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Edited Transcript of STMP earnings conference call or presentation 2-Nov-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Stamps.Com Inc Earnings Call

LOS ANGELES Nov 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Stamps.Com Inc earnings conference call or presentation Thursday, November 2, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Carberry

Stamps.com Inc. - CFO

* Kenneth T. McBride

Stamps.com Inc. - Chairman & CEO

* Kyle K. Huebner

Stamps.com Inc. - President

* Suzanne Park

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Conference Call Participants

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* Allen R Klee

Sidoti & Company, LLC - Senior Equity Research Analyst

* Darren Paul Aftahi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Kevin D. Liu

B. Riley FBR, Inc., Research Division - Senior Analyst of Software and Business Services

* Tyler Wood

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the third quarter 2017 financial results call. (Operator Instructions)

I would now like to introduce your host for today's conference, Suzanne Park, please go ahead.

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Suzanne Park, [2]

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Thank you. On the call today is Ken McBride, CEO; Kyle Huebner, President; and Jeff Carberry, CFO. The agenda for today's call is as follows: we'll review the results of our third quarter 2017; we'll provide an update on elements of our business model and partnerships; we'll discuss our financial results and talk about our business outlook; and finally, we'll provide some comments on our long-term outlook. But first, the safe harbor statement.

Safe harbor statement under the Private Securities Litigation Reform Act of 1995. This release includes forward-looking statements about our anticipated financial metrics and results, all of which involve risks and uncertainties.

Important factors, including the company's ability to successfully integrate and realize the benefits of its past or future strategic acquisitions or investments, including the company's ability to complete and ship its products, maintain desirable economics for its products, the timing of when the company will utilize its deferred tax assets and obtain or maintain regulatory approval, which could cause actual results to differ materially from those in the forward-looking statements, are detailed in filings with the Securities and Exchange Commission made from time to time by Stamps.com, including its annual report on Form 10-K for the fiscal year ended December 31, 2016, quarterly reports on Form 10-Q and current reports on Form 8-K.

Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The financial results we will discuss on the call today include non-GAAP financial measures. In the third quarter of 2017, GAAP net income was $46.2 million and GAAP net income per fully diluted share was $2.49. Our non-GAAP financial measures exclude the following third quarter items: $11.3 million of noncash, stock-based compensation expense; $4.1 million of noncash amortization expense of acquired intangibles and debt issuance costs; $6 million of executive compensation expense, a $1.9 million onetime insurance proceeds gain relating to a prior legal settlement, and $16 million of non-GAAP income tax expense.

Please see our third quarter 2017 earnings release and metrics posted on our investor website for reconciliations of our non-GAAP financial measures to the corresponding GAAP measures.

Now let me hand the call over to Ken.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [3]

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Thanks, Suzanne, and thanks for joining us today. Today, we announced strong third quarter financial results which included total revenue, which was $115.1 million, that was up 24% year-over-year; non-GAAP adjusted EBITDA, which was $56.6 million, that was up 24% year-over-year; and non-GAAP earnings per share of $2.68, which is up 73% year-over-year.

We're pleased with our overall financial performance during the third quarter. Let me turn to a little bit more detailed discussion of the Mailing and Shipping business. As a reminder, the Mailing and Shipping numbers we discuss include service fees,

Partner Rev shares, product sales in our online store and the package insurance we offer to our customers. Mailing and Shipping revenue was $106.5 million in the third quarter, that was up 21% year-over-year. The growth in Mailing and Shipping revenue was driven by both growth in paid customers and growth in the average revenue per unit or ARPU. Our total paid customer metric was 736,000, and that was up 13% versus the third quarter of 2016. We're pleased to see solid growth in our seasonally weakest quarter. We have now seen strong double-digit year-over-year growth in our paid customers each quarter of 2017. The first quarter up 11%, second quarter up 14%, and now the third quarter up 13%. The average monthly churn rate during the third quarter was 3%, which was flat versus the third quarter of 2016. The churn continues to benefit from our focus on shipping customers who tend to have lower churn rates compared to our traditional small business customers.

Note that 2 years ago, our third quarter churn metric was 3.4%, so we have continued to see a nice long-term down trend in that metrics. The average monthly revenue per paid customer or ARPU was $48.23 in the third quarter, and that was up 7% versus the third quarter of 2016. Growth in ARPU benefited from the continued growth in our shipping business, because those customers pay higher subscriptions fees, and we collect additional partnership revenue shares in that area. Total postage printed through all our solutions was $1.4 billion in the third quarter, and that was up 8% versus the third quarter of 2016.

We would note that the total postage growth includes slower growth traditional mail postage as well as the higher growth shipping postage. Our management team and all our employees are very proud of continued financial and business success we generated for our shareholders.

With that, let me provide an update based on a subset of some of the initiatives we are working on in 2017 -- we're continuing to work on. First, we are continuing to leverage the product portfolio of Mailing and Shipping solutions to drive continued strong growth. The acquisitions we've made, coupled with our traditional solutions, we now have a full suite of diverse solutions across our 5 brands; ShipStation, ShipWorks, ShippingEasy, Endicia and Stamps.com. Our product solutions meet the needs of a broad array of target customers that include e-commerce merchants, warehouse, fulfillment houses, large retailers and other type of shippers. While we believe we are already successfully meeting the majority of needs of our target customers, we plan to continue innovating, adding more and more features and capabilities to further differentiate our products and services from those of our competitors.

We also plan to continue to build out support for other related areas, such as inventory management and customer relationship management, as those complement the shipping process for many customers. The second initiative for 2017, we plan to continue to invest heavily in the sales and marketing area with a focus on acquiring shipping customers, and in particular e-commerce shippers. Our return on investment continues to be strong and we plan to continue to increase our total sales and marketing expense in 2017 versus 2016. Planning to continue increasing investment in direct sales, direct mail, traditional media, radio, television and search engine marketing. Also continue to direct an increasing amount of our customer acquisition budget into the e-commerce segment.

Finally, we are going to continue capitalizing on the synergy opportunities with our acquired companies. Across all the product and services, we're realizing synergies in sales and marketing in operations, customer service, and in product development from all the acquisitions we've done over the past 3 years. The marketing area, Stamps.com and acquired companies have historically targeted many of the same customers. We plan to continue utilizing our marketing expertise to accelerate the growth in all of our brands. We've also leveraged technology expertise across the companies, including web-based and client-based expertise, various operating system expertise, various methodologies and paradigms for product development and other things. We are also able to eliminate duplicate operations in several areas across our various acquired companies. For example, we've been able to streamline several areas of our backend data center, we've been able to combine several areas of operations, and we have unified our customer support operations. As one last point on synergy, we brought significant financial resources to our acquired brands, and have used those resources to expand our marketing and their product development activities.

Today, we're announcing the retirement of our Chief Legal Officer, Seth Weisberg. Seth has been at Stamps.com for more than 18 years, and over that period has made significant contributions to the company. Seth is planning to transition to retirement in January of next year in order to spend more time with his family. Seth will continue to serve the company on an ongoing part-time role, and will hold the title of Chief Legal Officer Emeritus. We are pleased that he will be able to continue -- we would be able to continue to benefit from Seth's extraordinary legal expertise and his deep knowledge of our industry. With the transition of Seth, we've promoted Matt Lipson to Chief Legal Officer, effective following Seth's retirement. Matt has been an integral member of the Stamps.com legal team since joining the company in 2002, and has served as Senior Counsel, Associate General Counsel and Deputy General Counsel for the past 15 years.

Matt has a very deep knowledge of our industry and has over 20 years of experience as an attorney. And we wish Seth the best and thank him for his long and valuable service to the company.

And with that, let me hand the call over to Jeff for a detailed discussion of the financial results.

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Jeffrey Carberry, Stamps.com Inc. - CFO [4]

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Thanks, Ken. We'll now review our third quarter 2017 financial results. The discussion of our financial results today includes non-GAAP financial measures. As Suzanne described, a reconciliation of non-GAAP financial measures to the corresponding GAAP measures can be found in our earnings release and in our 2017 metrics on our investor website. Total revenue was $115.1 million in Q3, and that was up 24% year-over-year versus Q3 of '16. The strong growth in Q3 revenue was driven by strong growth in both

Mailing and Shipping and Customized Postage businesses. Mailing and Shipping revenue was $106.5 million, up 21% year-over-year versus Q3 of '16. The growth in Mailing and Shipping revenue was driven by increases in paid customers and ARPU, as Ken described earlier. We would also note that the anniversary of our ShippingEasy acquisition was a meaningful headwind in Q3 with the year-over-year growth rate in Q2 of '17, excluding ShippingEasy, being 28%. Mailing and Shipping gross margin was 86.9% in Q3 versus 86.0% in Q3 of '16. The increase in gross margin was attributable to growth in service revenue, which has a higher gross margin and accounted for a higher percentage of revenue. We experienced year-over-year increases in our Q3 cost of sales and marketing, R&D and G&A, primarily related to our continued investments to support the strong growth in our Mailing and Shipping business. Sales and marketing, and G&A cost as percent of revenue, are all approximately flat to down year-over-year, while R&D is somewhat higher year-over-year as we've recently increased our hiring in this area to continue deriving innovation.

Non-GAAP operating income was $55.1 million in Q3, and that was up 24% year-over-year versus Q3 of '16. Adjusted EBITDA was $56.6 million in Q3, and that was up 24% year-over-year versus Q3 of '16. Non-GAAP adjusted income per fully diluted share was $2.68 in Q3, and that was up 73% year-over-year versus Q3 of '16 non-GAAP adjusted income per fully diluted share of $1.55. Fully diluted shares in the EPS calculation was 18.5 million for Q3 of '17. Q3 of '16 was a recast using our 2016 effective tax rate of 35.7% to conform to our current methodology and for year-over-year comparability purposes. We'd also note that Q3 of '17 benefited from a reduction of our expected tax rate for 2017 from 32.5% for full year '17 to 20% for fiscal year '17, which was primarily driven by our option exercises in the third quarter which created a GAAP income tax benefit of $11.4 million this quarter. We ended Q3 with $184 million in cash and investments, which was up $73 million from $110 million at the end of Q2 '17. The increase in cash and investments was primarily driven by strong operating, free cash flows, option exercises, and changes in net working capital, which was partially offset by share repurchases. During Q3, we made a required principal repayment of $1.5 million, resulting in total debt under the credit agreement excluding debt issuance costs of approximately $134 million. During Q3, the company repurchased approximately 89,000 shares at a total cost of approximately $15 million. And for the first 3 quarters of '17, the company repurchased approximately 818,000 shares at a total cost of approximately $103 million.

On October 24, 2017, the Board of Directors approved a new share repurchase program that will take effect upon the expiration of current plan on November 10, '17. And that plan authorizes the company to repurchase up to $90 million of stock over the 6 months following its effective date.

Now turning to guidance. We continue to expect fiscal 2017 revenue to be in the range between $435 million to $460 million. We expect 2017 revenue to continue to be driven by continued focus on growing our e-commerce driven shipping business. We expect sales and marketing, R&D and G&A to increase in 2017, generally in line with revenue growth as we continue to invest in the business. Given the importance of investing in R&D and sales and marketing to grow the business, we could see increases in any given quarter higher than the revenue growth rates. We continue to expect fiscal 2017 adjusted EBITDA to be in the range between $220 million to $240 million. We expect non-GAAP tax expense to be approximately 20% of non-GAAP pretax income for 2017. And that compares to our previous estimate of 32.5% for 2017. As we discussed earlier, the reduction of our expected rate for 2017 was driven by the level of our option exercises in the third quarter of this year.

Our full year 2017 effective tax rate could differ from our current estimates based on a number of factors, including the level of option exercises. We expect fully diluted shares to be between 18 million and 19 million in 2017. We expect fiscal 2017 non-GAAP adjusted income per diluted share to be in a range between $9 and $10, which compares to previous guidance of $7.50 to $8.50. The increase in our non-GAAP adjusted income per fully diluted share guidance is primarily driven by our revised non-GAAP tax rate. Our 2017 non-GAAP adjusted income per diluted share guidance compares to our 2016 non-GAAP adjusted income per diluted share of $5.88, which was recast to conform to the current tax method [adopt] earlier.

With our increased focus on shipping, we expect our revenue and financial results to exhibit seasonality reflective of customer shipping usage during the year. In particular, we expect the fourth quarter to be meaningfully higher than the other 3 quarters due to the seasonally strong Q4 holiday shipping period.

And finally, we expect capital expenditures to be in a range between $3 million and $5 million in 2017.

Now with that, let me hand the call over to Kyle to for some comments on our long-term outlook.

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Kyle K. Huebner, Stamps.com Inc. - President [5]

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Thanks, Jeff. We achieved a significant transformation of our business over the past few years with our acquisition and focus on shipping. The significant majority of our investment in the business and focus has been on shipping, and we expect that to continue over the next 5 years. We are well positioned to capitalize on the shipping opportunities in our business. We expect our long-term growth rates to naturally benefit from the growth in e-commerce sales, which have been growing at 15% year-over-year in 2016 and 2017.

In addition, we believe there are opportunities to grow in excess of e-commerce growth rates through increased adoption of our multi-carrier and other technology solutions. Shipping related revenue in Q3 grew approximately 30% year-over-year. This growth was all organic as we anniversary the ShippingEasy acquisition, so we're still growing much faster than the overall e-commerce market. In addition, we believe there are opportunities to expand and grow outside of our existing shipping businesses today. ShippingEasy continues to make progress on customer management and inventory management solutions. ShippingEasy recently launched automated e-mail marketing as part of their customer management module to help e-commerce merchants increase sales from their existing customers. ShipStation continues to invest in international shipping solutions for countries including Canada, the U.K. and Australia. Our 5-year revenue growth rate target is 20%. While we continue to execute on our non-shipping businesses, we expect that our revenue going forward will be driven more by the shipping business. Our current revenue growth reflects the slower growth in non-shipping businesses, which we expect to grow in the low to mid-single-digit range. Thus we would expect our long-term revenue growth rate to approximate our growth in the shipping part of the business as it becomes a larger and larger percent of our total revenue over the next 5 years. We expect our 5-year adjusted EBITDA margins will be in a range similar to up modestly compared to our current margins. While there may be potential to expand our margins over time, we are more focused on investing for revenue growth as opposed to expanding margins at the expense of growth.

In summary, we are excited by our continued strong performance and look forward to delivering great results in the future.

And with that, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [2]

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Guys, there's a fair amount of confusion I sense because of the seasonal factors that are going on relative to Q3 and the better shipping seasons that we're about to go into. So when we look at the postage growth of $1.4 billion in the quarter, that was showing a slower growth rate. But that also is -- that quarter's driven a lot by the smaller players, not the larger shippers that you see in the holiday season, for example. Can you just kind of clarify that relative to what we might see in terms of postage growth and then other things that go with that in the fourth quarter and first quarters?

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Jeffrey Carberry, Stamps.com Inc. - CFO [3]

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Yes. So George, I think one thing to bear in mind with the postage number, the metric we provide is that a metric is total postage. That includes mailers as well as shippers. So you're absolutely right to point to the seasonality of the shippers. And then the other thing I'd point to is the fact that our mailers, they're facing the same secular trends that you see with the USPS. So broader mailing volumes, non-shipping-related volumes, that is, may be in a secular decline. They're still great customers with us because of the diversity of postage that they print. So you don't see that reflected in our churn rates. But you do have this artifact of our postage metrics that we give being a total postage metric reflecting both, what you could potentially assume to be secular declines in mailing combined with broader increases in shipping.

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Kyle K. Huebner, Stamps.com Inc. - President [4]

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The other thing that I would mention, George, is that with the large shippers, none of them are going to adopt new solutions in Q4 with the holiday season. And so it's possible to have large shipping customers that are implementing and testing a solution in Q3 that aren't going to show up in those numbers. But then you get the benefit of the shipping volume in the holiday period. So I think it's just with the shipping, the business days are dramatically higher than weekends or holidays. So you can see based on the mix of business days, and weekend and holidays kind of fluctuations and quarterly year-over-year growth rate. So we don't think anything is fundamentally changed in the business, and are excited for Q4.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [5]

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Now in your prepared comments, you talked about investing in sales and marketing a bit more aggressively, focusing on acquiring e-commerce shippers. Can you talk a little bit more about what you mean by investing in the sales and marketing? Or are we talking direct sales force? I just wanted a little more clarity.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [6]

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Yes, I think it's everything we've talked about in the past. Just kind of ramping it up more. So we're talking about the direct selling effort which we've expanded over the last couple of years, including when we acquired Endicia. And then it's traditional channels like direct mail and television, radio, [SEM] and so I think it's more just as we look into our mix of marketing and sales, there is an increasing amount of that going into targeting specific e-commerce areas of the Internet, targeting specific e-commerce users, buying direct mail lists that are heavy in e-commerce. And so I think it's just -- over time we have really shifted our focus of our overall sales and marketing budget more into e-commerce focused areas of our marketing programs.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [7]

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Got you. Lastly, if I could. Both FedEx and UPS have raised prices for the holiday season, have some surcharges in place. I'm curious your thoughts on that relative to your focus with the postal service in terms of volume potential?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [8]

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Yes, so I mean I think that generally speaking, we track the percentage increases of USPS versus other carriers. So the most recent announcements were for the shipping services products for the USPS, the average is about 3.9% increase. And UPS, their plans that they've announced are to increase an average of 4.9%. And then FedEx I think is also about 4.9%. So you're seeing USPS come out with a lower increase, which is good. I think from a competitive perspective, we continue to see USPS as very competitive, particularly in the segments where they are strong. They're very strong in e-commerce, very strong in residential delivery, and then very strong in smaller packages. So -- and I think we're pleased to see the continued trend on the USPS. As you know, we succeed when they succeed. So we were happy with the percentages we saw. And I think also you've seen some -- from UPS, in particular, some rate changes that increased the rates around high peak periods. And so to the extent that, that also plays out in Q4, that's effectively another price increase that they're implementing. So in the case of USPS, they're even more competitive in those peak periods.

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Operator [9]

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And our next question comes from Kevin Liu with B. Riley & Co.

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Kevin D. Liu, B. Riley FBR, Inc., Research Division - Senior Analyst of Software and Business Services [10]

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Just a couple of questions in terms of competitive landscape. First off, just kind of curious as to whether you've seen the shipping APIs from Pitney start to gain any sort of traction with some of your existing customers? And then more broadly, you've seen Pitney go out and acquire Newgistics, which is more of an asset-heavy operation, and with news like Amazon looking to extend their Seller Flex program, just curious how you guys think about competition from these types of fulfillment services? And whether or not you guys would ever have an interest in moving in that direction?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [11]

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Sure. So that's like 5 different questions. So let me go through down through them. So in terms of Pitney's API, I think obviously, we take Pitney very seriously as a competitor. But really, we haven't -- I would say we haven't seen a major impact from that in the marketplace. In fact, we have seen some partners who've actually switched some of their business over and then came back to us complaining about slow performance and bugs and issues. So I think in general, the API is something that's pretty complicated to build. We have been doing it for a very, very long time. We have more than a dozen years invested. And there's a really sophisticated set of features that we offer that nobody else does. And so I think speed, reliability, breadth of mail classes you support and ability to do things like customization for your solution are really important. And so an API is not an API. And so as we look out and we're competing against the likes of Pitney Bowes in the market, we're not really seeing a big impact from that. I think specific to the Newgistics acquisition, I think we saw the acquisition and we really -- it's primarily a logistics company. They have warehouse space, 1.2 million square feet of warehouse space, they have trucks. And so it's not the kind of business we've really ever been interested in. It's -- they're really a company that picks up and drops packages, often utilizes USPS for the first and last mile, so they're really competing with the likes of like FedEx SmartPost and UPS SurePost and DHL eCommerce. And it's really -- that acquisition was very consistent with Pitney Bowes and their focus historically on logistics. They already do a lot of logistics around sharing some of the work with the USPS and some of their presort businesses. And so I think it makes sense for Pitney to some degree. We do work with Newgistics as a partner. We see Pitney Bowes as, that's the logical acquirer. But that's not really something that we've really been interested historically. Primarily, we focus on software and we focus on high margin business and that's not really a high margin business. In terms of Amazon you mentioned, the new Seller Flex that they came out with. When you really look -- when you really boil that down to what it is, it's really an extension of something they have been doing for a very long time which is Fulfillment by Amazon or FBA as we call it. The only difference is that -- where the inventory is held. In the case of FBA, the inventories is actually shipped to an Amazon warehouse. And in case of Seller Flex, the merchandise is really held -- continue to be held at the seller's facility. And then Amazon is still the carrier and picks up and delivers the merchandise. And we really view Fulfillment by Amazon as just another one of the carriers that we support. We support over 35 carriers. They're one of them. And they are often used as part of the mix for small business when they're looking at optimizing their operations across carriers. Fulfillment by Amazon is one of them. And as we go forward, Seller Flex will be something we would view as an enhancement to our solution, something we would support and something which should give the customers more option for fulfilling their products.

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Kyle K. Huebner, Stamps.com Inc. - President [12]

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I would just say more broadly in terms of fulfillment, as Ken said, it's very operationally intensive, tends to be low margin, low return on assets, and so that's not really our core competence. So I think we would look to more partner with companies where that is their core competence, if it creates value for the customers as opposed to acquiring or getting into the business ourselves.

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Kevin D. Liu, B. Riley FBR, Inc., Research Division - Senior Analyst of Software and Business Services [13]

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Understood. I appreciate the thoughts, sir. And then just one quick one. Can you talk about what sort of attraction you're starting to see from some of the adjacent offerings for shipping? You see some things like CRM and e-mail, just kind of curious if you feel like that's contributed much to results yet?

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Kyle K. Huebner, Stamps.com Inc. - President [14]

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Yes, I think at this point, I would say it hasn't contributed really to the overall results. But I think we've made a lot of progress in terms of building the solutions and functionality. We moved from kind of a free trial or free service offer to charging customers for it. We have seen adoption within ShippingEasy's customer base. But it's something that I think more in terms of the 3- to 5-year picture with an area that we think we can create a lot of value for customers. And it could become more relevant and significant to our results as opposed to where we are today.

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Operator [15]

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And our next question comes from Allen Klee from Sidoti.

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Allen R Klee, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

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Can you just explain a little more that the change in the tax rate assumption? And is something changed that we can maybe think that it will be a lower tax rate going past '17?

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Jeffrey Carberry, Stamps.com Inc. - CFO [17]

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Yes, so in terms of the tax rates, as you probably recall, we adopted ASU 2016-09 this year. That requires the tax attributes of option exercises to flow through our P&L. And what you saw in the third quarter, and what you saw -- and really the first and second quarter as well to a lesser degree is the option exercises creating a tax-deductible item for us in our P&L, and that reduces our effective tax rate. So you saw in Q3 actually a tax benefit as a result of the option exercises. So what you do is you look at what that effective rate's likely to be for full year. And that's why we saw -- historically, what we saw earlier this year was an effective rate expectation of 32.5% with the tax benefit we got in Q3. That forced us to revise our estimate for the full year, and that new revised estimate is 20%. But the primary driver of that is option exercises. So if you look at 2018, there are a lot of variables that are very difficult to forecast. I'd say, look, all else equal, I would expect a marginal tax rate in 2018. But obviously, there are a lot of variables there in terms of book tax differences, timing differences, option exercise behavior, pending tax legislations. So to be safe for 2018, given current knowledge and assumptions, I would assume a 40% tax rate. But obviously, things could change that could cause us to revise that rate.

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Kyle K. Huebner, Stamps.com Inc. - President [18]

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Yes, I would just add, at this point we have used majority of our NOL tax asset. So really the tax rate is going to be driven by option exercise deductions which are very volatile and fluctuate quarter-to-quarter. So I think you're just going to have a situation where the tax rate's going to fluctuate a lot more going forward. And almost to some extent [meet] the EPS numbers or what's relevant relative to adjusted EBITDA and pretax income.

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Allen R Klee, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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Okay. Can you give us some impact in the quarter of Amazon taking in some of their business in-house?

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Jeffrey Carberry, Stamps.com Inc. - CFO [20]

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Yes, we don't quantify the impact, generally speaking, of any given partner. It certainly was a headwind in the quarter. But we don't really provide any relative sizing. But to be fair, it was certainly a headwind for the quarter with the balance of the Amazon business going in-house to Amazon.

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Operator [21]

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And our next question comes from Tim Klasell from Northland Securities.

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Tyler Wood, [22]

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This is Tyler Wood on for Tim. A quick one. Given the globalization we're seeing in e-commerce, are you seeing some opportunities for Stamps selling those shipping services from nations with e-commerce volumes coming into the U.S? And then how you're approaching filling into that market?

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Kyle K. Huebner, Stamps.com Inc. - President [23]

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Yes. So I think there's -- if you look at Stamps, our traditional model, we were an approved PC postage vendor of the Postal Service. And so for the past 18 years we didn't really pursue the international market because of the complexity of being regulated by the individual markets overseas. And so I think as we look at it now, what we see is more of the ShipStation model where the value to the e-commerce merchant is in a multi-carrier solution that can optimize shipping for e-commerce merchants across different carriers, whatever the carriers happened to be in a particular country but where you're not a regulated entity actually producing the shipping label. So that's kind of as we look internationally, we see more of that business model as opposed to the traditional PC Postage business model.

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Tyler Wood, [24]

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That's helpful. And then one more. In terms of integrating those acquisitions and getting all those kind of on a single back end, how are you seeing that progressing, specifically with the data centers?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [25]

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Yes, I mean we're content to march forward on that effort. It's not simple. But I think we're seeing really positive results in a lot of operational areas in terms of combining not just the data centers but also the customer support organizations, putting together the R&D development teams, and I think -- and I think we're pretty far down the path now in terms of realizing the benefit of the really, primarily the Endicia acquisition and seeing the resulting cost savings there.

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Operator [26]

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And our next question comes from Darren Aftahi from Roth Capital Partners.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [27]

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Can you just talk a little bit about the implied 4Q guidance? Typically, you see seasonality uptick here, but keeping your revenue and EBITDA unchanged at the low end at least implies kind of negative rate. I'm just kind of curious if there is any kind of noise assumed in that competitively or whatnot? And then why just the range has kind of been kept where it is?

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Jeffrey Carberry, Stamps.com Inc. - CFO [28]

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Yes, no problem. So a very good question. So in our guidance range, our methodology and really kind of conceptual framework is to provide a range that provides both upside and downside. We generally don't kind of decrease the range as we move through the year, although, certainly we expect to see greater precision. So that the downside assumes a number of downside scenarios which may or may not be very likely to happen. I think the key to understand in terms of our results, when you look at Q3 obviously, you can see the volatility that you have in Customized Postage. That business that we've talked about quite a bit in the past is highly volatile. There are business orders there so it become a very difficult to predict. So I think that is something you need to control for in terms of the volatility. The other thing I think is key is understanding really the core of the business, as Kyle mentioned, on the shipping side of the business, we saw 30% growth year-over-year. And that's a number that really reflects really a clean number, as it were, in the sense that we anniversaried all the acquisitions. So I think when you look at the fundamentals of the business, you have 30% shipping growth, volatility with Customized Postage. And with the 30% growth, that would imply low single-digit numbers for non-shipping, non-Customized Postage. You can see how certain aspects of the business really act as a drag on the core of the business, which is shipping. So that helps put, I think, some of the context around what you see with the Q4 numbers in terms of the guidance and what's implied.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [29]

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Just as a follow up with the Customized Postage in the quarter. That's a pretty substantial jump and I get that kind of moves around, but was there anything kind of driving that specifically in 3Q?

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Jeffrey Carberry, Stamps.com Inc. - CFO [30]

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I wish there were something I could point to. You simply have, at the end of the day, quite a bit of randomness in terms of Customized Postage. The primary driver of that number, and especially because of the volatility of our business orders, and that's a function of individual businesses decide at any point in time they want to run a marketing campaign where they brand it with the postage, those are highly unpredictable. And there really isn't any natural seasonality to that. It's really a function of kind of the decision of individual companies at any point in time and there's no predictability there. So that's why that part of the business is very hard to forecast. And that's why we discount it heavily in terms of our expectations for guidance.

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Operator [31]

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And our next question comes from Allen Klee from Sidoti.

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Allen R Klee, Sidoti & Company, LLC - Senior Equity Research Analyst [32]

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I'm sorry. My question was answered.

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Operator [33]

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And I would now like to turn the call back to Ken McBride for any further remarks.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [34]

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Thank you, everyone. And as always, if you have any follow-up questions, you can contact us through our website, investor.stamps.com or on our investor line at (310) 482-5830. Thank you.

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Operator [35]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect. Everyone, have a wonderful day.