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Edited Transcript of STMP earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Stamps.Com Inc Earnings Call

LOS ANGELES Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Stamps.Com Inc earnings conference call or presentation Wednesday, May 8, 2019 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

* Suzanne Park

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Conference Call Participants

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* Allen Robert Klee

Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst

* George Frederick Sutton

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

* Kevin Liu

* Timothy Elmer Klasell

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Stamps.com First Quarter 2019 Financial Results Conference Call. (Operator Instructions)

And now I would like to introduce your host for today's call, Suzanne Park. You may begin.

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Suzanne Park, [2]

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Thank you. On the call today are CEO, Ken McBride; and CFO, Jeff Carberry. The agenda for today's call is as follows: We'll review the results of our first quarter 2019. We'll provide an update on elements of our business model and partnerships. And finally, we'll discuss our financial results and talk about our business 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 could 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, 2018, 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 discuss on the call today include non-GAAP financial measures. In the first quarter of 2019, GAAP net income was $15.8 million, and GAAP net income per fully diluted share was $0.87. Our non-GAAP financial measures exclude the following first quarter items: $8.9 million of noncash stock-based compensation and $5.6 million of noncash amortization expense of acquired intangibles and debt issuance costs.

Our non-GAAP financial measures include $8.1 million of additional non-GAAP income tax expense in the first quarter. Our Mailing and Shipping numbers include service revenue, product revenue and insurance revenue and do not include any revenue from Customized Postage. Please see our first quarter 2019 earnings release and 2019 metrics posted on our investor website for a reconciliation 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 thank you for joining us today. Today, we announced our first quarter results which included GAAP revenue of $136.0 million, which is up 2% year-over-year, and non-GAAP adjusted EBITDA of $39.2 million, which was down 37% year-over-year.

During the first quarter, we continued to make progress in our efforts to diversify from a domestic single-carrier business model to a global multicarrier business model. We continued to work proactively with the USPS to drive value for customers as the USPS remains a very important carrier partner for us. We also continued to make strides in our diversification for our carrier relationships and with international posts, including Royal Mail, French Post (sic) [France Post] and Australia Post and nontraditional carriers and with our Global Advantage Program.

Our financial results for the first quarter were in line with our expectations in light of our new strategic direction that we outlined in detail in last quarter's earnings call. I'd like to spend a little bit of time reviewing some of the things we covered in our February conference call and then also discuss some of the most recent changes in the shipping industry.

The shipping industry continues to change rapidly. And as we look 5 years out, we continue to see the landscape being very different than it is today. E-commerce-driven packages have become a larger and larger portion of the total package industry. And the growth and trends in e-commerce are the most significant factor driving overall package growth worldwide.

The incumbents in the U.S. shipping business have been getting more and more aggressive in their approach to e-commerce as the competition heats up amongst them and also -- and all the new entrants in the shipping industry. For example, UPS publicly announced the new corporate transformation focus last fall focused on B2B and B2C e-commerce and a focus on enhancing services and value for small- and medium-sized businesses. UPS has been actively partnering in the e-commerce space, for example, their partnership with Shopify that launched in late 2017.

And FedEx has also come out with some very good programs and products that are very attractive for our e-commerce customers. For example, FedEx One Rate, a heavily discounted new service that offers 2-day guaranteed flat rate shipping to anywhere in the country, very attractive pricing. And our customers are reacting positively to that solution.

FedEx is also investing in several global initiatives and in fulfillment and logistics. And they've continued to build out a local presence for package drop-off and package pickup, and they now have nearly 10,000 U.S. locations at their FedEx offices, inside Walgreens stores and Walmart stores and in other locations.

A significant number of new entrants in the package market such as Uber, Postmates and Deliv have also taken aim at this business, particularly the same-day business. And we expect that some of them could be successful in taking share in the shipping industry.

One segment of the USPS shipping industry that has, in our opinion, been a very meaningful factor in their success is what has been called the reseller industry. We'd like to provide an update as to how the industry has developed over the past several years and then update you on the most recent developments.

Resellers have what are called negotiated service agreements, or NSAs, which are customized negotiated contracts between the Postal Service and the individual customer or reseller, which provides discounted rates that vary based on each agreement. Each of the reseller NSAs allow resell -- a reseller partner to buy postage for shipping or package at one rate from the USPS and then to resell that postage to customers at a higher rate. Companies with reseller NSAs come in many forms, from companies that are primarily in the business of being resellers to marketplaces like eBay and Etsy to third-party logistics providers like fulfillment houses.

The reseller industry started in 2010 when the USPS began making these types of NSAs available to some companies that were previously reselling shipping for DHL. And since the beginning of its reseller partnerships 9 years ago, the USPS has seen significant success in the market, and the resellers have played a large role in that success. Over the past 10 years, the USPS has seen a 21% compound growth rate for their total shipping volume through their PC Postage and their reseller partnerships collectively.

One of the most successful areas of growth for the USPS has been in e-commerce where the USPS has become the market leader in e-commerce package shipping for small and medium business. In our view, the reseller industry has been a big factor in that success.

We're aware of approximately 125 e-commerce marketplaces, software tools, small business software solutions, order and management fulfillment solutions, multicarrier software solutions and other shipping solutions that are in some way -- that in some way participate in a portion of the margins created via these USPS reseller NSAs. When you look at the behavior of these various organizations, you see a disproportional focus on USPS shipping versus other carriers, for example, on their home pages, in their products, in their technology, in their marketing and in their sales.

We're also aware of more than $100 million in venture capital that has gone into new startups in these various e-commerce solutions. In our opinion, a big factor of the business models and projections that attracted that VC funding has been these reseller revenue share of partnerships.

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.

Our goal is to position this company for the best long-term outcome as all of these trends play out and any changes to the reseller industry are going to just accelerate our plans to diversify our business.

We have amassed a significant number of assets in worldwide e-commerce shipping that have put us in a great position to succeed as all of these rapidly changing global shipping trends unfold. Worldwide volume of shipping done by our customers is over 1 -- $11 billion. We are currently, by far, the largest shipping partner of the USPS with the $5.5 billion (sic) [5.5 billion] in packages that we generate for the USPS, which represents over 35% of the U.S. domestic priority mail packages.

We also have significant strength in our partnership network worldwide with over 450 partnerships where our solutions are embedded into or integrated with those partners' software solutions. We have the market-leading e-commerce multicarrier software solutions with ShipStation, ShippingEasy and ShipWorks.

We have built a U.S. sales force that is over 100 strong and are highly knowledgeable in shipping logistics, software and technology. And we have significant internal expertise in marketing where we spend more than $65 million per year on e-commerce small business marketing.

We have significant technology resources, customer onboarding capabilities, account management and customer support. And our acquisition of MetaPack has also positioned us to take our multicarrier strategy worldwide. And we have already turned our significant assets towards a focus on partnerships with the carriers that will help our customers and our shareholders succeed over the next 5 years.

With that, now I'll turn the call over to Jeff.

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

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Thanks, Ken. We'll now review our first quarter 2019 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 2019 metrics on our investor website.

Total revenue was $136.0 million in Q1, and that was up 2% year-over-year versus Q1 of '18. Total revenue excluding MetaPack was $122.9 million in Q1, and that was down 8% year-over-year versus Q1 of '18. The growth in revenue in the first quarter was driven by the inclusion of MetaPack revenue and by growth in our Global Advantage Program and offset by the elimination of USPS commission revenue.

Mailing and Shipping revenue was $132.6 million in Q1. That was up 1% year-over-year versus Q1 of '18. Mailing and Shipping revenue excluding MetaPack was $119.5 million in Q1, and that was down 9% year-over-year versus Q1 of '18. The growth in total Mailing and Shipping revenue was because of the inclusion of MetaPack revenue and by growth in our Global Advantage Program and was offset by the elimination of the USPS commission revenue.

We estimate that revenue derived from our shipping customers grew year-over-year at a low single-digit rate and as a percentage of total revenue in Q1 was in the high-70% range. We estimate that revenue derived from our shipping customers in Q1 excluding MetaPack declined year-over-year at a low double-digit rate and as a percentage of total revenue was in the high-60% range.

We also estimate that our Mailing and Shipping revenue derived from our several mailers as a percentage of total revenue was in the high-teens and declined year-over-year at a low single-digit rate.

Mailing and Shipping gross margin was 74.9% in Q1 versus 82.5% in Q1 of '18. The decrease in gross margin was primarily attributable to the elimination of USPS commission revenue. It was also negatively impacted by our continued increase of our international offerings including our Global Advantage Program. These programs tend to have a lower gross margin profile than our other service fee revenue components.

The gross margins were also negatively impacted by the inclusion of MetaPack which under U.S. GAAP generated a gross margin of approximately 66% in Q1. We had a year-over-year increase in our Q1 operating costs, including sales and marketing, R&D and G&A primarily related to strategic investments to support the strong growth and innovation in our Mailing and Shipping business and due to the inclusion of MetaPack.

Non-GAAP operating income was $37.7 million in Q1, and that was down 38% year-over-year versus Q1 of '18. Adjusted EBITDA was $39.2 million in Q1, and that was down 37% year-over-year versus Q1 of '18. Adjusted EBITDA margin was 28.8% in Q1 versus 46.5% in Q1 of '18.

The decreases in adjusted non-GAAP operating income, adjusted EBITDA and adjusted EBITDA margin were primarily attributable to the following: the elimination of USPS commission revenue, lower gross margins associated with the scaling of our international offerings, higher operating expenses associated with our shipping-related investments and the inclusion of MetaPack, which has a lower gross and EBITDA margins.

Non-GAAP adjusted income per fully diluted share was $1.23 in Q1 based on a non-GAAP tax expense rate of 40%. And that was down 51% year-over-year versus $2.54 per share in Q1 of '18 based on a non-GAAP tax expense rate of 22%.

Fully diluted shares used in the EPS calculation was 18.0 million for Q1 and 18.5 million for 2018. Q1 '19 was negatively impacted by an increase in our estimated effective tax rate for 2019 from our previously estimated 30% to our now revised estimate of 40%. The increase in our revised estimated effective tax rate was primarily driven by an increase in projected nondeductible expenses related to executive compensation, which now includes additional executives who were previously excluded, coupled with the reduction in projected pretax book income.

With that, we can now discuss our customer metrics. Our total paid customer metric was [736,000], our churn rate was 3.1% and our ARPU was $60.05 for the first quarter. Paid customers were down 1% versus the first quarter of 2018. Churn was up slightly versus the churn we've seen over the past several quarters, and ARPU was up about 2% year-over-year.

There was an impact on our paid customer metric numbers, our churn rate and our ARPU metrics for the first quarter that resulted directly from our decision that we made earlier this year to discontinue our exclusive revenue share relationship with the USPS. A segment of our higher-volume customers were receiving our technology solution without our customary monthly service fee. Without our USPS revenue share, those customers are currently not counted under our paid customer definition.

Additionally, our ARPU metric benefited from the inclusion of MetaPack revenue in our financials this quarter and also benefited from growth in our Global Advantage Program.

Total first quarter USPS postage printed was $1.6 billion, and that was up 2% versus the first quarter of 2018. The total USPS postage printed metric includes both higher gross shipping volume and traditional nonpackage volume, which continues to see a steady decline.

Let's now discuss our cash, debt and uses of cash. We ended Q1 with $111 million in cash and investments, which was down $3 million from $114 million at the end of Q4 '18. The decrease in cash and investments was primarily driven by the following: share repurchases and a scheduled debt repayment, and was partially offset by strong operating cash flow and cash from option exercises.

During Q1, we made a required principal repayment of $2.6 million, resulting in total debt under the credit agreement excluding debt issuance costs of $58.8 million. During Q1, we repurchased approximately 235,000 shares at a total cost of approximately $32 million. On March 8, 2019, our Board of Directors approved a $60 million share repurchase plan which is scheduled to expire in September 2019. To date, approximately $24 million has been repurchased under that plan.

On May 1 of this year, the Board of Directors adjusted these repurchase parameters, and the plan is now expected to repurchase an additional approximately $9 million in addition to the approximately $24 million already purchased between May 9 and its expiration in September of this year.

Let's now turn to guidance. As Ken discussed, we have very recently become aware that the USPS is currently renegotiating the negotiated service agreements of several of our reseller partners. As you know from our prior earnings calls and filings, we have revenue-sharing arrangements with several of the reseller partners. The revenue we earn from such arrangements would be negatively impacted by reductions in the margins associated with their NSAs.

While there are ongoing negotiations with uncertain outcomes and we have limited visibility given that the negotiations are being conducted between the USPS and our reseller integration partners, we believe it is reasonably possible that the margins associated and earned by the resellers as a result of these negotiations will begin to decrease around the second half of 2019. We have therefore reduced our 2019 guidance to reflect this potential reduction as we currently understand it.

We expect fiscal 2019 revenue to be in the range of $510 million to $560 million, which compares to our previous guidance of $540 million to $570 million. With the elimination of USPS commission revenue and now the expected decrease in revenue earned through reseller revenue-sharing arrangements, our shipping-related revenue is expected to continue to decline year-over-year. We expect Mailing and Shipping revenue derived from our SOHO mailers to be approximately flat year-over-year. And we expect our Customized Postage revenue to be down 30% to 40% year-over-year.

We expect operating expenses to increase in 2019 reflecting the strategic investments we made in 2018 and the additional investments we anticipate making in 2019 as well as the inclusion of MetaPack in our financials. We would also expect to see the impact of these investments to be front-loaded given the effect of 2018 headcount investments and MetaPack's operating expenses impacting 2019 while the effect of additional investments in 2019 will occur throughout the year.

We expect fiscal 2019 adjusted EBITDA to be in the range of $110 million to $150 million, which compares to previous guidance of $145 million to $165 million. Our revised guidance implies a full year adjusted EBITDA margin in the low- to mid-20% range based on all the aforementioned factors affecting our business.

Our margin guidance again reflects the inclusion of MetaPack in our financials, the inclusion of headcount expenses, expense increases, the elimination of the USPS commission revenue and an expected decrease in revenue earned through reseller revenue-sharing arrangements.

We expect non-GAAP tax expense will be approximately 40% of non-GAAP pretax income for 2019, which compares to our previous estimate of 30%. As we discussed earlier, the increase in our revised estimate of -- estimated effective tax rate was primarily driven by an increase in our projected nondeductible expenses related to executive compensation under Internal Revenue Code 162(m). The increase in effective compensation expense is primarily driven by the inclusion of 3 additional executives who are newly subject to 162(m) limitations, which when coupled with the reduction in pretax book income, results in an increase in our expected effective tax rate.

Our full year 2019 effective tax rate could differ from our current estimates based on a number of factors. We expect fully diluted shares to be between 17.6 million and 18.4 million in 2019, which compares to our previous estimate of 18.3 million to 19.1 million. We expect fiscal 2019 non-GAAP adjusted income per fully diluted share to be in a range between $3.35 to $4.85, which compares to our previous estimate of $5.15 to $6.15.

With our increased focus on shipping, our financial metrics would ordinarily exhibit seasonality reflective of customer shipping usage during the year. However, we would not expect that trend to continue this year with the negative financial impacts associated with the elimination of the USPS commission revenue and reduction of reseller-related partner revenue shares that we expect. In particular, we would expect the second half revenue and adjusted EBITDA to be particularly negatively impacted. And finally, we continue to expect capital expenditures to be approximately $2 million to $4 million in 2019.

Although we do not provide guidance beyond 2019, the current U.S. proposals as we currently understand them could also result in additional meaningful reductions in margins earned by resellers in 2020 and '21. This in turn could have a significant impact on our revenues and earnings in those years.

And while we do not know what ultimately will become of the USPS' proposed changes, it does not alter our own long-term global multicarrier business strategies, which we believe will be successful. However, we believe it is prudent to explain the near-term and medium-term risks as we currently understand them to be.

And with that, I'll turn it back to Ken for some additional summary comments.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [5]

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Thanks, Jeff. As we've stated, our goal is to position this company for the best long-term outcome as all of the rapidly changing trends play out in the shipping industry and any changes to the USPS reseller industry are just going to accelerate our efforts towards our new long-term goals. We expect the changes to the reseller industry will also drive a significant strategy shift in the approximately 125 companies in the e-commerce ecosystem that has -- that have previously focused on the USPS. Those companies will now turn their focus to other carriers and new business strategies.

As we look back on the history of our company, we've made major changes in our corporate strategy approximately every 10 years as the Mailing and Shipping industry has evolved. Our original corporate focus started in 1999 when we first launched our PC Postage solution. The goal was to replace small business postage meters.

In 2009, as the decline of first-class mail continued to accelerate, we shifted our strategy to focus on U.S. domestic shipping. Driven by our revenue share arrangements with the USPS and our partnerships with the reseller industry, we focused our primary efforts on driving shipping volume to the U.S. Postal Service. Now as the USPS appears to be changing its approach to shipping, we have discontinued our exclusivity with them. We have shifted our focus to new -- our new global multicarrier strategy.

Every time we made a major strategy shift in the past 20 years, we faced short-term challenges as we moved in a new direction. But in the long run, all of the changes were necessary so that we could continue to thrive as the complex and dynamic mailing and shipping industries changed.

We built an extraordinary company with incredible assets and amazing workforce. We're exceptionally well positioned to continue to drive our organization in this new direction. We're confident we will become the global leader in multicarrier e-commerce shipping.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Zach Cummins with B. Riley.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [2]

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I guess just starting off, when did you really become aware of the potential changes to the reseller arrangements?

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

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It was just very recently.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [4]

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Understood. And then I guess around that, just -- I guess how much variability is there in terms of the range of the potential negotiations and how those could play out in the second half of the year? I mean do you really have much insight into that? Or just kind of what you've been relayed between the USPS and some of the partners?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [5]

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Yes. Really the latter. I mean we're not a party to the negotiation, just what we've been relayed through our partnership conversations. And the visibility we have is limited. And so we're really on the sidelines in this whole process, just as a partner to the resellers and a participant in the industry overall just like the other 125 companies that are participating in some kind of economic way with the reseller industry. So like I said, it's a direct conversation between the resellers and the USPS.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [6]

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Understood. And then I guess is there a potential down the line that if these negotiated rates or the NSAs that the resellers have with the USPS don't become attractive that they could potentially be turning away and moving to some other carrier going forward?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [7]

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Yes. I mean I think that it's a strong reality that sooner rather than later, if the USPS -- I mean effectively, when you talk about what a reseller is, it's nothing more than a basic partnership revenue share. That's the standard way that all companies kind of work together. And so when a partner reduces your revenue share, you're inevitably going to focus in other directions where other partners may give you a better opportunity.

So I think it just makes sense that, that revenue share reduction which flows from the resellers into ourselves and the other 125 companies that, that reduction in the economics is going to change behavior. And it's going to drive those companies to focus on the other carriers. And the other carriers are certainly going to be interested in courting that business, the 5.5 billion in volume through us as well as all the efforts and collective capabilities of those 125 organizations that have really been the key growth vehicle for e-commerce for the USPS.

So we are expecting a fairly large defection of companies away from the USPS focus, which are inevitable. When you reduce your revenue share, people stop paying attention to you.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [8]

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Understood. And then can you update us on your strategy with Endicia and Stamps.com platforms just given that you no longer have the exclusivity with the USPS? Have you been working towards getting other carrier integrations within that platform?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [9]

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Yes. I mean we're still -- it's early in the process of kind of changing directions. As you know, the last quarter, 2 months ago, was really the first time we kind of discussed our new strategy, our new direction. So we are working through our plans in terms of how we're going to change our approach on the -- really on the front-end products, the Stamps and the Endicia products, which have traditionally been exclusively USPS-only products. And clearly without that exclusivity, we will be likely to open those up to additional carriers to the extent that makes sense for our customers. Those products have always been kind of our first offer and our first product that we try to push customers onto in terms of newer, smaller, up-and-coming e-commerce customers because they're simpler and they're really more suited for the more basic needs of a smaller company that has just gotten going in e-commerce.

And so we're going to continue to try to focus on keeping it simple. So we're not going to put 40 carriers in them like we have in ShipStation, but adding a second or third or fourth carrier might make sense. Certainly, a large number of our customers, I think, would benefit from immediately bringing in a second carrier where they're able to get better services and more cost-effective services versus the USPS solutions that are in those products today.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [10]

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Understood. And then I guess just the final question for me. Can you talk about your progress in terms of negotiations with private carriers at this point and kind of looking into other strategic partnerships?

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

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Yes, sure. I think last February -- February is the first time we kind of announced to the world, all our investors and all our partners and everyone at the same time that we were no longer going to be exclusive to the USPS. As you can imagine with the assets we've discussed and the volumes, the sales team, the technology, the capabilities that we've really -- the engine we've been driving down the road with the USPS for the past decade and driving that 21% compound growth rate, you can imagine how other carriers have seen that as a very, very attractive thing to potentially get on to their side.

And so we've been in lots of conversations and -- with lots of carriers. And there's lots of interest in either adding new partnerships or enhancing existing partnerships with carriers. So it's only been a short period of time. That was 2 months ago. So these conversations take time to play out. But we're very optimistic that we'll cement new carrier partnerships and basically put those building blocks in place as we change our direction in our strategy.

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Operator [12]

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Our next question comes from the line of 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 [13]

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I wanted to look at this from a bigger picture, USPS strategic perspective. Megan Brennan has consistently talked about the need for the Postal Service to be competitive relative to the package volumes and I think have generally recognized this is a high-fixed cost, low-variable cost model that they're running.

These moves, both your negotiations previously and the reseller negotiations, suggest a -- illogical, bureaucratic type of a thought process. And I'm just curious if you can give us a picture from your viewpoint in terms of the larger competitive strategy the Postal Service seems to be deploying.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [14]

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Yes, sure. I mean -- I think as much as you're scratching your head and kind of what we're doing as well, I'd really -- the position that the USPS, the market share they have gained, the position they have really built in this e-commerce space, I mean they've really grown to dominate especially the small business, small and medium enterprise e-commerce area. And that domination has really come on the heels of our efforts and the efforts of the resellers in the last decade. I think in many ways what they did in 2009, when they both came to Stamps and Endicia and offered us a commission to focus on their shipping business and also created this reseller industry when DHL exited the market and these resellers were available to potentially bring onto their team. When they made those moves early on, it really made a ton of sense, and it's paid off in spades for them.

So it's a bit of a mystery for us. It really makes no sense. I think there's -- the industry that's developed around this really -- this thing we've referred to as the e-commerce ecosystem, really complicated to understand. From the outside looking in, it's just -- it may not be evident, the gravity of the type of decisions they're making right now in terms of how complicated this industry is.

I mean we're on the front lines. We're partners with everyone in the ecosystem. So we see firsthand how these revenue shares change their behavior day-to-day, how these companies are pushing USPS on their home page and their products.

They're focused on marketing. They're focused on selling the USPS over other carriers. We see that day-to-day with these partners that we work with every day. And that may not be as evident to some of the people that are kind of looking at it more of a 30,000-foot view and maybe just looking at, "Hey, how do we cut costs? or other kind of strategies."

So we have conversations with them and -- but it's not, it's -- I would not say it's totally clear to us exactly why they would consider effectively cutting a revenue share to an industry that collectively has been extremely successful in building their business.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [15]

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So you've put in place a surcharge for some of your large customers, former Endicia customers. Can you just give us a sense of the response that you've heard from those customers?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [16]

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Yes. I mean -- I think when we had our earnings call 2 months ago, that was the first time that we really announced the surcharge, about the same time that we announced the change in direction publicly. And so I think that the -- certainly, nobody wants to be paying more money. The customers understood that, "Hey, somebody has got to pay for the technology. And if it's not the USPS, it's got to be you." And certainly, it's not been a popular decision. But we're still in the process of kind of working through that conversation.

There's a -- this is a small number of customers. This is not our entire customer base. This is a very select, small set of customers on these very high-volume NSAs where they've been receiving a free solution from us, funded by the USPS revenue share.

And so they understand why they can't get the solution for free. I mean they get their solution for free from FedEx and UPS. And so certainly, the idea that they're paying an additional fee on top of what they're already paying to the USPS is not -- is a tough pill to swallow for them. But ultimately, I think it -- and it will drive their behavior to switch carriers to FedEx and UPS when this offer is free because ultimately it's a 3% increase on top of rates that may only be at parity or even worse already versus those rates.

So it's just kind of more the dynamics in the industry that are moving so quickly. And these competitors are really aggressively coming after the USPS and all the new entrants and all the new products they are launching. And so things are changing so rapidly that we certainly see the 3% surcharge as a detriment to the USPS.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [17]

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Lastly, you're obviously making -- you're giving guidance for particularly the back half of the year and suggesting into 2020 and '21 significant changes to the reseller program. And I understand you have imperfect information at this point. But your guidance is suggesting -- is it suggesting a full end to the program? Or can you just give us a sense of sort of where on the continuum these numbers are suggesting?

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Jeffrey Carberry, Stamps.com Inc. - CFO [18]

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Yes. So our guidance, George, does not contemplate a termination of the program. And based on the information we have to date, which as we said before isn't perfect, we do not believe the program will be terminated in the long run.

However, we do expect, again based on what we know to date, that margins will continue to decline in 2020 and '21 for the resellers, and therefore our rev shares will decline as well. As we mentioned, there's a lot of uncertainty there, right, and a lot of opacity for us, and they are subject to ongoing negotiations.

So it is quite uncertain what the impact financially will be in terms of precise numbers and hits for '20 and '21. But we wanted to make sure people understood that based on what we know to date, there would be further reductions, not a termination of the program but reductions in 2021.

And as we get more information, we'll, of course, provide additional color. And obviously, at '19 -- at the end of '19, we'll give guidance for '20. But as of right now, we want to just make sure people understood that as it stands currently, we'd expect further declines in '20 and '21.

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Operator [19]

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Our next question comes from the line of Allen Klee with Maxim Group.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [20]

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A couple other questions on the reseller agreements. What percent of your revenue comes from these reseller agreements? And what percent of that is getting renegotiated this year? So how much will be left? And can you give us a sense of how long these contracts are? And I guess you've kind of -- or some range of what they're -- percent they're looking at cutting them?

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Jeffrey Carberry, Stamps.com Inc. - CFO [21]

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Yes. So in terms of the numbers, we don't quantify the revenue associated with the resellers. However, obviously, with the elimination of the commission revenue, there are fewer variables for investors to triangulate on. You know our paid customers. You know the monthly service fees that we have. You have Customized Postage. We break out MetaPack separately. So the number of variables that are there for you to triangulate on, to estimate reseller revenue are pretty few. So I think investors probably got a reasonable sense of what the risk to our revenue is. But to be clear, we don't break it out separately.

As we've said historically as well and as we talk about in our risk factors and our Qs and Ks, these are generally shorter-term arrangements. And they have various provisions to change terms and to potentially cancel these arrangements. So again based on what we know thus far, we'd expect the program to continue albeit with lower margins, but obviously it's subject to ongoing negotiations.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [22]

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Okay. And then I -- you had given guidance on number of shares outstanding, and I missed that. Could you repeat that please?

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Jeffrey Carberry, Stamps.com Inc. - CFO [23]

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Sure. So in terms of the number of shares outstanding, the decrease in the number of shares we'd expect is going to between 17.6 million and 18.4 million. That compares to our previous guidance of 18.3 million to 19.1 million.

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Operator [24]

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Our next question comes from the line of Tim Klasell with Northland.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD & Senior Research Analyst [25]

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I just wanted to sort of jump on to the prior question on -- with the resellers. First of all, can you sort of walk us through how you believe this will roll out across the resellers? Is there a few right now, and they will get reset and they're going to continue to roll that out, and that's what you're thinking '20 and '21 happened? And maybe you can give us a little bit of color on what sort of a magnitude the USPS is cutting the discounts to the resellers? Or just sort of give us an idea of how you expect this to flow through the reseller community.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [26]

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So in terms of the magnitude of the discounts, again, there's a lot of uncertainty. It's subject to anongoing negotiation. So it's not as if -- to our understanding at least, it is a negotiation. And therefore, we'd expect some give-and-take as part of that process as opposed to a take-it-or-leave-it kind of proposition. So it's far too early for us to determine what we think the longer-term effects are going to be.

As it relates to the NSA program broadly written, we don't have visibility into all the partners that have NSAs. We are aware of our reseller partners and those that have advised us that they are currently involved in these renegotiations. But we don't have perfect information around the entire population of customers that may be impacted by this decision the USPS appears to be making. Again, we think it's counterproductive to their longer-term financial goals, but it is what it is.

So given that uncertainty as to their ultimate strategy, it's also uncertain to us as to how broadly this will reach. Whether it remains narrowly focused on the reseller partners with whom we work currently or whether it's intended to expand beyond, it's just too uncertain, unfortunately.

So as it relates to the '20 and '21 impacts, it's very hard for us to give you a magnitude, an estimate, because of the inherent uncertainty. But as we get information, we'll certainly update our investors in the markets.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27]

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Okay. Good. And then just some -- that's helpful. And then in terms of the background information, clearly these arrangements have been out for a long time, for multiple years as you brought out earlier. Have they tried this aggressive level of negotiation in the past? Or is this -- it sounds like this is absolutely new, that they maybe had these set rates for a long time, and now they're trying to just squeeze them. Or did they try to squeeze them in the past?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [28]

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Well, I mean it's -- the industry has been around for 9 years. And these -- the NSAs are, I think, have been through multiple rounds with all the resellers. So I think, going back 9 years, the economics have changed. I'm not sure to what extent every time that there's been an NSA, a new NSA approval, but I know that there's been multiple instances of modifications of reseller margins.

I think we do know based on our limited information that this change is being proposed and negotiated as a negative margin change. So the margins are getting smaller. And so I think it's -- that's clear, and it's being -- I think it's being negotiated across multiple resellers at once.

So I think the NSAs have -- there have been multiple NSAs in the reseller industry. But just based on our current knowledge, these -- the organizations out there that do the -- that are primary in the reseller business are the ones being in these negotiations with the USPS.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

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Okay. Good. And then one sort of follow-up housekeeping one that -- I'm assuming that the increase from 30% to 40% on the tax rate is a cash tax level. Is that correct?

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

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That's correct.

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Operator [31]

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(Operator Instructions) Our next question comes from the line of Kevin Liu with K. Liu & Company.

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Kevin Liu, [32]

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I wanted to spend a little time on your guidance first. Obviously, low end is coming down about $30 million and then $10 million at the high end. Can you talk about some of the puts and takes of why that number isn't more consistent? And more specifically at the high end, do you assume any sort of new strategic agreements within that number?

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Jeffrey Carberry, Stamps.com Inc. - CFO [33]

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Yes. So in terms of the high end, what ultimately happened was we dropped the high end and also dropped the low end by virtue of expanding the range. So the high end does not assume any impact from new arrangements that may come online with other carriers obviously because of the uncertainty. We're not going to bake that into our estimates or guidance in the short run. So it doesn't contemplate any new financial arrangements with additional carriers.

In terms of the rationale for the decrease, again, there's uncertainty with regard to where the reseller revenue shares ultimately end up. And in the past, they take over '19, '20 and '21. But what we've done and endeavor to do at least is to adjust our guidance to reflect our best estimate of what the implications are going to be for '19.

As it relates to the range, obviously, the range was extended because of the fact there's inherent uncertainty. So I would argue that the uncertainty in the business and therefore the range of potential results is inherently greater than it was last quarter because of this unexpected change that we previously learned about with the reseller revenue shares. So that's the rationale for both the reduction as well as the broadening of the range.

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Kevin Liu, [34]

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All right. And then looking at the EBITDA guidance, that actually came down by more -- than the revenues that you're taking out of the model. Can you talk a little bit about the drivers for those incremental expenses or why that magnitude is higher?

And then also just more strategically, now that you do know there are a lot of these USPS revenues that aren't going to be there, historically, you guys have been very focused on the cost to acquire customer versus the lifetime value. And obviously, lifetime value seems to be coming down a bit. So why are you holding the line in terms of the level of investment you're putting into the customer acquisition?

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Jeffrey Carberry, Stamps.com Inc. - CFO [35]

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Yes. So in terms of the OpEx side, OpEx came in higher because of some additional investments we're making in sales and marketing principally as well as R&D both in terms of discretionary spend as well as headcount investments that we're making.

The question is a good one as to -- given the change in expectations with reseller revenue. Why would we continue to make investments? Well, I mean as it relates to Q1, obviously, we just very recently, as Ken mentioned, learned of this. The other thing as well is that there's inherent uncertainty. And as you know, we take a highly quantitative approach to looking at return on investment with things like marketing spend. And those returns look favorable.

Given the uncertainty, things may change going forward. If our expectations are going to be reseller revenue turns materially negative, given the negotiations, that might change our decisions going forward. But as it stands right now, given what we expect with the reseller revenue shares for '19, given what we see in terms of the empirical data regarding ROIs on marketing spend on a discretionary basis, we think those are good investments to make.

As it relates to the longer-term prospects of the business regarding global opportunities, the global opportunities are incredibly attractive. Our addressable market has expanded dramatically. And I think the returns that we're going to see internationally should our strategies work out are going to be quite attractive, and you have to invest to achieve those opportunities.

We have a very good position in the market the way we see it. And we think it's a very good strategy for the long-term business to capitalize on those opportunities and capitalize on them aggressively. But obviously, as things unfold with the USPS, vis-à-vis reseller, those things may change a bit. But it doesn't change our fundamental outlook on the global opportunity and the investments we need to make to capitalize on those opportunities.

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Kevin Liu, [36]

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All right. And one last one for me. As Amazon starts to roll out their shipping network here at least broaden it beyond the initial cities they've highlighted, what sort of interest do they have in coming to you and your platforms? Can you confirm, for instance, that ShipStation is now in a beta test with them? And do you anticipate being able to get any sort of economics from Amazon as they roll out more broadly?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [37]

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So I think you're asking about shipping with Amazon and, yes, the ShipStation. There has been some initial test with that solution. Obviously, we talked a lot about wanting to bring carriers that make sense to our customers to -- to the customers.

And so Shipping with Amazon as we see it is just another carrier that may become part of the portfolio of the now, I believe, 42 carriers that we support within ShipStation. And to the extent that Amazon is able to offer a service that's attractive to our customers, it's certainly something we want to bring to them.

I think we talked a lot about -- last quarter about some of the trends and the things they're doing. And so they certainly are going to be a factor in the industry overall and a factor in many industries. And so certainly, it's something we will bring to our customers if it makes sense.

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Kevin Liu, [38]

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All right. And actually, if I could squeeze one more in. I know you guys don't want to disclose specific revenues attached to different streams. But maybe more generally, can you just talk about how much of your service fee comes from just pure monthly subscriptions so we have kind of a ballpark for what's the potential puts and takes on the transaction side might be?

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Jeffrey Carberry, Stamps.com Inc. - CFO [39]

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Yes. So I think the best way to think about that, we haven't broken it out separately. So I'm sort of averse to do so now. But I think in terms of the way you -- we would -- you would frame the question and solve the problem is you have our paid customers. You have a very good sense given the changes in our customer metrics over time to reflect the acquisitions. Given some pretty basic assumptions about growth rates of those customer numbers by UI and assuming ARPU is in the lower quartile of the ranges available on each one of the solutions, you get to a pretty close number as to the revenue derived from monthly subscription fees. So it's -- the mathematics and data points are there to triangulate pretty closely for you.

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Operator [40]

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I'm showing no further questions at this time. I would now like to turn the call back over to Ken McBride for closing remarks.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [41]

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Appreciate for you joining this -- joining us today. If you have follow-up questions, as always, you can contact us through our website, investor.stamps.com, or you can contact us through our investor hotline, (310) 482-5830. Thank you.

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Operator [42]

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Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.