Stamps.com Sending Positive Messages

The U.S. postal business seems to be passe — but not for Stamps.com. In fact, with its software tools for consumers and businesses, Stamps.com has put together a fast-growing enterprise.
In the second quarter, Stamps.com posted a 42% increase in revenues, to USD 20.2 million. Net income nearly doubled to USD 4.2 million, or USD 0.17 per share. This includes a USD 696,000 charge for expensing stock options. Free cash flow was about USD 4.3 million in the second quarter, and the company has about USD 117 million in the bank.
Stamps.com's core business is its PC Postage software, which lets users print up electronic stamps and offers delivery confirmation, signature confirmation, collect-on-delivery, and so on. A majority of customers pay a monthly convenience fee of USD 15.99.
In the second quarter, Stamps.com acquired 87,000 new customers for its core business, compared to 66,000 in the same period a year ago. During this time, the customer-acquisition cost declined from USD 73 to USD 57 per customer as the company shifted advertising from direct mail to online sources.
Stamps.com also offers PhotoStamps, a service that allows users to convert digital photos and designs into valid U.S. postage. In the second quarter, PhotoStamps earned USD 3.7 million in revenues.
Furthermore, Stamps.com implemented a new platform combining its website, e-commerce, and download products within one system. This gives the company more options to cross-sell, upsell, and change its marketing mix. Before this move, customers needed separate account profiles for PC Postage and PhotoStamps.
With the new platform, Stamps.com has launched PC Postage 6.0, which adds international shipping (including customs forms). The company also revamped its e-commerce store, adding 116 SKUs for a total of 279. (Its goal is to have 500 SKUs by the end of the year.)
Furthermore, Stamps.com increased guidance for 2006 to a range of USD 0.73 to USD 0.78 per share, up from prior guidance of USD 0.67 to USD 0.75 per share. Revenues are expected to be USD 85 million to USD 90 million, up from prior guidance of USD 82 million to USD 90 million.
Stamps.com faces stiff competition from two players: Pitney Bowes and Endicia.com. Endicia enaged in heavy marketing in the second quarter, partnering with Dymo, a label-printer manufacturer. While Pitney Bowes charges no monthly service fee, a consumer still needs to pay at least USD 140 or more for a Dymo device, and purchase printing labels at about USD 0.10 each. (A Stamps.com label ranges from USD 0.033 to USD 0.045.) Despite Endica's heavy prime-time TV advertising, Stamps.com believes that Endicia only signed up about 4,000 customers in the second quarter.
Pitney Bowes also has a PC product, but at a higher price of USD 18.99 per month. It also lacks some of the features of Stamps.com's offering, such as an address book, integration with Microsoft products, and so on.
Last April, Stamps.com provided weaker guidance, and the stock plunged. After reaching the high USD 30s, the stock is now trading at USD 21.37. Then again, the Internet sector has been particularly weak lately, given the suffering stocks of companies like Amazon.com, eBa, and Yahoo!.
But Stamps.com has several catalysts for continued growth, including its unified platform, new PC Postage software, and PhotoStamps. The company also has a significant barrier to entry – competitors must gain approval from the U.S. Postal Service – as well as a big market opportunity. U.S. postage is a USD 65 billion market, with about 22 million small office and home office customers. In other words, when investors warm up to Net stocks again, Stamps.com should benefit.