Key Takeaways Following Stamps.com’s 10-K Filing
Stamps.com (STMP) filed its 10-K for FY ’18 on Friday, March 1. Not surprisingly, the primary changes relative to last year were new risks and disclosures pertaining to the recently announced loss of direct compensation arrangements from the United States Postal Service (USPS) and the acquisition of MetaPack, which was completed in mid-August 2018. Regarding MetaPack, updated risks pertained to Brexit, geopolitics, potential changes to international trade agreements and tariffs. As for the loss of certain USPS financial arrangements, we note that the company leaves open the possibility that an agreement could be reached in the future, stating “[w]e have been, and in the future could be, compensated directly by the USPS and/or other carriers for shipping labels printed that meet certain requirements.” Of course, this also indicates the potential for arrangements with other carriers, which we believe is the company’s priority for replacing the lost revenues. Of note, the number of carrier partnerships has ballooned to 450 from 30 following the acquisition of MetaPack. From a timing perspective, however, the 10-K filing makes clear that Stamps.com has no expectation that much of those revenues will be supplanted this year. Specifically, the 10-K states that “[w]e do not expect any material replacement of such revenues to occur during the 2019 fiscal year. Operating results in 2019 and beyond may be materially less than in 2018.” This of course begs the question of how and when exactly Stamps.com could begin to offset the lost USPS revenues.
While we have no insight into who the company is likely to partner with first and when these arrangements might come into play, the 10-K indicates that Stamps.com is in various stages of discussions with other carriers. In our view, the company is unlikely to reach any material agreements until its Stamps.com and Endicia platforms are integrated with carriers aside from the USPS. We believe these integrations are on the come given a blog post on stamps.com addressing a myriad of questions from customers following the termination of its exclusive relationship with the USPS. Towards the end of the post, the company suggests that “[i]n the future, you may see additional shipping carriers as an option to print shipping labels.” The ability to access other carriers like FedEx and UPS within Endicia and Stamps.com is critical to negotiating favorable terms with those carriers, in our opinion, given the magnitude of subscribers on the company’s two USPS-only platforms and shipping volumes that represent new market share for any potential partners. We note that when Shopify (SHOP) announced a partnership with UPS for the 2017 holiday season, the company had over 600k merchants on its platform. Stamps.com has 736k subscribers across its various offerings, but of course the vast majority are on its USPS-only offerings. Thus, we surmise that incorporating multi-carrier capabilities into its USPS-only solutions should further any discussions underway with the major domestic carriers. In this regard, investors should be on the lookout for when Endicia and Stamps.com are updated to allow access to other carriers.
Amazon.com (AMZN) may also prove to be a significant partner. While perusing Amazon.com’s seller forum, we were encouraged to see a mention that Amazon’s Shipping Service will be integrated with ShipStation in the near future. As seen in the image below, one seller indicated that a beta test of Amazon’s Shipping Service would commence in April and that seller had heard the only platform integration with the service is ShipStation. We believe this speaks to ShipStation’s dominant position in the multi-carrier software space and bodes well for future technical and economic arrangements with Amazon.com. That said, we believe that over the long-term, Stamps.com is more likely to benefit from partnerships with FedEx and/or UPS given Amazon.com’s penchant for displacing intermediaries within its ecosystem. In our view, Stamps.com likely wants Amazon.com to have a meaningful impact on the logistics market, not necessarily to extract significant economics from Amazon.com, but to ensure a highly competitive landscape where Stamps.com is best positioned to support each carriers’ attempts to acquire and retain shipping volumes. We note that last week’s announcement from Amazon.com allowing Prime members to select a single day each week to receive all of their orders is consistent with its attempts to offer conveniences that its third-party sellers can only support by relying on its Shipping with Amazon or Fulfillment by Amazon services. We do not believe this is a hindrance to a partnership with Stamps.com in the near-term, but of course significant uptake of this feature by customers could have longer term implications.
As for other financial tidbits from the 10-K, the Global Advantage Program added $29.9MM in pass-through revenues for the year. MetaPack contributed $20.4MM to FY ’18 GAAP revenues and generated $53.4MM in revenues for 2018, up from $44.7MM in 2017. MetaPack’s gross margin in Q4 was 77.5%, much better than the 58% reported for the stub period in Q3 ’18. Our prior estimates remain intact following the 10-K filing, and we maintain our $150.00 price target, representing a FY ’20 EV/EBITDA multiple of 15x.
Disclosure(s):
The author holds a long position in Stamps.com (STMP).