Strong Start and Commentary Assuage Our Near-Term Concerns
Stamps.com (STMP) reported Q1 ’21 results above our estimates and consensus, benefiting from continued strong growth in both paid subscribers and shipping volumes. As we previewed, the upside relative to expectations was less material than in recent quarters as estimates have caught up to the pandemic-fueled acceleration in e-commerce, and management again refrained from providing specific guidance for the year given a wide range of potential scenarios. In contrast to last quarter, however, commentary on the trajectory of growth from here sounded more positive from our perspective. Specifically, management’s general outlook for the year no longer includes a statement warning of a potential revenue decline against last year’s challenging comparisons, which we surmise means the more dire scenarios are unlikely. Moreover, when asked about shipping volumes in April, the response suggested that while growth has certainly moderated, an outright decline may have been avoided. Of course, management was a bit coy in its response, so we plan to await some additional data points as the quarter progresses before declaring the risks of a meaningful decline in volumes over the coming quarters are behind us.
As far as surprises in Q1, we were pleased to hear that domestic shipping labels printed increased over 40% Y/Y and that contribution from the UPS partnership rose sequentially. Of note, Stamps.com revealed that over 130,000 paid subscribers have now been connected to UPS via its Digital Access Program (DAP). Based on prior data points provided by UPS, we believe Stamps.com’s customers now represent approximately 15% of DAP merchants. These metrics coupled with near-term expectations from several e-commerce bellwethers lead us to believe shipping volumes may prove more resilient in the face of difficult comparisons than we previously thought. On the negative side, customer churn in Q1 was higher than we anticipated and was above the levels seen last year, resulting in fewer paid customers at quarter-end than we modeled. Importantly, management indicated the churn was largely associated with mailing customers that were added during the pandemic, and churn related to shipping customers remains consistent with historical norms.
Overall, we are less concerned about the trajectory of volume growth heading into Q2 but until churn returns to more normalized levels, we think a more conservative posture on subscriber growth is in order. As such, we are reducing our estimates for this year and next. Our price target moves lower in concert from $358.00 to $340.00 and continues to represent a FY ’21 EV/EBITDA multiple of 25x. Worth noting, our estimates for the year remain above Street expectations heading into the print. Near-term considerations aside, we think Stamps.com is criminally undervalued considering its market dominance, international expansion opportunity and cash flow generation.
Exhibit I: Reported Results Versus Expectations
Q1 revenue was $189.1 million (+24.9% Y/Y), above our estimate of $184.4 million and consensus of $188.2 million. Relative to our projection, the upside was attributable to higher than anticipated service revenue of $179.0 million (+28.7% Y/Y). Product sales of $5.5 million (-7.4% Y/Y) were slightly below our $6.1 million estimate, while Insurance sales of $4.6 million (+43.3% Y/Y) were modestly above our $4.4 million forecast.
Regarding the company’s key customer metrics, the paid customer count was 991,000 (+27.6% Y/Y), down from 1.016 million in the prior quarter and below our estimate of 1.011 million. Although we had anticipated a sequential decline in paid subscribers given the outsized growth in mailing customers throughout the pandemic, average monthly churn of 5.0% was above the 4.3% assumed in our model and the 4.5% reported last quarter. Average monthly revenue per customer (ARPU) was $63.58 (flat Y/Y), comparing favorably with our $60.80 estimate due to strong growth in transaction volumes.
Gross margin was above our assumption due to higher service revenue, while operating expenses were lower than we projected. As a result, both adjusted EBITDA and non-GAAP EPS surpassed our estimates and consensus. As in recent quarters, non-GAAP EPS beat by a more substantial margin due to a lower tax rate than modeled. On an apples-to-apples basis, non-GAAP EPS would have been $1.94 versus our estimate of $1.63 and consensus of $1.69.
Cash and investments at quarter-end end rose to $567.5 million from $443.6 million in Q4, and the balance sheet remains debt free. In Q1, Stamps.com repurchased 137,000 shares for $27.0 million, leaving approximately $93.0 million available under the company’s existing share repurchase authorization. As in the prior quarter, management opted not to provide any specific guidance for FY ’21 due to a wide range of potential scenarios.
Exhibit II: Estimate Revisions
We lowered our estimates for this year and next, primarily reflecting a reduction in our subscriber growth assumptions due to higher churn. While this was partially offset by an uptick in our expectations for growth in shipping volumes, the net decline on the top line coupled with our unchanged expectations for a near 20% increase in operating expenses resulted in a corresponding decrease in our profitability expectations. More than anything, our revisions reflect a desire to maintain a high degree of conservatism, particularly since post-pandemic conditions remain unknown and the current valuation is easily justified without resorting to stretch targets.
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).