Stamps.com’s Capital Gives It Sticking Power
Since going public in 1999, Stamps.com has fired nearly 90% of its staff, burned through more than $200 million and hired its third chief executive. But after more than a year of restructuring, the online postage service hasn’t been licked.
Among the Internet’s first high-profile start-ups, Stamps.com was also among the first dot-coms to go public, watch its stock rise and fall dramatically and lay off hundreds of employees in what became a familiar cycle of boom and bust.
But after many high-tech high hopes died in the market collapse of 2001, the Santa Monica company remains alive, struggling to build a profitable business around selling postage over the Internet.
“Things changed and so did we,” Chief Executive Ken McBride said. “But it was a very long, hard road to get back to where we should have been all along.”
Stamps.com--which allows customers to print first-class, priority and express postage from personal computers--has yet to post a profit, but its losses have narrowed consistently over the last year. During the fourth quarter of 2001, the company lost $987,000, or 2cents a share, on revenue of $4.5million. A year earlier, Stamps.com lost $68.4million, or $1.41 a share, on revenue of $5.3million.
McBride said he expects the introduction this year of new services--including postage that won’t expire--to expand the company’s customer base beyond its core of 280,000 and make Stamps.com profitable.
Meanwhile, McBride keeps the company alive with the $193 million remaining from its first two rounds of public offerings.
“It’s kind of hard to put a company out of business with that kind of cash,” said Bruce Coleman, who served as interim CEO before McBride took over in August.
Even with its sizable reserves, Stamps.com faces several hurdles.
PC postage accounts for just 0.1% of the U.S. postage market, and three other firms are fighting to take some of Stamps.com’s dominant share.
In addition, U.S. Postal Service restrictions and technology limitations have discouraged rapid growth.
Postal Service regulations require that postage purchased through Stamps.com expire 24 hours after being printed. And Stamps.com’s technology ties each stamp to a specific mailing address.
McBride said Stamps.com is seeking Postal Service approval for postage that does not expire, and the company is improving its technology to print stamps that can be used for any address or class of postage.
The new products would be Web-based or sold through kiosks and automated teller machines, eliminating the current need for software download.
Given recent concerns with mail security, McBride said Stamps.com is talking to the Postal Service about licensing its technology to reduce the amount of anonymous mail.
Postage printed from Stamps.com contains a bar code and meter number unique to the customer; letters or packages that bear the company’s postage can be traced to the sender.
Even with the changes, it’s unclear whether Internet postage will catch on beyond its core of small and home-based businesses. The Postal Service estimates that there are 380,000 PC postage customers.
But in the months leading up to the company’s July 1999 initial public offering, it didn’t seem to matter. In the midst of the Internet craze, investors threw money at just about any venture with a “.com” after its name.
Three months before it launched its service in October 1999, Stamps.com raised $60 million. It raised an additional $360 million in its secondary offering two months later.
Those funds, combined with the $30 million that Stamps.com raised from a group of investors that included Microsoft Corp. co-founder Paul Allen, gave the company enough money to expand, but like many of the early Internet start-ups, it grew too big too fast.
“It’s human nature. The more money you raise the more money you want to spend,” McBride said. “That was clearly the philosophy of the previous management team.”
Under CEO John Payne, Stamps.com expanded to three divisions--small business, enterprise and e-commerce--each with its own staff.
The company also broadened its Internet presence, forming an online-ticketing subsidiary, EncryptTix, at the end of 1999 and acquiring the Internet shipping service iShip.com a few months later.
To attract customers, Stamps.com entered into multimillion-dollar agreements with America Online Inc. and Yahoo Inc. to advertise the site.
But with free postage promotions and low service fees, Stamps.com only generated high customer acquisition costs.
“The expenses were not in line with the revenue,” said Michael Crawford, an analyst with B. Riley and Co.
A year after launching the online postage service, Payne resigned in October 2000 and Coleman took over as interim CEO. During the next 15 months, Stamps.com started cutting costs “before cost cutting became popular,” said McBride, who served as chief financial officer during much of this time.
The company began by consolidating its three divisions and focusing on small businesses.
It liquidated EncryptTix last March and sold iShip.com to United Parcel Service Inc. two months later. A series of layoffs reduced the staff from about 550 employees to 64.
Advertising agreements were formed on a pay-per-performance basis only, reducing customer acquisition costs. The company decreased free-postage promotions by half and increased minimum service fees from $1.99 a month to $4.99.
About 25% of its customers left after the price hikes--Stamps.com had estimated that as many as 50% would leave--but the restructuring has improved the company’s overall performance.
Last year, the company turned in its first quarter of positive cash flow. “People are starting to realize there is a real business here,” Crawford said.
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Taking a Licking
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