Stamps.com®(NASDAQ: STMP) is a provider of Internet-based postal products and services. The products include United States Postal Services(USPS) mail classes such as First Class Mail®, Priority Mail®, Express Mail®, Media Mail®, Parcel Post®, and others. Their products enable a wide range of customers, including individuals, small businesses, and home offices print US postage or shipping labels using any computer with internet and printer. The company was founded in 1996. It became the first ever USPS-licensed vendor to offer PC Postage® in a software-only business model and completed the initial public offering in 1999.
PC Postage Services offer customers to buy and print their own United States Postal Service approved postage using either inkjet or laser printers. Customers can purchase any USPS mail classes except standard mail and periodicals. The offered products are periodicals, including First-Class Mail, Priority Mail, Express Mail, Parcel Post, Media Mailand Bound Printed Matter. Customers can also experience the same services that actual post offices offer. Customers can add USPS Special Services such as Delivery Confirmation™, Signature Confirmation™, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery (COD) and Restricted Delivery to their mail pieces.
PC Postage Service does not require customers to install any additional hardware. The software associated with PC Postage Service can be download from the website for free or can be installed from a free CD. Customers are obligated to pay a monthly subscription fee as well as predetermined prices for any postage they purchase online.
PC Postage Service basically offers 3 ways to print postage:
The company introduced a new service called PhotoStamps in 2004. This service offers highly customized US valid postage. Customers can upload digital images or any pictures to www.photostamps.com. They can customize the picture to be onto their own postage and purchase at the website.
PC Postage Supplies Store existed within the free software the company offers. It provides NetStamps labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies.
Customers can purchase on stamps.com brand package insurance for their mail or packages. This service saves trips to post office for customers. Customers can also purchase official USPS insurance on the website.
Revenue or Stamps.com consists of 5 main sources: (1) service and transaction fees charged to customers for use of our PC Postage service; (2) product sales consisting of Supplies Store revenue from the direct sale of consumables and supplies; (3) insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of licensing revenue and advertising revenue derived from advertising programs with our existing customers. 
The company’s total revenue has increased by approximately 4% from 2009 to 2010 making it over $85 million. The company had been struggling since its inception to turn a positive net income until 2004. In the last quarter of 2004, the company managed to turn a profit for the very first time and has been profitable since with a significant sales increase from 2004 to 2005. The company’s total revenue continued to grow to and peak at approximately $85.8 million until 2006 and has been fluctuating above $80 million. The company’s earlier failure to turn a profit has resulted in a huge net operating loss. The company has been and will carryforward the loss and partially recover the loss from future tax savings.
Different sources of revenue have been notably changing since the introduction of PhotoStamps, the company’s innovative service. PhotoStamps revenue directly did help the company increase its revenue and income (PhotoStamps turn a profit of approximately $700,000 in the first year it was launched), however, the company was able to increase the total revenue by a larger customer base. PhotoStamps indirectly helped the company by attracting new customers in 2004. PC postage revenue has been continuously increasing from 2006 to 2010, as opposed to PhotoStamps revenue, which had peaked in 2006 and has been down sloping. Despite the lowest PhotoStamps revenue in 2010, total revenue was back up to $85 million with the highest PC postage revenue since its inception. The internet postal market is still growing and the company has been finding potential customers to bring up the PC postage revenue although the growth rate has been weakened.
Average paid customers increased 6% from 2009 to 2010 and the average annual revenue per paid customer increased by 3% in the same period. The increase in average annual revenue per paid customer can be explained by customers engaging in higher priced services and more frequent use of services Stamps.com offers. This implies that the company is finding more customers and the customers find the company’s service useful and valuable.
When analyzing a company, it is necessary to compare its competitors in the same industry because an analysis without comparison does not tell readers whether the company is relatively successful or not. An absolute analysis cannot be made in the business world. Stamps.com’s direct competitors are Pitney Bowes (NYSE: PBI) and Endicia.com. The three companies almost make the entire market for PC postage.
Pitney Bowes (NYSE: PBI) is a the current market leader in the U.S. traditional postage meter business, with approximately $5.6 billion in revenue. Pitney Bowes not only participates in PC postal business but also provides software, hardware and services to effectively integrate communications among businesses. Its current PC postal business is Ship Stream and approximately owns a 10% market share.
Endicia.com is a small private US company that entered PC postage market in 2000. The company also goes by Envelop Manager Software. It owns a 5% market share.
Stamps.com is the first company to offer PC postage approved by USPS. The company has deeply developed the market with the largest market share. The company believes it to be approximately 85%. The name of the company is easy to remember and access via internet while its competitors are lesser-known. Stamps.com was able to attract more customers than its competitors through more sophisticated and convenient services and products. For example, Stamps.com offers NetStamps which is the only current PC postage product offered that does not have expiration dates or destination addresses therefore can be used as regular stamps. Also, the company has more address books than any other PC postage company. Its software is the only PC postage service that is tightly compatible with Microsoft Office.
Since Stamps.com dominates the PC postage market, this company is really competing with traditional postage meters which means high potential customers are small businesses. Stamps.com offers PC postage services that can save a significant amount of money for small businesses when compared with traditional postage meters. First, Stamps.com does not require any new hardware. If you want to a traditional postage meter, you need to acquire a meter. Secondly, The monthly fee is almost half as much as the meters. Third, there is no tax or reset fees charged to the Stamps.com PC postage service. According to the company’s annual report, Stamps.com PC postage service can be as much as 80% less costly than traditional postage meters.
The company can also expect tax savings for several years since it still retains net operating losses of $225 million in Federal and $150 million in state tax purposes.
The company’s innovative service, PhotoStamps has been making less and less revenues over the past 5 years. The company’s only revenue comes from PC postage service which makes the company vulnerable since it depends on one type of revenue. If a company performs poorly in the service sector of PC postage revenue, the company’s revenue may take a serious hit and may result in a negative income once again.
Since the company has been carrying forward the NOLs, under Internal Revenue Code Section 382, a shift in ownership by more than 50% by one or more “5% shareholders” within a three-year period can impair the company’s NOL assets. The Board of Directors at Stamps.com may not approve investors to become a new 5% shareholder. This restricts any individual investors or banks to invest in Stamps.com which may make them turn away from investing in the company at all.
In 2000, the company had acquired a subsidiary company, iShip.com in the attempt to expand to shipping industry. Due to negative earnings in the early years, the company had to divest iShip.com in 2001. Now, since the company seems to be doing well and turning profits, is the time to expand to a related business. The company cannot entirely depend on one business that has a limited potential. It may be a good strategy to reach out to a shipping business that can create a synergy with their PC postage business. Also, the company can heavily invested in advertising to gain small business customers by letting them know the cost benefits they can obtain from using Stamps.com products.
PC postage industry is fairly young market globally, not only in the US. Stamps.com can seek opportunities available in Europe and Asia. Studies show the PC postal market in Europe is growing and Stamps.com should jump in the market before it gets too competitive to get it. Also, internet usage in Asia is growing rapidly. With highly developed internet network in Japan and South Korea, and fast growing internet population and economy in China, the company can obtain high growth in these areas.
The industry has potential to grow and has been growing. However, as seen in the analysis of their revenue, the growth rate of customers has not been boosting up. If more competitors continue to appear, Stamps.com will face a rough time capturing the same level of market share, revenue and profits as now. Although the company is dominating the market, there are not any serious competitor. Without strong competitive advantages over potential competitors, the company may not survive in the market.
The company has invested in money market, U.S. government obligations, asset-backed securities and public corporate debt securities. Since the current global economy has been poor, unrealized losses from decreased fair market value of these securities might have an impact on company’s financial condition, cash flow, and reported earnings.
U.S Postage Market is controlled and regulated by an independent agency of the United States government. PC postage market requires a business to be approved by United States Postal Service. Somebody cannot just launch a business and start selling postage on the internet. There are only 3 USPS approved PC postage companies(Stamps.com, Endicia.com, Pitney Bowes) in the market. It takes about two and a half years of waiting after applying for the approval and the last approval was made in 2000. Stamps.com has over 120 patents on the PC postage products which makes it even more difficult for potential competitors to enter the market. This particular segment of the U.S postal market requires businesses to develop extensive research and development. The key to succeed in the industry to be efficient, cheaper and convenient. It will take years and heavy investment in research and development to develop software that can compete with the current software Stamps.com offers. The market is dominated by three companies and one of the three (Stamps.com) dominates over 80% of the market. It will be hard to take market share for a newborn company to stay alive in the market. It is hard to imagine that multiple competitors will appear in the following few years.
For individuals, they can go to a post office and purchase stamps at the site. When talking about more convenient and less time consuming way to purchase PC postage, there are only Endicia.com and Pitney Bowes. These companies do offer PD postage products, however, Stamps.com offers the most sophisticated products such as NetStamps.
For small businesses, there are Endicia.com and Pitney Bowes products plus traditional postage meters. As discussed earlier, traditional meters have relative disadvantages against Stamps.com services and products. Also nobody can offer some innovative products such as PhotoStamps that Stamps.com has been offering since 2004.
Customers choose Stamps.com for its sophisticated services and products. This does not mean that Stamps.com has significantly higher prices than its competitors. The industry is basically split in three companies. For these reasons, bargaining power of customers is limited because it would be hard to go back to traditional meters for price reasons and the competitors do not offer significantly more sophisticated or cheaper services.
Stamps.com’s biggest revenue source is service. Its product revenue only consists approximately 13% of the total revenue. Although this portion is not relatively large, the company’s website only shows that among all of its partners, the only one whom supplies PC postage products is Avery® Dennison Corporation. The smaller number of suppliers, the larger power they get. Having only one or a few suppliers give the company less flexibilities on shipments and less power to control and negotiate product prices with them. Other than products, the company consists of service, insurance and PhotoStamps business segments. They do not require physical suppliers since most of business is done by downloading and printing at customers’ cost through internet.
Although the industry is made up of only three companies, the Intensity of Competitive Rivalry is high. It still is a growing industry with a limited number of customers at the moment. Endicia.com recently started offering zero monthly fee service to compete against Stamps.com and Pitney Bowes started offering customized postage and shipping service without monthly charges through a partnership with Zazzle.com, Inc., and eBay accordingly.
Stamps.com is a the only company in the PC postage industry that entirely focuses on internet postage business. Being a unique company in an industry with only 3 participants, it is pretty hard to compare Stamps.com to it competitors by most financial and operating metrics. Since Endicia.com is a private company and does not release annually or quarterly reports, it seems appropriate to compare Pitney Bowes to Stamps.com on Net Profit Margin. Net Profit Margin indicates how well a company converts revenues into profit. As it appears on the chart, Stamps.com’s Net Profit Margin is higher than Pitney Bowes’ with the exception in 2009. Stamps.com was able to achieve higher Net Profit Margins throughout the years because it attracted more customers in high-priced services in recent years. Another way to look at this is that Stamps.com’s main revenue source is services revenue as opposed to Pitney Bowes relies more on product sales. Product sales generally create larger expenses because a company would have to engage in manufacturing or merchandising where as services only require a medium of the service provided whether it is a person or a computer software.
An internet company can compute a unique metric called revenue per user. Per user consumption is more important in internet-based industries than others such as the apparel industry because the number of customers can be more easily counted and is more directly reflected on total revenues. For an apparel company, revenue per square foot of their store is more important because a store can only carry a certain amount good depending on the size of the store. Stamps.com has experiences increase in average annual revenue per paid customer since 2006. This can be interpreted as the company not only gained more customers (because its total revenue increased more significantly) but also an average customer has spent more on the company's services and products.
The company experienced some significant losses in the earlier years. A Net Operating Loss occurs for tx purposes in a year when tax-deductible expenses exceed taxable revenues. A company may use loss carryforward to offset future taxable income for up to 20 years. In Stamps.com's case, the company will experience tax benefits from loss carryforward until 2018.