Stamps.com Inc. Q2 2009 Earnings Call Transcript

Stamps.com Inc. (STMP)

Q2 2009 Earnings Call

July 30, 2009 5:00 pm ET

Executives

Jeff Carvari - Investor Relations

Kenneth McBride - President, Chief Executive Officer, Director

Kyle Huebner - Chief Financial Officer

Analysts

Kevin Liu - B. Riley & Co.

Clayton Ripley - Bears Capital

William Meyers - Miller Asset Management

George Sutton - Craig-Hallum Capital Group

Presentation

Operator

Good afternoon ladies and gentlemen. Welcome everyone to the Stamps.com Second Quarter 2009 results call. (Operator Instructions) At this time I would like to turn the call over to Mr. Jeff Carvari. Please go ahead.

Jeff Carvari

Thanks very much and 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 second quarter 2009 then we will discuss the financial results and talk about our business outlook, but first the Safe Harbor Statement.

The Safe Harbor Statement is 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 complete and ship its products, maintain desirable economics for its products, and obtain or maintain regulatory approval which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com including its end report on Form 10-K for the fiscal year ended December 31, 2008, full year reports on Form 10-Q, 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 Ken.

Ken McBride

Hi, good afternoon and thanks for joining us today. During the second quarter we did $20.2 million in total revenue. Total PC postage revenue including service fee revenue, store revenue and insurance revenue was $18.2 million which is down 2% versus revenue in the second quarter of last year. Excluding the enhanced promotion channel revenue was $16.6 million which was up 3% from the second quarter of 2008.

PhotoStamps revenue was $2 million, $2.0 million down 31% versus the second quarter of 2008. We reduced our PhotoStamps sales and marketing by approximately 56% versus the second quarter of 2008 and that resulted in the decrease in revenue.

Our non-GAAP income from operations for the second quarter was $2.1 million which is down 7% versus the second quarter of 2008. As you may recall, we had a 1x promotional expense benefit in the second quarter of 2008 that was approximately $725,000.00. Non-GAAP earnings per fully diluted share were $0.14. We were pleased with our earnings per share was $0.14. We were pleased with our earnings this quarter in light of the continued difficulty in the economic environment.

On the call today we will talk about the PC Postage business in detail and we will talk about photo stamps and we will discuss financial results and our business outlook.

Now we will begin with a more detailed discussion on the PC Postage business. As a reminder the customer metrics we discuss on this call exclude all enhanced promotion channel activity.

During the second quarter we acquired approximately 54,000 gross customers which was up slightly from the first quarter this year. We believe the weak economy continues to have a negative impact on our acquisition trends, as small businesses may be less willing to take on new monthly expenses when they are struggling. Our cost per acquisition for the second quarter was $126.00 which was up slightly from the $122.00 in the first quarter of this year. Despite the small increase we continue to believe we are earning a very good ROI on our marketing investment. We continue to estimate that our lifetime value is at least 2x the cost of acquiring a customer.

Our monthly churn during the second quarter was 4.4% versus 3.7% in the second quarter of 2008. The higher churn this quarter was a direct result of the large number of customers that we acquired from the USPS in December 2008 as a result of their website outage. Those customers have churned at a higher rate than our regular customers. We believe that our normalized pay customer churn continues to run between 3.5% and 4% during this tough economy period and we expect that our churn will return to that level next quarter.

Pay customers in the second quarter of 2009 were at 317,000 an increase of 1% versus the second quarter of 2008, but down 4,000 sequentially from the 321,000 in the first quarter of 2009 going to the higher churn that we just discussed.

Now let’s turn to the 2009 plan for PC Postage and talk about progress we’ve made against your plan to date.

At a high level our plan for PC postage includes a focus in at least four major areas:

First we plan to continue to modestly ramp up our small business customer acquisition spends outside of the enhanced promotion channel. We continue to believe that the lifetime value of a non-enhanced promotion customer is at least 2x higher than the current cost of acquisitions. We feel the expected ROI on our marketing spend is still attractive and thus it is still important to continue to invest for the long-term growth of the business. We are spending at a more modest rate in 2009, reflecting the current state of the economy. In total we still expect to increase our PC Postage small business acquisition spend outside of the enhanced promotion channel by approximately 5% to 10% in 2009 compared to the 26% growth we did during 2008. Our goal is to maintain a reasonably strong investment in our acquisition channels 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. We have already made several optimizations this year such as improved welcome kits and emails, improved store experience, free USPS supplies and we have several more planned for the remainder of the year.

We are also continuing to add significant new features to our product. In June we launched version 8.0 which included a totally overhauled interface that allows a customer to view their print history and use account tools from any web browser. Previous to version 8.0 all customer print history was saved locally on each individual PC so it could only be accessed from the same PC from where it was printed. This was a limitation in several situations.

For example for a small fulfillment house where one PC is used to print and another PC is used by the customer support team to look up packaged tracking information. This change required us to build a very large and complex central database system to house the large amount of data included in the hundreds of millions of print transactions that we process with our system each year. We also added several enhancements in version 8.0 such as improved certified mail capabilities, return labels, and other improvements to our shipping capabilities.

We are currently planning to launch several new features in the second half of the year including enhanced reporting with online reporting capabilities, improved ability to integrate with third party applications and improved Enterprise and 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 versus a postage meter based on our dramatically lower total cost of ownership and based on the great visibility into individual employee activity that isn’t available with a meter. In this economic environment we believe the desire to save costs has become a much bigger focus for businesses. We plan to continue scaling up our Enterprise sales and marketing efforts in a cost effective manner.

As a reminder, the expected length of the sales cycle and account roll out 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.

We do believe we made a lot of great progress in the Enterprise area during the second quarter. We grew Enterprise revenue by 118% versus the same quarter last year. Our pipeline continued to grow and our new locations added for the second quarter were the highest ever. We also continued driving better processes and improved performance in the Enterprise business. 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 in 2009 and that will help our sales efforts. In the second half of 2009 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 for central decision makers.

Overall we are excited about the progress we have made at Enterprise. We feel that we are beginning to see returns on the investments 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. We began a more aggressive push in this area during 2008 and plan to ramp our efforts in this area through out 2009. We launched our Professional Shipper solution last year to target advanced shippers such as fulfillment houses, small package e-commerce shippers and large retailers and enterprises.

This year we are continuing to invest in the product and technologies as part of our releases of version 8.0 in June and version 8.5 scheduled for release in the second half of this year. Enhancements include improved back shipping, improved integration with e-commerce websites, improved email customization, improved 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 big, new, strategic focus for our company. It is also one of the most strategic initiatives of the U.S. Postal 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.

Now let’s turn to a more detailed discussion of PhotoStamps. During Q2 we continued our program to increase profitability in the PhotoStamps area with a smaller, more focused marketing plan. We decreased our total sales and marketing expense for PhotoStamps by 56% versus the second quarter of 2008. As a result of our decreased spends, total revenue was $2.0 million for the second quarter, which is down 31% versus the second quarter of 2008. The decrease in revenue during Q2 was expected given the magnitude of our decrease in sales and marketing activity. We also believe the broader economic slow down continues to negatively impact PhotoStamps as it is more of a luxury item than a necessity.

Although we experienced a significant decline in PhotoStamps revenue in Q2 as a whole, we continue to be successful in meeting our original goal of improving the bottom line impact of PhotoStamps.

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 costs per acquisition at a level that provides a good financial return. We plan to continue to drive fewer, but more profitable orders to our website through our own consumer marketing activity and through our distribution partnerships like HP Snapfish, Costco.com, and Walgreens.

We plan to continue to evolve the PhotoStamps retail business model. We expect the 2009 retail holiday season to continue to be challenging and as a result our investment in retail PhotoStamps 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 a key strategic initiative for PhotoStamps.

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

Kyle Huebner

Thanks Ken. Q2 customer metrics, all PC Postage metrics we will discuss in the section exclude all estimated enhanced promotion activity. We will now review the PC Postage metrics.

Paid customers in Q2 were 317,000, down 4,000 from the 321,000 paid customers in Q1 ’09 and up 3,000 or 1% versus the 314,000 paid customers in Q2 ’08. The paid customer number represents the unique number of customers successfully billed at least once during the quarter.

The change in paid customers from Q1 ’09 to Q2 ’09 was composed of 44,000 new paid customers who were successfully billed for the first time during the quarter offset by 48,000 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.

The sequential decrease in Q2 paid customers is primarily driven by the increase in lost paid customers which I will discuss further in a moment.

Customer acquisition: PC Postage small business customer acquisition spend, which includes both sales and marketing, as well as promotional spend, which is included in cost of sales, was $6.7 million in Q2 which was up 19% versus $5.6 million in Q2 ’08. We had a 1x promotional expense benefit in Q2 ’08 which reduced our customer acquisition spend by approximately $725,000.00 and without that benefit Q2 ’09 small business customer acquisition spend would have been up 5% year-over-year.

Small business costs per new registered customer were $126.00 in Q2 which was comparable to the $122.00 in the first quarter of this year. At these CPA levels were earning an attractive ROI on our marketing spend and plan to continue investing in the business for the long term.

We expect 2009 small business acquisition spend to increase 5% to 10% over 2008 spend and we will continue to monitor the acquisition trends and expected returns through out the year and adjust accordingly.

Subscriber revenue per customer: PC Postage revenue, which includes service fee, store, and insurance revenue, excluding the enhanced promotion customers was $16.6 million in Q2 which was up 3% versus $16.1 million in Q2 ’08.

RPOO was $17.50 for Q2 which was up 2% versus $17.14 for Q2 ’08. This metric is calculated as total PC Postage revenue for the quarter divided by paid customers in the quarter divided by three months. The increase in monthly RPOO was primarily due to having a larger number of customers on higher priced plans, resulting from our pricing tests over the past year, and an increase in the number of customers in our premier pricing plan which includes the multi-user feature and other features. We do see some normal quarter-to-quarter fluctuations in our RPOO metric based on such factors as price and plan tests, store promotions, and seasonality.

Paid customer cancel rates: The paid customer cancel rate was 4.4% in Q2 ’09 versus 3.7% in Q2 ’08. 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 that influence churn rates including the type of customer, age of customer, levels of customer acquisition, mix of acquisition by channel, pricing, retention program offers, usability of the product, and the economy. As such we expect to see a degree of fluctuation from quarter-to-quarter.

First I would note that historically in each of the last four years we have seen an elevated level of churn in the second quarter which is primarily a result of higher customer acquisition in December owing to the holiday season. Those customers become paid customers in the first quarter and subsequent churn is reflected in the second quarter churn metric.

The increase in Q2 churn over the second quarter of last year is primarily attributable to the weaker economy and the fact that we experienced higher churn rates on customers acquired via the USPS in December ’08.

While the economy continues to impact our churn we believe the impact of the December USPS acquisition has largely worked its way through our metrics and thus we expect churn rates to return to the 3 ½% to 4% range in Q3.

We believe the efforts we have taken to reduce churn such as our retention program and product usability improvements are helping to mitigate the impact of the economy on churn and that our churn rates would be higher without those programs in place. Total postage used by all customers was $83 million in Q2 ’09, up 8% versus Q2 ’08.

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

Q2 financial results: Revenue was $20.2 million in Q2 which was down 6% compared with Q2 ’08. PC Postage subscription revenue which includes service fee, store, and insurance revenue and which also includes the enhanced promotion channel was $18.2 million in Q2 which was down 2% compared with Q2 ’08.

Subscription revenue excluding the enhanced promotion channel was $16.6 million which was up 3% compared with Q2 ’08. Subscription revenue from the enhanced promotion channel was $1.5 million in Q2 which was down 36% compared with Q2 ’08. The decline in enhanced promotion revenue was primarily attributable to lower marketing spend which was down 57% compared to Q2 ’08 as we continue to reduce our investment in this segment of the business.

PhotoStamps revenue was $2.0 million in Q2 which was down 31% with Q2 ’08 largely as a result of the pull back in marketing spend which was down 56% year-over-year. While we did see an increase in Q2 versus Q1 ’09 in high volume business orders the tougher economic environment continued to negatively impact consumer sales at PhotoStamps.

Gross margin, excluding 123R expense was 72.9% in Q2 compared with 75.0% in Q2 ’08. PC Postage gross margin, excluding 123R expense was 78.2% in Q2 compared with 82.4% in Q2 ’08.

Cost of sales included promotional expenses of $363,000 in Q2. The year-over-year decrease in both total and PC Postage gross margin was primarily due to the approximately $725,000 1x promotional benefit in Q2 ’08 that I discussed. Without that benefit subscription gross margins would have been comparable to last years Q2 number.

For the PhotoStamps business gross margin excluding 123R expense was 23.9% in Q2 compared with 27.5% in Q2 ’08. The year-over-year decrease in PhotoStamps gross margin was primarily attributable to less fixed costs leverage with the revenue declines. Total sales and marketing excluding 123R expense was $8.0 million in Q2 which was down 7% compared with $8.6 million in Q2 ’08.

PC Postage sales and marketing including the enhanced promotion channel decreased by 1%. The decrease was primarily driven by the decrease in the enhanced promotion marketing spend.

PhotoStamp sales and marketing decreased by 56% owing to our continued focus on improving profitability in that area.

R&D spend excluding 123R expense was $2.0 million in Q2 which was up 4% compared with Q2 ’08. R&D spend in Q2 was consistent with recent quarters.

G&A spend excluding 123R expense was $2.5 million in Q2 which was down 21% compared with $3.2 million in Q2 ’08. The decrease was primarily attributable to lower legal spend compared with the second quarter of 2008 which contained the expense of the [Cara] technologies litigation going to trial.

Non-GAAP operating income was $2.1 million in Q2. Interest income was $232,000 in Q2 which was down 69% versus $736,000 in Q2 ’08. The lower interest income compared with last year was attributable to lower interest rate and lower cash balances helping from our stock repurchase program.

Non-GAAP net income was $2.3 million or $0.14 per fully diluted share based on $16.4 million fully diluted shares compared with $2.9 million or $0.15 per fully diluted share based on $19.7 million fully diluted shares in Q2 ’08.

Free cash flow defined as non-GAAP net income plus D&A less CapEx was positive $2.5 million in the quarter. D&A was $313,000 and CapEx was $62,000 in the quarter. We ended Q2 with $70 million in cash and investments which was equivalent to approximately $4.30 per ending balance sheet share. Calculating total cash and investments we are including cash, cash equivalents, short-term investments, long-term investments, and restricted cash.

Share repurchase: Under the current share repurchase plan originally approved by the Board of Directors in February 2009 the Company has repurchased 850,000 shares for a total cost of $7.1 million. On July 23 Stamps.com’s board of directors approved a new share repurchase plan effective upon the expiration of the current plan in August 2009 authorizing the Company to repurchase up to 2.5 million shares of Stamps.com stock from August 2009 through February 2010.

Net operating loss shareholder update: We have approximately $235 million in federal and $150 million in state NOLs which could save us up to $95 million in taxes over the next 15 years. We estimate that as of June 30, 2009 the Company was at an approximately 28% level compared with a 50% level that would trigger impairment of our NOL asset.

During the second quarter of 2008 we received shareholder approval to amend our articles of incorporation in order to protect our NOL asset, the NOL protective measures, and those measures are now in effect. Full details of the protective measures are 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 from the Company’s board of directors.

We currently have approximately 16.1 million shares outstanding, so ownership of approximately 805,000 shares or greater would currently constitute a 5% shareholder. Stamps.com strongly urges any shareholder contemplating 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 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 123R expense, $375,000 asset write off and $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 expense the asset write off and the additional California income taxes, we expect 2009 non-GAAP EPS will be between $0.40 to $0.60 per fully diluted share. 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 and shipping businesses are currently in an investment phase that we expect to act as a drag on 2009 earnings, but with a high expected return over the next five years. We expect the enhanced promotion and PhotoStamps revenue and marketing spend to continue to be down significantly in 2009 compared with 2008 as we continue to reduce our investments in those areas.

We expect legal expenses to ramp back up in the second half of 2009 related to our patent infringement lawsuits.

The third quarter is usually our seasonally slowest quarter and the fourth quarter is our seasonally strongest quarter, so we would expect our third and fourth quarter revenue to reflect this pattern.

In summary, despite the current short-term challenges related to the economy we feel we have a solid business model and the fundamentals of our long-term business prospects have not changed. Our PC Postage business model with recurring revenue and high gross margin provides a higher degree of stability and provides a measure of downside protection during the economic downturn. Our business generates strong free cash flow which has funded our share repurchase program.

We have a strong balance sheet with $70 million cash and investments and no debt and a large $95 million deferred tax asset.

With that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Liu from B. Riley & Co.

Kevin Liu - B. Riley & Co.

I have a couple of questions on the churn. First, if we exclude some of these customers that were acquired via the USPS and just kind of look at the core customer base was there any sort of discernable trend in terms of how the churn rates progressed through out the quarter? Then I am also wondering as to your retention efforts, are they delivering kind of what you expect in terms of the number of customers who want to churn that you are able to retain?

Kyle Huebner

Yes, Kevin on the first one there wasn’t a tracking mechanism in place during that period of time so it is hard to identify exactly which customers came from that source versus coming to our general Stamps.com website. So, it is hard to give an exact number If you look at it the churn rates were definitely lower than the reported rates. I think the important thing is at this point it has kind of worked itself out and so we expect it to be back in the 3.5% to 4% range.

Ken McBride

On the retention efforts we are continuing to run the retention program. I think the program has kind of reached a steady state and it’s running at full scale now. As you know we are working with customers when they call in to try to understand their motivation for canceling and offering them various ways to remain a customer, more time, potentially a different price point, a different set of features and we do think the program is having positive impact on our churn rates and we are planning to continue it. At this point it is really running steady state and we feel it is kind of more of a permanent program for the company

Kevin Liu - B. Riley & Co.

In terms of the customer acquisitions is it becoming easier at all to acquire customers towards the end of your quarter? Did you see a few more additions there or was it pretty consistent through out the quarter?

Ken McBride

Yes, I think customer acquisition has continued to remain kind of one of the more difficult areas for us in this bad economy. We really kind of saw some of the difficulties with customer acquisitions start last summer and I don’t think we have really seen much change in that even through this quarter.

Kevin Liu - B. Riley & Co.

I see and just one question on the churn if you were to look at the customers you have on the premier plan versus some of the lower priced plans has there been more customers churning off the higher priced plans versus the lower or has that not really made too much of a difference?

Ken McBride

I think the premier plan relative to the overall paying customer base is still a relatively small percent, you know, less than 10%. So, I actually don’t have the data in front of me on the differential churn rates but I don’t think it would materially impact the overall reported churn number given the percent of the customer base that it makes up.

Kevin Liu - B. Riley & Co.

Okay and one last question on the Enterprise side of the business. At this point when you are going in to meet with these customers are there features or functionalities that aren’t out yet that you might have provision to though, which would be kind of the sticking point before they are willing to sign on, or are you still getting pretty good traction and are you able to close some of these deals even in this environment?

Ken McBride

I think you heard us say that the enterprise revenue was up 118% versus the same quarter last year and last year as a whole I think we were up 80% so we have seen some acceleration in the business. I think it is largely due to just improved processes and improved performance. The product has gotten better year after year, but we still feel like there is more things we need to do. Enterprise version 2.0 is coming out later this year does have, we think, a pretty big step forward in terms of just the overall sophistication of the product. The Enterprise reporting system, the front end reporting tool has real time data information, better management tools, just better overall financial and administrative controls and I think that will help the sales process, but we are being successful today already with our existing product which is already a very good product.

Kyle Huebner

I would just add too that some of the things Ken talked about in terms of the feature improvements are things that will make it a smoother process for corporations that kind of deploy it in the pilot and then roll it out to their existing offices; so the stronger you can make the user experience after they have agreed to roll it out to a pilot, that improves your odds of making it past the pilot and then getting the full adoption in the organization.

Operator

Your next question comes from Clayton Ripley with Bears Capital.

Clayton Ripley - Bears Capital

Could you guys shed some light on the discussion that you had with the board on the decision to repurchase shares versus maybe a special dividend or something else. Could you just talk about some of the thoughts that went through your head when you talked about repurchasing versus some other capital allocation decisions you could have made?

Ken McBride

Yes, I think when you think about the share buy back the board looks at all of the alternative uses of cash and we look at those alternatives on a multi-year time frame, not just based on the current year. So I think given our levels of repurchases I think that shows that the board feels that the share repurchase is the best alternative use of cash at this point. And, I think if you think about it on a five-year horizon some of the turmoil in the stock market that we have seen I think does create a strong opportunity to repurchase the stock given the longer term five year outlook on the business.

Clayton Ripley - Bears Capital

Then on the Enterprise product you talked a little bit earlier about the sales process, but who exactly are you trying to reach and what are some of the hurdles with getting your foot in the door or getting some of these things rolled out?

Ken McBride

The main target with the Enterprise solution is what we call kind of distributive corporate. The ideal candidate really has a lot of small offices distributed in a network geographically. So, our solution really does extremely well in small business as you know and when a business has a lot of these smaller offices then it is a solution that really resonates with them for several reasons.

First is obviously we save a ton of money relative to a postage meter, 75% cheaper than a postage meter, so when you take that analysis and you apply it to 100 or 200 or 500 locations across your network the magnitude of the cost savings becomes extremely meaningful.

The other thing is a lot of these enterprises with these far-flung operations with hundreds of locations don’t really have any visibility right now into the postage being spent. Postage meters don’t really have good information about that. They are largely stand-alone devices that don’t really network; so our ability to provide that information to a central decision maker to provide new visibility into the network and how much postage is being spent is really a dramatically better feature than they have ever seen before.

So those are the two primary selling strategies that we use really pushing the cost savings as well as the visibility in the network.

Clayton Ripley - Bears Capital

Okay thanks and then my last question is on the PhotoStamps marketing spin slow downs, how far do you think you are going to take this marketing spending cut, maybe how low can it go for you guys?

Kyle Huebner

Well I think the thing is that we made a strategic decision back in Q3 Q4 of ‘07that the expected returns we were seeing on the PhotoStamps business just weren’t nearly as attractive as the PC Postage business; so we had already started the process of kind of pulling back on the investment and reallocating it to PC Postage kind of before the economy really turned down and then I think what happened was when the economy turned down our threshold of what marketing programs met the acceptable ROIs got tighter so programs that might have worked even as we’d pulled back, but worked in a good economy, those programs in a down economy suddenly became unprofitable or the ROIs didn’t meet our threshold, so we kind of had to take an additional really lag of cutting the marketing spend given the down economy.

At this point I think we feel we are running PhotoStamps with a neutral impact to the bottom line and to the extent the economy comes back I think some of those programs could potentially come back and especially things like the retail program that Ken talked about.

Clayton Ripley - Bears Capital

Okay thank you.

Operator

Your next question comes from William Meyers with Miller Asset Management.

William Meyers - Miller Asset Management

I think I heard you say how much you spent on stock repurchases since the last plan, but I wasn’t sure if that was the same number as you would have spent in the second quarter?

Kyle Huebner

No, the plan covered a six-month period. So during the February ’09 the current period that was the $7.1 million for 850,000 shares.

William Meyers - Miller Asset Management

Okay and is there a figure for just the second quarter?

Kyle Huebner

Yes, in Q2 the repurchase did slow. It was $1.7 million for 208,000 shares.

William Meyers - Miller Asset Management

Okay and my other question was about the guidance which seems to have a fairly wide range. Would you attribute all of that to economic uncertainty or are there some other factors that would help us understand the top and bottom end of the guidance?

Kyle Huebner

We set out guidance range in February of this year. I think our strategy is to provide the initial guidance range which we expect the full years revenue and earnings to come in based on the information we have. I think the wide range this year in particular reflects, one, there as in February when we set the guidance there was certainly a lot of uncertainty in the economy and how that would turn out for the year.

The other factor which is more of a bottom line impact is our legal expenses. In litigation the ability to control or predict expenses is harder. A lot of times it is really driven by court schedules and how quickly or not judges make rulings and so we do have the [Inveshia] litigation is a major expense for us and the original schedule we had at the beginning of the year, we had the trial scheduled for 2009. So, the legal spend really forces us to contemplate a pretty wide range of spend depending on whether the litigation goes slowly or more quickly.

I think those are some of the factors that went into the thinking.

Operator

Your last question comes from George Sutton with Craig-Hallum Capital Group.

George Sutton - Craig-Hallum Capital Group

I just want to understand a bit more the $126.00 to acquire the customer relative to your estimated value over a period of time, since we don’t have all of the things to come up with the variables that give you the conclusion that that is still profitable. You seem to be changing the definition a little bit and saying well it is the non-enhanced customer that returns 2x or are you suggesting that the enhanced channel doesn’t? And are you able to give us a variable cost per customer so we can try to calculate the customer value life?

Kyle Huebner

Well the first one, George, when we talked about it historically being the 2x that was really focused on the non-enhanced promotion side, in the enhanced promotion I think there has been a lot more variability in the returns. The main thing that characterizes that channel is that it’s cheaper to acquire a customer, which is more like a lead gen, but they have much shorter lives and quicker paybacks. So, I think the 2x has been more consistent historically with the non-incentive.

The enhanced promotion really that return is kind of ranged and there we have had to adjust what we are willing to pay for a customer down as we have seen changes in the environment and the expected lifetime values.

George Sutton - Craig-Hallum Capital Group

I am trying to calculate a customer value life myself. One variable we don’t have, we can make some assumptions, but I am curious if you are able to offer it, and that is a variable cost per customer on a monthly basis?

Kyle Huebner

What I can say, I mean the majority of the CTA is on discretionary spend as opposed to kind of fixed marketing overhead. But, with our public metrics you can do some calculations in terms of taking the churn rate and looking what the average life of a customer is and what the average revenue over the life at our gross margins to kind of get an estimated lifetime value based on our public metrics and then compare that to the CTA.

I think, at least using the public metrics you can kind of get a ballpark to validate that the expected lifetime values are certainly a lot greater than the $126.00.

George Sutton - Craig-Hallum Capital Group

Lastly, just to understand this churn increase in the quarter and I saw it as a great opportunity in a key part of the holiday season for the USPS site to go down and therefore drive a lot of traffic to your site and you are suggesting that those are the people that are churning out. I would assume you are disappointed that those customers aren’t seeing whatever value they need to see to stay. Is there anything in your focus groups as they have been leaving that have given you some information or some things that you can do differently with the business to keep those kinds of customers? Because I don’t know that we will see another opportunity like that.

Kyle Huebner

I think what it mainly comes down to is click n ship customers we believe tend to be lower volume customers who are doing a shipping label at no mark up or no face value over postage and so click n ship is a more limited solution, but it works for some customers. So, compare to we have a fuller service offering, a much more complete offering, but you have to pay the service fee. So, I think the fact that they were previously click n ship customers and kind of lower volume, or consumers, and not used to paying a mark up was probably the primary factor in the fact that they churned out at a higher rate.

George Sutton - Craig-Hallum Capital Group

Okay, thanks guys.

Operator

At that we have no additional questions, so I would now like to turn the call back over to today’s presenters for any additional or closing comments.

Ken McBride

Thank you very much and if you have any follow up questions you can contact us at investor.stamps.com or at 310-482-5830. Thank you.

Operator

Thank you that does conclude today’s conference and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!

Comments

[Tim Roller:]

Clayton Ripley asked the most important question. Why does Stamps.com continue to have a repurchase plan? However, another pertinent question is why doesn't Stamps.com repurchase their stock when it falls? Obviously, the future income of this company is limited based on the current business model. They are even facing competition from USPS itself! Yes, they have their own online postage service! The NOL asset has become a joke. WIth federal and state governments overbudget, does anyone really believe that the suspended program will be reinstated soon? Any reputable board would understand that the five-year outlook for Stamps.com is bleak. Yes, they might be able to sustain current revenue levels, but earnings per share growth will never return. This company once profited from INTEREST INCOME!!! In fact, it could have reported profits even without OPERATIONS REVENUE! Strangely, they now have to enhance their INSURANCE REVENUE because it represents more than 10% of net income! Ordinarily, those funds go straight to USPS. Thus, the real business model is to use existing funds to buyback shares? Not only is this ludicrous, ridiculous, and totally insane, it provides absolute certain proof that Stamps.com has NO REPUTABLE BUSINESS PLAN or acquisition plans. Thus, the good times are over for a long, long time. Tim Roller - available for current employment! 213-453-6706

Jul 31 05:58 PM

[Tim Roller:]

After giving the whole Stamps.com a complete analysis, I have determined that the name: Stamps.com is worth more than the current company! Can you imagine how much money you could make with the website: Stamps.com? I say destroy the current business plan. Rip it up and re-invent the whole business of Stamps.com. Shareholders have been taken for a wholesome milk truck ride with this management. Let's spice it up a little and make mineral milk! Available for employment, Tim Roller [phone]

Aug 24 04:40 PM