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Executives

Jeff Carberry - Director of Finance

Ken McBride - Chief Executive Officer

Kyle Huebner - Chief Financial Officer

Analysts

George Sutton - Craig-Hallum

Jared Schramm - ROTH Capital Partners

Stamps.com Inc. (STMP) Q2 2013 Earnings Conference Call July 31, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Stamps.com Second Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Jeff Carberry, Director of Finance. Sir, you may begin.

Jeff Carberry - Director of Finance

Thanks very much. Good afternoon everyone and thanks for joining us today. 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 second 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 forward-looking statements, such as our expectations and financial guidance that involve risks and uncertainties. Important factors, including the company’s ability to complete and ship its products, maintain desirable economics for its products, and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time-to-time by Stamps.com, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, quarterly reports on Form 10-Quarter, 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 the call over to Ken.

Ken McBride - Chief Executive Officer

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

During the second quarter, we achieved continued strong execution in our core PC Postage business with core PC Postage revenue of $30.1 million, which was up 15% year-over-year. We achieved record non-GAAP operating income of $9.6 million, up 42% year-over-year, record non-GAAP net income of $9.7 million, which was up 41% year-over-year, record non-GAAP earnings per fully diluted share of $0.60, that was up 50% year-over-year, and a record number of paid customers in our core PC Postage business. Record paid customers in our enterprise business and strong total postage printed by our customer base of $372 million, which was up 60% year-over-year.

We were pleased with the continued strength in our core business despite the challenges that persist in the small business segment of the economy and the traditional seasonal slowness we experienced in our business in the second and third quarters. On the call today, we’ll talk in more detail about our PC Postage metrics and our business and our financial results and business outlook.

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

Core PC Postage revenue, including small business, enterprise, and high volume shipping customer segments was $30.1 million in the second quarter, which was up 15% versus the second quarter of 2012. This was the 11th 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 as a result of continued solid performance in our small business segment, coupled with strong performance from our enterprise and high volume shipping customer segments.

During the second quarter, we acquired 70,000 gross small business customers, which was comparable to the number acquired in the second quarter of 2012. Our cost per new small business customer acquired, or CPA, was $128 in the second quarter. That was up 2% versus the second quarter of 2012. Note that the second and third quarters are seasonally slowest quarters. And as expected, we experienced a seasonal slowdown in the second quarter compared to the first quarter of this year. We also note that customer acquisition in the first quarter of 2013 benefited from the January postal rate increase, which did not repeat in the second quarter making the seasonal effect even more pronounced. So, we continue to experience a strong ROI in our marketing spend with an estimated lifetime value that exceeds our current cost per acquisition by at least two times.

Our average monthly churn during the second quarter was 3.6%, which was down versus the 3.7% in the second quarter of 2012. Second quarter has historically shown the highest churn rate of the four quarters each year owing to seasonality. So, the sequential increase in churn was expected.

We are pleased to see our second quarter churn rate down compared with second quarter last year. While we see quarter-to-quarter fluctuations in our churn rate, we believe that overall churn rates are still benefiting from our growth in postage printed, lower churn rates in our enterprise and high volume shipping customer segments, new product features, which contribute to increased usage of our service, and continued success in our ongoing customer retention efforts. Paid customers in the second quarter were 467,000, up 12% versus the second quarter of 2012 and up 2,000 sequentially versus the first quarter of 2013. We typically generate the majority of our paid customer growth in the seasonally strongest first and fourth quarters with smaller sequential increases or decreases in paid customers during the second and third quarter. And this year, again, follow that historical pattern.

So, we are pleased to see continued sequential growth in paid customers this quarter. The 12% year-over-year growth in Q2 was consistent with the 12% to 13% range we have seen for each of the past four quarters. Average subscriber revenue per paid customer or ARPU was $21.51 in the second quarter. That was up 3% versus the second quarter of 2012. We are pleased with the year-over-year improvement in ARPU, which was primarily driven by higher per customer revenue in our high volume shipping and enterprise segments.

Total postage printed by all our customers was $372 million in the second quarter of 2013. That was up 60% versus the second quarter of 2012. This is now our ninth consecutive quarter where year-over-year growth in our quarterly postage usage has exceeded 50%. We monitor our 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 and continues to affect our small business customer acquisition and churn.

The National Federation of Independent Business, Small Business Optimism Index, averaged 93.3 for the second quarter, which was comparable to the 93.4 average for the second quarter of 2012. The index continues to fluctuate around the 93 level threshold, that is considered a recessionary reading. 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.

Now, with that, let’s discuss some detailed initiatives we are working on in PC Postage. Again, the discussion we do is about the core PC Postage business excluding the enhanced promotion channel. In the 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 cost per acquisition by at least two times.

During the second quarter, we increased our small business customer acquisition spend by 2% year-over-year. During the second quarter of 2012, we increased the acquisition spend by 13%. So, we experienced a more modest year-over-year increase in our spend this year in comparison to the strong growth we experienced last year. Our goal this year is to increase our 2013 small business customer acquisition spend by 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 are continuing to optimize our business model and our overall customer experience in several ways. We are continuing to optimize our website, registration process, and post registration customer interactions.

We also continue to launch new features in our client product that make mailing and shipping easier for our customers. We have recently released version 10.5 with great new features such as a USPS Rate Shopping Engine added to our batch shipping capability, which allows our users to automatically select the optimum mail class and shipping rate based on preset requirements. A new best trade identifier that highlights the lowest cost option that meets the users’ shipping requirements, faster batch order processing and improved status messaging for higher volume order processing, improvements to certified mail into envelope printing, and new USPS features for shipping services.

In the enterprise area, we plan to 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 our service. Customers also like the visibility available from our centralized reporting tool, where they can monitor postage spend across their entire network of users. This feature is not available with postage meters.

During the second quarter, we continued to make strong progress in the enterprise area with year-over-year growth in the second quarter revenue of 45%. We also saw strong growth in new enterprise locations and our pipeline of opportunities continue to grow nicely as well. Overall, we are excited about the continued progress in enterprise until 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.

In our high volume shipper area, we plan to continue to scale up our efforts in this area during this year. We continue to attract high volume shippers such as warehouses, fulfillment houses, e-commerce shippers, larger retailers, and other types of high volume shippers to our service through our efforts in this area. During the second quarter, we continued to make strong progress in high volume shipper area with growth in second quarter postage printed by this segment of 55% year-over-year continuing to see strong year-over-year growth by continuing to add high volume shippers and e-commerce users to our service and by continuing to drive innovation.

For 2013, we will continue to focus on scaling this business area. We will continue to introduce improvements to software and features that target high volume customers. We will continue to add new shopping cart integrations for easier data export and import from the tools that customers 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.

We wanted to take a minute to provide an update on Postal Reform. The House of Representatives has begun to draft legislation on Postal Reform with the House Oversight and Government Reform Committee introducing H.R. 2748 also known as The Postal Reform Act of 2013. The Bill was passed by the Committee, but has not yet been taken up on the floor of the House and provisions of the Bill remain influx. The House Bill continued to provision the costs for facing out door-to-door delivery replaced with delivery to curbside and cluster boxes. We believe this provision is focused on residential delivery and would impact residential inbound mail delivery, whereas our service is focused on outbound mailing and shipping primarily for businesses. So, at this point, we think this provision as discussed if it does happen, would not have any material impact on us. We would note that there is still a lot that needs to happen before passage of a final bill into law. So, there is a lot of uncertainty as to what the final outcome maybe.

Our focus is on ensuring that we can do everything possible to help create value for the USPS and we feel that we are doing this as evidenced by our growth in postage printed, including growth in the high volume shipping segment.

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

Kyle Huebner - Chief Financial Officer

Thanks, Ken. Now, we review our second quarter financial results. We will discuss our second 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 Q2, up 14% compared with the second quarter 2012. This is now the ninth consecutive quarter of year-over-year double-digit growth in total revenue.

Growth in total revenue continues to be driven by core PC Postage revenue, which was $30.1 million in Q2, up 15% compared with the second quarter of 2012. The year-over-year increase in core PC Postage was a result of both increased paid customers and growth in ARPU as discussed by Ken in the metrics section. Non-core PC Postage revenue from the enhanced promotion channel was $731,000 in Q2, which was flat compared with the second quarter of 2012.

PhotoStamps revenue was $1.2 million in Q2, down 5% compared with the second quarter of 2012. PhotoStamps revenue for the quarter benefited from a stronger than usual level of high volume business orders. Excluding high volume business orders, PhotoStamps revenue would have been down 21% compared to the second quarter of 2012. PC Postage gross margins were 80.6% in Q2 compared with 79.2% in the second quarter of 2012.

Cost of sales includes promotional expenses related to customer acquisition of $0.8 million in Q2, which was comparable with the $0.8 million in the second quarter of 2012. PC Postage gross margins, excluding these promotional expenses was 83.1% in Q2, compared with 82.3% in the second quarter of 2012. The improvement in PC Postage gross margin was primarily due to cost leverage with the strong revenue growth we have seen.

PhotoStamps gross margin was 17.4% in Q2, compared with 24.9% in the second quarter of 2012. PhotoStamps gross margin declined versus the second quarter last year primarily due to higher mix of the high volume business orders, which have a lower gross margin and less fixed cost leverage from the lower levels of PhotoStamps revenue.

Sales and marketing spend was $9.6 million in Q2, which was comparable with the second quarter of 2012. Sales and marketing spend in our core PC Postage business increased as we continued to focus on driving new customer acquisition while spend in our enhanced promotion and PhotoStamps businesses both decreased compared to the second quarter of 2012.

R&D spend was $2.5 million in Q2, which was up 7% compared with the second quarter of 2012. The increase was primarily related to increased headcount related expenses to support our expanded product offerings. R&D as a percent of revenue in Q2 was lower compared with the second quarter of 2012.

G&A spend was $3.3 million in Q2, which was up 14% compared with the second quarter of 2012. The increase was primarily related to increased headcount related expenses to support the growth in the business we have experienced. G&A as a percent of revenue in Q2 was consistent with second quarter of 2012.

Non-GAAP operating income was $9.6 million in Q2, which was up 42% compared with the second quarter of 2012, and non-GAAP operating margin was 30% in Q2 compared to 24% in the second quarter of 2012. This was our highest ever operating margin and the first time we achieved 30%. The income growth and margin expansion were primarily attributable to the revenue growth in our core PC Postage business, PC Postage gross margin improvements, and leverage in our operating expense lines, which increased at rates less than our revenue.

Non-GAAP net income was $9.7 million, up 41% versus $6.9 million in the second quarter of 2012. Non-GAAP net income per share was $0.60, based on 16.2 million fully diluted shares, which was up 50% compared with the $0.40 per share, based on 17.2 million fully diluted shares in the second quarter of 2012. Earnings per share benefited from a reduced number of fully diluted shares due to the share repurchases over the past year.

Non-GAAP adjusted EBITDA was $10.1 million in Q2, which was up 44% compared with the second quarter of 2012. This metric is calculated as $9.6 million non-GAAP operating income plus $497,000 of D&A contained in operating expenses.

Capital expenditures for Q2 were $895,000 and for year-to-date were $1.7 million. As expected, our capital expenditures for the business are running higher than historical levels as we increased our level of investment this year in our technology platform to ensure the reliability and scalability of our solutions to handle the very large postage volumes and growth we are experiencing.

Non-GAAP free cash flow generated by the business was $9.3 million for the second quarter. This metric is calculated as $9.7 million of non-GAAP net income, plus $497,000 of D&A contained in operating expenses, plus the $895,000 of CapEx related to the business. Note this calculation excludes capital investments related to our new corporate headquarters as well as tenant-related D&A.

We ended Q2 with $66 million in cash and investments, or $4.22 per ending balance sheet share, which was up $9 million from the $57 million in cash and investments at the end of last quarter.

During the second quarter, we repurchased 105,000 shares at a total cost of $2.5 million. Company’s current repurchase plan remains in effect through 2013 with an authorization of up to 1 million shares. We have now returned $187 million in excess cash to our shareholders since 2002 through our share repurchases. In the independent third-party firm recently ranked Stamps.com as the company with the number one most profitable share buyback over the past 13 years out of 232 publicly traded companies.

NOL and DTA, as of June 30th, we had approximately $200 million in federal NOLs and a $100 million in state NOLs, which when combined with our other tax credits result in a gross deferred tax asset, or DTA of approximately $65 million. We have an approximately $35 million valuation allowance against the gross DTA resulting in a net DTA of approximately $30 million on the balance sheet. We estimate that as of June 30th, our Section 382 ownership shift was at an approximately 20% level as compared with the 50% level that would trigger a potential impairment of our NOL asset. As part of our ongoing program to preserve future use of this NOL asset, we request that any shareholder contemplating owning more than 625,000 shares contact the company before doing so.

Now, turning to guidance, we expect fiscal 2013 revenue to be in the range between $125 million to $135 million. We expect fiscal 2013 GAAP EPS to be in a range between a $1.73 to a $1.93 per fully diluted share. This compares to our previous expectation for 2013 GAAP EPS of a $1.68 to a $1.88 per share. GAAP numbers assume approximately $4.5 million of stock-based compensation expense. Excluding the stock-based compensation expense, we expect fiscal 2013 non-GAAP EPS to be in the range between $2 to $2.20 per fully diluted share. This compares to a previous expectation for fiscal 2013 non-GAAP EPS of $1.95 to $2.15 per fully diluted share.

We expect growth in the 2013 core PC Postage revenue in the low to mid-teens. We expect enhanced promotion revenue will be flat to down in 2013 compared with 2012. We expect PhotoStamps revenue will continue to be down in 2013 compared with 2012 as we continue to minimize investments in this area. We are targeting 2013 small business PC Postage customer acquisition spend to be up 5% to 15% compared with 2012. While this range is above what we experienced in the first half of the year, our goal is still the increased spend at a higher year-over-year percent in the second half of the year.

We expect capital expenditures for the business in 2013 to be approximately $3.5 million. Our expected capital expenditures in EPS both reflect an increased level of investment and expenses in our technology platform as discussed previously. While we don’t provide specific quarterly guidance, we would note a couple of things. The third quarter is typically our seasonally slowest quarter in terms of customer acquisition, sequential change in paid customers, ARPU and store and insurance and PhotoStamps revenue, and we do expect to continue to follow that seasonal pattern.

Last year, Q3 was the strongest quarter of the year for our Amazon-related revenue, resulting in Q3 this year being the toughest year-over-year comparison of this year. And thus we expect a little bit greater Amazon headwind in Q3 as compared to Q2, especially in our ARPU metric. High volume PhotoStamps business orders benefited Q2 revenue, but are unpredictable. So, Q2’s year-over-year decline in PhotoStamps revenue, excluding high volume orders is more likely indicative of the underlying trend in the PhotoStamps business. We plan to increase our customer acquisition spend in Q3 and Q4, especially Q4 is our seasonally strongest quarter as that is our primary reinvestment in the business. And this does negatively impact short-term EPS, quarterly EPS but results in expected benefits in over the next several years. We expect fully diluted shares outstanding to be in the $16.4 million or $16.6 million range for the second half of the year. The fourth quarter is typically our seasonally strongest quarter in terms of revenue and customer metrics. So, we would also expect Q4 results to reflect those factors.

Our core PC Postage, in summary, our core PC Postage business model of recurring revenue, high gross margins is demonstrating continued double-digit revenue growth and operating margin expansion. We are seeing strong performance 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 $294 million of excess cash to shareholders via special dividends and our share repurchase program. 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 up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of George Sutton with Craig-Hallum. Sir, your line is open.

George Sutton - Craig-Hallum

Thank you. Nice numbers guys.

Ken McBrid

Thanks.

George Sutton - Craig-Hallum

So, I wondered if you could give us some thoughts on your marketing spend in the quarter they did come in well below our estimates. And I know you’ve gone back and forth year-after-year in the slower periods of Q2 and Q3 sometimes increasing, sometimes decreasing marketing spend. Was there anything in the quarter you learned that caused you to change course at all that would cause these marketing dollars to be smaller?

Ken McBrid

George, I think we generally see – we see some fluctuations quarter-to-quarter Q2 is – from a seasonal perspective is one of the seasonally slower quarters. And so we are always seeking to balance a lot of factors and our acquisition spending trying to optimize the overall expected ROI and that across the mix of market channels, types of marketing programs, the level of spend, the risk associative with the spend, CPAs, small business economic environment and all that within the context the seasonality. And so our level of spend I think it’s going to fluctuate from quarter-to-quarter. We’re working to constantly both scale and optimize the spend. And so we are targeting as I mentioned higher levels spend in the remaining quarters and keep for us our seasonally strongest quarter and that’s our target and we monitor the environment as we go throughout the year.

So, the other thing I would point out is the level of spend is only one factor and kind of the overall equation along with CPA is gross acquisition conversion to pay customer in churn and that really drives a pay customer metric, which is what drives revenue. And so there where our conversion rates on gross customers acquired to new pay customers improved again in Q2 versus Q2 last year indicating its likely better quality of acquisition and also we mentioned churn was down year-over-year. So, I think the main message is we take a lot of factors into account, it wasn’t one thing in particular and we’re working to optimize the overall equation.

George Sutton - Craig-Hallum

Okay. That’s helpful color. Do you tend to see some of the numbers coming from the US PS in terms your market share online and I’m wondering do you – are you seeing your so gaining healthy share of that online specific market?

Ken McBrid

Yeah. I mean it George depends really on which number you’re talking about, but generally speaking the answer is yes we’ve been growing in terms of your postage spend or our postage spend or our customer base it dramatically rapid more rapid cliff than the overall industry certainly kind of this quarter up 55% and our high volume segment is up 60% in our overall postage. We’ve seen that kind of growth rate now for 9 or 10 quarters in a row. So, we definitely in terms of total postage represented and process by our system, we definitely moved up pretty dramatically in the last couple of years in terms of total share of the market postage printed. I think the other thing George historically with the small business segment with flat rate pricing, so we had quoted looking at the market more on a number of paid customer basis since it is the flat rate pricing. As we’ve gotten into the shipping space and enterprise and you have a better ability to monetize volume, there is different, it becomes less clear the exact metric, but in general our postage printed has been growing faster than our paid customer, so that’s a positive indication for the market.

George Sutton - Craig-Hallum

Okay, fair point. Last question relative to government agency contracts we did pick-up some additional nice wins during the quarter. Can you talk about your program overall relative to some of these government agency opportunities.

Ken McBride

Yeah so, George you cut in and out a little bit, but I think what you are asking about is our government sector, how we’re doing in that area and I think we’ve continued to see nice progress in the government sector, it’s really a great with our typical customer profile to exactly what we’ve been going after in our enterprise area, centralized organization, large number of distributed locations the federal agencies, they tend to have lots of agencies, lots of possible locations in states throughout the country. They love the ability to provide that central visibility into the postage spending, so that’s really resonated well.

And I think in addition to all of that and the fundamental aspects of our product, we took a lot of steps over the last three or four weeks to really kind of put all the necessary things in place in terms of being able to meet the specific needs of the government, the capabilities, the payment methods going through all the different necessary approvals and working through all the different organizations, there is quite a bit of bureaucracy there that we’ve been working out for some time. So, we continued to see some nice penetration into the major departments in federal government and we’re really pleased with our progress there.

George Sutton - Craig-Hallum

Okay, thanks guys.

Ken McBride

Thanks George.

Operator

Our next question comes from the line of (indiscernible) with B. Riley & Company. Your line is open.

Unidentified Analyst

Good afternoon.

Ken McBride

Hi Kevin.

Unidentified Analyst

This is (indiscernible) for Kevin actually so just the question on how much of the top line growth is tied to the transaction based volumes?

Ken McBride

That’s not a breakout that we give, our service line item is composed of the service fees can be flat rate subscription that could be transaction based with volume. Those are fees in compensation related to us delivering our service. And then so the service line item is a mixture. The store revenue and the insurance revenue are transaction based in nature as customers are printing postage, they buy the consumable labels and they repurchase some as they continue to print similarly with insurance and insurance purchases tied to typically a shipping label print. So, that’s really transaction driven by the number of packages shipped. So, I think our business has both transaction components as well as flat rate subscription. But in general, they are recurring in nature with the usage.

Unidentified Analyst

Okay, understood and we’ve been expecting higher investments in R&D, but so far it’s been fairly steady. Are there any plans to ramp expenses going forward or is the current run rate kind of a good proxy to users as we model forward.

Ken McBride

I mean, our R&D was up 7% year-over-year. So, we did see a year-over-year increase and it was up sequentially versus Q1. So, I think our goal in R&D is to continue to invest in our technology innovation and our new products. And so we are going to expect that to grow, but with the goal of being able to get leverage relative to the overall top line growth, so it could -- R&D could be high single-digits, low double-digits kind year-over-year growth as long as we continue to invest in the technology and the products.

Unidentified Analyst

Okay. And also if I understood correctly for the PC Postage acquisition spend you are still maintaining the outlook of 5% to 15% versus last year, and it is correct to think about that being mainly for Q4 really like the top end of the range?

Kyle Huebner

I think on a year-over-year basis, I think we are targeting increased spend in both Q3 and Q4. The year-over-year kind of neutralizes for the seasonality. And one thing as last year I think we have a little bit easier year-over-year comps in Q3 and Q4 versus last year. From a absolute dollar perspective, Q4 is the seasonally stronger quarter. So, we typically allocate more of the absolute dollars to Q4 to take advantage of the seasonally stronger quarter.

Unidentified Analyst

Okay, I understood. Thank you so much.

Kyle Huebner

You’re welcome.

Unidentified Analyst

Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Jared Schramm with ROTH Capital Partners. Your line is open.

Jared Schramm - ROTH Capital Partners

Good afternoon.

Ken McBride

Hi, Jared.

Kyle Huebner

Hi, Jared.

Jared Schramm - ROTH Capital Partners

Most of them were answered previously. I wanted to touch on sales effort into the enterprise client side really where does that stand today and where do you see this growing to you may say two years’ time?

Ken McBride

Could you repeat the question, I iterated out a little bit.

Jared Schramm - ROTH Capital Partners

The sales effort on the enterprise client side, I am just curious where you see that as it stands today and where you envision that in maybe two years’ time from now?

Ken McBride

I think we are pleased with the performance. I mean, you saw the revenue growth up 45%. We continue to feel like we are making good progress on all the fundamentals. We think the pipeline is getting stronger. Sales team is getting better. The sales processes are improving, where we are really continuing to optimize our lead gen, our lead generation, our marketing spend. And we are happy with the rate of which we had new customers, new locations within existing customers. And I think we are really pleased with the things we have seen in terms of the trends on churn rate, and the higher ARPUs compared to our small business customers. So, I think in the enterprise business, we really feel like we are in an ongoing execution and optimization mode now. So, I think we are optimistic that we will be able to see some nice growth going forward, and overall very pleased with the enterprise business.

Jared Schramm - ROTH Capital Partners

The growth in enterprise is this primarily from new customers that you are selling on to the platform or are these taking share from the likes of Pitney, etcetera? Ken, I mean, any new customers?

Ken McBride

Could you repeat, I am sorry Jared, there is some kind of technical problem with the voice.

Jared Schramm - ROTH Capital Partners

Just curious in the enterprise side is the growth really coming from selling services to existing customers or taking share from the likes of Pitney Bowes for example?

Ken McBride

We still couldn’t hear. We apologize for – obviously there is some technical challenges hearing the quality come through.

Jared Schramm - ROTH Capital Partners

Okay. I will try one more time.

Ken McBride

Try one more time.

Jared Schramm - ROTH Capital Partners

On the growth in the enterprise side, is this primarily what you are seeing from adding new customers to your platform or in selling existing customers, new services or is this primarily taking shares from the likes of Pitney Bowes?

Ken McBride

Both things are happening in terms of we are adding new customers to the overall process, but we are also continuing to see existing customers rolling out new locations. So, we have lots of different accounts in lots of different stages of their lifecycle. And typically it can take anywhere from six months to several years to see the full rollout in account. So, which was kind of like combination of both, but we feel like where the pipeline is strong, we feel like we are adding new customers in a nice clip. And most of those are at the directly against – like selling against a postage – an existing postage meter installation. And then we are continuing to see nice rollout pace in a lot of our large customers that haven’t reached the full potential to get out of the account.

Jared Schramm - ROTH Capital Partners

And lastly looking at small business PC Postage marketing in the back half of this year, do you anticipate a similar strategy to what you enacted in the back half of ‘12 or is it going to shift as far as medium of marketing is concerned?

Ken McBride

Are you saying mix of marketing channels?

Jared Schramm - ROTH Capital Partners

Yes.

Ken McBride

Yes, I think we – I mean, we are constantly trying to look at the different channels to try to optimize amongst the different areas that we do, but generally speaking, I think we anticipate that the mix of the different channels that we will be using for the remainder of the year will be similar to what we saw in the first half of the year and also similar to what we saw last year. So, we continue to utilize direct mail. It’s one of our strongest channels and also some of our newer traditional media areas, and we were seeing reasonable performance across all the channels.

Jared Schramm - ROTH Capital Partners

Okay, thank you very much.

Ken McBride

Thank you.

Operator

At this time, I’m not showing any questions in queue. I would now like to turn the call back over to Ken McBride, CEO for closing remarks.

Ken McBride - Chief Executive Officer

Thank you for joining us today. We apologize for the technical difficulties, but if there are any follow-up questions, please contact us at investor.stamps.com or 310-482-5830. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect and everyone have a great day.

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