Stamps.com Q1 '20 Recap: Business Surges Amidst Global Pandemic

Stamps.com (STMP) posted Q1 ’20 results far above expectations. Per management, the COVID-19 pandemic prompted a surge in both new customer acquisition and shipping volumes processed as businesses and consumers increasingly transacted online during the latter part of March. These trends have further accelerated in April, leaving the company well positioned to deliver against its plan for the year. In this regard, guidance for FY ’20 was left unchanged, which considering the United States Postal Service’s (USPS) recent decision to end the customized postage program, implies higher expectations for the core mailing and shipping business. In our view, guidance appears quite conservative considering the results to date and normal seasonality, but we believe management is simply being prudent given the extraordinary circumstances at present. Reflecting both a higher subscriber count and an uplift in our average revenue per user (ARPU) assumptions, we raise our estimates for this year and next. Our price target rises in concert from $160.00 to $178.00 based on an unchanged FY ’20 EV/EBITDA multiple of 20x.

Although we had anticipated Stamps.com would come out of the gate strong, the magnitude of the upside, not only in the company’s headline numbers but also across all key customer metrics, was considerably greater than we imagined. In a normal environment, we think the results would have supported a more significant uptick in guidance as our analysis suggests that revenue and adjusted EBITDA in FY ’20 could be over $20 million higher than reflected in our revised estimates, which would coincide with a $200.00 price target based on our current valuation methodology. Of course, visibility into the state of the economy in 2H ’20 is limited to say the least, hence our unwillingness to model results above management’s current outlook. Our point, however, is that investors should feel reasonably confident in Stamps.com’s fundamentals even if economic conditions deteriorate in the coming quarters. Conversely, should a U- or V-shaped recovery be in the cards, then the stock will be off to the races. With this in mind, our stance remains consistent with that expressed in our Q1 preview. Current investors should shelter-in-place in light of the company’s prospects for further near-term outperformance, landing another major carrier partnership and international expansion. For those with outsized exposure to the stock, we see no issue with taking some profits here given the broader macro uncertainty but we believe Stamps.com should remain a core holding.

Q1 revenues were $151.3 million (+11.3% Y/Y), exceeding our estimate of $136.3 million and consensus of $133.4 million. Service revenue of $139.1 million (+12.3% Y/Y) accounted for the majority of the upside relative to our estimate, benefiting from a surge in paid customers and shipping volumes processed following the COVID-19 outbreak. In Q1, Stamps.com expanded access to its discounted UPS rates across all of its platforms, which proved timely given the late quarter ramp in transaction volumes. MetaPack also outperformed our expectations, benefiting from the same coronavirus-related dynamics seen in the domestic shipping business and returning to positive growth despite ongoing economic softness in Europe.

Perhaps even more surprising than the revenue upside was the increase in Stamps.com’s paid customer count, which reached 777,000 and represented the largest quarterly increase in gross customer adds that we can recall. Importantly, the ramp in paid customers was not done at an inordinate cost. In fact, a simplistic calculation of cost per acquired customer (CPA) points to the lowest CPA by far since the 2018 acquisition of MetaPack. Average monthly churn of 3.0% also improved on a sequential and Y/Y basis and compared favorably with our 3.2% assumption. Average revenue per user was $63.60, up 5.9% Y/Y versus our expectation for a modest decline.

Reflecting higher service revenues, gross margin was higher than we modeled. Operating expenses also ran higher than projected with much of the variance attributable to the sales and marketing line. Given the number of gross customer additions in the quarter and the associated CPA, the incremental investments should be viewed favorably in our opinion. Regardless, both adjusted EBITDA and non-GAAP EPS again beat our estimate and consensus by wide margins.

Management reaffirmed its prior FY ‘20 guidance 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. The outlook incorporates the termination of the USPS’ customized postage program in June, implying a slight uptick in guidance for the core mailing and shipping business.

We raise our estimates for this year and next, principally due to an increase in our subscriber growth and ARPU assumptions. Partially offsetting the increase in our revenue forecasts was a significant increase in our estimate of sales and marketing expenses as we expect management to invest further given the attractive customer acquisition economics available at present.

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).