Stamps.com Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com Third 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). As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Mr. Jeff Carberry, Vice President of Finance. May you go ahead sir.

[Jeff Carberry:]

Thanks, very much. Good afternoon everyone, and thanks for joining us today. 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 for third quarter 2014; then we'll discuss financial 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 includes 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. With that, let me hand the call over to Ken.

[Ken McBride:]

Thank you, Jeff, and thank you for joining us today. Today we announced our third quarter financial results. During the third quarter we achieved the following non-GAAP results. Record core mailing and shipping revenue of $35.8 million, record total revenue of $37.8 million, record operating income of $11.7 million, with a 30.9% operating margin, record net income of $11.5 million, and record earnings per fully diluted share of $0.71. Note that our third quarter results included a full quarter impact from our ShipStation acquisition completed in the second quarter and partial quarter impact from our ShipWorks acquisition, which was completed in the third quarter. We are very pleased with our operating results in this traditionally slow, seasonal period, which highlighted the strength of our core mailing and shipping business. On the call today we'll talk more in detail about the ShipWorks acquisition, our core mailing and shipping metrics, and business and our financial results and business outlook. During the third quarter, we acquired ShipWorks which is based in St. Louis, Missouri. ShipWorks offers monthly subscription based shipping software to provide simple powerful and easy to use solutions for online sellers. ShipWorks solutions integrate with over 50 popular online sales and marketplace systems including eBay, PayPal, Amazon, Yahoo, and others. ShipWorks offers many powerful features including the ability to send email notifications to buyers, updating online order status, automatic order processing, and generating reports amongst many others. The acquisition of ShipWorks represents another significant strategic investment in our high volume and e-commerce shipping business. E-commerce driven package shipping is the fastest growing segment within the mailing and shipping space and this acquisition will help us accelerate our growth in this area. Our goal has always been to help customers simplify their shipping process and ShipWorks has been another great product for this. The addition of ShipWorks to our previous ShipStation acquisition, really feel like we have a great suite of products that address the potential needs of an e-commerce customer. Both products offer over 50 integrations into online sales and marketplace channels that an e-commerce user can automatically bring in and update all their orders automatically. Both products support significant number of carriers for shipping, package so that the user can chose the most cost effective solution; and both products offer a depth of supporting features that are needed by an e-commerce user to make processing their orders easier. However the two companies differ dramatically in their approach whereas ShipStation is entirely web based, ShipWorks is a windows client-based solution. We find that customers may prefer one or the other so ultimately both products have been very successful in the marketplace and we see them as a great compliment to each other. As with ShipStation, we do not plan to breakout ShipWorks results separately going forward, for competitive reasons but our updated guidance reflects our expectations of our consolidated results including ShipWorks and 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 with a more detailed discussion of the core mailing and shipping business. Our core mailing and shipping business now include ShipStation and ShipWorks. Note that we have removed the PC postage terminology we used prior to our recent acquisitions, as our service offerings for ShipStation and ShipWorks are now broader than just PC Postage. As always we exclude all enhanced promotion channel activity from the metrics we discuss. We would note that our third quarter revenue used to calculate our metrics including a full quarter impact from our ShipStation acquisition completed in the second quarter, and a partial quarter impact from our ShipWorks acquisition completed in the third quarter. We would also note that we included ShipStation customers in our third quarter paid customer metrics since ShipStation has now been with us for a full quarter. ShipStation paid customers were included as new paid customers in our investor metrics. We did not include ShipWorks in our third quarter customer metrics since the acquisition was done in the quarter. If I may include ShipWorks customers in our customer metrics starting in the fourth quarter, for a more detailed definition of how we calculate each of our metrics you may refer to our quarterly investor metrics spreadsheet at investor.stamps.com. Core mailing and shipping revenue comprised of our small business enterprise and high volume shipping customer segments was $35.8 million in the third quarter, core revenue grew 21% versus the third quarter of last year. During the third quarter, we acquired 67,000 gross small business customers and our cost per new small business customer acquired or CPA was $119. We would note that that this metric is for our traditional PC Postage business only. It does not include any contribution from independent marketing under our subsidiaries, which did not have a material impact. Gross small business customers acquired was up 5% compared to Q3 last year, while the CPA was down 5% compared to Q3 last year. Our customer acquisition spend was down 1% compared to Q3 last year, given it was our seasonally slowest quarter. We're pleased to see growth in customer acquisition with the lower CPAs reflecting a greater efficiency in our spend. Our average monthly churn during the third quarter was 3.3%, which was down versus the 3.4% in the third quarter of 2013. We are pleased to see our third quarter churn rate down compared with the third quarter last year. Paid customers in the third quarter were $500,000, up 8% versus the third quarter of 2013 and up $7,500 sequentially versus second quarter of 2014. We typically generated the majority of our paid customer growth and is evenly strong as first and fourth quarter, the smaller sequential increases or decreases in paid customer is during the second and third quarter and this year again followed that historical pattern. But the growth this quarter attributed primarily to the inclusion of ShipStation paid customers. Average subscriber revenue per paid customer or ARPU was $23.86 in the third quarter that was up 12% versus the third quarter of 2013. The year-over-year ARPU growth this quarter was primarily due to growth in the shipping segment, which benefited from our recent acquisitions as those products have a much higher ARPU. Postage printed through Stamps.com was $394 million in the third quarter that was up 8% versus the third quarter of 2013. You would note that this represented only Postage going through specific Stamps.com business model, which is the same as we've always reported. But I didn't even go through other carriers in our subsidiaries is not counted under this metric but is something which we may be able to monetize. As we go forward and continue to grow on multi carrier solutions the specific postage metric may become less indicative of the strength of our overall business and we may consider whether it continues to make sense reporting in future quarters. We are very pleased with our metrics in what has traditionally been our seasonally slowest quarter as we saw strength in our underlying business and starting to realize the benefits of our recent acquisition. With that now, let's discuss some initiatives we are working on our core mailing and shipping business. Small business area as we plan to continue building and optimizing our customer acquisition activity. As we continue to scale our spend, we continue to see a strong ROI that's at least two times greater than the cost to acquire a customer. As we plan to continue to increase our small business customer acquisition with the goal of spending 5% to 15% more this year. We plan to continue to utilize the marketing channels we had 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 stronger customer value proposition compared to postage meters with our dramatically lower total cost of ownership and our greater visibility and controls than are not available with postage meters. Third quarter enterprise revenue was up 15% year-over-year. We're pleased with our continued progress in Enterprise and feels that we're achieving a very attractive return on our investment in this area and we'll continue to focus on the area. In our high volume shipper area, we're continuing to ramp up our efforts. Stamp.com, ShipStation and ShipWorks 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. Third quarter postage printed by high volume shippers through Stamps.com was up 25% year-over-year. We're pleased with the year-over-year growth in this area where our recent acquisitions were able to positively impact our growth. For 2014, we will continue to focus on scaling the Stamps.com high volume shipping solutions. 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 import and export from the tools that customers like to use. We'll continue to scale our marketing efforts and our sales efforts using our national sales force. We'll also continue to scale and optimize our sales and marketing in this area. Also for 2014, we will focus on executing our post-acquisition strategy to maximize the benefits of a combined Stamps.com ShipStation and ShipWorks entity. We believe there are significant ways where we'll be able to realize synergies amongst these businesses. In the marketing area we have traditionally targeted many of the same e-commerce customers and we believe that we have a broad marketing expertise that we'll be able to utilize to increase market penetration of the solutions. We'll bring capital to scale up the marketing efforts in these business we have a national sales force who will be able to sell the combined suite of products and where we'll now be armed with a more complete set of options to meet the needs of a broad set of customers. We'll be able to offer an effective upgrade path for the traditional Stamps.com single carrier solution to a ShipWorks or ShipStation solution. Likewise the Stamps.com single carrier solution may become an effective dropdown solution for those customers whose needs may have decreased overtime and who no longer need a full multi-carrier solution. Possibly the technology expertise in the various companies will be synergistic of the ShipStation, web based expertise will compliment the client-based expertise at Stamps.Com and ShipWorks. We would note that we have begun the process of scaling up our efforts to utilize synergies across these businesses or very early in the process and we expect them to be more impactful to 2015 than it will be to 2014. With that, let me hand the call over to Kyle.

[Kyle Huebner:]

Thanks, Ken. We will now review our third quarter financial results. Our third quarter results include the full quarter results from the ShipStation acquisition completed in the second quarter and include the results of ShipWorks from August 29, 2014, to September 30, 2014. We will discuss our financial on a non-GAAP basis, which excludes the following

[Operator:]

Thank you. (Operator Instructions). Our first question comes from George Sutton of Craig-Hallum. Your line is open.

[Jason Kreyer:]

Hey, guys Jason on for George. Thanks for taking my call and good work on the quarter.

[Ken McBride:]

Thank you

[Kyle Huebner:]

Thank you

[Jason Kreyer:]

The results for the quarter were better than we had expected I think better than most people had expected and I'm just wondering if may be you could walk through where you would outperform in the quarter is this related to ShipStation or was this kind of just better results across the core business?

[Ken McBride:]

Yes, we're not breaking out the different component parts. I think that's fair to say that we see -- we saw continued growth in our traditional Stamps.com business and that we also started to see the benefits of the acquisitions that we've recently done. If you look you see that things like the high volume postage printed metric was up, year-over-year growth accelerated there and that helps to drive things like the ARPU metric. So I think that it's -- we were across the board pleased with the results and I think we attributed to both the core Stamps business as well as the recent acquisitions.

[Jason Kreyer:]

Okay. That's fair. And then I know you're not breaking out specifics for the acquisition as you mentioned but I'm trying to look at the metrics a little bit, the customer acquisition cost was down year-over-year but the net customer ads was up in a quarter that's typically down or flattish and I'm just wondering if you can may be talk about what some of these numbers would have been directionally I mean would that number have reflected net adds exclusive of the acquisition or can you give us any details on that at all?

[Ken McBride:]

Well the small business customer acquisition numbers we talked about are just for the traditional Stamps.com business so those numbers the $119 CPA and the numbers of customers acquired are directly comparable to previous results so that's our core business as I mentioned we saw increased acquisition at a lower CTA. So that was improvement unrelated to the acquisition. If you look at the paid customer number typically Q3 is our seasonally slowest quarter. We typically see a modest decline in the paid customer. So directionally the increase that we saw in Q3 this year was primarily related to the inclusion of the ShipStation paid customers.

[Jason Kreyer:]

Okay that's helpful. And just the last one from me so can you give us some sort of an idea of what proportion of Stamps.com users would be opportunities that could convert to like a ShipStation or ShipWorks platform?

[Ken McBride:]

Yes, we do see it as a nice opportunity and I don't think we prefer to comment on the exact numbers as to the number of customers we see there is an opportunity for an up-sell but certainly one of the things that we looked at when we were looking at the synergies in the businesses the ability to as a customer continues to grow we feel like we capture that customer early on their lifecycle and we introduce them to a single carrier solution. And over time as that customer business, the ecommerce business grows they tend to need broader capabilities and so we did see that the ability to up-sell them into a ShipWorks or ShipStation type solution as a potential great synergy that we would be able to utilize. So we see it as a nice opportunity for the business.

[Jason Kreyer:]

Is that something that you're actively pursuing right now or is this the plan to down the road look at the customer roster and identify those opportunities that could may be convert something you'll do in the future but not currently?

[Ken McBride:]

Well, it's really early in the process and we just, as you know we just, we're sort of one quarter into ShipStation and we're and did a matter of a month or two into the ShipWork. So generally speaking we saw it as a great opportunity but it's not something that we've really managed to utilize yet at this point.

[Jason Kreyer:]

Okay thank you. I'll get back in queue.

[Operator:]

Thank you. Our next question comes from Sarkis Sherbetchyan of B. Riley & Company. Your line is open.

[Sarkis Sherbetchyan:]

Thanks for taking the question and good quarter guys.

[Ken McBride:]

Thank you.

[Sarkis Sherbetchyan:]

So with regards to the latest ShipWorks acquisition, can you help us understand may be what the expected top and bottom-line contribution to be for fiscal 2015?

[Ken McBride:]

Yes, I mean at this point we haven't given any guidance on 2015. So we can't really comment on it at this point. On our February call we'll be giving our 2015 guidance and at that point we will have a little bit more time to start the process with the integrations and synergies. And so I think it's something that we'll address on the February call but not at this point.

[Sarkis Sherbetchyan:]

Okay understood. I guess if I move on to the next, Newell announced that it would be divesting its Endicia online postage business but would there be any regulatory hurdles say if you were to acquire to them and more importantly would you be interested in acquiring?

[Kyle Huebner:]

I think that Newell Rubbermaid just made that announcement so very recently so I think it's something that we all look at evaluating as an opportunity but it's really too early to comment on anything beyond that.

[Sarkis Sherbetchyan:]

Yes understood. And then just kind of shifting gears here. Are you seeing any benefits or expect any benefits from the USPS's marketing campaign that targets FedExs and UPS's shift towards dimensional weight pricing may be if you can talk about that?

[Ken McBride:]

Sure, I think there has been overall the postal service has traditionally spent a fair amount of money on advertising and to the extent we are a solution, they represent as one of the ways to do online postage, we benefit in general form those. I mean I think it's hard to really capture or to really comment on specific lift from specific programs like the most recent advertising campaign they have been doing, but certainly like overall I think we do benefit from the postal service marketing.

[Sarkis Sherbetchyan:]

Okay. And then finally you guys did provide a look to the sales outlook. Is that exclusive to the kind of core business ex the acquisitions or is that just holding in the acquisition that you just performed accounting for that as well?

[Ken McBride:]

The metric we gave with the small business customer acquisitions stand up 5% to 15%. So that would be again kind of the Stamps.com traditional small business marketing. So it would be exclusive of any spend related to the acquisition.

[Operator:]

Thank you. And our next question comes from Tim Klasell of Northland Capital. Your line is open.

[Unidentified Analyst:]

Hi, this is Josh in for Tim. So, my first question is on the service revenue fee which is strong, can you guys give us any additional color on that? I know of it, you said that primarily it was from the ShipStation acquisition, but is there anything else you can talk about in that line item that may have outperformed in the quarter?

[Ken McBride:]

Yes, I mean, I guess in general that line is really the service, the description, and transaction fees generated from the paid customers. And so to the extent that we see stronger growth in areas like high volume and e-commerce shipping segments, those are segments where we have a better ability to monetize the volume as compared to the traditional office space small business. So I think, as I mentioned, the acceleration and the high volume postage printed growth certainly translates to better ARPU across those things like service fees and insurance revenue.

[Unidentified Analyst:]

Okay, thank you. And then on the ShipStation and ShipWorks acquisition, would you say that the synergies are going to be greater on the top-line or the bottom-line over the long run? I mean, does that mean that you will be able to sell more across the board? Or are you going to see greater cost savings of having a full suite of products available?

[Ken McBride:]

Well I think the answer is probably more in the top-line. I think that's really kind of what drove our ability to grow these businesses as we talked about in prepared remarks around being able to apply our marketing expertise to the businesses in the e-commerce area being able to bring our sales effort, national sales force into the products where we can basically offer the suite of products to a set of customers and then looking I think upsell and dropdown opportunities within the ability to kind of move customers between the products. So I think it's really mostly about that top-line growth and it's not really looking at a lot of cost savings initiatives.

[Unidentified Analyst:]

Okay. And then finally on the contingent consideration, is that going to fluctuate quarterly now until that earn out is completed?

[Ken McBride:]

Yes, it's something that the accounting rules require us to remeasure the fair value on each quarter as it approaches the date. So in June 30, it was valued at $16.2 million and the updated fair value this quarter was $17.1 million. So that increase flows through the P&L as the non-cash operating expense. So it's certainly a case where we can see changes in that from quarter-to-quarter as a three measure.

[Operator:]

Thank you. Our next question comes from Allen Kleen (ph) of Sidoti. Your line is open.

[Unidentified Analyst:]

Hello. For customer acquisitions then you've guided for the year for that to be up 5% to 15%. In the current quarter it was down slightly. Could you go through a little? And you also commented that you expect it to be up significantly next quarter. But perhaps if you could comment on a little on what the thinking rationale was on how much was spent this quarter. Thank you.

[Ken McBride:]

Sure. We saw in Q1 and Q2, Q1 is our seasonally stronger period to the spend was up I think in the 8% to 10% range. Q3 is our seasonally slowest quarter. So I guess we weren't too concerned that it was down slightly given that we were able to grow the acquisition and the CTAs but heading into Q4 it's our seasonally strongest quarter. So we try and allocate our marketing spend across the year to take into account seasonality. So in looking at Q4 compared to Q3, Q3 is typically the lowest level and Q4 is typically the highest. So we expect that, I mean, you look at Q3 versus Q4 to have a significant increase. And in Q4 we're expensing all the cost in that quarter but really earning very little revenue from the customer. So the real benefit from the higher marketing spend in Q4 will be a higher run rate as we head into 2015.

[Unidentified Analyst:]

Okay, thank you. And then you spoke about how ARPU improved and you pointed to the high volume in enterprise customers benefitting the top-line. Are there any comments you can make on the relative profitability of high volume and enterprise customers compared to the company average?

[Ken McBride:]

Yes, I mean, I think in general we've talked about the enterprise customers and high volume shippers tend to have higher ARPU, lower churn rates so that their lifetime values tend to be higher than small business customers. In some cases, they can be more expensive to acquire in the enterprise where if they a direct sales model but in general I think we see the lifetime value as being higher for high volume shipping and enterprise customers as compared to the traditional small business customers.

[Unidentified Analyst:]

Okay. And with the ShipStation, the ShipWorks acquisition is there anything that you learned that you were surprised about now that they're part of your company versus before you had owned them?

[Ken McBride:]

I think we had prior partnerships with both companies. So I think we had gotten to know them down through the years through exposure through those partnerships and I think that we did thorough due diligence and I think generally speaking it was as expected.

[Unidentified Analyst:]

Okay, great. And how do you feel about other acquisition opportunities?

[Ken McBride:]

I mean, it's not typically something we would comment on but I think we will always do evaluate opportunities that on the specific merits of those opportunities if they were to something we would take a look at.

[Operator:]

Thank you. At this time, I'd like to turn the call back over to management for any closing remarks.

[Ken McBride:]

Thank you for joining us today. For any follow-up questions you can contact us at investor.stamps.com or at [phone]. Thank you.

[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.