Stamps.com Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2015 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 follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Jeffrey Carberry, VP of Finance. Sir, you may begin.

[Jeffrey 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 third quarter 2015, then we’ll discuss financial results and talk about the outlook. But first, the Safe Harbor statement. The 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 and our planned acquisition of Endicia, 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 proposed acquisition of Endicia, the Company’s abilities to complete and ship its products, maintain desirable economics for its products, and obtain and 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, 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, the financial results include income, and adjusted EBITDA measures. We discuss on the call are on a non-GAAP basis and exclude the following third quarter 2015 items. $3.1 million of noncash stock-based compensation expense, $0.7 million of non-cash amortization expense from acquired intangibles, $1.7 million of nonrecurring expenses, $1.9 non-cash contingent integration charges and a $5.3 million noncash income tax expense. Please see our third quarter 2015 earnings release and past 8-K filings for reconciliations between GAAP and non-GAAP measures. Core Mailing and Shipping is comprised of our small business, enterprise and shipping customer segments, and excludes non-core enhanced promotion and PhotoStamps. Core Mailing and Shipping metrics exclude all enhanced promotion channel activity and beginning Q4 2014, all metrics include ShipStation and ShipWorks. 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. Now with that, let me hand the call over to Ken.

[Ken McBride:]

Thanks, Jeff. And thank you for joining us. Today, we announced record third quarter financial results including total revenue which was $51.7 million, up 37% year-over-year. Record Core Mailing and Shipping revenue of $48.8 million, which was up 36% year-over-year. Record non-GAAP, adjusted EBITDA of $21.4 million, which was up 71% year-over-year. Record non-GAAP net income of $20.0 million, which was up 74% year-over-year and record non-GAAP earnings per share of $1.14, which was up 62% year-over-year. We also announced record third quarter business and customer metrics including record pay customers of 559,000 and that was up 12% year-over-year. And record monthly ARPU of $29.05 and that was up 22% year-over-year. As a result of our third-quarter performance and our current business outlook, we increased our revenue and our earnings guidance today. Today we also announced an expected close date for the Endicia acquisition. You’ll recall that we entered into a definitive agreement with Newell Rubbermaid March of 2015 to acquire Endicia, which is a wholly-owned subsidiary of Newell Rubbermaid, for $215 million in cash. One of the closing conditions was the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Act. On November 2, we received notice from the U.S. Department of Justice that it had closed its investigation. And as a result the acquisition is expected to close on November 18. Let me quickly review some of the information about Endicia. Endicia is based in Mountain View, California. They’re the leading provider of high-volume shipping services, technologies and solutions for use with the U.S. Postal Service and other postal partners. Endicia provides solutions to help businesses run their shipping operations more efficiently. Endicia sells its products under brand names Endicia, Dymo Stamps, and PictureItPostage. Endicia also provide seamless access to USPS and other shipping services through its integration with more than 250 partner applications. They have approximately 230 employees who have deep knowledge and expertise in the shipping space. Endicia had approximately $59 million in revenue during fiscal 2014. While Stamps.com and Endicia both provide Internet, mailing and shipping solutions, the two companies have traditionally focused on different segments of the market. Stamps has traditionally focused primarily on small business, while Endicia has traditionally focused on high-volume shippers. We expect that the combined company will significant synergies. First, the companies have minimal overlap in their customer basis. Majority of our paid customers are small businesses, while the majority of Endicia’s paid customers are shippers. Majority of our largest revenue customers are in the enterprise mailing area, while the majority of Endicia’s largest customers are in the high-volume shipping. Endicia’s customers have a significantly higher average postage printed per customer, compared to our customers. And very few customers switch between the respective solutions of the two companies. So together we will achieve a combined customer base that is almost entirely additive with very minimal overlap. Second, the companies have complementary brands which can be leveraged in their respective customer segments and coordinated to provide unified messaging to customers and partners. The Stamps.com brand is broadly recognized for small business and enterprise Internet mailing and shipping solutions. Endicia has the most well-known brand in the high-volume shipping area. We plan to keep both brands, going forward, to leverage the strength of each brand in their respective customer segments. We expect that the combined companies’ unified messaging will reduce customer confusion and streamline the onboarding of customers. We also expect that the combined company will have more streamlined coordination with the U.S. Postal Service shipping sales team with whom we work closely in the high-volume shipping area. Third, the combined companies have a significant number of additive partnerships. Endicia has over 250 partnerships and Stamps.com has over 120 partnerships. These partnerships include things like integrations with solutions such as marketplaces, multi-carrier products, shopping carts, listing management solutions, inventory management solutions, enterprise resource planning, warehouse management, transportation management, partnerships with private carriers, regional carriers, other international posts and, of course, the most important partnership, the U.S. Postal Service. While there are some common partnerships between the respective companies, the majority of the partnerships are additive. Together the two companies will have over 325 unique partnerships which represent the majority of all mailing and shipping solutions that provide USPS functionality to their customers. First, in the sales and marketing area, the two companies generally take different approaches which are highly complementary. Endicia acquires its customers primarily through its high-quality national sales team, which is over 60 people, and is supported by their targeted marketing at high-volume shippers. We have traditionally focused primarily on broad marketing targeted small business and enhanced by our sales teams targeting enterprise and high-volume shippers. We have spent approximately $40 million on marketing during 2014 with nearly all of that spend going into broad-based small business marketing programs. We expect that we can utilize Endicia’s national sales team to help drive sales of our solutions and, likewise, we expect we can utilize our large-scale marketing spend to further drive sales of Endicia solutions in the high-volume shipping space. Fifth, in the development area by combining resources and sharing expertise, we expect that the two companies will be able to streamline and enhance software development. Each company spends significant effort maintaining its respective products for U.S. Postal Service requirements. For example, annual rate changes, regulatory changes, new USPS products, new USPS features and other development tasks. By removing the redundant activity, the combined company will be able to redeploy its development resources into other areas. For example, building new customer solutions, and targeting new market areas. Sixth, we expect to gain scale economies and customer support, which will result in better, more effective service. The combined companies will have a larger overall support team, which together can operate more efficiently to handle the overall customer support needs. The companies also have complementary knowledge and expertise that can be combined and then utilized to provide more specialized support into different customer segments. Seventh, by operating independent brands in one corporation we expect to realize significant cost synergies. We have significant duplication in our back and infrastructure that can be eliminated. For example, both companies run very similar datacenters for their software and those datacenters can be combined at a significant cost savings to the company. We expect that we can increase – that our increased scale will allow us to negotiate more effectively with our technology and other vendors. And we expect to be able to provide the G&A infrastructure that is needed by Endicia as it transitions out of Newell Rubbermaid at minimal incremental cost. Finally, the combined company will have significant scale with which it can more effectively compete with larger companies. Together we will have more development capability, larger sales team, more marketing scale, a larger customer support team, a very significant number of partnerships, a larger customer base and two brands with significant market recognition in their respective areas. The combined company is expected to reach approximately $5 billion in annual postage printed by its customers this year. With this acquisition, we feel we are in an exciting position to continue innovating, investing in growth and offering the best possible solutions and service for our customers and partners, including U.S. Postal Service. High-volume and e-commerce shipping are the fastest growing segments in the mailing and shipping industry and an Endicia acquisition represents a significant strategic investment in that area. The acquisition will allow us to continue to drive growth in this very important area. We’re very excited to join together the significant, complementary assets and the high quality employees of Stamps.com and Endicia and to move forward with this acquisition. With that, let’s move on to a more detailed discussion of our Core Mailing and Shipping business. Our core revenue was up 36% to $48.8 million in the third quarter. During the third quarter, we acquired 93,000 gross small business customers at a cost per small business customer acquired, or CPA, of $106. Customers acquired were up 40% compared to Q3 last year and the CPA was down 11% compared to the third quarter last year. We’re pleased that we achieved continued strong year-over-year growth in customers acquired while simultaneously achieving a significant decrease in CPA. Our small business customer acquisition spend was $9.9 million, up 24% compared to the third quarter of 2014. The customer acquisition spend includes the marketing cost of ShipStation and ShipWorks as well. Our average monthly churn during the third quarter was 3.3%, which was flat versus the third quarter of 2014. Our churn performance is a result of multiple factors, including a strong value proposition of our products and services. Paid customers in the third quarter were $559,000 and that was up 12% versus the third quarter 2014 and up $5,000 sequentially versus the second quarter of 2015. We typically generate the majority of our paid customer growth in the seasonally strongest first and fourth quarters, with smaller sequential increases or decreases in paid customers during the second and third quarter. And this year, again, followed that same historical pattern. Average monthly revenue per paid customer, or ARPU, was $29.05 in the third quarter and that was up 22% versus the third quarter of 2014. The year-over-year ARPU growth in this quarter benefited from continued growth in the shipping segment including positive contributions from ShipStation and ShipWorks. Total USPS postage printed through our solution was $547 million in the third quarter, which was up 39% versus the third quarter of 2014. We are over a $2 billion annualized run rate in total USPS postage printed and we’re pleased with the strong growth in a traditionally, seasonally slower quarter. Overall, we’re very pleased with our metrics across the board and pleased with the benefits we’re continuing to see from our recent acquisitions. With that, let me discuss some initiatives we’re working on in the Core Mailing and Shipping business. In our small business area, we’re continuing to build and optimize customer acquisitions. Through our continued optimization, we’re able to achieve continued acceleration in the year-over-year growth rates for our customers acquired this quarter and we also optimize across our channels to achieve a significant decrease in cost per acquisition. The business continues to show very strong return on investment of at least two times the cost per acquisition. Given the continually improving economics in the area, we plan to continue to increase our small business customer acquisition spend. The goal of increasing the acquisition spend by 15% to 25% in 2015, as compared to 2014. As we just mentioned, the spend goal also includes the marketing costs in our two subsidiaries. The channels we use for small business customer acquisition continue to include direct mail, traditional media, online marketing and other areas. We continue to optimize among the various channels in order to achieve the best overall ROI. The goal is to continue to scale the marketing spend while balancing the ROI of each of the channels. In our enterprise area, we continue to scale up the sales and marketing efforts in that area. The business continues to grow consistently with third-quarter revenue growth of 16% year-over-year. It also continues to make meaningful contributions to our bottom-line performance. The value proposition area continues to support our efforts and our service has lower total cost of ownership, better user visibility and better financial controls than a postage meter. In our shipping area, we continue to experience success. In this area of our business we have the Stamps.com branded single-carrier USPS products and we have the ShipStation and ShipWorks branded platforms, which offer multi-carrier solutions. Both single-carrier and multi-carrier type products target e-commerce shippers and target high-volume shippers. You recall that e-commerce shippers are individuals or small office, home offices that sell online and ship products in moderate volumes. And the high-volume shippers are customers more like warehouses or fulfillment houses, large volume retailers, whose business centers around shipping products in large production shipping environments. Our third quarter USPS postage printed in the shipping area was up 53% year-over-year. The primary factor in our growth in the shipping area was the contributions from our ShipStation ShipWorks businesses. Those subsidiaries contributed nicely to overall postage-printed growth and to our Q3 revenue growth. Both subsidiaries also made a meaningful impact to our bottom-line performance in the third quarter. In addition, the synergy opportunities we’ve been discussing since we made these two acquisitions, continue to positively impact the results. The synergies we have discussed include Stamps.com’s broad marketing expertise and capital applied to the targeting of e-commerce small businesses for ShipStation and ShipWorks. Our national sales team selling the ShipStation and ShipWorks solutions, creating upgrade paths from the Stamps.com single-carrier product to a ShipWorks or ShipStation solution for multicarrier needs; increasing customers’ use of Stamps.com as a USPS solution within the ShipStation and ShipWorks solutions; offering dropdowns from the multicarrier ShipStation ShipWorks to a single-carrier Stamps.com solution for customers whose needs may have decreased. The sharing of technology expertise among the Companies, for example; the web expertise in ShipStation which may be utilized in other areas. Overall, we’re very pleased with the performance in the shipping area which was largely driven by these two acquisitions. Finally, we will also begin the process of integrating Endicia and will have an update for you on our progress next quarter. We’re very excited about the opportunities in our small business, our enterprise, our shipping and our multicarrier shipping areas. And we’re very excited to move forward with the Endicia acquisition. 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 third-quarter financial results. As Jeff described, we will discuss our results on a non-GAAP basis and reconciliation in non-GAAP to GAAP can be found in our earnings release and past 8-K filings. Total revenue was $51.7 million in Q3, up 37% versus the third quarter of 2014. Growth in total revenue in the quarter was driven by the Core Mailing and Shipping revenue where we continue to benefit from our multicarrier acquisitions and stronger small business customer acquisition metrics. For the third quarter, Core Mailing and Shipping revenue is up 36% year-over-year, driven by a 12% year-over-year increase in paid customers and a 22% year-over-year increase in ARPU. Non-core revenue from the enhanced promotion channel was down 17% in Q3 versus the third quarter of 2014 as a direct result of our continued decreased marketing spend in this area. PhotoStamps revenue was $2.5 million in Q3, up 62% versus the third quarter of 2014, as a result of increased high-volume business orders which can fluctuate from quarter to quarter. Mailing and Shipping gross margin was 82% in Q3 versus 80.2% in the third quarter of 2014. Cost of sales includes promotional expenses related to customer acquisition, which was an expense of $0.8 million in Q3 compared to an expense of $0.7 million in the third quarter of 2014. In our recorded investor metrics, our customer acquisition spend includes both promotional expenses and sales and marketing spend as we feel they are both direct costs directly related to acquiring customers. As such, we feel it is more informative to look at the Core Mailing and Shipping gross margins excluding promotional expenses as a better indicator of the ongoing gross profits of that business. On that basis, the Mailing and Shipping gross margins, excluding promotional expenses, was 83.7% in Q3 versus 82.1% in the third quarter of 2014. PhotoStamps’ gross margin was 14.7% in Q3 versus 15.6% in the third quarter of 2014. The decrease in gross margin was primarily attributable to a higher mix of high-volume business orders which have a lower gross margin compared to website orders. We experienced year-over-year increases in our third-quarter costs of sales and marketing, R&D and G&A, primarily related to our acquisitions and to our investments to support the strong growth of our core business. However, these costs as a percentage of revenue have all declined. Sales and marketing spend was $10.6 million in Q3, up 12% versus the third quarter of 2014. Sales and marketing as a percent of revenue was 20.5% in Q3 compared to 24.9% in Q3 2014. R&D spend was $4.1 million in Q3, up 27% versus the third quarter of 2014. R&D as a percent of revenue was 8.0% in Q3 compared to 8.6% in Q3 2014. G&A spend was $5.6 million in Q3, up 12% versus the third quarter of 2014. G&A as a percent of revenue was 10.8% in Q3, compared to 13.2% in Q3 2014. Non-GAAP operating income was $20.4 million in Q3, up 75% versus the third quarter of 2014. Non-GAAP operating margin was 39.5% in Q3, compared to 30.9% in Q3 2014. Adjusted EBITDA was $21.4 million in Q3, up 71% versus the third quarter of 2014. Adjusted EBITDA margin was 41.3% in Q3, compared to 33.1% in Q3 2014. We would note that we expect to see quarter-to-quarter fluctuations in our operating and adjusted EBITDA margins depending on the level of customer acquisition spend incurred, and thus we would expect to see higher margins in the seasonally slower second and third quarters compared to the seasonally stronger first and fourth quarters which typically have higher customer acquisition spend. Our non-GAAP cash tax expense was $0.4 million in Q3. We have a $55 million deferred tax asset on the balance sheet as of September 30 that we expect to be able to use to reduce our peak cash taxes in future periods. Non-GAAP net income was $20 million up 74% versus the third quarter of 2014. Non-GAAP net margin was 38.8% in Q3, compared to 30.4% in Q3 2014. Non-GAAP net income per fully diluted share was $1.14 in Q3, up 62% versus $0.71 per share in the third quarter of 2014. Fully diluted shares used in the EPS calculation was 17.5 million for Q3. Capital expenditures for the business were $0.4 million in Q3. Our primary capital expenditures are investments in our technology platform to ensure the reliability and scalability of our solutions to handle the large postage volumes we are 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. We ended Q3 with $102 million in cash and investments, which was up $12 million compared to Q2 2015 and up $45 million compared with year-end 2014. Endicia acquisition. As Ken discussed, we expect to close the Endicia acquisition on November 18. The purchase price of $215 million is subject to adjustments or changes in Endicia’s net working capital as of the closing date and certain transaction expenses in closing cash adjustments. We expect to fund the acquisition with cash and investments on hand and committed financing of $165 million, which we have secured from three leading banks. We expect to borrow the full $165 million available under the credit facility, which will have a five-year term. We expect the annual interest rate of the debt to be approximately 2% based on current LIBOR rates. Endicia had approximately $59 million in revenue during fiscal 2014. While we have not disclosed Endicia’s operating margins, we would note that our historical non-GAAP operating margin at $62 million in revenue was approximately 14%. We will file an amended 8-K with Endicia’s audited financials within 75 days of the closing at which time we plan to discuss their financial results in further detail. We expect to realize the synergies Ken outlined over the course of time and will report on our progress on our quarterly earnings calls. We would note that the realization of synergies takes time to achieve as we experienced with ShipStation and ShipWorks, where we are now more meaningfully seeing the benefits four to five quarters following the acquisitions. In addition, we will provide our 2016 business outlook for the consolidated companies on the next earnings call on February. Now turning to 2015 guidance. Our updated guidance for revenue and non-GAAP net income per fully diluted share includes the expected financial results from Endicia from the expected close on November 18 through December 31, excluding the associated non-recurring acquisition-related expenses. We expect fiscal 2015 revenue to be in a range between $198 million to $208 million. This compares to previous guidance of $170 million to $190 million. We expect fiscal 2015 non-GAAP EPS to be in a range between $3.60 to $4 per fully diluted share. This compares to previous guidance of $3.10 to $3.50 per share. Non-GAAP net income per fully diluted share excludes noncash stock-based compensation expense, non-cash amortization of acquired intangibles, noncash contingent consideration charges, noncash tax expenses or benefits, litigation settlements and reserves, acquisition-related expenses including corporate development, regulatory approval and transaction-related costs and other nonrecurring expenses. We’re not providing GAAP EPS guidance because of the difficulty of forecasting some non-GAAP items such as contingent consideration charges which is partly driven by future changes in our stock price. We expect 2015 Core Mailing and Shipping revenue to be up between 35% to 45% versus 2014. The strong growth reflects the accelerating benefits of our multicarrier acquisitions and stronger small business customer acquisition metrics. We expect noncore revenue from the enhanced promotion channel to continue to be down in 2015 compared with 2014, consistent with historical trends, as we continue to minimize our investments in this area. We expect PhotoStamps’ revenue to be up modestly in 2015 compared with 2014. We would note that high-volume business orders can fluctuate significantly from quarter-to-quarter which can make PhotoStamps’ revenue trends difficult to forecast. We’re targeting small business customer acquisition spend, including ShipStation and ShipWorks, to be up 15% to 25% in 2015 compared with 2014. Given the strong customer acquisition metrics we experienced so far this year, we’re expecting to see a significant sequential increase in customer acquisition spend in Q4 compared to Q3 in order to take advantage of the seasonally strong Q4. We expense our customer acquisition spend in the quarter incurred, but earn the return over the life of the customer which negatively impacts quarterly EPS when customer acquisition spend increases, but which maximizes the long-term return on the investment for the business. We expect cash taxes will be approximately 2% to 3% of non-GAAP pre-tax income. We expect capital expenditures for the business in 2015 to be approximately $3 million. In summary, our Core Mailing and Shipping business model with recurring revenue and high margins is a very attractive and sustainable business model. We are experiencing strong revenue growth and significant margin expansion demonstrating the strength of our financial model. There are significant opportunities in the fast-growing, e-commerce-driven package market. We’re already realizing the benefits of our ShipStation and ShipWorks acquisition and the Endicia acquisition will also help us capitalize on these opportunities. We’re seeing strong small business customer acquisition metrics where we continue to see an attractive ROI on our customer-acquisition spend and we continue to expect to ramp-up that investment. We have strong free cash flow generation and a strong balance sheet. We’re looking forward to delivering continued great results. With that, we will open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of George Sutton from Craig-Hallum. Your line is now open.

[George Sutton:]

Thank you, guys, congratulations on the results and certainly the Endicia update.

[Ken McBride:]

Thanks, George.

[George Sutton:]

So as we look at Endicia, you mentioned $59 million in revenues in 2014. They’ve been under the umbrella of an acquisition most of the year in 2015. Are you able to give us a sense of the kind of growth that they have been seeing this year? And I think we’ve been led to believe through some of the Newell numbers that that number is somewhere in the low double-digit range?

[Ken McBride:]

Yes. At this point, George, where I mentioned we’re filing the – we’ll be filing the 8-K with the full audited financial results. So we haven’t given any public update in terms of the revenue for this year on our end to the extent you can derive that from Newell’s information. That’s up to your analysis. But at this point we are focused more on ensuring strong execution of the synergies, you know, out of the box. So that’s really our focus and that’s where we will be focusing our efforts.

[George Sutton:]

Okay. As we look at your marketing program, which has been increasingly successful, can you give us or point us in which directions you have seen this success? Obviously, you’ve been seeing a lot of success in traditional print – or, I’m sorry, traditional TV and radio, and had also seen success in direct mail. Can you give us a little bit of an update of why it is working as well as it is?

[Ken McBride:]

Yes. I mean I think it’s, kind of – we’ve been utilizing all the same channels for years and years. I think it’s just more like we constantly test, we constantly try to optimize all of the variables and all the factors related to each of those. So, in the case of direct mail, for instance, we will change the look of the piece, we will change the form factor, we’ll change the colors, we’ll change, all sorts of factors there, so – and different lists. So I think over time we’ve been able to continue to just continuously improve each of our channels through that kind of continuous testing. So I think you are just continuing to see ongoing improvement from all the different optimizations we do across all the different areas.

[George Sutton:]

And just to be clear, none of the success you are really seeing would you view as a true macro benefit that you are seeing yet? Is that correct?

[Ken McBride:]

It’s a little bit hard to tell from things like, we typically refer to the small business optimism index which, has – in general we’ve seen at a little bit higher level in the past year than the previous years. But it’s hard to make a direct correlation. But it’s certainly possible that, at least compared to two or three years ago, we are seeing the benefits of a slightly better small business economic environment.

[George Sutton:]

Okay. One other thing, if I could. Relative to the messaging you talked about, Ken, the combined companies will have a unified message which will reduce confusion, but you are keeping the brands separate. I wasn’t clear what you meant by that. And you also mention more coordination with the U.S. Postal Service. Can you just be more specific in terms of what the benefits there might be? Thanks.

[Ken McBride:]

Sure. I think it’s really – I think that when you look at the respective brands of the companies, our brand has really been – through the broad marketing we’ve done, has really been targeted primarily at small businesses. And that’s where, the vast majority of our customers are. Endicia, on the other hand, has really been focused, really for the entire history of the company, has been focused more deeply in the high-volume shipping area. And they’re really the most well-known brand in that area. So I think we’re looking at really, optimizing across the different brands. Looking at really kind of honing down the messaging and pushing forward, one brand over another in each segment where that brand has more strength. And I think the benefit of that is, customers will have less confusion as they are presented kind of with a more unified messaging. The streamlining of the onboarding will be simpler to really bring the customers on board. And then, as we work with the U.S. Postal Service to the extent that their sales team is out there meeting with customers and they have, they have more of a unified branding, then I think there’s less confusion there. So they’ll be able to more effectively compete in their job utilizing our technology. And then the customer onboarding, as well, will be more clear and more streamlined.

[George Sutton:]

Got you. Okay. Thanks, guys.

[Ken McBride:]

Thanks, George.

[Operator:]

Our next question comes from the line of Allen Klee with Sidoti. Your line is now open.

[Allen Klee:]

Yes. Hi. First question is the impact of the USP – U.S. Postal Office price increases that they’ve said are going to happen in January. I know FedEx and UPS are also announced some increases. But any view on how that might impact business?

[Kyle Huebner:]

Yes, sure. I think that as you look at the rate increases that the Postal Service announced, I think you really have to keep it in perspective because it’s really the first rate increase that they’ve had in shipping-related mail classes of Priority Mail and Priority Mail Express since 2013. When you look at other carriers, they increase their rates each year and have had consistent rate increases. So I think that – and I think they’ve announced FedEx in particular has announced a 5% increase in 2016. They also increased rates by 5% in 2015. So, I think, net-net, you really don’t – I mean I think when you look at the carriers in relation to the alternatives, on that basis USPS really remains competitive and their value proposition is still very strong despite the price increase.

[Allen Klee:]

Okay. Great. And then we continue to see an improving trend in your cost to acquire customers. And I’m just wondering, could this be a function of kind of, I don’t know, something about volume advantages or something else that I know in the past you’ve said it stays in a band and not to read into this, but it feels like a trend. So I’m just wondering if you had any thoughts on that?

[Ken McBride:]

Yes. I think it’s similar to what I said earlier. We just – I mean I think Kyle mentioned there probably is some impact of improved economy and I think there is always just the continuous testing that we’ve done. And, one of the factors in testing includes volume that you can – the volume of a marketing program that you can put spend against. So you kind of optimize against the different variables and the different channels. And, inevitably, as you increase volume too rapidly, the CPA tends to go up. I think it’s optimization across all those variables and certainly, over time we’ve been able to both reduce CPA, increase the ROI, and also scale up the volumes without, having an increase in CPA.

[Allen Klee:]

Okay, great. And then last month you guys put out a paper explaining international postage rates. And I was just – I know traditionally you haven’t focused on the international market, but I was just wondering if there’s anything we should read into that?

[Ken McBride:]

No. I think this time of year we typically put out some white papers which are really just meant to highlight the different things that are available to customers out there. The white paper we put out on the international shipping was really meant to try to help demystify some of the complexities around that. When you look at the customs forms you need to fill out, the different steps that an international package needs to go through. But also really meant to highlight the fact that the Postal Service has some of the lowest rates out there. So really trying to get that in front of customers ahead of the shipping season so that we can make them more aware that it’s a great alternative to, using, for example, FedEx or UPS or DHL.

[Kyle Huebner:]

And in addition, I would say, as e-commerce merchants look to grow their business, one of the avenues is selling to an international audience. So we want to make sure that our shipping solutions are able to meet their needs and simplify and streamline that process to help them be able to grow their business.

[Allen Klee:]

Okay. Thank you so much.

[Ken McBride:]

Thanks.

[Operator:]

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

[Tim Klasell:]

Yes. Hey, guys. Just going to throw up my congratulations as well on a good quarter. Obviously the shipping business is really accelerating off of the two acquisitions. But I think, as you said in your prepared remarks, it took several quarters for that to happen. What were the integration points that you needed to solve before you started to see that? And should we sort of expect similar things with Endicia? Or maybe you can walk us through the process of how you integrated the prior acquisitions and how we should think about Endicia?

[Kyle Huebner:]

Yes. I mean, I can address that. We focus on ensuring very strong execution. So one, we want to make sure we thought through kind of how the integration is going to look at the end of the path. Then we also – we test and measure before we really scale and try and accelerate. So, for example to the extent we’re spending on marketing for one of the two acquisitions, we would test the spend, measure it, measure the lifetime value to ROI before accelerating that spending. So I think it’s – we’re really focused on we run the company for a three to five year timeframe and so, it’s more important for us to be disciplined, get the execution, get the result right, even if it takes, four quarters when you are up three to five years out. So I think the Endicia acquisition, different elements of the different synergies will have different time frames, but, in general, we’re going to use the same philosophy of being, very disciplined, ensuring strong execution and so, it – it’s certainly, some of the – some of the synergies, it may be a similar case where it’s, four quarters before, you really start to see, the type of impact that we’re seeing from our existing acquisitions.

[Tim Klasell:]

Okay, great. And then, finally, on cross-selling into your install base. You have, obviously, excellent visibility into a lot of small businesses and their U.S. Postal Services’ need. How have you been able to cross-sell the ShipWorks and ShipStation products into that group? Has that been part of the growth drivers there or should we not assume that?

[Ken McBride:]

I think that’s certainly one of the things that we identified as, as a synergy opportunity. When we acquire a customer on the Stamps.com platform, we’re a single-carrier product. Inevitably most customers, most e-commerce users begin with a single carrier and then as their business scales up, they perhaps look to some multicarrier solutions in order to continue to scale and optimize. And so I think we – within our product, we can see the usage patterns. We have a what we would call batch area of the product, if customers begin to use that, depending on their patterns there, we’re able to predict like, oh, this customer is of a certain type or category where it appears as if they might benefit from an upsell message. And so we – I think we’ve been able to do that. We’re continuing to kind of test and make sure we’re doing a – optimizing that customer experience. But, yes, it has been a factor in the benefit of the acquisitions.

[Tim Klasell:]

Okay, great. And then one final one. In your channel – other products inside of Endicia, we know of their high volume shipping products, but are there other products they have that might be sort of more addressable to your traditional small business SOHO customer that we are not aware of?

[Kyle Huebner:]

Yes. They have an offering called Dymo Stamps which is targeted more at the kind of traditional office-based small businesses. It’s a little bit different model where there’s not a recurring subscription fee and the, business model is really making the profits off the sale of labels based on usage. So, that’s a product that, I’d say, maps more to the traditional office-based small business and, that’s obviously an area we’ll work to, ensure that we’re offering an integrated suite of solutions to meet the customers’ needs.

[Tim Klasell:]

Great. Thank you very much, guys, this has been very helpful.

[Ken McBride:]

Thanks.

[Kyle Huebner:]

Thanks.

[Operator:]

[Operator Instructions] Our next question comes from the line of Bill Sutherland with EG Equities. Your line is now open.

[Bill Sutherland:]

Thanks and thanks for taking the question. Just a clarification, really, on the Endicia acquisition. Is it going to be in your numbers starting that quarter after the closing date?

[Kyle Huebner:]

Yes. So what – in the guidance we gave, the assumption is that their financial results will be included from the expected close of November 18 through December 31, in terms of our non-GAAP EPS numbers, it would exclude the guidance we gave would exclude the acquisition-related, kind of one-time nonrecurring expenses such as the regulatory approval, transaction costs for the acquisition. But the normal business operations, the results will be included. Again, it’s only about a six-week period, but those will be in our reported numbers for Q4.

[Bill Sutherland:]

Okay. And, Kyle, I think you upped your core mail and ship revenue growth band to 30% to 40%. So that’s part of the reason for that?

[Kyle Huebner:]

Yes. I think it was 35% to 45%. So, on one hand, we have now anniversaried the ShipStation and ShipWorks initial acquisitions. So, the year-over-year growth is kind of – the incremental growth that we have been able to achieve since the acquisition. On the other hand, you know, the Endicia contribution will be new. So kind of both of those factors played into it. And us increasing the range from the 35% to 45%.

[Bill Sutherland:]

I don’t know if you mentioned CapEx for the year, updating that. Is it still $3 million to $3.5 million?

[Kyle Huebner:]

Yes. I would say approximately $3 million. It was a little light in Q3, but I mentioned we tend to see kind of fluctuations based on the timing of projects. So the full-year number is about $3 million is the estimate.

[Bill Sutherland:]

Okay. Thanks a lot for the clarification.

[Operator:]

At this time, I’m showing no further questions. I would now like to turn the call back over to Ken McBride, CEO, for closing remarks.

[Ken McBride:]

Thanks for joining us. As always, we direct you if you have any questions to our investor relations website which is at investor.stamps.com. We also have a telephone number you can call us, 310-482-5830. Thanks so much.

[Kyle Huebner:]

Thank you.

[Operator:]

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