TMCnet News
STAMPS.COM INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to expectations concerning matters that are not historical facts. You can find many (but not all) of these statements by looking for words such as "approximates," "believes," "expects," "seeks," "anticipates," "estimates," "intends," "plans," "would," "could," "should," "will," "may" or other similar expressions in this report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this report, or that we may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends and uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends. Please refer to the risk factors under "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2013 as well as those described elsewhere in our public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Stamps.com, NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the Stamps.com logo are our trademarks. This report also references trademarks of other entities. Overview Stamps.com® is the leading provider of Internet-based postage solutions. Our customers use our service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a wide range of United States Postal Service ("USPS") mail classes, including First Class Mail®, Priority Mail®, Priority Mail Express®, Media Mail®, Parcel Select®, and others. Customers using our service receive discounted postage rates compared to USPS retail on certain mail pieces such as First Class letters and domestic and international Priority Mail and Priority Mail Express packages. Our customers include individuals, small businesses, home offices, medium-size businesses and large enterprises, and within these segments we target both mailers and shippers. We were the first ever USPS-licensed vendor to offer mailing and shipping in a software-only business model in 1999. Services and Products Mailing and Shipping Business Our mailing and shipping solutions enable our customers to buy and print USPS approved postage and services with just a personal computer ("PC"), printer and Internet connection, right from their home or office. We offer the following mailing and shipping products and services to our customers under the Stamps.com brand: · Mailing and Shipping Services. After completing the registration process, customers can purchase and print postage 24 hours a day, seven days a week, through our software or web interface. Typically, when a customer purchases postage for use through our service, the customer pays the face value of the postage, and the funds are transferred directly from the customer's account to the USPS's account. The customer then draws down their prepaid account balance as they print postage and repurchases postage as necessary. Customers typically pay a monthly subscription fee for access to our service. 17-------------------------------------------------------------------------------- Table of Contents Our USPS-approved mailing and shipping service enables users to print "electronic stamps" directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. Our service currently supports a variety of USPS mail classes. Customers can also add to their mail pieces USPS Special Services such as USPS Tracking TM, Signature Confirmation TM, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery. Our customers can print postage (1) on NetStamps® labels, which can be used just like regular stamps, (2) directly on envelopes, postcards or on other types of mail or labels, in a single step process that saves time and provides a professional look, (3) on plain 8.5" x 11" paper or on special labels for packages, and (4) on integrated customs forms for international mail and packages. For added convenience, our mailing and shipping services incorporate address verification technology that verifies each destination address for mail sent using our service against a database of all known addresses in the United States. Our mailing and shipping service is also integrated with common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications. We also offer several different versions of NetStamps labels, such as Themed NetStamps labels and Photo NetStamps labels, which allow customers to add stock or custom designs to their postage label. We offer multiple mailing and shipping service plans with different features and capabilities targeted to meet different customer needs. Our Pro Plan offers a basic set of Stamps.com mailing and shipping features with single-user capability. Our Premiere plan, typically targeted at larger small businesses, adds multiple-user functionality, automated Certified Mail forms, additional reference codes and higher allowable postage balances as compared to our Pro Plan feature set. Our Professional Shipper plan is typically targeted at higher volume shippers such as fulfillment houses, retailers and e-commerce merchants and features direct integration into a customer's order databases, faster label printing speed, the ability to customize and save shipping profiles, and integrations with many of the industry's leading shipping management systems. We have launched shipping integrations with several of these e-commerce focused companies. Our Enterprise plan is typically targeted at organizations with multiple geographic locations and features enhanced reporting that allows a central location, such as a corporate headquarters greater visibility and control over postage expenditures across their network of locations. Customers typically pay us a monthly service fee ranging from $15.99 to $39.99 depending on the service plan. In certain circumstances, customers may be on a plan where they do not owe us any monthly service fees. We have an arrangement with the USPS under which if a customer or integration partner prints a certain amount of domestic or international Priority Mail or Priority Mail Express postage, the USPS compensates us directly and the customer can qualify to have their service fees waived or refunded. In addition, we also have plans with service fees less than $15.99 which offer more limited functionality and are targeted at retaining customers who print a lower volume of postage. · Mailing and Shipping Integrations. As part of our mailing and shipping services, we offer back-end integration solutions where we provide the electronic postage for transactions to partners who manage the front-end process. Our software integrates directly into the most popular e-commerce platforms, allowing web store managers to completely automate their order fulfillment process by processing, managing, and shipping orders from virtually any e-commerce source through a single interface without manual data entry. Managers can retrieve order data and print complete shipping labels for all USPS mail classes, including First Class International®. We have an integration partnership with Amazon.com that makes our domestic and international shipping labels available to Amazon.com Marketplace users. The service allows customers to automatically pay for postage using their Marketplace Payments account, to set a default ship-from address so they do not have to type or write it for each shipment, and to automatically populate the ship-to address on the label. Domestic and international mail classes are supported and Marketplace users may request carrier pickup from the USPS. A transaction fee per shipping label printed is charged to merchants who are not Stamps.com subscription customers. In October 2012, Amazon.com launched their own internally developed Marketplace USPS shipping solution system that resulted in a reduction in postage printed through our solution. Amazon's shipping solution is utilized by merchants for certain mail classes while our shipping solution is utilized by merchants for the other mail classes. In addition, we continue to provide the integrated Amazon.com Marketplace solution to Stamps.com subscription customers. 18 -------------------------------------------------------------------------------- Table of Contents We have an integration partnership with the USPS where we provide electronic postage for shipping transactions generated by Click-N-Ship®, a web-based service available at USPS.com that allows USPS customers to purchase and print shipping labels for domestic and international Priority Mail and Priority Mail Express packages at no additional mark-up over the cost of postage. · Mailing & Shipping Supplies Store. Our Mailing & Shipping Supplies Store (our "Supplies Store") is available to our customers from within our mailing and shipping software and sells NetStamps labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies. Our Supplies Store features a store catalog, messaging regarding our free or discounted shipping promotions, cross-selling product recommendations during the checkout process, product search capabilities, and same-day shipping of orders with expedited shipping options. · Branded Insurance. We offer Stamps.com branded insurance to our customers so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms. Our branded insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund. PhotoStamps PhotoStamps is a patented form of postage that allows consumers to turn digital photos, designs or images into valid USPS-approved postage. With this product, individuals or businesses can create customized USPS approved postage using pictures of their children, pets, vacations, celebrations, business logos and more. PhotoStamps can be used as regular postage to send letters, postcards or packages. The product is available via our separately-marketed website at www.photostamps.com. Customers upload a digital photograph or image file, customize the look and feel by choosing a border color to complement the photo, select the value of postage, and place the order online. Each sheet includes 20 individual PhotoStamps, and orders arrive via U.S. Mail in a few business days. When we refer to our mailing and shipping business, we are referring to our Mailing and Shipping Service and Integrations, Mailing & Shipping Supplies Store and Branded Insurance offering. We do not include our PhotoStamps business when we refer to our mailing and shipping business. ShipStation Acquisition On June 10, 2014, we acquired 100% of the outstanding equity of Auctane LLC, which operates ShipStation, in a cash and contingent stock transaction. ShipStation, based in Austin, Texas, offers monthly subscription based e-commerce shipping software primarily under the brand ShipStation and Auctane. ShipStation is a leading web-based shipping software solution that allows online retailers and e-commerce merchants to organize, process, fulfill and ship their orders quickly and easily. ShipStation supports automatic order importing from over 40 shopping carts and marketplaces, including eBay, Amazon, Shopify, Bigcommerce, Volusion, Squarespace and others. ShipStation offers multi-carrier shipping options, and automation features like custom hierarchical rules and product profiles that allow customers to easily and automatically optimize their shipping. Using ShipStation, an online retailer or e-commerce merchant can ship their orders from wherever they sell and however they ship. The acquisition of ShipStation represents a significant strategic investment in our high volume and e-commerce shipping business. Please see Note 2 - "Acquisition" for further description. Results of Operations Total revenue in the second quarter of 2014 was $34.3 million, an increase of 7% from $32.1 million in the second quarter of 2013. Total revenue during the six months ended June 30, 2014 was $67.6 million, an increase of 5% from $64.2 million in the six months ended June 30, 2013. Mailing and shipping revenue, which includes service revenue, product revenue and insurance revenue, was $32.9 million in the second quarter of 2014, an increase of 7% from $30.9 million in the second quarter of 2013 and was $65.2 million in the six months ended June 30, 2014, an increase of 5% from $62.0 million in the six months ended June 30, 2013. PhotoStamps revenue in the second quarter of 2014 was $1.4 million, an increase of 11% from $1.2 million in the second quarter of 2013 and was $2.4 million in the six months ended June 30, 2014, an increase of 7% from $2.3 million in the six months ended June 30, 2013. 19 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the breakdown of revenue for the three and six months ended June 30, 2014 and 2013 and the resulting percentage change (revenue in thousands): Three months ended June 30, Six months ended June 30, 2014 2013 % Change 2014 2013 % Change Service revenue $ 26,921 $ 24,888 8 % $ 52,564 $ 49,736 6 % Product revenue 3,955 4,075 (3 %) 8,568 8,551 0 % Insurance revenue 2,047 1,917 7 % 4,040 3,663 10 % Mailing and shipping revenue $ 32,923 $ 30,880 7 % $ 65,172 $ 61,950 5 % PhotoStamps revenue $ 1,359 $ 1,229 11 % $ 2,408 $ 2,259 7 % Other revenue 2 - - 2 1 73 % Total revenue $ 34,284 $ 32,109 7 % $ 67,582 $ 64,210 5 % Core mailing and shipping revenue in the second quarter of 2014 was $32.4 million, an increase of 7% from $30.1 million in the second quarter of 2013. Core mailing and shipping revenue during the six months ended June 30, 2014 was $64.1 million, an increase of 6% from $60.4 million during the six months ended June 30, 2013. Non-Core mailing and shipping revenue in the second quarter of 2014 was $544,000, a decrease of 26% from the $731,000 in the second quarter of 2013. Total Non-Core mailing and shipping revenue during the six months ended June 30, 2014 was $1.1 million, a decrease of 26% from the $1.5 million in the second quarter of 2013. When we refer to our "Core mailing and shipping business", we are referring to the portion of our mailing and shipping business targeting our small business, enterprise and high volume shipping customers, and "Core mailing and shipping revenue" is the revenue from our Core mailing and shipping business including ShipStation. When we refer to our "Non-Core mailing and shipping business", we are referring to the portion of our mailing and shipping business that targets a more consumer oriented customer through the "enhanced promotion" marketing channel and "Non-Core mailing and shipping revenue" is the revenue from our Non-Core mailing and shipping business. In the "enhanced promotion" channel, we work with various companies to advertise our service in a variety of sites on the Internet. These companies typically offer an additional promotion (beyond what we typically offer) directly to the customer in order to get the customer to try our service and we find that this channel attracts more consumer oriented customers. The following table sets forth the breakdown of mailing and shipping revenue, which includes Core mailing and shipping revenue and Non-Core mailing and shipping revenue and the resulting percent change for the periods indicated (revenue in $000s): Three months ended June 30, Six months ended June 30, 2014 2013 % Change 2014 2013 % Change Core mailing and shipping revenue $ 32,379 $ 30,149 7 % $ 64,055 $ 60,436 6 % Non-Core mailing and shipping revenue 544 731 (26 %) 1,117 1,514 (26 %) Mailing and shipping revenue $ 32,923 $ 30,880 7 % $ 65,172 $ 61,950 5 % The increase in Core mailing and shipping revenue was driven by both an increase in average revenue per paid customer and an increase in paid customers. The average monthly revenue per paid customer in the second quarter of 2014 was $21.92, an increase of 2% compared to $21.51 in the second quarter of 2013. Paid customers in the second quarter of 2014 were approximately 492,000, an increase of 5% compared to 467,000 in the second quarter of 2013. We define paid customers for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue from at least once during that quarter. 20-------------------------------------------------------------------------------- Table of Contents The following table sets forth the growth in paid customers and average quarterly revenue per paid customer for our Core mailing and shipping business: Three months ended June 30, 2014 2013 % Change Paid customers for the quarter (000s) 492 467 5 % Average quarterly revenue per paid customer $ 65.76 $ 64.53 2 % Core mailing and shipping revenue (000s) $ 32,379 $ 30,149 7 % The increase in paid customers is primarily driven by an increased number of new paid customers as a result of new customers generated by our increased spend in our Core mailing and shipping marketing channels while our lost customer churn rates were consistent with the prior year. For our Core mailing and shipping business, our average quarterly and monthly Core mailing and shipping revenue per paid customer in the second quarter of 2014 was $65.76 and $21.92 respectively, which increased 2% compared with $64.53 and $21.51, respectively, in the second quarter of 2013. Revenue by Product The following table shows our revenue and revenue as a percentage of total revenue for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Total Revenues Service $ 26,921 $ 24,888 $ 52,564 $ 49,736 Product 3,955 4,075 8,568 8,551 Insurance 2,047 1,917 4,040 3,663 PhotoStamps 1,359 1,229 2,408 2,259 Other 2 - 2 1 Total revenues $ 34,284 $ 32,109 $ 67,582 $ 64,210 Revenue as a percentage of total revenues Service 78.5 % 77.5 % 77.8 % 77.5 % Product 11.5 % 12.7 % 12.7 % 13.3 % Insurance 6.0 % 6.0 % 6.0 % 5.7 % PhotoStamps 4.0 % 3.8 % 3.5 % 3.5 % Other 0 % 0 % 0 % 0 % Total revenues 100 % 100 % 100 % 100 % Our revenue is derived primarily from five sources: (1) service and transaction fees related to our mailing and shipping; (2) product revenue from the direct sale of consumables and supplies through our Supplies Store; (3) package insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from the sale of PhotoStamps postage labels; and (5) other revenue, consisting of advertising revenue derived from advertising programs with our existing customers. The above described revenue includes related revenue from ShipStation for the period from June 10, 2014 through quarter end. Service revenue increased 8% to $26.9 million in the second quarter of 2014 from $24.9 million in the second quarter of 2013 and increased 6% to $52.6 million in the six months ended June 30, 2014 from $49.7 million in the six months ended June 30, 2013. The 8% increase in service revenue during the second quarter of 2014 consisted of a 9% increase in service revenue from our Core mailing and shipping business while the service revenue from our Non-Core mailing and shipping business decreased 27%. The 9% increase in our Core mailing and shipping service revenue consisted of a 5% increase in paid customers and a 4% increase in average service revenue per customer. The 6% increase in service revenue during the six months ended June 30, 2014 consisted of a 7% increase in service revenue from our Core mailing and shipping business while the service revenue from our Non-Core mailing and shipping business decreased 27%. 21 -------------------------------------------------------------------------------- Table of Contents Product revenue decreased 3% to $4.0 million in the second quarter of 2014 from $4.1 million in the second quarter of 2013 and remained unchanged at $8.6 million both in the six months ended June 30, 2014 and 2013. The decrease during the second quarter of 2014 was primarily attributable to the decrease in NetStamps label sales. In addition, postage printed growth was flat year over year, which typically helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service was $371 million and $372 million during the second quarter of 2014 and 2013, respectively. Postage printed by customers was $762 million and $750 million during the six months ended June 30, 2014 and 2013, respectively, an increase of 2%. Insurance revenue increased 7% to $2.0 million in the second quarter of 2014 from $1.9 million in the second quarter of 2013 and increased 10% to $4.0 million in the six months ended June 30, 2014 from $3.7 million in the six months ended June 30, 2013. This increase was primarily attributable to increased insurance purchases by high volume package shippers. PhotoStamps revenue increased 11% to $1.4 million in the second quarter of 2014 from $1.2 million in the second quarter of 2013 and increased 7% to $2.4 million in the six months ended June 30, 2014 from $2.3 million in the six months ended June 30, 2013. The increase was primary attributable to an increase in high volume business PhotoStamps orders; partially offset by a decrease in PhotoStamps revenue from orders placed through our website. The decrease in revenue from website orders is primarily attributable to a reduction in our PhotoStamps sales and marketing spending in the second quarter of 2014 compared with the second quarter of 2013, and we plan to continue to reduce our sales and marketing spending on PhotoStamps in future periods to maintain or improve profitability in that business. Total PhotoStamps sheets shipped was approximately 95,000 in the second quarter of 2014, a 32% increase compared to 72,000 in the second quarter of 2013 and was 155,000 in the six months ended June 30, 2014, an increase of 19% compared to 130,000 in the six months ended June 30, 2013. Average revenue per sheet shipped decreased 16% in the second quarter of 2014 to $14.3 from $17.1 in the second quarter of 2013 and decreased 11% in the six months ended June 30, 2014 to $15.6 from $17.4 in the six months ended June 30, 2013. The increase in sheets shipped and decrease in average revenue per sheet shipped was primarily attributable to increased business orders which sell in larger volumes but typically have a lower price per sheet. Other revenue consists of commissions from the advertising or sale of products by third party vendors to our customer base was approximately $2,000 and $0 in the second quarter of 2014 and 2013, respectively and was approximately $2,000 in the six months ended June 30, 2014 and $1,000 in the six months ended June 30, 2013. Commission revenue from the advertising or sale of products by third party vendors is currently not material to our consolidated financial statements. Cost of Revenues The following table shows cost of revenues and cost of revenues as a percentage of its associated revenue for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Cost of Revenues Service $ 4,449 $ 4,015 $ 8,818 $ 8,570 Product 1,292 1,382 2,834 3,007 Insurance 717 676 1,405 1,317 PhotoStamps 1,158 1,015 2,004 1,846 Total cost of revenues $ 7,616 $ 7,088 $ 15,061 $ 14,740 Cost as percentage of associated revenues Service 16.5 % 16.1 % 16.8 % 17.2 % Product 32.7 % 33.9 % 33.1 % 35.2 % Insurance 35.0 % 35.3 % 34.8 % 36.0 % PhotoStamps 85.2 % 82.6 % 83.2 % 81.7 % Total cost as a percentage of total revenues 22.2 % 22.1 % 22.3 % 23.0 % 22-------------------------------------------------------------------------------- Table of Contents Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of the cost of products sold through our Mailing & Shipping Supplies Store and the related costs of shipping and handling. The cost of insurance revenue principally consists of parcel insurance offering costs. Cost of PhotoStamps revenue principally consists of the face value of postage, customer service, image review costs, and printing and fulfillment costs. The cost of service revenue described above includes ShipStation for the period from June 10, 2014 through quarter end. Cost of service revenue increased 11% to $4.4 million in the second quarter of 2014 from $4.0 million in the second quarter of 2013 and increased 3% to $8.8 million in the six months ended June 30, 2014 from $8.6 million in the six months ended June 30, 2013. The increase, both during the second quarter of 2014 and six months ended June 30, 2014, is primarily attributable to higher customer service costs to support our growing customer base offset by a decrease in our promotional expense. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion while the revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period. Promotional expense was approximately $732,000 in the second quarter of 2014, a decrease of 5% from $772,000 in the second quarter of 2013, and was approximately $1.6 million during the six months ended June 30, 2014, a decrease of 15% from $1.9 million during the six months ended June 30, 2013. The decrease in our promotional expense both during the second quarter of 2014 and during the six months ended June 30, 2014 is primarily attributable to lower coupon redemption rates. Cost of product revenue decreased 7% to $1.3 million in the second quarter of 2014 from $1.4 million in the second quarter of 2013 and decreased 6% to $2.8 million in the six months ended June 30, 2014 from $3.0 million in the six months ended June 30, 2013. The percentage decrease in the cost of product revenue was higher compared to the percentage decrease in product revenue both in the second quarter of 2014 and six months ended June 30, 2014 primarily due to lower fulfillment costs as a percentage of product revenue. Cost of insurance revenue increased 6% to $717,000 in the second quarter of 2014 from $676,000 in the second quarter of 2013 and increased 7% to $1.4 million in the six months ended June 30, 2014 from $1.3 million in the six months ended June 30, 2013. The percentage increase in cost of insurance revenue was lower compared to the percentage increase in insurance revenue primarily due to the level and mix of discounted insurance rates for shippers. Cost of PhotoStamps revenue increased 14% to $1.2 million in the second quarter of 2014 from $1.0 million in the second quarter of 2013 and increased 9% to $2.0 million in the six months ended June 30, 2014 from $1.8 million in the six months ended June 30, 2013. The percentage increase in cost of PhotoStamps revenue is higher compared to the percentage increase in PhotoStamps revenue primarily due to an increase in high volume business orders, which typically have lower gross margins. Accordingly, cost of PhotoStamps revenue as a percentage of PhotoStamps revenue increased during both the second quarter and six months ended June 30, 2014 by approximately 2%, respectively. 23 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table is our operating expense and operating expense as a percentage of total revenue for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Operating expenses: Sales and marketing $ 10,663 $ 9,792 $ 22,033 $ 20,175 Research and development 3,036 2,718 5,952 5,343 General and administrative 5,350 3,966 9,547 7,592 Total operating expenses $ 19,049 $ 16,476 $ 37,532 $ 33,110 Operating expenses as a percent of total revenue: Sales and marketing 31 % 30 % 33 % 31 % Research and development 9 % 9 % 9 % 8 % General and administrative 16 % 12 % 14 % 12 % Total operating expenses 56 % 51 % 56 % 51 % Sales and Marketing Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased 9% to $10.7 million in the second quarter of 2014 from $9.8 million in the second quarter of 2013, and increased 9% to $22.0 million in the six months ended June 30, 2014 from $20.2 million in the six months ended June 30, 2013. Sales and marketing spending in both the second quarter and six months ended June 30, 2014 in our Core mailing and shipping business increased as we continued to focus on customer acquisition while spending in our Non-Core mailing and shipping and PhotoStamps businesses both decreased compared to 2013. Ongoing marketing programs include the following: customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing, and traditional advertising. Research and Development Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and development expense increased 12% to $3.0 million in the second quarter of 2014 from $2.7 million in the second quarter of 2013, and increased 11% to $6.0 million in the six months ended June 30, 2014 from $5.3 million in the six months ended June 30, 2013. The increase is primarily due to an increase in headcount-related expenses to support our expanded product offerings and technology infrastructure investments. General and Administrative General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment, software and building used for general corporate purposes and amortization of intangible assets. General and administrative expense increased 35% to $5.4 million in the second quarter of 2014 from $4.0 million in the second quarter of 2013, and increased 26% to $9.5 million in the six months ended June 30, 2014 from $7.6 million in the six months ended June 30, 2013. The increase, both during the second quarter and six months ended June 30, 2014, is primarily attributable to an increase in headcount related expenses and infrastructure investments to support the growth in the business, increased corporate legal expenses not related to our acquisition and the inclusion of acquisition related corporate development expenses and the amortization of acquired intangibles in the second quarter of 2014 that we did not have in the second quarter of 2013. 24 -------------------------------------------------------------------------------- Table of Contents Interest and Other Income, Net Interest and other income, net primarily consists of interest income from cash equivalents, short-term and long-term investments and rental income from our corporate headquarters in El Segundo, California. Interest and other income, net decreased 7% to approximately $89,000 in the second quarter of 2014 from approximately $95,000 in the second quarter of 2013, and decreased 10% to $225,000 in the six months ended June 30, 2014 from $249,000 in the six months ended June 30, 2013. The decrease, both during the second quarter and six months ended June 30, 2014 is primarily due to lower yields on our investment balances including certain investments in our portfolio that matured and were replaced with lower yield investments and lower cash and investment balances as a result of the ShipStation acquisition and share repurchases during the second quarter of 2014. Provision for Income Taxes In the second quarter of 2014, our net income tax benefit consisted of an income tax benefit resulting from a release of a portion of our valuation allowance offset by current income tax expense consisting of federal and state alternative minimum taxes. On June 10, 2014 we completed our acquisition of ShipStation (see Note 2 - "Acquisition"). Based on this discrete event, we re-evaluated our forecast of our projected taxable income. As a result, we released a portion of our valuation allowance totaling approximately $3.6 million during the second quarter of 2014. We recorded current income tax expense for alternative minimum federal and state taxes of $167,000 and $339,000 in the second quarter of 2014 and six months ended June 30, 2014, respectively. Accordingly, our net income tax benefit in second quarter of 2014 was $3.5 million compared to alternative minimum income tax expense for federal and state of $27,000 in the second quarter of 2013. Net income tax benefit in the six months ended June 30, 2014 was $3.3 million compared to alternative minimum income tax expense for federal and state of $90,000 in the six months ended June 30, 2013. We continued to evaluate the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence. As of June 30, 2014, we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets. We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence, including our recent earning trend, expected future taxable income and the federal and state effective tax rates related to future taxable income. Liquidity and Capital Resources As of June 30, 2014 and December 31, 2013, we had approximately $53 million and $87 million, respectively, in cash, cash equivalents and short-term and long-term investments. We invest available funds in short-term and long-term securities, including money market funds, corporate bonds, asset backed securities, and US government and agency bonds, and do not engage in hedging or speculative activities. Net cash provided by operating activities was $26.9 million and $20.5 million during the six months ended June 30, 2014 and 2013, respectively. The increase in net cash provided by operating activities was primarily attributable to the growth in our revenue and changes in our operating assets and liabilities. Net cash used in investing activities was $48.7 million during the six months ended June 30, 2014. Net cash provided in investing activities was $1.4 million during the six months ended June 30, 2013. The increase in net cash used in investing activities was primarily due to the acquisition of ShipStation (see Note 2 - "Acquisition"). Net cash used in financing activities was $11.1 million during the six months ended June 30, 2014 and net cash provided in financing activities was $1.9 million during the six months ended June 30, 2013. The increase in net cash used by financing activities is primarily due to the increase in our stock repurchase program. We believe our available cash and marketable securities, together with the cash flow from operations, will be sufficient to fund our business for at least the next twelve months. There have been no material changes to our contractual obligations and commercial commitments included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013. 25 -------------------------------------------------------------------------------- Table of Contents Updated Expectations for 2014 As of the date of the filing of this Quarterly Report, we expect the following trends for 2014: · We expect total revenue to be in a range of between $130 million to $145 million. · We expect growth in 2014 Core mailing and shipping revenue to be up 5% to 15% compared to 2013. Our ability to grow our Core mailing and shipping revenue is dependent on our ability to increase our small business customer acquisition spending on marketing programs resulting in the addition of new customers. To the extent we are not able to achieve our target increase in spending, as outlined below, this would negatively impact our 2014 Core mailing and shipping revenue growth expectations. · We expect Non-core mailing and shipping revenue from the enhanced promotion channel to continue to be down in 2014 compared with 2013 consistent with the trend we saw in Q2 as we continue to minimize our investments in these areas. · We expect PhotoStamps revenue from website orders will be down in 2014 compared with 2013 as we continue to minimize our investments in this area; however we expect to continue to see quarterly fluctuations in total PhotoStamps revenue depending on the level of high volume business orders. · We are targeting small business customer acquisition spending on our Core mailing and shipping marketing channels to be up 5% - 15% in 2014 compared to 2013. We will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly. · Customer acquisition spending is expensed in the period incurred while the revenue and profits associated with the acquired customer is earned over the customer's lifetime. As a result, increased customer acquisition spending in future periods could result in a reduction in operating profit and cash flow compared to past periods. · We expect research and development expenses to be higher in 2014 as compared to 2013, primarily related to an expected increase in headcount costs to support the growth in our products and services. · We expect general and administrative expenses to be higher in 2014 as compared to 2013, primarily related to an expected increase in costs to build and support the infrastructure necessary to grow the business and as a result of our acquisition related expenses such as amortization of acquired intangibles. · We expect capital expenditures for the business to be approximately $2.5 million. As discussed above, our expectations are subject to substantial uncertainty and our results are subject to macro economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations. These expectations are "forward looking statements", are made only as of the date of this Report and are subject to the qualification and limitations on the forward-looking statements discussion on page 15 of this Report. Critical Accounting Policies Management's discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. Except as noted below, for more information regarding our critical accounting estimates and policies, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Judgments" of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014. Business Combinations We account for business combinations using the acquisition method of accounting. Under this method, assets and liabilities are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Results of operations of the acquired entity are included in our results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets. We expense all corporate development costs associated with business combinations. 26-------------------------------------------------------------------------------- Table of Contents SPECIAL NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK We currently have federal and state net operating loss ("NOL") carry-forwards. Under Internal Revenue Code Section 382 rules, if a "change of ownership" is triggered, our NOL asset may be impaired. A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more "5% shareholders" within a three-year period. We estimate that as of June 30, 2014, we were at approximately a 14% level compared with the 50% level that would trigger impairment of our NOL asset. Under our certificate of incorporation, any person, company or investment firm that wishes to become a "5% shareholder" (as defined in our certificate of incorporation) must first obtain a waiver from our board of directors. In addition, any person, company or investment firm that is already a "5% shareholder" of ours cannot make any additional purchases of our stock without a waiver from our board of directors. The NOL protective provisions contained in our certificate of incorporation (the "NOL Protective Measures") are more specifically described in our Definitive Proxy filed with the Securities and Exchange Commission on April 2, 2008. On July 22, 2010, our board of directors suspended the NOL Protective Measures by approving a waiver from the NOL Protective Measures to all persons and entities, including companies and investment firms. As a result, our stockholders are now allowed to become "5% shareholders" and existing "5% shareholders" are allowed to make additional purchases of our stock each without having to comply with the restrictions contained in the NOL Protective Measures. This waiver may be revoked by our board of directors at any time if the board deems the revocation necessary to protect against a Section 382 "change of ownership" that would limit our ability to utilize future NOLs. For complete details about this waiver from the NOL Protective Measures, please see our Form 8-K filed on July 28, 2010. As of July 31, 2014, we had approximately 15,875,163 million shares outstanding, and therefore ownership of approximately 793,000 shares or more would currently constitute a "5% shareholder". We strongly urge that any stockholder contemplating becoming a 5% or more shareholder contact us before doing so. |