Stamps.com Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good day ladies and gentlemen and thank you for your patience. You've joined the Stamps.com Incorporated Fourth Quarter 2017 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 be given at that time. [Operator Instructions]. As a reminder this conference maybe recorded. I would now like to turn the call over to your host, Senior Director of Finance, Suzanne Park. 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 fourth quarter and fiscal year 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 provide some details on new business initiatives for 2018. 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 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 on the call today include non-GAAP financial measures. GAAP net income was $40.2 million in the fourth quarter and $150.6 million in fiscal year 2016. GAAP net income per fully diluted share was $2.15 in the fourth quarter and $8.19 in the fiscal year 2017. Our non-GAAP financial measures exclude the following fourth quarter and fiscal 2017 items. $7.2 million of non-cash stock-based compensation expense in the fourth quarter and $40.8 million in 2017. $4.1 million of non-cash amortization expense of acquired intangibles and debt issuance cost in the fourth quarter and $16.4 million in 2017, $6 million of executive consulting expense in 2017, and a $1.9 million onetime insurance proceeds gain relating to a prior legal settlement in 2017. And lastly, our non-GAAP financial measures include a $25.5 million non-GAAP income tax benefit in the fourth quarter and $3.7 million of additional non-GAAP income tax expense in 2017. Additionally the maybe shipping numbers we discussed today include service fees and partner revenue share, product sales in our online store and the package insurance we offer to our customers and do not include any sale from customized postage. Please see our fourth quarter 2017 earnings release and 2017 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 fourth quarter and fiscal year 2017 financial results, which included total fourth quarter GAAP revenue of $132.5 million and that was up 25% year-over-year, total fiscal 2017 GAAP revenue of $468.7 million and that was up 29% year-over-year, the fourth quarter non-GAAP adjusted income per fully diluted share of $4.68, which was up 71% compared to $2.73 million in the fourth quarter of 2016. Total fiscal 2017 non-GAAP adjusted EBITDA of $229.9 million, and that was up 32% year-over-year; very pleased with our financial performance during the fourth quarter and for the full fiscal year 2017. With that now let's turn to a more detailed discussion of our business. Mailing and shipping revenue was $128.5 million in the fourth quarter that was up 26% year-over-year. Growth was driven by both growth in paid customers and growth in ARPU or Average Revenue Per Paid Customer. Our total paid customer metric was 735,000. Paid customers were up 8% versus the fourth quarter of 2016. The year-over-year growth in paid customers in the fourth quarter of 2017 was consistent with the same annual 8% growth rate we saw in the fourth quarter of 2016. You would note that our growth of paid customers has been more moderate in the past several years, as we have shifted our focus to the acquisition of Shippers, which are numerically fewer in number, but where each customer has a much higher lifetime value. With this changing focus, our business model 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 fourth quarter was 3.0%, that was up slightly versus 2.9% in the fourth quarter of 2016. But we continue to be within the normal range of variability that we have seen empirically over the last three years. Our churn has exhibited a 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. For example, three years ago our fourth quarter of 2014 churn metric was 3.4%. The average monthly revenue per paid customer or ARPU was $58.28 in the fourth quarter, that was up 16% versus the fourth quarter of 2016. The growth in APRU benefited from continued growth in the shipping focused areas of our business. Shipping customers generally pay higher subscription fees than small businesses. In addition, we collect additional partner revenue share payments and commissions tied to the dollar volume of packages that we process on behalf of our shippers. Total fourth quarter postage printed was $1.7 billion, that was up 9% versus the fourth quarter of 2016. Total 2017 postage printed was $6.1 billion, that was up 10% versus 2016. We would note that these total postage metrics show more moderate growth, because they include 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 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. Our system has significant scalability. For example, during our peak period over the holidays and Q4 this year, we processed over 14 million packages and mail pieces in a single day. We estimate that more than one third of all U.S. priority mail packages and more than one half of all first class mail package in the U.S. are processed through our systems. Our management and our employees are very proud of our continued financial and business success we generated for our shareholders. With that, now let me turn to discuss some of the initiatives we're focusing on for 2018. First, we plan to continue to scale our sales and marketing with a focused on acquiring shipping customers. As I just mentioned, with our focus on shipping over the past several years we've been -- we have seen a significant increase in the average life time value of a customer that we acquire. We began focusing more intently on shipping in 2014 and since then our ARPU has grown over 100%. While our typical monthly churn rate has declined by about 0.5% from the mid-3% range to now in the low 3% range. This has resulted in a significant increase in the lifetime value of the average customer that we acquire. At the same time the acquisition cost of the average customer that we acquire has not changed materially for the past decade. Thus our return on investment from our sales and marketing investment has increased dramatically over the past four years. With that great return we plan to continue to scale our total sales and marketing expense in 2018 versus 2017. A significant focus for that investment will be towards the acquisition of e-commerce and other high volume shippers. Second, we plan to expand the core features and functionality of our shipping solutions. One other key value propositions of our solutions has the number of integrations that we support including sales channels, third party fulfillment providers, marketplaces and e-commerce tools. We continue to add new integrations at a rapid phase with over 20 new integrations added in 2017. We finished the year with over 130 integrations, which is far more than any other solution out there. Another key value proposition is the breadth of carriers that we support with our solutions, and during 2017 we added five new carriers and ended the year with 36 follow supported carriers. We're also increasingly seeing the adoption of our mobile platform that we provide under our ship station brand. And that is proving great value add to our customers. And we've seen great traction with our new ship engine API, which offers all of the capabilities of our market leading ship station solution in the form of an API available to third-parties 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 and we will also continue to develop our industry leading mobile platform. We will continue developing and marketing our new ship engine API and we will continue to add new carriers to our solutions. 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. While it's very early, we've seen great attraction in both new solutions within our ShippingEasy 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 that customer. We also believe that customers that adopt these solutions drive greater value from our solutions overall and this results in greater customer stickiness and that's lower churn. We plan to continue to enhance the features in our inventory management and customer marketing solutions during 2018. We will continue to market those solutions to new as well as to existing customers. Fourth, we're going to focus 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 and that's a program we're by companies can do a portion of the work for the USPS and receive a discount on their postage rates. Note that we formally referred to this program as Global Post, but we will refer to it as the Global Advantage Program going forward. 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. 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 ship station in those respective countries. We have already acquired several thousand customers from the efforts. We have also done integrations in the UK with Magento, BigCommerce, WooCommerce, Square Space, Open Card and Press the Shop in order to support the e-commerce customers there. We’ve also done an integration with Amazon in all three countries to support that selling channel as well. And we launched support in ship station for a new discounted carrier service with DHL Express, the leading provider of the international express services. We plan to continue to ramp up our business development and our marketing efforts in the UK, Canada, and Australia as well as other countries during 2018. Today we have announced two announcements related to the organizational changes on our Broad of Directors and our executive management team. We regret to announce that earlier this year one of our long standing board members, Lloyd Miller passed away from complications related to a long-term illness. Lloyd has been a member of the board since April 2002, he was an extraordinary individual and we appreciate his expertise, his advice and his invaluable contributions over the last sixteen years. On behalf of our Board, the management team and all of our employees I would like to convey our deepest condolences to all of Lloyd’s family and friends. Today, we are also announcing the retirement of our Chief Technology Officer, Michael Biswas. Michael has been with Stamps for almost 15 years and over that period has made significant contributions to the company. Michael’s planning to fully transition to retirement in May of 2018 in order to spend more time with his family and to pursue other endeavors. We wish Michael the best and thank him for his long invaluable service. With Michael’s retirement we are also announcing today a new addition to the execute management team, Jonathan Bourgoine who will succeed Michael Biswas as our new Chief Technology Officer. Jonathan most recently served as Vice President and Chief Technology Officer of Mattel. We are very excited to Jonathan join the team and we look forward to working with him. With that, let me now hand the call over to Jeff for a detailed discussion of our financial results.

[Jeff Carberry:]

Thank you very much, Ken. We’ll now review our fourth quarter and fiscal 2017 financial results. The discussion of our financial results today include 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 2017 metrics on our Investors website. Total revenue was $132.5 million in Q4, that was up 25% year-over-year versus Q4 2016, and was $468.7 million in 2017 and that was up 29% versus 2016. The strong growth in revenue in the fourth quarter and for the year was primarily driven by strong growth in our mailing and shipping business. Mailing and shipping revenue was $128.5 million, that was up 26% year-over-year versus Q4 of 2016, and was $449.4 million in 2017, and that was up 28% versus 2016. The growth in mailing and shipping revenue was driven by increases in paid customers and ARPU, as Ken described earlier. We estimate that revenue derived from our shipping customers as a percentage of our total revenue was approximately 75%, and grew approximately 30% year-over-year. We also estimate the mailing and shipping revenue derived from our server mailers as a percentage of total revenue was approximately 20%, and grew year-over-year in the low single-digits. Mailing and shipping gross margins was 86.7% in Q4 versus 85.7% in Q4 of 2016, and was 86.3% in 2017 versus 85.7% in 2016. The increase in gross margin was attributable to growth in service revenue, which has a higher gross margin and accounted for a higher percentage of revenue. We experienced year-over-year increases in our Q4 costs of sales and marketing, R&D and G&A primarily related to our continued investments to support the strong growth and innovation in our mailing and shipping business. As Ken discussed earlier there were number of new initiatives planned for 2018, that we invested in over many periods and in particular in the back half 2017. As seen in the increases in sales marketing, R&D and G&A as a percentage of revenue. We would expect to see continued investment at elevated levels in 2018 to drive our growth and innovation, In addition Q4 2017 G&A expense was negatively impacted by sales tax expense of approximately $6 million, representing the catch up for 2017 sales tax nexus [Ph]. The additional sales tax Nexus is a result of our national sales team, which we acquired through the Endicia acquisition, began to sell all of our product and services in 2017, where as they strictly sold Endicia products and services in 2016. The timing of the catch up is a function of the timing of our periodic studies, which we regularly perform. Non-GAAP operating income was $62.7 million in Q4 and that was up 15% year-over-year versus Q4 2016 and was $224.5 million in 2017 or 80% versus 2016. Adjusted EBITDA was $64.1 million in Q4, up 15% year-over-year versus Q4 of 2016 and was $229.9 in 2017, up 32% versus 2016. Adjusted EBITDA margin was 48.4% in Q4 versus 52.8% in Q4 2016 and was 49.1% in 2017 versus 47.9% in 2016. Non-GAAP adjusted income per fully diluted share was $4.68 in Q4, that was up 71% year-over-year versus $2.73 per share in Q4 of 2016, and was $11.33 in 2017, up 30% versus $8.70 in 2016. Fully diluted shares used in the EPS calculation was $18.7 million for Q4 and $18.4 million for 2017. As Ken mentioned, Q4 2017 benefited from a further reduction of our tax rate for 2017, from our previously estimated 20% to an effective tax rate of 6%, which is primarily driven by our additional option exercises in the fourth quarter. We ended Q4 with $154 million in cash and investments, which was down $30 million from $184 million at the end of Q3 of 2017. The decrease in cash and investments was primarily driven by debt repayments and share repurchases, which was partially offset by strong operating cash flow. During Q4 we made a required principal repayment of $2.1 million and an optional repayment of $62 million, resulting in total debt under the credit agreement excluding debt issuance costs of $70.1 million. During Q4 the company repurchased 169,000 shares the total cost of approximately $31 million. And for 2017 the company repurchased approximately 988,000 shares at a total cost of approximately $134 million. The company’s $90 million repurchase program approved by the Board on October 24, 2017 remains in effect through May of 2018 with the remaining authorization of approximately $50 million. Now turning to guidance, we expect fiscal 2018 revenue to be in a 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 mailer 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 higher than expected contribution from high volume orders in 2017 that we would not necessarily expect to repeat in 2018. We expect sales and marketing, R&D and G&A to all increase in 2018 greater than the rate of revenue growth as we continue to make headcount related investments to bring the initiatives we discussed earlier to fruition. On the common side of basis we would expect to see operating expenses as a percent of total revenue to increase approximately 200 basis points relative to 2017. We would expect to see G&A particularly impacted given the sales tax expense we discussed, which we would expect to continue to incur. We would also expect to see the impact of these investments, on a common side basis to be frontloaded given normal seasonality, and given the ramping of the initiatives we discussed. We expect 2018 adjusted EBITDA to be in the range of $245 million to $265 million, which implies a full year adjusted EBITDA margin in the mid-40s, reflecting both our headcount investment and our sales tax expense. Similar to our operating expenses, we’d expect the margin impact to be frontloaded for the same reasons, which I just discussed. And accordingly, we expect EBITDA margins from the first half of 2018 to be lower than the back half of 2018. We expect non-GAAP tax expense will be approximately 28% of non-GAAP pre-tax income for 2018. Our full year 2018 effective tax rate could differ from our current estimates based on a number of factors including the level (inaudible). We expect fully diluted shares to be between 19 million and 19.5 million in 2018. We expect fiscal 2018 non-GAAP adjusted income per fully diluted share to be in a range between $8.80 to $9.80. With our increased focus on shipping, we expect our revenue and financial results to exhibit seasonality reflective of customers shipping usage during the year. In particular, we expect the fourth quarter to be meaningfully higher than the other three quarters due to the seasonally strong Q4 holiday shipment period and the scaling of our new initiatives. And finally, we expect capital expenditures to be approximately $2 million to $3 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 company acquisitions, we've achieved a significant transformation in our business over the past five years. We expect our focus to be -- continue to be on shipping for the foreseeable future. We are very well positioned to capitalize on e-commerce shipping opportunities. Growth in e-commerce provides the natural base line tailwind to our growth and e-commerce growth in the U.S. has been running in the mid to high-teens. We are able to then grow above typical e-commerce business growth rates for several reasons. First, our solutions are suitable for the largest e-commerce seller that need the sophisticated solutions which we provide and as we attract the largest and most successful e-commerce company into our suite of solutions effective skimming the cream of that crop off the top of the universe of the e-commerce sellers. Second, we are expanding the scope of what we offer outside the traditional area 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 for both domestic U.S. 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 our traditional core USPS focused business with new relationships and new potential revenue sharing deals with other carriers. As Jeff discussed, shipping related revenue in Q4 grew approximately 30% year-over-year. This growth was all organic as we pass the anniversary of our shipping acquisition, ShippingEasy acquisition in the previous quarters. So even with the very early state of our new initiatives, we are already growing much faster than the overall e-commerce 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. We expect our strategy of maximizing revenue growth will lead to long-term adjusted EBITDA margin expansion. However, we expect our adjusted EBITDA in the shorter term to reflect the increased levels of investments 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, sir. [Operator Instructions] Our first question comes from line of Kevin Liu of B. Riley. Your line is now open.

[Kevin Liu:]

Hi, good afternoon. First question here just given some news out there that Amazon plans to launch a competing delivery network hub, I was curious if you guys have any plans to have one of your platforms integrated with their Shipping with Amazon service. And just at a higher level with increased competition within the carrier market how you feel that will kind of impact your growth if at all this year?

[Ken McBride:]

Sure, Kevin. So the new services called Shipping with Amazon, Amazon is basically going to be picking up packages from warehouses and businesses and shipping them to consumers. And as we understand that it's a pilot Loss Angeles right now with really just the Amazon's third-party sellers currently. And like our philosophy on this is our multi-carrier UI solution they already support all the national and regional carriers, we have about 36 carriers currently. So we were just look at this as another option, as another third-party carrier that we would support. We already support Fulfillment by Amazon, we already support Seller Fulfilled Prime, so we look at those as other options for customers in terms of getting their packages in hands of their own customers -- option for our customers. And so we would effectively just add SWA Shipping with Amazon to the portfolio of 36 carriers and that will become part of the mix that our customers would use. I think generally in terms of the effect, our view on it is options are good and choices are good for our customers and any new services that are available to our customers good that could reduce their cost and enable them to grow their business that is positive for us. So, to the extent Shipping with Amazon enables more merchants to sell and ship more products, the merchants will be a beneficiary and we'll see them growing and that'll in-turn help us to grow.

[Kevin Liu:]

Alright. And then just with respect to some of the international integrations you talk about within Canada, the UK and Australia, curious if you have the ability to also monetize the transaction volumes that go through there or if you would expect most of the revenues associated with those integrations to come more so from subscriptions with customers in those countries?

[Ken McBride:]

Yes, at this points it's really more the latter, I think we're really super early in this whole effort and we just wanted to highlight that it’s a new initiative for us for 2018 and we're very excited about it, but we literally just finished integrations and without those integrations like for instance Royal Mail in the UK, we can't market the solution to UK customers because that's the dominant carrier. And so I think we're just getting started on this and overtime I think we hope to be able to develop partnerships that include revenue shares with some of the international carriers like we have with the USPS. But at this point, it's really just about subscription fees.

[Kyle Huebner:]

Yes, I would just say broadly the initial focus is getting into the market, establishing brand presence building the customer base, coming to market with the best solution and to the extent that we're successful in that and we're able to grow the business the way we have in the U.S. with ship station. And that opens up longer term opportunities for rev share partnerships beyond with the carriers not just the customer monetization.

[Kevin Liu:]

Great. And just lastly for me, with the shift towards the shipping customers that you have going on, historically we’ve been become kind of custom to seeing a ramp up in gross customers adds right at your end. Does the e-commerce dynamic change that? And if so what should we expect for a seasonality from a customer add perspective?

[Ken McBride:]

Yes, I mean, I think Jeff and Kyle can comment, but the comments I made during the prepared remarks was really about our focus is on really acquiring the customers that we feel are going to build the company long-term the e-commerce space. Those are the shippers, they are just factually speaking fewer of them out there. But the lifetime value of these customers is far, far higher than the traditional small business that we've acquired. So, I think we're with a growth rate of 8% this year in Q4 year-over-year, which was consistent with the growth rate we saw in Q4 of last year. So it’s the same growth rate for two years in a row we're still able to grow our business at a significant clip overall, because we're able to continue to find higher and higher value customers and overall the average ARPU continues to go up like I mentioned over the last five years it’s increased by more than 100% our churn has come down. So, really we view this as like quality over quantity and the customers they are just so much more valuable that we are very pleased to be able to add the number e-commerce customers we have added and the 8% growth rate in overall customers was positive thing for us.

[Kyle Huebner:]

I would just add to that Kevin, from an acquisition and ARPU standpoint the seasonal dynamics are different. In the traditional small business most of the customers are going to the retail post office. And so when you get into the holiday season, the lines are longer at the post offices and so customers feel more pain and adopt our solution it’s very easy to get up and running as a small business customer. It’s very different in the shipping side where the e-commerce merchants the holiday season is there all-out selling and fulfilling in shipping. So they are really not adopting or testing new solutions in the peak holiday period. So in the e-commerce where the seasonality is more about the ARPU, and so you’ve gotten the e-commerce customer by the holiday season and then you average that to benefit from the increase volumes where their package volumes are concentrated in holiday season and with our revenue model reach to a higher level of ARPU for that e-commerce merchant. So there are different dynamics in terms of the seasonality for a small business versus e-commerce.

[Jeff Carberry:]

So, Kevin the only thing I would add there as echoing what Ken and Kyle net-net you probably see the same seasonal patterns, but on a much more muted basis given the fact you don’t see the push in Q4 for shippers that you see the small business, but with a less of a focus on small business there is broader patterns will still exist, but on a more muted basis in terms of manifesting themselves in the metrics.

[Kevin Liu:]

Okay, understood. And congrats on a quarter and good luck this year.

[Kyle Huebner:]

Thanks, Kevin.

[Operator:]

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

[George Sutton:]

Thank you. Your guidance does assumes some pretty significant investments in 2018, I am wondering if you could give us some breakdown when we think through things like direct sales or partner incentives or other programs that would be part of this.

[Ken McBride:]

Yes, so thanks George. In terms of the investments we saw is really kind of a back half of 2017 loaded kind of investment in primarily headcount related expenses, you are going to see those elevated levels of hiring continue in 2018. And then obviously increase additional direct discretion spending as well to further fuel this program. So I think what you are seeing is really the composition of that is principally headcount related in all three OpEx lines with addition in G&A of additional kicker of sales tax, but you expect to see those things really again kind of back half loaded in 2017 continuing through 2018.

[George Sutton:]

On your international spend, I am just curious our international program this is obviously not been a focus previously I am curious what operationally made you decide to do this now? And I am curious kind of what sort of a TAM you are looking at relative to that opportunity?

[Ken McBride:]

Sure well, I think maybe the global answer as we’ve had our hands full with the domestic market and I think it’s now to the point where we’ve grown as a company and we’ve expanded our activity to the point where we now feel that international is a market that we really want to go after. We’ve added the carriers, we added all the domestic carriers that were really meaningful and now we’ve started to add the international carriers and without the international carriers for instance Royal Mail in the UK with Royal Mail and that integration which was of really significant undertaking without that integration we can’t market our solution in the UK. So once we got that right we started to ramp up our marketing and like I mentioned we have been very encouraged with our initial success in the market. We’ve already acquired through those three countries I mentioned Canada, Australia, and the UK we have already acquired several thousand customers in a fairly limited test approach so far. So I think it really is -- it really comes down to where we're now starting to focus on that because we’ve got the bandwidth. In terms of the market, I think as we look at the U.S. market we've talked in the past about the total size of the USPS being about $20 billion. And I think as you add in domestic revenue for the big three carriers really UPS, FedEx and USPS it's about $90 billion. If you then expand that to look at the size of the market worldwide, I think it's approximately $230 billion. So it's a much larger market and so we're excited about that opportunity and we really see it as a big initiative for us in 2018 and going forward.

[Kyle Huebner:]

And I think if you look longer term George before we acquired the multi-carrier shipping companies are model has been the regulated postage provider in the U.S. regulated by the USPS. We didn't see as an attractive international business model with the heavy regulation in each individual country. So it was really the multi-carrier acquisitions and ship station in particular that enabled us to really have a business model that we felt like we could take internationally and would work internationally where you’re integrate with the carriers you're not regulated and you create value through the frontend solutions for the e-commerce merchants in the international countries.

[George Sutton:]

Kyle, history would suggest those were outstanding acquisitions. And I'm curious you mentioned you're able to expand outside of the USPS relationship potentially with other carriers. Do you have rev share agreements with any other shippers yet? That's my final question.

[Ken McBride:]

Yes, we haven't really disclosed our relationship with some of the other carriers out there. I think part of our business model clearly with shippers had been monetize their package volume and we have been able to do a revenue share with the U.S. Postal Service. And I think that we would very much like to have additional revenue shares with other carriers. And as we scale and as we get additional volume more customers, we are tracking the attention of other carriers more and more. So we feel optimistic about the long-term opportunity for us to be able to monetize the other volume other than the USPS that goes through our solutions. But at this point we haven't really made many comments on that.

[George Sutton:]

Okay. Thanks, guys.

[Ken McBride:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Darren Aftahi of ROTH Capital Partners. Your line is open.

[Darren Aftahi:]

Yes, thanks for taking my questions. Just I guess first on international expansion. So Jeff, your comments about headcount hiring late in the year and into 2018. How much localization do you need in those countries? Open office there, have feet on the street, sales force that sort of saying. Is that the bulk of the kind of cost pickup next year. And then on churn, just as we think about this, I understand when we have less customers that are pushing more volume. I'm just kind a curious the pickup in the fourth quarter not a big movement, but is anything you would call out there. And then just lastly, on your inventory management CRM initiatives you talked about couple of quarters back, how are those progressing in terms of penetration within your installed base and particularly shippers? Thanks.

[Jeff Carberry:]

Yeah. So I'll take churn and then I'll turn it over to Ken for kind of broader strategy and hiring and inventory management. So on the churn, I think if you look empirically since 2014 you’ve seen churn bounce around in terms of year-over-year plus or minus 20 to 40 to 50 basis points. So we’ve seen it kind of moderate and it's impacted by a lot of variables. So I think the broader keep in mind and I think it's important is the longer term trends. And given empirically given the volatility on either end of the decrease year-over-year. We view the Q4 result as well within normal parameters what we'd expect. So I don't have any real concerns over the churn rate in Q4. So with that, I will hand it over to Ken for hiring strategy and inventory management.

[Ken McBride:]

Yes, so like in terms of international we don't really need at this point and we haven't developed any kind of local presence or feet on the street presence in the markets that we have gone after, the UK, Australia and Canada. I think at this point, there is some people cost related to those integrations I mentioned. They are significant, as they are more complicated than some of our other integrations, the Royal Mail integration in particular was very complicated. So we have developers that are working on that and product people that work on that. So there are headcount costs related to going against those integrations that we need to add. And while we have added some of the key integrations they are still more -- the carrier market when you look at carrier market internationally it’s a lot more fragmented, there's a lot more carriers in each market. And there is generally a postal organization within each country, but the share of the overall volumes and when you look at the total mailing shipping in those markets it’s less dominated by that carrier. So when you really look at a full customer suite of solutions there's a lot of integrations beyond like the postal authority that you need to add in each country. So there are people costs related to doing those integrations that will impact our cost structure. The feet on the street isn’t really -- at this point isn’t really a necessary thing for us. We have managed really attract e-commerce customers through mostly through marketing so there will be cost to marketing the solutions in the international markets as well. We have started to test those and we've been encouraged by the results so far, but we're using some of the same traditional methods that we've used in our own U.S. marketing in terms of attracting those customer. So, I think those are really the main to additional customer cost adds related to the effort to go international. And then on the question related to customer relationship management or inventory management, we are not calling the CRM by the way we are calling that customer marketing because it's really kind of -- we’ve more of those solution into more of a revenue generating solution for customers. And that’s as we've gone into building those solutions and starting to test market those solutions we’ve really only done those solutions -- the test marketing of those within the ShippingEasy customer base. And that is the smaller area and what we’re really trying to do is we’re really trying to market to that customer base and really understand what we need to add, what solution the customers are looking for, what’s value-added features. And so we have been adding a lot of features to both inventory management and to the customer marketing capability and we are seeing some really encouraging results from our initial marketing of those solutions into the customer base and we're learning a lot about what additional features we need to add. The ultimate goal is as we develop those solutions within that customer base and ultimately try taking those solutions and rolling them out to our entire customer base. But if you will it’s somewhat -- you could look at it as more of a beta approach where we are really kind using a smaller segment of customers in the ShippingEasy base to really understand the needs of the customers.

[Kyle Huebner:]

Yes, I would just add on in the international and really a lot of these new initiatives we really do require the people on the product side, the development side and we've really staffed those opportunities incremental to the employees that we had that are working on our current business. So where as in the past we might have traded off within our existing development group and product group between opportunities we see these as attractive enough and long-term growth drivers that we are staffing really incrementally to dedicate resources to these new areas. And then on the customer marketing and inventory just following what Ken said, within ShippingEasy we’ve been pleased with the penetration rates there in the double-digit percent and that's really just two plus quarters in. But the results are encouraging enough that we are continuing to dedicate resources and have a full product roadmap of features that we will be building out and evolving those solutions to again get to the goal. As Ken said that when you really have the robust solution and you roll it out to all the properties and that's really where the leverage is from a financial model perspective.

[Darren Aftahi:]

Just one more if I may. Your sales guidance for this year is international contemplated significantly in that number, the needle mover or is it pretty modest at this point?

[Ken McBride:]

It’s a factor obviously we have a very large domestic business. So, it is certainly a factor, but I think beyond that I wouldn’t really quantify it beyond that.

[Kyle Huebner:]

Yes, I think would just add, we look at it as in something like international there is a leading investment to get to phase 1 initial revenue, which we are now at with the three countries. Then there is the investment to drive that revenue from initial to building scale. And then I think you reach an inflection point where the penetration and the growth then starts to move the needle. So, I think we are looking at it on a five year basis saying we have to make the investments now in order to get to that scale inflection point within the next few years where it will move the -- it would move the needle.

[Darren Aftahi:]

Great, thank you.

[Ken McBride:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Allen Klee of Sidoti. Your line is open.

[Allen Sidoti:]

Yes. hi. Just following up on international, I think I heard you say that the revenues coming from the multi-carrier solution, but I am having trouble understanding where you’re going to be getting the incremental revenue from? I think you said it can come from packages under a work share program, but maybe if you could you just delve into what that means a little bit.

[Ken McBride:]

Sure, so I kind of mixed two concepts in my discussion of this. So really its two separate things, so think about it, first off as we talked about there is additional customers we’ve already acquired several thousand customers that are customers that are based in the UK, customers that are based in Canada, customers that are based in Australia, that are now using ship station to ship their e-commerce packages. And those customers are paying us a subscription fee just like they do in the U.S. And so that’s one area of the opportunity and that’s really marketing our solution to customers that reside in other countries. The second thing that I mentioned was really more about us and going more into the international, which is domestic origination going to international countries. So this is the new program we called Global Advantage and we are really trying to add a lot of value around our international solution for our customers. So with this what we are doing is we are offering a private label carrier -- so we have private label carrier partnership they utilizes what they call the work share program. And so this is a program the USPS has had for several decades where you do a portion of the work in terms of sortation or caring a portion of it that you are able to get a discount from them for the portion of work that they do. So you can kind of combine your operations with their operations and make revenue by having that solution for a customer and then paying the USPS for the portion of that that you are not doing. And so it’s really of revenue opportunity for us and that we are taking advantage and it’s really the first time we have ever participated in the USPS work share program in any meaningful way in order to get revenue. And so at the same time this Global Advantage Program is from a customer facing perspective is bringing a lot of benefits they we’re bringing to the customers in order to enhance our overall international value add to the customer. So free package pickup, free insurance, upgraded delivery speed. So international packages take a very long time to get to their destination. So upgrading the delivery speeds for the customer, adding better tracking, tracking internationally traditionally is really not very good. So enhancing the tracking, customs forms are very complicated. So being able to simplify that for a customer and really effectively fill out the customs forms for them. And so we are trying to package up a lot of new capabilities and feature for the customer around our domestic packages that are going international.

[Allen Sidoti:]

Okay, thank you. Then on you also talked about a new ship engine API that's available to third parties like marketplaces. Could you talk about where you are on that and what you see is the opportunity?

[Ken McBride:]

Sure. With our market leading solution ship station, we have taken effectively what are guts of ship station and made it available instead of the user interface that most customers use it for. We made it available in the form of an API. And so this allows another solution out there like a marketplace or an e-commerce tool, who wants to provide a shipping functionality within their own user interface to harness the power of what's in ship station and then provide their own user interface to the end customer. And so this is really trying to bring the breadth of the 35 carriers, the 165 integrations that we've got in ship station and provide that in the form of something that a third party can use. And so the opportunity is really new incremental investment that we wouldn't otherwise have received because some of these customers of these other e-commerce tools or marketplaces are not currently using ship station.

[Allen Sidoti:]

Okay, great. And then any comments on any changes you've seen in the competitive environment?

[Ken McBride:]

No, I think for the most part, the competitive environment has continue to be what we've seen from the last year or so. I think that there haven't really been any new developments of note. I think that [indiscernible] is still out there doing what they do. And we're still managing to grow at the kinds of rate we're growing at despite their efforts. And I think that's really kind of the main company that we focused on in terms of direct competitors. We've got some smaller new entrance into the market that have come about, but we really haven't seen any impact from those companies at this point. So it's really been a fairly benign competitive environment.

[Allen Sidoti:]

Okay, thank you so much.

[Operator:]

Thank you. Our next question comes from the line of Tim Klasell of Northland Securities. Your line is open.

[Tim Klasell:]

Yes, hey guys. Just a couple of quick follow-up questions. First, you mentioned with the ShippingEasy customers that you're trying the new inventory management solutions sort of like in a beta I think you said. But can you give us an idea with those customers, what you think the ARPU increase would be, maybe to give us an idea of what the potential impact over the years could be there? Thank you.

[Ken McBride:]

Sure. And when I mentioned there was beta. I mean, this full blown product that's out there and customers are using it right now. As Kyle mentioned, we've already seen double-digit penetration rates into the customer base. I think when I said beta I really meant in terms of the overall 735,000 customers we have. We have not launched to that entire base, we've really focused on launching it into the ShippingEasy customer base. And then learning as much as possible about what features we need to add and what works and what doesn't work. And in terms of inventory management in particular, this is a feature that really is very well suited for the ShippingEasy type customer. It's really when you look at inventory management as you get larger as a customer and you're selling products, the more channels and the more skews you have, you're starting to manage a really complex set of multi-variant channels and skews across all these areas. And as an example, if you're advertising an inventory of an item on Amazon and you actually don't have that item on hand, you can only do that so many times and then you'll get banned from selling on Amazon. So being able to monitor your inventory as a small business when you're holding that inventory in potentially in multiple places, when you're selling that inventory multiple places, when you have multiple skews it becomes a bit of an unwieldy problem. And so what inventory management does is it helps the customer really automatically monitor the stock levels, figure out when they need to reorder to automatically provide stock out so that when you advertising inventory you actually really do have it. And then within the ShippingEasy solution you're already figuring out optimizations of how to ship and one of the carriers or one of the solutions in terms of shipping is typically in the mix is something like a fulfillment by Amazon. So you maybe shipping some packages out of your own warehouse and some packages that have fulfillment by Amazon. And so that means you have the inventory both places. So, that's an example of a type of customers that sees inventory management as a nice value add. And as we look at what we're able to extract for providing that feature, we’re charging depending on the volume of packages that you are running through the system, we're charging anywhere from call it $0.09 extra to $0.69 extra. So it's really an extra fee depending on how large you are. So that's one benefit. And the other side benefit of this is what I mentioned is the stickiness, so to the extent, this is a painful process and to the extent you get this all set up and running in your solution. The switching cost of going back to spreadsheets or other ways tracking it or switching to another solution are very, very high. So it has a side benefit of reducing the churn of those customers just for the core feature of ShippingEasy. And so it's really a double benefit.

[Tim Klasell:]

Okay, great, great. Thank you for that clarification. And then just one quick follow-up, your ARPU sequentially jumped in Q4, as it normally does, but maybe it jumped a bit higher than what we were anticipating. Can you just sort of -- and clearly it’s on the shipping side, was it volumes or of the packages or of the price on those packages that maybe drove it a little bit harder this quarter than maybe in prior years? Thank you.

[Ken McBride:]

Yes, I think what I point to on that is, clearly there is a seasonal impact in terms of the way we are able to monetize postage. So to the extent that you have seasonality massive result in different growth rates that can have an impact on our level of monetization on those packages. So that's why you see some variability that's kind of essentially with the seasonality.

[Tim Klasell:]

Okay, thank you.

[Ken McBride:]

Thanks, Tim.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Chairman and CEO, Mr. Ken McBride for any further remarks. Sir?

[Ken McBride:]

Appreciate you joining us today. And if you have any follow-up questions as always you can contact us through our Investor website, investors.stamps.com or you can also call our investor hot line is 310-482-5830. Thanks so much.

[Operator:]

Thank you sir, and thank you ladies and gentlemen. That does conclude your conference. You may disconnect at this time. And have a wonderful day.