Delivers Substantial Q2 Beat Against Elevated Expectations

Stamps.com’s (STMP) Q2 ’20 results crushed Street expectations as the COVID-19 crisis provided a significant tailwind on several fronts. Of course, the accelerated shift of retail sales to digital channels amidst the pandemic produced a massive surge in shipping volumes, a phenomenon we believe was reasonably well reflected in our recently raised estimates for Q2 and beyond. With management indicating that the dollar value of total U.S. shipping volumes grew in excess of 50% during July, we expect e-commerce growth to remain a strong tailwind in the near-term. More surprising to us was the jaw-dropping pace at which Stamps.com acquired new customers. New customer acquisition increased nearly 250% Y/Y as office mailers transitioned to remote work and shippers sought solutions to operate more efficiently amidst heightened demand. Avoiding in-person visits to carrier locations was also a catalyst for new subscribers. Per management, new customer acquisition has begun to moderate thus far in Q3 but was still up a whopping 150% Y/Y in July. As importantly, the soft economic backdrop has kept a lid on advertising costs, enabling Stamps.com to generate the strong adds at a cost per acquired customer nearly 50% lower than last year. Combining these factors with the timely strategic partnership entered into with UPS late last year, Stamps.com remains extraordinarily well positioned amidst the pandemic and thus raised its FY ’20 outlook.

As we had adjusted our model to account for the strength in e-commerce just days prior to yesterday’s print, our estimates were already squarely within management’s updated guidance for the year, albeit at the lower end. With Stamps.com outperforming our assumptions on all key financial and operating metrics in Q2, however, and management’s commentary regarding performance in July, we see potential for further upside to guidance. That said, we recognize that considerable uncertainty remains with respect to the impact of COVID-19 on the global economy, so we are simply moving our estimates to the higher end of management’s expectations. For the record, we think our new FY ’21 revenue and adjusted EBITDA estimates of $766.2 million and $251.3 million may very well be achieved in FY ‘20 if the trends in July hold for the remainder of the year. Reflecting the increase in our estimates and a higher target multiple, we are raising our price target from $232.00 to $342.00, which represents a FY ’21 EV/EBITDA multiple of 25x. Our prior target was based on a FY ’21 EV/EBITDA multiple of 20x but considering the obscene multiples being afforded to the company’s peers in the e-commerce solutions space (as well as the software industry at-large) and our view that Stamps.com is poised to beat and raise again, we think the higher valuation is warranted and readily achievable. In our opinion, investors should continue to maintain a core position in Stamps.com, and for those with outsized exposure following this latest run, taking some profits to position for a potential economic downturn is a prudent course of action.

Exhibit I: Reported Results Versus Expectations

Q2 revenue of $206.7 million (+49.0% Y/Y) was considerably better than our estimate of $181.0 million and consensus of $153.3 million. Similar to the prior quarter, service revenue of $187.0 million (+46.7% Y/Y) accounted for the majority of the upside relative to our $167.7 million estimate, benefiting from a surge in paid customers and shipping volumes processed amidst the COVID-19 crisis. All other revenue line items also outpaced our expectations with customized postage accounting for the greatest variance on a percentage basis as customers placed orders ahead of the United States Postal Service’s termination of the program in June.

Turning to the company’s key customer metrics, the paid customer count of 956,000 (+28.9% Y/Y) at quarter-end was most surprising with growth accelerating from the mid-single digits in Q1 and far exceeding our projection of 796,000. Gross customer additions were certainly the big contributor, but monthly churn of 2.8% also compared favorably with our 3.5% assumption and marked an improvement on both a sequential and Y/Y basis. Of note, management indicated that new customer additions increased over 150% in July, which we believe would put Stamps.com on pace to exceed 1 million paid customers this quarter if sustained throughout Q3.

Gross margin compared favorably with our assumption due to higher service revenue, while operating expenses were generally consistent with our model. Reflecting the substantial revenue outperformance and strong flow-through to the bottom line, both adjusted EBITDA and non-GAAP EPS significantly exceeded our estimates and consensus. We note that a lower tax rate accounted for $0.59 of the upside relative to our earnings projection but Stamps.com would have beat by a wide margin regardless.

Management raised its FY ’20 outlook and now anticipates revenue of $650.0-$725.0 million, adjusted EBITDA of $180.0-$240.0 million and non-GAAP EPS of $6.25-$9.25. Guidance previously called 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. Based on the company’s Q2 performance and commentary on July, we believe guidance could prove conservative but acknowledge that the cautiousness is warranted given the ongoing COVID-19 pandemic.

Exhibit II: Estimate Revisions

We raise our estimates for this year and next, principally due to an increase in our subscriber growth assumptions. Our FY ’20 non-GAAP EPS estimate also benefits from a reduction in the assumed tax rate from 40% to 28%, which we expect to revert back in FY ‘21. Overall, we believe both management’s guidance and our estimates reflect a high degree of conservatism. Were we to extrapolate recent trends across our forecast horizon, the results suggest our current FY ’21 revenue and adjusted EBITDA projections could be achieved this year and increase to over $800.0 million and $300.0 million, respectively, for next year.

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).