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Pitney Bowes Updates '19 View on Software Unit Divestment

Zacks Equity Research

Pitney Bowes Inc. PBI has inked a deal with Syncsort to divest its Software Solutions business in a bid to optimize portfolio. The move is considered appropriate as the Software business has been performing poorly for a while. Let’s take a closer look at this latest development and analyze as to how it will impact the company.

Notably, the company had total cash and cash equivalents of $830.6 million, and debt burden of $3.244 billion, as of Jun 30, 2019. The deal is anticipated to help Pitney Bowes simplify the business structure by focusing on core operating areas. The latest move can result in lower capital requirements and boost shareholders’ value.

Pitney Bowes has lost 43.9% year to date compared with the industry collective decline of 7.6%.

 

Terms of the Deal

The agreement is valued at $700 million and is subject to certain customary closing norms. The transaction is expected to close before the end of the calendar year. Management stated that proceeds from the sale will be utilized to lower debt burden. Along with third-quarter earnings release, the company plans to update guidance for 2019 to reflect the divestiture.

SoftwareUnit Sales: A Prudent Move

Pitney Bowes’ Software solutions include revenues from license and SaaS-based applications including location intelligence, customer information management, and customer engagement solutions.

The company’s Software business has been performing poorly. Sales in the segment plunged 21% to $72.2 million in the second quarter of 2019. Reduction in license revenues, lesser renewal deals and softness in new license deal wins negatively impacted results. Software solutions EBIT plummeted 89% year over year to $2 million owing to lower license revenues.

These headwinds have compelled management to consider the divestiture. This is likely to enable the company to focus on other profitable businesses.

However, improving SaaS revenues, and increase in data subscriptions limited the revenue decline. According to Marc B. Lautenbach, president and CEO, “Our software and data business, together with Syncsort, provides instant scale that creates value for our clients, partners, and the Pitney Bowes Software Solutions team.”

Divestment: A Key Growth Strategy

The company is dedicated to increase shareholders value. In doing so the company last year completed the deal with Platinum Equity to divest its Document Messaging Technologies (DMT) production mail and supporting software business.

Moreover, Pitney Bowes divested its SMB businesses based across six Europe countries — Sweden, Denmark, Norway, Finland, Italy and Switzerland — to BAVARIA Industries Group AG in a bid to enhance go-to-market strategy.

Updates Fiscal 2019 Outlook

Shares of Pitney Bowesfell around 8.3% yesterday, after the company updated guidance for fiscal year 2019 and revealed its intention to divest Software business.

Owing to the impact of the sale of its Software Solutions and the U.S-China trade war impact, Pitney Bowes now expects fiscal 2019 revenues (constant currency basis) to increase in the range of 1-2% over 2018 (Previously an increase in the band of 1-3%).

Adjusted EPS is projected to be in the band of 65 cents to 75 cents. The Zacks Consensus Estimate is pegged at 90 cents per share.

Free cash flow is now anticipated between $175 million and $205 million (previously $200 million and $250 million).

Bottom Line

The Commerce Servicesbusiness which consist Global Ecommerce and Presort Services as sub-segments continues to be one of the strongest growth drivers of the company. In less than five years, Global Ecommerce has grown from $20 million business to a worth of over $400 million. Going forward, the company anticipates this segment’s growth rate to accelerate, in light of expansion in overall retail volumes and customer wins.

In the last reported quarter revenues from Commerce Services improved 13% from the year-ago quarter to $410.5 million. Global Ecommerce revenues surged 18% to $282.3 million, while Presort Services of $128.1 million advanced 4% year over year.

Moreover, robust adoption of new products in digital commerce, including Commerce Cloud, is anticipated to bolster the top line.

However, as the company continues to transform portfolio and make necessary investments to bolster sales, it expects pressure on margins at least in the near term. Changing business mix is also likely to impact the bottom line adversely. Moreover, adverse changes in postal regulations across key markets may negatively impact profitability.

Zacks Rank and Stocks to Consider

Pitney Bowescarries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Alibaba Group Holding Limited BABA, Chegg CHGG and Anixter International AXE. All three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Long-term earnings growth rate for Alibaba, Chegg and Anixter is currently pegged at 28%, 30% and 8%, respectively.

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