Q3 '20 Results Beat But Outlook Raises Questions

Stamps.com (STMP) reported Q3 ’20 results well above Street expectations and comfortably ahead of our recently raised estimates. As we previewed, the strong performance reflected another quarter of outsized growth in shipping volumes and new customer acquisition, both of which have accelerated meaningfully amid the COVID-19 pandemic. Even with an uptick in churn, the paid subscriber count at quarter-end easily exceeded our projection due to a 90% Y/Y increase in new customer acquisition. While that pace has moderated somewhat, management noted that customer acquisition was up 80% Y/Y in October, a still stellar growth rate in our opinion. Importantly, the high level of subscriber additions has not necessitated a similar step up in spending, resulting in a 30% Y/Y decrease in the cost per acquired customer. With overall operating expenses coming in below our estimate and a tax benefit realized in the quarter, all of the upside on the top line (and then some) flowed through to the bottom line.

Turning to the outlook, management raised its FY ’20 guidance across the board. Although the upwardly revised revenue, adjusted EBITDA and non-GAAP EPS guidance ranges compare favorably with consensus estimates heading into the print, the outlook implies a sequential decline on all measures in what is typically the company’s seasonally strongest quarter. Per management, the company has not seen any trends in its business that deviate materially from the broader e-commerce landscape and there have been no changes to any of the strategic relationships underpinning the performance of late. Rather, the implied guidance for Q4 simply reflects the heightened uncertainty inherent in the midst of a global pandemic and assumptions for shipping volumes to moderate relative to the extraordinary levels realized over the past two quarters. In short, management is being conservative.

While we certainly understand management’s reticence to elevate expectations further in an unprecedented environment and we agree that industry growth rates are likely to moderate in Q4, we are far more sanguine about the prospects for a strong peak season. Recall that in conjunction with raising our Q3 estimates ahead of the print, we also hiked our projections for Q4 and FY ‘21. We posited at the time that guidance for FY ’20 could reset higher at approximately $750 million in revenue and $250 million in adjusted EBITDA. The latter now matches the top end of guidance but the former sits above the current revenue outlook. Regardless, we are leaving our previous Q4 revenue and adjusted EBITDA estimates intact and raising our FY ’21 expectations slightly. Our price target is unchanged at $358.00 based on the same FY ’21 EV/EBITDA multiple of 25x we applied previously. In our view, Stamps.com (STMP) remains well positioned to benefit from e-commerce trends both near- and long-term. Should shares trade lower on the implied outlook for Q4, investors should be thankful for the buying opportunity.

Exhibit I: Reported Results Versus Expectations

Q3 revenue of $193.9 million (+42.4% Y/Y) exceeded our estimate of $181.8 million and consensus of $166.8 million. The upside was attributable to higher than anticipated service revenue of $183.8 million (+47.4% Y/Y), which outpaced our $171.7 million estimate due to continued strong growth in paid customers and shipping volumes. Product and Insurance sales matched our projection in aggregate, although the former came in slightly lower and the latter slightly higher than we modeled.

As for the company’s key customer metrics, the paid customer count of 987,000 (+32.8% Y/Y) at quarter-end surpassed our estimate of 962,000 as gross additions increased approximately 90% Y/Y. Monthly churn of 4.2% increased 100 basis points Y/Y and was 90 basis points above our assumption. Given the robust growth in gross adds and the sheer number of mailing-oriented customers secured last quarter, the uptick in churn is neither surprising nor concerning. Moreover, the current trajectory of new customer acquisition leaves us comfortable with Stamps.com’s ability to reach 1 million paid customers within the next twelve months even if churn remains elevated. Average monthly revenue per customer of $65.47 was above our $63.00 forecast.

Gross margin was below our assumption due to higher service costs, but the impact was mitigated by operating expenses coming in lower than we projected. Combined with the outperformance on the top line, this resulted in both adjusted EBITDA and non-GAAP EPS easily exceeding our estimates and consensus. We note that non-GAAP EPS beat by a substantial margin due to a tax benefit recorded in the quarter. On an apples-to-apples basis, non-GAAP EPS would have been $2.68 versus our estimate of $2.26 and consensus of $1.53.

Management raised its FY ’20 revenue, adjusted EBITDA and non-GAAP EPS guidance from $650.0-$725.0 million, $180.0-$240.0 million and $6.25-$9.25, respectively, to $705.0-$735.0 million, $230.0-$250.0 million and $10.35-$11.35. The revised outlook implies a sequential decline in revenue and adjusted EBITDA, leaving Q4 expectations short of our estimate and consensus. That said, management has a penchant for conservatism and this hardly the first time the company’s outlook heading into year-end has raised eyebrows. While the backdrop of a global pandemic, contentious election season and general macro uncertainty supports a cautious approach to guidance, we consider the outlook more of a floor that investors can bank on even if the bottom falls out of the economy. In other words, we believe the company’s Q4 performance is likely to come in considerably better when all is said and done.

Exhibit II: Estimate Revisions

Aside from incorporating the Q3 results, our model remains little changed. We maintain our prior Q4 estimates despite the optics of being outside of management’s current guidance ranges as we remain comfortable with our underlying assumptions. Our FY ’21 estimates tick up slightly as we fine-tuned our expectations for growth in subscribers and average revenue per user.

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).