Stamps.com Q4 ’18 Earnings Preview

Stamps.com (STMP) reports Q4 ’18 results on Thursday, February 21, after the market closes. Consistent with our update following the USPS’ reported financial results and December PC Postage data, we expect the company’s Q4 results to exceed Street expectations. In this regard, we project $163.4MM in revenues, $70.6MM in adjusted EBITDA and $3.16 in non-GAAP EPS, ahead of the Street’s $160.0MM in revenues, $69.1MM in adjusted EBITDA and $2.90 in non-GAAP EPS. Management’s FY ’18 guidance implies Q4 revenues of $133.3MM-$163.3MM, adjusted EBITDA of $58.3MM-$78.3MM and non-GAAP EPS of $2.55-$3.55.

As for management’s FY ’19 outlook, past experience suggests Stamps.com tends to guide conservatively out of the gate. As such, we surmise the company’s five-year target growth rate of 20% may well represent the top end of guidance on an organic basis with a 10% organic growth target reflecting a reasonable lower bound. Management’s current FY ’18 guidance implies MetaPack is likely to finish FY ’18 with approximately $50.0M in revenues, so a conservative assumption would be flat to double-digit growth for the coming year. Aggregating these organic and inorganic growth scenarios points to potential FY ’19 revenue guidance of $666.0MM-$727.0MM, which would imply a midpoint above current consensus expectations for $689.1MM and our estimate of $670.9MM. As for profitability, Stamps.com’s margin expansion tends to be muted in periods of growth given the positive ROI on customer acquisition spend, and management’s aspirations for international expansion are also likely to weigh on operating leverage. We therefore suspect adjusted EBITDA margin is guided flat to up slightly, which based on our current assumptions suggests a mid-40% EBITDA margin. Applied to our prior assumed revenue guidance ranges, this implies a potential adjusted EBITDA guidance range of $300.0MM-$327.0MM, which would also place the midpoint above the Street’s $293.2MM and our $302.0MM estimate. Stamps.com’s effective tax rate has fluctuated considerably over the past two years, but on a normalized basis should range from the mid-to high-20% range. As we are unsure what consensus implies at the moment, we will not hazard a guess as for the company’s guided range, but with our positive view on adjusted EBITDA and the 28% tax rate assumed in our model, we think FY ’19 non-GAAP EPS guidance should also compare favorably with our estimate and consensus.

Given the prospects for an upside surprise in Q4 and guidance at least in line with expectations, we continue to believe shares could close the gap relative to our $320.00 price target, which represents a FY ‘19 EV/EBITDA multiple of approximately 20x. That said, share price performance in the near-term is likely to be predicated more so on the perceived risk of Stamps.com’s arrangements with the USPS, which first came into question when the company’s 10-Q risk disclosures referred to the negotiation of an existing agreement. Until management provides an update on the status of the contract, shares may not fully reflect the company’s positive fundamentals. While we have no insight into the contract in question, we note that an agreement governing the sharing of credit card fees with the USPS was extended in October 2018 with no substantive changes, adding credibility to management’s commentary during its last earnings call that the company’s agreements with the USPS are unlikely to reflect any material changes. Given that two quarters have now passed since the initial disclosure, we surmise an affirmation that the referenced agreement has been extended may well come this quarter or next, which should remove the overhang that has been present.

Disclosure(s):

The author holds a long position in Stamps.com (STMP)