A Secular Growth Story
Given its association with postage stamps, those less familiar with Stamps.com (STMP) may find the company’s high historical growth rates surprising. However, the company’s growth trajectory and management’s long-term outlook since entering the multi-carrier shipping software space are indicative of strong secular growth trends in our opinion. Between FY ’13 and FY ’17, revenues increased from $127.8MM to $468.7MM, representing a CAGR of 32.3%. Although acquisitions contributed to the stellar performance, organic growth also accelerated dramatically from 8.3% in FY ’14 to 26.5% in FY ’17. While growth in paid customers has been a factor, the ability to monetize a portion of its customers’ shipping volumes has driven substantial increases in Stamps.com’s average monthly revenue per user (ARPU) metric, which has risen from $21.21 in FY ‘13 to $62.14 in Q3 ’18. This in turn has fueled significant margin expansion. The company’s adjusted EBITDA margin expanded from 32.2% in FY ’13 to 49.1% in FY ’17 with non-GAAP EPS increasing from $2.39 to $9.74 over that same period.
Despite increasingly difficult comparisons, Stamps.com’s results of late have continued to reflect positive growth trends. In Q3 ’18, Stamps.com reported revenues of $143.5MM, representing an increase of 24.7% Y/Y. Excluding the initial contribution from MetaPack, which was acquired mid-quarter, revenues increased 20.2% Y/Y. Gross margin of 76.9% was down from 81.3% in the year-ago period and 78.9% in the prior quarter, reflecting both the inclusion of MetaPack’s results and growth of the company’s Global Advantage Program. The Global Advantage Program is offered to domestic shippers with international shipping requirements. These shippers send shipments designated for international markets to a domestic facility managed by Stamps.com’s partner in the program who then ensures that items are appropriately packaged and prepares the requisite customs forms. In contrast to the bulk of Stamps.com’s mailing and shipping revenues, accounting rules pertaining to the Global Advantage Program require the face value of postage purchased by customers to pass through both revenues and cost of revenues. These pass-throughs amounted to $7.3MM in Q3. Thus, on a net basis, gross margin would have been down only marginally from the prior year. Adjusted EBITDA was $61.0M, representing a margin of 42.5%. Non-GAAP EPS were $2.76.
Reflecting strong results to date and the initial inclusion of MetaPack within guidance, management raised its FY ’18 revenue outlook to $550.0MM-$580.0MM. Contribution from MetaPack is expected to range from $15.0MM-$20.0MM, implying organic growth of 13.1%-20.5%. Our projection of $580.1MM reflects the high-end of management’s guidance, as we believe the combination of seasonal strength, initial contribution from MetaPack in the prior quarter and PC Postage data points through the first two months of Q4 bodes well for upside on the top line. Our adjusted EBITDA estimate of $257.3MM sits closer to the midpoint of management’s $245.0MM-$265.0MM guidance, however, as we expect ongoing investments in the business to support the company’s international expansion efforts and to reaccelerate growth in the paid customer count. Similarly, our non-GAAP EPS estimate of $11.27 sits within management’s guidance range of $10.60 to $11.60.
Beyond FY ’18, we model revenues of $670.9MM (+15.6% Y/Y) and $762.4MM (+13.6% Y/Y) in each of the next two years. Worth noting, management has consistently reaffirmed its five-year target growth rate of 20% for the company’s mailing and shipping revenues (i.e. everything but Customized postage) since the latter half of FY ’16, reflecting in part a belief that the company can outpace overall e-commerce growth rates in the mid-teens. As such, our revenue estimates may well prove conservative as we assume mailing and shipping growth more commensurate with overall e-commerce growth. We assume modest margin expansion in FY ’19, yielding adjusted EBITDA of $302.0MM (45.0% margin) and forecast more significant expansion in FY ’20 to $359.1MM (47.1% margin). Our non-GAAP EPS estimates include $10.63 and $12.08 in FY ’19 and FY ’20, respectively. We note that the Y/Y non-GAAP EPS decline in FY ’19 reflects the assumption of a more normalized 28% tax rate versus 15% in FY ’18.
Our detailed estimates are available here.
Disclosure(s):
The author holds a long position in Stamps.com (STMP).