Stamps.com Inc.
Q1 2015 Earnings Call Transcript

Published: 9 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Stamps.com First Quarter 2015 Financial Results Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] As a reminder, today's conference is being recorded. And now I’ll turn the conference over to your host Jeff Carberry, Vice President of Finance. Please begin.

[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 of our first quarter 2015, 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, 2014, 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 reminder for today, the income and adjusted EBITDA results we discuss on the call are on a non-GAAP basis and exclude the following items

[Ken McBride:]

Thank you, Jeff. Thank you for joining us today. Today we announced our first quarter financial results. During the first quarter, we once again achieved record results including record total revenue of $44.1 million, which was up 32% year-over-year, record gross new small business customer acquisition of $120,000, which was up 33% year-over-year. The largest sequential quarterly increase in paid customers ever up by 32,000 versus Q4 to 545,000 paid customers. Record high total postage in our shipping business, which was up 62% year-over-year and record net income of $12.2 million, which was up 46% year-over-year. Overall, we are extremely pleased with the results for the quarter. And as result of our first quarter performance and current business outlook, we increased our revenue and our earnings guidance today. Now let's begin with a more detailed discussion in the Core Mailing and Shipping business. Core revenue was up 34% to $42.6 million in the first quarter. During the first quarter, we acquired 120,000 gross small business customers at a cost per new customer or CPA of $108. Customers acquired were up 33% compared to Q1 of last year and the cost per acquisition, CPA was down 10% compared to Q1 last year. We were pleased that we achieved an acceleration in our year-over-year growth rate for customers acquired while simultaneously achieving a significant decrease in CPA. Our small business customer acquisition spend was $13.0 million, which was 19% compared to Q1 last year. Note, our customer acquisition spend now includes costs related to ShipStation and ShipWorks personnel and also their marketing spend. Average monthly churn during the first quarter was 2.9%, which was down versus the 3.0% in the first quarter of 2014. Positive trend on churn is a result of continued improvement in our value proposition in our products and services. Paid customers in the first quarter were 545,000, was up 11% versus the first quarter of 2014 and up 32,000 sequentially versus the fourth quarter of 2014. This was the largest sequential quarterly increase in paid customers we have had since we began tracking and reporting the paid customer metric back in 2005. Average subscriber revenue per paid customer or ARPU was $26.02 in the first quarter that was up 21% versus the first quarter of 2014. Year-over-year ARPU growth this quarter benefited from growth in the Shipping segment including positive contributions from ShipStation and ShipWorks. Total USPS postage printed through our solutions was 554 million in the first quarter, which was up 41% versus the first quarter of 2014. This was the highest quarterly level ever and we are now over 2 billion annualized run rate in total USPS postage printed. We are very pleased with our metrics across the board and we are pleased with the benefits we’ve already seen from our recent acquisitions. Now let’s talk about some of the initiatives we are working on in the Core Mailing and Shipping business. In our 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 where we experience at least 2 times greater churn than the cost to acquire a customer. Thus we plan to continue to increase our small business customer acquisition with a goal of increasing acquisition spend for the year by 10% to 20%. Note again that that spend now includes marketing personnel and spend for our two subsidiaries. We plan to continue to utilize the marketing channels we have traditionally used, including direct mail, traditional media, online marketing and other areas. Across each of the 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 business, we plan to continue scaling up our sales and marketing efforts. Our enterprise product has a lower total cost of ownership, better user visibility and better financial controls than a postage meter. This area of our business continues to grow consistently with first quarter revenue growth of 15% year-over-year and it continues to contribute to our bottom line performance. In our USPS shipping area, we continue to experience success. In this area of our business, we have single-carrier USPS products that we sell to both e-commerce shippers, which are individuals or SOHOs that sell online and ship products in moderate volumes and to high volume shippers, which are warehouses, fulfilment houses and large volume retailers, whose business centers around shipping products in large production shipping environments. Fourth quarter USPS postage printed by high volume shippers and e-commerce shippers through our solutions was up 62% year-over-year. For 2015, product enhancements in our shipping area include continued focus on improvements in the software features that are requested by high-volume customers and continued expansion of integrations with shopping cards, tools and marketplaces for easier data export and import from the third-party platforms the customers like to use. In our multi-carrier shipping area, which includes ShipStation and ShipWorks, we continue to run both subsidiaries independently and are focusing on ways to optimize our efforts across all of our brands. The ShipStation and ShipWorks platforms offer great solutions for shippers such as e-commerce shippers and high volume shippers that may need more than just the USPS for their business needs. We have begun and are continuing to work on realizing the synergies we have discussed related to our two new subsidiaries, including Stamps.com’s broad marketing expertise and capabilities applied to the targeting of e-commerce small businesses for ShipStation and ShipWorks. Our national sales force is selling ShipStation and ShipWorks, creating upgrade paths from the Stamps.com single-carrier products to a ShipWorks or ShipStation solution for multi-carrier, offering a drop-down from the multi-carrier ShipStation or ShipWorks solution to a single-carrier Stamps.com solution for customers whose needs may have decreased and sharing of technology expertise amongst the companies, for example, the web expertise in ShipStation, which may be utilized in other areas. We're very excited about the opportunities in our small business, expertise, shipping and our multi-carrier shipping areas. Let me just provide a quick update on Endicia. On March 22, 2015, we announced that we had entered into a definitive agreement to acquire Endicia, a wholly owned subsidiary of Newell Rubbermaid, for an aggregate purchase price of $215 million in cash. Endicia is based in Palo Alto, California. It is the leading provider of high-volume shipping services, technologies and solutions for use with the U.S. Postal Service and other postal partners. Endicia has approximately -- had approximately $59 million in revenue during fiscal 2014. Transaction is expected to close five business days after the fulfillment of customary closing conditions including regulatory approval. We intend to fund the transaction with cash on hand and committed financing of up to $165 million, which we have secured from three leading banks. The rationale for doing this acquisition is multifold. It would combine complementary businesses, business focus, and core competencies where Stamps.com traditionally focused on mailing and Endicia focused on shipping. The two companies had minimal overlap and sources of revenue, customers, and partners. It would create a stronger USPS partner to accelerate growth of USPS mailing and shipping revenue and it would enable stronger competition against large rivals including Pitney Bowes, eBay, PayPal, UPS, FedEx, DHL, USPS, and others. The potential acquisition has significant synergies. The two companies have complementary focus on expertise in sales and marketing. The two companies have strong brands in different segments which can be cross sold through the sales or marketing channels of the other company, their significant duplication of efforts in research and development between the companies that can be redirected towards accelerating innovation. The combined companies can achieve better customer service through increased scale and complementary expertise and there are additional significant cost savings available by eliminating duplicate infrastructure, for example, duplicate data centers. We are currently in the regulatory review process with the Department of Justice and the timing of that process remains uncertain. And with that, let me hand the call over to Kyle for a more detailed discussion of our financial results.

[Kyle Huebner:]

Thanks Ken. We will now review our first quarter financial results. Total revenue was $44.1 million in Q1, up 32% versus the first quarter of 2014. Growth in total revenue continues to be driven by Core Mailing and Shipping revenue. For the first quarter, Core Mailing and Shipping revenue was up 34% year-over-year as a result of 11% year-over-year increase in paid customers and 21% increase in ARPU. Non-core revenue from the enhanced promotion channel was down 15% in Q1 versus the first quarter of 2014 as a direct result of our continued decreased marketing spend in this area. PhotoStamps revenue was $1 million in Q1, down 6% versus the first quarter of 2014, primarily as the result of decreased website order and the impact of inherent quarterly volatility and high-volume business orders. Mailing and Shipping gross margins were 80% in Q1 versus 79.9% in the first quarter of 2014. Cost of sales includes promotional expenses related to customer acquisition, which was an expense of $1.1 million in Q1 compared to expense of $900,000 in first quarter of 2014. In our reported investor metrics, our customer acquisition spend includes both promotional expenses, and sales and marketing spend as we feel they are both costs directly related to acquiring customers. As such, we feel it is more informative to look at Mailing and Shipping gross margins excluding promotional expenses as a better indicator of the ongoing gross profit for that business. On that basis, Mailing and Shipping gross margins excluding promotional expenses was 82.4% in Q1 versus 82.6% in the first quarter of 2014. PhotoStamps gross margin was 16.2% in Q1 versus 19.3% in the first quarter of 2014. Decrease in gross margin was primarily attributable to a relative increase in high volume business orders, which have a lower gross margin compared to website orders. We experienced a year-over-year increase in our costs in sales and marketing, R&D and G&A related to the inclusion of ShipStation and ShipWorks in the first quarter of 2015 that were not included in the first quarter of 2014. We also increased headcount-related expenses and infrastructure investments we made to support the growth in all of our businesses, including expenses to support our expanded product offering and technology infrastructure. Sales and marketing spend was $13.3 million in Q1, up 19% versus the first quarter of 2014. Sales and marketing as a percent of revenue was 30.2% in Q1 compared to 33.6% in Q1 last year. R&D spend was $3.7 million in Q1, up 39% versus the first quarter of 2014. R&D as a percent of revenue was 8.5% in Q1 compared to 8.0% in Q1 2014. G&A spend was $5.1 million in Q1, up 37% versus the first quarter of 2014. G&A as a percent of revenue was 11.6% in Q1, which was comparable to 11.1% in Q1 2014. Non-GAAP operating income was $12.5 million in Q1, up 49% versus the first quarter of 2014. Non-GAAP operating margin was 28.3% in Q1 versus 25.2% in Q1 2014. We would note that we expect to see quarter-to-quarter fluctuations in our operating margins depending on the level of customer acquisition spend incurred. Non-GAAP adjusted EBITDA was $13.3 million in Q1, up 46% versus the first quarter of 2014. Non-GAAP adjusted EBITDA margin was 30.3% in Q1 versus 27.4% in Q1 2014. This metric is calculated as non-GAAP operating income plus D&A contained in operating expenses of $870,000 in Q1. Non-GAAP net income was $12.2 million, up 46% versus the first quarter of 2014. Non-GAAP net income per fully diluted share was $0.72 in Q1, up 43% versus $0.50 per share in the first quarter of 2014. Diluted shares used in the EPS calculation was 17.0 million for Q1. The increase in diluted shares compared to Q4 2014 reflects the issuance of 192,000 shares under the ShipStation earnout as well as the increase in stock price during the first quarter. Capital expenditures for the business, excluding investments in our corporate headquarters was $114,000 in Q1. Our primary investments are in our technology platforms to ensure the reliability and scalability of our solutions to handle the large postage volumes we're experiencing. These investments are a function of the timing of ongoing projects throughout the year, so we would expect to see some variability in our quarter-to-quarter spending in Capex. Non-GAAP free cash flow generated by the business was $13.0 million in Q1. This metric is calculated as non-GAAP net income plus D&A contained in operating expenses less capital expenditures related to the business. This calculation excludes capital investments in our corporate headquarters as well as tenant-related D&A. We ended Q1 with $81 million in cash and investments or $4.98 per ending balance sheet share, which was up $24 million compared with Q4 2014. During the quarter, we did not repurchase any shares. The Company is currently authorized to repurchase up to 1 million shares of Stamps.com stock through November 2015. Taxes; we have approximately $55 million deferred tax asset with no valuation allowance against that on the balance sheet as of March 31, 2015. In the first quarter of 2015, we reported a GAAP tax benefit of $1.1 million, of which, $1.5 million was non-cash income tax benefit based on our GAAP net loss position and $400,000 was the expected cash taxes based on our pro-forma net income. The GAAP net loss was primarily driven by the $10.5 million change in the fair value of ShipStation earnout, which was primarily attributable to the increase in our stock price during the quarter. On a cash tax basis, we will continue to use our net operating losses and our other tax credits and thus we expect to just pay the alternative minimum cash tax for 2015 consistent with prior years which we expect will be approximately 2% to 3% of pretax income. Now, turning to guidance. We expect fiscal 2015 revenue to be in a range between $165 million to $185 million. This compares to previous guidance of $160 million to $180 million. We expect fiscal 2015 non-GAAP EPS to be in a range between $2.55 to $2.95 per fully diluted share. This compares to previous guidance of $2.50 to $.290 per share. Non-GAAP net income per fully diluted share excludes non-cash stock-based compensation expense, non-cash amortization of acquired intangibles, non-cash change and contingent consideration changes, non-cash tax expenses or benefits and non-recurring acquisition-related corporate development expenses and the impact of any other currently unanticipated non-recurring items. We would note we are not providing GAAP EPS guidance because of the difficulty in forecasting some of the items such as the change in contingent consideration, which is driven in part by future changes in our stock price. We expect 2015 Core Mailing and Shipping revenue to be up year-over-year versus 2014 in the mid-teens to mid-20% range. We expect non-core revenue from the enhanced promotion channel to continue to be down in 2015 compared with 2014 consistent with the trend we saw in the past year as we continue to minimize our investments in this area. We expect non-core PhotoStamps revenue to be down in 2015 compared with 2014, possibly by as much as 25% as we expect it may be challenging to be repeat the same level of high volume business orders in 2015 as we saw in 2014. We’re targeting small business customer acquisition spend, including ShipStation and ShipWorks to be up 10% to 20% in 2015 compared to 2014. We expect capital expenditures for the business in 2015 to be between $3 million to $3.5 million. We expect fully diluted shares will be approximately 17.5 million for 2015, reflecting the higher current stock price. While we don’t provide quarterly guidance, we would note the following. We do expect to see the traditional seasonal slowness in the second and third quarters that has generally been present in our business in past years. We will anniversary the acquisition of ShipStation in the second quarter. We had a very strong level of high volume business orders and PhotoStamps in Q2 ’14 that will make for a tough year-over-year comparison in the second quarter. Given the strong customer acquisition metrics in Q1, we plan to try to maintain our customer acquisition spend in Q2 as that as our primary reinvestment in the business, which negatively impacts quarterly EPS results but results in expected benefits in future quarters. Finally, we would note that the above guidance does not include any Endicia results as that transaction is still proceeding through the Hart-Scott-Rodino regulatory process. In summary, our Core Mailing and Shipping business model with the recurring revenue and high gross margin is very attractive and sustainable business model. There are significant opportunities in the fast growing e-commerce driven package market and we expect our ShipStation and ShipWorks acquisitions to help us capitalize on those opportunities. We continue to see a very attractive ROI on our customer acquisition spend and we expect to continue to ramp up that investment. We have strong free cash flow generation and a strong balance sheet and a very attractive return on equity. We have demonstrated our commitment to enhancing shareholder value, including $307 million of excess cash returned to shareholders via special dividends in our share repurchase programs. We are looking forward to delivering -- continuing to deliver great results. With that, we’ll open up for questions.

[Operator:]

Thank you. [Operator Instructions] First question is from Kevin Liu of B. Riley & Company. Your line is open.

[Kevin Liu:]

Hi, good afternoon, guys, and congrats on the strong results here. First question I wanted to ask was just on the ARPU number. Obviously for two quarters now, it’s run right around that $26 level. Just wondering, is that primarily based on the higher transactions you are seeing as a result of the acquisitions or is it more so just the higher subscription pricing enables you to sustain this? And at the heart of it, I'm just curious if you feel like this $26 level is sustainable over the course of the year or if it fluctuates from quarter to quarter quite a bit?

[Kyle Huebner:]

Yes, I think as we talked about in the past, our ARPU growth benefits from growth in the overall shipping segment, where we typically have a better ability to monetize the volume. And so, I think the benefit is coming from the ShipStation and ShipWorks acquisition but also coming from the growth in shipping that Stamps.com is seeing. So, I think it’s really the combined factor of the three companies and the 62% growth in shipping that Ken mentioned on the prepared remarks. So, that’s -- that was part of our strategy with the acquisitions and we’ve been pleased kind of with the results that we’ve been realizing. We do see quarter-to-quarter fluctuations and the year-over-year percent change in the ARPU we have historically for the last few years. So, there isn’t seasonality associated with that on a quarter-to-quarter basis, but the year-over-year growth that we’ve seen so far in Q1 and Q4 reflects the two quarters of the fully consolidated results of the three companies.

[Kevin Liu:]

Got it, and you did mention earlier, though, that Q2 and Q3 tend to be seasonally slower periods, so I am just wondering how that seasonality impacts the ARPU figure. Would it be down more considerably or do you expect that you have enough volumes running through now where it can be fairly stable even throughout those two periods?

[Kyle Huebner:]

I think the better -- the best way to look at the ARPU is on a year-over-year basis to neutralize the seasonality. So, you can -- so, last year the ARPU was $21.92. So, I think we expect to see year-over-year growth in the ARPU metric continue but on an absolute basis, you will potentially see that number fluctuate compared to the stronger Q1 and Q4 quarters.

[Kevin Liu:]

Understood. And certainly, the CPA figure was also pretty strong within the quarter, as well as the gross adds. Just in terms of the efficiency of that marketing spend, are you seeing that across the core stamps product, as well as the acquired shipping solutions, or is one performing better than the other?

[Ken McBride:]

I think really numerically and in terms of magnitude the spend at Stamps.com really dwarfs the other two subsidiaries. So, the really the efficiency gains is primarily in the core small business marketing that we always do and we saw -- we continue to use all the channels that we always do in terms of all the traditional media, online, direct mail, radio but I think we really have been focused on the direct mail area in particular really try to drive more efficiency into that and saw some of the gains in that this quarter.

[Kevin Liu:]

Great, and just one last one, if I may. On the acquisition, I know you said it's currently going through the regulatory review. I mean, what's your sense in terms of how closely the government is kind of evaluating this? Do you expect that there is going to be requests for more information? Just any insight you can provide into the process and how complex it might be would be helpful.

[Ken McBride:]

Sure. So currently the -- we file for Hart-Scott-Rodino in about mid-April and so we are currently in the first 30-day waiting period. We don't really have any indication that the process is fairly unpredictable. We don't have any indication as to what direction it may be taking so far. And so it's just too early to comment, but at the time appropriate time we will update everybody.

[Kevin Liu:]

Alright. Thank you and congrats again.

[Ken McBride:]

Thanks.

[Operator:]

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

[Jason Kreyer:]

Hey, guys, good afternoon. It's Jason on for George. Congrats on the results in the quarter. I wanted to see if you could maybe touch on your efforts to work with the ShipWorks and ShipStation customers and what you've seen so far in efforts to upsell or down-sell or to cross-sell that services, if there is any feedback you can provide now that we are a couple quarters in.

[Ken McBride:]

I think generally speaking, overall you can see that our financial results are definitely being I think lifted by the overall -- the businesses together and so we have been able to start to work on some of the efficiencies of the different areas we've highlighted between the businesses. More specifically it's hard to comment, all the – programs still are fairly new in terms of the up-sell, cross-sell, down-sell and all the different marketing initiatives that we are working on together but I think we're excited about what we've seen so far. We think it makes a ton of sense. We thought it made a ton of sense before we did it and we continue to think it makes a ton of sense strategically. The products really fit together well.

[Jason Kreyer:]

Okay. And then, we talked about this periodically, but just any updates on pricing, if you see any opportunities in the market to adjust pricing or if the expectation is just to remain stable.

[Ken McBride:]

We've been stable for a decade at the $15.99 price point and as we've evaluated potential price changes and we've looked at that in terms A/B testing on our website. We really haven't been able to sustain any increase increases, but we still have a large number of customers that come and go the US Postal Service and retail solutions and online solutions they offer. So we think as the main factor as to why the price is stuck where it has for 10 years is really US Postal Service and their offerings.

[Jason Kreyer:]

Okay, great. Thank you.

[Operator:]

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

[Allen Klee:]

Yes, hi. Where would you point to for why you are raising your guidance? What area of your business would you say is driving that?

[Kyle Huebner:]

Yeah. I mean, I think the guidance raise reflects the stronger Q1 results which were driven by the core mailing and shipping business. And I think that it's really a reflection of the strength in several areas across the core mailing and shipping. Our customer acquisition metrics were very strong in Q1 as well as our growth in the postage and the shipping related postage volume and the shipping businesses, ShipStation, ShipWorks. So I think it's really a reflection of strength across a lot of different areas in the core business.

[Allen Klee:]

And could you give us some color on what was behind customer acquisition costs improving during the quarter?

[Ken McBride:]

No, I think just like I mentioned earlier, we are continuing to just optimize across all the different channels, traditional media, radio, television, online media and direct mail. In particular I think the gain this quarter came from some improvements in our direct mail area where we managed to improve efficiencies of acquisition, decreasing costs, so and being a large percentage of our overall spend that flow-through to the overall CPA numbers.

[Kyle Huebner:]

The other thing I would mention is it's possible that some of the improvements in that small business customer acquisition metrics are coming from improvements in the small business economic environment. Although it is hard to isolate the impact but the NFIB Small Business Optimism Index averaged 97 in Q1 compared to 93 in Q1 '14 and 93 is the recessionary level and during Q1 it crossed 100 for the first time in eight years, although it went back down to about 95. So it hasn't stayed at an elevated sustained level, but it is possible that the small business economic environment is positively contributing to the results.

[Allen Klee:]

Thank you.

[Operator:]

[Operator Instructions] Next question is from Tim Klasell of Northland Securities. Your line is open.

[Tim Klasell:]

Thank you, guys, for taking my question. Just to go back to the seasonality, with the addition of ShipWorks and ShipStation, so we can try and dig into the historical numbers, but now that they have been with you for six months or so or a year, will the seasonality be similar to what we saw before the acquisitions or more enhanced?

[Kyle Huebner:]

I think it generally in terms of customer acquisition, as Ken mentioned, the majority of the spend in customers acquired is from Stamps.com. So the seasonality in our acquisition metric should be fairly comparable and in terms of the ARPU, the seasonality will be more enhanced as ShipStation, ShipWorks are targeting shipping customers, e-commerce merchants that have disproportionate amount of volume in the Q4 holiday season. So on that basis and as stamps grows their shipping business as well, I think the ARPU seasonality will be enhanced relative to historical trends.

[Tim Klasell:]

Okay. And then looking at those two acquisitions, is there -- I know they have just a slightly different architecture the way they deliver the solutions. Is one having better traction with your installed base than the other?

[Ken McBride:]

Yeah, I mean we do have different capabilities and different aspects. One, clearly ShipStation is more of a web-based solution really kind of targeting more at the e-commerce users and so that resonates. Traditionally when we talk about our shipping business, it's primarily more in the e-commerce sector and so that solution tends to resonate more with our existing e-commerce based customers. ShipWorks is more of a client-based software solution and it's really kind of targeted at the more of the traditional high-end warehouses, the fulfillment houses and the retail, large retailers. So we don't have as many customers in that segment and so we haven't been able to cross-sell that as well as we have ShipStation, but those products are doing a lot -- there is good benefits to both in that strategically and also makes ton of sense to us.

[Tim Klasell:]

Great. Thank you very much.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the conference over to Ken for any closing remarks.

[Ken McBride:]

Thanks for joining us and as always, if you have questions you can contact us through our website, investor.stamps.com or you can contact us through our phone number 310-482-5830. Thanks.

[Operator:]

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