Jeff Carvari - Senior Director of Finance & IR
Ken McBride - CEO
Kyle Huebner - CFO
Kevin Liu - B. Riley
George Sutton - Craig Hallum
Bill Sutherland - Northland Capital Markets
Stamps.com Inc. (STMP) Q1 2012 Earnings Call April 25, 2012 5:00 PM ET
Good day and welcome to the Stamps.com Inc. first quarter 2012 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 how to participate will be given at that time. (Operator Instructions) And as a reminder today's conference is being recorded.
I would now like to turn the call over to your host, Senior Director of Finance and Investor Relations. Jeff Carvari.
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 first quarter 2012 and we will discuss the 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, 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 www.stamps.com including its annual report on Form 10-K for the fiscal year ended December 31st, 2011, quarterly reports on Form 10-Q 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 it over to Ken.
Today we announced another great quarter where we had strong financial performance and again we had record performance in multiple areas of the business. We achieved a record sequential quarterly increase in our paid customers which were up 28,000 to a new record level of 413,000. We achieved a record for small business due to customer acquisition at 86,000, total gross customers acquired, an increase of 28% year over year.
We achieved a record growth rate for total postage printed by our customer base which was up to 53% to a new record high level of $222 million. And our 27% core PC Postage revenue year-over-year growth rated matched our previous record high growth rate set during the fourth quarter.
The strength across our business lines drove earnings, strong earnings in the first quarter with non-GAAP operating income of $5.7 million which was up 70% year over year. Non-GAAP net income of $5.8 million which was up 66%. And non-GAAP earnings per share of $0.34 a share, up 42% year over year. The record highs in our business were particularly significant in light of the fact that the small business economic environment continues to struggle relative to previous session levels. On the call today we will talk more in detail about our PC Postage metrics and business, our financial results and our business outlook.
Now to 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 this excludes all enhanced promotion channel activities. For more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metric spreadsheet at investor.stamps.com.
Core PC Postage revenue including small business enterprise and high-volume shipping customer segments was 26.2 million in the first quarter which was up 27% versus the first quarter of 2011. For the past seven quarters, our core PC Postage revenue year-over-year growth rates have shown strong acceleration from 8% to 11% to 14% to 23% to 25% to 27% and again 27% this quarter.
This was our highest quarterly revenue level and matched the highest growth rate we have ever experienced in our core PC Postage business. The increase in our core PC Postage revenue was attributable to continuous strength in our small business area and in our enterprise and high volume shipping customer segments which are now contributing to our core business revenue, growth in a more material way. During the first quarter, we acquired at 86,000 gross small business customers that was up 28% versus the first quarter of 2011.
Our cost per new small business customers acquired or CPA was $110 in Q1 and that was down 5% versus the first quarter of 2011. This was our highest customer acquisition for any quarter in history of the company. We were able to significantly increase our customer acquisition spend which is up 22% versus the first quarter last year. And still achieve the lower CPA which is a great result and show that our marketing spend continues to scale efficiently. Our monthly churn rate during the first quarter was 3.0% matching the 3.0% churn seen in the first quarter of 2011. We are pleased to see that churn consistent with last year particularly considering our large growth and customer acquisition and paid customers over the past year. The churn we are experiencing is consistent with the range we experienced before the recession began. Overall we believe that our churn rates are benefiting from lower churn in our enterprise and high volume shipping customer segments, new product features which are driving increased usage of our service making our service stickier and continued success in our ongoing customer retention efforts.
Paid customers in the first quarter was 413,000 which was up 15% versus the first quarter of 2011 and up 28,000 sequentially versus the fourth quarter of 2011. This is our highest single quarter growth every for this metric and was a result of our increased customer acquisition efforts along with the lower churn rates. Average revenue per unit or ARPU was $21.16 in Q1, that was up 11% versus the $19.09 we saw in the first quarter 2011. We are pleased to see continued growth in ARPU. The increase in ARPU was attributable to higher professional fees from the high volume shipping in enterprise customer segments. Higher store revenue per paid customer driven the increased usage of our and service and higher insurance purchases per paid customer driven by our focus on shipping and by new insurance features that we have added.
Total postage used by all our customers was $222 million in the first quarter. That was up 53% versus the first quarter of 2011. the highest growth rate we have ever seen for our total postage printed and now the fourth consecutive quarter where year over year growth in our quarterly postage usage has exceeded 50%. Total postage printed in our high volume shipping segment was up 89%. Continuing the high levels of growth we saw in that segment during 2011. For our customers who are not high volume shippers we also saw a strong 39% year over year growth in first quarter postage usage. We carefully monitored total postage usage as an indicator of the value customers drive from our service and its growth has been co-related with strength in our other business metrics.
We continue to believe that the economic environment or with respect to small business remains challenging relative to pre-recession levels and continues to effect our small business customer acquisition. We note that the National Federation Of Independent Business Survey of small business optimism from March 2012 declined from February levels and was again below the threshold that is considered a recessionary reading.
While the economic environment, and particularly the small business environment remains challenging, we believe that improvements in the small business economic environment from current levels could provide a further lift to our small business efforts.
Now, let me turn to some detailed initiatives we are working on in PC Postage. Again, the discussion is about the core PC Postage business excluding the enhanced promotion channel. In the SOHO area, we are continuing to scale and optimize our customer acquisition spend. We continue to experience a strong ROI on our marketing spend, with an estimated life time value that exceeds our current cost per acquisition by at least two times.
During the first quarter, we were able to increase our small business customer acquisition spend investment by 22% versus last year, while also realizing a decrease in the CPA by 5%. We expect that our total 2012 small business customer acquisition spend will increase by 10% to 20% year-over-year. We continue to utilize 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 costs per acquisitions at a reasonable level.
Also in the SOHO 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 customary actions. We also continue to launch new features in our client product that make mailing and shipping easier for our customers.
We recently released Version 9.5 of our client software which added several great new features such as support for new international customs forms for first class, medium mail and parcel post both for new 2012 USPS shipping products including additional priority mail and express mail, flat rate boxes, pre-delivery confirmations for first class packages and enhancements to address book functions among other features. In enterprise area, we’re continuing to scale up our sales of marketing efforts. Customers continue to choose our service as a great alternative to postage meter based on the dramatically lower total cost of ownership.
Customers also like the visibility available from our centralized reporting tool where they can monitor postage spend across their entire network of users, a feature that is not available with postage meters.
During the first quarter, we continue to make strong progress in the enterprise area and growth in first quarter revenue was 36% year-over-year.
We also saw a strong growth in new enterprise locations and our pipeline of opportunities continues to grow nicely as well. Continue to see lower churn rates and higher ARPU and enterprise compare to our SOHO business.
Overall, we’re very excited about the continued progress we’re making in enterprise and feel that we are seeing returns on investment we’ve been making in this area.
We’re expecting to see continuous strong growth out of the enterprise business ongoing forward. In our high volume shipper area, we are continuing to scale up our efforts in that area in 2012. We continue to attract high volume shippers, such as warehouses, fulfillment houses, ecommerce shippers, large retailers and other types of high volume shippers to our service to do our efforts in this area.
Our business in this area is doing very well as evidence by the 89% year-over-year growth rate and high volume shipping postage printed we saw during the first quarter. For 2012, we’re continuing to focus on scaling this business area. We’re continuing to introduce improvements in this software and features to further improve scalability of the product to the largest high volume customers.
We’re also continuing to add new shopping card integrations for easier data import and export from the tools the customers like to use. We’re also continuing our sales efforts using our national sales force. Overall, we’re very excited about the progress we’re making in the high volume shipping area and we feel that we’ll continue to be a strong contributor to our overall business.
Given the large amount of activity on the postal reform, we want to take a minute to talk about the latest issues in this area and how they might affect us. Today, a bill was approved by the Senate that gives the postal service some financial relief but doesn’t give or delay some of the other reform goals of the postal service. Some of the more interesting areas of postal reform for us include three issues, which are, first, the USPS has proposed closing approximately 3,700 retail postal offices.
The Senate bill has made it more difficult to achieve this goal by creating an expanded appeal process and by prohibiting rural post office closings for at least another area amongst other our requirements.
Hopefully, that any actual post office closings would be beneficial to us, highlight the convenience of our service for those who will be impacted by the closures. Second, the USPS has proposed closing half of its 500 mail processing centers and eliminating over nine first class mail.
The Senate Bill cuts the number of mail processing centers that the USPS would be allowed to close to 125 and it adds new processes to possibly slowdown the closings of those 125 locations. And it would allow more U.S. areas to maintain overnight first class mail delivery for at least three more areas. Either way, we don’t really believe that cutting mail processing centers would have a material impact on us. Priority and express mail delivery times would not be impacted. We do not think there are other viable cost effective physical delivery alternatives to first class mail. Many people do not even realize the first class mail frequently arrives in one day to local areas.
We believe the customers make decisions regarding first class mail based on the weight of the mail piece. If it’s less than 13 ounces, they send it first class because it is significantly more cost effective. They don’t generally differentiate between one or two day delivery. The third item the USPS has proposed eliminating is eliminating Saturday delivery. The Senate Bill will delay a cut in Saturday delivery for at least two years.
Now if the Saturday delivery is cut sooner or later, we don’t believe this would have a material impact on our enterprise small business segments. On the margin, the loss of Saturday delivery could potentially result in the USPS losing marginal package volume to UPS or FedEx when a Saturday delivery is necessary. But we don’t believe the impact will be material as it relates to Stamps.com.
We’re strongly in favor of any bill that will restore the Postal Service to financial health, as we depend on them to continue delivering the mail and packages to our customers.
We would note that the Senate bill is not law yet, that the bill that has been circulating in the House has several material differences. Our focus is on ensuring that we can do everything possible to help create value for the USPS and we felt that we’re doing this as evidenced by our 53% growth in total postage printed in the first quarter and in particular our 89% growth in high volume shipping postage printed during the first quarter.
The growth in our customer’s postage print directly translates into growth in the USPS’ revenue in these areas and that’s results in us helping create one of the fastest growing revenue streams for the USPS.
With that, now Kyle will discuss our more detailed financial result. Kyle?
Thanks Ken. We will now review our first quarter financial results. We will discuss our first quarter financials on a non-GAAP basis, which excludes the following. $1.3 million of stock-based compensation expense and $11.9 million non-cash tax benefit resulting from the reversal of a portion of our 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 $28.3 million in Q1, up 24% compared with Q1 2011. The first quarter marked the continued trend of growth in total revenue driven by strong results in our core PC Postage business. This was our fourth consecutive quarter of year-over-year revenue growth greater than 20%.
Core PC Postage revenue was $26.2 million in Q1, up 27% compared with the first quarter of 2011. 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 metric section. This was our fifth consecutive quarter of year-over-year core PC Postage revenue growth greater than 20%. There was a postal rate increase in January 2012 which we believe benefited certain areas of business such as customer acquisition and store revenue.
Non-core PC Postage revenue from the enhanced promotion channel was $782,000 in Q1, down 3% compared with Q1 2011. While we continue to experience year-over-year declines and enhanced promotional revenue we are seeing stabilization in quarterly revenue trends with the past five quarters in a consistent range between $775,000 to $805,000 per quarter.
PhotoStamps revenue was $1.3 million in Q1, down 5% compared with Q1 2011. PhotoStamps revenue benefited from growth in high volume business orders. However, these orders tend to fluctuate from quarter-to-quarter. Excluding the high volume business orders, PhotoStamps revenue would have been down 10% year-over-year.
PC Postage gross margin were 77.4% in Q1 compared with 76.3% in Q1 2011. Cost of sales included promotional expenses related to customer acquisition of $1.1 million in Q1 compared with $842,000 in Q1 2011. The increased promotional expense was driven by increased levels of customer acquisition.
PC Postage gross margin excluding these promotional expenses was 81.4% in Q1 compared with 80.3% in Q1 2011. The improvement in gross margins excluding promotional expenses was due to the strong revenue growth we have seen in the core PC Postage business.
PhotoStamps’ gross margin was 21.6% in Q1 compared to 21.2% in Q1 2011. Total sales and marketing spend was $9.8 million in Q1 which was up 21% compared with Q1 2011. PC Postage sales and marketing spend increased by 22% and PhotoStamps sales and marketing spend decreased by 20%.
R&D spend was $2.3 million in Q1 which was up 10% compared with Q1 2011. The increase was primarily related to increased headcount expenses to support our expanded product offerings. G&A spend was $3.3 million in Q1 which was up 6% compared with Q1 2011.
As previously announced, we settled our outstanding patent infringement litigation with Endicia in March of the 2012. We did incurred litigation expense throughout the first quarter in preparation for the trial which was scheduled to commence on March 20, 2012.
Non-GAAP operating income was $5.7 million in Q1 which was up 70% compared with Q1, 2011 and non-GAAP operating margin increased from 14.8% in Q1, 2011 to 20.3% in Q1, 2012. The growth was primarily attributable to the strong revenue growth in our core PC Postage revenue. We are also realizing leverage in our operating expense line items which are increasing less than our revenue growth rates.
Non- GAAP net income was $5.8 million or $0.34 per share based on 17.2 million fully diluted shares compared with $3.5 million or $0.24 per share based on 14.6 million fully diluted shares in Q1, 2011 which represented 66% and 41% year-over-year growth rates respectively. The increase in fully diluted shares was attributable to higher shares outstanding from option exercises during 2011 and higher common stock equivalents resulting from a higher average stock price during the first quarter of 2012.
EBITDA was $6.0 million in Q1 which was up 65% compared to Q1, 2011. This metric is calculated is non-GAAP operating income plus $221,000 of D&A contained in operating expenses.
Free cash flow generated by the business was a positive $5.7 million for the first quarter. This metric is calculated as non-GAAP operating income plus for the $221,000 D&A contained in operating expenses, less $313,000 of CapEx related to the business. Note that this calculation excludes net tenant rental income and capital investments related to the new corporate headquarters.
We ended Q1 with $67 million cash and investments or $4.12 per ending balance sheet share, which was down $2 million from the $69 million in cash and investments at the end of Q4 2011. The $2 million decrease in cash and investments during the first quarter was comprised of the following:
Positive $5.7 million free cash flow for the business; positive $5 million cash from changes in networking capital due primarily to a large AR balance as of 12/31/2011 that was paid during Q1 of 2012; positive $2.2 million cash from option exercises; less a negative $13.4 million use of cash for the purchase of our corporate headquarters which closed and was fully funded in January 2011, less $1.7 million use of cash for the initial spend on the renovations to the new corporate headquarters and a positive $0.1 million from tenant rental cash flow.
NOL and DTA update. As of March 31, 2012 we had approximately $230 million in federal NOLs and $125 million in state NOLs resulting in a gross deferred tax asset or DTA of approximately $83.5 million. We have a $55.5 million valuation allowance against this gross DTA resulting in a net DTA of $28 million on the balance sheet.
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 and federal taxes for approximately the next 10 years. We estimate that as of March 31, 2012, our Section 382 ownership shift was at an approximately 17% level compared with the 50% level that would trigger an impairment of our NOL assets. As part of our ongoing program to preserve the future use of our NOL assets, we request that any shareholder contemplating becoming a 5% shareholder equivalent to approximately 815,000 shares or more contact the company before doing so.
Now turning to guidance, we expect total 2012 revenue to be in a range between $107.5 million to $117.5 million. This compares to our previous expectation for 2012 revenue of $105 million to $115 million. We expect fiscal 2012 GAAP EPS to be in the range between $1.80 to $2 per fully diluted share. GAAP numbers assume approximately $4 million of stock-based compensation expense in the first quarter $11.9 million non-cash tax benefits. Excluding the stock-based compensation expense and non-cash tax benefit, we expect 2012 non-GAAP EPS to be in a range between $1.35 to $1.55 per fully diluted share.
This compare to our previous expectations for 2012 non-GAAP EPS of a $1.25 to $1.45 per share. We expect 15% to 20% growth in 2012 core PC Postage revenue. We expect enhanced promotion revenue will continued to be down in 2012 compared to 2011. We expect PhotoStamps revenue will also continue to be down in 2012 compared to 2011 as we continue to focus on our core PC Postage business.
We expect 2012 small business PC Postage customer acquisition spend to be up 10% to 20% compared to 2011. We expect G&A excluding stock-based compensation expense to be down between 5% to 10% in 2012 compared to 2011. Fully diluted shares for 2012 are expected to be in a range between 17.2 million to 17.5 million shares compared to 15.2 million 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 to 20 percentage points higher than the year-over-year growth rate for 2012 non-GAAP diluted earnings per share. As a reminder, 2011 financial results contain $2.2 million of revenue and $1.7 million of income related to the initial recognition of PhotoStamps retail box breakage in the second quarter of 2011.
While 2012 revenue and income from PhotoStamps retail box breakage is not expected to be material. For purposes of comparing annual growth rates excluding the initial recognition of PhotoStamps breakage, second quarter 2011 results without the breakage would have been total revenue of $24.5 million and non-GAAP diluted earnings per share of $0.33. In fiscal 2011 results, without the second quarter breakage would have been total revenue of $99.4 million and non-GAAP diluted earnings per share of $1.29.
We expect another approximately $10 million capital investment in our new corporate headquarters for the remainder of the year. While we don’t provide quarterly guidance we would note the following. We do expect to have much tougher year-over-year comparisons starting in the second quarter.
Specifically we had a noticeable acceleration in our year-over-year growth rate for our core PC Postage revenue from 14% in Q1, 2011 to 23%in Q2, 2011 due to strong contributions from our high volume shipping area in the second quarter of 2011. We also had a noticeable acceleration in our year-over-year growth rate and our small business customers acquired from 4% in Q1, 2011 to 25% in Q2, 2011 due to our increased small business customer acquisition spend and improving market efficiency in the second quarter of 2011.
Thus we did not experience a seasonal slowdown that we would have normally expected to see in the second quarter of 2011. However we do expect to see more of the traditional seasonal slowness that has been present in our business in the past years for the second and third quarters of this year. Overall we are very pleased with the start to this year and are looking forward to delivering solid results for 2012.
In summary, we were very pleased with our overall first quarter results including continued strength in our key customer metrics, core PC Postage revenue and non-GAAP income and earnings per share. Our core PC Postage business model with recurring revenue and high gross margins continues to demonstrate strong growth and we are continuing to realize the benefits of our investment in the enterprise and high volume shipping areas.
We are seeing record-setting performances across many of our key financial and customer metrics. We have a strong balance sheet, attractive return on equity, strong free cash flow generation and a large deferred tax asset of $83.5 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 it up for questions
(Operator Instructions) Our first question comes from Kevin Liu with B. Riley. Your line is open.
Kevin Liu - B. Riley
So wanted to start with the insurance sales in the period, you talked a little about how it begins in the high volume shipper market are certainly helping on that front so, are you seeing broad based usage of your insurance solutions not only in high volume shipping, but also across enterprise and small business and then beyond that how sustainable are these levels you've seen of late?
Yes, I mean specific to the insurance, typically the best way to look at it is the year-over-year growth rates and insurance revenue relative to the year-over-year growth rates and the postage printed by the high volume shipping segment. So for Q1, insurance revenue was up 99% year-over-year and high volume postage printed was up 89% year-over-year.
So we did exceed the postage printed which I think that’s attributable partially to slightly increased penetration in the high volume shipping segment as well as slightly increased purchases outside of the high volume shipping segment. But from a big picture perspective it really is the growth in the high volume postage printed and that drives the insurance revenue.
Kevin Liu - B. Riley
And then on the high volume side of things, you guys had the partnership with Amazon third-party website. I am wondering if that also applies to the new Amazon supply initiative that they have announced?
Well, what we are doing in Amazon is specifically related to the Amazon marketplace solutions. So its consumer-to-consumer shipping solution where our shipping labels available through that or seamless integration through the back end of Amazon, so that the consumers can ship packages between each other without happen to repopulate the adverse information. That’s the main opportunity we’re working with Amazon around at this point.
Kevin Liu - B. Riley
And you mentioned earlier in the script that because of your exposure to enterprise and then high volumes is becoming more material. Now generally it was down again, as the level of revenues you are getting out of those two groups I am thinking now if you guys start to disclose now?
And then along those lines, with churn rate coming down at 3% obviously we saw that in Q1 last year as well. What’s kind of your take as to the impact of seasonality on bringing that number down versus I think you guys have done to ensure that it day around these levels of shipment for the coming quarters?
If you look at churn, the churn calculation definitely has a seasonal component to it. If you look back over kind of the six years metrics that we provide, Q1 tends to be typically the lowest seasonal churn rate; Q2 tends to be the seasonally highest churn rate and then Q3 and Q4 kind of fall in the middle.
So I think at this point, you really have to look at it on a year-over-year comparison as opposed to sequential comparison. The churn rate in Q1 at 3% was about the same as the 3% we saw last year which we’re actually happy with that just given the increase from in the customers acquired and the increase in pay customer base to be able to maintain the churn rate at that run rate, you know it’s something we were pleased with.
So at this point, I think we said that maintaining the churn rate in the 3.0% to 3.5% range given the small business economic environment. That’s something we are very happy with given that what we saw in the pre-recessionary times with 3.0% to 3.5% range.
So I think we feel that the fact that we are achieving similar type churn rates in a more difficult small business economic environment is really attributable to company specific factors such as the enterprise and high volume shipping segments having more return and some of the product features and usability features that we have introduced over the last couple of years.
Kevin Liu - B. Riley
And having had a chance to get through the get math on this yet so maybe if you seek high level – as you look at increasing your EPS guidance for the year. How much of that is directly tied to the higher revenue guidance as well versus the lower legal expense following the settlement with Endicia and your decision as to how much to reinvestment in further marketing?
Our goal is to give kind of a big picture on the revenue and the EPS, and so we don’t necessarily tie each discrete event to the changes in the EPS. I think in general the way to think about it is that the increase in the EPS guidance reflects the increase in the revenue guidance reflects the void spend in the Endicia litigation, but to some degree that was offset by the fact that our customer acquisition spend was higher than we had originally anticipated with 22% in Q1 and we spend at that range of customer acquisition spend to be 10% to 20%.
And yeah the thing to keep in mind is that Q1 and Q4 are seasonally strongest quarters so to the extent that things are looking good and we increase our customer acquisition spend in Q4 of the year are our seasonally strongest quarter, we really don’t get any revenue benefit out of that, so there is kind of a headwind on the current year EPS but then benefits the subsequent year revenue and EPS number.
Thank you. Our next question in queue is from George Sutton with Craig Hallum. Your line is open.
George Sutton - Craig Hallum
I wanted to see if you could help us walk through your thoughts the 10% to 20% growth in spend you talked about. Obviously, you’ve been spending at levels in excess of that you’ve been a generally falling cost of per acquisition?
And I am curious how are you determining the governor on your spend, in other works why are you limiting it at this point given that you are continuing to see really improved results?
I guess I wouldn’t classify it as a case where we’re actively limiting the spend; I think reins that we gave to some degree reflects the fact that starting in Q2 of last year we kind of really ramped up our marketing, our customer acquisition spend. So you know on a percentage basis Q2, Q3 and Q4 are going to be tougher comparisons but generally speaking the way we approach it is that we are, our goal is to invest as much as we can in customer acquisition spend ensuring that the customer economics are reasonably maintained and that the programs are scalable et cetera.
So it's really something that we monitor real time throughout the course of the year and are constantly looking at what the right spend levels are and we will definitely adjust it on a quarter-to-quarter basis, so I won’t think of you know that range as set in stone for the full year. It's really kind of our best approximation at this time and we monitor the small business economic environment levels of acquisition, CPAs, specific program results et cetera as we go throughout the year and are trying to optimize the level of investment in the business.
George Sutton - Craig Hallum
That's actually good to hear. So relative to your customer postage printed, we are kind of in an annualized run rate of about $880 million, obviously a good portion of that is high volume shipping. Is there a way to quantify for us what you view the total addressable market to be of either the customer postage printed that you would be going after or the high-volume shipping piece specifically?
I guess there is a couple of perspectives, you can look at, there is data available from the USPS in terms of the postage market but I think that you are working specifically at the high volume postage printed for shipping. Really you know the addressable market expands to include the private carrier shippers and really our strategic goal is to you know work with the USPS to capture share from UPS and FedEx. So when you include kind of the e-commerce driven shipping from UPS and FedEx I mean we’re still at a point where we feel that our postage printed at a very low level of penetration and then I thinks that’s reflective of the fact that you know the high volume shipping efforts you know it really are newer effort for us relative to kind of small business where you know we’ve been in the market for a much longer period of time.
George Sutton - Craig Hallum
And then lastly for me we talked last quarter about federal opportunities. You had won some initial federal opportunities. Our due diligence suggest you’ve actually seen quite a bit of success there. Can you just update us on that specific opportunity set?
Sure. George we’ve been pushing hard on the areas like we talked about last quarter and I think we continue to make good progress in the federal government area. The solution we have really resonates with them well. They love the visibility, they get into the spend across the multiple location, the centralized dash board that we provide for them to be able to monitor that spend and clearly there is a mandate to save money. So they are taking a look at their postage meter spend and they are looking at our solution as an alternative and dramatically lower total cost of ownership, less ink cost, less monthly meter cost, less reset feed cost and all those things go away.
Our solution, we typically tell people that they can expect to see at least 50% decrease in their overall total cost of ownership and the Federal government, that's really resonated well. We took a lot of steps the last couple of years to really put all the features and capabilities in place to be able to go after the Federal government.
So particular like payment methods, there is some unique payment methods that you have to be able to support in that market. Other thing is where we kind of put all those pieces in place and so you know we went through some approvals with some different organization to kind of get some separate stance of approval there were also necessary.
So we kind of, we have been building that for several years and I think over the past few year, certainly last year and this year we really started to see some good penetration in the Federal government organizations. No we have done well in the department of agriculture. The agriculture and Department of Commerce, Defense, Energy, Homeland Security, veterans affairs. So we are seeing some nice penetration in lots of federal government sectors.
Our next question in queue comes from (inaudible) Capital Markets. Your line is open.
Looking at ARPU at 21.16 compared to $19.09 at Q1 2011, can you attempt to quantify the impact in new enterprise clients that I am driving ARPU in the quarter?
Yeah, I mean, I think from a bigger picture perspective, the way, you know, we’ve seen in the last year is that the growth in the core PC Postage businesses is coming from the growth in the paid customers and the growth in the ARPU and the growth in the paid customer is being more driven by the small business segment and the growth in the ARPU is being driven more by posting enterprise firm and shipping segments. So, I think it’s a combination of enterprise and shipping and the enterprise, you know, the average revenue per rotation is tends to be higher than the small business because you’re getting the incremental functionality, networking, everything together.
You know, in terms of this shipping side, you know, I think you realize higher, you have a better ability to realize higher monthly fees per paid customer in the high volume shipping segment. It is well as the insurance. You know I talked about before. The insurance revenue growth tends to mirror the growth and the high volume postage printed by the shipping customers. So you know the increase in the growth in the high volume shipping segment, the postage printed is definitely contributed to the growth in the ARPU as it relates to the insurance revenue. So I think, we don’t break out this stuff like numbers but at a big picture, I think that’s the best way to think about it.
And keeping on the enterprise segment how would you gauge your success to date in acquiring customers there?
I mean I think we've been continuing to be very happy with the progress we've been making in the enterprise segment. I think we've been working on it for several years and through this quarter we were pleased with the progress we've made building the sales pipeline, spend a lot of time and energy working on sales team, sales process, you know optimizing our lead general marketing spend and we are continuing to add new customers, new locations within existing customers and the great thing about the enterprise segment is the churn rate is very low, the ARPU is high. So it’s a great ROI on the marketing dollar we are spending, sales and marketing dollars we are spending and yeah, I think at this point we feel like enterprise we've been out long enough that feel comfortable that we can execute on the business model and continue to optimize and drive it going forward, and we are pleased with how the business did last year, we are pleased with how the business did in the first quarter.
The other thing I would add is we've talked about just as opposed to the small business segment where the customer acquisition can happen relatively real time and quickly. In the enterprise, its more than extended cycle where the customer will typically do a pilot, evaluate it and then roll it out to locations on a rolling cycle. So in some cases it takes an extended period of time to be able to kind of determine the ultimate economics as it relates to customer acquisition, but the flip side to that, as Ken mentioned, is once you are in there there’s significant, switching costs, the customers are more stable and you see a lot lower churn rates than in the small business.
Our next question comes from Bill Sutherland with Northland Capital Markets. Your line is open.
Bill Sutherland - Northland Capital Markets
Ken, I am impressed by the number of federal agencies that you might some penetration into and I was -- one thing add I could benefit from understanding a little bit about the marketing process there, I mean as soon as go treated sales team and is there kind of like an enterprise sale, where it’s the pilot and than a gradual roll out or was it just -- I mean its not a broad-based strength to an agency is while I’m assuming?
No, I mean we don’t typically conquer all agencies at once. There is sub-groups and sub-groups of sub-groups that we sort of -- our goal is typically when we go into these department is to try to establish a beachhead, then try to work our way into the -- certainly the home office in D.C. and hopefully we get you know kind of referrals down into the various branches of the department. So it tends to happen in the same way and as it does in the commercial side, in terms of the process we going in there and start with the pilot. We had a sales team on the ground, it’s you know calling into the Federal government organizations.
We start with the pilot, we go to the pilot process and in many cases, their maybe you know, because it’s the government, their maybe an RFP process. So we have to go to kind of more paper work related to that, but it’s been a been a nice sector for us. And we do there a lot of departments and lot of departments that we are going after right now.
Bill Sutherland - Northland Capital Markets
I am looking at couple of things that Kyle referenced and I just wanted to get a clarity. Did you mentioned the legal -- the litigation expense you spent quarter-to-date if you want?
We, our kind of policy is then to, you know, that we don’t break out that the litigation expense separately. So I think what we have done in the guidance I gave kind of the full year expectation for G&A stock base compensation expense and so. That should give you a sense of what the G&A range will be for either the remainder of quarter, remaining quarters of the year where we wont be incurring that litigation spend.
Bill Sutherland - Northland Capital Markets
Okay. That makes sense. Thanks. And then, Kyle, you mentioned seasonality was probably going to crop up a bit more in this quarter two, and quarter three in last year. I guess being new to this. So, maybe its something I not (inaudible) why would that be changing this year?
Well, So the way to think about just kind of the context of seasonality, generally speaking Q4s are strongest quarter and Q1 is a strong quarter. Q2 and Q3 tend to be, overall, seasonally slower. I think primarily because small businesses and shippers kind of, as you approach the summer month, the activity tend to slow down and so there are components of our business take for example, customer acquisition where the lines at the post office in Q4 are typically longer and so the value and more being mails and ships.
So the value proposition tends to be stronger there and lets say in Q2 and Q3 when you get kind of a bit of slowdown and so really historically we’ve just seen that postage printed activity on a consistent customer basis if you look at the same customer they tend to print less postage inQ2 and Q3 so that things like the store revenue, insurance revenue are driven by that activity.
So I think what we’re saying is that the seasonality exist in the business. Last year in Q2 we had certain positive factors that kind of outweighed the seasonal flow so that as you look to this year, we expect that the seasonal pattern might be more inline with what we’ve seen historically in the business.
Bill Sutherland - Northland Capital Markets
That’s kind of parts of my question; the positive factors also out weighted and I understand the seasonality; I am kind of curious that either ahead of stream your customer acquisition spend super effective; what’s are the proper seasonal factors that rise up again or (inaudible)?
I think what we are trying outline is that Q2 last year was really a quarter where we hit more than inflection point and that certain things like the customer acquisition, customers acquired and the revenue year-over-year revenue growth really accelerated. So its more just saying that we are going to have a tougher comparison this year as we anniversary kind of that inflection point.
Bill Sutherland - Northland Capital Markets
Okay, so its just the comp ratio alright. That makes sense. But you guys aren't going to be holding back deliberately on customer acquisitions and your response rates are still ahead, right?
Yeah, and that's what I was saying before, I mean we don't manage to a specific number. We are trying to invest as much as we can in the business while monitoring factors such as the acquisition of CPAs, the economic environment, the specific program results so it’s a constant process of looking ahead and adjusting what the optimal investment level is.
Bill Sutherland - Northland Capital Markets
And if I could one on Kevin’s questions, you are not going to breakout enterprise and shipping in the immediate near future?
Not at this point, no.
Thank you. And at this point, I would like to turn the program back to the presenters for concluding remarks.
This is Ken, thank you for joining us today. If you have any follow-up questions as always you can get a hold of us through our Investor Relations website at investor.stamps.com or you can call us at 310-482-5830. Thanks.
Ladies and gentlemen, thank you for joining today’s call. This does conclude the program and you may now disconnect.