Having Slashed Staff and Costs, Stamps.com Expects Profitability

By CHRISTOPHER KEOUGH
Staff Reporter

Stamps.com Inc., once mentioned in the same breath with eToys Inc. as a prime example of the misplaced enthusiasm for unproven Internet business models, is now promising a profit.

The first step is stanching its losses, and Chief Executive Ken McBride said that will happen when the Santa Monica company releases its fourth quarter 2001 figures next week. "We told Wall Street we'd break even in the fourth quarter and we haven't changed our guidance," he said.

Through an austerity program of deep staff layoffs and smarter marketing strategies, McBride said, the company weathered the dot-com implosion and promises to stop the bleeding. Now, it is poised to post profits for the first quarter of 2002.

Stamps.com was at one time riding the inflating Internet bubble. Boasting a staff of 400 and a burn rate of $32 million in the third quarter of 2000, its prospects seemed perhaps as bright as eToys'.

The cost cutting had begun before McBride, formerly Stamps.com's chief financial officer, was tapped to become chief executive last summer. The company had reduced its burn rate to $2.4 million in third quarter 2001 and slashed its high-priced personnel from a high of 400 to 65. "We can't shrink much more as a company," McBride said. "The main goal for 2002 is growing the top line."

The market has responded if not to its prospects, then to its restructuring. Stamps.com's stock was $2.40 when McBride took over last summer. It hit a 52-week high of $4.60 on Jan. 9 and last week was trading at around $4.

New business lines

The company now generates its revenues, which have been static at around $4.5 million for the last four quarters, by charging a 10 percent markup on every stamp it sells.

McBride believes the company can grow revenues with two products approved by the United States Postal Service for beta testing this month.

The first, net stamps, allows printing of postage of any amount on labels with no expirations. This lets customers print postage on sheets and put them in a drawer until needed. Digital postage, as with traditional metered postage, expires after 24 hours.

The other product, plain paper shipping, would allow small businesses and home businesses to print priority and express mail labels on standard paper without making a trip to the post office.

The biggest hurdle remains the cumbersome process of using Stamps.com. McBride said customers with a 56K modem face as much as an hour to download, install and process USPS mandated registrations before the first digital stamp is printed.

Assessing depth of market

James Lundy, vice president and research director at research group Gartner Inc., said the Postal Service is to blame. "They've proven that they can hang in there, but they're still in for a long haul," Lundy said. "Will the postal service make changes to make it easier?"

Roy Gordon, supervisor of PC Postage for the United States Postal Service, said more than 375,000 customers use computer postage, which has only been around for two years. Postal meters, which have been in existence for 75 years have 1.6 million users.

"Those are pretty reasonable numbers as far as customer acquisition is concerned," Gordon said of the new technology.

As for hassles involved in registering, Gordon said it's not that different from other forms of e-commerce. "This is not a Big Brother thing. What we're talking about is authenticating who we're transacting business with," he said. "I think the entire industry has to find a better way."

In the aftermath of Sept. 11, and the subsequent fear of malignant biological agents distributed through letters, Stamps.com's products provide a trackability that reduces the amount of anonymous mail in the system. Identifying senders and the path a piece of mail takes from origin to destination is an alternative to irradiation, the only way to deal with tainted mail.

Another potential opportunity for Stamps.com is in ATM machines. McBride said the company is negotiating with ATM manufacturer NCR about putting blank stamp labels in Internet-enabled ATMs.

Chris Dunn, vice president of sales and marketing at NCR, said the concept is promising because blank labels could be stored in unsecured parts of an ATM. Currently, stamps sold through the machines must be protected because they have value.

"The advantage is to the institution where the machine is installed," Dunn said. "When they access the secure side they have to hire double labor: someone to access it and someone to watch. With labels you can send a clerk over to replace them."

The 34-year-old McBride is at the helm of the company that joined the United States Postal Service's information-based indicia AKA PC Postage - program as StampMaster Inc. in 1997. Privately funded by investors such as Brentwood Venture Capital, Enterprise Partners, Chase Capital Partners and Vulcan Ventures, StampMaster changed its name to Stamps.com in December 1998.

In June of the following year Stamps.com, still field-testing its technology, raised $11 million in an initial public offering and made the service available to individuals and businesses. The product, aimed primarily at the SoHo market (small office/home office) enabled customers to print postage with a computer, printer and Internet connection.

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