Description

We recommend purchase of Stamps.com for two main reasons:  (1) Current value reflects a discount to the sum of its parts, (2) the company has excellent assets that have nothing to do with recent U.S. Postal Service disputes. 

Forget the USPS issues and consider this…….on a market cap of $750m, if you back out $50m in net cash, a HQ building worth $50m and $150m for the recently acquired Metapack (vs. a $230m cost), then the enterprise value of this company is $500m……that isn’t much considering $200m in recurring annual subscription revenue from Stamps market leading offerings that are completely unaffected by recent USPS issues.  On top of that, if you assume all USPS revenue goes away…….what is the strategic value of $11 billion of postage volume flowing through Stamps.com platforms? What would UPS/FedEx/Amazon pay for some of that volume? The company says that it’s a matter of when and not if it will have a deal with one of the majors.

We note the following:

• Stamps has assembled an impressive group of online postage solution assets utilized by home/office mailers, e-commerce shippers and high volume shippers.  Approximately $11 billion of postage/shipping volume flowed through the company’s platforms in 2018 (pro forma for Metapack), about $5.5 billion of which was USPS postage utilized by e-commerce users and high volume shippers.

• Stamps.com and Endicia are USPS exclusive, focused on office mailers and e-commerce/high volume shippers.  ShipStation is the premiere multi-carrier (supports over 40 carriers) e-commerce shipping solution in the U.S.  Metapack (based in the UK) is a highly attractive international postage solution with over 400 international carriers integrated into its system and an attractive list of enterprise clients (global retailers and brands like Marks & Spencer, Sportsdirect.com etc.) from whom Metapack generate fees per units shipped.

• Stamps has about 575,000 small office/home office mail user subscribers (“mailers”) who utilize Stamps.com to print postage onto an envelope or label.  Stamps also has about 160,000 e-commerce subscribers (“shippers”) paying monthly subscription fees for the use of its Stamps.com, Endicia, ShipStation, ShipWorks and ShippingEasy online platforms. 

• Stamps has historically earned revenues from its users primarily in two ways: (a) subscription fees from its ~735,000 paid subscribers (b) Monetization of USPS postage volumes flowing through Stamps.com/Endicia via commissions and reseller spreads.

• This monetization was immensely valuable to Stamps ($285m in 2018), as it was essentially a rapidly growing royalty on overall e-commerce growth.  EBITDA grew from $40m in 2013 to $258m in 2018 resulting in a ~$300 share price and a $5+ billion market cap.  

Stamps dropped two bombs on its shareholders this year:

• In February, the company announced the termination of its commission arrangement with the USPS.  The Stamps.com (shippers) and Endicia sites have historically only offered USPS postage. But with numerous new players/offerings (i.e. Amazon) in the market and the USPS falling behind competitively (i.e. can’t guarantee two day shipping), Stamps wanted to offer alternative carriers on these sites.  The USPS refused and the agreement was terminated. We estimate these commissions amounted to $100m in 2018 revenue.

• In May, the company announced that the USPS was renegotiating pricing on reseller agreements with the assumption that margins/fees will be substantially reduced beginning in the second half of 2019, continuing through 2020/21.  We estimate the reseller fees were $185m in 2018 going down to $170m in 2019. It is unclear what reseller fees will be in 2020 and 2021 but they are almost certainly going down and could go to zero eventually.

With Amazon as a new entrant into the shipping business, package delivery competition is heating up and management is highly confident that it will monetize a portion of the $5.5 billion of current USPS postage volume with an alternative carrier.  It isn’t crazy to think that Stamps will continue to grow its subscribers/volumes and that with its market leading assets, it could drive a significant amount of volume to specific carriers. 

Understandably, the guidance reductions necessitated by these two bombs caused Stamps.com share price to collapse.  From $258m EBITDA in 2018 management is now guiding $130m in 2019 EBITDA and the street is assuming about $100m in 2020 EBITDA. 

2020 EBITDA estimates are a complete guess at this point.  How much will reseller revenue decline? Will Stamps enter into new monetization agreements with non USPS players? If yes, when? What will the expense structure look like? All are unknowable at this point…we could easily see EBITDA at far less than the street’s $100m in 2020.

All this said...the 735,000 paying subscribers and the recently acquired Metapack business have nothing to do with the USPS issues.  Here’s what you get for the $750m market cap.

• $50m in net cash on the balance sheet at 3/31, growing to $100m by year-end based on current guidance.

• Headquarter building in El Segundo, California which cost all in $25m in 2012 and per management’s estimate is likely worth $40 - $50m today.

• Small office/home office subs totaling 575,000 who are paying $18 monthly.  This is a mature $125m annual recurring revenue business...30% EBITDA margins and a 6x to 7x multiple would bring about $225m to $260m in value.  

• E-commerce shipper subscribers totaling 160,000 who we assume on average are paying $35 monthly.  This is a growing $70m annual recurring revenue business....20% EBITDA margins at a 10x to 12x multiple would bring about $135m to $160m in value.

• Metapack was acquired for $230m, it is a highly strategic European asset with integrations into 400 carriers globally, a blue chip enterprise customer base and an attractive per unit shipped revenue model.  We estimate Metapack does $60m - $70m in annual revenue growing double digits with minimal profitability at the current time given management’s desire to invest in growth. For purposes of this analysis we value Metapack on the low end at a $50m discount to its $230m cost and at the high end at $200m (about 3x revenue).

• Other odds and ends...the Stamps.com store sells product/insurance to the company’s subscriber base, about $35m in revenue, we assume $5-$7m EBITDA...Global Advantage is a $50m annual revenue business which consolidates mail for the USPS, we assume about $5m to $7m EBITDA...customized postage about $12m to $15m revenue likely very minimal EBITDA…at a 5-6x multiple there’s $50m to $70m in total value here.

• The values described add up to $680m to $840m in value which divided by 18m shares would bring $37 to $47 in per share value and $42 at the midpoint.

• In this sum of the parts analysis, with zero monetization Stamps would be generating about $360m in revenue and $250m in gross profit...with a current expense structure Q1 annualized of $240m, there would need to be a substantial reduction in costs which would take time to happen.  With cost cutting (particularly sales and marketing), we believe Stamps would seek to operate at a 20% EBITDA margin (ex the breakeven Metapack) which would bring about $60m in annual EBITDA ($240m expenses would go down to $190m). $60m EBITDA at a 7.5x multiple plus $200m for Metapack + cash and the HQ building brings about $42 per share. 

• The more likely scenario is Stamps achieving some level of monetization from any of the major carriers, call it $100m (vs. $285m from the USPS previously) which added to the $250m gross profit referenced above less $240m in current expenses would bring something closer to $110m EBITDA.  As detailed below this would drive an overall sum of the parts value of $72 at the midpoint. 

In summary, Stamps trades slightly below the midpoint of our “base value” (i.e. assumes zero monetization) and our multiples are quite conservative.  There is dramatic upside to our base value from any potential monetization agreement, which we think is highly likely. While actual Revenue/EBITDA could be choppy in the near term, the long-term outlook seems very bright.

February 21, 2019 - Q4 2018 earnings call:

“As everyone knows, we've been in discussions with the USPS about a renewal of our long-standing revenue share agreement that we utilize to drive their shipping business. We have proposed our terms of renewal to the USPS. One of our nonnegotiable items is that within our significant single-carrier efforts offered under the brand name Stamps.com and Endicia, offered by our large national sales team, we will no longer be exclusive to the USPS. And that's nonnegotiable.

USPS has not agreed to accept these terms or any other terms of our partnership proposal. So at this point, we've decided to discontinue our shipping partnership with the USPS so that we can fully embrace partnerships with other carriers who we think will be well positioned to win in the shipping business in the next 5 years. And we now plan to turn our significant assets, such as our technology and product development, our sales force, our significant marketing budget, and our marketing organization towards a focus on partnerships with the carriers that will help our customers succeed over the next 5 years. We're going to align ourselves with the carriers that we think are going to be the winners in the shipping business. We will continue to bring USPS products to our customers where it makes sense. But in many segments of the business, we will start bringing in the more competitive products from other carriers.

We are currently in discussions or already have partnerships with all of the major incumbent private carriers and we're also in discussions with many of the new entrants into the U.S. shipping business. Note that our decision to discontinue our exclusive partnership with the USPS does not in any way impact our regulatory relationship with them or the products and services we are able to offer our customers. The USPS regulatory group is governed in a separate part of the organization. We will continue to work constructively with them, and we will comply with all of their requirements as we always have.

We have already begun redirecting the activities of our development teams, of our national sales force and redirecting our marketing budget and other activities to support our new multicarrier-focused partnership model.”

May 8, 2019 - Q1 2019 earnings call:

So in essence, the USPS is offering a small revenue share through what has been characterized as a wholesale network of resellers. And then those resellers have courted partnerships and shared some of those economics with end-user e-commerce software solutions. And then those software organizations have pushed the USPS as their primary carrier.

This software ecosystem has been extremely successful in making the USPS the market leader in small- and medium-business e-commerce. And it has all been fueled by a great business move they made in 2009 to create the reseller industry.

Despite the success of the USPS reseller program, we have very recently become aware that the USPS is currently renegotiating the NSAs of several of our reseller partners. While these ongoing -- are ongoing negotiations with uncertain outcomes and we have limited visibility given that the negotiations are being conducted solely between the USPS and their resellers, we believe that it's reasonably likely that margins earned by resellers as a result of these negotiations will begin to decrease starting around the second half of 2019 and may continue to decrease in 2020 and 2021.

Because we are 1 of the 125 organizations that have a revenue share arrangement with the resellers, the expected decreases in margins earned by the resellers will also negatively impact our financial results. We also expect that it will directly impact the financial results of many of those approximately 125 companies. With a less attractive revenue share, we believe many of these e-commerce solutions are going to shift their focus to other carriers.

The USPS will likely lose a very large set of strong company allies and potentially stands to lose a large amount of volume. Their significant success in driving the USPS' business should have resulted in a reward, but instead, is being met with a decrease in their economics.

While we do not expect the USPS to take such actions that in our opinion are counterproductive to their own interests, they are an example of why we feel so strongly that the actions we took last quarter to diversify our carrier relationships away from our USPS-centric model were absolutely the right business decision. We're disappointed in the proposed changes being made by the USPS to its reseller strategy. But ultimately, it does not affect the new long-term business strategy we laid out for you last quarter.

Catalyst

Monetization of postage volume.