Business News

Stamps.com Announces Third Quarter 2008 Results

Monday 27. October 2008 - Total Revenue of $20.2 Million; GAAP Net Income of $2.1 Million; Non-GAAP Income From Operations of $2.7 Million, Up 20%; Non-GAAP Diluted Earnings per Share of $0.17

Stamps.com (NASDAQ: STMP), the intelligent online postage alternative to a postage meter, today announced results for the third quarter ended September 30, 2008.
For the third quarter:
— Total revenue was $20.2 million, down 1% versus the third quarter of
2007.

— PC Postage subscriber-related revenue, including service revenue,
store revenue and insurance revenue, was $18.1 million, up 8% from the
third quarter of 2007. Excluding the enhanced promotion channel (which
consists of online programs where additional promotions are offered to
customers), subscriber-related revenue was $16.0 million, up 11% from the
third quarter of 2007.

— Total gross margin was 75.0% versus 71.8% in the third quarter of
2007. PC Postage subscriber-related revenue gross margin was 80.4% versus
80.7% in the third quarter of 2007, and PhotoStamps gross margin was 26.3%
versus 29.7% in the third quarter of 2007.

— Total spending on small business PC Postage customer acquisition,
excluding spending on the enhanced promotion channel, was $5.6 million, up
25% from the same quarter last year.

— The Company continued its program to increase profitability in the
PhotoStamps business by reducing the overall level of sales and marketing
in this area by approximately 68% versus the third quarter of 2007; this
resulted in PhotoStamps revenue of $2.0 million, down 43% versus the third
quarter of 2007.

— GAAP net income was $2.06 million, or $0.10 per fully diluted share,
after the effects of a $0.88 million non-cash stock-based compensation
expense, a $0.06 million charge related to expected legal settlements in
litigation matters, and a $0.35 million adjustment resulting from the
temporary suspension of the Company’s ability to utilize its net operating
losses for California income tax purposes.

— Excluding the FASB Statement 123R expense, the litigation charge, and
the income tax adjustment, non-GAAP income from operations was $2.7
million, up 20% versus the third quarter of 2007, and non-GAAP net income
per fully diluted share was $0.17, up 6% versus the third quarter of 2007.

“In the current tough macroeconomic environment, we were happy with the strength in our earnings this quarter,” said Ken McBride, Stamps.com president and CEO. “Our non-GAAP income from operations grew at 20% versus the third quarter last year, the fastest growth rate we have seen in two years. However, in this tough atmosphere we did experience a slowdown in our gross customer acquisition for our PC Postage business which led to slower customer acquisition spending and also to a slowdown in our top line growth in that business this quarter. Overall, we believe that our core PC postage business is a very stable and predictable model, and we expect that our recurring revenue business will allow us to continue to produce solid earnings in tough times.”
Third Quarter 2008 Detailed Results
Stamps.com reported 2008 third quarter GAAP net income of $2.06 million. On a per share basis, total 2008 third quarter GAAP net income was $0.10 based on fully diluted shares outstanding of 19.7 million. Third quarter GAAP net income was reduced by a non-cash cost of $0.88 million for FASB 123R stock-based compensation expense, and by $0.06 million representing adjustments to the prior one-time litigation charge related to a lawsuit emanating from the Company’s iShip operations and representing expected settlements in other litigation matters. Third quarter GAAP net income was also reduced by an income tax adjustment of $0.35 million resulting from the temporary suspension of the Company’s ability to utilize its net operating losses for California income tax purposes based on new legislation which was signed on September 23, 2008 and is effective for tax years 2008 and 2009. The $0.88 million stock-based compensation expense, $0.06 million litigation charge, and $0.35 million income tax adjustment were allocated among cost of sales, sales and marketing, research and development, general and administrative, and provision for income taxes as shown in the following table:
All amounts in millions
except per share or Income
margin data: Non-GAAP FASB Litigation Tax GAAP
Amounts 123R Charge Adjustment Amounts
——– ——– ——– ——– ——–

Cost of Sales $ 4.96 $ 0.08 $ – $ – $ 5.05
Research & Development 2.06 0.18 – – 2.24
Sales & Marketing 7.45 0.20 – – 7.65
General & Administrative 2.95 0.41 0.06 – 3.42
——– ——– ——– ——– ——–
Total Expenses 17.42 0.88 0.06 – 18.37

Gross margin 75.4% -0.4% – – 75.0%

Income from Operations 2.73 (0.88) (0.06) – 1.79
Interest and Other Income 0.70 – – – 0.70
——– ——– ——– ——– ——–
Pre-Tax Income 3.43 (0.88) (0.06) – 2.49

Provision for Income
Taxes 0.08 – – 0.35 0.43

——– ——– ——– ——– ——–
Net Income $ 3.35 $ (0.88) $ (0.06) $ (0.35) $ 2.06
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——– ——– ——– ——– ——–
On a diluted per share
basis $ 0.17 $ (0.04) $ (0.00) $ (0.02) $ 0.10
======== ======== ======== ======== ========

Shares used in per share
calculation 19.73 19.73 19.73 19.73 19.73
Excluding the FASB Statement 123R expense, litigation charge, and income tax adjustment, 2008 third quarter non-GAAP net income was $3.35 million or $0.17 per fully diluted share based on fully diluted shares outstanding of 19.7 million. This compares to 2007 third quarter non-GAAP net income per fully diluted share excluding 123R expenses of $0.16 (there were no comparable litigation charges or income tax adjustments in the 2007 period). Thus, non-GAAP third quarter diluted earnings per share excluding 123R-related expenses were up 6% versus the same quarter last year.
PhotoStamps
During the third quarter, approximately 120 thousand sheets were shipped to customers. The Company continued its program to increase profitability in the PhotoStamps business, reducing the overall level of sales and marketing costs in this area by approximately 68% versus the third quarter of 2007. As a result of the reduced level of sales and marketing activity, total third quarter PhotoStamps revenue was $2.0 million, a decrease of 43% versus the third quarter of 2007.
Net Operating Losses (NOL) and Protective Measures
Stamps.com currently has approximately $240M in Federal NOLs and $150M in State NOLs, with a potential value of up to $95M in tax savings over the next 15 years. Under Internal Revenue Code Section 382 rules, if a change of ownership is triggered, the Company’s 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 the Company is currently at an approximately 37% level compared with the 50% level that would trigger impairment of our NOL asset.
During the second quarter of 2008, the Company received shareholder approval to amend its articles of incorporation in order to protect its NOL asset (the “NOL Protective Measures”) and those measures are now in effect. Under the NOL Protective Measures there is no change to the way that existing Stamps.com shares are held or traded, but any person, company or investment firm which wishes to become a “5% shareholder” of Stamps.com must first obtain a waiver from the Company’s board of directors. In addition, any person, company or investment firm which is already a “5% shareholder” of Stamps.com cannot make any additional purchases of Stamps.com stock without a waiver from the Company’s board of directors.
Stamps.com currently has 18.2 million shares outstanding and therefore ownership of 910 thousand shares or greater would currently constitute a “5% shareholder.” Stamps.com strongly urges that any stockholder contemplating owning more than 725,000 shares contact the Company before doing so.
Share Repurchase
On July 16, 2008, Stamps.com’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to 2.0 million shares of Stamps.com stock through February 2009. The Company purchased 1.2 million shares for a total cost of $13 million under that program during the third quarter and the fourth quarter to date. On October 16, 2008, Stamps.com’s Board of Directors amended the current share repurchase program so that the Company may now purchase up to 3.0 million shares of Stamps.com stock, including the 1.2 million shares that have already been purchased, though February 2009.
The timing of share purchases, if any, and the number of shares to be bought at any one time will depend on market conditions and also will depend on the Company’s assessment of risk that its NOL asset could be impaired if such a repurchase were undertaken. Share purchases may be made from time-to-time on the open market or in negotiated transactions at the Company’s discretion in compliance with Rule 10b-18 of the United States Securities and Exchange Commission. The Company’s purchase of any of its shares is subject to limitations that may be imposed on such purchases by applicable securities laws and regulations and the rules of the Nasdaq Stock Market.
Business Outlook
Stamps.com currently expects total 2008 revenue to be $80 to $90 million. 2008 GAAP net income per share is expected to be $0.52 to $0.62, including approximately $3.4 million of 2008 FASB Statement 123R stock-based compensation expense, the first quarter $0.45 million asset write-off, the second and third quarter $0.77 million litigation charges, $0.50 million of 2008 NOL California income tax adjustment, and the first quarter $3.7 million deferred tax benefit. Excluding the FASB Statement 123R expenses, the asset write-off, the litigation charges, the NOL tax adjustment, and the income tax benefit, non-GAAP 2008 net income per fully diluted share is expected to be $0.60 to $0.70.