Stamps.com Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Greetings, and welcome to the Stamps.com Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Suzanne Park, Vice President of Finance. Thank you Ms. Park, you may begin.

[Suzanne Park:]

Thank you. On the call today are CEO, Ken McBride; and CFO, Jeff Carberry. The agenda for today's call is as follows

[Ken McBride:]

Thanks, Suzanne, and thank you for joining us today. During the fourth quarter and throughout fiscal 2020, we saw very impressive results in our financial and business metrics. The results we announced today included many highlights, including total fourth quarter revenue of $206.0 million, that was up 28% compared to the fourth quarter of 2019; non-GAAP adjusted EBITDA of $74 million, up 44% compared to the fourth quarter of 2019; and we reached a significant milestone of over one million total paid customers, the highest in the company's history. We're very pleased with our financial performance, and it continues to demonstrate the strength and relevance of our best-in-class global multicarrier e-commerce solutions. During this year 2021, the company and our team will reach a significant milestone of 20 years under current leadership, and I wanted to use that anniversary to reflect briefly on the impressive evolution we have experienced. Our services from the late 1990s focused on PC postage, originally developed as a convenient Internet-based alternative to a mailing postage meter for small businesses. Over the years, we have made various minor and major shifts in our business strategy. For example, in 2008 we began to rapidly move into shipping and e-commerce, as we began to build and later acquire solutions for e-commerce. In 2018 and 2019, we expanded to international markets with MetaPack and we added UPS as a key carrier partner. We've been successful with our homegrown solutions and our acquisitions in shipping and e-commerce. However, the breadth of our position in global e-commerce is sometimes not always fully appreciated so I wanted to highlight a few metrics. Globally, the volume of shipping done by our customers is impressive. During 2020, our customers purchased over 8 billion in US Postal Service shipping in the US and they purchased an additional 5 billion in US shipping from all of the other carriers we support in the US; such as UPS, FedEx, DHL and others. During 2020, we had more than five billion in shipping volume outside of the US in our MetaPack business group. In total during 2020, our customers all over the world sent approximately 3.5 billion packages representing a total dollar value of shipping done through our various software products and solutions worldwide of more than $19 billion. Within the over eight billion in packages that we generated in the US for the U.S. Postal Service we represent over one-third of all US domestic priority mail packages and we are over 40% of all US domestic first-class packages.

[Jeff Carberry:]

Thanks, Ken. We'll now review our fourth quarter and fiscal year 2020 financial results. Discussion of our financial results today includes non-GAAP measures. A reconciliation of non-GAAP financial measures to the corresponding GAAP measures can be found in our earnings release and in our metrics on our investor website. Total revenue was $206.0 million in Q4. That was up 28% year-over-year versus Q4 of 2019 and was $758.0 million in fiscal year 2020 and that was up 33% versus 2019. Total revenue excluding MetaPack was $190.3 million in Q4 and that was up 30% year-over-year versus Q4 of 2019 and was $695.9 million for fiscal year 2020 up 34% versus 2019. The growth in revenue in the fourth quarter and for the year was primarily driven by strong shipping growth attributable to the shift to online e-commerce purchasing that has been driven by the worldwide COVID-19 pandemic. The year-over-year revenue growth in the fourth quarter and for the fiscal year was negatively impacted by the termination of the customized postage program in June of 2020, resulting in no revenue from that area in the second half of fiscal year 2020. Mailing and shipping revenue was $206.0 million in Q4 and that was up 32% year-over-year, versus Q4 of 2019 and was $746.1 million in fiscal year 2020 and that was up 34%, versus 2019. Mailing and shipping revenue excluding MetaPack was $190.3 million in Q4, up 34% year-over-year, versus Q4 of 2019 and was $684 million in fiscal year 2020, up 36% versus 2019. We estimate that total revenue derived from our shipping customers grew approximately 35% year-over-year and was in the mid-80% range as a percentage of total Q4 revenue. We also estimate that our total revenue derived from mailing customers, as a percentage of total revenue, was in the mid-teens and grew year-over-year in the mid-teens as well. Mailing and shipping gross margin was 77.8% in Q4, versus 74.7% in Q4 of 2019 and was 77.9% in 2020, versus 74.7% in 2019. And Mailing and shipping gross margin was positively impacted by the strong growth in revenue associated with e-commerce-driven shipping. The MetaPack business gross margin was 68% in Q4 and 66% in fiscal year 2020. We had year-over-year increases in our Q4 and fiscal year 2020 operating costs, primarily driven by growth in sales and marketing and R&D related to customer acquisition and strategic investments, to support innovation and long-term growth. As Ken mentioned, we continue to aggressively scale our operational investments to drive our domestic and international business initiatives. Non-GAAP operating income was $73.0 million in Q4. That was up 45% year-over-year, versus Q4 of 2019 and was $263.6 million in fiscal year 2020. That was up 66% versus 2019. Adjusted EBITDA was $74.0 million in Q4. That was up 44% year-over-year, versus Q4 of 2019 and was $257.6 million in fiscal year 2020 and that was up 63% versus 2019. Adjusted EBITDA margin was 35.9% in Q4, versus 32.0% in Q4 of 2019 and was 35.3% in fiscal year 2020, versus 28.7% in 2019. The increase in adjusted EBITDA margin was driven by strong revenue growth and a more favorable mix of higher-margin service revenue. Non-GAAP adjusted income per fully diluted share was $4.13 in Q4 based on non-GAAP tax benefit rate of 11.8% and was up 95% year-over-year, versus $2.12 per share in Q4 of 2019, based on a non-GAAP tax expense rate of 23.4%. Non-GAAP adjusted income per fully diluted share was $12.51 in 2020 based on a non-GAAP tax expense rate of 9.1% and was up 118%, versus $5.73 in 2019 based on a non-GAAP tax expense rate of 34.7%. Fully diluted shares in the EPS calculation was 19.7 million for Q4 of 2020 and 19.1 million for 2020, versus 17.9 million for Q4 of 2019 and 17.8 million for 2019. Let's now discuss our customer metrics. Our total paid customer metric was 1.0 million, which was up 35% versus Q4 of 2019 and represents the highest number of paid customers in our company's history. This was driven by strong new customer acquisition, but partially offset by an increase in customer churn. Our fourth quarter churn rate was 4.5%. Churn was up 130 basis points year-over-year. As discussed earlier, the increase was primarily driven by churn in the mailing segment of the Stamps.com customer base and was expected, given the large magnitude of recently acquired customers and the normal dynamics of customer churn in which churn, especially in the mailing segment is meaningfully higher in the first year. Our fourth quarter ARPU was $67.51. ARPU was down 2% year-over-year, driven primarily by strong growth in our mailing customers -- total mailing paid customers, who have generally much lower ARPUs, than those of our shipping customers. Total fourth quarter USPS postage printed was a record 2.4 billion, up 30% versus the fourth quarter of 2019. And total fiscal year 2020 USPS postage was 8.6 billion, up 30% versus fiscal 2019. The total USPS postage printed metric includes both, higher growth in shipping volume and traditional non-package mail volume. Historically, we've seen a steady decline in non-package mail volume. But this year, we saw growth in this area both, for the fourth quarter and for total fiscal 2020. Now I'll discuss our cash, debt and uses of cash. We ended Q4, with $444 million in cash and investments which was up $54 million, from $390 million, at the end of Q3 of 2020. The increase in cash and investments was primarily driven by strong operating cash flows and cash from option exercises and was partially offset by share repurchases and changes in net working capital. We continue to have, no debt outstanding. During Q4, the company repurchased approximately 96,000 shares, at a total cost of approximately $20.8 million. Our current $40 million repurchase plan that was approved by our Board of Directors in August 2020 was completed earlier this month. On February 11 2021, our Board of Directors approved a new $60 million repurchase plan that runs, through August of 2021. Let's now turn to our business outlook. The COVID-19 pandemic contributed a meaningful financial benefit, to our business in 2020, driven by an increased need, for online mailing and shipping solutions, and driven more generally by the global shifts to online purchasing behavior, that drove unprecedented worldwide e-commerce growth. However, as we look forward to 2021, the myriad of factors that are beyond our control, and the resulting effects that those factors could have on our business are very difficult to accurately forecast. These factors include ones, such as, global macroeconomic risks, associated with the ongoing pandemic, timing and degree of moderation, in Safer at Home restrictions, the shift back to an office-based working environment. And the overall changes those things could have on global e-commerce. Thus, given the circumstances, we do not feel that we are able to accurately forecast, the range of potential outcomes that could unfold in 2021. And thus, we are not providing any specific numerical guidance, for 2021 revenue or earnings at this time. In the lieu of specific guidance, we will provide some more general thoughts to help investors think about certain dynamics that might affect our business in 2021. Financial benefits associated with COVID-19, to our business started with the large-scale implementation of Safer at Home restrictions around the middle of March of 2020. And we continued to see strong year-over-year growth in our business throughout the remaining nine months, of fiscal 2020. However, we would note, that the pace of our growth that we saw, has slowed each quarter. For example, total customer acquisition was up approximately 200% in the second quarter of 2020, approximately 80% in the third quarter of 2020 and approximately 6% in the fourth quarter of 2020. Also, the total US dollar shipping volume, we processed across all carriers that we support in the US, was up over 60% in the second quarter, over 50% in the third quarter and over 50%, in the fourth quarter of 2020. During January of 2021, we continue to see a strong growth. But, once again, the growth seems to have slowed a bit, versus the pace we saw during fiscal 2020. Customer acquisition in January of 2021 was up approximately 50% year-over-year and total US dollar shipping volume we processed, across all carriers that we support in the US was up over 40%, in January 2021. As we move into the second quarter of 2021, we also begin to face very tough comparisons given the strong growth that began in March of 2020. Hence, in light of the significant number of macroeconomic and other COVID-related factors we outlined earlier, it would not be unreasonable to consider a very wide range of potential outcomes that may include negative year-over-year revenue growth rates, once we reach that point of the year. In terms of operating expenses, we plan to continue to invest in strategic initiatives that Ken discussed -- our long-term growth. Accordingly, we would expect our operating expenses in 2021, may increase as much as 20% or more. The growth in operating expenses reflects both, the annualized -- annualizing of investments in R&D made throughout 2020, and additional RD investments expected in 2021. Additionally, growth in operating expense is heavily dependent on new customer acquisition, which as we saw in 2020 was very difficult to predict. As a result, we anticipate that our adjusted EBITDA margins are likely to moderate from the elevated levels we saw in fiscal year 2020. Despite the significant near-term risks and uncertainties, we remain very excited about the longer term secular trends of shipping e-commerce our global market opportunities, the strength and the sensibility of our technology platforms and the strong value proposition of our service offerings. So while we would potentially expect shorter term volatility, we believe the longer term fundamentals of our business offer a very attractive long-term financial profile. And with that, we'll open the call for questions.

[Operator:]

Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question comes from George Sutton with Craig-Hallum. Please proceed with your question.

[George Sutton:]

Thank you. First, I really would like to say thank you Ken for providing the volumes relative to the market. I believe that's the first time you've ever done that. I found that to be very helpful and good perspective. As you looked into the providing or not providing guidance for 2021, aside from the tough Q2 to Q4 comparisons, which are fairly obvious, is there anything else fundamentally that you are specifically concerned about that might not be obvious?

[Jeff Carberry:]

Thanks for question. There's nothing that I think is not an obvious. I think the reality is that COVID has a -- and has obviously shown a very large impact on not just our business but broader e-commerce. And the myriad of factors that impact global e-commerce and us in particular are subject to those COVID related variables that are just impossible to forecast. And, therefore, what they create for us is really an unreasonably wider range of entirely possible outcomes to make guidance effectively not very useful for anyone. So I think -- the bottom line is that the level of risk and the associated ranges really make guidance not particularly relevant and extraordinarily difficult this year for us just given those uncertainties.

[Ken McBride:]

Yeah, I'll just add George. I mean, I think the point of view I expressed at the beginning, I think the punch-line of that was we represent -- we process merchandise value, the shipping for merchandise value of 15% of all U.S. e-commerce. So clearly we're very heavily tied to the outcomes in e-commerce and what the growth may be there. And I think that -- I think it's just challenging to forecast that. I mean, you guys are probably in a better position to forecast it than we are being able to sit in the position you are as an analyst. And so it's -- I think it's challenging for us in 2021 given the magnitude of what happened in 2020. And so I think as a result of that we just decided to not be the ones that are trying to forecast the e-commerce business to allow our investors to do that for themselves.

[George Sutton:]

So what if we were to look beyond 2021? Obviously a tough compare in 2021. But 2022 and beyond, we are still clearly driven by the secular growth of e-commerce and you also have an international opportunity that's pretty significant. Can you discuss growth rate potential beyond 2021?

[Ken McBride:]

Yeah. I mean, I think likewise it's tough for us to kind of really talk about -- if we can't talk about what happens this year it's even more challenging to talk about the out-years. But I certainly think that we're in a great position. If you look at worldwide as you mentioned, we have a lot of greenfield if you will for expansion as we go out there. There really is no other solution out there like a ShipStation or a Stamps.com solution when you look across the world. It's really wide open. And as we go into these new markets in Europe and Australia and other areas, we're finding that our solution is resonating with these new customers. And so we're kind of just getting started in that area. We have a lot of plans and we're aggressively going after it. But worldwide as a percent of e-commerce we're only about 5%. And as a percent of shipping worldwide we're just a few percent. So I think that we have a huge runway here with international that we'll be able to access in the out-years. And certainly that will start to be a lot more meaningful in 2022 and beyond.

[George Sutton:]

Finally, if I can you're scaling up to quote you, your sales and marketing effort in 2021. I would assume given how conservative you are that is not to do anything other than grow the business. Can you just provide perspective on the thoughts behind the scaling up of the sales and marketing?

[Ken McBride:]

Yes sure. I mean I think we saw -- like aside from all the things we've talked about and the effects of our business, we also saw a lot of interesting things that happened in the marketplace in terms of advertising, TV, inventory things that were available companies like travel companies and entertainment companies pulled back from their advertising and that allowed us to go in and get some really cost-effective rates for some of the advertising. So, I think --we -- as we evaluate we'll continue to look at that. We certainly are earning a huge ROI on our investments right now. We'd like to continue to be aggressive on spending where it makes sense.

[Jeff Carberry:]

Yes. The only thing I'd add George is obviously you know us very well and we take a very quantitative and manual approach to sales and marketing. So we keep a very close eye on all the myriad of channels we utilize. And obviously we have in a number of those cases an ability to modulate that spend virtually real-time with a lot of those channels. So, I think we obviously are going to be judicious on how we spend our money looking to balance both the opportunities as well as the risks. But I think on the sales and marketing spend to Ken's point we're investing for growth. But obviously we have an ability to modulate that based on what we see real-time with how the economy shakes out with COVID and other factors.

[George Sutton:]

Understand. Thank you.

[Ken McBride:]

Thanks George.

[Operator:]

Thank you. Our next question comes from Kevin Liu with K. Liu & Company. Please proceed with your question.

[Kevin Liu:]

Hi, good afternoon guys. First question here just in terms of the outlook for 2021. I know there's no specific guide. But as we think about the different levers that you guys have obviously you're coming into the year with an extremely large paid subscriber base much higher than what you came into 2020 with. So is it fair for us to assume that so long as e-commerce is generally growing in the US and abroad that your current existing arrangements with your various partners those are relatively stable? It's really just kind of volume dependent. And to the extent there is growth in e-commerce you guys should see some commensurate benefit?

[Jeff Carberry:]

Yes. I think obviously when we talk about our performance in 2020 with regard to acquisition the nature of those customers and how they continue to look both on a pre- and post-COVID world basis as consistent all those things speak very well for 2021 obviously. To your point though volume is really the uncertainty. And as you can see COVID has a huge impact on the nature of e-commerce and specifically how it manifests for us in terms of shipping labels. So certainly one scenario is where you have moderation in growth. You can also see scenarios where growth could potentially go down as people allocate capital to other things as the economy opens up. So it just highlights really some of the inherent risks in forecasting 2021 and even potentially in 2022 based on COVID-related variables. So, I think at the end of the day you're going to see us obviously correlate with e-commerce. But I think you have to understand some of those broader dynamics as well that manifest itself for us financially in terms of e-commerce generally, but how people are purchasing through e-commerce and then the impact on shipping volume for us.

[Kevin Liu:]

Understood. And certainly a lot of positive e-commerce trends as it relates to COVID. The one area that's kind of mix for most companies has been kind of the global cross-border shipments. I was wondering if you could talk a little bit more about how your cross-border business performed in 2020 and then what your outlook for growth is here in 2021.

[Jeff Carberry:]

Sure. So from a cross-border standpoint that's obviously an area that is developing very quickly. And an example of where -- with our technology platforms we are always pushing to be on the cutting-edge of those developments and the needs of our customers. So cross-border gets extraordinarily complicated with things like sales use tax and import duties and controls and regulations around what you can and can't import and forms and things of that nature. What we're doing obviously as the world becomes more and more globally connected is ensuring that we make that process as efficient as humanly possible for our customers both domestically in the US as well as abroad. So that's certainly a highly evolving area and one that we do have our eye on closely as we prioritize R&D. And we see it as a very attractive opportunity for us again as the world becomes more interconnected globally.

[Kevin Liu:]

Got it. And then just lastly, the expectation for operating expenses to grow as much as 20% or more this year. Can you talk about to the extent those are kind of fixed investments you need to make in order to expand your international business versus more kind of the variable spend for customer acquisition? And to the extent, your CPA metric starts to get back towards higher levels that you've seen historically how comfortable are you continuing to spend at this rate?

[Jeff Carberry:]

Yes. I think I'll start with the last part of the question, which is CPAs. They were down 50% -- 15% year-over-year in Q4. But even if we saw CPAs back as they were kind of pre-COVID, there was still a very attractive ROI. As it relates to the spend for OpEx, obviously, in R&D, it's principally headcount expense. And in sales and marketing, it's a combination of discretionary as well as headcount expense. A lot of that increase is related to international efforts. And there we are very early on in tapping extraordinarily attractive opportunities, which we believe to have very high ROIs in the longer run, but to be clear we are early on. So we are building a business effectively from scratch internationally for that kind of low to mid-sized e-commerce merchants, whereas MetaPack is going after the large preeminent omni-channel retailer. So, I think, we're making investments that we feel are extraordinarily attractive in the long run. But in terms of being able to modulate that certainly we could modulate that. But I would bear in mind the way we think about that is a lot of those are obviously investments for a multi-year framework. As far as to sales and marketing, obviously, if we saw for example something like a global recession as a result of COVID, we can certainly modulate back on that in terms of headcount as well as modulate back on the sales and marketing spend. So we're not going to spend recklessly. But a portion of that spend obviously a good portion of that is headcount-related to drive long-term multi-year opportunities for us internationally. So you might see even with some downside risk in the shorter run with COVID, you might see us still spend pretty aggressively, especially on the headcount stuff that drives multi-year investments.

[Kevin Liu:]

Okay. Thanks for taking the questions and good luck here in 2021.

[Ken McBride:]

Thanks, Kevin.

[Jeff Carberry:]

Thank you, Kevin.

[Operator:]

Thank you. Our next question comes from Allen Klee with National Securities. Please proceed with your question.

[Allen Klee:]

Yes. Hi. I'm at Maxim now. On the international, how do you think about the progression that you hope to get from getting paid directly from the shipper to what you do in the US where you can get on the volumes with the carriers? How do you envision how that could potentially play out over the next year or two?

[Ken McBride:]

Yes. Certainly a part of our goal is as we go out into the world and we look at carriers in particular that those carriers are going to like in the US be interested in accessing our customer base and that we will be able to effectively get a revenue share for that activity. I think that the vast majority -- well actually all of our customers effectively other than a few hundred are US customers, right? So we have one million customers in the US. And so that customer base is extremely attractive here and now today. And so we were able to do partnerships. We've been able to do partnerships with the other carriers. We have a rev share partnership effectively with USPS and with UPS and with others. So internationally we're still -- I think we're still up and comer. So it's going to take some time to kind of build that customer base as we go into these new markets. We've seen incredible growth. I mean, I think we mentioned that we saw 150% year-over-year growth for international shipments with ShipStation in particular. However, that's off a small base and we're early. And these markets are complex in many ways more complex than other companies have faced. As we go in we have to work through lots of relationships with a lot of the carriers there. There's -- we support over 300 carriers worldwide. There's really only three in the U.S. that are the vast majority of the market. So each market is more complicated. We have to go into business development relationships. And so, it's a matter of building the market presence the customers in those markets. And then we believe we'll be able to do more revenue share arrangements with the carriers in those markets.

[Allen Klee:]

Thank you. You've built up a nice war chest of cash on your balance sheet. I'm curious how you think about M&A. If I guessed there's probably a lot of interesting things out there but the prices may not be where you would want. But what would you -- generically what would you be looking at?

[Ken McBride:]

Well yes I mean I think you're right in pointing out that certainly the valuations are high in the market. If you look at 20 years of the management team having run this company we did 5, right? So we're -- I guess we're averaging one every four years. And I think within that -- and so we're pretty picky. We like to hit home runs when we do acquisitions and we think we've done that in the vast majority of the activities we've done. So we're picky. M&A can be very distracting for the company for the management team. And so we want to make sure when we do it, it's the right company, the right fit, the right culture, the right valuation. And we're certainly actively searching as we always do. But at this point obviously we haven't been able to find something that meets our criteria.

[Allen Klee:]

Okay. Thank you so much.

[Ken McBride:]

Thank you, Allen.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

[Ken McBride:]

Thank you everyone for joining us. We appreciate it. And as always if you have follow-up questions you can come to our website investor.stamps.com or contact us through our Investor Relations number [phone]. We appreciate your tuning in today.

[Operator:]

Ladies and gentlemen this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.