Pitney Bowes Inc.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good morning, and welcome to the Pitney Bowes Third Quarter Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call and question-and-answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today's conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President, Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the Safe Harbor overview.

[Adam David:]

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2017 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points that we will discuss during the call. These slides can also be found on our Investor Relations website. Now our President and Chief Executive Officer, Marc Lautenbach will start with a few opening remarks. Marc?

[Marc Lautenbach:]

Good morning and thank you for joining the call. We continue to make progress against our strategic initiatives and move forward in our transformation. In the third quarter, revenue continued to deliver double-digit growth, and through the first three quarters of this year, revenues grown on both reported and a pro forma basis. Let me provide you an update on the milestones we achieved since we last spoke 90 days ago. Stan will follow-up with a more detailed discussion on the quarter and we will then take your questions. Our portfolio continues to shift to shipping, which is available through our Commerce Cloud. Shipping revenues comprised more than 30% of our overall revenue in the quarter and that number continues to grow. On a pro forma basis, total shipping volumes in our Commerce Services business grew 14% over prior year and also increased from prior quarter. On a year-to-date basis, this takes our label and parcel volumes to nearly $400 million. One of the main pillars of our strategy is to remove the complexity of shipping for our clients and we are doing it. The growth we are seeing in our volumes is the proof point. In support of our shipping strategy, we recently opened our new Fulfillment, Delivery and Returns Center in Greenwood, Indiana. This facility leverages cutting edge technology that we can service our domestic shipping clients more quickly and efficiently. This Super Center is unique in its ability to facilitate the entire ecommerce process by leveraging state-of-the-art technology, including solutions powered by robotics to efficiently fulfill orders, enable deliveries, and process returns for consumers in ecommerce retailers. We are also reaping the benefits of Newgistics cross-sell opportunities while reducing the complexity of shipping for our clients. Earlier this year, we launched a new offering within client which leverages our cross-border expertise in combination with our Newgistics domestic delivery services to enable ecommerce sellers in China to ship products to buyers in the U.S. faster and easier. In SMB, our SendPro C-Series is another proof point of how we are taking the complexity out of shipping for our clients. Since launching this product, we have placed nearly 57,000 units in the market. As a reminder, this product addresses a large segment of our existing SMB install-based in the U.S. in addition to new prospective clients. With the 57,000 placed in the first year, we are making good progress in transitioning this existing base of clients to the new product as leases come due. The C-Series is a multi application mailing and shipping device that is digitally connected on open android platform. Because of this platform, we are able to start to point new apps to our clients. In the third quarter, we deployed five apps which include the SendPro care, shipping alerts and reports and same day delivery apps. As we are launching these apps in a phased rollout, but we are always starting to see a positive response as client see the new value we are able to deliver to them especially around shipping. Additionally, with the recent USPS proposed $0.05 discount in first-class mail computer users, our C-Series brings together reduced postage and competitive shipping pricing options for our clients which is a strong value proposition. Our achievements and operational evident in our spend reduction. To date this year, we’ve reduced gross spend by over $100 million. The savings are our evident in our SMB margins which continue to perform above the long-term market range. And as we announced last quarter, in August we redeemed $300 million in notes that will mature in 2019. This brings our total debt reduction to over $560 million this year with no major tranches of debt coming due until 2020. When we think about leveraging economies of scale and experience as a company, we spent the last five years developing the necessary assets around our software, systems and platforms within each of our businesses in order for them to operate more efficiently. These assets are now embedded in each of our businesses. We are able to use these assets to help drive client value. With the Commerce Cloud, we have been enabling the creation of competitive modern solutions across our lines of business. The Commerce Cloud as a catalyst for our transformation and modernization leveraged across the company. The progress that we have made building our strategic foundational technologies of SaaS, API Management, Mobile, Big Data, and IoT have been enablers to our growth. In addition, our APIs are a great example of how we are leveraging economies of scale and experience across the enterprise. Our shipping APIs, which are used within SMB and global e-commerce, continued to ramp up volumes. Another example of leveraging our economies of experience and scale is through the expansion of our Newgistics network, we are also able to take advantage of additional operational synergies with our Presort network. Let me switch gears here for a moment. I spoke with you over the last few months regarding our capital allocation priorities, specifically in regards to our dividend. Let me try to lay this out succinctly. First and foremost, all of our capital allocation decisions are made with the objective of creating long-term shareholder value and we will continue to invest for that long-term value creation albeit organically or inorganically. Our level of investments and any changes to the composition of the portfolio will drive our capital needs. Therefore, our dividend will be a result of our decisions and actions, not a driver. Just a few years ago, Pitney Bowes was a company that was largely tied to physical equipment and mail volumes. A business closely did with an industry that is in secular decline. We could have stayed the course. We are the number one player in postage meter space with a solid client base and very strong margins. But the mail market is in decline, sustain the course would not be the right long-term solution for our stakeholders for the company overall. We have made tough decisions to divest certain businesses and product lines, reduce costs and get out certain geographies while at the same time making strategic acquisitions. We have changed the complexion of our business and our business model. This wouldn’t have been possible without investments. We invest in our platforms, our systems, our products, our brand and our talent in order to move this Company well under the 20% trade and well into the adjacent shipping space, which is growing. We’ve utilized our strong cash flow to make these necessary investments and have been able to maintain a manageable debt level. Today, our debt is actually lower than where we were two years ago and yet our portfolio has changed significantly and portfolio that has shifted to growth. That being said, we must continue to move forward. While the toughest parts of our transformation are behind us. We still certainly have more work in front of us. The Pitney Bowes of tomorrow will continue to evolve. I anticipate that our conversations a year from now will be different just as they are different today from five years ago. Let me reiterate our capital allocation priorities as I present them at Analyst Day in March. First, we have and we will continue to invest in our portfolio particularly around shipping and shipping related capabilities. As I mentioned, shipping is a large market that is growing quickly. We cannot move forward without making investments to differentiate ourselves through our unique offerings, which will further reduce the complexity of shipping for our clients. Second, as the Pitney Bowes portfolio evolves, we will continue to look at inorganic investments and we also ensure that value within our existing portfolio is being realized. Our third objectives cover the balance sheet through the pay down of debt. And finally, we will continue to deliver shareholder return primarily through a competitive dividend. Our capital allocation strategy has always been oriented toward long-term value creation, which has resulted in a balanced approach. So to summarize, we have moved the portfolio to growth. We’ve reduced our cost structure significantly while making necessary organic and inorganic investments. We have reduced debt by over $1 billion and we returned over $1 billion and $1.25 billion to our shareholders. Let me now make a few points on the third quarter before handing it over to Stan. We reported revenue growth again this quarter and EBITDA grew over prior year. SMB turned in a good performance with revenue decline and EBIT margin both performing within the long-term market ranges. In fact, we grew EBIT dollars year-to-year in this business. In addition, North America Mailing revenue declined less than 2% and their EBIT margin expanded significantly. With software, we knew we’re entering the quarter with a lower level of renewals and last year also included a large deal, which skews the comparison. The team did a good job closing small deals with a lack of large opportunities coupled with a difficult compare made for a tough quarter. That said, we're off to a good start this quarter, having already closed several deals that moved out of the third quarter, which gives us confidence for the fourth quarter. In addition, we now closed three platform deals with our Global Systems Integrators. These deals are in managed service and have the opportunity to be a reliable future stream with partners that have significant reach. Commerce Services continues to turn in a solid topline performance. Newgistics once again had very strong topline growth, which indicates the market attractiveness of the capabilities in this business. That said, Commerce Services continues to be impacted by headwinds around a higher dollar and higher transportation and labor costs, and investments made through the quarter are also impact in the bottom line, but they're necessary to support the Company's strategy to continue to take advantage of the growing shipping market. Despite all of these headwinds and investments Commerce Services still grew EBITDA from the prior year. Let me now turn it on the Stan and he can take you through the details of the quarter.

[Stanley Sutula:]

Thank you, Marc, and good morning. This quarter revenue grew over prior year and we continue to reduce spend and our debt. EBITDA also grew over prior year. We continue to make good progress against our strategic initiatives and the portfolio continued to shift more towards shipping. As our portfolio shifts with the growth of our global ecommerce business inclusive of Newgistics, our seasonality will also shift even more towards the fourth quarter. And while more work still lies ahead, we are seeing the progress begin to manifest itself in our financial performance. Let me turn to our results. As always unless otherwise noted, my statements going forward will be on a constant currency basis when talking about the revenue comparisons and on an adjusted basis when talking about earnings related items including cash flow. Reconciliations of our non-GAAP to GAAP measures can be found in the financial statements posted with our earnings press release and on our Investor Relations website. For the third quarter, revenue totaled $833 million or growth of 14% over prior year. On a pro forma basis, with Newgistics assumed to both periods revenue rounds to flat compared to prior year. Looking at revenue by group, Commerce Services grew 59%, SMB declined 3%, and software declined 19%. Adjusted EPS was $0.27 for the quarter. GAAP EPS was $0.41. GAAP EPS included $0.03 in restructuring charges and that $0.03 charge related to the early redemption of our 2019 notes. GAAP EPS also included a net benefit of $0.04 related to the 2017 tax legislation. The net gain of $0.16 and discontinued operations largely related to our recent divestiture of our Production Mail business. GAAP and adjusted EPS include a net benefit of $0.03 largely from the resolution of certain tax examination. Free cash flow was $94 million and GAAP cash from operations was $116 million, compared to the prior year, free cash flow declined by $11 million, largely due to the timing of accounts payable and improvement and finance receivables, which was partly offset by the timing of accounts receivable. Free cash flow came in as we expected this quarter, with the exception of a $30 million tax refund that we anticipated in third quarter, but now expect to be a fourth quarter occurrence. This $30 million refund is anticipated in our annual free cash flow guidance. Looking at capital allocation, for the quarter, we used cash flow to pay $35 million in dividends to our shareholders and $12 million in restructuring payments. Capital expenditures totaled $41 million, which is about $2 million lower than prior year. At the end of the quarter, our total debt was just under $3.3 billion, which was about $910 million lower than the same period last year. The $3.3 billion in total debt that a similar level to the first quarter of 2017. As we mentioned last quarter, we redeemed our 2019 notes of $300 million bringing our total debt paydown to over $560 million to-date this year. At the end of the quarter, we had $815 million in cash and short-term investments on the balance sheet. During the quarter, we repatriated $53 million of non-U.S. cash, bringing our total and repatriated cash to just over $520 million to-date this year. Looking at the P&L, starting with revenue performance by line item as compared to prior year. Business Services grew 58%, which is largely attributable to the incremental contribution for Newgistics. On a pro forma basis, business services revenue grew 8%, driven by the continued growth in Global Ecommerce and Presort. Equipment sales declined less than 2%. We have declines in support services of 2%, rentals of 4% and financing and supplies of 5% each, software declined 18%. Gross profit was $398 million with a margin of 47.8%. This is a decline of 9 points from prior year, primarily driven by the addition of Newgistics, which was not in our results last year and accounts for 6 points of the drop. The remaining portion of the decline reflects the organic shift to our growth businesses as well as continued headwinds around labor and transportation costs. SG&A was $269 million or 32.3% of revenue, which was an improvement of 6 points from prior year. Compared to prior year, SG&A was $14 million lower despite $16 million of incremental SG&A related to Newgistics, which was not in the prior year. The lower SG&A reflects our execution of our operational excellence initiatives throughout the business. At a gross level, we continue to reduce spend this quarter and to date, have achieved a significant percentage of our commitment for 2018, putting us on track to deliver gross savings of over $120 million this year and at least $200 million through the end of 2019. R&D expense was $33 million or 3.9% of revenue. Compared to prior year, R&D expense increased $3 million was essentially flat as a percent of revenue. As our portfolio shifts to growth markets, we also continue to shift our R&D spend to take advantage of these opportunities. EBIT was $98 million and EBIT margin was 11.7%, which was declined of $6 million and 2.5 points versus prior year. Excluding Newgistics, EBIT margin would have been essentially flat to the prior year. EBITDA was $148 million, which was an improvement of about 1% over prior year. Interest expense, including financing interest expense, was $37 million, which was $4 million higher than prior as a result of our debt management. The provision for taxes on adjusted earnings was $10 million and our tax rate was 16.6%, which was lower than prior year by about 4 points, mostly due to the resolution of certain tax examinations in the quarter. And year-to-date basis our adjusted tax rate is 22.4% is still expect to be within our annual guidance range of 23% to 27%. Diluted weighted shares outstanding at the end of the quarter were 188 million, which was about 1 million shares higher than prior year. Let me now discuss the performance of each of our business segments this quarter. Within the Commerce Services Group, revenue was $358 million, which was growth of 59% over prior year. On a pro forma basis, revenue grew 8% over prior year. EBIT for the Group was $3 million, and EBIT margin was 1%. EBITDA was $25 million and the EBITDA margin was 7%. In Global Ecommerce, revenue was $233 million, which was growth of 120% over prior year, and included a full quarter of incremental revenue from Newgistics. On a pro forma basis, Newgistics delivered strong revenue growth of 19% driven by double-digit growth and fulfillment and parcel volumes. We are delighted with the market acceptance of our Newgistics offering. On a pro forma basis Global Ecommerce grew revenue 10% over prior year this was driven by the growth Newgistics. Shipping solutions are strong, double-digit volume growth over prior year and also grew volumes from the prior quarter. The growth was partially offset by a decline and cross border revenue due to strengthened U.S. dollar and new regulations and taxes and some of our larger inbound market. Within our Global Ecommerce business we have diversified the portfolio and client base through new and expanded offerings like shipping API’s and the Newgistics business. Enabling us to perform better than before in different economic environment. EBIT was a last of $14 million and EBIT margin was negative 6.2%. The EBIT performance was driven primarily by investments in market growth opportunities as well as automation, network optimization, simplification and technology upgrades. As Marc mentioned, these investments are necessary to remain competitive and move forward with our strategy as well to drive long-term profitability. EBIT was also impacted by higher transportation labor costs as well as incremental amortization of intangible assets related to the Newgistics acquisition. EBITDA was $1 million which was an improvement from prior year. Within Presort Services, revenue was $125 million, which was growth of 5% over prior year and driven by higher volumes of First Class mail as well as bound and packet mail in flat, but partially offset by lower Standard Class mail volumes. EBIT was $17 million and EBIT margin was 13.9%. EBITDA was $24 million and EBITDA margin was 19.4%. Presort EBIT dollars and margin improved this quarter as compared to last quarter. While our margins are still impacted by the macro environment around increased transportation and labor costs, we have taken actions to reduce spend in this business. Additionally, we continue to invest in automation and process improvements. These investments include new equipments like sorters and sleevers, which reduced costs and meet our client's expectations more efficiently over the longer term. Turning to our SMB Group, revenue was $399 million, which was a decline of 3% from prior year. EBIT for the group was $131 million and EBIT margin was 32.8%, which is an improvement from prior year and within the long-term market range. This improvement aligns with our long-term model for this business to generate strong free cash flow. EBITDA was $152 million and EBITDA margin was 38%. In North America Mailing, revenue was $314 million, which was a decline of 2% from prior year. Equipment and sales grew 2% over prior year. We continue to experience good growth and placements of our C-series product. Since launching a year ago, we have placed nearly 57,000 units and are on track to transition our client base into the new product over the next several years. For me though, the headline of the quarter for North America Mailing is around our recurring revenue streams. In total, our streams continue to decline at a lesser rate than prior period. Additionally, we saw growth in services, largely as a result of our shipping-related products. As a result of the improved equipment sales and streams, gross margins grew over prior year and continued to perform within a one point range over the last several quarters. EBIT was $118 million, which was an increase over prior year and it is the first time EBIT dollars have grown year-over-year since the fourth quarter of 2015. EBIT margin was 37.6%, which is about four points higher than prior year. EBITDA was $135 million and EBITDA margin was 43.1%. In International Mailing, revenue was $85 million, which was a decline of 7% from prior year. Equipment and sales declined largely driven by weakness in the UK and France, but partially offset by growth in Japan and Australia. Recurring revenue streams also contributed to the overall decline. EBIT was $13 million and EBIT margin was 15.1%, which improves six points over prior year due to lower expenses and higher gross margins. EBITDA was $16 million and EBITDA margin was 19.1%. In Software Solutions, revenue was $76 million, which was a decline of 19% from the prior year. Coming off a strong second quarter, we knew we had a lower level of renewals this quarter, while we closed a similar number of large deals this quarter last year that generated lower overall revenue. This quarter’s comparison was also partially impacted by a large location intelligence deal we closed last year. We continued to achieve strong execution in small deals, growing double-digit over prior year and our SaaS revenues grew as well. EBIT was $4 million and EBIT margin was 4.7%, which was a decline from prior year attributable to lower revenue. EBITDA was $6 million and EBITDA margin was 8%. Let me wrap up with our annual guidance. We are reaffirming our annual guidance of revenue on a constant currency basis in the range of 11% to 15% growth, adjusted EPS to be in the range of $1.15 to $1.30 and free cash flow to be in the range of $300 million to $350 million. From a timing perspective, historically, the fourth quarter has always been our biggest quarter on revenue, earnings and cash flow. Given our portfolio continues to shift to growth around shipping, the seasonality of our business has shifted even more to the fourth quarter, especially with the holiday seasoning our Global Ecommerce and Newgistics businesses. We continue to invest in items around automation and network optimization, particularly within our Commerce Services businesses. We expect to recognize some of these benefits as well as more synergies related to our Newgistics business in the fourth quarter. We are on track to achieve our growth spend reductions of at least $200 million through the end of 2019. Let me wrap up. On the year-to-date basis, we have grown reported and pro forma revenue over prior year. We have reduced spend significantly while still in the business for the long-term. We have reduced our debt and manage the balance sheet. We continue to make progress in this transformation, but as always there is still work in front of us. With that, Marc and I will now take your questions. Operator, please open the line.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Ananda Baruah from Loop Capital. Please go ahead.

[Ananda Baruah:]

Hi, good morning, guys. Thanks for taking the question. Really appreciate it. I think just three if I could to be really quick. The first is just with regards to the December quarter revenue guidance in the comments around seasonality. If I just do the quick math, I think it implies at least 50% sequential revenue growth Q-over-Q. Is that accurate? I just want to make sure I'm not doing any of my numbers wrong. And then if it is, can you sort of just layout the signposts for us with regards to the forecast totally make sort of that skew because of the ship, because of the ecommerce and the shipping, but maybe if there's any additional detail you can give us with regard to that to get us context around. What could be the drivers as you go into year-end, some of the specific stuff things? And then I have a couple follow-ups.

[Stanley Sutula:]

Good morning, Ananda. Thanks for the question. So as we look at the full-year guidance, this portfolio is quickly shifted to growth. Revenue year-to-date were 16% constant currency growth over the prior year. Now in Q4, that level dropped just given Newgistics will annualize here over it. But if you look at Q4 heading in, the SMB, we had arguably the best quarter we've had in a very long time in SMB, and the streams and EBIT margin are expected to perform kind of similar to Q3 are improved slightly. But then when you look at holiday volumes and driving scale, this is the driver for ecommerce and Newgistics. I mean this a big lift for both of those businesses. Presort, we continue to invest in improvement, managing transport and labor costs and as they pick up going through. And then software, software is going to be one of the bigger drivers quarter-to-quarter. When you look at it in that regard, we have a difficult quarter in software, but as you go to the fourth quarter, there are more renewables, there's a larger pool of big deals and certainly an easier compare. So if you look at Q3 to Q4, we remain confident of being within our annual guidance range revenue of 11% to 15%.

[Ananda Baruah:]

Okay, great. And then just to follow onto that one, is this kind of seasonality, I mean it's early days in bringing this portfolio together in this way. But it seems like I didn't count the high end of the guide, but it's probably like imply something like 80% Q-over-Q rev growth. So it was just kind of like 50% to say 80% or so, do you think this is going to be normal for the December quarter going forward, if you guys are successful with this?

[Stanley Sutula:]

As you moved towards shipping because of what the peak is in those industries. Our business, we've talked about this over the last several quarters is going to continue to shift towards Q4. If you just kind of think of globally extend the rate of growth that we have in that business, both through Newgistics, cross-border and looking at ecommerce in total, I do believe that we'll continue to see a shift in our portfolio to be more backend weighted into Q4 just as natural occurrence of the volumes in that business.

[Marc Lautenbach:]

In a very simplistic level, if you think about the two drivers quarter-to-quarter in software, so if you look at the range of software, unfortunately it kind of purposes quarter-to-quarter, which adds variability in quarter-to-quarter. We believe the fourth quarter looks more like the higher end of the ranges we experienced over the last couple of years. And then if you think about the shipping business, we talk about shipping, but underneath it – business to consumer or we talk to consumers. So if you think about all the stuff that goes on in the holiday season, Black Friday, Singles Day, and all those kinds of things. Those are the kinds of things that are in the fourth quarter. So I think there's a natural skew of these businesses around seasonality then software has its own unique characteristics on top of that.

[Stanley Sutula:]

Yes, we see Newgistics as a – just to add-on to that, accelerate in Q3 over the first half growth rate, so we like where that business is going.

[Marc Lautenbach:]

That's the other aspect of it. As we exploit the cross-sell opportunities, so there's a natural seasonality to all these businesses, partly because of the holidays, partially because of how businesses operate. But we're also picking up incremental demand from cross-selling Newgistics and how we reconfigure our capabilities. So there's a bunch of things that kind of add momentum as we go into the fourth quarter.

[Ananda Baruah:]

Okay. Got it. That’s super helpful. And I just keep it to one quick follow-up. Just the 5% discount, can you just walk through the dynamics, how we should think about that, the mechanics behind that? How it impacts you guys in the opportunity?

[Marc Lautenbach:]

Yes, if I can just go up a level, so as you look at what's going on with the USPS in particular. If you think about Pitney Bowes reason for being for almost 100 years. It was to help the USPS become more efficient and drive value into their business. So as we look out what's on the horizon with the USPS and as they strive as the other institution does become more economically sound, in general we see that as an opportunity for Pitney Bowes and USPS to do even more together. As it relates to the $0.05 discount, let me quote the USPS here because I think it's worth noting. Meter based payment is more efficient than stamp based payment. It eliminates the need for stamp production, distribution and cancellation and fosters more consistent use of the postal system. Slow in the migration of mail volume to electronic channels, small business volume in particular should be protected by this decision. So I think that – I think the postal service as a quite well. In general, this makes meter mail more attractive vis-à-vis alternatives that can't help, but be a stimulus for Pitney Bowes in 2019.

[Stanley Sutula:]

And I think our new C-Series that we launched last year, actually positions clients to take full advantage of this and add shipping to that capability as well. So it enhances the value proposition of our offering.

[Marc Lautenbach:]

Your respect of the C-Series is it does multi-care something shows those prices evolve in that marketplace and the competitive marketplaces. The ability for clients to do price compare versus the different cares is even more important going forward. So we like what we're seeing from what's gone on so far.

[Ananda Baruah:]

Okay. Great. That’s great. Thanks so much.

[Stanley Sutula:]

Thank you.

[Operator:]

Your next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Please go ahead.

[Glenn Mattson:]

Hi, good morning. Thanks for taking the questions. Just one point of clarification against the last question. I think Ananda had said that that the rev guide pointed to 50% sequential growth. But perhaps that's not taking into account some of the adjustments that were made in the portfolio because of the way I do my math is at the low-end it's like 13% sequential growth that at the high-end it's like 28% sequential growth?

[Marc Lautenbach:]

I thought he said 15%, but…

[Glenn Mattson:]

He said 15% maybe, okay, but so just to be clear on that, okay. Otherwise, I wanted to ask questions about number of things, there were some interesting things in the quarter. The outperformance in SMB, I mean, can we talk about that a little further and just talk about how it's sustainable to what level it is, I mean…?

[Marc Lautenbach:]

How they long?

[Glenn Mattson:]

Yes. I mean, I think it's the second quarter in a row where the recurring streams kind of performed a little better. So perhaps Marc, you want to expand on what your thoughts there?

[Marc Lautenbach:]

Sure. I’ll add and Stan will enhance. So I would still points you towards our long-term guidance as it relates to how our businesses perform. So it’s tempting with quarter-to-quarter swings to over interpret a particular quarter. That being said, if you look at the SMB performance in the third quarter, it was within our overall long-term range. So the different those things match thing, yes, we think it's sustainable. I would point out in particular you mentioned the streams. Our services business had just a great performance in the quarter. They're really doing a good job with their existing legacy business, but they're also doing a good job picking up new business and importantly our financial services business is setting as well. So lots of good things and you made a really insightful point. So it's easy to kind of get overly enamored with equipment sales and all those kinds of things that that stream revenue, stabilizing it 300 million-ish or so, is at important factor because it protects the overall cash generation of the company. Now Stan will elaborate on that.

[Stanley Sutula:]

So Glenn, as we look at North America Mailing, we’re pleased with the performance this quarter. Overall revenue is down 2%, equipment and sales were up 2%, the stream revenue though, I think it’s actually the one to focus on as you highlighted, it’s down 3.6%, that's the best performance recently. Gross profit margin has been consistent over the last several quarters, expense continues to improve year-to-year, and EBIT dollars grew year-to-year, and EBIT margin was up four points. So the revenue certainly wasn't easier to compare in the current quarter given last year we’re announcing the new product that came out late in the quarter, but we're really pleased with the margin expense performance. I think more importantly, one quarter doesn't make an overall trend, but we really liked the progress and it gives us confidence that we will perform in the long-term model over time at this minus 2% to minus 4% and 30% to 35% EBIT. So good quarter overall in North America Mailing. You also see it manifest itself and finance receivables, which reduced on a year-to-year basis at a slower rate than it has in prior quarters.

[Glenn Mattson:]

Can you remind me, you said you give a number for a number of units that were converted to the new meter? Is that – are we – how far along in the process are we in that conversion and maybe, are we towards the bottom of the pendulum swing as it relates to that?

[Stanley Sutula:]

We've shipped about 57,000 units over the past year. We've said originally that this will address about half of our overall population, so we still have a ways to go. I'd say we're early in. And keep in mind we're just starting. In 2019, we'll be rolling out this capability to the non-U.S. So I'd say, we're still early innings on this, and again that offering combined with the meter mail benefit of $0.05 now in multi-carrier shipping and the ability we have launched five new apps this quarter as well. I think the value proposition only strengthens for the C-series.

[Marc Lautenbach:]

I'd build off that last point, so as we think about the C-series, it’s for sure in meter replacement, but candidly it’s much more than that. So we don't look at the opportunity for C-series. It’s just a meter replacement for ours or our competitors. We look at that as a utility device that carries contemporary applications for shipping into the market. So in that sense, it's a whole different ballgame.

[Glenn Mattson:]

Okay, great. Thanks. I'll pass onto someone else. Thanks guys.

[Operator:]

Your next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.

[Kartik Mehta:]

Hey, good morning. Marc, I wanted to ask you a little bit about Global Ecommerce business, and when you think it can achieve sustained profitability? I realized you've been investing in it and trying to achieve as much growth as possible and take market share. I'm wondering at what point do you think you foresee sustained profitability.

[Marc Lautenbach:]

Let me step back and provide a little bit of context because I think it's important. So the way that that business gives the profitability is three-year old. But the most important one is scale. So if you think about the things that we're doing to drive profitability in the business scale is number one. The Newgistics integration and the synergies around Newgistics are number two. And number three is operational excellence stuff that they're doing. So if you go back to that first one and you double click on scale, we think it's important to make those investments in the network and customer acquisition, and if we can find acquisitions that make sense because that gets us to sustained profitability sooner versus later, in terms of any particular period, we're EBITDA positive in the third, we think that will continue to be true in the fourth. And then, we'll get into 2019 soon enough. So I think it's sooner versus later. I'm not going to put a particular timeframe on it because of the nature of the opportunities. The more that we can make investments that get us to scale, the better off that is in the long-term. And the reason is, if you think about our businesses, if you look at the shipping business and in terms of an external marketplace, the multiples that go in shipping and logistics market are higher than office supplies. So sooner we can get on profitability tilted towards shipping, the sooner we can have a different conversation about multiples.

[Kartik Mehta:]

Marc, if you just look at it, I know you talked about a little bit about the USPS and the $0.05 discount, but it seems like there's a lot more going on at USPS and maybe Congress and others pushing for changes. Just overall what's happened, what do you see that – what are the positives that could come out of that for Pitney in order, some of that maybe negative that might happen because of all the changes that are being proposed?

[Marc Lautenbach:]

Well, I mean again, I go back to the very top level. So if you look at all the changes that are being discussed or contemplate for the USPS. It's about how you make that entity more financially viable going forward. As you think about why Pitney Bowes has existed for almost 100 years now? It's been to that particular cause to help the USPS be more economically viable. So in general, we see what's going on as an opportunity of the meter mail is a good example. If you look at some of the workshop programs, that's the second example. And then we'll see what happens on the negotiated discounts and that's still in front of us. But what I would say about the negotiated discounts in the competitive market rates is as we look at the value that we provide to the postal service in those competitive markets. We're really confident of the value that we provide, and that's something that you'd want to build off of.

[Kartik Mehta:]

Thank you very much. I appreciate it.

[Operator:]

Your next question comes from the line of Allen Klee from Maxim Group. Please go ahead.

[Allen Klee:]

Good morning. In the Presort segment, you spoke of taking actions to reduce spend and then investing in automation. Do you believe that this can get you back to where margins had been there over time, say the around 20% EBIT margin range? Thank you.

[Stanley Sutula:]

If you take a look at Presort, 2Q is difficult quarter for them. But if you look at what happened in Q3, grew revenue in that business, we took a number of faction and EBIT margin bounced back to 14%, so just below where we are now. The year-to-date margin is 15%. So we said that the margin and long-term plan for this business should be north of 15%. We're still confident. We will operate in that level. Let me give a little color on what we've done in this business. Debbie Piper runs this business for us, it is 37 centers across the U.S. and we have invested heavily and capital. We have doubled the capital spend on a year-to-year basis that is doing things like shorter refreshes, which we get a big productivity boost out of that. We've invested in sleevers, which automates a very difficult part of the process for us and we've enhanced the facilities that our workers operate in. When we look at that, that long performance of combining these, we are seeing synergies now of combining trucking routes with our Newgistics facilities and those routes that go both to clients and to the post, and as we look at that combined with the labor efficiencies, we're confident that we'll continue to improve this margin. There is another aspect of Presort that we're getting into in a deep way and that's found in packet mail, think of kind of heavy flat if you will, a calendars and things like that that get mailed. We launched this in a more material way here in the second half and we think that will contribute to both growth and it leverages our investments in a network, our investments in people, and our investments in the management team. So I like this business. I think it will continue to improve and operate within a long-term model range.

[Allen Klee:]

Thank you. And my last question is for cross-border e-commerce. What's your view to – do you think that the current run rate is where it's going to stay out or do you think there could be any positive changes there?

[Stanley Sutula:]

Yes, for cross-border, there's a certain sensitivity here obviously to changes in the U.S. dollar and the weekends are strengthens, it does impact demand. So we expect an improved performance in Q4 versus the previous quarter as a result of the holiday season. And I think it's important to note, while it didn't have a great revenue quarter here this quarter, it is being recognized in the industry. For the second year in a row, we are the number one ranking for international commerce and fulfillment technology by the Internet retailer, 1,000 vendor reports and that is a survey of a 1,000 top online retailers. So I think our offering is strong in cross-border and it's not entirely dependent on currency, but currency has a big effect and that's why we have a multifaceted portfolio within global e-commerce. So we're confident that that will improve here in Q4.

[Allen Klee:]

Thank you.

[Operator:]

Your next question comes from the line of Shannon Cross from Cross Research. Please go ahead.

[Shannon Cross:]

Thank you very much for taking my question. The first one is, I'm curious and maybe there's nothing to really think about yet because it's a ways off. But the talk about renegotiating the postal treaty. How should we think about that in terms of volumes? I mean, it appears that it would make it cheaper for us to maybe ship, I don't know, are more expensive with internship and just your thoughts there.

[Marc Lautenbach:]

If you’re trying to the UPU Shannon, we don't really have any volume that goes through that particular program. So it's – I think it's important for the postal service is not so important for Pitney Bowes.

[Shannon Cross:]

Okay. So that won't make yours more, more competitive I guess. And then, from a divestiture standpoint, you've made several divestitures and improved your balance sheet, which had been definitely the correct decision. Now that you're appearing to stabilize some of the mail meter business, or the mail meter business in general? Does it make sense to maybe look even further strategically between the two businesses? I don't know, maybe you could just talk a little bit about, why better together versus separate at this point, because again, with the growth you're seeing any commerce, clearly that's not being reflected in your multiple. So what are your thoughts?

[Marc Lautenbach:]

Yes. So that's a good question. When we think about a lot. So the first thing that I would say as we contemplate divestitures in particular. We use the same criteria that we have started out with and plus the one that we had with [indiscernible], so that is strategically coherent, acceptable returns, and leaders within the marketplace. And then one we had with [indiscernible] was that it's not worth more to somebody else then would be to us. So as you're thinking about Global Ecommerce or Commerce Services and SMB in particular, the strategic coherency is around shipping and the assets that they share, particularly the API technology, but also Commerce Cloud and others. So we think in the context of the first three criteria, the portfolio makes sense together as it relates to the last point about more to ask them to somebody else. That's one that we continually look at, we will – we'll do what we've done in the past and as we conclude an assets worth more on the market to the market than it is dust and we'll make the correct shareholder decision. So it's one that we continually to decision that we continually look at and revisit.

[Shannon Cross:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Anthony Lebiedzinksi from Sidoti & Company. Please go head.

[Anthony Lebiedzinksi:]

Yes. Good morning and thank you for taking the questions. So I wanted to follow-up on a previous question in regards to Global Ecommerce. And Marc, are you prepared to say how much in terms of the - your answer about scale? Is there a particular revenue run rate that you need to get to the scale that you think you need to get to better leverage that business?

[Marc Lautenbach:]

Yes. We think of it in terms of parcels. So parcels are important is if you think about the economics of that business, it's driven by the type of scale that you provide the carriers, USPS, UPS, Federal Express to the more parcels you can ingest in their network, the better economics you'd get. So I would say that were as we contemplate our three to four year plan, we get to the desired economics. So we asked the question before about wanting to get to profitability. So we don't, we think profitability center, the desired economics, we way within our long-term plans. So I'm not going to pin this down to a particular point in time. The candle, it's why we're interested in acquisitions is we are, because if you can find an acquisition that gets you there sooner versus later that's accretive. So whether it’s a big acquisition or smaller acquisitions. That's kind of our interest. Today as you look at our evolution in that business and I'm not sure how long have you been following the Company? How the company evolved in Presort. That's kind of how we think about it. So you think about it, an anchor acquisition or a couple of anchor acquisitions and then a bunch of tuck-in acquisitions that become immediately accretive. But that's kind of the economic formula that we're contemplating. We'll talk more about that early next year as we get into Analyst Day.

[Anthony Lebiedzinksi:]

Okay. And also as far as the Newgistics, so earlier that show you collocated one of the Newgistics operations within the existing Presort site, can you give us an update on that, and should we expect additional sites like that to be opened?

[Stanley Sutula:]

Anthony, thanks for the question. Newgistics here as we look, we've accelerated the growth in the second half of the year, growing 19%. This year, we've opened four new facilities, remember they had nine. We've consolidated two. So when you talk about investments into this business, a good example of launching these, including our Super Center in Greenwood, Indiana. And we have to set up all the transport, all the labor, and all the volume is not there yet, and we think we're well positioned for peak. But we're going to continue to invest. And I mentioned before that when you look at part of the benefits to Presort is the transport costs of combining some of these lanes with Newgistics. We see that on both sides of the house. And remember, of the original nine, eight are within an hour of the Presort facilities. So here's a couple examples of where that can truly help us on transport and labor. On transport, you can fill the trucks much cheaper and reduces the demand for having to go out and use the spot market, which has increased dramatically this year. On labor, the two businesses have very different labor profiles and so the peak season for Newgistics and the shipments is obviously fourth quarter and returns is mid-December through early first quarter. But Presort, busy time of the year, it’s actually in January with all the year-end statements. So we're in a process now of taking the labor force and being able to leverage that labor force to help assist during peak. It leaves us a much better position this year candidly than last year to do that. So we like this combination and I think you'll see us bring that closer and closer over time. Now, why not go faster? Obviously, we have leases of these facilities in both businesses. We're not going to go break leases early just to bring these together, but we'll bring those together over time because we see a lot of benefits.

[Anthony Lebiedzinksi:]

Okay. That makes sense. Thanks for that explanation. And lastly, as far as the Software business, you guys mentioned that there was a timing shift, some deals shifted from 3Q to 4Q, I wanted to get a better sense of the magnitude of that. And also, I would be curious to know what the software sales we're excluding the impact or adjusting for the impact of 606?

[Stanley Sutula:]

If you take a look at the Software business in Q3, I’ll talk about that first. There was a lower level of renewables in the quarter. Remember this business has changed under 606. Even if you signed or renewed early, that revenue will not show up in the quarter anymore where it used to in the past. So with the lower level of renewals in the quarter that impacted performance. And in Q2, we did have a strong overall performance where it grew 13% on a year-to-year basis. And keep in mind, we disclosed it last year, in Q3 of 2017, we had a large location intelligence deal which certainly impacted the year-to-year performance. Now there were some bright spots here within the software. I think one of the best ones for us is small deals. Small deals grew a healthy 26% on a year-to-year basis. That's double-digits each of the first three quarters on the year-to-year basis. So as we look at fourth quarter, this is going to be part earlier. We had the question of how much does revenue go up on quarter-to-quarter? And let's say it's in the low to mid double-digits that it increases on a quarter-to-quarter basis, and software will be a part of that. There's more renewals in Q4. There's a bigger large deals in Q4, and we expect to see that continued performance with small deals. In terms of 606, you actually will see this upcoming in the Q. It had a smaller impact benefit here in Q3 than it did in the prior quarters. And then obviously that will wrap around as we head into 2019.

[Marc Lautenbach:]

I’ll just make one additional point because I think it speaks to kind of how 606 affects market dynamics. If you go back to the third quarter of last year where we had the large deal that was toe head renewal. So typically when you're running a Software business before 2018, you look at the inventory of deals in the quarter, and you make a judgment about that, inventory is sufficient to do what you need to do within the quarter and you act accordingly. So last year as we looked at the third quarter, which is always a difficult quarter for any software vendor just because of the seasonality of that business works. So we were able to pull ahead a large renewal. As you get into 2018, that option is no longer available to you, so…

[Stanley Sutula:]

We can find it…

[Marc Lautenbach:]

Yes, the economics are little bit different. So 606 an interesting thing. It changes a little bit in terms of how you think about bringing your deals forward and I suspect over time it will even out, but it makes the business a little bit lumpy right now.

[Anthony Lebiedzinksi:]

Okay. Thank you very much. End of Q&A

[Operator:]

And at this time, there are no further questions. I'd now like to turn the conference back to Mr. Lautenbach for any closing remarks.

[Marc Lautenbach:]

Thanks, operator. Listen let me just close with a couple of high level remarks and some of these I made before. If you think about, Pitney Bowes over the last couple of years, it's a company that's growing the topline. It has reduced our expense substantially. It has reduced debt and same time we have made significant investment in innovation and our capabilities. As we look forward to the fourth quarter and 2019, you can begin to see those decisions paying dividends. So we like our position as we go into the fourth quarter, more work to do for sure. But fundamentally, this is a business that's been repositioned for a healthy and prosperous future. So more work to do, we'll talk in 90 days and we'll update you then. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.