Stamps.com Inc.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Financial Results Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) I would like to introduce your host for today’s conference, VP of Finance Mr. Jeff Carberry. Sir, you may begin.

[Jeff Carberry:]

Thanks, very much. Good afternoon everyone, and thanks for joining us. On the call today is Ken McBride, CEO; and Kyle Huebner, CFO. The agenda for today’s call is as follows. We’ll review the results of our second quarter 2014; then we’ll discuss net results and talk about our business outlook; but first, the Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, this release contains forward-looking statements about our anticipated financial metrics and results that involve risks and uncertainties. Important factors, including the Company’s ability to complete and ship its products, maintain desirable economics for its products, and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings with the Securities and Exchange Commission made from time-to-time by Stamps.com, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2013, 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 the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now, let me hand the call over to Ken McBride.

[Ken McBride:]

Thank you Jeff and thank you for joining us today. Today we announced our second quarter financial results. During the second quarter we achieved the following non-GAAP results; record core mailing and shipping revenue $32.4 million, record total revenue of $34.3 million, operating income of $9.1 million with 26.5% operating margin, net income of $9.0 million and earnings per fully diluted share of $0.55. Note of our second quarter results included a small impact from ShipStation for the 20 day period from the acquisition close to the end of the quarter. We are pleased with our strong operating results in light of traditional seasonal slowness and the tough year-over-year compressions we face this quarter. On the call today we’ll talk in more detail about the ShipStation acquisition, our core mailing and shipping metrics and business and our financial results and Business outlook. During the second quarter we acquired ShipStation which is based in Austin, Texas. ShipStation offers monthly subscription based e-commerce shipping solutions, primarily under the brand names ShipStation and [indiscernible] ShipStation solutions allow online retailers and e-commerce merchants to organize, process, fulfill and ship their orders quickly and easily. ShipStation supports automatic order importing from over 40 shopping carts and marketplaces including eBay, Amazon, Shopify, Bigcommerce, Volusion, Squarespace and many others. The definition of ShipStation represents the significant strategic investment and our high volume in e-commerce shipping business. E-commerce driven package shipping is the fastest growing segment within the mailing and shipping phase and this acquisition will help us to accelerate our growth in this area. Our goal has always been to help customers simplify their shipping process and ShipStation is a great product for this. We do not plan to breakout ShipStation results separately going forward for competitive reasons but our updated guidance reflects our expectations for our consolidated results including ShipStation. We’re very excited about the acquisition and look forward to continuing to capitalize on the opportunities in the e-commerce space. We’ll now begin a more detail discussion with core mailing and shipping business. Core mailing and shipping now include ShipStation. Note that we have removed the PC Postage terminology as there service offering with ShipStation is broadened into PC Postage. As always, we exclude all enhanced proportional channel activity from the metrics we discuss. Note again that our second quarter revenue, used to calculate our metrics included a small impact from ShipStation for the 20 day period from the acquisition closed at the end of the quarter. However, we did not quite ShipStation second quarter customer metrics such as paid customers, customers' acquisition, customer churn and customer postage printed. We do plan to include those metrics in our customer metrics starting in the third quarter. For a more detailed definition of how we calculate each of our metrics, you may refer to our quarterly investor metric spreadsheet at investor.stamps.com. Core mailing and shipping revenue comprised of our small business enterprise and high volume shipping customer segments was $32.4 million in the second quarter while revenue grew 7% and a tough compare with the second quarter of last year where core revenue was up 15%. During the second quarter we acquired 71,000 gross small business customers and our Cost Per new Small Business Customer Acquired or CPA was $135. Gross small business customers acquired was 2% compared to Q2 last year. While we did see a modest increase in CPA compared to Q2 of last year, we continue to experience a strong ROI on customer acquisition spend, with expected customer lifetime values in excess of two times the cost to acquire a customer. Our goal in general is to continue to scale our marketing spend whenever possible if we see strong expected ROI, and our customer acquisition spend was up 8% versus Q2 last year. The increase in spend did pressure our earnings a bit again this quarter, but we see that as the right trade-off in alignment with our goal of generating long-term growth in the business. Our average monthly churn during the second quarter was 2.6%, which was flat versus 3.6% in the second quarter of 2013. The second quarter has historically shown the highest churn rate of the four quarters each year owing to seasonality. So the sequential increase in churn was expected. Paid customers in the second quarter were $492,000. That was up 5% versus the second quarter of 2013 and flat sequentially versus the first quarter of 2014. [Indiscernible] generate the majority of our paid customer growth in the seasonally strongest business first and fourth quarters with smaller sequential increases or decreases in paid customers during the second and third quarters and this year again followed that same historical pattern. Average subscriber revenue per paid customer or ARPU was $21.92 in the second quarter that was up 2% versus the second quarter of 2013. The year-over-year change was in a range similar to what we have seen over the past several quarters where we have range from minus 2% to plus 3% for ARPU. Postage printed by our customers was $371 million in the second quarter, which is flat versus the second quarter of 2013. We again faced very tough comparison with postage printed in the second quarter of 2013 which was up 60% year-over-year. Our second quarter results come against the background of continued challenging economic environment for small businesses and the NFIB index continues to fluctuate slightly above the 93 threshold which is considered a recessionary reading. Now with that let’s discuss some initiatives we’re working on in our core mailing and shipping business. In Small Business area we plan to continue building and optimizing our customer acquisition activity. As we continue to scale our spend we continue to see very strong ROI that is at least 2 times greater than the cost to acquire a customer. Thus we plan to continue to increase our small business customer acquisition with a goal of spending 5% to 15% more this year. We plan to continue to utilize the marketing channels we have used in the past including direct mail, traditional media, online marketing and other areas. Across each of our marketing channels we plan to continue to focus on efficiently scaling the total spend, while keeping cost per acquisition at a reasonable level. In the Enterprise area, we plan to continue scaling up our sales and marketing efforts. Our solutions continue to have a strong customer value proposition compared to postage meters and had dramatically lower total cost of ownership and a greater visibility controls than are available with postage meters. Second quarter enterprise revenue was up 13% year over year. Revenue growth faced a tough comparison with the second quarter of 2013, which was up 45% year over year. We’re pleased with our continued progress in Enterprise and feel that we’re achieving a very attractive return on investment in this area and we’ll continue to focus on this area in 2014. In our high volume shipper area, we’re continuing to ramp up our efforts. The Stamps.com and ShipStation platforms offer great solutions for high volume shippers such as warehouses, fulfillment houses, e-commerce shippers, large retailers and other types of high volume shippers. Second quarter postage printed by high volume shippers, excluding ShipStation customers was up 10% year-over-year. Similar to other metrics this quarter, Q2 was a particularly tough comparison as high volume shipping postage printed was up 55% in the second quarter of 2013. For 2014, we’ll continue to focus on scaling this business area. We’ll continue to introduce improvements in the software and features to further improve efficiency and scalability of the product to the largest high volume customers. We’ll continue to add new shopping cart integrations for easier data export and import from the tools that customers like to use, like the new Shopify integration we added this quarter to the Stamps.com interface. And we’ll continue to scale our marketing efforts and our sales efforts using our national sales force. We’ll continue to scale and optimize our sales and marketing in this area and we will focus on executing our post acquisition strategy to maximize the benefits of a combined Stamps.com and ShipStation entity. With that, let me hand the call over to Kyle for our financial review and results.

[Kyle Huebner:]

Thanks, Ken. We will now review our second quarter financial results. As Ken mentioned, our results include the results of ShipStation from June 10, 2014 to June 30, 2014. We will discuss our financials on a non-GAAP basis which exclude the following items

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Kevin Liu of B. Riley & Company. Your line is open. Kevin Liu - B. Riley & Company A couple of questions on ShipStation. Can you talk a little bit about some of the metrics that they have in terms of number of customers, maybe an average sell price? I know you can see kind of the range of prices they offer but we would be curious what the overall average is? And then maybe what their historical growth rates look like?

[Ken McBride:]

Yes, Kevin for the metrics we’re not going to breakout ShipStation separately. The metric -- their business model is to a large degree comparable to ours. So the metric such as paid customers and ARPU and churn are going to be the same types of metrics that we report on. So we’ll be reporting those aggregated numbers going forward. I think in general we said about our own business that the high volume shipping space has a better ability to monetize volumes and so we do tend to see higher ARPU and lower churn in the high volume shipping customer segment. So I think as with our business, I think ShipStation is similar to that profile in terms of focusing on those high volume shipping customers. Kevin Liu - B. Riley & Company And maybe if you can talk a little bit actually about the customer acquisition strategy. Do you expect it to be fairly similar to what you do on the PC Postage side or do you think there needs to be kind of the higher touch and perhaps more actual reps calling on folks here.

[Ken McBride:]

I think we’re really early in the process of trying to understand more about the company and the business but historically their product has really resonated online with a lot of folks an a lot of online marketing has certainly been something that’s worked well. And as we go forward and we look at applying some of our capital and our expertise to the various ways to target small businesses; as you know, e-commerce has been a focus for some time. So we’ve been looking at attracting e-commerce merchants and I think we feel that was one of the great benefits that we brought to the acquisition was being able to hire expertise and capital to the future marketing of their solutions. Kevin Liu - B. Riley & Company And just lastly, I would assume that given kind of the ARPUs here and the fact that it's more akin to high volume shipping business with these particular customers, any sense you can us in terms of kind of life time value of their customers and with that in mind, how do you think about the upfront investment you’re willing to make in terms of how aggressive you might be growing on the margin side in order to secure additional growth here?

[Ken McBride:]

Yes, I think it’s exactly what you said. Customers are more akin to our high volume. Customers where we see much higher ARPU are able to charge higher price and attract the additional monetization from the volume. So I think as we look at the formula for applying the marketing, clearly the higher life time value, the higher you can spend upon in terms of acquisition. So we’ll be taking a look at those equations as we move into it but certainly the customers have higher life time value than our average overall and so I think we feel like we can spend more on marketing to the extent that it works.

[Kyle Huebner:]

Yes, I would say similar framework for how you evaluate it as we use in our own business, looking at what that expected lifetime value is relative to the cost to acquire a customer and we test all the different marketing channels and programs and monitor how the expected return will look. So the same framework and philosophy that we use for our own business is applicable with ShipStation.

[Operator:]

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

[Unidentified Analyst:]

It’s Jason on for George. I was just wondering if you can provide a little bit more color on the expectations for sales and marketing spend. So through the first two quarters of the year I think that sales and marketing spend is of course up year-over-year but we’ve seen a little bit less return on the customer acquisition cost. I’m just wondering if that’s related to traditional channels or if you're pursuing some new channels or Kenneth if you can give us any more detail on what’s going there?

[Ken McBride:]

Yes, the guidance we gave is the spend being up to 5% to 15% in the first few quarters. The small business acquisition spend was up I believe with that 10%. So we’re right in the midpoint of that range and our goal is to continue to look for opportunities to invest and scale our marketing spend across channels and as marketing and advertising environment can change quarter to quarter. So it’s something we continuously monitor and adjust but I would say at this point, the first half of the year being up 10% is in line with our expectations and the guidance we gave.

[Unidentified Analyst:]

Okay and I guess I'm just wondering if you've had some changes in the channels that you’re using for advertising and if that may be causing some of this change that we’ve seen or if it’s the traditional channels you’ve used in the past.

[Ken McBride:]

We’re largely utilizing all the same channels as you know, direct mail, traditional media, online marketing and it’s not really the contribution from any kind of shift in the mix. As always we really focus on trying to make sure our ROI is there when we spend the money and to the extent that we’re able to scale the business, even if the CPA is a little higher, it's something that we’d like to do. And so we’re trying to -- focusing on scaling and making sure that ROI is there, optimizing the customer unit economics. So we have seen some uptick in the CPAs. So I think we’re very comfortable with the customers we’re acquiring at these levels and the ROI is definitely a good return.

[Unidentified Analyst:]

And then just curious, the features that you guys have through ShipStation versus the features that you have on the Stamps.com service, I’m curious if there’s plans to integrate some of those features across platforms or at this point are you looking to keep this as kind of two separate services?

[Ken McBride:]

We’re really focused on keeping them as separate services. We think they have a lot of complementary capabilities. First and foremost they’re really a purely web based solution, which is -- as you know traditionally Stamps.com has been client based. So I think there is a nice complement there in terms of not only products but also in terms of internal technology capabilities as we move forward. I think that they have far more integrations. They have over 40 e-commerce integrations, really far more than us or any of their competitors and that’s kind of what sets them apart in many ways from their competitors. So we see that as great complement. And I think that the power of the product is really designed for really customizing and automating orders. They’ve gone well beyond anything we’ve been able to do internally in terms of our batch capability and the customization, automatization is really saving customers a lot of time by getting the high volume segments versus our customer base which tends to be more higher volume but not quite in the same realm as we’ve seen, as we’ve see at ShipStation. So there is -- I think the number of integrations, the ability to customize and automate, which saves a lot of time and the ability to support very large batches of orders through the product.

[Unidentified Analyst:]

Okay and then just last one for me Kyle. On the G&A increase that we see year over year, I think there is some onetime costs included in there but I’m just wondering if you could go maybe a little bit more specifically about the increase that we’ve seen relative to last year.

[Kyle Huebner:]

Yes, I mean I’ve got some of it. There's about $420,000 that related to -- was acquisition related. Excluding that G&A was still up as I talked about. I think the broader context is the company has grown pretty significantly from 2010 to 2013 and G&A tended to be flattish and so in the second half of last year, we made some additional investments in terms of infrastructure investments and headcount that resulted in kind of a year-over-year increase. As we get into the second half of the year, some of those comparisons will become a little bit easier, So I would say we still expect to see a higher level of G&A for the second half of this year, but then as we move into ’15 and in the longer term model, we'd return to more kind of traditional growth rates.

[Operator:]

Thank you, our next question comes from Tim Clavell of Northland Securities. Your line is open.

[Unidentified Analyst:]

This is Josh in for Tim. Say going back to this ShipStation acquisition, can you talk about how much overlap there is in the respective customer bases between Stamps and ShipStation?

[Ken McBride:]

Well, I think that generally speaking both companies address e-commerce and so in terms of the segments that we go after, I think that was one of the things that we really saw a great benefit because we understand the segments they’re going after. Like I said before, we’ve been testing and working on our marketing in that area. So we feel like we bring that to their products. In terms of capability, they have really capabilities that suit a higher volume user in many ways, so that there's -- I think their positioned, their product is really positioned targeting a higher volume e-commerce users whereas we tend to get e-commerce users in the earlier part of life cycle, [indiscernible] get customers kind of in the later part of life cycle as they grow up and become, have additional stores and we need the additional integrations that they bring to the table and also that the volume gets to such a point where the customization and automatization they bring really provides a big value add for those customers. So I think it’s really like kind of -- the positioning is both e-commerce in terms of size we’re really traditionally focused on somewhat smaller and they're focused on larger customers.

[Operator:]

(Operator Instructions) At this time I see no other questions in queue.

[Ken McBride:]

Okay. Thank you for joining us today. If you have follow up questions, you may contact us at our investor website, which is investor.stamps.com or our investor phone number, which is 310-482-5830. Thank you.

[Kyle Huebner:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program, you may all disconnect.