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Edited Transcript of STMP earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Stamps.Com Inc Earnings Call

LOS ANGELES Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Stamps.Com Inc earnings conference call or presentation Wednesday, August 7, 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

Stamps.com Inc. - Director of Finance

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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;K. Liu & Company LLC;Founder;CEO

* Tyler Jacob Wood

Northland Capital Markets, Research Division - 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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Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Stamps.com Second Quarter 2019 Financial Results. (Operator Instructions) I would now like to turn the conference over to your host, Ms. Suzanne Park. Please go ahead.

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Suzanne Park, Stamps.com Inc. - Director of Finance [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 second 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 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 10 -- 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 second quarter of 2019, GAAP net income was $14.0 million, and GAAP net income per fully diluted share was $0.79. Our non-GAAP financial measures exclude the following second quarter items: $9.8 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 $7.2 million of additional non-GAAP income tax expense in the second 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 second quarter 2019 earnings release and 2019 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. Thank you for joining us today. Today, we announced our second quarter results, which included GAAP revenue of $138.8 million, that was down 1% year-over-year; a non-GAAP adjusted EBITDA of $39.3 million, down 38% year-over-year. During the second quarter, we continued to make progress in the efforts to diversify from a domestic single carrier business model to our global multicarrier business model. We continued to work proactively with the USPS to drive value for our customers, as the USPS remains a very important carrier partner for us. We also continued to make strides in our diversification of our carrier relationships with international posts, including Royal Mail, French Post, Australia Post. Nontraditional carriers with our Global Advantage Program. Our financial results for the second quarter were in line with our expectations in light of our new strategic direction.

Now I'd like to spend a bit of time discussing some of the most recent changes in the shipping industry. The shipping industry continues to change rapidly. The announcements we've seen recently from both shipping industry incumbents as well as other newer entrants into the carrier market highlight the pace of change in the market, which has continued to accelerate. UPS recently made some very meaningful announcements. They announced that they'll be adding Sunday pickup and delivery in order to move to a 7-day delivery starting in January of 2020. They also announced the addition of 12,000 new pickup and drop-off points for packages in partnership with CVS, Michaels and Advance Auto Parts. That dramatically expands their already broad reach. UPS also continues to add more automation to its ground sort centers and to increase its airlift capacity with 44 new wide-body jets by 2022. Likewise, FedEx has made several significant announcements and continues to rapidly evolve its business model to more squarely focused on e-commerce.

In June, FedEx announced the termination of its air shipping contract with Amazon; earlier this morning, announced it was ending its ground network relationship as well, which have stated will allow it to focus more clearly on serving the broader e-commerce market. FedEx also announced that it plans to in-source the balance of its low-cost smart post business that traditionally utilized the USPS for last-mile delivery, with the goal of increasing its ability to meet the demands of e-commerce shippers and online shoppers. FedEx also recently announced the addition of 8,000 pickup and drop-off points inside Dollar General stores by 2020. They recently just stated that their goal was to be the low-cost producer in the e-commerce space for residential deliveries, which of course, positions them directly in competition with the USPS's traditional area of strength. The nontraditional carriers and logistics providers continue to evolve and create new and exciting changes in the e-commerce shipping industry. Amazon continues to expand its shipping and logistics capabilities with the recent announcement of 1-day prime service, further expansion of its air shipping network, and investments in newer technologies, like electric vehicles, to improve the economics of its shipping operations. eBay and Shopify both recently announced new fulfillment services that will launch in the U.S. this year and next year, and a significant number of new entrants such as Uber, Postmates and Deliv continue to make progress on their businesses focused on same-day delivery.

The shipping industry is showing itself to be extraordinarily dynamic. We see ourselves as very strong driver of value to both traditional and nontraditional carriers and logistics providers.

Let me now provide an update on the latest developments in the USPS reseller area. As a refresher for everyone, resellers have what are called negotiated service agreements, or NSAs, which are customized negotiated contracts between the Postal Service and an individual customer or a reseller, which provides discounted rates that can vary based on each agreement. Companies with reseller NSAs come in many forms, from companies that are primarily in the business of being resellers to marketplaces like Amazon, eBay and Etsy, to third-party logistics providers, like fulfillment houses. Each reseller's NSA allows a reseller partner to buy postage for shipping a package at one rate from the USPS and then to resell that postage to customers at a higher rate, and it's precisely those margins that have created a deep and robust ecosystem of e-commerce companies and partnerships fueling innovation. 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 in some way participate in a portion of the margins created by these USPS reseller NSAs. The benefits of this innovative deep and robust ecosystem have in our opinion largely accrued to the USPS and have driven USPS to be the market leader in the e-commerce-related shipping with phenomenal growth. 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.

We discussed at length last quarter the negotiation that the USPS has initiated with certain seller partners of ours. While these are ongoing negotiations with uncertain outcomes, we have limited visibility given that the negotiations are being conducted solely between the USPS and the resellers. We'd like to provide our investors with our current understanding of the status of those negotiations. Since our last earnings call, we've seen a positive shift in the USPS's negotiating position with respect to its reseller partners. Back in April, the USPS told some of the resellers that their economics would be decreasing starting in June of 2019. Recently however, the USPS extended the NSAs of some of our reseller partners at their current margins through the end of 2019. The USPS has also recently engaged in more productive conversations that seem to recognize the value that resellers bring to the post office. It remains our understanding that the USPS intends to decrease margins for resellers in 2020, but we believe that the latest collaborative conversations are a positive sign. While we continue to disagree with the USPS's strategy of reducing the incentive structures for programs that have driven strong growth over the past 10 years, we're encouraged by the recent positive shift in the USPS's apparent approach to this negotiation. We hope that as discussions continue regarding the complex and rapidly evolving e-commerce ecosystem, the USPS becomes less focused on cutting costs, more focused on growing its package business and supporting its very important e-commerce technology partners.

Our goal is to position this company for the best long-term outcome as all of these trends play out and to continue 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, the volume of shipping done by our customers is over $11 billion. We're currently the largest shipping partner of the USPS, with 5.5 billion in packages that we generate for the USPS, representing over 35% of their U.S. domestic priority mail packages. We're also -- we also have significant strength in our partnership network worldwide with over 450 partnerships where our solutions are embedded into or integrated with those partner software solutions. We have the market-leading e-commerce multicarrier software solutions, with ShipStation, ShippingEasy and ShipWorks. We've built a U.S. sales force that is over 100 strong, and they're all highly knowledgeable in shipping logistics software and technology. We have significant external -- internal expertise in marketing, where we spend more than $65 million per year. 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.

Following the business model changes that we announced in February, we have had multiple very productive discussions with traditional and nontraditional carriers, both domestic and international, regarding new and enhanced relationships. These discussions have been very positive. They recognize the strong value proposition we provide driven by the strength of our multicarrier properties, the level and number of our partnerships and integration, the size and strength of our national sales force and the scale and success of our marketing programs. Overall, we've 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 a global leader in multicarrier e-commerce shipping.

With that, now I will 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 second quarter 2019 financial results. The discussion of our financial results today include 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 $138.8 million. In Q2, that was down 1% year-over-year versus Q2 of '18. Total revenue, excluding MetaPack, was $126.3 million in Q2 and that was down 10% year-over-year versus Q2 of '18. The decrease in revenue in the second quarter was driven by the elimination of the USPS commission revenue, offset by the inclusion of MetaPack revenue and by growth in our global managed program. Mailing and Shipping revenue was $135.6 million in Q2, and that was up 1% year-over-year versus Q2 of '18. Mailing and Shipping revenue, excluding MetaPack, was $123.2 million in Q2 and that was down 8% year-over-year versus Q2 of '18. The growth in total Mailing and Shipping revenue was driven by the inclusion of MetaPack revenue and 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 was approximately flat year-over-year, and as a percentage of total revenue in Q2, was in the high 70% range. We estimate that revenue derived from our shipping customers in Q2, 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 estimate that our Mailing and Shipping revenue derived from our [single] mailers as a percentage of total revenue was in the high-teens and grew year-over-year at a low single-digit rate.

Mailing and Shipping gross margin was 75.3% in Q2 versus 81.9% in Q2 of '18. The decrease in gross margins was primarily attributable to the elimination of USPS commission revenue. It also was 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 gross margin of approximately 65% in Q2. We had a year-over-year increase in our Q2 operating cost, 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 $37.8 million in Q2, and that was down 39% year-over-year versus Q2 of '18. Adjusted EBITDA was $39.3 million in Q2, and that was down 38% year-over-year versus Q2 of '18. Adjusted EBITDA margin was 28.3% in Q2 versus 45.6% in Q2 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 again, lower gross and EBITDA margins. Non-GAAP adjusted income for fully diluted share was $1.25 in Q2 based on a non-GAAP tax expense rate of 40%, and that was down 54% year-over-year versus $2.75 per share in Q2 of '18 based on a non-GAAP tax expense rate of 16%.

Fully diluted shares used in the EPS calculation was 17.8 million for Q2 and 18.9 million for Q2 of '18.

Let's now discuss our customer metrics. Our total paid customer metric was 742,000, our churn rate was 3.4% and our ARPU was $60.96 for the second quarter. Paid customers were up 1% year-over-year, churn was up 0.2% year-over-year but broadly in line with the churn we've seen over the past several quarters. And ARPU was flat year-over-year. As we discussed last quarter, a segment of our higher volume customers continue to receive our technology solution without our customary monthly service fee, which, with the elimination of our USPS commission revenue results in some of those customers being excluded from our paid customer count. The exclusion of those customers from our paid customer count accordingly impacts our paid customer metric, churn metric and ARPU metric. 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 second quarter USPS postage printed was $1.6 billion, and that was up 4% versus the second quarter of 2018. Total USPS postage printed, that metric includes both higher growth for shipping volume and traditional nonpackaged volume related to mail, which continues to see a steady decline.

Let's now discuss our cash, debt and uses of cash. We ended Q2 with $110 million in cash and investments, which was down $1 million from $111 million at the end of Q1. The decrease in cash and investments was primarily driven by the following: share repurchases, changes in net working capital and a scheduled debt repayment. And was partially offset by strong operating cash flow. During Q2, we made a required principal repayment of $2.6 million resulting in total debt under the credit agreement, excluding debt issuance cost of $56.2 million. During Q2, the company repurchased approximately 296,000 shares at a total cost of approximately $20 million. On March 8, 2019, our Board approved a $60 million share repurchase plan, which was due to expire in September of 2019. On May 1, 2019, the Board of Directors adjusted the repurchase parameters of the plan, as discussed last quarter. And on July 29 of this year, the Board of Directors approved an extension of the current plan through February 2020 from its prior expiration in September of this year.

To date, approximately 30 million has been purchased under that plan.

Now turning to guidance. As Ken discussed today, USPS negotiations with our reseller partners are ongoing, and we have limited visibility into those negotiations. It is our understanding that some of our reseller partners have received extensions of their current agreements through the end of 2018, while others have not yet received extensions. And these margins could decline in the second half of 2019. We have therefore refined our guidance to reflect our current understanding of the contract margins of our reseller partners for this year. We expect fiscal 2019 revenue to be in the range of $520 million to $560 million, which compares to our previous guidance of $510 million to $560 million. With the elimination of USPS commission revenue and the expected decrease in revenues earned through some 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 will be approximately flat year-over-year. And we expect our customized postage revenue to be down between 30% and 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 continuing to make in 2019 as well as the inclusion of MetaPack in our financials. We expect fiscal 2019 adjusted EBITDA to be in the range of $120 million to $150 million, which compares to previous guidance of $110 million to $150 million.

Our revised guidance implies a full year adjusted EBITDA margin in the low- to mid-20% range based on all of the aforementioned factors affecting our business. Our margin guidance again reflects the inclusion of MetaPack in our financials. The inclusion of head count expense increases. The elimination of 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 remains unchanged from our previous estimates. 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 $18.7 million in 2019, which compares to our previous estimate of $17.6 million and $18.4 million. We expect fiscal 2019 non-GAAP adjusted income per fully diluted share to be in the range between $3.60 and $4.85, which compares to our previous estimate of $3.35 to $4.85. With our increased focus on shipping, our financial metrics would ordinarily exhibit seasonality reflective of the customer shipping usage during the year. However, we would not necessarily expect that trend to continue this year to the same degree with a negative financial impact associated with the elimination of the USPS commission revenue and reduction of reseller-related partner revenue shares with the latter of that now to a lesser degree than our previous guidance due to some of our reseller partners receiving extensions.

In particular, we expect 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 USPS proposals, as we currently understand them at least, could also result in meaningful reductions in margins earned by resellers in 2020 and 2021. 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's proposed changes, it does not alter our long-term global multicarrier business strategies, which we believe will be successful.

And with that, we'll open up the call for questions

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first 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 [2]

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I appreciate your, I would call, relative enthusiasm with respect to some of the reseller negotiations as you understand them. I'm curious if you can compartmentalize those in terms of timeframe. Are you specifically referring to what people are hearing relative to 2019? Or is that some indication relative to the speed at which some of these changes might make and therefore, affect 2020?

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

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Well, I mean I think, just in general, we've -- based on what we've heard, of course, were not -- again were not a part of the negotiation but there's been -- I think initially in April, it was -- largely what came down was very concrete and clear and the reseller economics were going to be decreasing. The NSAs were terminated and starting in June of 2019, the economics would be decreasing. And so what happened was some discussions ensued. We believe some partners came forward and perhaps there was just more digging into the area, it's a very complicated area. And so the conversation shifted. The tenor of the USPS seemed to change. The June 2019 decrease was removed for at least some of the resellers. And we believe some of the other resellers are still in conversations. And so the conversation around 2020, to our knowledge, has not really changed at this point, but I think the general change in attitude and the tenor gives us hope that the collaborative conversations are a positive sign that perhaps that will be looked at as well.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [4]

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Okay. That's helpful. So it's been 6 months effectively since the commission program was terminated with the U.S. Postal Service. And your thought at that point was, we now can pursue opportunities with other growing carriers. Obviously, there has been a tremendous amount of moves made since then. I'm wondering if you can characterize your relative position in this game of musical chairs versus what you might have anticipated 6 months ago.

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

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Yes. I mean I don't think we thought the changes that we were making were going to be simple or easy or were going to immediately result in some massive change in terms of our carrier partnerships. The carriers we're talking to -- it's a complicated space, of course, and some of them are very large organizations and it takes time for large organizations to examine their strategies. I think starting in February, when we came out with our announcements, certainly, the conversations took a step up across the board with carriers, both domestically and internationally. And I think there was a clear recognition that given the assets that we built that we would be a very strong player to add to your team if we get behind your organization and your -- and driving your carrier revenues. So the conversations really increased dramatically in February. The conversations have continued to be very active. I think we're hopeful that we'll have more to discuss in the coming months around some concrete changes. But I don't think we ever thought that this would be something that would happen very quickly in terms of the changes in the new partnerships.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [6]

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Last question, if I could. You have a very strong sales force. You have a lot of integrations in the e-commerce space. I'm curious if you could just update us on sort of sales force retention and integration. If you want to call it retention or any changes that might have occurred there, again, relative to, say, 6 months ago.

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

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Yes, it's been -- I mean I think in terms of our sales team, we've continued down the same path that we would have otherwise done without the -- with the commission still in place this year. We continue to drive the USPS's business. We continue to gain new customers. Our commission plans haven't changed, and overall, we haven't seen any change in terms of our retention of the sales personnel since the changes were made. I think they're all excited about the opportunity to potentially broaden their portfolio of solutions they can offer to customers beyond just the USPS. I think they're waiting to hear what the new direction is and we're -- as our conversations are progressing with the carriers, we're keeping them in the loop but also hopeful that soon, perhaps, the second half of this year, if not early next, next year, we'll be able to alter their path and their direction and really get them focused on driving revenue for additional carriers.

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Operator [8]

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Your next question comes from the line of Zach Cummins with B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [9]

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In terms of the reseller contracts that were extended to the end of 2019, are these back up for renegotiation again right there at the beginning of 2020? Just sort of any incremental color around that would be helpful.

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Jeffrey Carberry, Stamps.com Inc. - CFO [10]

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Yes, Zach. So the contracts are currently being negotiated. The resellers received -- some of the resellers received an extension under their current margin through the end of the year. That simply creates additional runway for those negotiations to happen. So it's still our understanding that those reseller contracts will continue but will continue at lower margins in the coming years. But to answer your question, the negotiations are ongoing between the resellers and the USPS to our understanding.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [11]

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Understood. That's helpful. And then I guess in terms of the high-volume customers that are not being currently charged to use your software, what's going to be your approach with them at this standpoint? Is it a matter of looking for other ways to monetize that down the road? Just kind of curious as to your approach to the customer set.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [12]

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Yes. I think we talked about potentially adding a surcharge when we're looking at really a small segment of our customers that are on these high-volume negotiated service agreements so that -- and where we aren't, we haven't been traditionally charging a fee because of the commission agreement where the USPS was really picking up the fee -- the cost of serving those customers. We had conversations -- we have had conversations with those customers. We've discussed adding a surcharge to their solutions. They understand the reasoning behind that. Of course, the alternative carriers, UPS and FedEx, do not charge for their solutions, so that certainly has been a factor in making sure that we move slowly and cautiously about how we approach it. We don't want to lose the customers, particularly as we're looking at potentially monetizing them through new relationships with other carriers. We have -- in some selected cases, we have charged -- we have begun charging a service commission -- a surcharge to customers. But by and large, we've been cautious in our approach in that area.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [13]

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Understood. And then I guess just final question. I don't know if you've ever divulged this, but could you give us any sort of indication as to the number of reseller partners? Or anything along those lines? It sounds like, based on your commentary, that some of the agreements have been terminated, while others are still in ongoing negotiation. Just any sort of incremental color would be helpful.

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

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Yes. I think broadly there's -- I think we counted at one point some time back, and there's north of 20 different companies out there that have some form of reseller agreement with the USPS from some of the marketplaces we mentioned, like Amazon and Etsy, to some of the fulfillment houses that have the ability to resell at a higher margin. And then what we would call the traditional resellers, really the ones that are -- primarily have been in the business of driving the USPS business through activities like business development and through sales, kind of call those maybe more the pure-play resellers. There's really 3 large ones, and the conversations that we're aware of have primarily been focused on those 3 organizations. So when you look at the shift in the conversations, we're really talking about primarily those 3 conversations.

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Operator [15]

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Your next question comes from the line of Kevin Liu with K. Liu & Company.

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Kevin Liu;K. Liu & Company LLC;Founder;CEO, [16]

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First question for me. Just in terms of some of the new NSAs that are being approved by the USPS, has your ability to pursue those changed at all since you guys kind of moved away strategically? And just generally, I would be curious if you could kind of update us on what sort of run rates you have for those NSAs versus things like eVS and other alternatives those customers could use?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [17]

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I mean NSAs, I guess, there's multiple flavors of NSA. We talked about NSAs in our business or customers within -- those agreements are directly between the USPS and the customer. And I think we saw with some of the changes in the Board of governors and some of the other areas of the USPS and some new board members came on board, we saw some clear slowdown in the approval of the NSA. I think we've seen some -- an improvement in that area for customer NSAs. So I don't know if I answered your question. Perhaps there's -- if I haven't, you can ask some follow-ups.

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Kevin Liu;K. Liu & Company LLC;Founder;CEO, [18]

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Just a follow-up to that would be as these NSAs are being approved, historically, it seems like you guys would be kind of in the pole position to take those. Are you guys adding NSA volumes still with some of these new approvals? Or do you think that's going to other alternatives like eVS or other PC Postage providers?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [19]

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No. I think the vast majority of those are still coming to us in terms of the customer relationships. We're by and large the PC Postage industry. We haven't really seen any significant customer defections to other alternatives out there. And we really haven't seen an uptick in eVS adoptions on the behalf of customers. So it's really, by and large, still coming to Stamps.com and its properties.

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Kevin Liu;K. Liu & Company LLC;Founder;CEO, [20]

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That's great to hear. And then your paid customer count was up nicely on a sequential basis as well as year-over-year. I'm just curious if you could talk about if there are any particular marketing channels or maybe specific brands within your portfolio of products that are driving most of that growth today.

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

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Yes. Good question, Kevin. So as you know, with us, we take a portfolio approach to marketing and we're highly innovative and experimental in testing new things. So generally, what we find is that in any given quarter, it's generally more of a mixed bag of things that are working better than they were previously and other things that may not be working as well. There's nothing I would particularly point to at this quarter that I can say drove a lot of that change. I will say that we're having good success in TV and radio, and we continue to experiment in those 2 channels.

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Kevin Liu;K. Liu & Company LLC;Founder;CEO, [22]

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Got it. And then just lastly for me. You talk about your international expansion opportunity and you're in discussions with some of the carriers out there. Do these tend to be more of the private carriers? Or are you in talks with some of the national postal services that are out there?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [23]

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We're both. I think we're in conversations with the -- there's -- obviously, there's a lot of carriers when you talk about international. There's a lot of smaller carriers, there's larger national post, and we're having conversations with all of them. We do have -- when you talk about carriers worldwide, we do have existing agreements with many carriers, and we continue to have conversations as we move more into the international arena with both ShipStation and also MetaPack. Those conversations have accelerated and we're very encouraged by the openness of some of the carriers out there to potentially share the economics with both ShipStation as well as MetaPack.

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Operator [24]

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(Operator Instructions) Your 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 [25]

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Just following up also on USPS resellers. I just wanted to make sure I understand. Of the 3 major ones, you said that it's been postponed for some, but is it true then for 1 or 2 of them that they actually did cut rates and that you're now, in your new guidance, you're taking into account that you're actually getting paid at a lower rate?

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

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The answer is, amongst the 3, they're -- they either definitively delayed any cuts to the end of the year, and continued in conversations that, like we characterized, have been positive, or they're still in conversations around potential changes they might make. So at this point, we're assuming, I think, within our guidance to be conservative that the ones that haven't received the definitive new agreement that postpones those rate cuts, that we're assuming that the rate cuts happen for purposes of guidance. But the conversations, to our knowledge, have continued, and the conversations are all very positive.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [27]

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Great. And then for potentially winning business with a large U.S. carrier or the likes of something like Amazon, you commented in your presentation how these negotiations have gone on and -- positively. But what do you think needs to happen on your side or their side to make one of those deals happen?

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

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Well, I think part of it is just the complexity of a new partnership, the likes of which has never been done with some of these larger carriers, to the extent that our businesses has such a significant footprint in e-commerce, and the multicarrier properties we have and the approach we take into the market, the position in small business, the sales team. There's a lot of complexity around how do you work together across the board, how do you have the sales teams coordinate, how do you work to on board customers, how do you potentially migrate existing customers onto new solutions? There's just a lot of complexity around how things work. I mean our agreement with USPS was 10 years in the making and was very complicated. And likewise, I think the larger organizations we're talking to have a large footprint. And our large footprint in e-commerce trying to meld those 2 together in a way that works for both organizations is really kind of what needs to happen.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [29]

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Okay. Recently, Alibaba made an announcement they were opening up their marketplaces to U.S. small businesses to go on, and I believe ShipStation is partnered with them in that. How do you think about this as a -- if you were going to size such an opportunity, do you think this could be -- this is something that could be pretty significant?

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [30]

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Yes. I mean we're very excited about that. I mean I think the Alibaba integration is early. We just did it. We just announced it, but we integrated between Alibaba. And as they've opened up their -- not just allowing the purchases of small business, but now allowing the sales of small businesses in the U.S. I think to my knowledge, their first integration was with ShipStation, really, ShipEngine. And so I think our philosophy has always been to go out there and do partnerships rapidly and aggressively. And as a result, we have over 200 sales channels and various partnerships just in the ShipStation property. And so Alibaba is yet another one of those. We're excited about that opportunity for sure. And like I said, it's early but everybody knows the size of Alibaba and the potential volume they can drive as they move into the market.

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Operator [31]

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Your final question comes from the line of Tim Klasell with Northland Securities.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - Analyst [32]

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This is Tyler Wood on for Tim, actually. As we think about source of growth going forward under the new strategy, is there any specific numbers you can put on growth rates for the shipping software piece and also the international side of the business?

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

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Yes, Tyler. I think broadly, what we're looking at from a global perspective is ever increasing percentages of dollars going through e-commerce. And those broader e-commerce trends correlating with our business. Now ultimately, growth rates will be a function of when revenue structures stabilize and anniversary with other carriers, both domestically and internationally for us. So I think it's premature to say when and what those numbers will look like. But I think the broad strokes are that we are effectively monetizing transactions, and therefore, you would see a strong correlation with broader e-commerce trends, both domestically and internationally in terms of our future business.

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Operator [34]

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There are no further questions at this time. I will now turn the call back over to Ken McBride.

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Kenneth T. McBride, Stamps.com Inc. - Chairman & CEO [35]

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Thank you for joining us. So as always, if you have questions, follow-up, we're available anytime at our Investor Relations hotline, 310-482-5830. Thank you very much.

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Operator [36]

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This concludes today's teleconference, you may now disconnect.