Stamps.com Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com Fourth Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to Mr. Jeff Carberry, VP of Finance. Sir, you may begin.

[Jeffrey Carberry:]

Thanks very much, and good afternoon everyone. Thank you for joining us today. First of all we do apologize for the delay, and the earnings release has been published. There were some technical issues in getting it uploaded. The release is now at the wire, it’s also on the Investor Relations website. So with that, let’s start the call. On the call today is Ken McBride, CEO and Kyle Huebner, CFO. The agenda for today's call is as follows. We will review the results of our fourth quarter and fiscal year 2016. We'll provide a progress update on our recent acquisitions. We'll provide an update on elements of our business model and partnership agreements. We'll discuss our financial results and talk about our business outlook. And finally, we'll provide an update on our long-term business model. But first, the Safe Harbor statements. 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 it's 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 the 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, 2015, 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. As a remainder the financial results we will discuss on the call today include non-GAAP financial measures. Our GAAP net income was $29.0 million in the fourth quarter and $75.2 million in fiscal year 2016 and GAAP net income for fully diluted share was $1.61 in the fourth quarter and $4.12 in the fiscal year 2016. Our non-GAAP financial measures exclude the following fourth quarter and fiscal year 2016 items. First, $9.2 million of non-cash stock-based compensation expense in Q4 and $33.9 million in 2016; $4.1 million of non-cash amortization expense of acquired intangibles and debt issuance costs in the fourth quarter and $14.9 million in 2016; and next $6.9 million non-cash income tax expense in the fourth quarter and $33.6 million in 2016. And finally, $1.1 million of acquisition related expenses in 2016 related to our ShippingEasy acquisition. Please see our fourth quarter 2016 earnings release and 2016 metrics posted on our Investors website for reconciliations of our non-GAAP financial measures to the corresponding GAAP measures. With that, let me hand the call over to Ken.

[Kenneth McBride:]

Thanks for joining us today. Today, we again announced a record fourth quarter financial results including the highest ever total revenue of $105.9 million which is up 52% year-over-year. Our highest ever non-GAAP adjusted EBITDA of $55.9 million which is up 85% year-over-year. Our highest ever non-GAAP earnings per share of $2.73 and that was up 74% year-over-year. For fiscal 2016 as a whole, we also set several records including our highest ever total revenue of $364.3 million that was up 70% year-over-year. Our highest ever non-GAAP adjusted EBITDA, which was $174 million that was up 111% year-over-year, and our highest ever non-GAAP earnings per share of $8.70, that was up 96% year-over-year. With that, I'd like to turn into a more detailed discussion of the mailing and shipping business. As a reminder, the mailing and shipping numbers we discussed include service fees and partner revenue shares, product sales in the online store, package insurance we offer the customers. Mailing and shipping revenue was $102.3 million in the fourth quarter that was up 52% year-over-year. Revenue growth was driven by both growth and paid customers and growth in the ARPU, which is the average revenue per paid customer. The average monthly churn rate during the fourth quarter was 2.9% that was down compared to the 3.4% in the fourth quarter of 2015. The reduction in churn was primarily a result of the continued focus on acquiring shipping customers who tend to have lower churn versus the traditional small business office users because shippers use our product more in their core operations. Our total paid customer metric was 681,000, that was up 8% versus the fourth quarter of 2015. Paid customer growth was the result of our continued success and customer acquisition efforts, particularly in the shipping area. Paid customer growth is also driven by the reduction in the churn rates that I just mentioned. We would note that the growth in the paid customer is moderated this quarter versus the first through the third quarters of 2016, as we reached the anniversary of the Q4 2015, when we first began including Endicia’s customer numbers in our paid customer number metric. The average monthly revenue for paid customer or ARPU was $50.44 in the fourth quarter. That was up 43% versus the fourth quarter of 2015. Growth in the ARPU likewise benefited from the continued growth in our shipping business. For shippers, we’re able to increase ARPU above the baseline monthly service fee with partnership revenue share agreements that allow us to monetize the customer's package volume. Traditional small business office users do a minimal amount of shipping, so we did not have that component in our ARPU when our focus was more on that segment historically. Our ARPU has increased 110%, since 2013 and that's partly the result of the fact that the customers we acquired via our acquisitions of ShipStation, ShipWorks and Endicia and ShippingEasy are all shipping focused. Postage printed through all of our various products and services was $1.6 billion in the fourth quarter that was up 53% versus the fourth quarter of 2015. For the year, postage printed was $5.5 billion that was up 106% versus 2015. Our customers collectively printed approximately 2 billion mail pieces or packages. And of that number customers printed shipping labels representing over 1 billion packages during 2016. Management team and all our employees are very proud of the continued financial and business success we generated for our shareholders this quarter and 2016 overall. So with that, let me now discuss some of the initiatives we're working on for 2017. First, we're continuing to leverage our product portfolio of mailing and shipping solutions to drive continued strong growth. With the acquisitions we've made, coupled with our traditional solutions we now have a full and diverse suite of solutions across our five brands, ShipStation, ShipWorks, ShippingEasy, Endicia and Stamps.com. Our products solutions meet the needs of a broad array of target customers that include e-commerce merchants, warehouses, fulfillment houses, large retailers and other types of shippers. Customers needs vary based on their specific situation. Those needs may include specific technology or operating system support, some breadth and depth of product features, ease of use, which is often traded off versus product capability and complexity, even speed processing large volumes of packages in the fewest number of steps. The breath and the depth of integrations with partner solutions such as e-commerce tools, shopping carts, online marketplaces and where we have integrations with over 400 partners across our suite of solutions, and needs may also vary based on the domestic, the regional or the international package carriers that are supported in the solution. We have integrations with over 30 different carriers across our suite of solutions. While we believe we're already successful meeting the needs of the majority of our target customers, we plan to continue innovating and adding more and more features and capabilities to further differentiate our products and services from those of our competitors. We also plan to continue to build out support for other related areas such as inventory management and customer relationship management as those compliments the shipping process for many customers. Second, on our 2017 plan, we plan to continue to invest heavily in sales and marketing with a focus on acquiring shipping customers and in particular e-commerce shippers. Shipping customers are more expensive to acquire than small business customers, but they yield higher long-term return on investment with their typical characteristics, which include the higher average revenue per unit, the lower churn rates and higher postage usage when compared to the other small businesses that we have that predominately use our service to send mail. Based on our recent analysis and recent trends, we expect to get a strong return on our investment from our mailing and shipping customers, because they have a high expected lifetime value relative to the expected cost of acquiring those customers. So we plan to increase our total sales and marketing expense in 2017 again versus 2016. We plan to continue increasing our investment in direct sales, direct mail, traditional media, radio, television, search engine marketing, search engine optimization as well as refining our customer acquisition process through our affiliate, partners and using telemarketing in other areas. Furthermore, e-commerce shipping is the fastest growing part of the mailing and shipping industry and according to the U.S. Commerce Department recently e-commerce sales grew at approximately 15% in 2016 versus 2015. We intend to continue to direct the increasing amount of our acquisition budget to that segment. Third in our 2017 plan, we plan to capitalize on synergy opportunities with our public companies. During 2016, we continue to see the benefits from our 2014 acquisitions at ShipStation and ShipWorks and we've successfully integrated and realized our expected synergies from our 2015 acquisition of Endicia. During 2016, we completed our acquisition of ShippingEasy, we began the integration of that business as well. Across all the products and services, we are realizing synergies, sales and marketing, and operations, and customer service and in product development. For example, in the marketing area Stamps.com and acquired companies have historically target many of the same customers and we plan to continue utilizing our marketing expertise to accelerate the growth of all the brands. We have also leveraged technology expertise in our companies across various dimensions including web-based versus client-based expertise, various operating systems, various methodologies and paradigms for product development and other things. And that's resulted in accelerated, but at the same time lower cost product innovation. We are also able to eliminate duplicate operations in several areas across our various acquired companies. Additionally, Stamps.com has brought significant financial resources to our acquired brands. And we’ve used those resources to expand the marketing and the development activities in those brands. Finally, in our 2017 plan, we plan to continue enhanced our enterprise solutions and continue to grow the sales and marketing efforts we make in that area. Our solutions to targeted enterprise customers they continue to have strong value proposition compared to a postage meter, our customers continue to be attracted to our enterprise solution. We believe the customer preference is based on the overall lower top total cost of ownership and the greater visibility into individual employee activity, which is available from our centralized front end reporting tool. Those capabilities that aren't available with the postage meter things like real time data, improved web-based postage management tools, enhanced web-based financial administrative controls, and other things that are used by central decision makers. For 2017, we plan to increase and optimize and refine our enterprise customer lead generation and sales and marketing efforts. With that, let me just mention about the USPS. They are always and have been always our most important partner. We have a common goal with the USPS which is growing package volume and serving and retaining USPS customers. We've made significant investments in creating, developing and growing the online mailing and shipping category since 1999. We've invested more than $1.5 billion from 1999 through 2016 in customer service and support, research and development, sales and marketing, technology, infrastructure, product development and other areas. And all that's gone into support of helping the USPS grow their business and retain their customers. We've had over 15 billion in cumulative postage printed through our solutions since we launched in 1999. USPS recently reported that they processed and delivered a record volume of packages during the 2016 holiday season and for the entire quarter. USPS stated when they reported their fiscal 2016 result last fall, they continue to win e-commerce customers, grow their package delivery business and they delivered more e-commerce packages to the home than any other shipper because of their application service, their enhanced visibility and competitive pricing. And we continue to enjoy a great partnership with the USPS. We feel that we've created a sustainable win-win model both of us that will result in the continued growth of USPS packages. And with that, let me hand the call over to Kyle for a detailed discussion of the financial results.

[Kyle Huebner:]

Thanks, Ken. We will now review our fourth quarter and 2016 financial results. The discussion of our financial results today include non-GAAP financial measures. As Jeff described, the reconciliation of non-GAAP financial measures to the corresponding GAAP measures can be found in our earnings release and in our 2016 metrics on our Investors website. Total revenue was $105.9 million in Q4, up 52% year-over-year versus Q4 2015 and was $364.3 million in 2016, up 70% versus 2015. For fourth quarter, we estimate that revenue derived from our shipping customers accounted for over 70% of our total revenue and grew over 85% year-over-year. Mailing and shipping revenue was $102.3 million, up 52% year-over-year versus the fourth quarter 2015 and was $350.6 million in 2016, up 70% versus 2015. The revenue growth was driven by increases in paid customers and ARPU as Ken described earlier. Mailing and shipping gross margins was 85.7% in Q4 versus 84.2% in Q4 of 2015 and was 85.7% in 2016 versus 82.1% in 2015. The increase in gross margin was attributable to the growth and service fee revenue which has a higher gross margin resulting in accounting for a higher percentage of the total revenue. We experienced year-over-year increases in our Q4 costs of sales and marketing, R&D and G&A primarily related to our acquisitions and our investments to support the strong growth in our mailing and shipping business. However, these costs as a percent of revenue have declined as we scale our business. Non-GAAP operating income was $54.6 million in Q4, up 88% year-over-year versus Q4 2015 and was $169.8 million in 2016, up 115% versus 2015. Adjusted EBITDA was $55.9 million in Q4, up 85% year-over-year versus Q4 2015 and was $174.4 million in 2016, up 111% versus 2015. Non-GAAP adjusted income per fully diluted share was $2.73 in Q4, up 74%, versus $1.57 per share in Q4 2015 and was $8.70 in 2016, up 96% versus $4.43 in 2015. Fully diluted share used in the EPS calculation was $18.0 million for Q4 and $18.3 million for 2016. Our cash tax expense was $4.8 million in Q4 and $8.1 million for 2016. For 2016, our cash income tax expense consisted of federal alternative minimum tax and various state taxes. The Company expects it will utilize the remainder of its federal NOLs and other tax credits during 2017 and that’s expected to be a regular cash payer for 2017. We ended Q4 with $108 million in cash and investments, up $24 million from the $84 million at the end of Q3 2016. Increase in cash investments was primarily driven by operating cash flow which is partially offset by share repurchases during the quarter. During Q4, we made a required principal repayment of $1.5 million of our debt resulting in total debt under the credit agreement excluding debt issuance cost of $149 million. During Q4, the Company repurchased 316,000 shares for a total cost of $33.1 million. During 2016, the Company repurchased approximately 844,000 shares at a total cost of $80.5 million. On October 25, the Board of Directors approved a new share repurchase program which became effective November 7, 2016 and is still in effect that authorizes the Company to repurchases up to $90 million over six months following the program's effective date. As of today or yesterday, the Company has repurchased a total of 382,000 shares at a total cost of $44 million under this plan. Now turning to guidance, we expect fiscal 2017 revenue to be in a range between $400 million to $425 million. We expect 2017 revenue to continue to be driven by growth in our mailing and shipping business as Customized Postage accounts for less than 5% of total revenue. Now that we have anniversaried our Endicia acquisition, we expect our revenue growth rates to be in a more normalized growth range for 2017. We expect sales and marketing, R&D and G&A to increase in 2017, more in line with revenue growth as we continue to invest in the business. Given the importance in investing in R&D and sales and marketing to grow the business, we could see increases in any given quarter, higher than revenue growth rates. In particular, we have to invest in the first three quarters of the year ahead of the seasonally strong fourth quarter where we realize more of the benefits of those investments for the year. We expect non-GAAP tax expense will be approximately 40% of non-GAAP pre-tax income for 2017. As we expect to be a regular cash tax payer in 2017, we will no longer be excluding our non-cash tax expense from our non-GAAP tax numbers started in Q1 2017 and afterwards. We expect fully diluted shares to be in a range of $18 million to $19 million in 2017. We expect fiscal 2017 non-GAAP EPS to be in a range between $6 to $7 per fully diluted share. As a result of the expected change in our non-GAAP tax expense to reflect their status as a regular taxpayer, our 2017 guidance for non-GAAP EPS is not comparable to our 2016 reported non-GAAP EPS. To help investors better understand the impact of the tax change, our 2016 non-GAAP EPS would have been approximately $5.50 had we been a regular cash payer for 2016. This number can be calculated by applying 40% tax rate to our 2016 non-GAAP pre-tax income of $167 million which would have yielded a non-GAAP tax expense of $67 million and non-GAAP net income of $100 million, which is approximately $5.50 per share based on 18.3 million fully diluted shares. With our increased focus on shipping, we expect our revenue and financial results to exhibit seasonality, reflective of customer 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 shipping period. As such we would not necessarily expect the first quarter of 2017 to achieve the same result as the fourth quarter. Last year, Q1 2016 was up sequentially versus Q4 2015 as we benefited from having the full quarter of Endicia’s results in Q1 versus only half a quarter in Q4 2015, which offset the negative seasonal impact. We expect capital expenditures to be approximately $5 million to $8 million in 2017. Given the change in our non-GAAP tax expense, we will now provide 2017 guidance for adjusted EBITDA to help investors better understand the expected grow in our business on a comparable basis to last year. We expect 2017 adjusted EBITDA to be in a range between $200 million to $220 million. This represents an expected growth in adjusted EBITDA of approximately 15% to 25% compared to 2016 adjusted EBITDA of $174 million. Long-term outlook, we've achieved a significant transformation of our business over the past few years with our acquisitions and focus on shipping. Our mailing and shipping business model with recurring revenue and high margin is very attractive and sustainable business model. We are very well positioned to capitalize on the shipping opportunities in our business. We expect our long-term growth rates to naturally benefit from the growth in e-commerce, which has been growing at about 15% year-over-year recently. In addition, we believe there are opportunities for us to grow in excess of e-commerce growth rates through increased deduction of our multi-carrier and technology solutions. Our five-year revenue growth rate target is 20%. We will continue to execute on our non-shipping businesses, while we continue to execute our non-shipping businesses, we expect that our revenue going forward will be driven more by the shipping area. We would expect our long-term revenue growth rate to approximate our growth rate in the shipping part of the business as it becomes a larger and larger percent of total revenue over time. We expect our five-year adjusted EBITDA margins will be in a range similar to up modestly compared to our current margins, while there are potential opportunities to expand our margins over the next five years. We are more focused on investing for revenue growth as opposed to expanding margins at the expense of the revenue growth. In summary, we are very excited by a strong performance over the past few years and look forward to continuing to deliver great results. With that, we will open up for questions.

[Operator:]

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

[Kevin Liu:]

Hi, good afternoon.

[Kenneth McBride:]

Hi, Kevin.

[Kevin Liu:]

First question I wanted to ask about was just ShipStation seems to be partnering a little closer with FedEx with customers now able to get savings on FedEx advantage rates. Could you just provide some insight into the economics of that relationship and specifically whether you guys are in any sort of referral fees or participate in any sort of revenue shares for customers referred to FedEx?

[Kenneth McBride:]

Yes. I think it's in general, as we've discussed customer needs vary and certainly customers often utilize when they're at the size customers that ShipStation addresses in their technology. They often utilize the second carrier and USPS is always there, and the second carrier could be FedEx, could be UPS. And FedEx is excited about the relationship in the potential of selling ShipStation into their customers because it represents really great solutions for their particular customers. And we've got a lot of support from FedEx. In terms of that specific financial that we can't disclose those, it’s under NDA, but we were excited about the relationship and the partnership going forward.

[Kyle Huebner:]

I would just add that in the multi-carrier space our focus is always on delivering the value to the customer and making sure we meet their needs and so for certain customers who may do more volume of FedEx. So our technology is beneficial for those customers as well. So we just looked to expand our relationships in any way that continues to benefit the customer.

[Kevin Liu:]

Understood. And kind of a similar question, it seems like subscribers to your various product offerings also that access to GlobalPost, which I think leverages USPS versus smaller international package shipments. Is this more of just kind of expanding the number of options available to your customers or do you see this as potentially adding some incremental growth to your transaction oriented revenues?

[Kenneth McBride:]

I think it’s both, obviously we would like to bring new value to our customers in the international shipping is an area where there's a lot of complexity. There's a lot of challenges for customers. So it's an area where we're focused on trying to bring a good solution to market to help those customers and certainly we do things as a Company for the shareholders that we are looking to make money. Overall the customers are getting better solution and more excited about using our product, churn rates go down and so the value proposition is really the focus on providing a great solution to customers in that particular international category.

[Kevin Liu:]

Got it, and just lastly regarding the tax rate for 2017 understand why it's going to a full tax rate for the year. But do you guys still have NOLs that you haven't worked through yet, that would actually allow you to benefit from a cash perspective throughout at least the first half of 2017?

[Kyle Huebner:]

Yes. Kevin, so we do have NOLs impacts credits available at the end of the year that we expect will use in 2017. When you calculate the quarterly tax expense, you're basically using the projected effective tax rate for the full-year to calculate the tax for each quarter. So our best estimate is that our cash tax will be about 30% and the effective rate will be 40%, but that will be spread out evenly over the year in our calculation as opposed to all happening in Q1 and part of Q2. So we felt that because we're using the full-year effective rate projection at the beginning of the year, it made sense to switch our methodology for the full-year, so it will be consistent with the years after.

[Kevin Liu:]

Great. That’s all I had. Congrats on a very strong quarter.

[Kenneth McBride:]

Thanks, Kevin.

[Operator:]

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

[George Sutton:]

Thank you. And first, Kyle, thank you for the discussion on taxes. I'm sure you learned a lot about taxes this past quarter. So relative to your outlook for 2017, which if I include ShippingEasy, it’s 10% to 15% topline growth and you're talking about 20% toward greater growth going forward over the next five years. I just wanted to make sure, I'm not missing something in the translation and get a sense of what you're assuming for 2017 in terms of puts and takes for that organic growth part?

[Kyle Huebner:]

Yes. I mean I think that easiest way to think about it is that the non-shipping businesses still constitute 30% of the total revenue and those businesses are mature and the growth rates in those are in the low-to-mid single digits compared to shipping. And so we're experiencing kind of a negative effect on the revenue from the slower growth and in the non-shipping business today. But over the course of five years as shipping continues to grow, the non-shipping businesses will account for a smaller and smaller percent of the total revenue. And so on a weighted-average total basis, we think that the revenue growth will accelerate over time to reflect the growth and shipping, whereas this year we still have a 30% of the business growing at much lower growth rate.

[George Sutton:]

Gotcha, okay. Thank you for that. And Ken, you mentioned in your prepared comments, there is a – you currently now have built a fall-in and diverse suite of needs for your customers. Does that suggest from an M&A perspective that you're comfortable with your portfolio today or what with the big picture Plan B relative to M&A?

[Kenneth McBride:]

Well, I mean we don't comment on M&A potentially, but I think at this point in time, we feel through the acquisitions. We've gotten a very complete suite of capabilities across all the different platforms and they all have something that they feature that the other ones don’t have. So when we go into a customer sales process, we are able to figure out the customer's needs and then depending on what they may need depending on particular say shopping carts they want, or online marketplaces, what type of automation, different carriers they may need in their business. There's different solutions that fit that customer best. In case of ShipWorks it’s a client-based solution, the customer may prefer that. ShipStation web-based, ShippingEasy has a broader feature set and includes some capabilities in some areas like inventory management and customer management. So it just depends on the customer situation. And I think we’re able to address the vast majority of our target customers at this point. We're always looking for additional areas where we can enhance a product, obviously we're spending a lot on development, looking at new areas where we can expand and always evaluate potential uses of cash in different ways through different share repurchase or M&A. So we never roll it out, but we can't comment on these specific things.

[George Sutton:]

Lastly if I could, we talked about the 30% of the non-shipping business or the non-shipping, which is 30%. We recently got a very interesting pricing discount for online usage, which suggests the Postal Service continues to try to migrate customers to the online offering, which is largely you, wouldn't that suggest that SMB part of the business should start to increase penetration?

[Kyle Huebner:]

Yes, I think in that small business, George that the value proposition is really very different. With small business, historically the customers we acquire are making trips to the post office. So the primary value proposition is avoiding trips to the post office. And so those customers tend to benefit the most, if they do kind of diversity in mailing and shipping that anything beyond First Class stamp often requires a trip to the post office. Small businesses aren't necessarily a large volume customer. They're more about savings time by avoiding the trips to the post office. So while they get discounts, our First Class letter mail stamp as a result of the new rate case is now $0.46 for PC and metered postage versus $0.49 at retail, so our discount went from $0.05 to $0.03 and in shipping our customers get an average of 13% that's counterparty mail. But what happens is in the small business they're often not doing enough volume where saving the $0.03 or $0.10 is really the material driver of why they sign up for the service.

[George Sutton:]

Let’s say it’s incremental.

[Kyle Huebner:]

Yes. In terms of materially changing the penetration as they get more incremental on the margins.

[George Sutton:]

Okay. Thanks guys.

[Kyle Huebner:]

Thanks.

[Kenneth McBride:]

Thanks, George.

[Operator:]

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

[Tim Klasell:]

Yes. Congratulations on the great quarter.

[Kenneth McBride:]

Hey, Tim.

[Tim Klasell:]

Hey, guys. I want to speak a little bit to monetization, you guys have hit at that prior calls and I jumped a little bit late, so I apologize if you cover this. But if you go through all your channels, do you think you have optimized the pricing or the monetization to the point of where you think you are pretty close to there or do we have a ways to go in 2017?

[Kenneth McBride:]

I guess, when it comes to price points, I’d say that we’re a company that constantly tries to test, AB test like different price points and try to understand the correct one and we're perpetually trying to test different marketing strategies. And so in terms of what is currently available at this point, we feel those are the best price points in the current market, in current competitive environment, but doesn't mean that we don't changes those over time, we have change them over time, but I think we feel the current ones are – because of all our testing, the current ones are the best possible LTV versus CPA, the best ROI we can get in the current environment.

[Kyle Huebner:]

And just to add in terms of the monetization, the context we talked about it is in the small business customer. They're primarily on the flat rate subscription service and we might get a couple bucks from store purchase, whereas the shipper who are doing much higher volume, the value propositions much greater, the revenue model supposed to being all fixed price, it creates opportunities for us to earn revenue on package volume. So that's the reason the ARPU is increasing and talked about. So I think the way we look at it as we grow shipping, which that growth can come from getting new customers or existing customers, increasing their volume, the revenue and ARPU benefit from that. So we look at it more as we grow shipping, the monetization resulting in the higher ARPU is a natural byproduct of focusing on growing the package volume.

[Tim Klasell:]

Okay, great. And then if we jump over to the competition, obviously that’s a great market you guys are executing here, bad news is that's going to attract competition. What are you seeing out there particularly on the shipping side, any changes of note that you'd like to share with us?

[Kenneth McBride:]

Yes. I think there's lots of companies out there that are talking about like you said were given our success and financial success. You're always got to be concerned about becoming the Company that people are looking at. We never underestimate our competitors. We obviously talked a lot about Pitney Bowes and we continue to focus on them. But I think overall I feel like we continue to really have really amazingly good product with a massive over 400 integrations, over 30 carriers and sophisticated features that frankly took us, we spent $1.5 billion as a Company developing this industry and in partnership with the USPS. So there's a lot of capabilities in there and our almost 700,000 customers are using those solutions in very sophisticated ways when it comes to shipping. So again we watch competitors very carefully. We do feel like our solutions are very, very good and pretty far ahead in terms of the market.

[Kyle Huebner:]

I would just add to that I think there was a lot of discussion and focus on competitors, announcements back in Q1 and early Q2 of this year and if you look at the results, we continue to deliver, I think that speaks for itself in terms of our ability to execute from a competitive standpoint.

[Tim Klasell:]

Okay. And then finally on seasonality, should we just look at traditional, but retail sales that sort of being up parameters there. Will it be that strong or how much leverage or how much exposure do you have to B2B type shipments versus B2C with your packages? Just trying to get a handle on how seasonal we should be making our models going forward?

[Kenneth McBride:]

Yes, I mean that’s a good question. I would say it's not as extreme as the retail sales that you see in Q4 because one of the things that happen is especially in the shipping market, shippers really need to adopt a new technology solution before you get to Q4, which is one of the reasons I talk to front loading sales and marketing. So as a new customer [indiscernible] solution, you do benefit from that that growth in those incremental packages. But obviously when you get to Q4, you see the lift from the existing customer base. But I think the fact that we're continuously adding customers throughout the year before you get to Q4 helps to grow the package volume and somewhat mitigate that seasonality, but with 70% of our revenue coming from shipping. It is becoming more and more factor to take into account.

[Tim Klasell:]

Okay, great. Thank you very much.

[Kenneth McBride:]

Thank you.

[Operator:]

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

[Allen Klee:]

Yes, hi. Could I hear you say that you think you're mostly done with the synergies from Endicia?

[Kenneth McBride:]

Yes, I think we do feel like we've gotten a lot of synergies and we move quickly. We're about a year and a few months through the process and we've centralized the marketing efforts gained a lot of efficiencies there. We've combined the sales teams. We really aligned the teams that are selling all the different brands. We've achieved cost reductions. We've eliminate a lot to duplicate efforts, lots of duplicate infrastructure. We combine the development teams that they're working, across utilizing each other's expertise and developing the same software together and we've had the customer support organizations come together and under the same umbrella in terms of management team and we're really focused on optimizing and increasing the scale and putting those organizations together and gaining some scale economies. And like there's no a lot of cost savings through the purchasing and we didn't able to negotiate better deals, but the services from vendors and the products we purchase. And so yes, I think we're very happy with the progress. I think it took us about a year and a half and we feel like we really gotten a lot of the benefits of Endicia and we're really excited about going forward and starting to really – continue to really grow that business.

[Kyle Huebner:]

Yes, I would just add, as Ken said the kind of hard dollar cost savings synergies, we achieved and exceeded our targets, but I do think that there are still the longer term synergies as Ken talked about the technology development process, optimizing and fine tuning the sales model that maybe a little more intangible synergies. But I think there's still a lot of opportunity over the next few years to really take advantage of the combined organization in those areas.

[Allen Klee:]

Okay, great. And then where do you think you stand in terms of the opportunity to upsell your shipping offerings or your multi-carrier solutions to your historical small home office customer base?

[Kyle Huebner:]

I think it really comes down to the customer needs. So in cases where a Stamps customer may also be using UPS.com or a FedEx.com as separate system then the multi-carrier makes sense for them to unify the three different solutions into one single application they can use. So for customers where they're using FedEx and UPS already then we're creating value with a multi-carrier solution. For the other customers, we have a lot of customers that if at their packages are typically already going through the USPS and they're not really using other carriers then that may not be – there's really not as much of an opportunity to create value for the customer. So I think we just look at it, the customer need and the value we create, and if it's the right solution for the customer, we’ll try and upsell them, but if it's not the right solution and they're just using USPS we won't.

[Kenneth McBride:]

I’d just add to what Kyle said, I do think it’s within our product. We have a lot of information as to one particular customer's characteristics are and how they're using our solution. In our product there's various different if you will tabs like different places you can go to get the package labels or the postage. And so there is call one batch, and we use that batch. That's really the tab that you go to when you start to do higher and higher volumes and that's the tab where you can go on and you can pull an orders and combine orders and then typically customers are printing out orders in chunks of 10, 20, 30, 40 packages at one-time. So we are able to see those customers and profile them and so we found that once customers get to a certain volume of package processing, the correlation with using the second carrier is very high and so we know that’s a customer that's likely to be a good candidate for a multi-carrier solution. So in that case we're able to offer them a solution which we think will be a better suited solution and keep them happier long-term.

[Allen Klee:]

Okay, great. Is it possible to give a generic example of kind of the synergies that you can get when you buy a multi-carrier shipper?

[Kenneth McBride:]

Yes. I think we've talked a lot about the different synergies that we do get. I think the companies – the marketing, sales and the marketing is the synergy that we're able to take our marketing capabilities, our scale and our size in our financial, our balance sheet and put it against a solution that maybe constrained as a start up in terms of the capital they can invest. We have a national sales team and that sales team can begin to sell a solution to the extent that it's a solution that complements other things we may have. And so we're able to bring a sales and marketing capability to potential like small or multi-carrier solution that may have great technology, but not really a lot of hour or money to be able to go after the market. And so those are – that's probably the primary way that we're able to do that and able to – potential growth in an acquisition. I already talked about the potential upsell so that's another area where obviously in our customer base. If we have a certain need for a customer and we're able to identify that need. We have three multi-carrier solutions. If we needed an additional capability in order to address the needs that we didn't have then by understanding the customer characteristics we'd be able to upsell that. So then as we bring in customers on our general marketing and they perhaps maybe starting with a Stamps.com solution and then they grow over time, we're able to look at their characteristics survey and talk to them. And then if it's the right solution for them, it makes sense – for us to make sense for the Postal Service to get that customer on the best solution, so that they stick on a long-term.

[Allen Klee:]

Great, thank you. And then we saw more of a customer pick up this quarter than in the prior three quarters. Can you tell us what was kind of behind this and any flavor in the type of customers that mostly made this up?

[Kyle Huebner:]

Yes, I mean I think our traditional historical small business is the key for – from a customer acquisition perspective is the strongest quarter. As I mentioned they are typically going to the retail post office and so at the holidays their needs go up and number of trips go up, so that's kind of historically been the case where small business, customer acquisition is strong in Q4. On the shipping side, I mentioned the acquisition happens before you get to Q4, but the churn rates in Q4 are kind of among the lowest because the shippers are utilizing the solution to – through much more volume and so they're really maximizing the value proposition and the value created during Q4.

[Allen Klee:]

That's great. My last question is how do you think about for life time value of your customers?

[Kyle Huebner:]

Well, I think it varies pretty dramatically between small business and shipping. And small business, the ARPU’s are pretty consistent because the flat rate subscription pricing, accounts for the majority of ARPU. So in small business there doesn't tend to be a lot of variation in the customers we acquire and so we're measuring that lifetime value based on the specifics of small business customers in terms of their ARPU’s and churn against the CPAs. On the shipping side, we have much more variation because ARPU is correlated with packaged volume on a two e-commerce merchant’s one doing significantly higher volume of packages than another. Those are going to have different lifetime values because of the different ARPU’s and potentially lower churn rate with the higher volume. So we have to measure the lifetime value relative to the cost to acquire customers and shipping separately from small business, and the CPA is when you’re using a direct sales force are a lot higher in shipping with those larger volume customers. So net-net the lifetime values are a lot higher, the ROI’s are a lot higher, but it does cost more to acquire them upfront.

[Allen Klee:]

Thank you so much.

[Kenneth McBride:]

Thank you.

[Operator:]

Thank you. Our next question comes from Darren Aftahi with ROTH. Your line is now open.

[Darren Aftahi:]

Hi, guys. Thanks for taking my questions and offer my congratulations again. Just two if I may, you spoke in your 2017 initiatives, you’ve highlighted inventory management CRM areas of focus. I know you offer some of those products with this part your portfolio, but could you expand a little bit more on that and let drive any growth in ARPU? And then secondarily, as it change shipping as the percentage of the business, can you give us a general sense for where that number could be in fiscal 2017 related to your revenue guidance? Thanks.

[Kenneth McBride:]

Sure. So I think as you look at as a shipper in your day-to-day process of shipping, there's several things that you have to do. One is you're pulling the orders and you're bringing them into a solution, you're shipping out, you’re putting out the labels and your shipping and that's kind of been our core capability in ShipStation and ShipWorks and Stamps, Endicia, and ShippingEasy. But as you look at what else the customer does, well they are selling products and so managing that inventory as you get larger it starts become a real pain point. And so particularly they are just selling products across multiple channels. So you have a significant number of skews being sold in all the different channels. You maybe holding inventory in different places like you may have it in your own warehouse. You may have it using say for instance, fulfillment by Amazon. And so trying to keep that up-to-date across all the different sales channels and make sure you're not selling product that's not there and showing the different inventory levels like the only five left you see on Amazon and monitoring your stock levels, understanding when you need to reorder and generating purchase orders and managing suppliers. So this inventory management is a very tangential solution to shipping and just – it's a pain point the customers have and it naturally plugs into a shipping solution. So we built some capabilities there, really primarily in the ShippingEasy organization. And yes, we intend to – for those customers that utilize that we intend to charge additional fees because it's a big value add for those customers. Same thing with customer relationship management, a pain point of once you ship the product trying to communicate and keep track off and send returns labels and remarket. So having the ability you have all the orders and all the customer information in your core shipping function being able to send emails and communicate to those customers after the fact is also very tangential solution that is able to plug in. So as you kind of look at from the core shipping area, the different areas around that that makes sense and really it's trying to build a cohesive solution for those customers where those pain points, are there and trying to solve that for the customers, and of course, we intend to also. The value we provide, we will look at charging the customers additional fees for those services.

[Kyle Huebner:]

And to answer question on the shipping revenue, one thing to point out is that Q4 is a stronger seasonal shipping quarter, so the shipping was over 70%, but that benefited from the Q4 seasonality. So I think looking forward, we call it 30% for Q4 that that’s kind of growing in the low single digits and where the shipping is obviously growing significantly higher than that. So I think if you model out the 30% and growing at that low single digits that allows you to kind of back into what the mix of shipping will be at the end of the year depending on the shipping growth.

[Darren Aftahi:]

That’s helpful. Just one follow-up, on the commentary about CRM and inventory management, will that be charged with the additional fees? Is that a per unit or more of an umbrella increase would be?

[Kenneth McBride:]

Well, I mean I think those are really very early services and like I said earlier in the call, as an organization we are constantly trying to test, so we would float some trial balloons in different areas to try to understand the price sensitivity in the different capabilities how you differentiate the different price point. So certainly it’s an extra value proposition to customers that need that, it tend to be larger and they will pay additional fees. They may have a third-party inventory management solution already that they're paying fees too. So it’s really just from the core shipping function, which is the most complicated part of the overall, if you add these additional capabilities and then upsell customers into that. You can get them into a higher price point, monthly fee and so it could be monthly fee or it could be transaction fees. We're just early in terms of trying to optimize that business model.

[Darren Aftahi:]

Got it. Thank you. That's helpful. End of Q&A

[Operator:]

Thank you. I’m showing no further questions at this time. I would like to turn the conference back over Mr. Ken McBride, Chief Executive Officer for closing remarks.

[Kenneth McBride:]

Thanks for joining us today and as always if you have follow-up questions, you can contact us at the investor.stamps.com website or you can call us at 310-482-5830. Thanks so much.

[Kyle Huebner:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.