Stamps.com Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good day ladies and gentlemen and welcome to the Stamps.com Inc. First Quarter 2018 Financial Results Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer-session. And instructions will follow at that time. [Operator Instructions] As a reminder this call maybe recorded. I would now like to introduce your host for today's conference, Suzanne Park, Senior Director of Finance. You may begin.

[Suzanne Park:]

Thank you, Sarah. On the call today is Ken McBride, CEO; Kyle Huebner, President; and Jeff Carberry, CFO. The agenda for today's call is as follows. We will review the results of our first quarter 2018. We'll provide an update on elements of our business model and partnership. We'll discuss our financial results and talk about our business outlook. And finally, we'll provide some comments on our long-term outlook. But first, the Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This release includes forward-looking statements about our anticipated financial metrics and results, all of which involve risks and uncertainties. Important factors, including the company's ability to successfully integrate and realize the benefits of its past or future strategic acquisitions or investments, including the company's ability to compete -- complete and ship its products, maintain desirable economics for its products, the timing of when the company will utilize its deferred tax assets and obtaining or maintain regulatory approval which could cause actual results to differ materially from those in the forward-looking statements, are detailed in filings with the Securities and Exchange Commission made from time-to-time by Stamps.com, including its annual report on Form 10-K for the fiscal year ended December 31, 2017, quarterly reports on Form 10-Q and current reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The financial results we will discuss on the call today include non-GAAP financial measures. In the first quarter of 2018, GAAP net income was $47 million and GAAP net income per fully diluted share was $2.54. Our non-GAAP financial measures exclude the following first quarter items. $7.5 million of non-cash stock-based compensation expense and $4.1 million of non-cash amortization expense of acquired intangibles and debt issuance costs. Our non-GAAP financial measures also include a $11.7 million of additional non-GAAP income tax expense in the quarter. Additionally the mailing and shipping numbers we will discuss today include service revenue, product revenue and insurance revenue and do not include any revenue from Customized Postage. Please see our first quarter 2018 earnings release and 2018 metrics posted on our investor website for reconciliations of our non-GAAP financial measures to the corresponding GAAP measures. Now, let me hand the call over to Ken.

[Ken McBride:]

Thank you, Suzanne. Thank you for joining us today. Today we announced our first quarter results, which included GAAP revenue of $133.6 million which was up 27% year-over-year, non-GAAP adjusted income per fully diluted share of $2.54, which was up 39% year-over-year and non-GAAP adjusted EBITDA of $62.1 million which was up 21% year-over-year. We are very pleased with our first quarter financial performance. Let me now turn to the detailed discussion of our business. Mailing and shipping revenue was $131.0 million in the first quarter that was up 28% year-over-year. The growth was driven by both growth in paid customers and growth in the ARPU or the Average Revenue Per Paid Customer. Our total paid customer metric was 740,000. Paid customers were up 3% versus the first quarter of 2017. The modest growth of paid customers this is consistent with our strategic shift focusing on acquisition of Shippers which are numerically fewer in number but where each customer has a much higher lifetime value. With this shift in focus, our revenue has been driven more by growth in ARPU than it has been driven by growth in paid customers. Our average monthly churn rate during the first quarter was 3.0%, that's consistently with the churn rate we have seen over the past several quarters. We will note that our churn has exhibited the nice long-term downward trend and continues to benefit from our focus on shipping customers, who tend to have lower churn rates compared to traditional small business customers. The average monthly revenue per paid customer or ARPU was $58.96 in the first quarter and that was up 21% versus the first quarter of 2017. The growth in the APRU benefited from continued growth in the shipping focused areas of our business. Shipping customers generally pay higher subscription fees than small businesses or particularly also collected additional partner rev share, payments and commissions tied to the dollar volume of packages that we process on behalf of our shippers. Total first quarter postage printed was 1.6 billion, that was up 8% versus the first quarter of 2017. The total postage printed metric includes both higher growth shipping volume and traditional non-packaged mail volume, which continues to see a steady decline. With our central position in e-commerce shipping, we process a significant volume of transactions on behalf of our customers. For 2017 as a whole our customers collectively printed over 2 billion total mail pieces and packages. Of that number, shipping labels for packages represented over 1 billion total packages. We estimate that more than one-third of all USPS mail packages and more than one half of all first class mail packages in the U.S. are processed through our systems. Our management team and our employees are very proud of the continued financial and business success we generated for our shareholders. With that, let me now discuss some of the initiatives we're continuing to focus on for 2018. First, we plan to continue to scale up our sales and marketing with a focused on acquiring shipping customers. With our focus on shipping over the past several years we have seen a significant increase in the average life time value of a customer that we acquire. With our great return on investment, we plan to continue to scale our total sales and marketing expense in 2018 versus 2017. A significant focus of our investment is on the acquisition of e-commerce and other high volume shippers. Second, we plan to continue to expand the core features and functionality of our shipping solutions. One of the key value propositions of our solutions, the number of integration that we support including sales channels, third-party fulfillment providers, marketplaces and e-commerce tools. During the first quarter, we added several additional new integrations. We also continue to see strong adoption of our mobile platform that we provide under our ShipStation brand. And that is proving great value add to our customers. We also continue to see great traction with our ship engine API, which offers all the capabilities of our market leading ShipStation solution in the form of an API available the third-party such as marketplaces and e-commerce tools that are integrating that solution into their own user interfaces. During 2018, we will continue to develop new integrations with selling channels, marketplaces and e-commerce tools, we've also continue to develop our industry leading mobile platform. And we will continue developing and marketing our new ship engine API. Third, we plan to continue developing new feature supporting e-commerce customers. During 2017 we built and launched two great new solutions called inventory management and customer marketing. During the first quarter, we continue to develop these solutions and we see great traction with both new solutions within our shipping easy customer base. We charge additional service fees for the solutions, so this allows us to further increase our customer lifetime values and to leverage the investment we have already made in sales and marketing to acquire those customers. We also believe that customers that adopt these solutions drive greater value from our solutions and thus results in greater customer stickiness and thus lower churn. During 2018, we plan to continue to enhance the features in our inventory management and our customer marketing solutions. We will continue to market those solutions to new as well as existing customers. Fourth, we're going to continue focusing on expanding our international solutions in our international marketing. We recently launched a new international shipping initiative called the Global Advantage Program. Through this program we offer customers access to discounted USPS international shipping rates, through our private label carrier partnerships that utilize the USPS' work share program which is a program whereby companies can do a portion of the work for USPS and receive a discount on their postage rates. The Global Advantage Program also includes great customer benefits such as free package pickup, free insurance, upgraded delivery speeds, enhanced tracking, simpler customs procedures and other benefits. The Global Advantage Program represents a new revenue opportunity for us, as we grow and monetize our international volumes. We are able to earn incremental revenue on these packages under the USPS work share program. We already saw a nice increase in revenue under the Global Advantage Program during the first quarter. Also in international area, we are developing partnerships and marketing our solutions in international markets. After completing our integrations with Royal Mail in the UK, Canada Post, and Australia Post, we introduced ShipStation in those respective countries. We have also done integrations in the UK including Magento, BigCommerce, WooCommerce, Square Space, Open Card and Press the Shop in order to support the e-commerce customers there. And we've also done an integration with Amazon in all three countries to support that selling channel as well. During the first quarter, we continued to gain new customers in the UK, Canada and Australia. And to-date, we have already acquired several thousands of customers in those countries. We will continue to ramp our business development and our marketing efforts in those countries throughout 2018. With that, let me now hand the call over to Jeff for a detailed discussion of the financial results.

[Jeff Carberry:]

Thank you, Ken. We'll now review our first quarter 2018 financial results. The discussion of our financial results today includes non-GAAP financial measures. As Suzanne described, a reconciliation of non-GAAP financial measures to the corresponding GAAP measures can be found in our earnings release and in our 2018 metrics on our Investors website. Total revenue was $133.6 million in Q1 and that was up 27% year-over-year versus Q1 '17. The strong growth in revenue in the first quarter was primarily driven by strong growth in our mailing and shipping business. Mailing and shipping revenue was $131.0 million and that was up 28% year-over-year versus Q1 of '17. The growth in mailing and shipping revenue was driven by increases in paid customers and ARPU, as Ken discussed earlier. We estimate that revenue derived from our shipping customers as a percentage of our total revenue was in mid 70s, and grew year-over-year in excess of 30%. We also estimate that our mailing and shipping revenue derived from our server mailers as a percentage of total revenue was approximately 20%, and that grew year-over-year in the low single-digits. Mailing and shipping gross margin was 82.5% in Q1 versus 85.1% in Q1 of '17. The decrease in gross margin was attributable to the scaling of our international offerings including the Global Advantage Program which can have a lower gross margin profile than our other services revenue components. We experienced year-over-year increases in our Q1 costs of sales and marketing, R&D and G&A primarily related to the continued investments to support the strong growth and in innovation in our mailing and shipping businesses. As Ken discussed earlier, we have a number of new initiatives planned for 2018 and we expect to continue to invest in those initiatives at elevated levels throughout 2018. In particular, we would expect to see the absolute dollars invested in sales and marketing, R&D and G&A to be higher each quarter for the balance of the year relative to the Q1 '18 in order to drive our growth and innovation. Non-GAAP operating income was $60.7 million in Q1, up 21% year-over-year versus Q1 of '17. Adjusted EBITDA was $62.1 million in Q1, and that was up 21% year-over-year versus Q1 of '17. Adjusted EBITDA margin was 46.5% in Q1 versus 48.8% in Q1 of '17. The decrease in adjusted EBITDA margin was attributable to lower gross margins associated with the scaling of international offerings, higher operating costs associated with our 2018 initiatives as previously discussed, and the ongoing accrual of sales factors and was partially offset by lower than anticipated headcount expenses associated with lower than anticipated pace of hiring in the quarter. Non-GAAP adjusted income per fully diluted share was $2.54 in Q1 and that was up 39% year-over-year versus $1.83 per share in Q1 of '17. Fully diluted shares used in the EPS calculation was $18.5 million for quarter. Q1 '18 benefited from a reduction of our expected tax rate for 2018 from our previously estimated 28.0% to a reduced estimated tax rate of 22.0% for the full year, which was primarily driven by option exercises in the first quarter of '18. We ended Q1 with $196 million in cash and investments and that was up $43 million from $154 million at the end of Q4 '17. 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 and mandatory debt repayments. During Q1 we made a required principal repayment of $2.1 million resulting in total debt under the credit agreement excluding debt issuance costs of $68.1 million. During the first quarter, the company repurchased approximately 120,000 shares at a total cost of approximately $23 million. On April 25th of this year, the Board of Directors approved a new share repurchase plan that will take effect on expiration of the current plan on May 11th of this year and authorizes the company to repurchase up to $90 million of stock over the six months following its effective date. Now turning to guidance, we continue to expect fiscal 2018 revenue to be in the range of $530 million to $560 million. We expect 2018 revenue to continue to be driven by our continued focus on our e-commerce driven shipping business. In particular, we would expect our shipping revenue growth to be in the low to mid-20s range year-over-year. We would also expect growth in our mailing and shipping revenue to derive from our server mailers to continue to grow in the flat to low single-digits range year-over-year. Finally, we would expect our customized postage revenue to be down year-over-year as we saw a higher than expected contribution from high volume orders in 2017 that we would not necessarily expect to repeat in 2018. We expect operating expenses to increase in 2018 greater than the rate of revenue growth and we would expect to see absolute dollars invested in sales and marketing, R&D and G&A to be higher in each quarter for the balance of the year relative to Q1 of this year in order to bring the initiatives we discussed earlier to fruition. On a common side of basis, we would expect to see operating expenses as a percentage of total revenue to increase approximately 100 to 200 basis points relative to 2017. As we discussed last quarter, we would expect to see G&A particularly impacted given the sales tax expense we discussed, and which we would expect to continue to incur. We continue to expect fiscal 2018 adjusted EBITDA to be in the range of $245 million to $265 million. This implies a full year adjusted EBITDA margin in the mid-40s, reflecting both our headcount investment and our sales tax expenses. We would expect sequentially higher operating expenses associated with our headcount investments combined with traditional seasonal slowness in the second and third quarters. We believe the EBITDA margin pressure in the second and third quarters with EBITDA margin increases in the fourth quarter associated with the seasonal strength in revenue due to Q4 holiday shipping trends. We expect non-GAAP tax expense will be approximately 22.0% of non-GAAP pre-tax income for 2018 which compares to our previous estimate of 28.0%. As we discussed earlier, the reduction of our expected rate for 2018 was driven by option exercises in the first quarter. Our full year 2018 effective tax rate could differ from our current estimates based on a number of factors including the level of option exercises that we experienced for the balance of the year. We expect fully diluted shares to be in a range of 19.0 million and 19.4 million in 2018. We expect fiscal 2018 non-GAAP adjusted income per fully diluted share to be in a range between $9.60 to $10.60 and that compares to our guidance of $8.80 to $9.80. And finally, we expect capital expenditures to be approximately $2 million to $4 million in 2018. With that, let me hand the call over to Kyle for some additional comments on our 2018 initiatives and our long-term outlook.

[Kyle Huebner:]

Thanks, Jeff. With our increased focus on shipping, and our four acquisitions, we've achieved a significant transformation in our business over the past five years. We expect to continue to focus our efforts on shipping for the foreseeable future. We are very well positioned to capitalize on e-commerce shipping opportunities. Growth in e-commerce provides a natural base line tailwind to our growth and e-commerce year-over-year growth in the US has been running in the mid to high-teens. We have demonstrated the ability to grow our shipping related revenue above the typical e-commerce growth rates for several reasons. First, our solutions are suitable for the largest e-commerce sellers that need the sophisticated solutions which we provide and as we attract the largest and most successful e-commerce companies into our suite of solutions effectively skimming the cream at the top, creaming off the top of the universe of e-commerce sellers. Second, we are expanding the scope of what we offer outside the traditional areas of shipping and into new e-commerce features including things like inventory management and customer marketing that Ken mentioned earlier. Third, we are expanding our international solutions both for domestic US volume going to international destinations and for international customers using our solutions to ship within and outside their countries. Fourth, with our multi-carrier platforms, we are able to expand outside of our traditional core USPS focused business with new relationships and new potential revenue sharing opportunities with other carriers. As Jeff discussed earlier, shipping related revenue in Q1 grew in excess of 30% year-over-year. This growth continues to be all organic as we pass the anniversary of our last acquisition and Q3 of 2017. So even with the very early state of our initiatives, we already growing much faster than the overall ecommerce market. Our five year mailing and shipping revenue growth rate target is 20% and we expect that through the initiatives Ken and I have outlined, we will be able to exceed that target. Our main strategic priority is increasing our investments in the current business and new opportunities to maximize long-term revenue growth. New growth opportunities such as international expansion and expanding beyond shipping within e-commerce require upfront investments in order to generate initial revenue and subsequent investments to drive revenue growth. So we expect our strategy of maximizing revenue growth over the long-term, the long-term adjusted EBITDA margin expansion. However, we expect our adjusted EBITDA margins in the shorter term to reflect the increased level of investment we are currently making. In summary, we are excited by our continued strong performance and look forward to delivering great results for the future. And with that, we'll open it up for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Kevin Liu with B. Riley. Your line is now open.

[Kevin Liu:]

I was hoping, you could elaborate a little bit more just on the services gross margin in the quarter. It seem like with some of the international expansion that came in a bit. But I was wondering, if you had any sort of pass-through postage revenues or any sort of new carrier relationships that were impacting that number?

[Ken McBride:]

So as we mentioned on the last call, we look further along obviously in terms of international initiatives with a global advantage for them with the others. So what saw a nice first quarter except from or bump rather from Global Advantage Program. The margin associated with that program can certainly be less than that our existing margins. As you know from last year EBITDA margins were in the 50% range. And clearly, the margins are a little bit lower still very, very attractive. So you're seeing really is in terms of servicing margin on the gross side and EBITDA side. You really seeing the impact of a good first initial step into Global Advantage Program since the introduction of course.

[Kyle Huebner:]

And just to add as I mentioned Kevin. Some of these programs have costs and start-up costs that over time as you build that revenue you get to a scale inflection point, but in the beginning as you're launching and ramping some of these initiatives there are additional upfront operating costs that result in lower margins initially and with the goal being over a 5-year period, you get the scale inflection point and realize the benefits of that.

[Ken McBride:]

It's a good point Kevin. If you go to historically to financials, obviously seen some growth in gross margins. Those directly point to kind of scale efficiencies in the business. So I think when you look historically at our gross margin, I think it will step back in context to scale comments that Kyle mentioned.

[Kevin Liu:]

Yes, understood. And then just on a separate topic. I was hoping you could comment a little bit on kind of the pricing flexibility you feel, you might have, as we look at things like Amazon Seller Fulfilled Prime program or eBay's Guaranteed Delivery. They're certainly trying to capture more of the shipping economics for themselves. On the other hand, for you guys, you are trying to make things as easy as possible for your customers. So how are you thinking about kind of balancing out the economics of that you can ensure you're earning a good return on your customers while still giving them perhaps access to the capabilities that may enable them to sell in these programs?

[Ken McBride:]

Sure. Yes I think we kind of talked about a little bit last quarter. We really are looking at these new programs from Amazon and eBay as nice value adds to our customers. So to the extent things like shipping with Amazon or other Amazon programs or the eBay program that come out, those are benefit to the customers or benefit to us. So our strategy is typically just to make those solutions available as readily as possible to our customers in order to provide them the solution that they are looking for.

[Kevin Liu:]

I guess if I could question further on that I mean for your themes like the ShipStation offering, if someone wants to do Seller Fulfilled Prime, you kind of have transaction fees. Do you guys get uptake from your customer base for those guys that want to ensure they have that capability, are they going to pay that extra transaction charge?

[Ken McBride:]

Yes, we actually started -- we saw the opportunity that was something that we're providing a nice solution to the customer. We saw the opportunity to potentially add an incremental small -- very small fee for that capability and we started doing that about a year ago I believe and we've seen nice uptick from it.

[Operator:]

Thank you. Our next question comes from George Sutton with Craig-Hallum. Your line is now open.

[George Sutton:]

Guys I have a big capital allocation question, given your strong cash position and cash flow. So you obviously are pursuing a number of build opportunities. I am curious what you are thinking about on the buy side. Are you just not seeing things that necessarily could accelerate some of this through M&A? And I'm encouraged you see the $90 million buyback but I am wondering if you've contemplated something more aggressive along those lines?

[Ken McBride:]

Yes, I think generally speaking we don't comment about specific opportunities we are may be seeing out there in the M&A market. We continue to be open to potentially finding an acquisition and acquiring a company that may be strategic to us. But at this point we haven't been able to find one

[Kyle Huebner:]

Yes, I would just add on to that. I think what you are seeing is that strategically we do have the build path in place so that we are not dependent on finding an acquisition in order to realize our five year goal. And so that makes the acquisitions more opportunistic where as Ken mentioned if we find something and it's the right strategic fit, the right valuation, the right fit with our business, our business model, then that's certainly something that we are open to considering. But we also feel like we have a path in place that to build it and be successful and so that means acquisitions we look out will be opportunistic.

[Jeff Carberry:]

The one I would add, George, is really the -- given the strength in the business model, that allows us to pursue multiple options for the cash. So the buyback has been a historically long-term disciplined approach, repatriating cash. As sufficient cash generation and cash reserves to fund operations, investments for organic growth as well as potential opportunities for acquisitions. I think we're well position to pursue multiple pass with the capital structure we have.

[George Sutton:]

It sounds like you did not spend what you had originally planned necessarily against some of these new programs and it sounds like you're planning to accelerate to spend again some of those. I'm curious what you've learned in the past quarter has given you an increased confidence in the opportunity to sort of promote some of that more aggressive spending just curious of the thoughts there?

[Ken McBride:]

I mentioned there that which initially that a lot of the investments in some of those initiatives are principally headcount related investments. And that, as you can expect for headcounts goals finding highly qualified candidates can sometimes take longer than you expect. So as it relates to the first quarter and my comments around spending a little less than expected. There are definitely around headcount driven expenses and as such you'd expect more perhaps of a shifting of that expense as opposed to a change in strategy. So a bit of timing issue more than anything else, but doesn't reflects any shift in our perception on the opportunity or how excited we are about it.

[George Sutton:]

Last question inventory management and customer marketing. If I'm substation customer is there call from those customers to have some of these capabilities. I'm curious, your longer term thoughts about providing it across the customer bases?

[Ken McBride:]

Yes. So the initial focus with inventory management and customer marketing. As we develop those solutions within our ShippingEasy organization. And so we really rolled those out and our marketing those to be ShippingEasy base, customer base at this point including new customers and existing customers. And so what we are really focused on is making sure we understand, the customer needs adding new features as we see them, things that we need to have in order to complete the solution. And the goal is ultimately to open that out. So to make those solutions available across not just participation and ShippingEasy and ship for its customer base, but also the Stamps.com and [indiscernible] customer base as well.

[Operator:]

Our next question comes from Allen Klee with Sidoti. Your line is now open.

[Allen Klee:]

Any color or thoughts on the new hires for the Board of the U.S. Postal for some of the initiatives to review to U.S. Post Office, of just thoughts of how you think that could play out and potentially impact you guys? Thank you.

[Ken McBride:]

Sure. Yes. So the Trump administration nominated three Board of Governors last fall. And in terms of how that's playing out, it's taken a while, but it looks like they, may finally had their confirmation hearings. As you may recall the postal service has not had a Board of Governors other than the Postmaster General and Deputy Postmaster General those to other Board of Governors. There were no outside Board of Governor or Member. So these three appointees by the Trump administration are the first to join the Board in some time. So there will be effectively the new Board of Governors when they get confirmed. There hasn't been a vote yet on that, but we're expecting it to happen shortly here. We thought that all three candidates as good choices. They seem -- some of them have more experience directly in the postal world than others. But by and large, we were happy with the appointees and we're positive on that. In terms of the -- I think what you referenced was the Trump Task Force, he mentioned their view. So basically the fact -- the task force in April President Trump signed Executive Order basically that they set up of task force to effectively do as many task forces in the past have looked at which is triggering out the US business model. Setting that business model whether it's financially viable and really trying to understand and consider the profits of the USPS. And then really a third area where they are going to focus on, it's something whether the Agency has moved too far in the private sector. That process had a deadline of 120 days which that was from the date of the Executive Order. So it's already been close to a month and not a lot has happened. We understand that there has been a chair task force -- a chair of the task force appointed but by and large I think three months is far too short to review such a complex problem and complex situation. So by and large we are not -- we are hoping that something positive will come out of the task force but with such a short time frame and already a month passed, it's not clear that a lot is going to change from the result of this task force.

[Allen Klee:]

Okay. And then just bigger picture you've -- through acquisitions you have multiple brands now of multi-carrier solutions. Do you think at some point there's value in reducing the number of brands and may be gaining efficiencies of by doing that, going to market more with one of them like ShipStation or whatever?

[Ken McBride:]

We actually like having multiple brands. Each of the solutions have things about it that are better in some ways than the other solution. So in the case of ShipStation that really have the most number of integrations out there. In the case of ShippingEasy we are really focusing on providing a broader solution including the customer marketing, the inventory management. And I think the ShipWorks is really a solution, it's a client-based solutions, so it's very different than the other two solutions which are web based focused on very high volume customers. So each of them have something different about them that makes them valuable for the market place and we really see it as a great portfolio strategy. It allows you to really kind of segment customers and target customers on the sales side.

[Kyle Huebner:]

I would also factors brand equity each one of those platforms and that brand equity really does make strong within distribution community.

[Operator:]

Our next question comes from Darren Aftahi with ROTH Capital Partners. Your line is now open.

[Darren Aftahi:]

Hey, guys. Thanks for taking the questions. Nice quarter. Just wanted to circle back on you said your Q1 shipping growth was over 30 I think or thereabouts and then Jeff if I heard you correctly you are guiding a year for that metric to be lower to mid 20s. If that's correct, I am curious, what the underlying assumption on the deceleration throughout the year is, is it is just conservatism, law of large numbers? And then back to the question on gross margins with the Global Advantage Program. So I appreciate there is upfront cost. Should we sort of assume this year that margins are down on service for the year? And then lastly on the several thousand international customers. You talked about last quarter kind of reiterated this. I’m just kind of curious the character profile, how that's going and then also any thoughts with the new maybe geographic carriers and that get to into other countries as well? Thanks.

[Ken McBride:]

Yes. So on the servicing side, we are seeing a bit of growth you actually -- which you are talking about, which is certainly a deceleration based on something large numbers and moderation inherently in that growth. You also have -- and there we talked about some [indiscernible] now, but the two agreements we re-negotiated with USPS and the bump in revenue associated with that we anniversary that, anniversary at the end of this quarter. So you have some headwinds there as well. And you saw a nice initial particularly on the Global Advantage Program. So if you want to make sure that in guidance obviously, it's a new program. There are really from the partners, we are actually touching packages. So we want to make sure that we are not getting ahead of ourselves in terms of estimates on the Global Advantage Program. So what the net effect of that is in terms of margins is that, I would expect gross margins to be consistent with what we have seen in this quarter as well as EBITDA margins. On the EBITDA margins given additional investments on the OpEx side and seasonal slowness, I'd actually expect to see a deceleration sequentially roll our margins on EBITDA for Q2 and Q3 and probably getting Q4 at the seasonal strength. So that I think answers the broad range of questions on the margin and service fee components or you can take on that.

[Kyle Huebner:]

So the last question was about the characteristics of the international customers, is that correct?

[Darren Aftahi:]

Yes. Just you mentioned the last quarter, I was kind of curious on 90 plus days past. What can you kind of talk about those several thousand customers and then just as it pertains off of a period any new potential on postal security and work that even in a new [country] that these are u to through 2018?

[Ken McBride:]

Sure. Yes, I mean, I can’t say that there is something that's particularly different about these customers. They are out there, similar to the U.S. the online sellers, they are selling in various marketplaces. They probably have a shopping cart and so they’re using a solution to aggregate the orders. And then to their shipping their product via multiple carriers using the automation capabilities to process the orders. And so the characteristics of the customers, we do have several thousand of them that we manage to market and become customers of ours in those countries. The characteristics are largely the same as the ones in the U.S.. In terms of other countries, I mean, I think the three countries that we picked, were really the ones that were English speaking and so for us the easiest initial solution to go after new countries. So we will be looking at expanding into additional countries. But for now, we are really focused on really trying to test and understand our marketing initiatives in those countries this year and really understand whether there are any differences in the countries that are needed for those customers.

[Kyle Huebner:]

The only thing I would mention is within the three countries we talked about with ShipStation, we also are expanding the number of carriers they support. So as Ken mentioned, the postal certifications but they also -- ShipStation supports a number of other private carriers in each of those markets. So that's one of our strategic goals as to get kind of the critical mass carrier integrations in those countries to achieve coverage that the customer base would typically use. And I think in Europe especially the carriers are more a little fragmented than the US market where there is really three carriers that comprise almost all the market. So that's part of the strategy internationally as achieving critical carrier support coverage before necessarily going on to the additional countries. The other thing I would mention is, it becomes a learning process in terms of marketing and we are spending dollars on marketing to acquire international customers but we are also looking at the economics and how do we optimize that spend. So we are trying to scale it but at the same time do it in a risk managed way where we can learn and optimize as we go.

[Operator:]

Our next question comes from Tim Klasell with Northland Securities. Your line is now open.

[Tim Klasell:]

[indiscernible] I did mention. You may have alluded to may be giving deeper relationship with some of the carriers maybe able to get better economic type relations. How does that work internationally, is it better opportunity for you to get reseller type margins with that business and maybe you can update us on that and then may be any progress with the other two in the United States?

[Ken McBride:]

Yes the first thing I would point out is it's typically a long process of building the relationship with the carrier and building the volume and being able to create value for the carriers in terms of helping get attractive package volume for them. And so if you keep in mind the context that we have been working with the USPS for over 20 years now some of these other carrier relations whether they be the other private carriers in the US or going internationally I think are in process but in an earlier stage relative to I think where we are with the USPS given that focus for the last 20 years and a result of a 20 year relationship development. But I think as we look out over the next five years to the extent that we can create value for the carriers and help them grow their business that those opportunities exist, they just take time to develop and scale.

[Darren Aftahi:]

And then Jeff I think you alluded that two contracts we renegotiated last summer. Anything on the near term horizon you can share with us as far as other negotiations going on with other contracts with USPS?

[Jeff Carberry:]

On [all] accounts. We’ve mentioned that in light of rather opaquely in light of given the change of the metrics in that quarter. As we talked before these are longer term contracts, but I really can’t get into specifics around really kind of the tenure of those contracts, when we'd expect renegotiation on any of the contracts to be honest with you.

[Kyle Huebner:]

And I'd say more broadly, we continue to focus on how to create value for the USPS. How to help them be successful in the e-commerce package market. And so to the expense that we are successful in creating value and helping the USPS be successful in that part of the market than those create the type of long-term partnership opportunities that we have seen over the past decade.

[Operator:]

Thank you. That concludes our question-and-answer session. I would now like to turn the call back over to Ken McBride, CEO for any further remarks.

[Ken McBride:]

Thank you for joining us today. If you have any follow-up questions please contact us at our Investor Relations, investors.stamps.com or our telephone numbers 310-482-5830. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.