Q3 '19 Results Beat; What Can Brown Do For You?

Stamps.com (STMP) posted another big beat in Q3 and raised guidance for FY ’19, in effect taking expectations back to where the company had guided earlier in the year. Both the beat and raise largely reflected the extension of existing United States Postal Service (USPS) reseller agreements through year-end versus prior assumptions that new terms could be instituted after the June quarter. Similar to last quarter, management’s update on the status of the USPS reseller program was more constructive with respect to Postal’s plans to reduce incentives but still light on details regarding the anticipated impact.

Of course, Stamps.com’s recently announced partnership with UPS was the focal point of the earnings call. We were pleased to hear that access to the company’s discounted UPS rates will be available to customers of its USPS-only platforms by Q1 ’20 with those on its multi-carrier solutions potentially contributing this holiday season. Importantly, all customers will be provided with a UPS account by default, allowing for faster uptake of UPS’ delivery services. Although we are still asking “what can brown do for you?” due to a lack of specifics around the near and long-term contribution anticipated from the partnership, we currently project a few million dollars in associated revenues during Q4 ramping to $20 million in FY ’20 and doubling from there in FY ‘21.

Aside from incorporating new partnership revenues, our top line estimates for this year and next also increase as we now assume a restructuring of the USPS reseller program does not take effect until January 2020. However, our FY ’20 adjusted EBITDA estimate moves up only nominally as we expect the company to maintain higher levels of customer acquisition spend given its new strategic partnership. As for our initial forecasts for FY ’21, prior indications that reseller margins are likely to compress in both 2020 and 2021 before stabilizing thereafter leave us projecting a low single-digit decline in revenues. That said, we believe the company could secure another major carrier agreement prior to then, which in turn would allow for stability in revenue and adjusted EBITDA at the very least and perhaps mark an inflection point for renewed growth.

With all this in mind, we raise our price target from $59.00 to $91.00, reflecting a FY ’20 EV/EBITDA multiple of 15x. Our prior target was based on a FY ’20 EV/EBITDA multiple of 10x. With the stock already indicated above our price target in after-hours trading, we would not commit new money without a greater margin of safety. Even so, we believe existing shareholders should hold on for the ride given our view that Stamps.com is poised to surprise to the upside again in Q4, may well land another major partnership, and remains well positioned strategically amidst an increasingly competitive logistics landscape.

Total revenues of $136.2 million (-5.1% Y/Y) exceeded our $122.9 million estimate and consensus of $123.7 million. Higher service revenues were the primary driver of the variance as we had taken a fairly conservative posture on the potential loss of USPS reseller revenues beginning in Q3 ‘19. As it stands, the reseller program will remain in its current form through the end of 2019. Also notable, the paid customer count of 743,000 at quarter-end surpassed our estimate of 736,000 while average monthly churn of 3.2% was consistent with our assumption. This implies gross customer additions outpaced our expectations for the second consecutive quarter.

Reflecting the lift from higher transaction revenues, gross margin was higher than we assumed. Sales and marketing expenses were lower than we projected, offsetting higher investments in research and development and higher general and administrative expenses than modeled. As a result, both adjusted EBITDA and non-GAAP EPS exceeded our estimates by a wide margin.

Turning to guidance, management raised its FY ’19 revenue outlook from $520.0-$560.0 million to $535.0-$565.0 million and increased its adjusted EBITDA expectations from $120.0-$150.0 million to $132.0-$152.0 million. The low-end of the company’s non-GAAP EPS guidance also moved higher from $3.60 to $3.85 with no change at the $4.85 high-end. We believe the increase at the lower end of management’s guidance ranges is likely attributable to the push-out of diminished reseller economics into 2020, while the slight uptick at the higher end reflects the initial contribution anticipated from the new partnership with UPS.

Our FY ’19 estimates move higher, reflecting the upside in Q3, the addition of reseller revenues previously presumed lost in the latter half of the year, and the initial benefits of the UPS partnership. Similarly, our revised FY ’20 revenue estimate reflects reseller margin compression off a higher base in FY ’19 as well as our first stab at the potential ramp in UPS-related revenues. In regard to adjusted EBITDA and non-GAAP EPS, we assume much of the increase in our top line projection is reinvested back into sales and marketing. Finally, we introduce our FY ’21 estimates, which call for $509.4 million in revenue and $99.1 million in adjusted EBITDA, reflecting Y/Y declines given our assumptions for compression in reseller margins partially offset by a doubling in UPS revenues and a paring of sales and marketing spend. We view these projections more as placeholders for the time being as we acknowledge that significant uncertainty remains with respect to the reseller program as well as the timing of any new strategic partnerships, both of which may cause results in FY ’21 to deviate significantly from our current model.

Our report with model and disclosures is available here.

Disclosure(s):

The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of Stamps.com (STMP).