Stamps.com Inc.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com Inc. Third Quarter 2018 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] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Senior Director of Finance, Suzanne Park. Ms. Park, you may begin.

[Suzanne Park:]

Thank you, Josh. On the call today are 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 third quarter 2018. We'll provide an update on our recent acquisition of MetaPack. 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. 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 obtaining or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time-to-time by Stamps.com, including its annual report on Form 10-K for the fiscal year ended December 31, 2017, quarterly reports on Form 10-Q and current reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The financial results we will discuss on the call today include non-GAAP financial measures. In the third quarter of 2018, GAAP net income was $33.4 million and GAAP net income per fully diluted share was $1.75. Our non-GAAP financial measures exclude the following third quarter items, $8.9 million of non-cash stock-based compensation expense, $4.9 million of non-cash amortization expense of acquired intangibles and debt issuance costs and $2.6 million of transaction-related expenses associated with our acquisition of MetaPack. Our non-GAAP financial measures include a $2.8 million non-GAAP income tax benefit in the third quarter. Our mailing and shipping numbers include service revenue, product revenue and insurance revenue and do not include any revenue from customized postage. Additionally, our third quarter 2018 financial results unless otherwise noted, include MetaPack results from August 15 through September 30. Please see our third quarter 2018 earnings release and 2018 metrics posted on our investor website for reconciliations of our non-GAAP financial measures to the corresponding GAAP measures. Now, let me hand the call over to Ken.

[Ken McBride:]

Thanks, Suzanne. Thank you for joining us today. Today, we announced our third quarter results, which included a GAAP revenue of $143.5 million which is up 25% year-over-year, non-GAAP adjusted income per fully diluted share of $2.76, which was up 3% year-over-year and non-GAAP adjusted EBITDA of $61 million, which was up 8% year-over-year. We are very pleased with our third quarter financial performance. Let me now provide a brief update on our recent acquisition of MetaPack. We successfully closed the acquisition on August 15 and we are actively working on integrating the companies and executing on our long-term strategies. As a reminder, MetaPack is a London based software company providing the world's leading multi-carrier enterprise level e-commerce shipping solution. Their API supports over 450 parcel carriers in more than 200 countries around the world and offers a significant number of sophisticated capabilities, including carrier optimization, track and trace, returns and cross-border shipping to name a few. They have over 500 customers, including many of the world's leading e-commerce retailers and brands such as Adidas, ASICS, Fossil, John Lewis, L'Occitane, Marks & Spencer, Speedo, Ted Baker London, The North Face, Timberland, Urban Outfitters, WH Smith, Zulily and many more. Our strategic rationale for the acquisition remains multifold. First, we expect MetaPack will accelerate our efforts to expand our business internationally. Second, we expect to accelerate MetaPack's efforts to expand in the U.S. Third, we believe our businesses are highly complementary with very little customer overlap. Fourth, MetaPack’s preeminent customer list will allow us to strengthen our position with both private and public parcel carriers around the world. And finally, we believe MetaPack will further strengthen our already significant value proposition with the USPS. We remain very excited about the great acquisition, but we do expect that integrating and fully capturing the synergies associated with the acquisition will be a multiyear process. With that now let's turn to a more detailed discussion of our mailing and shipping business. Mailing and shipping revenue was $136.5 million in the third quarter that was up 28% year-over-year. Revenue growth was driven by strong growth in ARPU or average revenue per paid customer, which was driven by continued strong organic growth and contributions from MetaPack. Our total paid customer metric was 732,000. Paid customers were down slightly versus the third quarter of 2017. The more modest performance of paid customers in recent quarters is consistent with our strategic shift to focusing on the acquisition of shippers, which are numerically fewer numbers but where each customer has a much higher lifetime value. With this shift in focus, our revenue has been more driven by growth in ARPU than it has been driven by growth in paid customers. Our average monthly churn rate during the third quarter was 3.0%. And that's in line with the churn rates we've seen over the past several quarters. Average monthly revenue prepaid customer, or ARPU was $62.14 in the third quarter. That was up 29% versus the third quarter of 2017. The growth and ARPU benefited from continued organic growth in the shipping focused area of our business and the inclusion of MetaPack. Shipping customers generally pay higher subscription fees than small business mailers. And we typically also collect additional partner revenue share payments, commissions and transaction fees tied to the packages that we process on behalf of our shippers. Total third quarter USPS postage printed was 1.5 billion. That was up 8% versus the third quarter of 2017. The total USPS postage printed metric includes both higher growth shipping volume and traditional non-package mail volume, which continues to see a steady decline. Our management team and all of our employees are very proud of the continued financial and business success we generate for our shareholders. With that now let me update everyone on some initiatives we're continuing to focus on in 2018. First, we plan to continue to scale the sales and marketing with a focus on acquiring shipping customers. With our focus on shipping over the past several years, we have seen a significant increase in the average lifetime value of a customer that we acquire. With the great return on investment, we plan to continue to scale our total sales and marketing expense in 2018. A significant focus of our investment is on the acquisition of e-commerce and other high-volume shippers. Second, we plan to continue to expand the core features and functionality of our shipping solutions. During the third quarter, we unveiled a great new solution which will allow our customers to begin to use their voice to control their shipping software in our ShippingEasy product. Using an Amazon Alexa device, ecommerce sellers can accomplish hands-free shipping tasks with commands to manage orders, ship orders, print labels, print packing slips, purchase postage, check postage balances, and several other commands. ShippingEasy is the first company ever to bring voice controls to ecommerce shippers. We expect the new Amazon Alexa capability to reduce the time and labor required to manage and fulfill orders for our ecommerce shippers. The solution launched earlier in October, we are very excited about rolling it out to the ShippingEasy customer base. During the third quarter we also continued to support new sales channels, third party fulfillment providers, marketplaces, and ecommerce tools. We also continue to see success with our ShipEngine API, which offers all of the capabilities of our market leading ShipStation solution in the form of an API available to third parties such as marketplaces and ecommerce tools that are integrating our shipping solution into their own user interfaces. During 2018 we'll continue to develop new innovative features like our new Alexa solution and we'll continue to add new integrations with selling channels, marketplaces, and ecommerce tools. And we’ll continue developing our – and marketing our ShipEngine API. Third, we plan to continue developing new add-on features supporting e-commerce customers. During the third quarter, we continue to develop the inventory management and customer marketing solutions. We continue to see good traction with both solutions within our ShippingEasy customer base. And we plan to continue to enhance the features in our inventory management and customer marketing solutions. And we will continue to market those solutions to new as well as existing customers. Fourth, we're going to continue focusing on expanding our international solutions in our international marketing. We've begun discussions with MetaPack’s management team to drive the anticipated strategic benefits of this acquisition that we just discussed. MetaPack is part of the long-term strategic investment in both e-commerce shipping and international markets. And we will be looking to leverage this asset for the long-term benefit of our shareholders. We'll also continue to drive other international shipping initiatives, the initiative called the global advantage program. As you may recall, through this program, we offer customers access to discounted USPS international shipping rates through our private label carrier partnerships. The Global Advantage Program allows us to earn incremental revenue on international packages. Also in the international area, we continue to develop partnerships and market our solution in international markets. We've done integrations in the UK, including Magento, Bigcommerce, WooCommerce, Squarespace, OpenCart and PrestaShop in order to support the e-commerce customers there. We've done integrations with Amazon in multiple countries to support that selling channel as well. During the third quarter, we continue to gain new customers in the UK, Canada and Australia and will continue to ramp up our business development and marketing efforts in those countries throughout 2018. With the MetaPack acquisition, and its broad carrier library, we’ll also now begin to look at expansion into additional countries. With that, now let’s turn to a discussion of some recent news involving the USPS. We would like to provide our perspective on five topics that have garnered some attention from our investors. First, the USPS has proposed 2019 price increase. Second, the United States potential withdrawal from the Universal Postal Union or UPU. Third, the recent office of the inspector general report entitled pull for partnerships, the complex role of middlemen and discounts in the USPS. Fourth, the status of the president's various studies, reports and task forces on the USPS. And finally, the status of negotiations of our agreements with the USPS. On the first issue of the USPS has proposed 2019 price increases were generally pleased with their proposed rate changes. A 10% increase in first-class postage from $0.50 to $0.55 may have some effect on our legacy mailing business, but the rate increase if approved, should have a very positive effect on the financial health of the USPS. The rates that our customers pay for priority mail are going up on average, a very modest 3%, which should be very competitive with 2019 rate increases of UPS and FedEx. In addition, the rates for priority mail through retail and USPS.com are going up on average nearly 6%. So the average discount that our customers receive for priority mail versus those channels increases from 13% to 15%. thereby increasing the value proposition of using our service. On the second issue of the United States potential withdraw from the Universal Postal Union or UPU, we would expect the impact us to be minimal and potentially positive. The UPU effectively sets transfer pricing between the world’s postal authorities for packages that are sent between countries. First and foremost, we would say that in our view, the likelihood of a full U.S. withdraw from the UPU is remote. In fact, the UPU has already reacted to the threat by fast-tracking a review of rates and commissioned a report on the subject. The UPU Director General has publicly indicated his support for reforming the UPU’s rates and hopes to bring this issue to a vote in April, 2019. In the unlikely event of a full withdraw from the UPU, we would expect the U.S. to then negotiate individual bilateral agreements with other nations. The rates between the USPS and postal authorities of large developed countries that make up the lion's share of the volume are generally already viewed as fair and reasonable. So there is not likely to be any changes to the vast majority of volume between the USPS and other countries. The focus of the Trump administration threat of withdrawal is the large – is the classification of China as a developing country, which results in large discounts for Chinese companies shipping into the U.S. China was classified as a developing nation in 1969 when it's volume is very small, but now it represents a significant amount of volume coming into the U.S. And in the view of the Trump administration, their classification is no longer valid and their pricing is unfair. We have no volume of packages that are inbound to the U.S. from China. We would note that one potential outcome of the current negotiation process is that China's rates for shipping into the U.S. are increased to a more reasonable level. If such a change were made, it would be very good for our customers. Our customers predominantly ship within the U.S. And if the rate for China's inbound packages are raised to a more fair level, our customers would better be able to compete with Chinese e-commerce merchants, resulting in potential increases of volume through our systems. On the third issue of the recent office of Inspector General or OIG report, it has not been made public due to USPS concerns with the commercial sensitivity of competitive product pricing strategy in the report. And since we have also not seen the report, it's very difficult for us to comment. That said; based on the title of the report, we would expect that the report is focused on Negotiated Service Agreements or NSAs that the USPS offers its customers and its partners in the package business. The general goal of these types of OIG reports is specifically to review whether a program is meeting its legal criteria, which in the case of NSAs the legal criteria established is that each NSA much cover – must cover its cost and must contribute the legally required minimum of 5.5% of institutional costs. As of the last review of the contribution, the contribution was well above this level. And accordingly, we would have no reason to believe that the USPS is not generally meeting its obligations regarding the NSA program. We further expected any commentary in the report on postal partnerships would reflect the very positive effect that partnerships like ours have had on growth in the USPS’s package volumes. On the fourth issue of the President's various studies, reports, and task forces on the USPS, there's been a lot of discussion of potential major changes such as privatization of the USPS, but it's important to understand any such changes would require an act of congress. Following the June report from the Office of Management and Budget that recommended that the USPS begin to take steps toward privatization, congressional opposition to such a plan has increasingly been made clear. The House of Representatives issued a bipartisan resolution with almost half the house declaring opposition to a USPS privatization initiative, and the senate likewise issued a resolution with a large number of bipartisan members expressing opposition. In addition, President Trump formed a three-month taskforce in April to study the USPS and the report of that taskforce was completed and delivered to the President, but the report has not been made public. And since we have not seen the report, it's very difficult for us to comment. However, implementation of any major recommendations in the report would again require an act of congress. On the final issue of the negotiations of important agreements with the USPS, we would note the following general points. Historically, we have had a significant number of agreements with the USPS and we have negotiated those agreements many times. These types of negotiations are very common for us. Negotiations with the USPS often take many months to finalize. The USPS has many competing priorities and the process just takes time. In general, we expect that updates to our agreements with the USPS will continue to reflect the critical role that we play in their ecommerce package business, including that we have the largest private sales force focused on driving USPS growth, we process more than one-third of their priority mail volume in the U.S., and working hand-in-hand with the USPS through our partnership, we have contributed to a significant portion of overall USPS e-commerce package growth over the past five years. With that now, let me hand the call over to Jeff for a more detail discussion of our financial results.

[Jeff Carberry:]

Thanks, Ken. We’ll now review our third quarter of 2018 financial results. 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 then our 2018 metrics on our investor website. Total revenue was $143.5 million in Q3 and that was up 25% year-over-year versus Q3 of 2017. Total revenue excluding MetaPack was $138.3 million in Q3 and that was up 20% year-over-year versus Q3 of 2017. The strong growth in revenue in the third quarter was primarily driven by strong growth in our mailing and shipping business, which is offset by 19% decline in customized postage. Mailing and shipping revenue was $136.5 million in Q3 and that was up 28% year-over-year Q3 of 2017. Mailing and shipping revenue excluding MetaPack was $131.3 million in Q3 and that was up 23% year-over-year versus Q3 of 2017. The growth of mailing and shipping revenue was driven by an increase in ARPU, which was primarily driven by organic growth in shipping combined with contributions from MetaPack. We estimate that revenue derived from our shipping customers as a percentage of total revenue in Q3 was in the mid-70s and grew year-over-year in the mid-30s. We estimate that shipping revenue excluding MetaPack in Q3 was similarly in the mid-70s as a percentage of total revenue and grow year-over-year in the high-20s. We also estimate that our mailing and shipping revenue derived from our SOHO mailers as a percentage of total revenue was in the high teens and grew year-over-year in the low-single digits. Mailing and shipping gross margin was 80.5% in Q3 versus 86.9% in Q3 of 2017. The decrease in gross margins was primarily attributable to the scaling of our international offerings, including the global advantage program, which can have a lower gross margin profile than our other service fee revenue components. Gross margins were also negatively impacted by the inclusion of MetaPack, which under a U.S. GAAP generated a gross margin of approximately 58% for the period August 15 through September 30. We experienced year-over-year increases in our Q3 cost of sales and marketing, R&D and G&A at rates in excess of our revenue growth primarily related to strategic initiatives or strategic investments rather to support the strong growth and innovation in our mailing and shipping business and due to the inclusion of MetaPack. We would expect to see the absolute dollars invested in sales and marketing, R&D and G&A, to be higher in the fourth quarter relatively third quarter in order to drive our growth division. Non-GAAP operating income was $59.5 million in Q3 that was up 8% year-over-year versus Q3 of 2017. Adjusted EBITDA was $61.0 million in Q3 and that was up 8% year-over-year Q3 of 2017. Adjusted EBITDA margin was 42.5% in Q3 versus 49.2% in Q3 of 2017. The decrease in adjusted EBITDA margin was attributable to lower gross margins associated with the scaling of our international offerings, higher operating expenses associated with our 2018 initiatives as previously discussed. The ongoing accrual of sales taxes and the inclusion of MetaPack, which has substantially lower gross and EBITDA margins. Non-GAAP adjusted income per fully diluted share was $2.76 in Q3 based on a non-GAAP tax rate of 11.0%. That was up 3% year-over-year versus $2.58 per share in Q3 of 2017 based on a non-GAAP tax rate of 8.5%. Fully diluted shares used in the EPS calculation was $19.0 million for Q3. Q3 2018 benefited from a reduction of our expected tax rate for 2018 from our previously estimated full year tax rate of 18% to a reduced estimated full year tax rate of 15% for the year that was primarily driven by option exercises in the third quarter. We ended Q3 with $78 million in cash and investments, which was down $205 million from $283 million at the end of Q2 of 2018. The decrease in cash and investments was primarily driven by the MetaPack acquisition, which is fund as entirely from cash, changes in net working capital, foreign exchange driven net equity adjustments related to MetaPack, mandatory debt repayments and share repurchases. And it was all partially offset by a strong operating cash flow and cash option exercises. During Q3, we made a required principal payment of $2.1 million, resulting in total debt under the credit agreement, excluding debt issuance costs of $63.9 million. During Q3, the company repurchased approximately 49,000 shares at a total cost of approximately $12 million. On October 24 of this year the Board of Directors approved a new share purchase plan that will take effect upon expiration of the current plan on November 9 and that plan authorizes the company to repurchase up to $90 million of stock over the six months following its effective dates. Now turning to guidance. Our updated guidance now includes contribution from MetaPack for the period August 15 through December 31. We expect fiscal 2018 revenue to be in the range of $550 million to $580 million, which compares to previous guidance 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 high-20s to low-30s year-over-year. We would also expect growth in our Mailing and Shipping revenue derived from our SOHO mailers to continue to grow in the flat to low single-digit range year-over-year. Finally, we would expect our Customized Postage revenue to be down year-over-year as we saw a higher-than-expected contribution from high-volume orders in 2017 that we would not necessarily expect to repeat in 2018. We expect operating expenses to increase in 2018 greater than the rate of revenue growth, and we would expect to see the absolute dollars invested in sales and marketing, R&D and G&A to all be higher in Q4 2018 relative to Q1 through Q2 of 2018, not reflect the strategic investments we discussed earlier as well as the inclusion of MetaPack. We continue to expect fiscal 2018 adjusted EBITDA to be in the range of $245 million to $265 million. This implies both a fourth quarter and full year adjusted EBITDA margin in the low-40s, reflecting both higher operating expenses associated with our headcount investments and sales tax expense and the inclusion of MetaPack, which has as we discussed earlier significantly lower margins. We expect non-GAAP tax expense will be approximately 15% of non-GAAP pretax income for 2018, which compares to our previous estimate of 18%. The reduction of our expected tax rate for 2018 was driven by the level of option exercises in the third quarter, our non-GAAP tax rate was 20% in the first quarter, 16% in the second quarter and 11% in the third quarter. Our expected non-GAAP tax rate for the fourth quarter is 11%, yields on that is an effective 2018 rate of 15% like we discussed. Our full year 2018 effective tax rate could differ from our current estimates based on a number of factors including the level of option exercises. We expect fully diluted shares to be between $18.9 million and $19.7 million in 2018. We expect fiscal 2018 non-GAAP adjusted income per fully diluted share to be in the range of $10.60 to $11.60, and that compares to previous guidance of $10.15 and $11.15. And finally, we expect capital expenditures to be in the $2 million to $4 million range in 2018. With that, let me hand the call over to Kyle for some additional comments on our long-term outlook.

[Kyle Huebner:]

Thanks, Jeff. With our increased focus on shipping and e-commerce shipping-focused acquisitions, we've achieved a significant transformation in our business over the past five years. Our acquisition in MetaPack not only deepens our focus on e-commerce shipping, but also broadens that focus to include significant global opportunities. We expect our focus to continue to be on shipping for the foreseeable future and believe that we are well positioned to capitalize and what we believe to be an attractive global e-commerce shipping trends. E-commerce growth in the U.S. and Europe has been driven by strong secular trends towards greater e-commerce consumption with growth rates running in the mid-teens in both U.S. and Europe. But with European rates exhibiting some greater regional variability. These attractive e-commerce growth rates provide a natural fundamental driver to our growth that we've seen in our business over the past several years. In addition, we have successfully demonstrated our ability to grow both our shipping related revenue faster than overall e-commerce growth rates over the past five years as we focused on invested in shipping. In particular, we've achieved year-over-year organic growth rates and our shipping related revenue in the mid-20% to mid-30% range in each of the last eight quarters compared to the mid-teen growth rates for overall e-commerce. We believe that we will be able to continue to sustain this trend of growing our shipping revenue faster than overall e-commerce over the long term for several reasons. First, our solutions are suitable for the largest and most sophisticated e-commerce sellers. So we generally attract higher growth e-commerce companies. Second, we are expanding scope of our offerings and thereby increasing our customer monetization. Third, our multi-platform – multi-carrier platforms allow us to expand outside our traditional core USPS focus business. MetaPack's recent growth rate has been in the low to mid-teens. As we outlined in the strategic rationale that Ken discussed, we expect that the MetaPack acquisition will accelerate our international initiatives. And we expect that we will be able to enhance their growth rate as we realize various synergies over the course of time. With the inclusion of MetaPack, our portfolio of solutions now account for over $1.5 billion packages shipped annually worldwide. As shipping revenue as a percentage of total revenue increases from its current mid-70% – percentage level, total revenue will continue to be more directly correlated with our strong performance in fundamentals and shipping. We believe that global e-commerce trends provide exceptionally attractive fundamental drivers to our domestic and international businesses, and we believe we will be able to drive strong top line and bottom line performance for the foreseeable future with our portfolio of exceptional shipping platforms and technologies. With that, we'll open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from George Sutton from Craig-Hallum. Please proceed with your question.

[George Sutton:]

Thank you, and I appreciate all the updates. So I'm curious with respect to the OIG and the task force review, generically our belief has been that the value will increasingly be moving to generators of new customers and incremental revenues, which in our view would be a benefit to the model that you have now. I'm curious, if you can comment on that. Is it your belief that the summation of all of these different reports could end up leading to more value for you versus less that I think most people would assume?

[Ken McBride:]

Yes. No, I think that's an accurate assumption. I think when we look at the various reports that are out there, the conversations we've had with folks that are working on these reports, the general view is the idea of USPS increasingly embracing partnerships like ours, it makes a ton of sense for them. I think we mentioned the full blown privatization isn't really something that we see as likely, but I think more and more partnerships with private companies that allowed them to more embrace the pseudo privatization, if you will. It has been something that we seem to be the task force and other members of the community in the USPS world had been focused on.

[George Sutton:]

I understand. And generally, as you look at these regulatory processes in review, has it changed your hiring plans, your partnership focus expansion in any way as you look forward?

[Ken McBride:]

No, I don't think I can say that it has changed anything. As you know, this is an area where we have a significant number of very senior people that focus on our relationships with USPS and in Washington, D.C. in general. And I think that we have a great team on the ground there and we have – I think strategically, we've really had a very long relationship with USPS. And I think we see that continuing. So we really haven't changed in terms of our hiring plans in the USPS world or from a partnership perspective.

[Jeff Carberry:]

I would say that drill for results as well, right? When you look at the margin degradation sequentially as well as year-over-year, that’s a function of investments principally on headcounts across the board. So I think you also have Ken’s qualitative comments but also empirical results from us that show that we continue to invest heavily in the business to grow it for the long run.

[Ken McBride:]

The long-term fundamentals that I talked about in shipping e-commerce, shipping international all remain attractive. So our predisposition is to increasing our investments. And to the degree that we continue to increase our investments and get an ROI on that, that leads to more success for the USPS for their position in the ecommerce shipping world. So I think us increasing our investment is a win-win on both sides.

[George Sutton:]

Okay, great. Lastly a lot of questions came up obviously when you add a new disclosure in your last 10-Q. I wonder if you could just address the logic for having that now and will we get updates regularly when there are additional programs or conclusions to those negotiations? Thanks.

[Kyle Huebner:]

I think that in general, like I mentioned in the prepared remarks that these types of agreements, these types of negotiations are very common for us. We’ve had over the span of 20 years we’ve had dozens of these types of negotiations. I think it’s simply, this time is just an example of us deciding to provide some additional insight into the negotiations. As I mentioned earlier, the negotiation with the USPS take many, many months to finalize. And so, the USPS obviously has a lot on their plate, there’s a lot of things going on in the USPS world. So, we’re working with them closely on the negotiation, but it’s just going to take some time. So I think we just felt like in terms of the 10-Q that making that update was appropriate at this time.

[George Sutton:]

I understand. Thanks guys.

[Operator:]

Thank you. Our next question comes from Zach Cummins from B. Riley FBR. Please proceed with your question.

[Zach Cummins:]

Hi. Thank you. So congratulations on a really strong quarter. I guess are there any updates to your expectations in terms of contribution for MetaPack as you head into Q4 or is it still kind of along that range of $15 million to $20 million that you provided on the last call?

[Jeff Carberry:]

Yes. It’s really pulling in that same range. So we gave the qualitative guidance last quarter. You saw the increase in the top line that was in line with that qualitative guidance last quarter from MetaPack. So I think it’s only fair to assume that we’d expect MetaPack to come in that range as well for Q4.

[Zach Cummins:]

Great. Thank you. And then in terms of as you go into this holiday period, there has been some concerns, especially around Amazon lowering their revenue guidance as they head into the holiday period. I’m just kind of curious of your thoughts as you head into this and overall what are you feeling in terms of shipping volumes and just the overall view as you go into this really important holiday period?

[Kyle Huebner:]

I think that our perspectives on the business are reflected in our guidance. We tend not to really focus on providing color on the specific underlying factor of particular e-commerce trends that we’re seeing. Obviously I think the numbers imply that we continue to see a robust business for ourselves, which is inherently a function of growth in e-commerce. We don’t give specific commentary around package volume growth in terms of that nature that maybe inherent and maybe what some other people do. But we still feel very confident about Q4 in terms of performance expectations.

[Zach Cummins:]

Great. That’s helpful. And finally, last question for me. In terms of the new buyback program that you just announced, I’m just curious with that in mind, could you list your priorities when it comes to capital allocation? How do you view investing in the business either organically or through M&A versus buying back shares at this point?

[Kyle Huebner:]

I think we have a significant cash flow in the business and I think we look at all of the above when it comes to deploying capital. I think you’ve seen our trend towards looking at M&A is a way to build the business when we see a strategic acquisition that makes sense. We’d certainly like to have the ability to do that acquisition financially. But I think we've also continued, the board has continued to show that it's behind – repurchasing the shares and a consistent and ongoing manner. So I think, in terms of capital allocation, as Kyle mentioned, we're continuing to aggressively invest in the business, we're looking at more for additional M&A opportunities and we are continuing to do a buyback of the shares.

[Jeff Carberry:]

Yes. I would just say – I think when we look at it, we don't feel like we're constrained and having to sacrifice one area at the expense of another. As Ken said, we're investing in the business. We have the cash flow in the deck capacity to pursue acquisitions that they make sense, and we have the buyback program in place. So I think we're in a pretty favorable position where we can capitalize on all the opportunities with our capital allocation and we're not necessarily constrained in one particular area. We look at it as investments that generate ROI and will and that we have the capability to invest in any of the areas because we have a very strong capital position.

[Zach Cummins:]

All right. Great. Thank you for taking my questions and congrats again on the strong quarter.

[Operator:]

Thank you. Our next question comes from Allen Klee from Maxim Group. Please proceed with your question.

[Allen Klee:]

Good afternoon. Could you give me a little more understanding on where this synergies are going to come from MetaPack?

[Ken McBride:]

Sure. I mean I think we went over some of those last quarter, but I think in general, the idea with MetaPack is – it accelerates our efforts to expand internationally. It provides access to the largest carrier library in the world. 450 parcel carriers, over 450, in our current solution, before we bought MetaPack was about 40 carriers. So we immediately saw a tenfold increase in the number of carriers we can support in our products worldwide. And in the U.S. you really have USPS, FedEx, and UPS that dominate the market. But when you look at international markets and especially in Europe, you need a much broader footprint in terms of capabilities on the number of carriers you support in order to have a complete solution. So, in terms of MetaPack they brought that breadth of carrier library that we're able to then integrate with our e-commerce solutions like, like ShipStation in order to be able to go to those markets more, more quickly. I think the other thing that we discussed was, MetaPack really doesn't have penetration in the U.S. right now. We have a large national sales team and a network, and an expertise in the U.S. market that will allow us to provide us a solution in the U.S. market and to support their efforts to go to market in the U.S.. So we've already been working on some of our sales and marketing initiatives. We expect to launch some programs in early 2019. And so we see that as a potential early when the sales cycle is long with MetaPack. So we wouldn't see a huge contribution probably happening right away. But we do see that a big strategic initiative ours. And I think generally speaking, the businesses, when you look at them, we're just very complimentary. We’re small business, they’re very large retailers in enterprise. They’re mostly Europe. We’re all U.S. prior to the acquisition. And so it really fit between the two companies. So the company is really unique asset, no other company in the world has a carrier library anywhere near theirs. And so we really saw that as a great opportunity for us to expand our international efforts.

[Jeff Carberry:]

Yes. Let just to add on to that. You look specifically at ShipStation, they are focused on ecommerce customers and without the MetaPack acquisition, ShipStation where they had to go into Europe and develop all these carrier integrations and relationships of some scratch by acquiring MetaPack that those relationships and integrations are there and that allows ShipStation to really focus on growing the business, getting a partnerships, integration with marketplaces to grow their business, because the carrier, carrier relationship integration side is there with MetaPack whereas they would have had to develop themselves and the absence of MetaPack.

[Allen Klee:]

Thanks. I guess what I was trying to understand is, it sounds like most of what you’re saying are revenue synergies, but is it possible that the margin impact of this, that over the long-term you think you can improve the margins also to get them somewhat comparable to where you guys are?

[Kyle Huebner:]

Yes. So, I would certainly expect to see margin improvement relative to the current position for a number of reasons. But yes, I would expect improvement in margins, it’s primarily an income from growth in the top line, not from savings in the bottom line. So what I’m saying effectively that there’s a fair amount of leverage in their current cost structure.

[Allen Klee:]

Thank you.

[Operator:]

Thank you. Our next question comes from Darren Aftahi from ROTH Capital Partners. Please proceed with your question.

[Darren Aftahi:]

Hi. Thanks for taking my questions. Just a few if I may. First on just the cadence with customers, so I understand the shipping dynamic in higher ARPU, and just kind of curious as we go forward, should we assume that number kind of stays flat to decline like it has in the last two quarters and that perhaps ARPU growth is, maybe stronger than people are assuming. And then as it pertains to the ARPU growth in the quarter, I think it was 29% and accelerated, I’m just curious on a basis point, how much of that was a contributory versus MetaPack versus organic in a vehicle parts.

[Kyle Huebner:]

Yes. So in terms of the pay customers, we don’t give guidance, something customers, so I’m averse to do that now, but I think from a color standpoint, you see mailers, which is a very large portion of the pay customer metric growing low single digits. ARPU is generally tend to be reasonably flat with the small business customers, the mailers. So I would generally expect to see customers on the mailing side, kind of flattish maybe slightly down, maybe slightly up. You have some variability there with seasonal slowness as well or seasonal factors. So, I think you’re right that the majority of the growth, obviously in terms of long-term models going to be coming from principally shippers who have higher ARPU. So when you look at the relative contributions, the largest portion of that is really coming from ARPU growth versus paid customer growth. In terms of the ARPU growth, certainly a portion of that was a contribution from MetaPack, and MetaPack was relatively small, around $5 million in the quarter, which is in our filing. So, there certainly was a portion of the ARPU growth attributable to MetaPack, but it was a relatively small portion of that growth.

[Kyle Huebner:]

Yes. I would just say if you look at it, we said that MetaPack has in the ballpark of 500 customers. So, if you look at our metrics and you back out the $5 million MetaPack revenue, but really, the number of customers is the same. The organic ARPU growth was still in the kind of a 25% year-over-year range.

[Darren Aftahi:]

That’s helpful. Thank you. And then just one last follow-up kind of two parts. So, you’ve had this under your belt for about three months now, roughly speaking a little bit over that kind of what’s been going better on the integration, what’s been more challenging? And then as it pertains to MetaPack having kind of an installed base of some of the larger retailers, how quickly or will we see that kind of presence of a customer, say a larger retailer, maybe in the U.S. in the future? Thank you.

[Kyle Huebner:]

Sure. And I think we’re pleased with the progress so far with the integration. We’ve been working on the initiatives we discussed last quarter. One of our senior management members moved to London to help spearhead the integration. And we’ve already begun the process of bringing MetaPack to the U.S. with our sales and marketing teams. We’re expecting to launch some programs in that area in early 2019. We’ve been working through the technical challenges and the changes that will be necessary to achieve the integration between our e-commerce solutions like ShipStation and MetaPack’s carrier API. We’ve made good progress, but it’s achieving that full integration, leveraging that integration will take some time. We’ve seen some really good benefits with our relationships with carriers as we’ve gone in to meet with those carriers and as we began our negotiations with them for additional product and financial support. And we’ve seen a really positive reaction to the acquisition by partners and by the USPS. So net-net, I think we’ve been pleased with how the integration has gone so far. It’s been smooth and we continue to be very excited about the acquisition. I think in terms of challenges, M&A acquisitions always have challenges and I think the large difference in time zones has been a challenge holding meetings with them. Generally, there was a difference in culture between U.S. and UK employees, and we’ve been working to align the teams on strategy in sales and marketing and development philosophies. But those challenges so far have been reasonable and again, we’re pleased with how the integration process has gone. In terms of bringing retailers to the U.S., I think, like I mentioned, we’re just at the very beginning of that process. We really haven’t started to reach out with our sales team. Like I said, we’re planning to launch that program in early 2019. So, we really haven’t made any, any headway in terms of bringing the large retailers to the U.S.

[Darren Aftahi:]

Thank you.

[Operator:]

Thank you. And our next question comes from Tim Klasell from Northland Securities. Please proceed with your question.

[Tim Klasell:]

Hey, good evening guys. Sounds like, my question has to do around the periodic price increases that we see from all the major carriers out there, the USPS, FedEx, UPS, with your relationship with USPS, when these prices go up that they have, how does that flow through to you, particularly as they start maybe facing a higher inflationary environment? How will that flow through, with your contracts, with the USPS locating it to a specifics, is it very little, is it very similar impact on your revenues as what they – how they raised their prices. Thank you.

[Ken McBride:]

So in terms our impact, if – we can't get into the details of the contracts due to confidentiality, but generally speaking, we're monetizing postage dollars. So price increases are generally speaking an improvement for us.

[Kyle Huebner:]

I think the other aspect of that is, while we have relationships with 40 different carriers, our primary relationship is with the USPS. So, we look for them to be – and hope that they will be very competitive in terms of their rate increases versus UPS and FedEx. I think last year we saw them increasing by I guess about 3% or 4% versus a 5% increase from UPS and FedEx. So, we saw some additional business coming to USPS, with those improved rates. This year we were – in 2018, we were pleased to see that they're planning to increase the priority mail rate by only 3% and we would probably expect that UPS and FedEx when they announced their rate increases will be higher than that, traditionally 4% to 5%. So generally when the USPS gains market share, we benefit and so I think that's the other aspect of how the rates play through in our business.

[Jeff Carberry:]

And just the other thing we mentioned on the call is, to the extent in the retail at usps.com have higher price increases than PC Postage than, that differential spread increases the value proposition for our customers using our solutions versus the alternative ways to get the postage for packages.

[Tim Klasell:]

Great. Thank you so much for the color, I appreciate it. Good day.

[Ken McBride:]

Thanks Tim.

[Operator:]

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Ken McBride for any further closing remarks.

[Ken McBride:]

Again, thanks for joining us today. If you have follow-up questions as always, you can contact us through our investor relations website at investor.stamps.com, or you can contact us via our investor phone line at [phone]. Thanks for joining us.

[Operator:]

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.