Analyst Conference Summary

conference date: July 25, 2007 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2007 (2nd quarter)

Forward-looking statements

Overview: Now focussing on investing for long-term expansion of customer base.

Basic data:

$21.4 million revenue, up 7% sequentially from $20.0 million and up 6% from year-earlier.

$2.8 million GAAP net income or $0.13 EPS.

$94 million cash and equivalents. Decline due to share repurchases of $14 million.


Full fiscal 2007 revenue $85 to $95 million. GAAP EPS $0.48 to $0.52, lowered due to increased marketing spend.

Conference Highlights:

$16.8 million PC Postage revenue, of which $13.5 was subscription revenue, $2.5 million was online store revenue, and fees & other was $0.8 million.

Non-GAAP $3.4 million or $0.16 EPS, down 20% from year-earlier.

Lifetime value of direct mail customers is more than twice acquisition costs. Increased investment in direct mail up 90% from last year. Enhance promotion channel returns were good but lower than historical. Took steps towards end of quarter to improve economics. PC postage overall 27% spend increase over last year. Plan creates near-term earnings pressure but grows business for long run.

Tested new acquisition programs during quarter. Optimizing conversion rate, and have already seen some improvement. Focusing less on feature expansion and more on customer experience.

Multi-user product will launch in coming months.

Enterprise area is showing some momentum. Have 4 sales people for that.

291,000 sheets for $4.6 million revenue for PhotoStamps, up 24% from Q2 2006. Increased marketing spend from Q1. Saw nice increase in business orders. Competitor did a promotional price cut to $12.99 per sheet. We are at $18.99 per sheet. True revenue is markup. Face value data does not reflect reality very well. Revised USPS Q1 market share was 69%; Q2 estimate is 65%. Our own estimate is 70%.

Too early to tell if presorted 1st class rates will help.

Subscriber metrics: Paid customers 325,000. Sequentially 56,600 gained 54,700 lost. In enhanced channels 55,600. 270,300 in all other channels.$16.3 million total subscriber revenue. Per customer $16.59 per month.Paid customer cancel rate 4.8%. Customers are using more postage each on average.

Marketing spend total $6.2 million. Cost per new customer was $55.

$625,000 non-cash stock compensation expense.

Photostamps ha revenues of $4.6 million due to high-volume business orders. $16.8 PC postage business. $2.5 million online store revenue, higher due to postage rate increase related consumable purchases.

Non-GAAP: gross margin 69.9%, down from 72.6% in Q2 2006. PC Postage gross margin 79.8%. PhotoStamps 34% gross margin, down due to high-volume business orders.

$7.8 sales and marketing expense. R&D $1.95 million. G&A was $2.9 million. Operating margin 11.1%. GAAP operating expense was $19.67 million and gross margin was 69.9%

Free cash flow $3.9 million. $94 million cash and equivalents. Decline due to share repurchases of $14 million.

Guidance: Full fiscal 2007 revenue $85 to $95 million. GAAP EPS $0.48 to $0.52, lowered due to increased marketing spend.

Plan to increase spending for direct mail to drive long-term growth.

For 2007 assume decline in one of our patent licensing deal. Legal expense uptick. Effective tax rate 2 to 3%.


Why is revenue coming down despite increased marketing spend? Challenges in Photostamps. Also income lags spend for PC Stamps.

Acquisition in Q2 was due to spend, believe it shows importance for long term business.

Enterprise customer numbers? 300% increase year/year. On small base.

New retention program? Have been testing almost a year. This is the first quarter it was large enough to have impact. Again costs are short term but gains are long term.

Patent trial date has been set.

Seasonality of churn? Driven by mix of customers. Nothing in Q2 was obviously seasonal.

Retention program? Not a set price, tailored to reason each customer is thinking of leaving.

Direct marketing in 2008? Looking at 3 to 5 year time horizon. As long as long term returns are attractive we would not pull back on marketing spend.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers