The U.S. postal business seems to be passe -- but not for Stamps.com
In the second quarter, Stamps.com posted a 42% increase in revenues, to $20.2 million. Net income nearly doubled to $4.2 million, or $0.17 per share. This includes a $696,000 charge for expensing stock options. Free cash flow was about $4.3 million in the second quarter, and the company has about $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 $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 $73 to $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 $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 $0.73 to $0.78 per share, up from prior guidance of $0.67 to $0.75 per share. Revenues are expected to be $85 million to $90 million, up from prior guidance of $82 million to $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 $140 or more for a Dymo device, and purchase printing labels at about $0.10 each. (A Stamps.com label ranges from $0.033 to $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 $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 $30s, the stock is now trading at $21.37. Then again, the Internet sector has been particularly weak lately, given the suffering stocks of companies like Amazon.com
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 $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.
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Fool contributor Tom Taulli does not own shares mentioned in this article.