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Q3 2013 Conference Call

October 23, 2013 5:00 PM ET


Jeff Carberry - Senior Director, Finance

Ken McBride - Chairman and CEO

Kyle Huebner - Co-President and CFO


Kevin Liu - B. Riley & Co.

George Sutton - Craig-Hallum

Bill Sutherland - Emerging Growth Equities


Good day, ladies and gentlemen, and welcome to the Inc. Third 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 conference may be recorded.

I would now like to introduce your host for today, Mr. Jeff Carberry, Senior Director of Finance. Sir, please go ahead.

Jeff Carberry

Thanks very much and good afternoon everyone. 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 third quarter 2013; then we'll discuss financial results and talk about our business outlook, but first, the Safe Harbor statements.

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, 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.

And now, let me hand the call over to Ken.

Ken McBride

Thank you, Jeff, and thank you for joining us today. Today, we announce another strong quarter with record results in multiple areas of our business. During the third quarter, we achieved several record non-GAAP results, including record operating income of $10.1 million, which is up 21% year-over-year; record operating margin of 32.3%; record net income of $10.1 million, up 22% year-over-year; record earnings per fully diluted share of $0.62, which was up 24% year-over-year; and we also achieved year-over-year growth of 11% in paid customers in our core PC Postage business; record paid customers in our enterprise business, and strong total postage printed by our customer base, which was up 25% year-over-year.

We were pleased with the continued strength and performance in our core business during our seasonally slowest quarter, and despite continued Amazon headwinds. The anniversary of some significant customers coming online last year, and the challenges that persist in the small business segment of the economy. On the call today, we will talk in more detail about our PC Postage metrics, our business, and our financial results and business outlook.

Now, let's begin with a more detailed discussion of the PC Postage business. As always, the customer metrics we discuss on this call, are only for the core PC Postage business, which excludes all enhanced promotion channel activity. For a more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metric spreadsheet available at

Core PC Postage revenue, including small business, enterprise, and high volume shipping, was $29.5 million in the third quarter, which was up 9% versus the third quarter of 2012. As we discussed on the last call, we faced our toughest Amazon headwind this quarter, as the third quarter last year was the strongest quarter ever by Amazon related revenue.

During the third quarter, we acquired 64,000 gross small business customers, which was down 8%, compared to the third quarter of 2012, and our cost per new small business customer acquired, or CPA, was $126 in the third quarter, up 10%, versus the third quarter of 2012. The third quarter is always our seasonally slowest quarter, and we experienced a typical seasonal slowdown this year as well.

The decline in year-over-year customers acquired is largely attributable to a different mix of channels, with higher quality customer acquisition in the third quarter of this year, as compared to last year. We would note that the conversion of gross acquired customers to pay customers was 78% in the third quarter of this year, compared to 72% conversion rate last year. Thus, the total number of new paid customers and cost per new paid customer for the third quarter this year, was comparable to the third quarter last year.

We continue to experience a strong ROI on our marketing spend with an estimate lifetime value that exceeds our current cost per acquisition by at least two times. Our average monthly churn during the third quarter was 3.4%, that went down versus 3.5% in the third quarter of 2012. We are pleased to see our third quarter churn rate down compared to the third quarter of last year. While we do see quarter-to-quarter fluctuations in our churn rates, we believe that our churn rate is benefiting from lower churn rates in enterprise and high volume shipping customers, which are an increasing portion of our overall customer base; new features, which continue to enhance the utility of our products, and drive increased customer usage, and continued success in our ongoing customer retention efforts.

Paid customers in the third quarter was $464,000, that was up 11% versus the third quarter of 2012. We typically generate the majority of our paid customer growth in the seasonally strongest first and fourth quarters, with small sequential increases or decreases in paid customers during the second and third quarter, and this year, again, follow that same historical pattern.

The 11% year-over-year growth in Q3 was consistent with the double digit growth rates we have seen in our paid customers during the past [two] (ph) years. Average subscriber revenue per paid customer or ARPU was $21.24 in the third quarter, and that was down 2% versus the third quarter of 2012. Year-over-year decline was primarily attributable to lower Amazon related revenue, and the anniversary of some significant shipping and enterprise customers coming online last year.

You would also note that as shipping becomes a larger part of our core business, we expect to continue to see fluctuations in ARPU, as the individual customers in that segment can be much larger.

Total postage printed by customers was $367 million in the third quarter of 2013 and that was up 25% versus the third quarter of 2012. Total postage printed continues to benefit from the strong growth in our high volume shipping business. We would note that we had a very tough compare in the third quarter, as postage printed in the third quarter of 2012 was up 78% year-over-year.

We continue to monitor total postage usage as a good indicator of the value customers derive from our service and its year-over-year growth has been correlated with strength in our other business metrics, and customers have printed over $1.5 billion in postage during the past four quarters.

We believe that the economic environment, with respect to small business, remains challenging, relative to pre-recession levels, and continues to be negatively affecting our small business customer acquisition and our churn rates. The National Federation of Independent Business, Small Business Optimism Index was 93.9 for September. The index continues to fluctuate around the 93 level, which is considered a recessionary reading, and it remains far below the pre-recession readings of that index. We believe the sustained improvements in the small business economic environment from current levels could provide a further lift to the small business efforts, our small business efforts over the long-term.

Now let’s discuss some detailed initiatives in the PC Postage area. Again, the discussion is about the core PC Postage business, excluding the enhanced promotion channel. In our small business area, we are continuing to optimize our customer acquisition spend.

During the third quarter, we increased our small business customer acquisition spend by 1%, versus the third quarter of 2012. We expect small business customer acquisition spend for the full year 2013 to increase by 3% to 5%, compared to 2012. While the increase in spend has been more modest so far this year, our goal is to increase spend in our seasonally strongest fourth quarter by 5% to 10% year-over-year. We plan to do so, continuing to utilize a variety of marketing channels, including direct mail, traditional media, online marketing, and other areas. And 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, overall customer experience in many ways. We are continuing to optimize the website, the registration process, and the post registration customer interactions. We also continue to launch new features in our client product that make mailing and shipping easier for our customers. For example, our most recent product we launched the ability to print certified mail postage on plain paper, using our certified Mail Window Envelopes.

In the enterprise area, we plan to continue scaling up 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's not available with postage meters.

During the third quarter, we continued to make strong progress in the enterprise area, with year-over-year growth and third quarter revenue of 31%. 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 that we are seeing attractive returns on the investment we have made in this area. We are expecting to continue to see 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 as well. 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 third quarter, we continued to make strong progress in high volume shipper area with growth in third quarter postage printed by this segment up 20% year-over-year. We would note, that we had a very tough compare, as postage printed by our high volume shippers increased by 96% in the third quarter last year. We continue to see 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 continue to focus on scaling this business area. We continue to introduce improvements to the software and features that target high volume customers. For example, on our most recent version, we added several features targeted to high volume shippers, such as the USPS Rate Shopping Engine, which allows our users to automatically select the optimum mail class and shipping rate based on preset requirements, a new best rate identifier that highlights the lowest cost option into users shipping requirements and faster batch order processing and improved status messaging for high volume order processing.

We also continue to add new shopping cart integrations for easier data export and import from the tools that customers like to use. For example, we recently announced the new integration with Kewill, a high end multi-carrier shipping solution, and may also announce new integration with ProStores, e-commerce shipping tool. We are also continuing to scale and optimize our sales and marketing in this area. 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 for our overall business.

In the area of Postal Reform, Congress continues to make slow progress. The Senate and the House have both begun to draft legislation on Postal Reform that no bill has made it to the floor for a broader vote. All the discussions around Postal Reform continue to be a potential neutral or positive for our business.

With that, let me hand it over to Kyle, who will provide more details of our financial results and our business outlook.

Kyle Huebner

Thanks Ken. Q3 financial results, we will now review our third quarter financial results. We will discuss our third quarter financials on a non-GAAP basis, which excludes the following; $1.3 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 $31.2 million in Q3, up 7% compared with the third quarter of 2012. Growth in total revenue continues to be driven by core PC Postage revenue, which was $29.5 million in Q3, up 9% compared with the third quarter of 2012. The year-over-year increase in core PC Postage revenues was the result of increased paid customers, partially offset by lower ARPU, as discussed by Ken in the metrics section.

Non-core PC Postage revenue from the enhanced promotion channel was $699,000 in Q3, which was down 5% compared with the third quarter of 2012. The year-over-year decrease is a result of decreased marketing spend, as we continue to reduce our investment in this area of the business.

PhotoStamps revenue was $1.0 million in Q3, down 14% compared with the third quarter of 2012. As with our non-core PC Postage business, the year-over-year decline in PhotoStamps was a result of decreased marketing spend, as we continue to reduce our investment in PhotoStamps as well.

PC Postage gross margin was 81.2% in Q3, compared with 80.3% in Q3 of 2012. Cost of sales includes promotional expenses related to customer acquisitions of $0.6 million in Q3, which was comparable with the $0.7 million in the third quarter of 2012. PC Postage gross margin excluding promotional expenses was 83.3% in Q3, compared with 82.9% in the third quarter of 2012. The improvement in PC Postage gross margin was primarily due to cost leverage with the revenue growth we have seen.

PhotoStamps gross margin was 22.4% in Q3, compared with 20.6% in Q3 last year. PhotoStamps gross margin increased versus the third quarter last year, primarily because this year we had fewer high volume business orders, which are typically sold at a lower gross margin than (inaudible) orders.

Sales and marketing spend was $8.8 million in Q3, which was up 1% compared to the third quarter last year. Sales and marketing spend in our core PC Postage business increased modestly, as we continue to focus on driving new paid customer acquisition, while spend in our enhanced promotion and PhotoStamps business both decreased, compared to the third quarter last year.

R&D spend was $2.5 million in Q3, which was up 3% compared with the third quarter of 2012. The increase was primarily related to increased headcount related expenses to support the expanded product offerings. R&D as a percent of revenue in Q3 was slightly lower compared with third quarter of 2012.

G&A expense was $3.4 million in Q3, which was up 7% compared with the third quarter of 2012. The increase was primarily related to increased headcount expenses to support the growth in the business we have experienced. G&A as a percent of revenue in Q3 was consistent with the third quarter of 2012.

Non-GAAP operating income was $10.1 million in Q3, which is up 21% compared with the third quarter of 2012, and non-GAAP operating margin of 32%, compared to 29% in the third quarter of 2012. This was our highest ever operating margin in the history of the company.

The income growth and margin expansion were primarily attributable to revenue growth and our core PC Postage business, PC Postage gross margin improvement and leverage in our operating expense line items, which increased at rates less than our revenue.

Non-GAAP net income was $10.1 million, up 22% versus $8.3 million in the third quarter of 2012. Non-GAAP net income per share was $0.62 based on 16.4 million fully diluted shares, which was up 24% compared with $0.50 per share based on 16.7 million fully diluted shares in the third quarter of 2012.

Non-GAAP adjusted EBITDA was $10.7 million in Q3, which was up 23% compared with the third quarter of 2012. This metric is calculated at $10.1 million non-GAAP operating income, plus $595,000 of D&A contained in operating expenses.

Capital expenditures for the quarter were $1.3 million and $3.0 million for the year-to-date period. As expected, our capital expenditures for the business is running higher than historical level, as we increased our level of investment this year in our technology platform to ensure the reliability and scalability of our solutions to handle very large postage volumes and growth we are experiencing.

Non-GAAP free cash flow generated by the business was $9.4 million for the third quarter. This metric is calculated at $10.1 million of non-GAAP net income, plus $595,000 of D&A contained in operating expenses, plus $1.3 million of CapEx related to the business. Note that this calculation excludes capital investments related to our new corporate headquarters, as well as tenant-related D&A.

We ended Q3 with $84 million in cash and investments, or $5.21 per ending balance sheet share, which was up $18 million from the $66 million in cash and investments at the end of last quarter.

During the third quarter, we did not repurchase any shares. On October 16, 2013, the Board of Directors approved a new share repurchase program, that replaces all prior repurchase programs, and authorizes the company to repurchase up to 1 million shares of stock during the next six months. Since we began repurchasing our shares in 2002, we have returned a total of $187 million in excess cash to our shareholders through our repurchase programs.

As of September 30, 2013, we had approximately $200 million in federal NOLs and $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 the end of Q3, our Section 382 ownership shift was at an approximately 21% level compared with a 50% level that would trigger 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 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 $1.93 to a $2.13 per fully diluted share. This compares to our previous expectations for 2013 GAAP EPS of $1.73 to $1.93 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 between $2.20 to $2.40 per fully diluted share. This compares to our previous expectations for fiscal 2013 non-GAAP EPS of $2 a share to $2.20 per share.

We expect growth in 2013 core PC Postage revenue to be up approximately 12% to 13% versus 2012. We expect, both, enhanced promotion revenue and PhotoStamps revenue, will continue to be down in 2013 compared with 2012, as we continue to minimize our investments in these areas. We are targeting 2013 small business PC Postage customer acquisition spend to be up 3% to 5% compared with 2012. We expect capital expenditures for the business to be approximately $3.5 million for the year. Our expected capital expenditures and EPS both reflect an increased level of investment and expenses in our technology platform, as mentioned previously.

While we don't provide specific quarterly guidance, we would note the following; fourth quarter is typically our seasonally strongest quarter for customer acquisition and postage printed, so we would expect Q4 results to reflect that factor. We are targeting growth in small business customer acquisition spend of 5% to 10% in the fourth quarter, to take advantage of the seasonal strength in customer acquisition. Growth in customer acquisition spend negatively impacts Q4 EPS, but would result in an expected net revenue benefit in 2014.

For example, a small business acquisition spend grows by 5% to 10%, Q4 spend would be approximately $9.6 million to $10.1 million, which would be up sequentially by $1.6 million to $2.1 million versus the $8.0 million we spent in Q3. This sequential increase would be the equivalent to approximately $0.10 to $0.12 negative [EPS] impact when compared to Q3 pro forma EPS.

Amazon first deployed its permanent base system last year towards the end of October. So as we anniversary Amazon, we will still have part of the quarter as a headwind versus the fourth quarter of 2012. We also expect fully diluted shares outstanding for the fourth quarter to be approximately $16.6 million.

In summary, our core PC Postage business model with recurring revenue and high gross margin is demonstrating continued strength. We are seeing solid 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 programs.

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


Thank you. (Operator Instructions). Our first question comes from the line of Kevin Liu from B. Riley and Company.

Kevin Liu - B. Riley & Co.

Hey, good afternoon guys. First question here, Ken, I think you mentioned some of the new customer acquisition was coming from higher lifetime value channels. Maybe you could talk a little bit about which channels you are seeing them come from, where you are seeing it drop off a bit, and perhaps some of the reasons why that may be happening?

Ken McBride

I mean, we continue to utilize all of the same channels, the direct mail, traditional media like radio, TV, and online channels. So we don't typically break that out beyond the general comment that those are the main channels that we focus on and those are still the channels we continue to use. So I think we kind of prefer to stay at a higher level, in terms of what the specific channel-by-channel, blow by blow is for the quarter.

Kyle Huebner

And I would add Kevin that, in our marketing spend, it is an ongoing optimization process, where we are testing new things, we are evaluating results we are trying to scale, channel, and so, we typically see kind of fluctuation and -- some fluctuations in the quality of customers, and I think what we are seeing is, in Q3 of last year, that was probably a little bit higher than what was typical in terms of the number of gross customers that then convert to paid customers, compared to this year, and so as we look at our marketing spend level, we are trying to grow the overall level, but we are also trying to optimize the existing spend, and so there is a constant process of testing new things and phasing out things that may not be working as well.

Kevin Liu - B. Riley & Co.

Understood. What I was really getting at was, I think, years ago we would have thought, direct mail would produce kind of highest lifetime value customers, even though they were also the most expensive to acquire, and then maybe online would have been a little bit less sticky, so was just curious if you guys have seen any sort of shift in terms of which ones you consider to be your most favorable customer acquisition channels?

Ken McBride

Nothing really to kind of report on that front, I think it's -- when we look at the business, we look at it, at a far more granular level and so, we are just looking at not just the macro direct mail versus media, but also down to the level of the different promoters or lists that we look at. So I think depending on the different promoter list or channel we may be working with, there is a different outcome, different LTV, so we look at all of that stuff on a very granular level, and optimize across all of them.

Kevin Liu - B. Riley & Co.

Thank you. And shifting gears a bit, you guys had another two, kind of software integrations on the high volume shipping side. Maybe if you could provide some metrics around how many partners you have today and how many you believe you could target over the next few years here? Then talk a little bit about what's the [typical ramp] in terms of transaction volumes from each new partner you sign up would look like?

Ken McBride

Sure. We have a lot. Online marketplaces we integrate with the major ones out there. So our solution is integrated with eBay, [NSE] Google Checkout, PayPal, Yahoo!, Amazon, and then as we look at integrations into -- like shipping management software, like the Kewill integration we announced this quarter, I think there is 20 plus integrations that we have announced over time, either on our website, or through a press release, and then additional shopping carts, third party shopping carts like Magento, osCommerce, or the ProStores integration we announced this quarter.

So I think overall, when you count up the total number of integrations, we are probably right around, call it 50 or so, total integrations, and those are really just providing our customers the ability to manage their orders through multiple different areas, no matter how you want to run your website and your overall online selling strategy, we are able to support your orders, pull them all in to our single interface and complete those orders in a batch process. So it really makes it a much easier user experience for the e-commerce users.

Kevin Liu - B. Riley & Co.

And then, in terms of how a new partner typically ramps how many quarters does it generally take, before you start to see some traction with a new integration, like for the storage, for instance?

Ken McBride

It varies pretty widely, depending on what type of integration it is, but it's anywhere from weeks to months typically, in terms of seeing some impact from it.

Kevin Liu - B. Riley & Co.

All right. Thank you.


Thank you. And our next question comes from the line of George Sutton from Craig-Hallum.

George Sutton - Craig-Hallum

Thank you. Kyle, you mentioned your ongoing optimization process relevant to marketing, and certainly during the Q3 quarter, you spent a lot less than we had assumed. I am wondering, did you spend less in the quarter than you originally anticipated going into the quarter, or were we just being very conservative?

Kyle Huebner

Yeah, couple of thoughts, George. On the last call, we talked about increasing our acquisition spend in the second half of the year, but that the -- the focus would be on allocating more to the seasonally strongest Q4, as opposed to the seasonally slowest Q3. So I think the intention was to allocate more to the Q4 period.

As we go into the quarter, we have a target level of spend, but there is a lot of different factors that kind of go into trying to optimize that spend, versus the overall acquisition and ROI and we have things like the different mix of channels, the different types of programs, how scalable those programs are, the overall level of spend, the risk that we are taking as we scale spend, the EPAs and LTVs at the program level, things like the small business economic environment, seasonality. So, lot of factors at work will cause the spend level to come in, maybe little below or a little bit above where we planned, and can fluctuate from quarter-to-quarter.

And as I mentioned before, we are trying to balance both the spend level, but also optimizing not only the marketing spend, but the quality of customer that we acquire and what the overall customer economics look like. So I think Q3, it was a little bit below what we had -- for the second half, but also with the concept that we would allocate more towards the seasonally stronger Q4, then we just monitor the results, as we go throughout the quarter and see if we need to adjust.

George Sutton - Craig-Hallum

Okay. Just so I am clear on the ARPU. I understand, seasonally its often lower in Q3, but your [arrear] relative to last year, the primary difference would be the Amazon impact, is that a fair read?

Kyle Huebner

Yeah, I mean I think -- a couple of things to point out. One is that, as Ken mentioned in the remarks, Q3 Amazon revenue last year was the highest level of the year, so the Amazon headwind in Q3 was a little bit greater than we had seen. But beyond the Amazon, I think we have also talked about that we -- we do see normal quarter-to-quarter fluctuations, based on the activity of some of our larger customers in the enterprise and shipping segment. Ken mentioned, we did anniversary some larger significant shipping and enterprise customers who came online in Q3 last year. We can also see ARPU fluctuations by factors outside our control, such as customers shifting volume, either to the USPS or away from the USPS and to other carriers such as FedEx and UPS.

I think, part of it was the greater Amazon headwind and then part of it was the normal kind of quarter-to-quarter fluctuations and year-over-year ARPU that I think we are going to see in the business as enterprise and shipping become larger components of it.

George Sutton - Craig-Hallum

Got you. My biggest congratulations come on the cash flow side with the $18 million in the quarter. Now you don't provide the cash flow statement, so I am wondering where was that coming from outside of earnings?

Kyle Huebner

So we had about $10 million in the free cash flow that I mentioned. Then there was about $1.9 million positive change in net working capital. About $6 million was proceeds from option exercises, so that kind of gets you up to the $17.5 million increase.

George Sutton - Craig-Hallum

Okay, got you. Then last question is kind of hypothetical, but Ken, given that we have been in an environment for a long time of not so great SMB opportunities, how would you be thinking of the opportunities differently or operating the company differently if we did start to see a real economic expansion?

Ken McBride

Well you know, I think we talk a lot about the main area where we feel like we have seen an impact is in the Soho business, and along those lines, the metrics like the customer acquisition and the churn rates, and while we have seen I think really good results there, I think what we really have been highlighting mostly is that we are very optimistic about a world where, the NFIB at 93 goes back to say 100 like it was back in 2007 and prior to the recession, if we are seeing some record results like we did in Q4 and Q1 last year in terms of customer acquisition, seeing churn rates going down year-over-year like it did this quarter, and we have seen several times in the past year, then -- we are optimistic about when that eventually does happen, when the small business environment gets better, and we could see much bigger upside, and how we would change our approach, is we would monitor our marketing the way we always do, look at the ROI channel by channel and scale up our spend, if it made sense.

Kyle Huebner

I would add to it, in some of our marketing spend, where it's a fixed spend component, the economics are then driven by the conversion rates, and so we are [all at a] much better small business economic environment, if you saw improved conversion rate, some marketing programs that might not work now, might work in a better economic environment, and that would allow you kind of expanded opportunities to increase the customer acquisition spend and investment in the business.

George Sutton - Craig-Hallum

Well here's looking to a world like that. Thanks guys.

Kyle Huebner

That was (inaudible).

George Sutton - Craig-Hallum

[Cute] predictions.


Thank you. (Operator Instructions). And we do have a question now from the line of Bill Sutherland from Emerging Growth.

Bill Sutherland - Emerging Growth Equities

Thank you very much. Sorry I missed your earlier comment Ken, but I am assuming it was a good quarter for enterprise revenue, and I am curious as you build that out further, and just establish more of a presence in the marketplace. Are you seeing any impact to the sales cycle, as your referenceable client base expands, etcetera, and both I guess private sector and the government?

Ken McBride

I can't say that we have seen a material shortening of the sales cycle. I think it's still quite a long process, potentially on both sides, the commercial as well as the government. I think we just have continued to build a larger and larger pipeline over time, and then we have seen the outcome of that and yes, we did have a good quarter in enterprise, we were pleased with the results, both the -- in terms of the number of new locations we acquired, the expansion in the pipeline, as well as the revenue growth for the quarter.

So across the board, we are really happy, but I can't say that we have seen a material change in terms of the sales cycle at this point.

Bill Sutherland - Emerging Growth Equities

Okay. Then I just have one more, I am curious as you think about potentially the NFIB metrics telling you small business world is back on feet. Is that the point where you would think about adjusting the subscription pricing levels? It has been a while since you have looked at -- I think it goes back before recession? Thanks.

Ken McBride

Yeah I think potentially, we have felt that with the recessionary environment, it has been probably not the right time to consider those types of moves with the pricing. But I think in a better environment, as you point out, we have been at the 15.99 price point for a decade. So we will consider and increasing price if it made sense in the right environment.

Kyle Huebner

We did some pricing, testing and analysis back in 2007 timeframe and the better economic environment, and we actually started the move to a 17.99 price point, but that was in mid-2008 and when the market and the environment crashed, we rolled it back. So I think if you look over the longer term and a better economic environment, we believe there is some pricing optimization increases that can be supported in a small business environment, but its not something that we have been focused on, given the current environment.

Bill Sutherland - Emerging Growth Equities

Right. Okay. Thanks guys.

Kyle Huebner

Thank you.

Ken McBride

Thank you.


Thank you. (Operator Instructions). And I see no additional queued questions in the queue at this time. I'd like to turn the conference back over to Ken McBride for any concluding remarks.

Ken McBride

Thank you for joining us today. If you have follow-up questions, you can contact us at 310-482-5830 or through our Investor Relations website at Thank you.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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