Stamps.com Q2 '19 Recap: A Few Green Shoots
Stamps.com (STMP) delivered Q2 ’19 results ahead of expectations. Underlying the strong performance was the highest number of gross customer additions in recent memory, robust growth in Global Advantage Program revenues, and a modest reacceleration in customer postage printed. In contrast to the past two quarters, management’s commentary regarding revenue streams associated with the United States Postal Service (USPS) was also a tad less gloomy, resulting in an increase to the low-end of FY ’19 guidance. We raise our estimates for this year and next, and our price target increases from $56.50 to $59.00, representing an unchanged FY ’20 EV/EBITDA multiple of 10x. Given the latest developments in the USPS reseller program, we see potential for another beat as the year progresses. Per management, the company also remains in active discussions with both domestic and international carriers, leaving us hopeful that a strategic partnership could be announced in the coming months. In short, we remain bullish on shares.
Total revenue of $138.8 million (-0.6% Y/Y) was in line with our $138.2 million estimate and above consensus of $130.0 million. Relative to our estimate, organic contribution was higher, while revenue from MetaPack was slightly lower. From a metrics standpoint, the paid customer count of 742,000 at quarter-end outpaced our estimate of 734,000 despite an uptick in churn to 3.4% versus our 3.1% assumption. This implies gross customer additions at the highest level that we have seen in the past two years. As for the higher churn, the company has increased pricing for its USPS-only offerings and has also begun assessing sales tax, so the rate is likely to remain elevated in the near-term. That said, we expect the increase in pricing to more than offset the impact of higher churn, especially if new customer acquisition remains strong.
Below the top line, higher gross margin than we assumed resulted in both adjusted EBITDA and non-GAAP EPS exceeding our estimates. We believe this reflects higher than anticipated subscription revenues and perhaps higher transaction revenues as well given that customer postage printed was slightly above our estimate and some USPS negotiated service agreement (NSA) holders are now being assessed a surcharge. Operating expenses were generally consistent with our model aside from the mix of research and development versus sales and marketing, which skewed more to the former than we anticipated.
Not surprisingly, much of the earnings call focused on the status of the USPS’ negotiations with its reseller partners. Management noted that developments since last quarter’s call have been modestly positive as the company is aware of some reseller NSAs that have been extended through year-end with no change to margins. Previously, expectations were for margins to compress beginning in June 2019. With the impact delayed, management raised the low-end of its FY ’19 revenue and adjusted EBITDA guidance by $10.0 million apiece, resulting in expectations for $520.0-$560.0 million in revenue, $120.0-$150.0 million in adjusted EBITDA, and $3.60-$4.85 in non-GAAP EPS. Conversations between the USPS and its reseller partners were described as collaborative and productive, but as management is not privy to the negotiations, the outcome remains uncertain. We remain of the view that the reseller program has been a boon to the USPS’ growth in shipping, but as management still anticipates reseller margin compression in FY ’20 and beyond, we assume the revenue shares that Stamps.com participates in will begin to decline in Q3 with the full impact felt in Q1 ’20.
Our estimates move higher for FY ’19, reflecting the upside in Q2, a higher paid customer count going forward, and a smaller headwind from potential reseller margin compression in 2H. For FY ’20, we continue to model the full impact of lost reseller revenue shares implicit in management’s guidance last quarter, but our estimates tick up due to a higher subscriber count and a slight increase in our estimate of Global Advantage Program revenue. Applying the same FY ’20 EV/EBITDA multiple of 10x that we used previously to our revised projections yields an increase in our price target from $56.50 to $59.00.
Our Q2 ‘19 variance analysis is available here and our revised model 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).