Strong Quarter and Outlook Remove Major Overhang

Stamps.com’s (STMP) Q4 ’19 results reflected another big beat, although the upside was not particularly surprising from our perspective given the read-through from the United States Postal Service’s (USPS) peak season performance. Management’s initial outlook for FY ’20 was quite unexpected, however, and far better than we dared to hope. Numbers aside, the guidance is of more significance than the usual “beat and raise” as Stamps.com’s expectation for even a modicum of revenue growth this year implies that the previously anticipated reduction in USPS reseller economics was less than feared. Moreover, the four-year duration of the new reseller agreements coupled with management’s commentary that the new contracts “provide both relative stability and predictability” for its partners and the broader e-commerce ecosystem suggest that a multi-year compression of reseller margins is no longer in the offing. Put simply, the growth and risk profile of Stamps.com’s business has improved dramatically. This is perhaps best encapsulated in the substantial upward revisions to our estimates and price target, the latter of which rises from $91.00 to $160.00 based on a FY ’20 EV/EBITDA multiple of 20x. We note that our prior target reflected an EV/EBITDA multiple of 15x, but we believe the higher valuation is justified considering the removal of a major overhang on shares, the prospects for further upside surprises as the strategic partnership with UPS ramps and the potential for Stamps.com to land another meaningful carrier relationship. While we are generally reticent to chase a stock once the good news is out, in this case we are stepping off the sidelines to make the call that shares of STMP are worth buying even after what looks to be a 30%+ move in after-hours trading.

As for other notable developments, a subset of ShipStation customers were provided access to the company’s deeply discounted UPS rates in Q4, and those rates are now being rolled-out broadly across the entire ShipStation base. ShippingEasy and ShipWorks customers are also expected to be onboarded this quarter, and management relayed that the addition of UPS capabilities to the Stamps.com and Endicia platforms remains on track to launch in Q1. Given the pace of the UPS rollout, we anticipate nominal contribution in Q1 and a steady build thereafter. In our opinion, the partnership with UPS may well contribute to another upside surprise in the coming quarters, but we are keeping our expectations tempered for now as shifting customers there could cannibalize existing USPS-related revenues. Domestically, revenues from Global Post and the Global Advantage Program increased 45% last year, and MetaPack has penetrated the U.S. market with its first two major customer wins. Internationally, the company plans to ramp marketing, business development and product development investments aggressively in FY ’20 to capture greenfield opportunity for ShipStation and ShipEngine. The development of an entry level shipping solution for the international market based on the Stamps.com branded web solution is also in the works.

Delving into the details, Q4 revenues were $160.9 million (-5.5% Y/Y), exceeding our estimate of $151.8 million and consensus of $144.7 million. All revenue line items contributed to the upside with higher service fees and customized postage revenues comprising the majority of the variance versus our projection. The Y/Y revenue decline reflected the loss of direct incentives from the USPS. MetaPack revenues of $14.5 million were also down from the prior year due to challenging macroeconomic conditions in Europe.

Key customer metrics again exhibited favorable trends with gross customer adds increasing in the mid-teens range, resulting in a paid customer count of 750,000 at quarter-end versus our projection of 749,000. Average monthly churn of 3.2% was flat on a sequential basis. Average revenue per user was $69.33, down 7.5% Y/Y due to the loss of USPS commissions but above our assumption of $66.10.

Reflecting higher than modeled service revenues, gross margin was higher than we assumed. Both sales and marketing and general and administrative expenses were lower than we estimated, while spending on research and development was consistent with our projection. Both adjusted EBITDA and non-GAAP EPS beat our estimate and consensus by wide margins. Of note, a lower than anticipated tax rate accounted for approximately $0.46 of the upside on the bottom line relative to our estimate. That said, non-GAAP EPS of $1.66 on an apples-to-apples basis still would have easily exceeded our $1.17 estimate and the Street’s $1.03.

Management’s guidance for FY ’20 calls for revenue of $570.0-$600.0 million, adjusted EBITDA of $135.0-$155.0 million and non-GAAP EPS of $4.00-$5.00, all of which comfortably exceeded our estimates and consensus. Reflecting fears that the economics available under the USPS reseller program would be diminished in FY ’20 and beyond, we had previously assumed revenues would decline at a high single-digit clip, resulting in significantly lower profitability levels as well. Instead, guidance reflects a flat to mid-single digit increase in the top line for the year. While the flow through to adjusted EBITDA and non-GAAP EPS will be limited by heightened investments in sales and marketing and product development, guidance for both metrics still left us breathing a sigh of relief.

Our estimates for this year and next increase markedly due to a more benign outcome of the USPS’ negotiation with resellers than we had originally assumed. In short, not only do we anticipate a lower level of lost revenue in FY ’20 but we also surmise that the aggregate of USPS and UPS-related revenues should be within striking distance of the reseller-related revenues generated in FY ’20, if not increasing outright. More importantly, we no longer assume further compression in reseller margins during the outyear, which combined with the ongoing ramp of the UPS partnership supports an accelerating growth scenario.

Our report with model and disclosure 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).