CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Inc. (STMP) Inc. (NASDAQ:STMP)

Q1 2013 Earnings Call

April 24, 2013 17:00 PM ET


Jeff Carberry - Senior Director, Finance

Ken McBride - CEO

Kyle Huebner - Co-President and CFO


Kevin Liu - B. Riley & Company

George Sutton - Craig-Hallum

Jared Schramm - ROTH Capital Partners

Bill Sutherland - Northland Capital Market


Good day, ladies and gentlemen, and thank you for your patience. Welcome to First Quarter 2013 Financial Results Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Senior Director of Finance, Mr. Jeff Carberry. Sir, you may begin.

Jeff Carberry

Thanks very much. Good afternoon everyone and thanks for joining us. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda for today’s call is as follows: We’ll review the results of our first quarter 2013, then we’ll discuss financial results and talk about our business outlook, but first the Safe Harbor statement.

The Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release contains the forward-looking statements, such as our expectations and financial guidance that involve risks and uncertainties. Important factors, including the Company’s ability to complete and ship its products, maintain desirable economics for its products and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time to time by, including its Annual Report on Form 10-K for the fiscal year-ended December 31, 2012, quarterly reports on Form 10-Q and current reports on Form 8-K. undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now, I’ll hand the call over to Ken McBride.

Ken McBride

Thank you, Jeff, and thank you joining us today. Today, we announced another great quarter where we have strong finance performance and where we again had record results in multiple areas of our business.

During the first quarter, we achieved record core PC Postage revenue of $30.3 million, which was up 16 year-over-year, record non-GAAP net income of $9 million, which was up 57% year-over-year, record non-GAAP earnings per share of $0.57 which is up 68% year-over-year, record number of small business customers acquired of 92,000, a record higher for our total enterprise paid locations and the largest sequential increase in paid customers ever to a new record level of 465,000. We are very pleased that the business continues upon strong growth trends, particularly in light of that all indicators point to continued recessionary environment in the small business area.

On the call today, we’ll talk in more detail about PC Postage metrics and business and our financial results and business outlook. Now, let’s begin with more detailed discussion of this PC Postage business.

Customer metrics we will discuss in the call are only for the core PC Postage business. This excludes all enhanced promotion channel activity. For more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metrics spreadsheet at

Core PC postage revenue including small business enterprise and high volume shipping customer segments was $30.3 million in the first quarter, which was up 16% versus the first quarter of 2012. This was the 10th consecutive quarter in which we have generated double-digit year-over- year growth rates in our core PC Postage revenue.

The increase in our core PC postage revenue was primarily attributed to continued solid performance in our small business, coupled with strong performance from our enterprise and high volume shipping customer segments. Volume through our Amazon partnership continued to be down in Q1 which negatively impacted our overall growth rates during the first quarter.

During the first quarter, we acquired 92,000 gross small business customers that was up 7% versus the first quarter of 2012. This is the largest number of small business customers acquired in any quarter in the history of the company. We were particularly pleased with the gross customers acquired, given the tough compare to Q1 of last year when acquisition was up 28% year-over- year.

Our cost per new small business customer acquired or CPA decreased $106 in the first quarter. That was down 3% versus the $110 we saw in the first quarter of 2012, the lowest first quarter of CPA, we have experienced in five years. Our average monthly churn during the first quarter was 3.0%, which was flat versus the 3.0% churn in the first quarter of 2012 and down 0.1% from the 3.1% churn we saw in the fourth quarter of 2012.

We are very pleased to see churn rates consistent with prior trends and our goal continues to be churn in the 3.0% to 3.5% range. While we see quarter-to-quarter fluctuations in our churn rates we believe that overall churn rate should be benefitting from our growth in postage printed, lower churn rates than our enterprise and high volume shipping customer segments, new product features which contribute to the increased usage of our service and continued success in our ongoing customer retention efforts. Paid customers in the first quarter were 465,000, that was up 30,000 sequentially, the largest quarterly and sequential in paid customers we have ever had.

Sequential growth in paid customers was a result of the higher acquisition and the lower churn. Pay customers were up 13% year over year. Average subscriber revenue per pay customer or ARPU was $21.71 in the first quarter and that was up 3% versus the $21.16 we saw in the first quarter of 2012. We are very pleased with the improvement in ARPU, which grew to the highest level ever. The year-over-year increase in ARPU was primarily driven by higher per customer revenue and high volume shipping in enterprise.

Total postage used by our customers was $378 million in the first quarter 2013, and that was up 71% versus the first quarter of 2012. This is now the eighth consecutive quarter where year-over-year growth in our quarterly postage usage has exceeded 50%. We monitor total postage usage as an indicator of the value customers drive from our service and its growth has been correlated with strength in our other business metrics.

We continue to believe that the economic environment with respect to small business remains challenging, relative to pre-recession levels. It continues to affect our small business customer acquisition and our churn.

The National Federation of Independent Business, Small Business Optimism Index, averaged 89.5 for the first quarter. That was down compared to the 92.5 average for Q1 of 2012 and was again below the 93 level, which is considered a recessionary reading. However, we believe the sustained improvements in the small business economic environment from current levels could provide a further lift to our small business efforts over the long term.

With that, let’s discuss some detailed initiatives we are working on in PC Postage. Again this discussion is about the core PC Postage business excluding the enhanced promotion channel. In a small business area, we are continuing to grow and optimize our customer acquisition spend. We continue to experience a strong ROI in our marketing spend with an estimated lifetime value that exceeds our current CPA by at least two times.

During the first quarter we increased our small business customer acquisition spend by 3% year-over-year. During the first quarter of 2012 last year we increased the acquisition spend by 22%. So this year in comparison to that large growth number we experienced, we experienced this year a more modest year-over-year increase in our spend.

In addition, our first quarter 2013 CPA declined to the lowest level we had seen in five years at a $106. So we were able to increase acquisition to a new record level of $92,000 on a more modest spend increase, showing that we are able to continue generating great efficiencies as we scale our marketing spend.

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

Also in the small business area, we’re continuing to optimize our business model, our overall customer experience in several ways. We continue to focus on optimizing our website, our registration process, our post registration customer actions.

We also continue to launch new features in our client product that make mailing shipping easier for our customers. We have been particularly focused in e-commerce users in our recent 10.1 release with added functionality, such as hidden postage on international shipments, support for printing international labels and customs forms on label printers, support for adult signature required and whole for pick up options, support for parcel select which offers the lowest USPS rates for ground delivery and many other features particularly targeting our users.

In the enterprise area we primarily continue scaling our sales and marketing efforts. Customers continue to choose our service as a great alternative to a postage meter, based on the dramatically lower total cost of ownership. Customers also like the visibility available from our centralized reporting tool where they can monitor postage spend across their entire network of users, a feature that is not available with postage meters.

During the first quarter, we continued to make strong progress in the enterprise area with growth in the first quarter revenue of 54% year-over-year, which accelerated versus the 43% year-over-year growth we saw for all of 2012.

We also saw strong growth in new enterprise locations and our pipeline of opportunities continue to grow nicely as well. Overall, we are excited to continue progress in enterprise and feel that we are seeing attractive returns on the investment we have been making in this area. We are expecting to see continued strong growth out of this business line going forward.

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

During the first quarter, we continued to make strong progress in high volume shipper area with growth in first quarter, postage printed by this segment of 74% year-over-year. This was a nice increase versus the 66% growth we saw for all of fiscal 2012. As we continue to adding high volume shippers and e-commerce users to our service. For 2013, we will continue to focus on scaling this business area.

We continue to introduce improvements in the software and features that target high volume customers. We will continue to add new shopping cart integrations for user data, export and import from the tools that customers would like to use, and we will continue to scale our marketing efforts and our sales efforts using our national sales force.

Overall, we are very excited about the progress we are making in the high volume shipping area and we feel it will continue to be a strong contributor to our overall business. With that, we wanted to take just a minute to provide an update on some postal reform.

The USPS previously announced that were moving forward with the elimination of Saturday mail delivery but continuing with the delivery of packages on Saturday. Postal service recently announced that they will continue and going to mail on Saturdays until Congress addresses that as part of the broader Postal Reform bill.

We do not believe the elimination of Saturday mail delivery, if were to ultimately be implemented without any real impact on our business. The USPS continues to call on Congress to pass legislation that would allow them to better manage their cost and allow them more commercial flexibility. However there is currently no timeframe for Postal Reform in Congress and the uncertainty continues in this area.

Our focus is on ensuring that we do everything possible to help creates value for the US postal service and make sure that we’re doing it is as evidence by our growth in postage printed including the growth and in high volume shipping segment.

With that now let me turn the call over to Kyle to discuss more detailed financial results and our business outlook.

Kyle Huebner

Thanks, Ken. We will now review our first quarter financial results. We will discuss our first quarter financials on a non-GAAP basis, which excludes $1.1 million of stock based compensation expense. A reconciliation of all non-GAAP to GAAP numbers is contained in the earnings release posted on our website. Total revenue was $32.1 million in Q1, up 13% compared with the first quarter 2012.

The first quarter growth was driven by your Core PC Postage business. Non-core PC Postage revenue from the enhanced promotion channel was 783,000, which was flat compared with the first quarter of 2012.

PhotoStamps revenue was $1.0 million in Q1, down 21% compared with the first quarter of 2012. Core PC Postage revenue was $30.3 million in Q1, up 16% compared with the first quarter of 2012. The year-over-year increase in Core PC Postage revenue was a result of increased paid customers and growth in ARPU as discussed by Ken in the metrics section.

We are pleased with Q1 year-over-year growth as we faced a tough comparison with 27% year-over-year growth in Q1 2012 revenue. PC Postage gross margin were 78.4% in Q1 compared with 77.4% in the first quarter of 2012.

Cost of sales includes promotional expenses related to customer acquisition of $1.1 million in Q1, which was also $1.1 million in Q1 of 2012. PC Postage gross margins, excluding the promotional expenses was 82.0% in Q1, compared with 81.4% in the first quarter of 2012.

PhotoStamps gross margin was 19.4% in Q1, compared with 21.6% in the first quarter of 2012. PhotoStamps gross margins declined primarily because of the loss of leverage we see with a decrease in revenue resulting from fixed cost in the business.

Total sales and marketing spend was $10.1million in Q1, which was up 3%, compared with the first quarter of 2012. The increase is primarily due to increased sales and marketing expenditures to acquire new customers in our Core PC Postage business. R&D spend was $2.3 million in Q1, which was up 2% compared with the first quarter of 2012. The increase was primarily related to increased headcount related expenses to support our expanded product offerings.

G&A spend was $3.1 million in Q1, which was down 6% for the first quarter of 2012. The decrease was primarily related to decreased legal spend as a result of the Endicia litigation settlement last year.

Non-GAAP operating income was $9.0 million in Q1, which was up 56% compared with the first quarter of 2012, and non-GAAP operating margin was 27.9%, compared with 20.3% in the fourth quarter of 2012. The income growth in margin expansion were primarily attributable to revenue growth in our Core PC Postage business and leverage in our operating expense lines items, which increased at rates less than our revenue.

Non-GAAP net income was $9.0 million, up 57% versus $5.8 million in the first quarter of 2012. Non-GAAP net income per share was $0.57, based on $16.0 million fully diluted shares, which was up 68% compared with $0.34 per share, based on $17.2 million fully diluted shares in first quarter of 2012.

Non-GAAP adjusted EBITDA was $9.4 million in Q1, which was up 58%, compared with the first quarter of 2012. This metric is calculated as $9.0 million non-GAAP operating income plus 446,000 of D&A contained in operating expenses.

Non-GAAP free cash flow generated by the business was $8.6 million for the first quarter. This metric is calculated as 9.0 million of non-GAAP operating income, plus 446,000 of D&A contained in operating expenses, less 773,000 of CapEx related to the business. Note that this calculation excluded capital investments related to our new corporate headquarters as well as tenant related rental income and D&A.

We ended Q1 with $57 million in cash and investments of $3.3 or $3.73 per ending balance sheet share, which was up $10 million from the $47 million in cash and investments at the end of last quarter.

During the first quarter, we repurchased 73,000 shares at a total cost of $1.7 million. On April 18, 2013, the board of directors approved the new share repurchase plan that replaces all prior repurchase plans and authorizes the company to repurchase up to 1 million shares of stock during the next six months.

We have now returned $292 million in excess cash to our shareholders since 2002 through both special dividends and share repurchases. As of March 31, 2013, we had approximately $205 million in federal NOLs and $100 million in state NOLs resulting in a gross differed tax asset or DTA of approximately $70 million.

We have an approximately $40 million evaluation allowance against the gross DTA, resulting in a net DTA on the balance sheet of approximately $30 million. We estimate that as of March 31st, our section 382 ownership shift was at an approximately 20% level compared with a 50% level that would trigger a potential impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL asset, we request that any shareholder contemplating owing more than 615,000 shares contact the company before doing so.

Now turning to guidance, we expect total 2013 revenue to be in a range between $125 million to $135 million. This compares to our previous expectation for 2013 revenue of $120 million to $130 million.

We expect fiscal 2013 GAAP EPS to be in a rage between a $1.68 to a $1.88 per fully deluded share. This compares to our previous expectation for 2013 GAAP EPS of $1.48 to $1.68. GAAP numbers assume approximately 4.5 million of stock based compensation expense. Excluding the stock based compensation expense, we expect 213 non-GAAP EPS to be in a range between $1.95 to $2.15 per fully deluded share. This compares to our previous expectation for 2013 non GAAP EPS that of $1.75 to $1.95.

We expect growth in 2013 Core PC Postage revenue to be in the low to mid-teens. We expect enhanced promotion revenue and PhotoStamps revenue where both continued to be flat and down in 2013, compared to last year as we continue to minimize investments in these areas.

We are targeting 2013 small business PC Postage customer acquisition spend to be up 5% to 15% compared 2012. We expect capital expenditures for the business to be approximately 3.5 million and then separately we expect cap investments in our corporate headquarters of about $1 million remaining.

Our expected capital expenditures and EPS both reflect an increased level of investment in our technology platform and datacenters to ensure the reliability and scalability of our solutions to handle the very large postage volume we are experiencing. While we don’t provide quarterly guidance, we would note the followed.

We do expect to see traditional and seasonal slowness in the second and third quarters that has generally been present in our business in the past years. We note that some of the capital expenditures and expenses is related to the investment of our technology and datacenters that was planned for Q1 was shifted to Q2 and which we expect will have some impact on EPS.

We plan to try to increase our customer acquisitions spend in Q2 and the remaining quarters as that is our primary reinvestment in the business and which negatively impacts quarterly EPS but results in expected benefits in future quarters.

So in summary, our Core PC Postage business model of recurring revenue and high gross mergers is demonstrating continued growth and operating margin expansion. We are seeing record setting performances across many of our financial and key customer metrics.

We have a strong balance sheet, attractive return on equity, strong free cash flow generation, and a large deferred tax asset. We have demonstrated our commitment to enhancing shareholder value, including returning the $292 million of excess cash to shareholders via special dividends and our share repurchase. We believe we have a very attractive and sustainable business model and are looking forward to delivering results over the next five years.

With that, we will open it up for questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Kevin Liu of B. Riley & Company. Your line is open.

Kevin Liu - B. Riley & Company

Just looking at the ARPU year-over-year, I was little bit surprised by the increase given the Amazon loss and some of your commentary around that last quarter and so maybe if you could talk a little bit about some of the drivers of that growth and more specifically whether there were some larger new relationships that helped to offset that or perhaps Amazon didn’t drop off as much as you thought? Any color would be helpful.

Kyle Huebner

Sure. So in breaking down the ARPU we saw improvements in service fee and store ARPUs in Q1. This was partially offset by a decrease in the insurance ARPU, compared to Q4. In general ARPU is primarily driven by the higher ARPUs we get and high volume shipping and the enterprise and we did see strong growth in postage, printed and high volume shipping segment where we have better opportunities to monetize that volume and that is a key driver of ARPU.

In terms of Amazon, the impact Amazon on the quarter the volume through that partnership continues to be down and so it did continue to negatively impact, both the ARPU metric and the core PC postage revenue and revenue growth rate.

Overall I would say that the impact from Amazon in Q1 was generally on par, consistent with what we experienced in Q4. So the improvement in ARPU and the core revenue came from growth in the business outside of Amazon.

The one thing I would note Kevin is that when you look at our ARPU metric and the year over year growth, we do tend to see some fluctuations in that number on a quarter-to-quarter basis. If you look at the past year Q1 was up 3%, Q4 down 1%, Q3 up 7% and Q2 was up 3%.

So the improvement that we saw is in the range of some of the quarterly fluctuations we see, but we were certainly happy to see growth in that metric even with the Amazon headwind as compared to Q4.

Kevin Liu - B. Riley & Company

And looking at the customer acquisition spend in the first quarter, you mentioned up 3% year-on-year and that probably ticks up as you move into Q2 and beyond and in the context of the prior 5% to 15% guidance you had given before, are you expecting to still be towards the lower end of that when all is said and done for the year or would you expect that you could ramp investments much more meaningfully perhaps toward the high end for the remaining three quarters here.

Kyle Huebner

Yes, I mean it’s something that we usually monitor carefully and adjust as we go throughout the course of the year. Q1, we had a tough compare versus up 22 last year, as we move into the second half of the year, the comp should be a little easier and ultimately we are constantly working to scale and optimize the spend and so we are targeting a little bit higher year-over-year growth in Q2 and the remaining quarters.

At this point it’s within that range is what we are targeting, as we go through the year, and if there are changes in the small business economic environment or new opportunities to spend, we kind of take those into account and adjust accordingly. So at this point that’s kind of our stated range and it’s something we will monitor and adjust for throughout the year.

Kevin Liu - B. Riley & Company

And this is my last question here. I think Ken made some comments along the lines of scaling up your enterprise efforts, just curious it that refers solely to headcount on the sales side, or are there other measures that you guys plan to take?

Ken McBride

Yes, I mean I think generically we are just continuing to march forward and execute on our business plan in the enterprise area. Nothing in particular, but we do look at adding additional sales and marketing initiatives where we can make them work.

So we are very pleased with the outcome in the quarter for enterprise with 54% year-over-year growth. So we feel like the execution of the sales forces is positive. The pipeline of opportunities is growing nicely and so overall nothing specific to point to but just continued execution on what we've been doing in enterprise for the last five years.


Thank you, our next question comes from George Sutton of Craig-Hallum. Your line is open.

George Sutton - Craig-Hallum

So Ken, you had mentioned efficiencies as you scale spending and my assumption is what you mean by that is when a new potential customer gets a direct mail piece, because you've been spending on the brand as much as you have, they have heard the name through podcasts or on the radio or seen ads, they are more likely to understand Stamps in the service and therefore subscribe. Is that what you mean by the efficiency of the spend?

Ken McBride

Yes, I mean I think generally speaking, the number we track obviously with efficiency is the CPA and we saw a nice decrease in the quarter with where we hit a five year low for the first quarter. So 106 was the lowest level we have seen since 2008.

And so it’s really the efficiency of looking at that number relative to the spend and across all the different channels. I think we are starting to see some impact from the different channels overlapping and impacting each other from the traditional media, the direct mail, online initiatives and other things like that.

So, and I think we are very pleased with the scalability we saw and the marketing spend in the first quarter and I think we are continuing to really focus on that, trying to drive that CPA lower going forward.

George Sutton - Craig-Hallum

Just to be clear, you a year ago had talked a lot about your focus on traditional advertising areas; of TV and radio. Would you point to anything differently this year and this quarter in particular as something that’s a new initiative and had worked well?

Ken McBride

No, I think we are continuing to focus on a lot of the same things, just focusing on trying to scale up those efforts. So we continue to look heavily to direct mail as our main stage channel but as you know we have also been increasingly focused on adding new initiatives around traditional media like radio and TV and I think those initiatives were focused on trying to scale them up and make sure that the CPAs are in check and so those all contributed, just like last year but we are continuing to scale up those acquisition initiatives and seeing great results.

George Sutton - Craig-Hallum

In your 10-Q, you had mentioned the, I am sorry in your 10-K; you had mentioned the U.S. Postal Service discount rates rising and I am curious, if you could just give us some sense of has that had some impact that has benefited you and if some of the rate increases look to be relatively significant?

Ken McBride

Yes, so I think what we are mentioning there is that, our customers receive a discount particularly for shipping. So priority in express and international, versus going to a retail post office. So we have seen some generally some widening of those discounts overtime, which we think drives different initial push for people to go online and adopt solutions like PC Postage in order to print their shipping. So, it’s nice when the postal service continues to focus on trying to drive people into these alternative channels like online postage and that’s one of the ways that they’re doing it.

Kyle Huebner

This discounts have been in place for number of years. Overtime you can say USPS is kind of expended, yes, things like if you need certain volume requirements even larger discounts. So, in general that’s helped drive shipping growth over the past few years but in terms of T1 you have been normal kind of postal rate increase happened in January, but the discounts have been something we’ve had for a while now.

George Sutton - Craig-Hallum

Or you had suggested that the rates had increased. I just want to confirm finally, Kyle you’d mentioned that the Amazon impact was relatively similar in Q1 versus Q4, which surprises me a little bit because Q4 is a higher volume printed quarter. Did you mean to say it was similar impact?

Kyle Huebner

Yes. I did. In terms of a few lookout what we would have grown, excluding Amazon impact, the negative impact on a year-over-year growth rate was comparable. So, I was saying that it's not as much sequentially as opposed to kind of looking at what are our core business revenue growth on a year-over-year basis was in Q4 and Q1 and the headwind that Amazon had on that on a year-over-year basis.


Thank you. Our next question comes from Jared Schramm of ROTH Capital Partners. Your line is open.

Jared Schramm - ROTH Capital Partners

I think most of my questions were answered. There is just two I wanted to touch on here. In terms of the Enterprise segment, could you describe the reception you’ve been receiving from clients just year-to-date and secondly is this segment do you think you’d want to break out reporting wise in the near future or are we still quite a away from that.

Ken McBride

In terms of reception from customers and I think we continue to see in a strong value proposition to the customers we target for Enterprise. They continue to focus on the dramatically lower total cost of ownership. Particularly in the Enterprise area, we start to look at larger opportunities with multiple locations and the savings versus the postage meter really multiply and also the central visibility that’s available, centralize reporting tool where they can monitor their postage spend across the entire network.

That's something that I think really sets us apart from any other solutions out there. It’s not something you can really get with postage meter and I think as people become increasingly cost focused, that’s a feature that they really are continuing to focus on. So, I think we have tremendous growth in the first quarter, it’s one of our best quarters in Enterprise in a long time, 54% year over year and I think that speaks strongly as to how the customers are receiving and adopting the solution.

Kyle Huebner

The other thing I'd point out Jared is that Enterprise growth is a function of both adding new customers but also penetrating the existing customers that tend to have, sometimes an extended rollout schedule. So the growth is driven by the penetration of existing customers to try and get full deployment of all the locations.

In terms of breaking it out, at this point, the Enterprise and shipping are kind of more competitive segments for us and so I don’t think we're necessarily close to a materiality level that would be something we would break out but as we grow we continue to evaluate that.

Jared Schramm - ROTH Capital Partners

And lastly, looking at the buyback in the quarter, how are you looking to balance share buybacks versus the special dividend as your cash balances starts to push up on $60 million again?

Kyle Huebner

Yes, we always kind to have a share buyback in place and over the course of the last 10 years that’s worked very effectively. We haven’t always spot every quarter within that 10 years but on balance we try and be kind of in there consistently buying. The main thing with a special dividend, some of it comes down to tax efficiencies.

Because we still have a large NOL loss position, with a special dividend you are able to treat part of that dividend as a tax-free return of capital but it's based on tax factors and your level of your taxable income. So, historically our special dividend have been at point some time where we got the majority of the dividend, 95% to 100% of the dividend back to shareholders as a tax-free return of capital. So it's always something we evaluate kind of in coordination with the buyback but something that we usually to the extent possible try and optimize from a tax perspective.


(Operator instructions). Our next question comes from Bill Sutherland of Northland Capital Markets. Your question please.

Bill Sutherland - Northland Capital Markets

I wanted to just talk for a second on high volume shipping business and you've always mentioned the groups that you serve there, fulfilment houses, e-commerce shippers, warehouses, retailers and I'm seeking the relative (inaudible) larger of them and the relative growth opportunities.

Ken McBride

Sorry, can you repeat the repeat the last part of your question.

Bill Sutherland - Northland Capital Markets

And also in addition to kind of giving the sense of what are the biggest parts of those high volume shipping end users, the relative growth opportunities.

Kyle Huebner

I think the e-commerce segment is definitely a big segment that we’ve been very focused on. Our recent releases have had a lot of e-commerce driven features and functionality. So at this point of our business I’d say e-commerce is a bigger portion as compared to something like retail or fulfillment houses.

We're trying to penetrate really all three segments with our sales and marketing efforts, but I think the e-commerce segment is kind of naturally the biggest and most inclined to adopt our solution the great thing about the shipping is that out of the postage market the e-commerce driven shipping is really the growth part of the market.

So the investments we've made and the solutions we offer are in the growth part of the market and as opposed to traditional kind of office based small businesses, it’s more about penetrating the market and converting them from a traditional solution to our technology based solution.

Ken McBride

One additional, everything Kyle said, if we look at the different estimates out there and there is generally not a ton of information and data on the package market but we do see the e-commerce, some reports beside the e-commerce driven package, the portion of the market representing 20% to 25% of the U.S. market and it’s clearly the fastest growing area of the market. So it has been needed a nice driver for us and is an area we continue to focus on.

Bill Sutherland - Northland Capital Markets

Just real quick, color on margins, just looking across the margin profile, the first quarter and I had really worked based on your new guidance the model but is there anything I should think about relative to high performed across various profit areas in the first quarter as far as trending in?

Kyle Huebner

Yes, I mean the couple of things to point. I think I mentioned in this script you know in terms of G&A we settled the Endicia litigation at the end of Q1 last year. So Q1 of last year had kind of a full quarter litigation spent. So we were down 6% on the year-over-year basis. Moving forward now that we have anniversaried that, we expect the G&A line items to be up on a year-over-year basis.

The other thing I mentioned is it relates the kind of capital expenditures and R&D. There is an ongoing investment we’re making and kind of our technology platform and datacenters and we spent money in Q1 in that area but some of that got shifted to Q2. So we do expect R&D kind in the balance of the year to potentially be little bit higher on a year-over-year basis.

The gross margin extra promotional expense tend to be pretty stable. So we fluctuate a little bit within that kind of 81% to 82% range, but that’s usually pretty consistent and then the customer acquisition spend is the other big line item where we were up 3% and we are going to target a higher year-over-year percent.

So on balance, the operating margins tend to fluctuate a little bit based on things like customer acquisition spend, where you’re expensing it all on day one and then you get the benefit over the future three years. But these are all investments in the business and we look at the investments that were three to five year time horizon and feel that long term kind of our target is 30% operating margin in a non-GAAP margin and so we will make investments and see fluctuations in the operating margin but over the long term those as investments pay off and the operating margin expands, as we have seen over the past few years.

Bill Sutherland - Northland Capital Markets

So as I look at just like the linearity of quarters past couple of years, quarter one was usually the most profitable in terms of operating income margin and was that, is difference this year because it doesn’t feel like the first quarter would be materially lower than the full year. Is that the marketing spend that was just unusually low in the quarter?

Kyle Huebner

Yes we see fluctuations on things like ARPU that I talked about, the customer acquisition spend is based on the kind of partially the current market environment because of small business economic environment. So I don’t not think you can necessarily say any given quarter will be the lowest or highest operating margin of the year because we are optimizing the business kind of real time as we go throughout the year but last year marketing, customer acquisition spend was up 22%. This year it was up 3%. So clearly that had a favorable impact on our operating margins this year.


And at this time I would like to turn the call back over to Mr. McBride for any closing remarks.

Ken McBride

Thanks everyone for joining us and as always if you have any follow up questions you can contact us at or at 310-482-5830. Thank you.


And ladies and gentlemen that does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.

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