramp our retention efforts in Q2 of 2008 last year.

For the PhotoStamps business, gross margin excluding 123R expense was 24.3% in Q1 compared with 29.5% in Q1 2008. The year-over-year decrease in PhotoStamps gross margin was primarily attributable to less fixed cost leverage with the revenue decline.

Total sales and marketing excluding 123R expense was $7.9 million in Q1 which was down 7% compared with $8.5 million in Q1 2008. PC Postage sales and marketing including the enhanced promotion channel decreased by 3%. Decrease was driven by the decrease in enhanced promotion marketing which was partially offset by an increase in the non-enhanced promotion marketing spend. PhotoStamps sales and marketing decreased 41% which is our continued focus in improving the business profitability.

R&D spend excluding 123R expense was $2.1 million in Q1 which was up 15% compared with $1.8 million in Q1 2008. The R&D spend in Q1 2009 was consistent with the past three quarters.

G&A spend excluding 123R expense was $2.9 million in Q1 which was down 7% compared with $3.1 million in Q1 2008. The decrease was primarily attributable to lower legal strand which continues at a material level but was down year-over-year compared with Q1 2008. Non-GAAP operating income was $1.9 million in Q1 which was down 1% compared with Q1 2008.

PhotoStamps had a negative impact on operating income compared with Q1 2008 while PC Postage had a positive impact. Interest income was $357,000 in Q1 2009 which was down 61% versus $918,000 in Q1 2008. 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 the stock repurchase program.

Non-GAAP net income was $2.2 million or $0.13 per fully diluted share on 17 million fully diluted shares compared with $2.8 million or $0.14 per fully diluted share based on 20 million fully diluted shares in Q1 2008.

Free cash flow defined as non-GAAP net income plus D&A less CapEx was positive $2.5 million in Q1. For the quarter, D&A was $326,000 and CapEx was $94,000. We end the Q1 with $70 million in cash and investments which is equivalent to approximately $4.28 per ending balance sheet share. In calculating the total cash and investments, we are including cash, cash equivalents, long-term investments, short-term investments, and restricted cash.

Share repurchase: During the first quarter, the Company repurchased 800,000 shares for a cost of $6.9 million. The Company has repurchased approximately 700,000 out of the 2.5 million shares authorized under the current share repurchase program.

Net operating loss shareholder update: We have approximately $240 million in federal and $150 million in state NOLs which could save us as much as $95 million in taxes. We estimate that as of March 31, 2009, the Company was adding approximately 32% level compared with a 50% level that will trigger impairment of our NOL asset.

During the second quarter 2008, we received shareholder approval to amend our Articles of Incorporation in order to protect our NOL assets, the NOL protective measures. Those measures are now on effect. Full details of the protective measures covered in our 2008 proxy but essentially any person, company or investment firm who wishes to become a 5% shareholder of Stamps.com must first obtain a waiver from the NOL protective measures in the Company’s Board of Directors.

We currently have approximately 16.3 million shares outstanding so ownership of approximately 815,000 shares or greater would currently constitute a 5% shareholder. Stamps.com strongly encourages any shareholder contemplating owning more than 650,000 shares to contact the Company before doing so.

Now, turning to guidance. We expect fiscal 2009 revenue to be between $80 million to $90 million. We expect fiscal 2009 GAAP EPS to be between $0.20 to $0.40 per fully diluted share. The GAAP numbers include an estimated $3 million of non-cash stock-based compensation expense related to FASB 123R. The GAAP number also includes an estimated $500,000 to $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 will be between $0.40 to $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. 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 enhanced promotion revenue and marketing spend to be down more significantly in 2009 compared with the declines in 2008 as we further reduce our investment in that channel. We expect PhotoStamps revenue and marketing spend to be down significantly again in 2009. We assumed continued heavy legal expenses in 2009 related to our patent infringement lawsuits. We expect proforma cash taxes excluding the impact of the additional California taxes to be approximately 3% of proforma pre-tax income.

Also, in an effort to continue aggressively managing our cost, Stamps.com management proposed and our Board accepted a company-wide salary freeze for 2009. This action is consistent with our historical focus on running the Company in a cost effective and lean manner. This assumption is also in our guidance.

Q2 qualitative guidance comments: While we do not provide specific quarterly guidance, we want to highlight a few items related to our expectations for Q2. The Q1 increase in paid customers was driven by strong Q4 acquisition and we did see a slowdown in acquisition in Q1 which we expect to impact Q2 paid customers. We expect PC Postage customer acquisition spent in Q2 to be up from Q1 as we increase our marketing around the USPS rate change in May. We expect continued declines in PhotoStamps and enhanced promotion business as we focus on a non-enhanced promotion PC Postage business. We expect litigation spend in Q2 to be up sequentially from Q1 levels.

So in 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 provides a higher degree of stability and provide a measure of downside protection during the economic downturn. Our business generates strong free cash flow which has funded our share repurchase programs. We have a strong balance sheet with $70 million cash and investments; no debt and a large $95 million tax asset.

So with that, we will open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kar Kwong - Needham & Company.

Kar Kwong - Needham & Company

So, very nice quarter in terms of net new paid additions and it looks like both the new paid additions and the churn have improved quarter-over-quarter. It just does not seem like that is only been the seasonal trend and I was wondering if you could just give a little more color on what is going on there.

Kyle Huebner

Yes, so Kar as we mention with our trial period effectively any customers that we acquire in December on the first time we attempt to build them is in January which is in Q1 and so in Q4 of 2008, we saw I guess a higher level of customer acquisition in December out of the total acquisition for Q4 than maybe we had seen in other historical period. So, mechanically that is always been the case in any customers acquired in December or we first attempt to go in January. I think this past quarter in particular, we had a high level of acquisition in December that resulted in billing those customers in January.

Kar Kwong - Needham & Company

I guess the concern here will be that people have signed up for the free trial for the Christmas period and you have billed them once in January. I was just wondering how well have those customers stick around, I guess has turned kind of ticked up throughout the quarter or I guess anything that will give me a degree of comfort in these customers sticking around.

Kyle Huebner

Yes, I mean I think that certainly you do have the trial period and our value proposition is strong as around the holiday period so I think, every year you get a certain segment of customers who were signing up, trying it out in the holiday period and may not necessarily sticks around. So, it is something that we were able to bill those customers during the first quarter and there is certainly the possibility that after they receive a couple months of bills, they turn out of the system. So that is a possibility and it is something that will monitor as we go forward here under the second quarter.

Kar Kwong - Needham & Company

I guess just so far in the trends you have seen from January to February to March, has there been an uptick in turn or has it stayed pretty constant at 3.6%?

Kyle Huebner

Yes, it has, I guess I would say we looked at the churn on a quarterly basis because what happens, you may have customers that let us say you billed in January. They became unbillable in February or March and then you build them again in April. So, the way we define our metrics, we really look at were we able to successfully bill the customer at any point during the quarter. So, I think the metric really reflects a quarterly outlook, not specifics on a month-to-month because we do have customers that become billed and then unbilled within the quarter.

Kar Kwong - Needham & Company

Got it and just one more question, credit card limits have been coming down and credit card default rates have also been going up. I was just wondering if that dynamic has affected the business at all.

Kyle Huebner

We do have customers' credit cards on file that we attempt to charge their monthly service fees. I would characterize it as we have seen and we do experience normal decay in the customer billing rates over time. I would say we have seen our costs slightly lower approval rates on the customer credit cards with really the main things being the one you mentioned where customers have maxed up their credit and their credit card charge will get decline for being over the credit.

The other thing that can impact it is the issuing bank consolidation. There has been obviously a couple big acquisitions with Wells Fargo buying Wachovia and JPM Chase buying Washington Mutual. So, in those cases on certain times, the acquiring bank will reissue the credit cards of the bank that got acquired and so you have a turnover on those customer numbers. So, those are things that can be an impact I would say. We have seen some of that but not something that has had kind of an overall material negative impact on the business.

Kar Kwong - Needham & Company

Got it, and it looks like ARPU was down quarter over quarter. The last time you had mentioned that, you guys were testing some lower price point as well as higher price point. So, I was just wondering if things changed in that department whether you guys have decided to go in a more lower price point.

Kenneth McBride

This is Ken. We are continuing to optimize the price points on the website for new customer acquisition primarily and I would say we are testing different price points from $15 to $19.99. So, we have not really kind of made our final decision in terms of where the sort of more permanent price will be but I think we still feel that longer term, it is likely that our business will support a price above the historical $15.99 that we have charged in the business.

Operator

Your next question comes from the line of George Sutton - Craig-Hallum Capital Group.

George Sutton - Craig-Hallum Capital Group

I wanted to understand the thought process that went into lowering the marketing spend for the year. You had mentioned it had been up 10% to 15%. It is now up 5% to 10%. What was behind that?

Kenneth McBride

I think it is in Q1, we did see a higher level on the customer acquisition cost than we had seen in Q3 and Q4. So, I think it is just an ongoing continual process to try and balance continuing to invest in the business and still getting an acceptable ROI balance with the timing of that spend given that we are in a very severe economic downturn. So, as I said it is just something, it is an ongoing target and as we go throughout the year, we see improvement in the economy or improvement I the metrics and in the back half, I think we would then look at increasing the marketing spend more but based on kind of where the Q1 came out, we just kind of made an ongoing modification to reflect the current economy.

George Sutton - Craig-Hallum Capital Group

Is there are particular area you have changed the budget? I know you were getting into some nontraditional i.e. radio areas with your spending. Is that continuing or is that part of what is being set back?

Kyle Huebner

No, we have not really changed the make up of the overall marketing spend, much I think were still continuing with as you know direct mail at tradition area but also other areas that we have added more recently like the radio area. We are continuing to see good results there and continuing to move forward. I think it is just more overall the budget across all areas. We have decided to be a little more prudent given the acquisition trends and the CPA trends just as we see as the economy feels more pessimistic, we just do not feel like it makes as much sense that we really try to force the growth in the business that is why we are just being more prudent.

George Sutton - Craig-Hallum Capital Group

With respect to the PC Postage spend you did mentioned, you were planning some spending around the USPS rate change in May. Can you give a little more specificity in what you mean there? Is that being used as an event to market to new customers or at to current customers?

Kyle Huebner

Every year, the rate case, when the US gets rate is raised, it is always a great time for us in terms of trying to drive home our value proposition for the customer because one day, you have the old rates and the next day you log in, there are new rates just are there for you automatically in our service. You do not have to do anything. It is a great thing for customers and for those that need to go down to the post office to make a postage, they get confused of a different rates or different rate structures. I mean our software takes care of all of that for you and it has always been a good time for us to market to customers the value proposition of our service in avoiding the post office. So, we saw a nice acquisition last year, the year before, around this time and so we have always felt that it is a good time to step on the gas a little bit with our marketing spend.

George Sutton - Craig-Hallum Capital Group

Got your and then last with the respect to the enterprise opportunity, I will not admit to not being the most patient person in the world but I wonder how the board views this opportunity and what kind of anticipation there is with respect to trying to grow this business more rapidly and I am just kind of curios what you feel you have learned thus far about the program and what sort of an address for market you think there is relative to what you might have believed early on in the process.

Kenneth McBride

The Board is totally and completely behind this area. We view it as a great long term area for the Company with the understanding that we are in the enterprise area. We are largely going into the postage meter market and looking to switch customers out of postage meters and that is a market that has been around for almost 100 years so it is not going to be something that we can do over night but in the long term, we feel that it is a great area for the company, for the business.

So, the Board is focused on the progress we are making with understanding how to market, understanding how to sell, understanding the value, understand the product needs of the customer and I think we have made a lot of great improvements in terms of our understandings in that business since we started but that being said, the reason we told you how long the sale cycle is because we want to make sure you understand as well that nothing is going to happen over night in this business but we are really optimistic about what we have seen so far and what this business can do for us going forward.

George Sutton - Craig-Hallum Capital Group

Okay, got you and Ken, good luck at the technology council.

Operator

Your next question comes from the line of Kevin Liu - B. Riley & Company.

Kevin Liu - B. Riley & Company

Just in terms of the trends you saw over the first three months of the year, was there anything visible in terms of how your customer ads are coming in through January and then the February and March?

Kyle Huebner

I would generally characterize it as January and February were a little weaker and March was a little stronger.

Kevin Liu - B. Riley & Company

And then what you seen in terms of kind of the conversion rates on the growth adds you got in the second half of year? Have then been generally in line with your expectations or have you seen any sort of weakness relative to what you may have expected historically?

Kyle Huebner

Yes, I mean I think using our public metrics really that the best way I think to look at it is if you look at the new paid customers divided by the gross adds over let us say a trailing four quarter period, as I mention the timing difference with the 30 day trial period causes some fluctuations in that metric on a quarter-to-quarter basis but if you look at kind of the trailing four quarters together, that conversion rate tends up to be about 76% and that 76%, is it really any materially different than kind of our historical periods beyond that?

Kevin Liu - B. Riley & Company

Okay, and on the enterprise initiative, I know you guys fairly is not ready to disclose the revenue numbers there yet but how large does that business need to be before we start to talk about it more in terms of the size of revenues and then could you give us an update on what the pipeline looks like in terms of the number of customers kind of crippling in the pilot stage and maybe some of the number that are early on on this?

Kyle Huebner

Yes, I mean I think it is we had chosen for various reasons including competitive visibility to not give out more specific metrics but through the revenue growth, to try and to give you some flavor that it is an area that is growing and we really like the fact that it accelerated in Q1 in terms of growth rate versus Q4. So, we are happy with growth and the revenue. We are happy with the growth in the pipeline and prospects and most importantly, we are happy that we I think were learning better, becoming better and better and more affective as an organization in sales and marketing in terms of driving this business line.

So, at the right time we may consider adding additional metrics to give you more visibility into enterprise but for now, it is relatively small but it is growing fast and we hope that is, we expect that is going to be a big area for us going forward.

Kevin Liu - B. Riley & Company

And then just one last question on the PhotoStamps business, how much of that comes from the partners and indirect channels today versus what you got direct here? What size and maybe some of the large business orders? And then could you give us a sense for how large that order back in Q1 2008 was?

Kyle Huebner

Yes, in terms of the order, it was a, I believe it was in magnitude of about $400,000 last year. In terms of the channels, the main things are the website, every thing with partners we kind of drive through the website to the Stamps.com website and then separately we have the high volume orders which are executed in the sales people. In looking at it, still the majority of the revenue in Q1 was website orders kind of over 75% to 80%. So, I think we have seen declines in both the consumer side and the high volume side.

Operator

(Operator's instruction) Your next question comes from the line of Graham Ryan - Bears Capital.

Graham Ryan - Bears Capital

Ken, could you talk a little bit more about the pricing strategy on the enterprise PC Postage where the customers are most receptive to? I mean, is it a price per seat, price per location or just kind of a flat seat for the size of the customer? Can you just kind of talk a little bit more detail about any changes you are seeing there or customer reception?

Kenneth McBride

Sure. In enterprise, we are primarily competing against postage meters as I said earlier and postage meters are physical devices that generally tend to serve a single location. So, as we go up against that model, we have chosen to price our business on a similar app basis. We primarily charge based on number of locations. So, we have different flavors of enterprise for that location model so we have a more basic version and more advance version. The more advance version tend to have more features but also can support more users so per location, we kind of run in a different price range depending on how features you get per location.

And then for business, if they start to add more locations, we tend to give them out a bit of a discount for more locations across the organization. So, in general, the pricing and enterprise is quite a bit higher than our small business area because it is a much more sophisticated product sold by our sales team, supported by a dedicated account manager. So, it is a more expensive business model so we tend to charge more for the price per location.

Graham Ryan - Bears Capital

Okay and what about in terms of attrition for an enterprise customer? I mean I would think that it would be even more valuable for a company with multiple locations just a bit of accountability in reporting type functionality in the software. I mean, have you seen anyone cancel or what has been the reaction for the enterprise customers that have started using it?

Kenneth McBride

We do not have the same aspect of churn that we do in small business and enterprise. These organizations tend to be much larger, more established so one of the drivers of churn in small business is just the natural turnover of a small business in general in the economy and so with this segment, these are more established businesses so we do not tend to have these many issues with businesses going under and losing them as a customer for that reason.

We have organizations where they add new locations and close down locations and those sorts of things but overall, the churn is far lower in this business than it is in small business which is one of the reasons why we are so excited about it. It is definitely the lifetime value of these customers is far higher with all these customers per location.

Graham Ryan - Bears Capital

Okay, that is helpful and then the last thing I have is the buyback, is there, I know you do not want to impair those NOLs. I mean is there a certain number of shares outstanding that when you get to, you are going to have to quit buying back? Can you just kind of walk through the details of that? I know that, I guess at this beginning of the year, you might have some ownership rolling off and you might be able to buy more. Can you just talk in more detail of how that is going to look in the next six months or so?

Kenneth McBride

Sure. What I can say is that the currently authorized program is 2.5 million shares repurchased at which we fall back about 700,000. We are comfortable that we can buy, that if we were to buyback the entire 2.5 million shares that it would not kind of post a material risk to the NOL asset with Section 382. So, for the current plan, we feel like if that completes, we still will be in acceptable level of the ownership shift. As we move forward, it is that rolling three-year window so it is really kind of mid 2010 timeframe. We actually have a fairly material drop off in the ownership shift as the three-year window rolls forward. So, we will assess where we are in the buyback throughout the year but certainly as we get closer in that more material drop off in the spring of 2010 that increases our flexibility on the share buyback side.

Graham Ryan - Bears Capital

And has there been any talk at the board level of a special dividend? Are you contented with how you are deploying cash right now?

Kenneth McBride

No, I think the primary focus continues to be the share repurchase program. If we did buyback the remainder of the share repurchased that is authorized, I think that would drop our cash into kind of below the mid $50 million range. So, that we feel like there is still opportunity there and that continues to be focus. That said, if we do reach a point on the share repurchase where we feel that we are not able to repurchase shares for let us say the 382 purposes, it is something I think we would consider at that time.

Operator

And we have no further questions. At this time, I would like to turn it back to our speakers for any additional or closing remarks.

Kenneth McBride

Thank you for joining us this afternoon. If you have follow up questions, as always you can contact us at Investor.Stamps.com or 310-482-5830. Thank you.

Operator

This concludes today's conference call. We thank you for your participation.

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Comments

[Tim Roller:]

GAAP principles... They are basic principles. What they allow corporate LEADERS to do is just amazing. Juggling the books to make everything look pretty and neat. This company has performed horribly, yet on paper it looks good. Earnings per share in line with estimates. Revenue higher than expected. Bottom line is that Stamps.com LEADERS have done a bit sleight of hand with by REPURCHASING STOCK. What is worse is that by doing so, they actually lost $150 million in market capitalization and an additional $50 million in assets! Now, they want to reward their LEADERS with bonuses for doing such a great job. Frankly, I would have fired them all after their INEPT 2008 performance. Recently, referred to as a BORING CORPORATION, Stamps.com is self-imploding and eventually will be noncompetitive in the vary arena they think they have a future.

Apr 24 03:20 PM