Description

• Stamps.com trades like an open-ended growth story but it’s a low-quality product in a declining end market

• US total postal volumes have been declining at 5-10% annually and will likely continue to decline at a similar rate

• Stamps.com has many competitors include Pitney Bowes

• While Stamps sells postage and other products, the large majority of its revenues comes from the $15-25+ monthly subscription fees. This is primarily a subscription business

• Huge number of negative reviews online (http://www.consumeraffairs.com/online/stamps_com.html)

• Many customers complain of scam marketing tactics and extremely difficult cancellations policies

• Rapidly slowing organic growth masked by recent M&A

• Customer growth, total paid customers, postage printed, and core revenues were all on the decline until Stamps acquired two businesses – Shipstation and Shipworks – in 2H14

• STMP has avoided quantifying the revenue contribution from acquisitions on earnings calls and in its filings

• Momentum slowed again in 3Q15 as the company began lapping these acquisitions. STMP has since closed another deal, Endicia, in November 15

• Without these acquisitions, organic revenue at Stamps would likely be anemic to negative

• Sub base dynamics negative -- high churn & CPGA

• Annual churn has consistently been 35-45%. The company’s efforts at reducing churn have not been successful

• The company calculates a 3Q15 cost per gross addition (CPGA) of $106, down from $122 in 2014

• However, an all-in CPGA (calculated on total S&M costs) is $170 and has not showed improvement

• Stamps has paid fairly hefty multiples to consolidate smaller competitors

• Acquired Shipstation in Jun14

• Paid $50mm + 768,900 STMP shares tied to earn out

• ~6x run-rate revenues

• ~30x run-rate OP

• Acquired Shipworks in Oct 14

• Paid $22mm

• Acquired Enidicia in Nov15

• Paid $215mm cash

• $60mm in FY14 revenues

• Stamps hinted Endicia probably has around 14% PF operating margins

• >3x revenues

• >20x PF OP

• $287mm in acquisitions have increased STMP market cap by $1bn

• Corp governance is a question mark

• 4 person board comprised of:

• Current CEO

• One VC

• One outside investor, Lloyd Miller

• Sold $11mm of stock in 2H15

• One former CEO

• Valuation is very high. Trades like an open-ended internet company but is reliant on acquisitions and sells into a declining end market

• 5.5x consensus NTM revenues

• 16x consensus NTM EBITDA

• 22x consensus NTM PF EPS

• EBITDA and PF EPS include a large number of adjustments. For instance, 9MTH15 EBITDA was $52mm vs. GAAP operating loss of $4mm. Some of the adjustments -- like the $10mm litigation expense -- may be truly one-time in nature but others such as corporate development and contingent consideration expenses seem to be a feature of the business strategy

• LTM FCF $45mm. Add 10mm of FCF for Endicia (assume no capex and/or some cost cutting). That would put STMP at 32x EV/LTM FCF

Risks

• Endicia acquisition will boost numbers for next year

• Adds >$60mm in revenue

• Adds >$10mm in EBITDA

• The company typically sets a low bar for guidance and should be able to achieve it

Catalyst

By this time next year, Stamps will be lapping its deal with Endicia and organic growth will become clear.