Stamps.com Inc. (NASDAQ:STMP)
Q4 2011 Earnings Call
February 9, 2012 05:00 p.m. ET
Ken McBride – CEO
Kyle Huebner – CFO
Jeff Carvari – Senior Director of Finance and IR
Kevin Liu – B. Riley & Co.
George Sutton – Craig-Hallum Capital Group
Good day and welcome to the Stamps.com Fourth Quarter 2011 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 call is being recorded.
I would now like to introduce the host for today’s conference, Mr. Jeff Carvari, Senior Director of Finance and Investor Relations. Sir, please go ahead.
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 fourth quarter 2011 that’s 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. The 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, the risk factors also 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 www.stamps.com including its annual report on Form 10-K for the fiscal year ended December 31st, 2010; quarterly reports on Form 10-Q and current reports on Form 8-K. Stamps.com undertakes no obligation to release publically any revisions to any forward-looking statements to reflect events after the date hereof or to reflect the occurrence of unanticipated events.
Now, let me hand it over to Ken McBride.
Thank you, Jeff and thank you for joining us today. Today, we announced another great quarter and another set of record performance as across many areas of our business. During the fourth quarter we achieved a record high growth rate for core PC postage revenue at 27% year-over-year growth. A record high for paid customers at 385,000 and for ARPU at $21.25. A record high for small business new customer acquisition at 83,000 which was up 24% year-over-year and a record for total postage print of our customer base at $211 million up 52% year-over-year.
And the fourth quarter caps up a great fiscal 2011 where we generated multiple new records across our business include the vastest total annual core PC postage revenue ever at 22%, the highest total small business new customer acquisition at 276,000 which was up 19% year-over-year. The highest total postage printed in our high volume shipping segment, which was up 96% for the year, the highest customer acquisitions in our enterprise business with total new enterprise locations added for the year up 108% year-over-year and the highest total postage printed for the year at $6.72 million which was up 50% year-over-year.
The strength across our business lines drove strong earnings growth with non-GAAP net income of $5.7 million in the fourth quarter and $21.2 million in fiscal year 2011, which were up 29% and 55% respectively. Our non-GAAP earnings per share was $0.35 in the fourth quarter and a $1.40 in fiscal year 2011, which were up 14% and 50% respectively.
Strong performance and record highs in our business were particularly significant in light of the continued weaker small business economic environment that while it showed some recent improvements continued to struggle relative to pre-recession levels.
On the call today, we’ll talk in more detail about our postage metrics and business, our plan for 2012 and our financial results and our business outlook.
Now, let me 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 segment was $24.5 million in the fourth quarter, which was up 27% versus the fourth quarter of 2010. Over the past six quarters our core PC postage revenue year-over-year growth rates have accelerated from 8% to a 11%, 14%, 23%, 25% and now 27%. This was though the highest revenue and highest growth rate we’ve experienced in our core PC postage business since we started tracking this area separately six years ago.
The increase in the core PC postage revenue was attributable to continued strength in our small business area and our enterprise and our high volume shipping customer segments which are now contributing to our core business revenue growth in a more material way.
We acquired 83,000 gross small business customers in the fourth quarter that was up 24% versus the fourth quarter of 2010 and our cost for new small business customer acquired for CPA was a $108 in the fourth quarter and that was down 1% versus the fourth quarter of 2010. This was our highest customer acquisition for any quarter in the history of the company.
We were able to increase our customer acquisition spend versus the fourth quarter last year and still achieved the lower cost per acquisitions, CPA, which was a great result and shows that our marketing spend is scaling efficiently.
Our monthly churn rate during the fourth quarter was 3.4% which was comparable to 3.4% we saw on the fourth quarter of 2010. We are pleased to see churn consistent on a year-over-year basis despite the strong increase in customers acquired and paid customers. We’re also pleased to see our churn continue to be in the 3% to 3.5% range, which is consistent with the range we experienced before the recession began.
Overall, we believe churn rates are benefiting from lower churn rates in our enterprise and high volume shipping customer segments, new product features which are driving increased use of diverse service and continued success in our ongoing customer retention efforts.
Paid customers for the fourth quarter was 385,000 which was up 13% versus the fourth quarter of 2010 and up 11,000 sequentially versus the third quarter of 2011. Paid customers grew by 45,000 for fiscal 2011 that’s our biggest annual growth since we started tracking our core PC postage area separately. The growth in paid customers was a result of the strongest customer acquisition coupled with the lower churn rates.
ARPU was $21.25 in the fourth quarter and was up 12% versus the $18.92 we saw in the fourth quarter of 2010. This is our highest ARPU ever since we started reporting this metric. The increase in ARPU was attributable to the higher monthly fees and more high volume shipping in enterprise customer segments and increase in the average store revenue per paid customer driven the increase usage of our service and an increase in the insurance purchases driven by our focus on shipping and by new insurance features that we’ve added.
Total postage use by all customers was a record $211 million in the fourth quarter that was up 52% versus the fourth quarter of 2010. (Inaudible) consecutive quarter in which our growth and total postage usage has exceeded 50%. In addition, fourth quarter total postage printed in our high volume shipping area was up 87% year-over-year to an all time record high.
For customers outside of the high volume shipping segment, we also continued to see strong year-over-year growth at 36% and postage usage during the fourth quarter. The vast total postage usage is an indicator of the value customers drive from our service and we believe this growth has correlated the strength in other business metrics.
We continue to believe that the economic environment with respect to small business remains challenging relative to previous session levels and continues to affect our small business customer acquisition. We note that the National Federation of Independent Business survey, NFIB showed improvement in small business optimism during the fourth quarter, but continues to remain near recessionary levels and is still considerably below the pre-recession levels. We believe that improvements in the small business economic environment from the current levels could provide a further lift to our small business efforts.
With that let me now turn to the 2012 plan for PC postage. Again, the discussion is all about the core PC postage business excluding enhanced promotion channel. In the server area we plan to continue to scale and optimize our customer acquisition spend outside the enhanced promotion channel. We continue to experience some very strong ROI on our marketing spend with an estimated lifetime value that exceeds our current CPA by more than two times.
During the fourth quarter, we were able to increase our small business customer acquisition spend investment by 23% versus last year while realizing a decrease in the CPA at 1% and for the full year of 2011, we increased our small business customer acquisition spend by 18% and also realized the decrease for the full year in CPA of 1% versus the prior year. We expect that our total 2012 small business customer acquisition spend outside of the enhanced promotion channel will increase by 10% to 15%.
We plan to continue to employ variety of marketing channels including direct mail, traditional media, online media and other areas. Across each of our marketing channels we plan to continue to focus on scaling the total spend while keeping the cost per acquisition at a reasonable level.
During 2012, we also expect to continue making improvements to our total business in several ways. For example, we’re going to continue to optimize our website through constant testing and improvements, we’re working to shorten and streamline our registration process; we’re working to facilitate easier purchasing of postage by customers during registration; continue to expand our usage of demo videos and online “how-to” videos and we’re expanding our online presence through expansion of our own blog and through expansion of our relationship with bloggers and influencers online and continuing to build our presence with social networking.
Whilst we’re continuing to launch new features in our clients offer to make mailing and shipping easier for our customers including things such as continued enhancements to our vast shipping capabilities, which is more automated rate selection and additional e-commerce integrations. Continued improvements to our international shipping solution, continued improvements to our insurance capabilities such as ability to ensure packages for up to $10,000 and broaden support for USPS services such as adding support for USPS flat rate legal envelopes, new first class mail package services, free delivery confirmation and support for the express mail flat rate box.
In the enterprise area, we plan to continue scaling up our sales and marketing efforts in 2012. Customers continue to be attracted to us versus the postage meters based on our dramatically lower total cost of ownership. Customers also like the visibility available from our centralized reporting tool where they can postage spend across their entire network of users, a feature that is not available with postage meters.
During 2011, we attracted a record number of new locations to our enterprise service, up 108% versus number of locations we acquired in 2010. We also grew total enterprise revenue by 45% year-over-year in the fourth quarter and 41% for the full year 2011. We continue to see much churn rates and higher ARPU in enterprise then in our SOHO business.
During 2012, we plan to continue to scale and refine our sales and marketing strategies in the enterprise area. Overall, we’re excited about the continued progress we’re making in enterprise and feel that we’re seeing returns on the investment we’ve been making in this area. We’re expecting to see continued strong growth out of this business line going forward and we expect that it will continue to be great area for us.
In our high volume shipper area we plan to continue to scale up our efforts in this area in 2012. We continue to track high volume shippers such as warehouses, fulfillment houses, ecommerce shippers, large retailers other types of high-volume shippers to our service through our efforts in this area. We’ve always had these types of customers using our platform we began a more aggressive push into this area starting in 2008.
During 2011, we continued to invest in our shipping technology and our sales and marketing efforts and our business in these areas is doing very well as demonstrated by our record levels of postage printed, by the high volume shipping customer segment which in the fourth quarter and fiscal 2011 were up 87% and 96% year-over-year respectively.
For 2012, we’ll continue focus on scaling this business area, continue to introduce improvements in the software and features to further improve the scalability of the product to the largest high volume customers. We’re continuing to add new shopping card integrations for easier data export and import from the tool that customers like to use and will continue to scale and drive our sales effort using our national sales force.
Overall, we think, we’re very excited about the progress we’re making the high volume shipping area and we think it will continue to be a strong contributor to our overall business. We feel that our 2012 PC postage plan is a very solid one, we believe that our long term opportunities to grow this business as attractive. Despite a small business economic environment that whilst showing signs of improvement remains challenging, we plan to aggressively invest for the benefit of our long term shareholders.
With that let me take a minute to talk about some of the latest postal reform issues going on with the US Postal Service. Postal reform addressing the USPS’s financial challenges is a very fluid situation involving different proposals by diverse groups of constituents. From the range of potential postal reform options there are three decade path of potential impact on us, which are first, the USPS has proposed closing approximately 3,700 retail post offices. On this front we believe this would be a nice benefit to us as it would highlight the convenience of our service for those who would be impacted by the closures.
Second, the USPS has proposed closing approximately half of the mail processing centers and eliminating over nine first class mails. We do not believe this would have a material impact on us, priority and express mail delivery times would not be impacted and we do not think that there are other viable cost effective physical to every alternatives of first class mail. Many people do not even realize that first class frequently arrives in one day to local areas. We believe customers make decisions regarding first class based on the weight of the mail piece if its less than 13 ounces they send it first class because it is more cost effective and they don’t generally differentiate between one or two day delivery.
Third, the US Postal Service has proposed eliminating Saturday delivery. We don’t believe this would have any material impact on our enterprise or small business segments. On the margin the loss of Saturday delivery could potential result in the USPS losing marginal package volume to EPS or Fedex when a Saturday delivery is necessary. We don’t believe the impact would be material as it relates to Stamps.com.
There are a lot of uncertainty as to whether the USPS will be able to implement these changes and if they’re allowed to there is uncertainty in what form or what timeframe and that is difficult to predict when it will actually happen.
Our focus is on ensuring that we do everything possible to help create value for the postal service and we feel that we’re doing this as demonstrated by our 50% growth in postage printed in 2011 and 96% growth in high volume shipping postage printed in 2011. Growth in our customers’ postage printed directly transits to growth in the USPS’s revenue in these areas and those results in us helping create one of the fastest growing revenue streams for postage service.
Now, with that Kyle will discuss our more detailed financial results and our business outlook.
Thanks Ken. We’ll now review our fourth quarter financial results, we’ll discuss our fourth quarter financials on a non-GAAP basis which exclude the following; $814,000 of stock-based compensation expense and a non cash income tax benefit of $8.5 million resulting from the reversal of a portion of the company’s net deferred tax asset valuation allowance.
A reconciliation of non-GAAP to GAAP is contained in the earnings release posted on our website.
Total revenue was $27.2 million in Q4, up 20% compared with Q4 2010. The fourth quarter continued to trend of strong growth in total revenue driven by improving results in our core PC postage business. In the previous six quarters, year-over-year growth has accelerated from 2% to 5% to 9% to 15% to 20% and 20% again in the fourth quarter. These growth rates exclude the one-time impact of PhotoStamps’ retail breakage in the second quarter of 2011.
Core PC postage revenue was $24.5 million in Q4, up 27% compared to Q4 2010. The year-over-year increase in core PC postage revenue was driven by both increased paid customers and increased ARPU as discussed by Ken in the metrics section. In addition to the previously mentioned quarterly acceleration and revenue growth, we’ve also seen a multi-year acceleration in our annual core PC postage growth rates from 5% in 2009 to 10% in 2010, to 22% growth for 2011.
Non-core PC postage revenue from the enhanced promotion channel was $776,000 in Q4, down 19% compared with Q4 2010. While we continue to experience year-over-year declines in enhanced promotion revenue, we were pleased to see the magnitude of declines decrease throughout 2011.
PhotoStamps’ revenue was $1.9 million in Q4, down 20% compared with Q4 2010. The decline in PhotoStamps’ revenue was primarily attributable to low level to marketing spend as we continued to focus on our core PC postage business. We believe that January 2012 postage rate increase may have also had some negative impact on fourth quarter revenue for PhotoStamps’ revenue particularly in the area of high volume business orders.
PC postage gross margin was 77.9% in Q4 compared with 78.3% in Q4 2010. Cost of sales includes promotional expenses related to customer acquisition of $984,000 in Q4 compared with $771,000 in Q4 2010. The increased promotional expense was driven by increased levels of customer acquisition. PC postage gross margin excluding promotional expenses was 81.8% in Q4 which was comparable to the 82.1% margin in Q4 2010.
PhotoStamps’ gross margin was 30.2% in Q4 which was up compared to 24.2% in Q4 2010. PhotoStamps’ gross margin increased primarily due to one higher mix of higher margin consumer revenue compared to lower margin high volume business revenue and two continued efforts to reduce operational costs.
Total sales and marketing spend was $9.3 million in Q4 which was up 23% compared with Q4 2010. PC postage sales and marketing spend increased by 23% compared with Q4 2010 as a result of increased marketing spends in the small business enterprise and shipping segments. PhotoStamps’ sales and marketing spend was not material compared to the total overall sales and marketing spend.
R&D spend was $2.2 million in Q4 which was up 10% compared with Q4 2010. The increase was primarily related to increased headcount-related expenses to support our expanded product offerings. G&A spend was $3.4 million in Q4 which was up 23% compared with Q4 2010. The increase in G&A was primarily attributable to an increase in legal spend versus Q4 2010. There was a high level of activity in R&D’s litigation as we approached the trial which is scheduled for March 2012.
Non-GAAP operating income was $5.4 million in Q4 which was up 31% compared with Q4 2010 and non-GAAP operating margin increased from 18.1% in Q4 2010 to 19.8% in Q4 this year of 2011. The growth was primarily attributable to strong revenue growth in our core PC postage revenue. We are also realizing leverage in some of our operating line expense items which are increasing at rates less than our revenue growth rates.
Non-GAAP net income was $5.7 million or $0.35 per share based on 16.6 million fully diluted shares, compared with $4.4 million or $0.30 per share based on 14.6 million fully diluted shares in Q4 2010 which represented 29% and 14% year-over-year growth rates respectively. The increase in fully diluted shares from 14.6 million in Q4 2010 and 15.1 million in Q3 2011 to 16.6 million in Q4 2011 was attributable to higher shares outstanding from option exercises and higher common stock equivalents resulting from a higher average stock price during the fourth quarter.
Free cash flow defined as non-GAAP net income plus D&A less CapEx was positive $5.4 million in Q4. For the fourth quarter D&A was approximately $220,000 and CapEx was approximately $505,000. EBITDA defined as non-GAAP operating income less D&A was $5.6 million in Q4 which was up 29% compared with Q4 2010. We ended Q4 with $69 million in cash and investment or approximately $4.30 per ending balance sheet share.
We will now review our full year 2011 financial results which we’ve also discuss on a non-GAAP basis. A reconciliation of non-GAAP to GAAP for 2011 is also contained in today’s earnings release.
2011 total revenue was $101.6 million up 19% versus 2010 which was comprised of the following; core PC postage revenue was $90.2 million up 22%, non-core enhanced promotion revenue was $3.2 million down 30%. Non-core PhotoStamps’ revenue was $8.3 million up 15% including $2.2 million of revenue from the initial recognition of retail breakage in the second quarter of 2011. Excluding this retail breakage item PhotoStamps’ revenue was down 15% in 2011.
2011 PC postage gross margin was 77.6% which included $3.6 million of promotional expenses. 2011 PC postage gross margins excluding promotional expenses was 81.5% compared with 80.8% in 2010.
2011 non-GAAP operating income was $20.6 million up 59% versus 2010. 2011 non-GAAP operating margin was 20.3% up compared to the 15.1% in 2010. 2011 non-GAAP net income was $21.2 million up 55% versus 2010. 2011 non-GAAP income per fully diluted shares was $1.40 up 50% versus 2010. 2011 free cash flow as defined earlier was $19.1 million. 2011 EBITDA as defined earlier was $21.5 million up 55% versus 2010.
Now let me discuss our new corporate headquarters. We completed the purchase of our new corporate headquarters in January 2012 for $13.35 million. The two buildings located in El Segundo, California will house all company operations and will provide us with additional space and capability as to grow the business.
We’re currently engaged in renovation and construction project on the property which will improve the interior and exterior of the buildings will also join in the building together and increasing the size to 100,000 square feet. We expect to invest approximately $10 million in the building renovation. We expect to complete the project in mid 2012. We’d give a total price of approximately $24 million for a 100,000 square foot renovated building as a financially attractive investment compared for the alternative of wanting new space. We plan to occupy a portion of the space and the remaining portion will continue to be leased out to the existing building tenants.
We also expect to invest approximately $2 million in new corporate infrastructure during 2012. This includes the refresh to some equipment where we’ve held off for replacing the older equipment infrastructure in the anticipation of this move. This amount also includes upgrades to certain areas of our corporate infrastructure which is our datacenter which will provide us with the capabilities to continue to provide high quality service levels to our customers and support future growth of our service.
Both the purchase and the construction project will be funded from existing cash and investments. We will incur some duplicative operating expense as related to the building in the first half of 2012 until we move into our new headquarters after which we would expect to realize lower expenses going forward.
For the full year 2012, we expect our building related operating expenses to be equivalent or slightly higher than 2011 levels. Starting in 2013, our total expenses of owning our own building versus continuing to rent space will be lower. We will recognize net rental income below the operating income line consisting of tenant rental payments less direct tenant operating expenses and a portion of depreciation and amortization of the purchase price.
For the full year 2012, we expect net rental income to be cash flow positive and approximately breakeven on the P&L when included in the allocated depreciation and amortization. We expect future years to have a positive P&L impact from net rental income.
We’re excited about our new corporate headquarters as it provides us with the space necessary to accommodate our longer term growth objectives while subsidizing the excess space in the short term to rental income.
Share repurchase, during fiscal 2011 we repurchased approximately 426,000 shares at a total cost of $5.3 million, we did not repurchase any shares during the fourth quarter of 2011. On February 2nd, 2012, the Board of Directors approved the new share repurchase plan effective upon the expiration of the current plan on February 17th, 2012, authorizing the company to repurchase up to one million shares of Stamps.com stock during the next six months.
We’ve returned more than $257 million in excess cash to our shareholders since 2002 through approximately $107 million special dividends and $151 million in share repurchases.
NOL shareholder update: As of December 31st, 2011, we had approximately $230 million in federal NOLs and $125 million in state NOLs resulting in a deferred tax asset of approximately $90 million. Our federal NOLs do not begin to expire until 2021, so at our current annual profit level we would not expect to pay regular cash for federal taxes for the next ten years. We estimate that as of December 31st, 2011, our Section 382 ownership shift was at an approximately 15% level compared with the 50% level that would trigger an impairment of our NOL asset. Well, there are no current restrictions on investors becoming 5% shareholders as part of our ongoing program to preserve the future use of NOL asset. We do request that any shareholder contemplating becoming a 5% shareholder equivalent to approximately 800,000 shares or more, contact the company before doing so.
Now, turning to guidance, we expect fiscal 2012 revenue to be in a range between $105 million to $115 million. We expect 2012 GAAP EPS to be in a range between $1 to $1.20 per fully diluted share. GAAP numbers assume an estimated $4 million of stock-based compensation expense.
Excluding the stock-based compensation expense, we expect 2012 non-GAAP EPS to be in a range of a $1.25 to $1.45 per fully diluted share. We’re targeting 15% to 20% growth in 2012 core PC postage revenue. We expect enhanced promotion revenue to be down in 2012 compared to 2011 consistent with the 2011 trends we saw. We expect PhotoStamps’ revenue to be down in 2012 compared to 2011 as well as continue to focus on our core PC postage business.
We expect 2012 small business PC postage customer acquisition spend to be up 10% to 15% compared to 2011. We expect legal expenses to be material in 2012 related to our patent infringement lawsuit. The Trio and our Indicia litigation is scheduled to begin in March of 2012. Well, there is always uncertainty regarding changes to the schedule we’re currently preparing for the trial assuming the March stake holds. If the trial does commence in March and we incur the full cost of the trial, which could be in the range of $1 million to $2 million there will be a high concentration of legal spend in the first quarter.
Fully diluted shares for 2012 are projected to be approximately 17.5 million compared to 15.2 fully diluted shares in 2011. As a result we expect that the year-over-year growth for 2012 non-GAAP net income will be approximately 15 percentage points higher than the year-over-year growth rate for 2012 non-GAAP diluted earnings per share.
Balance sheet shares outstanding as of December 31st, 2011, was 16.2 million and the common stock equivalent to 2012 will rest depend on the share price during the course of the year. As a reminder 2011 financial results contained $2.2 million of revenue and $1.7 million of gross and operating income related to the initial recognition of PhotoStamps’ retail box breakage in the second quarter of 2011. Throughout 2012 revenue and income from PhotoStamps’ retail box breakage does not expect there to be material.
For purposes of comparing annual growth rate excluding the unit show recognition of PhotoStamps’ breakage, fiscal 2011 results without the second quarter breakage would have been total revenue of $99.4 million and total non-GAAP diluted earnings per share of a $1.29.
In terms of our outlook and our business relative to the economic environment we believe that the challenging small business economic environment continues to negatively impact our business and metrics relative to pre-recession historical levels. We believe there is upside potentials that SOHO business if the small business economic environment can return to those previous session levels. We were very pleased with our customer metrics and financial results in 2011 and hope all of those trends continue into and throughout 2012.
In summary, we’re pleased with overall fourth quarter and 2011 results including improvements in all our metrics, growth in our core PC postage revenue, growth in non-GAAP operating income and growth in non-GAAP earnings per share to record levels. Our core PC postage business model with the recurring revenue and high gross margin is demonstrating accelerating growth and we are starting to realize the benefit of our investments in the enterprise and high volume shipping areas. We are seeing record setting performance across many of our financial and key customer metrics. We have a very strong balance sheet, attractive return on equity, strong free cash flow generation and a large deferred tax asset of approximately $90 million. We have demonstrated our commitment to enhancing shareholder value including returning over $255 million of excess cash to shareholders via special dividends and our share repurchase program.
With that we will open up for questions.
[Operator Instructions] And our first question is from the line of Kevin Liu with B. Riley, please go ahead.
Kevin Liu – B. Riley & Co.
Hi, good afternoon guys and congrats on a strong quarter.
Kevin Liu – B. Riley & Co.
I guess first question here you guys talked about the acceleration and growth for core PC postage business where you’ve had the highest proceeds and without much of an increase in the CPA, so as you look at your spending plans for 2012, I’m wondering if you can talk about why you are not getting more aggressive with the customer acquisition spend and whether you would adjust that higher assuming some of the issues that the Postal Commission has raised if those come to task and they are able to implement some of the closures?
Okay, our initial target for this year is the 10% to 15% growth we talked about. That targets reflects opportunities that we have that we feel will be able to scale the spend and meet our target return on investment threshold. So, the key is to kind of increase the sales and marketing spend as much as we can while managing that risk profile. The 10% to 15% is the target estimate at that point in time as you know we kind of continuously monitor all the factors that go into the decisions, levels of acquisition, results of program, CPA trends and small business economic environment. So, we are constantly adjusting our spend based on all those factors and so certainly as we move through the year we could increase that 10% to 15% target range based on things that have been the trends that you say post office closures come to payout which is what we did last year. I think we started off the year last year with a 5% to 10% target. Nearby the end of the year we were at 15% to 20% target. So that’s kind of our initial estimate, but it’s a real time decision that we optimize throughout the year.
Kevin Liu – B. Riley & Co.
Okay, and relative to the fourth quarter, I wonder if you could either qualify or may be see quality related, what sort of benefit you guys clearly got from more of the transactional revenues that are coming from partners like Amazon or the USPS Click-and-Ship program.
Yeah, I think, one of nice things is that kind of throughout 2011 we saw strength in really all areas of the business. A few were gathered from a small business enterprise and shipping perspective if you have got it from a growth and paid customers versus growth on ARPU. So, we don’t break out the fixed versus variable revenue streams, but Q4 did benefit from the seasonal perspective not just in areas like shipping where you’ve higher postage printed but also in the small business area where we saw our highest levels of customer acquisition in the seasonally strongest fourth quarter. So, I think, the shipping is one factor that played onto the Q4 results but it was just part of the bigger picture where things are really working on all different fronts.
Kevin Liu – B. Riley & Co.
And then, just lastly from me on the accounts receivable I notice that it despite the pretty considerable and that’s not usually a trend we see in the past, just wondering without this validity?
Yeah, I think if you look at our AR it’s in the small business we are charging customers’ credit cards real time, so our AR and small business is not usually material. Where the AR is comprised in the many of the larger enterprise and shipping customers, we typically utilize more of a traditional invoicing model for our revenue stream that they are used to. So, as enterprise and shipping have grown, there is a related growth in the AR. Some of their sales have a high volume business. PhotoStamps’ orders are also included in the AR as well as some of the AR also contains some postage purchases that we make in advance on behalf of some of our larger customers and integration partnerships. So, given kind of the strong growth in the business and the postage printed in Q4 we ended the year with reflecting a higher level of AR then we might have traditionally seen with more of the small business segment.
Kevin Liu – B. Riley & Co.
Got it, thanks.
Thank you. (operator instruction) We have a question from the line of George Sutton with Craig-Hallum, please go ahead.
George Sutton – Craig-Hallum Capital Group
Thank you, hi guys another great quarter to watch. So, ARPU in the quarter was certainly better than we expected and I was wondering if there was any seasonal impact there that may not recur into the Q1 and beyond.
Yeah, I mean, I think in general we characterize Q4 and Q1 as seasonally stronger quarters versus Q2 and Q3. I think if you look at kind of the growth in the ARPU, I think some of the factors we attribute that to our higher monthly fees per paid customer and our high volume shipping and enterprise customer segments which continue to grow. Also the store revenue, our growth in our overall postage printed outside of the shipping segment tends to drive things like net stamps purchases so the increase in Q4 is always a benefit seasonally, seasonal peak of the year in terms of postage printed drives, helps drive the store ARPU in the fourth quarter and then the third is the insurance revenue and again that’s driven by primarily the high volume shipping and so the strong growth, the kind of the highest levels of postage printed in that segment in Q4 also contributed. So, I think we do see Q4 as being seasonally strong quarter that does benefit the absolute dollar ARPU amount.
George Sutton – Craig-Hallum Capital Group
Got you. Kyle in the recent conference you mentioned at least for the first time that I’ve heard that your TV and radio ads are creating more awareness for all of your ad spending and I am wondering if you feel like we may be losing, you’ve been the evangelist spending in this market, you think that now started behind us and we could now focus on more penetration and I am asking that in the context obliviously still being in the very low single digits penetration?
Yeah. I think when we look at our sales and marketing investment, the key factor is our overall level of spend relative to the overall customers acquired in CPA. So, I think the thing that we were very pleased with is that we were spending at significantly higher rates and maintaining CPAs ad were below historical levels and it’s hard to kind of allocate down to the channel level as you have situations where multiple touch points create a customer to act. So, I think, we will continue to try and grow the sales and marketing as much as we can, looking at it from a portfolio approach of the total spend and the total CPA. I think in terms of awareness I think at the end of the day I think the awareness is still being primarily driven by our sales and marketing spend, so I would expect going forward that we will continue to invest in the sales and marketing to create awareness and education about the category.
George Sutton – Craig-Hallum Capital Group
Okay and lastly from me, you picked up a nice size government agency win for you and that’s something we’ve never seen, is that part of your strategy going forward, is government a nice opportunity for you?
Yeah George, this is Ken. Yeah, we’ve been pushing in the government area and I think the one that you’ve picked up, you’re mentioning specifically at the USDA we made some good penetration in that organization. Federal government has a great segment for us, they love the ability of our solution to provide the visibility, the command and control style solution where they just don’t get that with the postage meter being able to monitor spending across multiple occasions really resonates with the federal government and on top of that we’ve really been over the last several years focused on adding features and capabilities, payment methods, gaining all the necessary approvals around the different organizations you have to work with in order to get the stamp of approval in the federal government sector. So, I think we’ve done a reasonably good job of starting some good penetration in the federal government and we have about 13 major departments where we have made some headway into different sectors.
George Sutton – Craig-Hallum Capital Group
Great year, thank you.
Thank you. (Operator Instructions) And it appears we’ve no further questions, at this time I would like to return the conference over back to Ken McBride, CEO for closing remarks.
I appreciate you guys joining us today and if you have any follow up questions please contact us at our website www.investor.stamps.com or you can contact our phone number 310-482-5830. 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 wonderful day.
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