Stamps.com Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com Incorporated Second Quarter 2017 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Suzanne Park, Senior Director of Finance. Ma’am, you may begin.

[Suzanne Park:]

Thank you. 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 second quarter 2017. We’ll provide an update on elements of our business model and partnerships. We’ll discuss our financial results and talk about our business outlook. We’ll discuss our recently announced organizational changes. And finally, we’ll provide an update on our long-term business model. 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 invoke 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 complete and ship its products, maintain desirable economics for its products, the timing of when the Company will utilize its deferred tax assets and obtain 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, 2016, 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 today on the call include non-GAAP financial measures. In the second quarter of 2017, GAAP net income was $31 million and GAAP net income for fully diluted share was $1.71. Our non-GAAP financial measures exclude the following second quarter items

[Ken McBride:]

Thanks, Suzanne. Thank you for joining us today. Today we announced very strong second quarter financial results that included total revenue, which was $116.1 million, that was up 38% year-over-year; non-GAAP adjusted EBITDA which was $58.1 million, that was up 52% year-over-year; non-GAAP earnings per share of $2.08, which was up 62% year-over-year. With that, let’s turn to a more detailed discussion of our mailing and shipping business. As a remainder, mailing and shipping numbers we discuss, include service fees and partner rev shares, product sales in our online store and the package insurance we offer the customers. The mailing and shipping revenue was $111.8 million in second quarter, that was up 37% year-over-year. Growth in that business was driven by both growth in paid customers and growth in the average revenue per unit or ARPU. We would note that our year-over-year growth in Q2 accelerated versus the 30% revenue growth we saw in Q1. Total paid customer metric was 738,000 and that was up 14% versus the second quarter of 2016. Paid customer growth was the result of strong customer acquisition this quarter as well as lower churn. We’ve seen a nice acceleration in year-over-year growth in our paid customers with Q4 of last year up 8%, Q1 of this year up 11% and now Q2 of this year up 14%. Average monthly churn rate during the second quarter was 2.8% that was down compared to the 3.2% in the second quarter of 2016. Reduction in churn was primarily a result of our continued focus on acquiring shipping customers who tend to have a lower churn versus our traditional small business office users. The average monthly revenue per paid customer or ARPU was $50.51 in the second quarter and that was up 20% versus the second quarter of 2016. Growth in ARPU benefited from continued growth in our shipping business because those customers pay higher subscription fees and we collect additional partnership rev shares in that area. Total postage printed through all of our solutions was 1.5 billion in the second quarter that was up 14% versus the second quarter of 2016. We would note that the total postage growth includes the slower growth traditional mailing postage as well as the higher growth shipping postage. Management team and all of our employees are proud of the continued success, business and financial success we’ve generated for our shareholders. With that, let me now update everyone on some initiatives we are continuing to work on for 2017. First, we’re continuing to leverage our product portfolio of mailing and shipping solutions to drive continued strong growth. The acquisitions we’ve made coupled with our traditional solutions, we now have a full and diverse suite of solutions across five brands, ShipStation, ShipWorks, ShippingEasy, Endicia and Stamps.com. While we believe we already successfully meet the majority of needs of our target customers, we plan to continue innovating and having more and more features and capabilities to further differentiate our products and services from those of our competitors. We also plan to continue to build out support for other related areas such as inventory management, customer relationship management as those complement the shipping process for many customers. And second initiative for 2017, we plan to continue to invest heavily in sales and marketing with the focus on acquiring shipping customers, in particular e-commerce shippers. We continue to see strong return on investment and we plan to continue to increase our total sales and marketing expense in 2017 versus 2016. We plan to continue increasing our investment in our direct sales team, direct mail, traditional media, radio, television, and search engine marketing. We also intend to continue to direct an increasing amount of our customer acquisition budget into the e-commerce segment. Finally, we plan to continue capitalizing on synergy opportunities with our acquired companies. Across all of the products and services, we’re realizing synergies in sales and marketing, operations, customer service, product development from all of our acquisitions over the past three years. In the marketing area, Stamps.com and our acquired companies have historically targeted many of the same customers. We plan to continue utilizing our marketing expertise to accelerate the growth in all of our brands. We have also leveraged technology expertise across the companies including web-based and client-based expertise, operating systems capabilities, various methodologies and paradigms for product development and other things. And we have also been able to eliminate duplicate operations in several areas across our various acquired companies. For example, we have been able to streamline several areas of our backend datacenter. We have been able to combine several areas of operations and we have unified our customer support operations. As a last point on synergy, we brought significant financial resources to our acquired brands, have used those resources to expand their marketing and product development activities. Over the past five years, the Postal Service has experienced strong growth in its package business and over the past several years it has outpaced the growth of its competitors. For example, in 2016, Postal Service domestic package revenue was up 16% while the growth of its largest two competitors was up only 10% and 4%, respectively in that same period. USPS’s growth in shipping has been fueled by its success in e-commerce, where it has become the leader in shipping in that key battleground area. In order to gain insight into their strategy, our marketing team recently discussed various USPS initiatives and e-commerce business with Mr. Jim Cochrane, the USPS Chief Customer and Marketing Office and Executive Vice President, in a conference call for our customers and partners which was posted to our blog at blog.stamps.com today. Mr. Cochrane discussed several topics during the call including products, product innovation, negotiated service agreements, pricing, tracking, returns, resellers, partners and its strategy for future growth. Several things of note were stated by Mr. Cochrane during the all including the USPS’s use of negotiated service agreements or NSAs are key component to the Postal Service’s success that gives a nice ability to craft a solution that can save the shipper money by customizing a solution for that shipper. NSAs help them go after new business and NSAs help them on existing business because it’s very competitive. The USPS had a focus on large customers but didn’t have a focus on small and medium sized businesses and they weren’t resourcing it. So, they thought resellers were an excellent opportunity to bring the USPS brand and shipping solutions down market to smaller ground [ph] shippers. Customers are a big player in e-commerce; everyone knows they’re there. But when customers are only shipping five to ten packages a day, how do you find those customers? And that’s where resellers have been a very effective addition to the Postal Service portfolio. USPS last year did 7 million in the channel that is coming out of the world of PC Postage and resellers. So, together, those solutions have really crafted a nice segment solution for the USPS in the small and medium-sized business. Resellers are important, both for keeping existing business and for growing new business. You have people that are shipping through the reseller channel; it works for the USPS. And if they aren’t shipping with the USPS, going after some of that business, also works for USPS. The USPS has to continue to serve customers and to find new customers. The reseller business is growing to the tune that the USPS reseller program is and is providing solutions down market where the USPS doesn’t have the sales team to interact. The USPS doesn’t see any reason why the program wouldn’t continue to serve both customers and the needs of the Postal Service going forward. Finally, the USPS looked at resellers and PC Postage providers like Stamps.com and Endicia as excellent partners on bringing the best solutions to customers. We continue to enjoy a great partnership with the Postal Service and feel that we’ve created a sustainable win-win model for both of us, which will result in the continued growth of USPS packages and e-commerce and online postage more generally. With that, let me hand the call over to Jeff for a detailed discussion of our financial results.

[Jeff Carberry:]

Thanks, Ken. We’ll now review our second quarter 2017 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 our corresponding GAAP measures can be found in our earnings release and in our 2017 metrics on our Investors website. Total revenue was $116.1 million in Q2 and that was up 38% year-over-year versus Q2 of 2016. The strong growth in Q2 revenue was partially attributable to the renewal with improved economics of two of our agreements with the Postal Service. Mailing and shipping revenue was $111.8 million and that was up 37% year-over-year versus Q2 of 2016. The revenue growth was driven by increases in paid customers and ARPU, as Ken described earlier. Mailing and shipping gross margin was 86.5% in Q2 versus 86.1% in Q2 2016. The increase in gross margins was attributable to service revenue which has a higher gross margin and accounted for a higher percentage revenue. We experienced year-over-year increases in our Q2 costs of sales and marketing, R&D and G&A, primarily related to our acquisitions and our continued investments to support the strong growth in our mailing and shipping business. However, these costs as a percentage of revenue are all approximately flat to slightly down as we scale our business. Non-GAAP operating income was $56.7 million in Q2 and that was up 53% year-over-year versus Q2 of 2016. Adjusted EBITDA was $58.1 million in Q2 and that was up 52% year-over-year versus Q2 of 2016. Non-GAAP adjusted income per fully diluted share was $2.08 in Q2 and that was up 62% year-over-year versus our Q2 of 2016 non-GAAP adjusted income per fully diluted share of $1.29. Q2 2016 was recast using our 2016 effective tax rate of 35.7% to conform to our methodology and for year-over-year comparability. Fully diluted shares used in the EPS calculation was 18.1 million for Q2 of 2017. We ended Q2 at $110 million in cash and investments which was down $8 million from a $118 million at the end of Q1 of 2017. The decrease in cash and investments was primarily driven by changes in net working capital and share repurchases during the quarter, which was partially offset by strong operating free cash flows and option exercises. The working capital changes were primarily driven by increases in accounts receivable which was simply a timing difference and has since reversed, and decreases in accounts payable, primarily related to the payment of compensation expense and taxes. During Q2, we made a required principal repayment of $1.5 million, resulting in total debt under the credit agreement excluding debt issuance costs of a $136 million. During Q2, the Company repurchased approximately 374,000 shares at a total cost of approximately $44 million and during the first half of 2017 the Company repurchased approximately 730,000 shares at a total cost of approximately $88 million. The current Board approved share repurchase program which expires in November of this year had a remaining authorization of approximately $68.5 million as of June 30th of this year. Now, turning to guidance. We expect fiscal 2017 revenue to be in a range between $435 million to $460 million, and this compares to our previous guidance of $405 million to $430 million. We expect 2017 revenue to continue to be driven by continued focus on growing our e-commerce-driven shipping business. As a reminder of that, we’ve now anniversaried our ShippingEasy, so we’d expect that to be reflected on our Q3 and Q4 year-over-year revenue growth rates. We expect sales and marketing, R&D and G&A to increase in 2017, generally in line with revenue growth as we continue to invest in the business. Given the importance of investing in R&D, and sales and marketing to grow the business, we could see increases in any given quarter higher than revenue growth rates. In particular, we have to invest in first three quarters of the year ahead of the seasonally strong fourth quarter in order to realize most of the benefits of those investments. We expect fiscal 2017 adjusted EBITDA to be in the range between $220 million and $240 million, and this compares to our previous guidance of $205 million to $225 million. We expect non-GAAP tax expense to be approximately 32.5% of non-GAAP pretax income for 2017. Our full year 2017 effective tax rate could differ from our current estimates, based on the level of option exercise and the filing of our 2016 tax returns. We expect fully diluted shares to be between 18 million and 19 million in 2017. We expect fiscal 2017 non-GAAP adjusted income per fully diluted share to be in the range between $7.50 and $8.50 and this compares to our previous guidance of $7 to $8. This compares to our 2016 non-GAAP adjusted income per diluted share of $5.88 which was recast to conform to the tax methodology as we discussed earlier. With our increased focus on shipping, we expect our revenue and financial results to exhibit seasonality reflective of our customer shipping usage during the year. In particular, we expect the fourth quarter to be higher than the other three quarters due to seasonally strong Q4 holiday shipping period and we would expect the third quarter to be lower than the second quarter as our third quarter typically is our seasonally slowest quarter. We expect capital expenditures to be approximately $5 million to $8 million in 2017. With that, let me hand the call back over to Ken for a discussion of our recent organizational changes.

[Ken McBride:]

Thanks, Jeff. Today, we announced some notable promotions, so I wanted to provide some additional color on those individuals in their roles. Kyle Huebner was promote from Co-President and CFO to President. Kyle has been with the Company for 18 years and is an integral member of the senior management team with valuable wealth and industry knowledge and experience. In his new role, Kyle will focus on key strategic initiatives that will help drive continued growth and innovation of the Company. Jeff Carberry was promoted from VP of Finance to Chief Financial Officer. Jeff has been with the Company for nine years and has been a key member of the finance team and an integral part of our successful growth as the Company. In addition to Jeff’s considerable experience with the Company, he leverages successful careers in investment banking and public accounting prior to joining the Company. And JR Veingkeo was promoted from VP of Accounting to Chief Accounting Officer. JR has been with the Company for 14 years, leads our accounting team. JR’s skills and leaderships in our accounting department have been integral components to our success as a company. Very proud of the accomplishments of each of these people and confident that the Company is very well positioned for the future, I congratulate them on their promotions. With that, I will hand the call over to Kyle for some additional remarks.

[Kyle Huebner:]

Thanks, Ken. First, I would also like to congratulate Jeff and JR and recognize their strong contributions to the Company over an extended period of time, and I look forward to working with them in their new roles. I am also very excited about my new role going forward in which I will focus on future growth opportunities and longer term strategies, which will help drive shareholder value. Now, I will summarize our long-term outlook and expectations. As you know, we have achieved a significant transformation of our business over the past few years with our acquisitions and focus on shipping. The significant majority of our investment in the business and focus has been on shipping, and we expect that to continue over the next five years. We are very well-positioned to capitalize on shipping opportunities in our business. We expect our long-term growth rates to naturally benefit from the growth in e-commerce sales which have been growing at 15% year-over-year in 2016 and 2017. In addition, we believe there are opportunities to grow in excess of e-commerce growth rates through increased adoption of our multicarrier and other technology solutions. For example, our shipping related revenue grew in excess of 50% year-over-year in Q2, demonstrating our ability to grow much faster than the overall e-commerce market. As a result, our five-year growth rate target is 20% or greater. While we continue to execute on our non-shipping businesses, we expect that our revenue going forward will be driven more by the shipping area. We would expect our long-term revenue growth rate to approximate our growth in the shipping part of the business as it becomes a larger and larger percent of total revenue over time. We expect our five-year adjusted EBITDA margins will be in the range similar to up modestly compared to current margins. While there may be potential to expand our margins over the next five years, we are more focused on investing for revenue growth as opposed to expanding margins at the expense of growth. We feel our Q1 and Q2 2017 results are reflective of this strategy of strong revenue growth with consistent margins, reflecting that we’re investing for revenue growth in the business. So, in summary, we’re very excited by our continued strong performance and look forward to delivering great results in the future. With that we’ll open up for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of George Sutton with Craig-Hallum. Your line is open.

[George Sutton:]

Well, first, I’d like to go on record saying I’m really excited about the leadership changes. So, congrats to all of you involved. I wanted to make sure I understood on this 50% shipping growth in the quarter. Is there a way to break that down into new customer growth versus penetration of existing customers or growth at those existing customers?

[Kyle Huebner:]

We don’t break out the data that way. I think you really have three different factors that contribute to the growth. One is bringing on brand new customers, e-commerce customers; the second is the existing customers who may be growing at the rate of e-commerce, so their volume and shipping may be up at 15% with the growth in e-commerce; and then the third, our existing customers that are growing faster than the market where they’re expanding and they’re selling on more than one platform, and that’s the key growth component for e-commerce shippers is a way for them to grow is to start selling on more-and-more channels with more-and-more products. And that’s really the sweet spot of a lot of our solutions are targeting those types of e-commerce customers that are selling in multiple places and the web. And I think that’s why you see that we’re able to grow faster than the overall e-commerce market because a lot of them ore existing customers that are really growing strongly by expanding where they sell and what products they sell.

[George Sutton:]

One thing that was mentioned on the blog post that you had from Cochrane was the $7 billion number, and he talked about other partners. But if I look at the volume, you’re doing, it’s a vast majority of that. Am I looking at the right numbers from your perspective?

[Ken McBride:]

Yes. I mean, I think Jim Cochrane was really talking about the entire PC Postage channel including all of their solutions, our solutions and then the volume that goes through the reseller program. So, I think it’s including all solutions up on the internet that don’t go through Stamps.com are companies things like Amazon Solutions or eBay Solution, Click-N-Ship Online, USPS.com and then the additional revenue that goes to their reseller program.

[George Sutton:]

Got you. Okay, thank you. And then lastly, I know CRM and inventory management and your new ShipStation API are all new efforts for you. Can you just give us a sense of what you’ve learned thus far with those products and how big those addressable markets might be? Thanks.

[Ken McBride:]

Sure. I mean, we’re very excited about both of those solutions. I think they’re both very new. So, it’s hard to comment a lot about the potential impact to our business. I mean, I think inventory management is a real natural for our product as our customers are selling across multiple channels. It’s a real pain point for them if they’re managing skews across multiple locations, they may be holding inventory in their own office, they may have their fulfillment summon house, they may be using to sell it by Amazon. So, being able to manage real time across all those different inventory levels and being able to provide real time updates to sales channels is key. And so, that we think is a really natural extension of shipping solution. And then the customer relationship management, something we launched a little bit more recently, it’s really a solution that allows them to kind of move from managing orders and aggregate those together and really provides more of a customer level view. And so, as you build that, you have the ability to kind of go across your customer base, look at segmentation, potentially send out marketing, create templates, use creative and be able to look at different segments form sending different templates automatically to customers and then just running campaign management, so being able to monitor the delivery, open those emails and be able to compare different campaigns over time and things like that. So, both of those solutions we’re planning to charge additional fees, our customer relationship management, in the ballpark of depending on volumes inside the customer anywhere from call it $10 to $75 a month. So, we really view that as a nice incremental add that leverages the existing customer acquisition spend that we’ve already made with those customer. So, really it’s just a chance to upsell those customers into two additional new solutions, which make total sense for a product extension in those shipping capabilities.

[George Sutton:]

I mentioned, the API offering ShipStation as well, that addresses really a small market that you’ve had some small competitors coming into. I am just curious your thoughts on that opportunity.

[Ken McBride:]

You’re mentioning ShipEngine?

[George Sutton:]

Yes.

[Ken McBride:]

Okay. Yes. That’s a solution that we just recently launched with ShipStation. And like you mentioned, it’s really taking the capabilities of ShipStation and providing those as a solution out there to really targeting third-party tools. So, as you know, the ShipStation, the breadth of carrier ShipStation supports over 40 carriers is unmatched in the industry. We have seen some new entrants in the market come in with these types of multi-carrier APIs and offer them out to the market as well. So, this is our solutions really taking the best product in the market and packaging that up into an API that allows other third parties to be able to potentially utilize that solution in a more turnkey fashion and then allows us to monetize, create additional monetization opportunities through integrations with those third party solutions.

[Operator:]

Thank you. And our next question comes from Kevin Liu with B. Riley & Company. Your line is open.

[Kevin Liu:]

First question I had was I think you mentioned USPS contract renewals in the quarter. Can you just talk a little bit about what those renewals were related to and if they had any sort of onetime benefits that we should consider in our modeling going forward?

[Ken McBride:]

Yes. We can’t really disclose. I think we were just really trying to give an indication that like we mentioned, the partnership with the Postal Service is continuing to be stronger and stronger and some of the -- we have multiple contracts and various partnerships with the Postal Service. And so in this case we were able to get a couple of our contracts renewed improved terms. So, we are just trying to get deeper and inside into -- the relationship with the Postal Service continues to get healthier and healthier.

[Kyle Huebner:]

I would just say and I mean, we have been saying over the last year that it’s a win-win partnership. And so, the more successful we both are in helping USPS compete, then I think that benefits both of us. So, it was really meant to highlight the win-win nature of the partnership and have both sides succeeding.

[Kevin Liu:]

Understood and you have talked in the past about how your business is going to see a little bit more seasonality as you transition more to high volume shipping. So, far you’ve been able to buck that trend, certainly with the kind of the Q2 results here. I am just kind of curious where you are seeing that strength to come from to offset what we would normally expect to be softer performance on a sequential basis?

[Jeff Carberry:]

Yes. Kevin, I think that what we are seeing is performance above what we might otherwise expect in shipping. Seasonality certainly is there, there’s no doubt about that. We certainly see that in the data. I think with regard to Q2 specifically, as we mentioned in the call and as Ken just discussed, the new contracts with economics [ph] or renewal of the contracts, that certainly was a contributor to the results as well as in Q2 kind of an outsized performance in the customer [indiscernible] that wouldn’t necessarily expect. So seasonality certainly does exist, we certainly see it on the data. We have seen some performance that that perform little better than we expected of course but going forward I wouldn’t necessarily extrapolate that. But I would certainly extrapolate seasonal trends that we know are fairly persistent.

[Kevin Liu:]

And then just lastly for me. UPS recently announced some holiday surcharges during the peak days for Q4. Can you just talk a little bit about whether you expect that to drive increased postage volumes for the USPS and whether you’ve factored anything of that nature into your guidance?

[Ken McBride:]

Yes. I think in general, pricing is a factor in the market between the carriers and to the extent that USPS has added new solutions and announced new pricing in the last -- during this year and so they talked about Saturday delivery and they’ve also now recently talked more about the surcharge that they’re going to be offering or they’re going to be charging in November and December for the peak time. Really USPS takes a much more simple approach to pricing, it’s very straight forward, there’s no hidden fee, there’s no surcharges, fuel surcharges, the residential delivery surcharges, whereas we’ve really seen UPS and FedEx take this more of an additional fee or adding from their base price, additional fees to try to optimize their business model. So, we do in general with USPS when UPS adds some new surcharges, does to benefit the USPS.

[Kyle Huebner:]

The only thing I would add is I think it’s a little bit reflective of the advantage the USPS has with their last-mile infrastructure that they already have to support. So, they’re going to every house everyday during the holiday season where some of the private carriers I think have to create and build infrastructure for the shorter terms, bike and so, that I think highlights one of the advantages of the USPS, is delivery infrastructure. But we didn’t really incorporate that in our thinking because it’s really -- we won’t really know the impact until you get through the holiday season.

[Operator:]

Thank you. And your next question comes from Allen Klee with Sidoti. Your line is open.

[Allen Klee:]

Could you give us some better understanding and color of what’s going on with Amazon in terms of with their change in their policy, how much you’re impacted by that, just kind of talking about that?

[Jeff Carberry:]

I mean, I think from a -- I’ll take it from a budget angle and a forecast angle. Certainly, Amazon has elected to bring in the balance of the transactional based business to the marketplace in-house. I think a lot of people certainly understand that that is a smaller part of the business but that certainly does present a headwind for us in the Q3, but it’s certainly a smaller part of the business. So, if you’re talking about the Amazon transactions, that’s one aspect of it. Amazon has made some other announcements as well recently, which I can’t speak to from a strategy point of view.

[Ken McBride:]

Yes. I mean, I think the specific change you’re referring to I guess wasn’t clear. I mean, I think that as Jeff was talking about the announcement that was made at Amazon’s removing stamps shipping options from its -- by shipping services. So, that was -- really that was a continuation of the strategy they began to make in 2012 and they decided to build their own solution based off EBS. [Ph] And so, we didn’t really see a material financial impact from that. You can see we raised our guidance today. And really when you look at Amazon, our customers utilize Amazon as a selling channel but they typically utilize many other selling channels as well. So, the key is that we’ll still support Amazon as a selling channel for our users, and that’s really the key feature that matters to the target that we’re going after.

[Allen Klee:]

And then somewhat similar, but I guess a little different, but Pitney Bowes had a pretty low promotion for their multicarrier solution during the quarter, and any comments on impact from that?

[Ken McBride:]

Yes. I think we saw an announcement Pitney in early May that they were going to offer their SendPro product at $5 a month. And they’re really making -- calling it out as their target. And so, we did see Pitney marketing that product aggressively. However, I think you can see from our numbers, we really didn’t see an impact in the customer acquisition or the churn. The Q2 customer acquisition was very strong, paid customers grew 14%, which was actually higher than -- higher percentage growth rate than we saw in Q1 before they made that announcement. So, and the churn, so they extent the customers were potentially defecting, well the churn rate was actually down year-over-year as well. So, we don’t ever -- we always take competition very seriously, especially with an organization the size of Pitney Bowes. But I can’t say that we really saw a big impact from that product this quarter.

[Operator:]

Thank you. And your next question comes from Tim Klasell with Northland Securities. Your line is open.

[Tim Klasell:]

Hey, guys. Congratulations on the quarter and on all the positive management moves. So, congrats on that. My first question has to do with penetration of the market. You’ve guided towards a target of 20%, a better growth and clearly the market isn’t growing that quickly. So, sooner or later you guys are pretty dominant as the blog -- or as the conversation went earlier. Where else do you think you’re going to get that leverage? Is it with the inventory management in the CRM? Do you think you’re going to get additional growth there going into additional markets or maybe you can walk us through how you think you can outpace the market over the next several years as far as just the e-commerce market? Thanks.

[Ken McBride:]

Sure. I think as you mentioned, e-commerce tailwinds are really kind of the baseline for us. So, they’ve been growing more recently in 2016 and the first quarter of 2017 at about a 15% growth rate. And so, as we look at that, we feel like we can outperform the e-commerce growth rates for several reasons. When you really look at our product, we’re really capturing the higher growth e-commerce shippers. So, we’re really capturing them later in their life cycles and they have really graduated to a level of growth and volume. That’s necessitating them to move to the more sophisticated type of solutions that we offer. For example when a seller starts on Amazon, starts in their platform, their sales and shipping is part of Amazon’s growth, I mean it’s partner of the e-commerce statistics. But as they grow, they add new sales channels, specifically on a shopping card, they start selling an additional sales channels when they find that their product’s being successful. So, we’re really seeing -- we’re really capturing the fastest growing part of the e-commerce which really I think allows us to grow at a faster clip. And as you mentioned as well, we’re looking at -- we’ve mentioned expanding into new areas, things like inventory management, customer relationship management. And we think there is natural extensions of the products going in those directions, like I mentioned earlier. And then, we’re continuing to look at, as you know, we got into multicarrier, we’re really looking at potentially accessing a larger parcel market. We’re primarily a USPS shipper today, but as we look out there at the multicarrier opportunity, it’s a much larger market. The domestic market for the top three carriers is about 90 billion. So, I think there is lots of opportunities for us to grow in all those different areas and we feel comfortable with our 20% projection over the next five years.

[Kyle Huebner:]

Yes. I would just add to that. We’re thinking about 15% versus 20%, to me that’s very achievable, based on the factors I talked about, Ken talked about. And so, I think we see some of these other CRM inventory management, other carriers, it’s still earlier stage. So, if we were to be successful in those markets, those would provide upside opportunities to kind of our core target growth rate.

[Tim Klasell:]

Okay, great. And then, I have one quick follow-on on all of that. Do you think you have the current distribution with your resellers and what have you to address that or do you think historically, at least as historic last couple of years, mostly doing product company type acquisitions? Could we see something maybe more in the distribution type of a move, maybe you can walk us through what sort of strategic moves you may be thinking about from a high level, going forward? Thanks.

[Kyle Huebner:]

Are you -- just to clarify, when you say distribution, are you talking about physical assets that would move…

[Tim Klasell:]

Sales assets, resellers, people who may not or organizations that may not come with a specific technology or product, if you will.

[Kyle Huebner:]

Yes. I think we keep our options open on the acquisition front. If you look at the four that we’ve done and done very successfully, it was oriented around the solutions and the customer relationships and creating value for the e-commerce merchants through the features and solutions. So, that would be acquiring just fewer sales or distribution would be different than our past strategy. So I mean, if we consider all manner stuff and to see if it makes sense, but at this point that would be a different strategy than what we have been successful doing the last four years.

[Operator:]

Thank you. And your next question comes from Darren Aftahi from Roth Capital Partners. Your line is open.

[Darren Aftahi:]

Hey, thanks for taking my questions and also my congratulations as well to Jeff and Kyle. Just a few if I may. Could you talk about what the shipping composition of revenue was in the quarter? I think in the past you’ve talked about shipping being around 70%; I am just curious where that number is trended.

[Kyle Huebner:]

I think quarter-to-quarter, it’s actually seasonally slower quarter, it’s not materially different than what we talked about last quarter, maybe a couple of percentage points. So, I think what’s more important is the kind of full year number and how that trends over a multi-year period. We would expect Q4 to be higher than Q3. But really the longer term trend, when we think about that five years that we are at 70 now; if that number is 95% five years from now, then our growth rate is going to be almost entirely driven by the shipping growth rate. Whereas now, we talked about the traditional small business market and enterprise are a nice growth but more single digits. So, right now, our overall growth rate is still weighted average that reflects the fact that 30% of our business is not the shipping growth rates.

[Darren Aftahi:]

As it pertains to customer growth, I mean accelerated in the quarter. Is there anything you can kind of call out that kind of drove that? And then, I guess as derivates, you can see they kind of talk about marketing spend growing but you’re fairly efficient year-on-year. So, I’m wondering if there’s a residual -- if you’re getting better at leveraging marketing dollars across all of your product platforms or just where that kind of leverage efficiency is coming from?

[Jeff Carberry:]

I think really, it’s more of the latter, it’s probably the first order effect. We’re cashing effectively portfolio benefits by spending across multiple channels and by marketing multiple platforms. So, certainly we’re still targeting small business customers as well as shippers. Leveraging multiple channels and those dollars across all of our solutions really increases the probability of finding good customers and you can see that in some of our customer metrics.

[Kyle Huebner:]

The other thing I would add is there’s the allocation of the total number between different channels that target small business let’s say versus more shipping oriented customers. And so, we’re constantly optimizing our marketing spend and allocating it where we think we’ll get the best benefit, the highest ROI. And I think as we spend broader marketing dollars but we’re building more of the shipping base, then we’re getting some benefits of acquiring shipping customers that we didn’t necessarily see when we were really entirely a small business oriented market and spend.

[Darren Aftahi:]

And then, just last one for me. We’ve heard recently from some of your platform partners that they’re starting to see larger brands kind of at more I would say like entrepreneurs, I’m just curious kind of given your focus is mostly on SMB, are you starting to see any kind of melt up [ph] into larger kind of brands and clients using your platform and is that kind of an additional TAM opportunity for you?

[Kyle Huebner:]

If you’re talking about the shipping, you dotcom [ph] I think those are really a different -- maybe a high volume segment that we’re not really targeting but we do have warehouse shipping solutions for fulfillment houses. And so, I think some of the larger brands to the extent they’re using larger fulfillment houses or creating internal warehouses, we do have solutions to address those. But, I don’t think we’ve seen a material shift that we can speak specifically to. But again, over the next five years, we’re looking to how do we evolve our solutions. And to the extent that we can evolve on to serve larger and larger customers, that will benefit us in the long run.

[Operator:]

Thank you. I’m showing no further questions. I’d like to turn the call back over to Ken McBride for closing remarks.

[Ken McBride:]

Thanks for joining us. And congratulations again to the folks who got promoted. And for any follow-up questions, please contact us at investor.stamps.com and at 310-482-5830. Thank you.

[Operator:]

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