UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q





(Mark
One)




þ
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934.
              
              For
      the quarterly period ended March 31,
    2010




OR




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For the
      transition period from ____________ to
  ____________




Commission
file number: 000-26427





Stamps.com
Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            77-0454966(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





12959
Coral Tree Place


Los
Angeles, California 90066


(Address
of principal executive offices, including zip code)





(310)
482-5800


(Registrant’s telephone
number, including area code)











Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ   No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes  ̈   No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer  o
                Accelerated
      filer  þNon-accelerated
      filer  o (Do not check if
      a smaller reporting company)
                Smaller
      reporting company  o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈   No
þ




As of
April 30, 2010, there were approximately 14,287,786 shares of the Registrant’s
Common Stock issued and outstanding.










STAMPS.COM
INC. AND SUBSIDIARY


FORM
10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2010




TABLE
OF CONTENTS




PagePART
      I - FINANCIAL INFORMATION
                          2ITEM
      1.
                          FINANCIAL
      STATEMENTS
                          2ITEM
      2.
                          MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                          14ITEM
      3.
                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                          21ITEM
      4.
                          CONTROLS
      AND PROCEDURES
                          21PART
      II – OTHER INFORMATION
                          22ITEM
      1.
                          LEGAL
      PROCEEDINGS
                          22ITEM
      1A.
                          RISK
      FACTORS
                          22ITEM
      2.
                          UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                          22ITEM
      3.
                          DEFAULTS
      UPON SENIOR SECURITIES
                          22ITEM
      4.
                          RESERVED
                          22ITEM
      5.
                          OTHER
      INFORMATION
                          22ITEM
      6.
                          EXHIBITS
                          23




1





PART
I - FINANCIAL INFORMATION




ITEM
1. FINANCIAL
STATEMENTS




STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share data)




March
      31,
                            
                            
                            December
      31,2010
                            
                            
                            2009(unaudited)AssetsCurrent
      assets:Cash and cash
      equivalents
                            
                            $
                            33,440
                            
                            
                            $
                            45,011Restricted cash
                            
                            
                            —
                            
                            
                            
                            554Short-term
    investments
                            
                            
                            5,157
                            
                            
                            
                            2,224Accounts receivable,
      net
                            
                            
                            4,120
                            
                            
                            
                            4,367Other current
    assets
                            
                            
                            3,058
                            
                            
                            
                            3,288Total current
    assets
                            
                            
                            45,775
                            
                            
                            
                            55,444Property
      and equipment, net
                            
                            
                            2,002
                            
                            
                            
                            2,102Intangible
      assets, net
                            
                            
                            498
                            
                            
                            
                            498Long-term
      investments
                            
                            
                            24,780
                            
                            
                            
                            23,956Deferred
      income taxes.
                            
                            
                            3,671
                            
                            
                            
                            3,671Other
      assets
                            
                            
                            3,237
                            
                            
                            
                            3,587Total assets
                            
                            $
                            79,963
                            
                            
                            $
                            89,258Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts payable and accrued
      expenses
                            
                            $
                            9,723
                            
                            
                            $
                            9,583Deferred revenue
                            
                            
                            4,088
                            
                            
                            
                            4,070Total
      current liabilities
                            
                            
                            13,811
                            
                            
                            
                            13,653Commitments
      and contingenciesStockholders’
      equity:Common stock, $.001 par
      valueAuthorized shares: 47,500 in 2010
      and 2009Issued
      shares: 24,460 in 2010 and 24,429 in 2009Outstanding shares: 14,288 in 2010
      and 15,681 in 2009
                            
                            
                            47
                            
                            
                            
                            47Additional paid-in
      capital
                            
                            
                            631,231
                            
                            
                            
                            630,322Accumulated
deficit
                            
                            
                            (448,069
                            )
                            
                            
                            (450,214
                            )Treasury
      stock, at cost, 10,172 shares in 2010 and 8,748 shares in
    2009
                            
                            
                            (117,159
                            )
                            
                            
                            (104,344
                            )Accumulated other comprehensive
      income (loss)
                            
                            
                            102
                            
                            
                            
                            (206
                            )Total
      stockholders’ equity
                            
                            
                            66,152
                            
                            
                            
                            75,605Total liabilities and
      stockholders’ equity
                            
                            $
                            79,963
                            
                            
                            $
                            89,258




The
accompanying notes are an integral part of these consolidated financial
statements.


2


STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except per share data)


(Unaudited)




Three
      Months Ended
                      March
      31,2010
                    
                    
                    2009Revenues:Service
                    
                    $
                    16,018
                    
                    
                    $
                    15,314Product
                    
                    
                    3,073
                    
                    
                    
                    2,617Insurance
                    
                    
                    394
                    
                    
                    
                    404PhotoStamps
                    
                    
                    1,501
                    
                    
                    
                    1,713Other
                    
                    
                    3
                    
                    
                    
                    —Total
      revenues
                    
                    
                    20,989
                    
                    
                    
                    20,048Cost
      of revenues:Service
                    
                    
                    3,483
                    
                    
                    
                    3,008Product
                    
                    
                    1,139
                    
                    
                    
                    945Insurance
                    
                    
                    114
                    
                    
                    
                    125PhotoStamps
                    
                    
                    1,078
                    
                    
                    
                    1,300Total
      cost of
      revenues
                    
                    
                    5,814
                    
                    
                    
                    5,378Gross
      profit
                    
                    
                    15,175
                    
                    
                    
                    14,670Operating
      expenses:Sales
      and
      marketing
                    
                    
                    7,984
                    
                    
                    
                    8,064Research
      and
      development
                    
                    
                    2,170
                    
                    
                    
                    2,227General
      and
      administrative
                    
                    
                    2,967
                    
                    
                    
                    3,264Total
      operating
      expenses
                    
                    
                    13,121
                    
                    
                    
                    13,555Income
      from operations
                    
                    
                    2,054
                    
                    
                    
                    1,115Interest
      and other income,
      net
                    
                    
                    171
                    
                    
                    
                    357Income
      before income taxes
                    
                    
                    2,225
                    
                    
                    
                    1,472Income
      tax
      expense
                    
                    
                    80
                    
                    
                    
                    250Net
      income
                    
                    $
                    2,145
                    
                    
                    $
                    1,222Net
      income per shareBasic
                    
                    $
                    0.14
                    
                    
                    $
                    0.07Diluted
                    
                    $
                    0.14
                    
                    
                    $
                    0.07Weighted
      average shares outstandingBasic
                    
                    
                    15,142
                    
                    
                    
                    16,864Diluted
                    
                    
                    15,272
                    
                    
                    
                    16,992





The
accompanying notes are an integral part of these consolidated financial
statements.


3


STAMPS.COM
INC.  AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)




Three
      Months Ended
                  March
      31,2010
              
              
              2009Operating
      activities:Net income
              
              $
              2,145
              
              
              $
              1,222Adjustments to reconcile net
      income to net cash provided by operating activities:Depreciation and
      amortization
              
              
              250
              
              
              
              326Stock-based
      compensation expense
              
              
              705
              
              
              
              793Changes in operating assets and
      liabilities:Accounts
    receivable
              
              
              247
              
              
              
              820Other
      current assets
              
              
              230
              
              
              
              571Other
      assets
              
              
              350
              
              
              
              (220
              )Deferred
      revenue
              
              
              18
              
              
              
              (160
              )Accounts payable and accrued
      expenses
              
              
              140
              
              
              
              (166
              )Net
      cash provided by operating activities
              
              
              4,085
              
              
              
              3,186Investing
      activities:Sale of short-term
      investments
              
              
              710
              
              
              
              9,315Purchase of short-term
      investments
              
              
              (3,599
              )
              
              
              —Sale of long-term
      investments
              
              
              3,526
              
              
              
              214Purchase
      of long-term investments
              
              
              (4,086
              )
              
              
              (14,983
              )Release
      of restricted cash
              
              
              554
              
              
              
              —Purchase
      of property and equipment
              
              
              (150
              )
              
              
              (94
              )Net
      cash used in investing activities
              
              
              (3,045
              )
              
              
              (5,548
              )Financing
      activities:Proceeds from exercise of stock
      options
              
              
              35
              
              
              
              1Issuance
      of common stock under ESPP
              
              
              169
              
              
              
              143Repurchase of common
      stock
              
              
              (12,815
              )
              
              
              (6,878
              )Net
      cash used in financing activities
              
              
              (12,611
              )
              
              
              (6,734
              )Net
      decrease in cash and cash equivalents
              
              
              (11,571
              )
              
              
              (9,096
              )Cash
      and cash equivalents at beginning of period
              
              
              45,011
              
              
              
              52,576Cash
      and cash equivalents at end of period
              
              $
              33,440
              
              
              $
              43,480




The accompanying notes are an
integral part of these consolidated financial
statements.


4


STAMPS.COM
AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




1.
            Summary
      of Significant Accounting Policies




Basis
of Presentation




We
prepared the financial statements included herein without audit pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with United States (“US”) generally accepted accounting
principles (“GAAP”) have been condensed or omitted pursuant to such rules and
regulations. We believe that the disclosures are adequate to make the
information presented not misleading. We recommend that these financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in our latest annual report on Form 10-K.




In our
opinion, these unaudited financial statements contain all adjustments
(consisting of normal recurring adjustments) necessary to present fairly our
financial position as of March 31, 2010, the results of operations for the three
months ended March 31, 2010 and cash flows for the three months ended March 31,
2010.  The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.




Principles
of Consolidation




The
consolidated financial statements include the accounts of Stamps.com Inc. and
PhotoStamps Inc. In October 2009, we formed PhotoStamps Inc., a wholly-owned
subsidiary, for the purpose of managing our retail gift card operations. Because
100% of the voting control is held by us, we have consolidated PhotoStamps Inc.
in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.




Use
of Estimates and Risk Management




The
preparation of financial statements in conformity with US GAAP requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes.  Actual results could differ
from those estimates, and such differences may be material to the financial
statements. Examples include estimates of loss contingencies, promotional coupon
redemptions, and deferred income taxes and estimates regarding the useful lives
of patents and other amortizable intangibles.




Contingencies
and Litigation




We are
involved in various litigation matters as a claimant and a defendant. We record
any amounts recovered in these matters when received. We record liabilities for
claims against us when the loss is probable and estimable. Amounts recorded are
based on reviews by outside counsel, in-house counsel and management. Actual
results could differ from estimates.




Fair
Value of Financial Instruments




Carrying
amounts of certain of our financial instruments, including cash, cash
equivalents, restricted cash, accounts receivable, and accounts payable,
approximate fair value due to their short maturities. The fair values of
investments are determined using quoted market prices for those securities or
similar financial instruments.




5


STAMPS.COM
AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




Reclassifications




Certain
reclassifications have been made to prior year amounts to conform to current
year presentations.




Subsequent
Events




We are
not aware of any material subsequent events or transactions that have occurred
that would require recognition in the financial statements or disclosure in the
notes to the consolidated financial statements.




Revenue
Recognition




We
recognize revenue from product sales or services rendered and commissions from
advertising or sale of products by third party vendors to our customer base when
the following four revenue recognition criteria are met: persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectibility is reasonably
assured.




Service
revenue is based on monthly convenience fees and is recognized in the period
that services are provided. Product sales, net of return allowances, are
recorded when the products are shipped and title passes to customers. Sales of
items, including PhotoStamps, sold to customers are made pursuant to a sales
contract that provides for transfer of both title and risk of loss upon our
delivery to the carrier. Return allowances for expected product returns, which
reduce product revenue, are estimated using historical experience. Commissions
from the advertising or sale of products by a third party vendor to our customer
base are recognized when the revenue is earned and collection is deemed
probable.




Customers
pay face value for postage purchased for use through our PC Postage software,
and the funds are transferred directly from the customers to the United States
Postal Service (“USPS”). We do not recognize revenue for this postage, as it is
purchased by our customers directly from the USPS.




PhotoStamps
revenue includes the price of postage and is made pursuant to a sales contract
that provides for transfer of both title and risk of loss upon our delivery to
the carrier.




On a
limited basis, we allow third parties to offer products and promotions to our
customer base. These arrangements generally provide payment in the form of a
flat fee or revenue sharing arrangements where we receive payment upon customers
accessing third party products and services. Total revenue from such advertising
arrangements was not significant during the three months ended March 31, 2010
and 2009.




We
provide our customers with the opportunity to purchase parcel insurance directly
through our software. Insurance revenue represents the gross amount charged to
the customer for purchasing insurance, and the related cost represents the
amount paid to the insurance broker, Parcel Insurance Plan. We recognize revenue
on insurance purchases upon the ship date of the insured package.




Revenue
from gift cards, which is recognized at the time of redemption, was not
significant to our consolidated financial statements during the three months
ended March 31, 2010 and 2009. Because we do not have meaningful historical data
upon which to base estimates for gift cards that will never be redeemed
(“breakage”), we have not recorded any breakage income related to our gift card
program.




6


STAMPS.COM
AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




2.
            Legal
      Proceedings




On
October 22, 2004, Kara Technology Incorporated filed suit against us in the
United States District Court for the Southern District of New York, alleging,
among other claims, that we infringed certain Kara Technology patents and that
we misappropriated trade secrets owned by Kara Technology, most particularly
with respect to our NetStamps feature. Kara Technology seeks an injunction,
unspecified damages, and attorneys’ fees. The suit was transferred to the United
States District Court for the Central District of California. In the trial
court, we won on all counts. However, on September 24, 2009, the United States
Court of Appeals for the Federal Circuit vacated-in-part and reversed-in-part a
portion of the judgment of the trial court in our favor. In particular, the
Court remanded for further proceedings that portion of the complaint alleging
infringement by NetStamps and breach of contract. The findings in our favor with
respect to infringement by PhotoStamps and the trade secret claim remain in
effect.




On
November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems,
Inc. in the United States District Court for the Central District of California
for infringement of eleven of our patents covering, among other things, Internet
postage technology. We seek an injunction, unspecified damages, and attorneys’
fees. On January 8, 2007, Endicia, Inc. and PSI Systems, Inc. filed
counterclaims asking for a declaratory judgment that all eleven patents are
invalid, unenforceable and not infringed. On November 10, 2008, we were required
to select fifteen claims (from over six hundred claims available) to be the
subject of the trial. On November 9, 2009, the Court granted the summary
judgment motion of Endicia, Inc. and PSI Systems, Inc. that the fifteen claims
we selected are invalid. We have filed a notice of appeal.




On August
8, 2008, PSI Systems, Inc. filed a lawsuit against us in the same court,
alleging that we infringed three PSI Systems patents related to Internet postage
technology. PSI Systems seeks an injunction, unspecified damages, and attorneys’
fees. On September 16, 2008, we filed counterclaims for infringement of four
more of our patents. In our counterclaim, we seek an injunction, unspecified
damages, and attorneys’ fees. A “Markman hearing” to determine the meaning of
the claims was held March 24, 2010. The Court has not scheduled a trial
commencement date.




In 2001,
we were named, together with certain of our current and former board members
and/or officers, as a defendant in several purported class-action lawsuits,
filed in the U.S. District Court for the Southern District of New York. The
lawsuits allege violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 in connection with our initial public offering and a
secondary offering of our common stock. Plaintiffs seek damages and statutory
compensation, including interest, costs and expenses (including attorneys’
fees). In October 2009, the court approved a settlement of this action, which
does not require us to make any payments. The court approval has been
appealed.




We are
subject to various other routine legal proceedings and claims incidental to our
business, and we do not believe that these proceedings and claims would
reasonably be expected to have a material adverse effect on our financial
position, results of operations or cash flows.




3.
            Net
      Income per Share




Net
income per share represents net income attributable to common stockholders
divided by the weighted average number of common shares outstanding during a
reported period. The diluted net income per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock, including stock options (commonly and hereafter referred to as “common
stock equivalents”), were exercised or converted into common stock. Diluted net
income per share is calculated by dividing net income during a reported period
by the sum of the weighted average number of common shares outstanding plus
common stock equivalents for the period.




7


STAMPS.COM
AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




The
following table reconciles share amounts utilized to calculate basic and diluted
net income per share (in thousands, except per share data):




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Net
      income
                  
                  $
                  2,145
                  
                  
                  $
                  1,222Basic
      - weighted average common shares
                  
                  
                  15,142
                  
                  
                  
                  16,864Diluted
      effect of common stock equivalents
                  
                  
                  130
                  
                  
                  
                  128Diluted
      - weighted average common shares
                  
                  
                  15,272
                  
                  
                  
                  16,992Earnings
      per share:Basic
                  
                  $
                  0.14
                  
                  
                  $
                  0.07Diluted
                  
                  $
                  0.14
                  
                  
                  $
                  0.07





The
calculation of dilutive shares excludes the effect of the following options that
are considered anti-dilutive (in thousands):




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Anti-dilutive
      stock option shares
                  
                  
                  2,433
                  
                  
                  
                  2,746





4.
            Stock-Based
      Employee Compensation




We are
required to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model and to recognize stock-based compensation
expense during each period based on the value of that portion of share-based
payment awards that is ultimately expected to vest during the period, reduced
for estimated forfeitures. We estimate forfeitures at the time of grant based on
historical data and revise, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Compensation expense recognized for all
employee stock options granted is recognized using the straight-line single
method over their respective vesting periods of three to five
years.




8


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




The
following table sets forth the stock-based compensation expense that we
recognized for the periods indicated (in thousands):




Three
      Months Ended
                        March
      31,2010
                      
                      
                      2009Stock-based
      compensation expense relating to:Employee
      and director stock options
                      
                      $
                      672
                      
                      
                      $
                      768Employee
      stock purchases
                      
                      
                      33
                      
                      
                      
                      25Total
      stock-based compensation expense
                      
                      $
                      705
                      
                      
                      $
                      793Stock-based
      compensation expense relating to:Cost
      of revenues
                      
                      $
                      63
                      
                      
                      $
                      71Sales
      and marketing
                      
                      
                      185
                      
                      
                      
                      191Research
      and development
                      
                      
                      151
                      
                      
                      
                      164General
      and administrative
                      
                      
                      306
                      
                      
                      
                      367Total
      stock-based compensation expense
                      
                      $
                      705
                      
                      
                      $
                      793




We use
the Black-Scholes option valuation model to estimate the fair value of
share-based payment awards on the date of grant, which requires us to make a
number of highly complex and subjective assumptions, including stock price
volatility, expected term, risk-free interest rates and actual and projected
employee stock option exercise behaviors. In the case of options we grant, our
assumption of expected volatility was based on the historical volatility of our
stock price. We base the risk-free interest rate on US Treasury zero-coupon
issues with a remaining term equal to the expected life assumed at the date of
grant.  The estimated expected life represents the weighted-average
period the stock options are expected to remain outstanding determined based on
an analysis of historical exercise behavior.




The
following are the weighted average assumptions used in the Black-Scholes
valuation model for the periods indicated:




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Expected
      dividend yield
                  
                  
                  N/A
                  
                  
                  
                  —Risk-free
      interest rate
                  
                  
                  N/A
                  
                  
                  
                  1.78
                  %Expected
      volatility
                  
                  
                  N/A
                  
                  
                  
                  53
                  %Expected
      life (in years)
                  
                  
                  N/A
                  
                  
                  
                  4.5Expected
      forfeiture rate
                  
                  
                  N/A
                  
                  
                  
                  20
                  %





We did
not grant any stock options in the first quarter of 2010.





5.
            Intangible
      Assets




We have
amortizable and non-amortizable intangible assets consisting of patents,
trademarks and other intellectual property with a gross carrying value of $8.3
million and accumulated amortization of $7.8 million as of March 31, 2010 and
December 31, 2009. The expected useful lives of our amortizable intangible
assets range from 4 to 17 years. During 2009, we assessed whether events or
changes in circumstances occurred that could potentially indicate that the
carrying amount of our intangible assets may not be recoverable. We concluded
that there were no such events or changes in circumstances during 2009 and
determined that the fair value of our intangible assets were in excess of their
carrying value as of December 31, 2009. Aggregate amortization expense on
patents and trademarks was not material to our consolidated financial statements
for the three months ended March 31, 2010 and March 31, 2009. Our amortization
expense for the next five years is not expected to be material to our
consolidated financial statements.




9


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




6.           Comprehensive
Income




The
following table provides the data required to calculate comprehensive income (in
thousands):




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Net
      income
                  
                  $
                  2,145
                  
                  
                  $
                  1,222Unrealized
      gain (loss) on investments
                  
                  
                  308
                  
                  
                  
                  (163
                  )Comprehensive
      income
                  
                  $
                  2,453
                  
                  
                  $
                  1,059





7.
            Income
      Taxes




During
the first quarter of 2010, our income tax expense consisted of both federal and
state alternative minimum tax. Our effective income tax rate differs from the
statutory income tax rate primarily as a result of our use of net operating
losses (NOLs) to offset current federal and state tax expense. A valuation
allowance was originally recorded against our deferred tax assets because we
determined that the realization of these assets did not meet the more likely
than not criteria. During the first quarter of 2008, we determined that a full
valuation allowance against our deferred tax assets was not necessary and
recorded a partial reversal of the deferred tax valuation allowance of $3.7
million. During 2009, we re-evaluated our deferred tax assets and determined
that the realization of our net deferred tax asset of $3.7 million continues to
be more likely than not.  In making such determination, we considered
all available positive and negative evidence, including our recent earnings
trend and expected continued future taxable income. We continue to maintain
a valuation allowance for the remainder of our deferred tax assets. In September
2008, the State of California passed legislation temporarily suspending the use
of NOLs to offset current state income tax expense for the tax years 2008 and
2009. As a result of not being able to use our state NOLs, we incurred
approximately $207,000 additional California state income tax expense during the
three months ended March 31, 2009. During the three months ended March 31, 2010,
we recorded a tax provision for corporate alternative minimum taxes of
approximately $80,000.




8.
            Fair
      Value Measurements




Financial
assets measured at fair value on a recurring basis are classified in one of the
three following categories, which are described below:




Level 1 -
            Valuations
      based on unadjusted quoted prices for identical assets in an active
      market




Level 2 -
            Valuations
      based on quoted prices in markets where trading occurs infrequently or
      whose values are based on quoted prices of instruments with similar
      attributes in active markets




Level 3 -
            Valuations
      based on inputs that are unobservable and involve management judgment and
      our own assumptions about market participants and
  pricing




10


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




The
following table summarizes our financial assets measured at fair value on a
recurring basis (in thousands):




Fair
      Value Measurement at Reporting Date UsingDescription
                
                March
      31, 2010
                
                
                Quoted
      Prices
                    in
      Active
                    Markets
      for
                    Identical
      Assets
                    (Level
      1)
                
                
                Significant
                    Other
                    Observable
                    Inputs
                    (Level
      2)
                
                
                Significant
                    Unobservable
                    Inputs
                    (Level
      3)Cash
      equivalents
                
                $
                33,440
                
                
                $
                33,440
                
                
                $
                —
                
                
                $
                —Available-for-sale
      debt securitiesAsset-backed
      securities
                
                
                4,520
                
                
                
                —
                
                
                
                4,520
                
                
                
                —Corporate
      bonds
                
                
                25,417
                
                
                
                —
                
                
                
                25,417
                
                
                
                —Total
                
                $
                63,377
                
                
                $
                33,440
                
                
                $
                29,937
                
                
                $
                —




The fair
value of our available-for-sale debt securities included in the Level 2 category
is based on the market values obtained from an independent pricing service that
were evaluated using pricing models that vary by asset class and may incorporate
available trade, bid and other market information and price quotes from well
established independent pricing vendors and broker-dealers.




There
were no non-financial assets or liabilities that were required to be measured at
fair value as of March 31, 2010.




9.
            Cash
      Equivalents and Investments




Our cash
equivalents and investments consist of money market, asset-backed securities and
public corporate debt securities at March 31, 2010 and December 31, 2009. We
consider all highly liquid investments with an original or remaining maturity of
three months or less at the date of purchase to be cash equivalents. All of our
investments are classified as available for sale and are recorded at market
value using the specific identification method. Realized gains and losses are
reflected in other income using the specific identification method. There was no
material realized gain or loss with respect to our investments during the first
quarter of 2010. Unrealized gains and losses are included as a separate
component of stockholders' equity. We have 11 securities with a total fair value
of $8.3 million that have unrealized losses of approximately $266,000 as of
March 31, 2010. The following table summarizes realized gains and losses for the
period indicated (in thousands):




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009Realized
      gain
                  
                  $
                  1.9
                  
                  
                  $
                  35.5Realized
      loss
                  
                  
                  —
                  
                  
                  
                  (4.9
                  )Net
      realized gain
                  
                  $
                  1.9
                  
                  
                  $
                  30.6




On at
least a quarterly basis, we evaluate our available for sale securities, and
record an “other-than-temporary impairment” (“OTTI”) if we believe their fair
value is less than historical cost, and it is probable that we will not collect
all contractual cash flows. We did not record any OTTI during the three months
ended March 31, 2010, after evaluating a number of factors including, but not
limited to:




11


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




·
            How
      much fair value has declined below amortized
  cost


·
            The
      financial condition of the issuers


·
            Significant
      rating agency changes on the issuer


·
            Our
      intent and ability to hold the security for a period of time sufficient to
      allow for any anticipated recovery in fair
value




The
following table summarizes our cash, cash equivalents, restricted cash and
investments as of March 31, 2010 and December 31, 2009 (in
thousands):




March
      31, 2010Cost
      or
                    
                    
                    Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    EstimatedCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair
      ValueCash
      equivalents:Cash
                    
                    $
                    9,664
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    9,664Money
      market
                    
                    
                    23,776
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23,776Cash
      and cash equivalents
                    
                    
                    33,440
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    33,440Short-term
      investments:Corporate
      notes and bonds
                    
                    
                    5,110
                    
                    
                    
                    53
                    
                    
                    
                    (6
                    )
                    
                    
                    5,157Short-term
      investments
                    
                    
                    5,110
                    
                    
                    
                    53
                    
                    
                    
                    (6
                    )
                    
                    
                    5,157Long-term
      investments:Corporate
      bonds and asset backed securities
                    
                    
                    24,725
                    
                    
                    
                    315
                    
                    
                    
                    (260
                    )
                    
                    
                    24,780Long-term
      investments
                    
                    
                    24,725
                    
                    
                    
                    315
                    
                    
                    
                    (260
                    )
                    
                    
                    24,780Cash
      equivalents and investments
                    
                    $
                    63,275
                    
                    
                    
                    368
                    
                    
                    
                    (266
                    )
                    
                    $
                    63,377




December
      31, 2009Cost
      or
                    
                    
                    Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    EstimatedCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair
      ValueCash
      equivalents:Cash
                    
                    $
                    9,132
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    9,132Money
      market
                    
                    
                    35,879
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    35,879Cash
      and cash equivalents
                    
                    
                    45,011
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    45,011Restricted
      cash:Corporate
      notes and bonds
                    
                    
                    554
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    554Restricted
      cash
                    
                    
                    554
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    554Short-term
      investments:Corporate
      notes and bonds
                    
                    
                    2,221
                    
                    
                    
                    17
                    
                    
                    
                    (14
                    )
                    
                    
                    2,224Short-term
      investments
                    
                    
                    2,221
                    
                    
                    
                    17
                    
                    
                    
                    (14
                    )
                    
                    
                    2,224Long-term
      investments:Corporate
      bonds and asset backed securities
                    
                    
                    24,165
                    
                    
                    
                    250
                    
                    
                    
                    (459
                    )
                    
                    
                    23,956Long-term
      investments
                    
                    
                    24,165
                    
                    
                    
                    250
                    
                    
                    
                    (459
                    )
                    
                    
                    23,956Cash
      equivalents, restricted cash and investments
                    
                    $
                    71,951
                    
                    
                    
                    267
                    
                    
                    
                    (473
                    )
                    
                    $
                    71,745




12


STAMPS.COM
INC AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(ALL
INFORMATION WITH RESPECT TO MARCH 31, 2010 AND 2009 IS UNAUDITED)




The
following table summarizes contractual maturities of our marketable fixed-income
securities as of March 31, 2010 (in thousands):




Amortized
                    Cost
                
                
                Estimated
                    Fair
      ValueDue
      within one year
                
                $
                5,110
                
                
                $
                5,157Due
      after one year through five years
                
                
                24,725
                
                
                
                24,780Due
      after five years through ten years
                
                
                -
                
                
                
                -Total
                
                $
                29,835
                
                
                $
                29,937




10.
            Recent
      Accounting Standard




In
January 2010, the Financial Accounting Standards Board issued Accounting
Standard Update No. 2010-06 which amends Fair Value Measurements and
Disclosures – Overall (ASC Topic 820-10). This update requires a gross
presentation of activities within the Level 3 rollforward and adds a new
requirement to disclose transfers in and out of Level 1 and 2 measurements. The
update further clarifies the existing disclosure requirements regarding: i) the
level of disaggregation of fair value measurements; and ii) the disclosures
regarding inputs and valuation techniques. This update was effective for our
fiscal year beginning January 1, 2010 except for the gross presentation of
the Level 3 rollforward information, which is effective for our fiscal year
beginning January 1, 2011. The adoption of this amended standard did not
significantly impact our consolidated financial statements.




13




ITEM 2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




This
Quarterly Report on Form 10-Q contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”),  and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”).  These statements relate to
expectations concerning matters that are not historical
facts.   You can find many (but not all) of these statements by
looking for words such as “approximates,” “believes,” “expects,” “anticipates,”
“estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in
this report.  We claim the protection of the safe harbor contained in
the Private Securities Litigation Reform Act of 1995.  We caution
investors that any forward-looking statements presented in this report, or that
we may make orally or in writing from time to time, are based on beliefs and
assumptions made by, and information currently available to, us.  Such
statements are based on assumptions, and the actual outcome will be affected by
known and unknown risks, trends, uncertainties and factors that are beyond our
control or ability to predict. Although we believe that our assumptions are
reasonable, they are not guarantees of future performance, and some will
inevitably prove to be incorrect. As a result, our actual future results may
differ from our expectations, and those differences may be material. We are not
undertaking any obligation to update any forward-looking statements.
Accordingly, investors should use caution in relying on past forward-looking
statements, which are based on known results and trends at the time they are
made, to anticipate future results or trends.




Please
refer to the risk factors under “Item 1A. Risk Factors” of our Form 10-K for the
year ended December 31, 2009 as well as those described elsewhere in our public
filings.  The risks included are not exhaustive, and additional
factors could adversely affect our business and financial
performance.  We operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time, and it is not possible
for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.





Stamps.com,
NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the
Stamps.com logo are our trademarks.  This report also references
trademarks of other entities.




SPECIAL
NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK




We
currently have federal and state net operating loss (“NOL”) carry-forwards of
approximately $230 million and $150 million, respectively, with potential value
of up to approximately $90 million in tax savings over the next 15 years. Under
Internal Revenue Code Section 382 rules, if a “change of ownership” is
triggered, our NOL asset may be impaired. A change in ownership can occur
whenever there is a shift in ownership by more than 50 percentage points by one
or more “5% shareholders” within a three-year period. We estimate that as of
March 31, 2010 we were at approximately a 34% level compared with the 50% level
that would trigger impairment of our NOL asset.




Under our
certificate of incorporation, any person, company or investment firm that wishes
to become a “5% shareholder” (as defined in our certificate of incorporation)
must first obtain a waiver from our board of directors. In addition, any person,
company or investment firm that is already a “5% shareholder” of ours cannot
make any additional purchases of our stock without a waiver from our board of
directors.  The NOL protective provisions contained in our certificate
of incorporation are more specifically described in our Definitive Proxy filed
with the Securities and Exchange Commission on April 2, 2008.




As of
April 30, 2010, we had approximately 14.3 million shares outstanding, and
therefore ownership of approximately 714,000 shares or more would currently
constitute a “5% shareholder”. We strongly urge that any stockholder
contemplating owning more than 570,000 shares contact us before doing
so.




Overview




Stamps.comÒ is the leading provider of
Internet-based postage solutions.  Our customers use our service to
mail and ship a variety of mail pieces, including postcards, envelopes, flats
and packages, using a wide range of United States Postal Service (the “USPS”)
mail classes, including First Class Mail®, Priority Mail®, Express Mail®, Media
Mail®, Parcel Post®, and others. Our customers include individuals, small
businesses, home offices, medium-size businesses and large enterprises, and
within these segments we target both mailers and shippers.   We
were the first ever USPS-licensed vendor to offer PC Postage® in a software-only
business model in 1999.




14




Services
and Products




We offer
the following products and services to our customers




Ÿ
            PC Postage Service. Our
      USPS-approved PC Postage service enables users to print “electronic
      stamps” directly onto envelopes, plain paper, or labels using only a
      standard personal computer, printer and Internet connection. Our service
      currently supports a variety of USPS and international mail classes.
      Customers can also add USPS Special Services such as Delivery
      ConfirmationTM, Signature ConfirmationTM, Registered Mail, Certified Mail,
      Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery
      to their mail pieces. After installing our software and completing the
      registration process, customers can purchase and print postage 24 hours a
      day, seven days a week. When a customer purchases postage for use through
      our service, the customer pays face value, and the funds are transferred
      directly from the customer’s account to the USPS’s
  account.




In
addition to postage purchases, customers pay us a monthly service fee ranging
from $15.99 to $39.99 depending on the features and capabilities of the
particular service. Our Pro Plan offers a basic set of Stamps.com mailing &
shipping features with a single-user capability.  Our Premiere plan
for larger small businesses adds multiple-user functionality, automated
Certified Mail forms, FedEx label printing, additional reference codes and
higher allowable postage balances to our Pro Plan feature set. Our Professional
Shipper plan is targeted to higher volume shippers such as fulfillment houses,
retailers and e-commerce merchants and features direct integration into a
customer’s order databases, faster label printing speed, the ability to
customize and save shipping profiles, and integrations with many of the
industry’s leading shipping management systems. Our Enterprise service is
targeted to organizations with multiple geographic locations and features
enhanced reporting that allows a central location such as a corporate
headquarters greater visibility and control over postage expenditures across
their network of locations.




Our
customers can print postage (i) on NetStamps® labels, which can be used just
like regular stamps, (ii) directly on envelopes, postcards or on other types of
mail or labels, in a single-step process that saves time and provides a
professional look, (iii) on plain 8.5” x 11” paper or on special labels for
packages, and (iv) on integrated customs forms for international mail and
packages.  For added convenience, our PC Postage services incorporate
address verification technology that verifies each destination address for mail
sent using our service against a database of all known addresses in the United
States.  Our PC Postage service is also integrated with common small
business and productivity software applications such as word processing, contact
and address management, and accounting and financial applications.  We
also offer several different versions of NetStamps, such as Themed NetStamps and
Photo NetStamps that allow customers to add stock or full custom designs to
their mail while still providing the same NetStamps convenience of printing and
using postage whenever it is needed.




·
            PhotoStamps®.In May 2009 we
      successfully completed the market test of our PhotoStamps product.
      PhotoStamps is a patented form of postage that allows consumers to turn
      digital photos, designs or images into valid US postage. With this
      product, individuals or businesses can create customized US postage using
      pictures of their children, pets, vacations, celebrations, business logos
      and more. PhotoStamps can be used as regular postage to send letters,
      postcards or packages. The product is available via our
      separately-marketed website at www.photostamps.com. Customers upload a
      digital photograph or image file, customize the look and feel by choosing
      a border color to complement the photo, select the value of postage, and
      place the order online. Each sheet includes 20 individual PhotoStamps, and
      orders arrive via US Mail in a few business days. We do not include our
      PhotoStamps business when we refer to our PC Postage
    business.




·
            Mailing & Shipping
      Supplies Store.Our Mailing & Shipping Supplies Store (our
      “Supplies Store”) is available to our customers from within our PC Postage
      software and sells NetStamps labels, shipping labels, other mailing
      labels, dedicated postage printers, scales, and other mailing and
      shipping-focused office supplies. Our Supplies Store features a store
      catalog, same day shipping capabilities, messaging of our free or
      discounted shipping promotions, cross sell during checkout, product search
      capabilities, and expedited and rush shipping
  options.




·
            Branded Insurance. We
      offer Stamps.com branded insurance to our customers so that they may
      insure their mail or packages in a fully integrated, online process that
      eliminates any trips to the post office or the need to complete any
      special forms. Our branded insurance is provided in partnership with
      Parcel Insurance Plan and is underwritten by Fireman's Fund. We also offer
      official USPS insurance alongside our branded insurance
      product.




15


Results
of Operations




Total
revenue in the first quarter of 2010 was $21.0 million, an increase of 5% from
$20.0 million in the first quarter of 2009.  PC Postage revenue,
including service revenue, product revenue and insurance revenue, in the first
quarter of 2010 was $19.5 million, an increase of 6% from $18.3 million in the
first quarter of 2009. PhotoStamps revenue in the first quarter of 2010 was $1.5
million, a decrease of 12% from $1.7 million in the first quarter of 2009. The
following table sets forth the breakdown of revenue for the first quarter of
2010 and 2009 and the resulting percentage change (revenue in
thousands):




Three
      months ended March 31,2010
                
                
                2009
                
                
                %
      ChangeService
      revenue
                
                $
                16,018
                
                
                $
                15,314
                
                
                
                5
                %Product
      revenue
                
                
                3,073
                
                
                
                2,617
                
                
                
                17
                %Insurancerevenue
                
                
                394
                
                
                
                404
                
                
                
                (3
                )%PC
      postage revenue
                
                $
                19,485
                
                
                $
                18,335
                
                
                
                6
                %PhotoStamps
      revenue
                
                $
                1,501
                
                
                $
                1,713
                
                
                
                (12
                )%Otherrevenue
                
                
                3
                
                
                
                —
                
                
                
                —Total
      revenue
                
                $
                20,989
                
                
                $
                20,048
                
                
                
                5
                %





We use
several PC Postage marketing channels to acquire customers, including
partnerships, online advertising, affiliate channel, direct mail, traditional
media advertising and others. Beginning in 2007, we significantly increased our
investment in our non-enhanced promotion marketing channels based on our
estimated high return-on-investment in that area, and we continued to increase
our investment in 2010 as our estimated return-on-investment continued to be
attractive.  Primarily as a result of these decisions, PC Postage
revenue for customers acquired through our non-enhanced promotion channels was
$18.2 million in the first quarter of 2010, an increase of 10% from $16.6
million in the first quarter of 2009.




In the
enhanced promotion channel, we work with various companies to advertise our
service in a variety of sites on the Internet. These companies typically offer
an additional promotion (beyond what we typically offer) directly to the
customer in order to get the customer to try our service.  We have
been reducing our investment in this area over the last few years, which reduced
our revenue for customers acquired through this channel to $1.3 million in the
first quarter of 2010, a decrease of 25% from $1.8 million in the first quarter
of 2009.




The
following table sets forth the breakdown of PC Postage revenue between customers
acquired through our non-enhanced promotion channels and customers acquired
through our enhanced promotion channels for the first quarters of 2010 and 2009
and the resulting percent change (revenue in thousands):




Three
      months ended March 31,2010
                
                
                2009
                
                
                %
      ChangeNon-enhanced
      promotion revenue
                
                $
                18,157
                
                
                $
                16,564
                
                
                
                10
                %Enhanced
      promotion revenue
                
                
                1,328
                
                
                
                1,771
                
                
                
                (25
                )%PC
      postage revenue
                
                $
                19,485
                
                
                $
                18,335
                
                
                
                6
                %




The
increase in revenue from customers acquired through our non-enhanced promotion
channels was driven by both an increase in paid customers and an increase in
average monthly revenue per paid customer.




The
number of paid customers originally acquired through our non-enhanced promotion
channels during the first quarter of 2010 was approximately 336,000, an increase
of 4.5% from the 320,000 in the first quarter of 2009. We define paid customers
for the quarter as ones from whom we successfully collected service fees at
least once during that quarter.




The
increase in paid customers in the first quarter of 2010 was attributable to both
increased customer acquisition and reduced churn in these channels. We believe
the increased customer acquisition was primarily attributable to increased
customer acquisition spending and improvements in the economic environment. We
believe the decreased churn rates were primarily attributable to increased usage
of our service and improvements in the economic environment.




16




For
customers originally acquired through our non-enhanced promotion channels, our
average monthly revenue per paid customer for the first quarter of 2010 was
$18.03, an increase of 5% compared to $17.18 for the first quarter of 2009. We
believe the increase in average monthly revenue per paid customer was partially
attributable to having a larger number of customers on higher-priced plans and
partially attributable to an increase in the average store revenue per paid
customer driven by increased usage of our service.




The
following table sets forth our results of operations as a percentage of total
revenue for the periods indicated:




Three
      Months Ended
                          March
      31,2010
                        
                        
                        2009Total
      RevenuesService
                        
                        
                        76
                        %
                        
                        
                        76
                        %Product
                        
                        
                        15
                        %
                        
                        
                        13
                        %Insurance
                        
                        
                        2
                        %
                        
                        
                        2
                        %PhotoStamps
                        
                        
                        7
                        %
                        
                        
                        9
                        %Other
                        
                        
                        —
                        
                        
                        
                        —Total
      revenues
                        
                        
                        100.0
                        %
                        
                        
                        100
                        %Cost
      of revenuesService
                        
                        
                        17
                        %
                        
                        
                        15
                        %Product
                        
                        
                        5
                        %
                        
                        
                        5
                        %Insurance
                        
                        
                        1
                        %
                        
                        
                        1
                        %PhotoStamps
                        
                        
                        5
                        %
                        
                        
                        6
                        %Total
      cost of revenues
                        
                        
                        28
                        %
                        
                        
                        27
                        %Gross
      profit
                        
                        
                        72
                        %
                        
                        
                        73
                        %Operating
      expenses:Sales
      and marketing
                        
                        
                        38
                        %
                        
                        
                        40
                        %Research and
      development
                        
                        
                        10
                        %
                        
                        
                        11
                        %General and
      administrative
                        
                        
                        14
                        %
                        
                        
                        16
                        %Total operating
      expenses
                        
                        
                        63
                        %
                        
                        
                        68
                        %Income
      from operations
                        
                        
                        10
                        %
                        
                        
                        6
                        %Interest
      income and other income, net
                        
                        
                        1
                        %
                        
                        
                        2
                        %Income
      before income taxes
                        
                        
                        11
                        %
                        
                        
                        7
                        %Income
      tax expense
                        
                        
                        0
                        %
                        
                        
                        1
                        %Net
      income
                        
                        
                        10
                        %
                        
                        
                        6
                        %




17


Revenue




Our
revenue is derived primarily from five sources: (1) service fees charged to
customers for use of our PC Postage service; (2) product revenue from the direct
sale of consumables and supplies through our Supplies Store; (3) insurance
revenue from our branded insurance offering; (4) PhotoStamps revenue from our
PhotoStamps business; and (5) other revenue, consisting of advertising revenue
derived from advertising programs with our existing customers.




Service
revenue increased 5% to $16.0 million in the first quarter of 2010 from
$15.3 million in the first quarter of 2009. The 5% increase in service
revenue consisted of an 8% increase in service revenue from customers acquired
through our non-enhanced promotion channels and a 25% decrease in service
revenue from customers acquired through our enhanced promotion channel. The 8%
increase in service revenue from customers through the non-enhanced promotion
channels consisted of a 4% increase in successfully billed customers and a 4%
increase in average service revenue per customer.   As a percentage of
total revenue, service revenue remained at 76% during each of the first quarters
of 2010 and 2009.




Product
revenue increased 17% to $3.1 million in the first quarter of 2010 from $2.6
million in the first quarter of 2009. The increase was primarily attributable to
the following: (1) growth in our paid customer base; (2) marketing our Supplies
Store to our existing customer base; (3) the additional SKUs we added to our
Supplies Store; and (4) growth in postage printed, which helps drive sales of
consumable supplies such as labels. Total postage printed by customers using our
service during the first quarter of 2010 was $101 million, an 18% increase from
the $85 million printed during the first quarter of 2009. As a percentage of
total revenue, product revenue increased two percentage points to 15% in the
first quarter of 2010 from 13% in the first quarter of 2009.




Insurance
revenue decreased 2% to approximately $394,000 in the first quarter of 2010 from
approximately $404,000 in the first quarter of 2009, primarily as a result of a
decrease in the total number of transactions. As a percentage of total revenue,
insurance revenue remained at 2% during each of the first quarters of 2010 and
2009.




We
reduced our PhotoStamps sales and marketing spending in the first quarter of
2010 compared with the first quarter of 2009 and plan to continue to reduce our
sales and marketing spending on PhotoStamps in future periods to improve
profitability in that business.  As a result of this decision,
PhotoStamps revenue decreased 12% to $1.5 million in the first quarter of
2010 from $1.7 million in the first quarter of 2009. As a percentage of
total revenue, PhotoStamps revenue decreased two percentage points to 7% in the
first quarter of 2010 from 9% in the first quarter of 2009. Total PhotoStamps
sheets shipped during the first quarter of 2010 was approximately 86,000, a 17%
decrease compared to 104,000 in the first quarter of 2009. Average revenue per
sheet shipped in the first quarter of 2010 was $17.4 compared to $16.5 in the
first quarter of 2009. The decrease in sheets shipped and increase in average
revenue per sheet was primarily attributable to a higher mix of lower volume,
higher priced consumer orders compared to higher volume, lower priced business
orders.




Other
revenue consisting of commissions from the advertising or sale of products by
third party vendors to our customer base was approximately $3,000 in the first
quarter of 2010 compared to $0 in the first quarter of 2009. Commission revenue
is currently not material to our consolidated financial statements.




18


Cost
of Revenue




Cost of
revenue principally consists of the cost of customer service, certain
promotional expenses, system operating costs, credit card processing fees, the
cost of postage for PhotoStamps, image review, printing and fulfillment costs
for PhotoStamps, parcel insurance offering costs, customer misprints and
products sold through our Supplies Store and the related costs of shipping and
handling. Total cost of revenue increased 8% to $5.8 million in the first
quarter of 2010 from $5.4 million in the first quarter of 2009. As a percentage
of total revenue, total cost of revenue increased one percentage point to 28% in
the first quarter of 2010 from 27% in the first quarter of 2009.




Cost of
service revenue increased 16% to $3.5 million in the first quarter of 2010 from
$3.0 million in the first quarter of 2009. The increase during the quarter is
primarily attributable to: 1) an increase in customer service costs aimed at
improving our overall customer experience and 2) an increase in promotional
expense. The increase in promotional expense is attributable to the increase in
customer acquisition and higher redemption rates of our free scale and free
postage offers. Promotional expense, which represents a material portion of
total cost of service revenue, is expensed in the period in which a customer
qualifies for the promotion, while the revenue associated with the acquired
customer is earned over the customer's lifetime. As a result, promotional
expense for newly acquired customers may exceed the revenue earned from those
customers in that period. Promotional expense was approximately $743,000
and $361,000 in the three months ended March 31, 2010 and 2009, respectively. As
a percentage of total revenue, cost of service revenue increased two percentage
points to 17% in the first quarter of 2010 from 15% in the first quarter of
2009.




Cost of
product revenue increased 21% to $1.1 million in the first quarter of 2010 from
approximately $945,000 in the first quarter of 2009. The increase in costs is
attributable to increased product revenue as discussed above as well as higher
fulfillment costs as we added an east coast fulfillment center to reduce
delivery times and improve customer experience. As a percentage of total
revenue, cost of product revenue was unchanged at 5% in the first quarters of
2010 and 2009.




Cost of
insurance revenue decreased 9% to approximately $114,000 in the first quarter of
2010 from approximately $125,000 in the first quarter of 2009. The decrease in
costs is attributable to decreased insurance revenue as discussed above. As a
percentage of total revenue, cost of insurance revenue was unchanged at
approximately 1% in the three months ended March 31, 2010 and 2009.




Cost of
PhotoStamps revenue decreased 17% to $1.1 million in the first quarter of 2010
from $1.3 million in the first quarter of 2009, corresponding to the decrease in
PhotoStamps revenue as discussed above. The gross margin from PhotoStamps is
significantly lower than that of our other sources of revenue because we include
the stated value of USPS postage as part of our cost of PhotoStamps revenue. As
a percentage of total revenue, cost of PhotoStamps revenue decreased one
percentage point to 5% in the first quarter of 2010 from 6% in first quarter of
2009.




Sales
and Marketing




Sales and
marketing expense principally consists of spending to acquire new customers and
compensation and related expenses for personnel engaged in sales, marketing, and
business development activities. Sales and marketing expense decreased 1% to
$8.0 million in the first quarter of 2010 from $8.1 million in the first quarter
of 2009. As a percentage of total revenue, sales and marketing expense decreased
two percentage points to 38% in the first quarter of 2010 from 40% in the first
quarter of 2009. The decrease, both on an absolute basis and as a percentage of
total revenue, is primarily due to our decision to decrease our enhanced
promotion marketing program expenditures and to decrease our marketing
expenditures related to PhotoStamps, partially offset by an increase in
marketing program expenditures relating to the acquisition of customers outside
the enhanced promotion channel for our PC Postage business. Ongoing marketing
programs include the following: traditional advertising, partnerships, customer
referral programs, customer re-marketing efforts, telemarketing, direct mail,
and online advertising.




Research
and Development




Research
and development expense principally consists of compensation for personnel
involved in the development of our services, depreciation of equipment and
software and expenditures for consulting services and third party software.
Research and development expense decreased 3% to $2.2 million in the first
quarter of 2010.  The slight decrease during the first quarter of 2010
is primarily due to lower headcount related expenses. As a percentage of total
revenue, research and development expense decreased one percentage point to 10%
in the first quarter of 2010 from 11% in the first quarter of 2009.




19




General and
Administrative




General
and administrative expense principally consists of compensation and related
costs for executive and administrative personnel, fees for legal and other
professional services, depreciation of equipment and software used for general
corporate purposes and amortization of intangible assets. General and
administrative expense decreased 9% to $3.0 million in the first quarter of 2010
from $3.3 million in the first quarter of 2009. As a percentage of total
revenue, general and administrative expense decreased two percentage points to
14% in the first quarter of 2010 from 16% in the first quarter of 2009. The
decrease, both on an absolute basis and as a percentage of total revenue, is
primarily due to the decrease in legal expenses as a result of lower legal
activity during the quarter.




Interest
and Other Income, Net




Interest
and other income, net primarily consists of interest income from cash
equivalents, short-term and long-term investments and other income, and is
currently immaterial to our consolidated financial statements. Interest and
other income, net decreased 52% to approximately $171,000 in the first quarter
of 2010 from approximately $357,000 in the first quarter of 2009.  As
a percentage of total revenue, interest and other income, net decreased
approximately one percentage point to 1% in the first quarter of 2010 compared
to 2% in the first quarter of 2009. The decrease, both on an absolute basis and
as a percentage of total revenue, is primarily due to lower interest rates and
lower investment balances, as we sold certain investments and used the cash to
repurchase shares of our common stock.




Provision
for Income Taxes




Income
tax expense decreased 68% to approximately $80,000 in the first quarter of 2010
from approximately $250,000 in the first quarter of 2009. The decrease is
attributable to the legislation passed by the State of California in 2008
temporarily suspending the use of NOLs to offset current state income tax
expense for the tax years 2008 and 2009. During the first quarter of 2010 our
income tax expense consisted of both federal and state alternative minimum
taxes.




Liquidity
and Capital Resources




As of
March 31, 2010 and December 31, 2009 we had approximately $63 million and $72
million, respectively, in cash, restricted cash and short-term and long-term
investments. We invest available funds in short-term and long-term securities,
including money market funds, corporate bonds, asset backed securities, and
government and agency bonds, and do not engage in hedging or speculative
activities.




There
have been no material changes to our contractual obligations and commercial
commitments included in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended December 31, 2009.




Net cash
provided by operating activities was $4.1 million and $3.2 million during the
three months ended March 31, 2010 and 2009, respectively.  The
increase in net cash provided by operating activities is primarily attributable
to an increase in net income due to an increase in gross profit and a decrease
in legal expenses.




Net cash
used in investing activities was $3.0 million and $5.5 million during the three
months ended March 31, 2010 and 2009, respectively. The decrease in net cash
used in investing activities is primarily due to the use of cash to repurchase
our stock rather than purchasing investments.




Net cash
used in financing activities was $12.6 million and $6.7 million during the three
months ended March 31, 2010 and 2009, respectively. This increase is mainly due
to our use of cash to repurchase our stock.




We
believe our available cash and marketable securities, together with the cash
flow from operations, will be sufficient to fund our business for at least the
next twelve months.




20


Critical
Accounting Policies




Management’s
discussion and analysis of our financial condition and results of operations is
based on our unaudited financial statements. The preparation of these financial
statements is based on the selection of accounting policies and the application
of significant accounting estimates, some of which require management to make
judgments, estimates and assumptions that affect the amounts reported in the
financial statements and notes. For more information regarding our critical
accounting estimates and policies, see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Estimates and Policies” of our Form 10-K for the
year ended December 31, 2009.




Recent
Accounting Standards




See Note
10 – Recent Accounting Standards of our Notes to Consolidated Financial
Statements.




ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Our
exposure to market rate risk for changes in interest rates relates primarily to
our investment portfolio. We have not used derivative financial instruments in
our investment portfolio. None of the instruments in our investment portfolio
are held for trading purposes. At March 31, 2010, our cash equivalents and
investments consist of money market, U.S. government obligations, asset-backed
securities and public corporate debt securities with duration of 446 days. At
March 31, 2010 our cash equivalents and investments approximated $62 million and
had a related weighted average interest rate of approximately 0.9%. Interest
rate fluctuations impact the carrying value of the portfolio. The fair value of
our portfolio of marketable securities would not be significantly affected by
either a 10% increase or decrease in the rates of interest due primarily to the
short duration nature of the portfolio. We do not believe that the future market
risks related to the above securities will have a material adverse impact on our
financial position, results of operations or liquidity.




As
we do not have any operations outside of the United States, we are not exposed
to foreign currency risks.




ITEM 4.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Our
management evaluated, with the participation of our Principal Executive Officer
and Principal Financial Officer, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that
evaluation, our Principal Executive Officer and Principal Financial Officer have
concluded, as of that time, that our disclosure controls and procedures were
effective.




Changes
in Internal Controls




During
the quarter ended March 31 2010, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




21


PART
II – OTHER INFORMATION




ITEM 1.
            LEGAL
      PROCEEDINGS




See Note
2 – Legal Proceedings of our Notes to Consolidated Financial
Statements.




ITEM 1A.
            RISK
      FACTORS




We are
not aware of any material changes to the risk factors included in Item 1A “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31,
2009.




ITEM 2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.




Issuer
Purchases of Equity Securities




During
the first quarter of 2010, we purchased our common stock as described in the
following table:




Period
                      
                      Total
      Number of
                        Shares
      Purchased
                      
                      
                      Average
      Price Paid
                        per
      Share
                      
                      
                      Total
      Number of
                        Shares
      Purchased as
                        Part
      of Publicly
                        Announced
      Plans or
                        Programs
                      
                      
                      Approximate
      Dollar
                        Value
      of Shares That
                        May
      Yet be
                        Purchased
      Under the
                        Plans
      or Programs
                        (in
      000’s)January
      1, 2010 –
                        January
      31, 2010
                      
                      
                      84,549
                      
                      
                      $
                      9.00
                      
                      
                      
                      84,549
                      (1)
                      
                      $
                      17,838February
      1, 2010 –
                        February
      28, 2010
                      
                      
                      1,339,446
                      (2)
                      
                      $
                      9.00
                      
                      
                      
                      71,494
                      (1)
                      
                      $
                      17,199March
      1, 2010 – March 31, 2010
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      $
                      17,199




(1)
On July 23, 2009, our board of directors approved a six month share repurchase
program, authorizing us to purchase up to 2,500,000 shares of our stock
effective beginning in August 2009 upon expiration of the prior program. On
February 4, 2010, our board of directors voted to extend the currently
authorized share repurchase program for an additional six months through August
of 2010.




(2) This
amount includes 1.3 million shares repurchased in a private transaction on
February 27, 2010. This repurchase transaction was authorized by our board of
directors independent of our existing shares repurchase plan.




Our
repurchase of any of our shares will be subject to limitations that may be
imposed on such repurchases by applicable securities laws and regulations and
the rules of The NASDAQ Stock Market. Repurchases may be made in the open
market, or in privately negotiated transactions from time to time at our
discretion. We will consider repurchasing stock under our current repurchase
program by evaluating such factors as the price of the stock, the daily trading
volume and the availability of large blocks of stock and any additional
constraints related to material inside information we may possess. We have no
commitment to make any repurchases.




ITEM 3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM 4.
            RESERVED




ITEM 5.
            OTHER
      INFORMATION




None.




22




ITEM 6.
            EXHIBITS




31.1
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.




31.2
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.




32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002.




32.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002.




23


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




STAMPS.COM
      INC.(Registrant)May
      10, 2010
                  By:
                  /s/
      KEN MCBRIDEKen
      McBrideChief
      Executive OfficerMay
      10, 2010
                  By:
                  /s/
      KYLE HUEBNERKyle
      HuebnerChief
      Financial Officer