Stamps.com Has Marks of a Dot-Com Survivor

When I heard that Stamps.com Inc. would be among the companies making presentations at the recent Montgomery & Co. technology conference, it was like discovering that some old entertainer you’d forgotten about actually has been playing Vegas for years: He’s not dead; he has just been hiding out in another world.

Stamps.com wouldn’t have been high on anybody’s list of likely survivors of the dot-com crash. Part of the IPO class of 1999, which also included such ghosts of Nasdaq past as EToys Inc., Drkoop.com Inc., and the online grocery service Webvan, the electronic postage company reached nearly $100 a share within six months of its initial public offering -- and was trading for less than $4 a few months after that.

It spent lavishly on acquisitions, recruitment and real estate, while its predictions that everyone soon would be printing postage from their personal computers proved, um ... optimistic. About one year after its shares peaked, its entire top management was gone, their successors left with the task of salvaging a business from the wreckage, if possible.

“There were some tough times,” Ken McBride, 36, the Santa Monica company’s current (and fifth) chief executive, told me, with the air of a pilot who has safely landed a plane lacking one engine, a rudder and its landing gear.

Upon taking over in mid-2001, McBride said, he placed the company in a sort of suspended animation. He cut marketing spending, which had peaked at nearly $90 million a year, almost to zero. He drastically cut the staff, re-engineered the company’s most promising products and refocused attention on the small-business and home-office sectors.

Last year Stamps.com posted a loss of $9.3 million on $17.6 million in revenue, a major improvement over the $233-million loss on $16.3 million in revenue it recorded in 2001. The big news is that, thanks to a growing base of customers (currently about 300,000) willing to pay a $16 monthly fee to print postage from their PCs, the company says it expects to be profitable starting in the first quarter of next year.

To look at this company’s history now is to be transported back to a sort of opium-fueled dream. Founded in 1996 by three UCLA business school graduates, Stamps.com became an emblem of its era. It was one of the first Internet companies to stage an IPO before it had earned a cent of revenue. The U.S. Postal Service, in fact, didn’t give it permission to sell postage until months after it started selling stock in July 1999.

Its then-CEO, John M. Payne, sometimes showed up as a panelist at the kind of dot-com conferences in which the speakers were identified by their name, the name of their company -- and their company’s market cap. Characteristically, Wall Street and media coverage of Stamps.com largely consisted of manic enthusiasm.

All the while, the company spent like crazy. There was a $16-million advertising campaign handled by a big-name agency and a $235-million all-stock acquisition of Iship, an online shipping services company. Employment soared: When McBride left an analyst’s job at Salomon Smith Barney to join Stamps.com as a finance executive in April 1999, he was employee No. 50; a year and a half later the headcount was 700.

At the end of 1999, when the company had 11,000 customers, its market value peaked at about $5 billion. The stock price then cooled, but the spending continued.

Stamps.com went into the real estate business, investing in the construction of a five-story building next door to IShip’s Bellevue, Wash., headquarters and leasing 200,000 square feet of space in Santa Monica. There were “partnerships” with Time Warner Inc.’s America Online unit and Intuit Inc., the developer of Quicken personal-finance software, in which the partners got paid tens of millions of dollars whether or not they produced worthwhile customers for Stamps.com.

When he took over as CEO, McBride knew the company’s survival depended on stanching an outflow of cash that had reached $12 million a month. The process resembled trying to hook a marlin with a paper clip.

“People don’t know how hard it is to cut the cash burn,” he said. When he started, the company had $250 million in the bank; by the time he reeled in the fish, the cash balance was only $165 million. Last month, the company returned about $80 million of that to shareholders in the form of a one-time dividend.

Meanwhile, the new management slashed employment to its current level of less than 50. It placed all but a core 26,000 square feet of office space out for sublet. And it sold IShip to United Parcel Service Inc. for a nominal $2.8 million, or a little more than one-hundredth of the price it had paid in stock to acquire the company.

At the same time, McBride pushed to improve the product line. Initially, Stamps.com customers were restricted to printing electronic stamps onto blank envelopes, using conventional PC printers. The Postal Service’s burdensome rules diluted the benefits of the electronic age, requiring that users enter a recipient’s mailing address into their computer before they could imprint the postage.

McBride worked to broaden the product line to compete more directly with the postage meter business dominated by Pitney Bowes Inc. After more than two years of regulatory dithering, the Postal Service in mid-2002 approved a product called NetStamps, which allows customers to print any amount of postage onto a sheet of peelable blanks, as needed. Soon after that, Stamps.com introduced a way to print shipping labels with postage attached.

The company also worked to graduate its customers from a low-cost service plan -- charging a 10% fee over the price of the imprinted postage and a $5 monthly minimum -- to a more lucrative service costing a flat $16 a month and allowing unlimited imprints. With nearly 80% of new customers signing up for the higher rate, McBride says Stamps.com can achieve 35% revenue growth this year even if its customer base grows only 10% to 15%.

He also says that even in this e-mail age, there’s enormous potential growth for Stamps.com. The company is trying to appeal to customers whose varied postage demands -- a 37-cent stamp here, a $1.40 package there -- mean they would gain from the convenience of printing stamps as needed instead of keeping an inventory on hand or constantly running off to the post office.

While Stamps.com says it serves about 85% of the nation’s 350,000 PC postage customers, it has less than 1% penetration into the small-office-home-office, or SOHO, space. Even with first-class mail volumes declining by 2% to 3% a year (thanks to online bill paying and e-mail) McBride figures he’s still looking at tapping a $46-billion market. With it, McBride notes, “we can continue to grow for some time.”

Targeting the SOHO sector may not be as heady as touting the notion that everybody with a PC is a potential customer. But given the shattered world from which Stamps.com came, merely surviving amounts to a big success.

“We’re hoping,” McBride said, “to be counted among the people who started off poorly and finished well.”

Golden State appears every Monday and Thursday. You

can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.