Stamps.com (STMP) Q4 2018 Earnings Conference Call Transcript — The Motley Fool


Image source: The Motley Fool.

Stamps.com (NASDAQ:STMP)
Q4 2018 Earnings Conference Call
Feb. 21, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Stamps.com fourth-quarter 2018 financial results call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Suzanne Park, senior director of finance.

Ma’am, you may begin.

Suzanne ParkSenior Director of Finance

Thank you. On the call today is Ken McBride, CEO; Kyle Huebner, president; and Jeff Carberry, CFO. The agenda for today’s call is as follows: We’ll review the results of our fourth-quarter and fiscal-year 2018, we’ll provide an update on elements of our business model and partnerships, we’ll provide some details on new business initiatives for 2019, and finally, we’ll discuss our financial results and talk about our business outlook. But first, let’s start with 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, 2017, quarterly reports on Form 10-Q and current reports on Form 8-K. Stamps.com undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The financial results we will discuss on the call today include non-GAAP financial measures. GAAP net income was 42.7 million in the fourth quarter and 168.6 million in fiscal-year 2018. GAAP net income per fully diluted share was $2.30 in the fourth quarter and $8.99 in the fiscal-year 2018. Our non-GAAP financial measures exclude the following fourth-quarter and fiscal-year 2018 items: 10 million of noncash stock-based compensation expense in the fourth quarter and 36.3 million in 2018; 5.6 million of noncash amortization expense of acquired intangibles and debt issuance costs in the fourth quarter and 18.7 million in 2018; and 4.2 million of acquisition and litigation settlement expenses in 2018.

Our non-GAAP financial measures include an 11.1 million non-GAAP income tax benefit in the fourth quarter and 6.9 million of additional non-GAAP income tax expense in 2018. Our mailing and shipping numbers include service revenue, product revenue and insurance revenue and do not include any revenue from customized postage. Additionally, our fiscal-year 2018 financial results, unless otherwise noted, include Metapack’s results from August 15th through December 31st. Please see our fourth-quarter 2018 earnings release and 2018 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.

Ken McBrideChief Executive Officer

Good afternoon. So before we begin today, I’d like to announce the retirement of our president Kyle Huebner. Kyle has been with Stamps for more than 20 years, and during that period, he’s really been my partner in every way. And we, the whole management team, took a dotcom failure and rebuilt it into a world leader in global e-commerce shipping software.

And his contributions as our chief financial officer, as our president, key member of our senior management team and a leader in the company have really been invaluable. So we’re wishing Kyle a great retirement as he transitions to spend more time with his family, and we’re really happy because Kyle has agreed to continue to serve the company in a part-time consulting role, so we can continue to benefit from his extraordinary strategic expertise and his deep knowledge of our industry. So, thank you, Kyle.

Kyle HuebnerPresident

You’re welcome, Ken.

Ken McBrideChief Executive Officer

With that, let me turn to our financial results. Today, we announced our fourth-quarter and fiscal 2018 results, which included fourth-quarter GAAP revenue of 170.2 million, which is up 29% year over year. Fiscal 2018 GAAP revenue of 586.9 million, which is up 25% year over year. Fourth-quarter non-GAAP adjusted EBITDA of 71.3 million, that was up 11% year over year; and fiscal 2018 non-GAAP adjusted EBITDA of 258.0 million, which was up 12% year over year.

We were very pleased with our financial performance and with the investments we’ve made throughout our multicarrier shipping businesses, including the successful acquisition of Metapack earlier in 2018. With that, let’s turn to more detailed discussion of our mailing and shipping business. Mailing and shipping revenue was $165.4 million in the fourth quarter; that was up 29% year over year. Revenue growth is driven by strong growth in average revenue per unit or per paid customer, ARPU, which was driven by continued strong organic growth in our shipping business and from contributions from Metapack.

Total paid customer metric was 736,000 and paid customers were flat versus the fourth quarter of 2017. The more modest performance of paid customers in recent quarters is consistent with our strategic shift to focusing on the acquisition of shippers, which are numerically fewer number, but where each customer has a much higher lifetime value. And with the shift in focus, our revenue had been more driven by growth in our ARPU than it has been driven by growth in our paid customers. Our average monthly churn rate during the fourth quarter was 2.9%, and that was in line with the churn rates we’ve seen over the past several quarters, down slightly compared to the 3% churn rate in the fourth quarter of 2017.

The ARPU, or average monthly revenue per paid customer, was 74.93 in the fourth quarter; that was up 29% versus the fourth quarter of 2017. Growth in ARPU benefited from continued strong organic growth in the areas of the business and the inclusion of Metapack. Shipping customers, as you know, generally pay higher subscription fees than the small business mailers, and we typically also collect additional revenue, tied to the packages that we process on behalf of our shippers. Total fourth-quarter USPS postage printed was up 1.8 billion; that was up 5% versus the fourth quarter of 2017.

The total USPS postage printed metric includes both the higher growth shipping volume and the traditional non-package mail volume, which continues to see a steady decline. For 2018, our customers collectively printed 6.5 billion in USPS postage and over 2 billion total mail pieces and packages. Of that number, packages, shipping represented over 1 billion total packages. We also continue to make strides in our diversification of our carrier relationships, including UPS, FedEx and DHL, and with international post including Royal Mail, French Post, Australia Post and with nontraditional carriers, including Amazon and our own consolidated services.

Management team and all our employees are very proud of the continued financial and business success we generate for the shareholders. So with that, let me turn to an update on some of the initiatives we’re focusing on in 2019. First, we plan to leverage the portfolio of mailing and shipping solutions to drive the growth with the multicarrier shipping offerings through Metapack ShippingEasy, ShipWorks and ShipStation brands and our USPS mailing and shipping offerings through Stamps.com and Endicia, we believe we have a complete product solution that will meet the needs of our current and our target customers, both in the United States and abroad. Our goal is to be able to meet the needs of as many customers as possible so that we can maximize our customer acquisition, maximize our average annual revenue per paid customer, ARPU, reduce our monthly customer cancellation rates, or churn, and increase our overall customer usage.

Second in our plan, we plan to invest for growth in the shipping part of the business. Our shipping customers include e-commerce merchants, warehouses, fulfillment houses, large retailers and other types of shippers. We devote a large percentage of our company’s investments to target e-commerce shippers. For 2019 and beyond, we expect to continue making these large investments in order to attract these types of shippers to our solutions.

Shipping customers are more expensive to acquire than small business customers; however, they yield higher long-term returns on investment with their typical characteristics, including higher ARPU, lower churn, higher usage when compared to other small business mailers that predominantly use our services to send mail. Based on our analysis and our trends, we expect to get a strong return in our investment from our mailing and shipping customers because they have a high expected lifetime value relative to the expected cost of acquisition. Accordingly, we plan to continue to increase our total sales and marketing expense in 2019 versus 2018. We continue to increase our investments.

We plan to continue to increase investments in direct sales, direct mail, traditional media, radio, television, search engine marketing, search engine optimization, as well as refining our customer acquisition process through affiliates, partners, telemarketing and other areas. Third, for our 2019 plan, we plan to expand the features and functionality of our solutions, particularly in the shipping part of our business. We plan to continue to enhance our technology and solutions for our target customers that include e-commerce merchants, warehouses, fulfillment houses, large retailers and other types of shippers. We plan to enhance and add new features and functionality to improve the value proposition of our solutions for shippers.

And we plan to continue to add new integrations for easier data export and import from the tools the customers use and add new carrier and partner integrations. And we plan to continue to build our support for new product features, such as inventory management, customer management and mobile solutions. We also — plan to continue launching new services, such as our international shipping program, which bundles international shipping with valuable customer methods, such as free package pickup, free insurance, upgraded delivery speeds, enhanced tracking, simpler customs procedures and other benefits. This program is otherwise known as the gap program and global advantage program.

Fourth in our plan in the international area, we plan to continue to develop partnerships and business — and market our solutions in international markets. ShipStation’s international growth was strong in 2018 with 77% growth in shipments, and we grew our customer base by 64%. In 2018, we launched 17 new partnerships internationally, including Hermes, DPD, Parcel Force, New Deal and Post, Shopware, Walmart Canada and Wix. We expanded our FedEx advantage solutions provider and logistics partner programs internationally.

We have also deepened our relationship with Amazon, launching Amazon Australia and offering the shipping with Amazon services in the U.K. for Amazon Prime sellers. We begun working on the technical design and integration to connect the 450 Metapack carrier services to the ShipStation international platform. We have also done integrations in the U.K., including things like Magento, Bigcommerce, WooCommerce, Squarespace, OpenCart and PrestaShop in order to support the e-commerce customers there.

With that, let me turn to a high-level discussion. So as we move into 2019 and we look at strategic plan for our company over the next five years, we thought it would be helpful to step back and take a broad look at some of the trends that are affecting the shipping industry worldwide. So today, I’d like to cover the following topics in this order: first, I would like to discuss the state of the current shipping industry and the trends we see playing out over the next five years; next, I’d like to discuss the significant assets we have developed and our position in the shipping market; then, we’d like to discuss our international expansion efforts; and finally, we’d like to discuss changes to our USPS partnership and a new strategic direction for the company. So first, let me start with our view of the shipping industry.

So things are changing really rapidly in the shipping industry, and as we look five years out, we see the shipping industry being dramatically different than it is today. Today, the U.S. industry is still largely controlled by the three big traditional carrier companies: UPS, FedEx and USPS. E-commerce-driven packages have become a larger and larger portion of the total worldwide package industry, and growth and trends in e-commerce are the most significant factor driving the growth in the shipping market.

E-commerce shipping is the fastest growing part of the mailing and shipping industry. According to the U.S. Commerce Department, e-commerce sales grew approximately 16% year over year in the United States, and according to some data cited by UPS, the U.S. industry package revenue is expected to grow by 40% from 2017 to 2022, and cross-border e-commerce volume is expected to grow by 28% over the next three years.

The incumbents in the U.S. shipping business having been getting more and more aggressive in their approach to e-commerce. In September 2018, UPS publicly stated that it’s implementing an enterprisewide transformation program that will enable and accelerate its enhanced business strategy, and they cited priority growth areas: One, the continued expansion of their high-growth international markets; two, the profitable expansion of B2B and B2C e-commerce; three, further penetration of the healthcare and Life Sciences logistics business; and four, enhanced services and value for small- and medium-sized businesses as the company repositions its commercial and service strategies to help the growing economic segment of the SME market. Clearly, we agree that UPS is right to focus on e-commerce and to focus on the small and medium business initiatives.

We would note that UPS partnered with Shopify in late 2017 to integrate UPS services directly into Shopify, a strategic move by UPS and Shopify, which supports UPS’s efforts to penetrate e-commerce in the small and medium business market. FedEx has also come out with some very aggressive programs that are very well suited for our e-commerce customers. Some of our customers have been offered a new special pricing program called FedEx One Rate, which is a heavily discounted new service that offers two-day guaranteed flat rate shipping to anywhere in the country at very aggressive pricing. Priority Mail from the USPS does not offer guaranteed delivery, and so this is a significant aggressive move by FedEx to capture e-commerce volumes.

FedEx is also investing aggressively in global initiatives. They are working aggressively on cross-border solutions. Those solutions originated from their acquisition of Bongo. They’ve also invested in their logistics background with FedEx fulfillment and logistics.

For example, they are doing FedEx Freight, which moves them into a very — much larger fulfillment items. Other things that FedEx has done include an alliance they formed with Walgreens for FedEx On Site, an alliance with Walmart, which anticipates adding 500 FedEx locations in Walmart stores by May 2020, and U.S. consumers can now pick up their packages at more than 9,700 FedEx retail locations at Walgreens across the country. DHL has also been working on e-commerce logistics.

The product called DHL Max, they are trying to expedite their service that utilizes Parcel Select, which is the last-mile delivery solution of the USPS. They are overlaying their own network, providing faster delivery of packages at lower costs by injecting packages more deeply into the USPS delivery network for faster overall delivery times. DHL Metro is another product that’s providing a local day and time definite window delivery service that’s cost effective and transparent. In DHL Metro, they are offering same day, next day and two-hour delivery services for packages up to 25 pounds.

We’ve also seen really strong growth in carriers that focus only on smaller geographic regions, which we call regional carriers. These carriers focus on pickup and delivery in a small number of states. They optimize their operations to be as cost-effective as possible within those states. Thus they offer — often they are able to undercut the prices of the national carriers for similar service times.

For example, here in California, we’re served by OnTrack that delivers packages to California, Nevada, Arizona and New Mexico. Other regional carriers include companies like Golden State Overnight, Lone Star, Dicom, Lasership, PittOhio, United Delivery and US Cargo. All of the most populous states have some kind of regional carrier that serves their business. And regional carriers are becoming a larger and larger factor in the overall shipping business.

Regional carriers all offer next-day delivery at very cost-effective prices in their entire regions, and thus, that is one of their key competitive advantages. There’s also been a significant number of new entrants that take a name at the package business, particularly the same-day shipping business. We expect that some of them could be successful in taking share. Uber has begun delivering packages in the trunks of its Uber drivers making their own Postmates and Deliver and also doing deliveries in less than an hour.

And there are several other companies that are focused on the same day delivery market and are receiving VC funding in order to focus in that business. And of course, the most significant driver of the e-commerce package business is Amazon. Their over 100 million Prime customer base represents a powerful business position in e-commerce, and it’s currently estimated that they now represent nearly 50% of all e-commerce in the U.S. Amazon has built an internal, captive, last mile, truck, air, rail, truck brokerage and air ocean global freight forwarding operation, and this has given it a global end-to-end delivery network for manufacturer to customer.

Starting in August 2016, Amazon also began building out a national air package network that they call Amazon Air. Currently, they are operating 27 planes with contracts to have 40 planes by June this year. With only the 27 planes that are currently in service, Amazon is already flying 4,000 flights per quarter, and they already ship 25% of their North American packages on its own planes. It already flies routes that could potentially compete with 67% of the routes of the volumes flown by UPS and FedEx combined.

Amazon also announced in January 2017 that they are investing $1.5 billion on a new Kentucky air hub to house their aircraft, and that hub can support up to 100 planes. One analyst report estimated that with those 100 planes, Amazon could be flying 55% of its U.S. packages by 2021. And now, more significantly, Amazon has taken direct aim at the package business.

They recently announced their top four new strategic initiatives for expansion in 2019, and that included grocery, healthcare, online advertising and, most significantly, and top among focus areas was shipping and logistics. With their own packages covering the high fixed cost of running their own captive logistics and package systems, their marginal cost of carrying additional packages will be low, and we expect that they will be able to offer their shipping services to third parties at a low price and still be able to make good margins. They’ve already begun this process with their efforts in what they call Shipping with Amazon, or SWA. So according to the media and the analyst reports, SWA launched a test pilot in Los Angeles and in London in November 2018.

Also according to media reports, Amazon has launched SWA with pricing that is 10% below UPS and FedEx on average. They have also promised to cut out the additional surcharges and fees that the traditional carriers charge to their customers. For example, the residential delivery surcharge. There’s also been some analyst reports that have said that Amazon is underpricing UPS and FedEx by as much as 50% in some areas.

We’re expecting that Shipping with Amazon may follow a similar strategy as Amazon did with their Amazon Web Services business, where they offered up excess capacity in their own highly reliable systems, and because the infrastructure was already built, they were able to offer the solution at very attractive rates. Amazon’s track record of disrupting an industry is well established. So their threat should be taken very seriously by every player in the shipping industry. We are setting our corporate strategy assuming Amazon will be a big global player in shipping.

Beyond just becoming a direct competitor to FedEx, UPS and USPS in the U.S., the Amazon effect, as its called, is having a big impact on how traditional retailers have been approaching their own e-commerce businesses. In order to compete with Amazon, retailers will be forced to get better and better at returns, at tracking, at showing in-cart delivery options and providing real-time delivery intelligence and in offering cost effective and reliable cross-border shipping and other aspects of providing the best possible customer experience in order to compete with Amazon’s amazing customer experience. We’d note here that one of Metapack’s key assets in their software, which can provide a turnkey Amazon-like solution traditional — to traditional retailers. We expect that retailers will also increasingly utilize ship from store, which will serve to help neutralize the advantage that Amazon has with their ubiquitous fulfillment network by utilizing the distributed geographic location of their stores.

Note also that ship from store typically does not utilize traditional last mile carriers like the USPS, but rather it uses its own local drivers. We’ve already seen a big push on ship from store by Walmart and Target and others. And so we are also setting our corporate strategy assuming the Amazon effect will continue to drive rapid change in these types of trends in retail and U.S. commerce.

So as we look at how the USPS will fare as these rapid and dynamic changes happen in shipping, we have concerns that they may become less competitive over time. And it’s really through no fault of their own. While the USPS is officially an independent organization that is supported by its own revenue from mail and packages, it has many, many rules and regulations and governmental requirements that do not allow it the flexibility to react to business trends as rapidly as it needs to do in order to keep up with the rapid pace of change in e-commerce. The USPS continues to support — to report significant financial losses, including a loss of 1.5 billion in their most recently reported quarter.

The USPS is hamstrung by the very large financial burden placed on them from the unreasonable requirement implemented in the 2006 Postal Accountability and Enhancement Act that the pre-fund — that the requirements that they pre-fund retiree health benefits to the tune of more than 5.5 billion each year. The USPS also has a significant financial burden in its requirement to support over 600,000 postal retirees that receive health and pension benefits. The USPS has oversight by congress, oversight by the postal regulatory commission and by its own board of governors. And all of these organizations have approval rights on various aspects of everything the USPS does.

One of the critical aspects in today’s very dynamic e-commerce industry is how quickly new products can come to market and how quickly an organization can make adjustments. All of these oversight bodies slow that process down for the USPS dramatically. Additionally, the executive branch has taken a keen interest in trying to fix the issues at the Postal Service, and the task force that President Trump formed in April 2018 to study the Postal Service came out with some recommendations that were made public in December 2018 in the 70-page report. The report had many recommendations, but one of its key recommendation was that the USPS should narrow its business and only provide essential services that are not already served by the private business community.

Since the majority of its packaged business is already served by the private business communities, it is unclear to us if the strategic direction of USPS will include a strong strategic focus on growing packages at all. So while the recommendations in the report are not binding on the USPS and many of them would require an act of congress to implement, they do represent one viewpoint that the USPS and the executive branch and other organizations like congress are likely to consider. Finally, one more comment with regard to the USPS. The standard delivery times in e-commerce have really been set by Amazon at two-day guaranteed delivery.

The bar was set by Amazon in its prime service, and now everyone in the e-commerce industry is — needs to pass that bar — needs to match the two-day delivery in order to compete in the e-commerce market. UPS, FedEx, DHL, all the regional carriers all have two-day guaranteed delivery solutions. The USPS does not have two-day guaranteed delivery solutions. Our customers are demanding and need two-day delivery guaranteed in order to be competitive in e-commerce in general.

And thus, in order to meet that need, they need to have carriers other than the USPS. As you look outside the U.S., the worldwide shipping business is very, very different. In the U.S., the business is still dominated by the big three carriers, UPS, FedEx and USPS. But the shipping business outside the U.S.

is very fragmented, and the customer preferences and expectations in those businesses are very different. Like the U.S., international markets and especially European markets require a much broader carrier footprint in order to provide a competitive service offering. This is why Metapack supports over 450 carriers. That’s what is needed in the international markets.

For example, in our Metapack solution, we support 85 carriers just in the U.K. in order to provide a complete solution in that business, in that market. Additionally, consumers in Europe have much different preferences. For example, they prefer to pick up and drop off their packages at local locations.

These are known as PUDOs or pick-up, drop-off locations. Also, ship from store and the ship to PUDOs is a critical success factor for retailers in Europe. So when you take a look at the assets we’ve acquired and built over the past 18 years, we’ve amassed a significant number of assets in worldwide e-commerce shipping software. That’s put us in a great position to succeed as all of these rapidly changing global shipping business trends unfold.

Worldwide, the volume of shipping done by our customers is enormous. In 2018, our customers all over the world sent over 1.5 billion packages. The total dollar value of shipping done through our various software products exceeded 11 billion. We have over 5.5 billion in U.S.

Postal Service shipping in the U.S., including packages going to both domestic and to international destinations from the U.S. We also have an additional 2 billion in U.S. shipping from all of the other carriers that we support in the U.S. And we have more than 4 billion in shipping volume outside of the U.S.

in our Metapack business group. We are currently, by far, the largest shipping partner of the USPS. With the 5.5 billion in packages that we generate for the USPS, those represent over 35% of all of the U.S. domestic priority mail packages.

They also represent approximately 50% of all of their U.S. domestic first-class packages. And we process approximately 30% of all of the international packages going from the U.S. to international destinations.

We also had significant strength in our partnership network worldwide, with over 450 partnerships where our solutions are embedded into or integrated with a partner software solution. For example, we integrate with all the major selling channels, such as Amazon, eBay, Etsy and others. We also integrate with e-commerce tools, small business software solutions, order and management fulfillment, ERP and CRM solutions, warehouse management solutions and transportation management solutions. And we work very closely with all of our partners to make sure they succeed, and the strength of our partnership network is unmatched.

We have integrations with over 40 carriers in the U.S. and a total of more than 450 carriers worldwide. Our goal is to bring the best carrier to the customer and having such a broad license allows us to meet that goal. We built a U.S.

sales force that is over 100 strong, and they are all highly knowledgeable in shipping, logistics, software and technology. We have significant internal expertise in marketing where we spend more than 65 million per year. And we have significant internal expertise in technology and software development where we spend more than 55 million a year. And we have significant internal expertise in customer onboarding and customer support.

Our track record in driving growth for our partners is undeniable. Under our partnership with the USPS, over the past 10 years, we have driven a 21% compounded growth rate for their total shipping volume. We’ve grown shipping through our solutions from approximately 300 million 10 years ago to over 5.5 billion today. In contrast to that, all of the other USPS shipping channels combined have only grown shipping by a compounded growth rate of 6% in the past decade.

With the acquisition of Metapack, we have started to build a very strong position outside the U.S. as well. And Metapack is by far the leading multicarrier solution worldwide. Our Metapack software supports over 450 parcel carriers that operate in more than 200 countries around the world.

It’s really challenging to negotiate with and integrate with the large number of carriers necessary to be considered a complete solution in each market. And Metapack has completed all these steps. That’s a huge part of why we bought Metapack. Metapack’s application programming interface, or API, is highly available, secure, reliable and they processed more than 550 million passages last year.

In addition to their core multicarrier API, they also offer significant number of sophisticated software capabilities, such as a track and trade system that provides unified and standardized tracking of a parcel’s journey, a delivery analysis engine, which provides reporting and analytics to track an individual carrier’s performance, a cross-border shipping solution, which manages international shipping, customs declaration and duty payments, and a dynamic delivery solution, which offers package delivery options based on package factors such as size, weight, stock availability, location and customer preference right at the point of purchase in the shopping cart. We expect Metapack will provide a significant acceleration and time-to-market for our current e-commerce solutions given Metapack’s large carrier library and their international expertise. As mentioned previously, all of these software features and capabilities offered by Metapack are in demand by traditional retailers because they are trying to compete with Amazon and they are trying to replicate the Amazon customer experience. Our Metapack asset has also positioned us very well to begin to take our multicarrier strategy worldwide and we also expect to bring Metapack’s solutions back to the U.S.

aggressively. Our 100-person sales team will provide Metapack with a turnkey sale solution with which to pursue the U.S. business market. Also, our significant expertise in marketing in the U.S.

will help us build the Metapack business in the U.S. Additionally, note that because of its European focus, Metapack’s significant expertise in ship from store and pick up drop off, or PUDO, will be a huge asset in the U.S. business as the U.S. market also begins to go that direction.

Metapack’s solution currently supports more than 250,000 PUDO points worldwide. With a background in some of the most relevant trends in shipping, as we look at the next five years, our goal is to position this company for the best long-term outcome as all of these trends play out in shipping. And as we look to the future of shipping, we no longer see an exclusive partnership with the USPS as the right strategy for Stamps.com. We have to align our organization to be well-positioned as the significant changes in the shipping business occur over the next five years.

One of the core principles that our team has always held up is to always focus on what’s best for the customer. What is best for our customers today will not likely be what is best for them five years from now. We need to bring the most cost-effective, the best, the most reliable package services to our customers, because if they don’t succeed in shipping their products to their customers, then their business won’t succeed. And if their business doesn’t succeed, then we won’t succeed because we lose the customer.

When our customers are offered services, such as Shipping with Amazon, FedEx One Rate, UPS’s new products, regional carriers, Uber shipping, ship from store and everything else, we have to bring those solutions to our customers so that they can always choose the best alternative for their business. The USPS is working hard to compete in the e-commerce shipping industry. But as we just mentioned, they have many constituents and they have many issues to deal with that the more nimble private carriers do not. As everyone knows, we’ve been in discussions with the USPS about a renewal of our long-standing revenue share agreement that we utilize to drive their shipping business.

We have proposed our terms of renewal to the USPS. One of our nonnegotiable items is that within our significant single carrier efforts offered under the brand name Stamps.com and Endicia, offered by our large national sales team, we will no longer be exclusive to the USPS. And that’s nonnegotiable. USPS has not agreed to accept these terms or any other terms of our partnership proposal.

So at this point, we’ve decided to discontinue our shipping partnership with the USPS so that we can fully embrace partnerships with other carriers who we think will be well-positioned to win in the shipping business in the next five years. And we now plan to turn our significant assets, such as our technology and product development, our sales force, our significant marketing budget, and our marketing organization toward a focus on partnerships with the carriers that will help our customers succeed over the next five years. We’re going to align ourselves with the carriers that we think are going to be the winners in the shipping business. We will continue to bring USPS products to our customers where it makes sense.

But in many segments of the business, we will start bringing in the more competitive products from other carriers. We are currently in discussions or already have partnerships with all of the major incumbent private carriers and we’re also in discussions with many of the new entrants into the U.S. shipping business. Note that our decision to discontinue our exclusive partnership with the USPS does not in any way impact our regulatory relationship with them or the products and services we are able to offer our customers.

The USPS regulatory group is governed in a separate part of the organization. We will continue to work constructively with them, and we will comply with all of their requirements as we always have. We have already begun redirecting the activities of our development teams, of our national sales force and redirecting our marketing budget and other activities to support our new multicarrier-focused partnership model. The short-term financial impact we will experience as we forgo our shipping revenue share with the USPS will represent some short-term pain for us over the next few years.

But as our approach to the changing times plays out over the next five years and beyond, we think those of you who continue to hold our stock for the long run will agree with our change in direction. That being said, we will take some immediate steps in 2019 to help ease the financial burden of the strategy change. First, we will immediately implement a new broad-based customers surcharge for some of our higher volume customers that are on negotiated service agreements, which we refer to as NSA customers. As you may know, all of the private carriers, including FedEx and UPS, offer their software to their customers for free.

And they pay the cost of developing and supporting that software by bundling that cost into the shipping they offer when they set their shipping rates. Our software, which is the primary software for the USPS, has also typically been free or low-cost in the businesses for these NSA customers as the USPS revenue share has allowed us to make that solution free. The revenue share we received from the USPS helped defray a significant cost we spent on technology, on customer support and on customer onboarding. Since our revenue share partnership has now ended, we will no longer be able to offer our software for free to all of the NSA customers.

So we will be forced to begin charging some customers a surcharge. Today, we began informing some customers that they will need to pay a surcharge of 3% of their shipping volumes to us in order to help us defray the costs of their shipping software since the USPS no longer is paying for the software. Second, we are going to begin aggressively driving the revenue of other carriers where we already have revenue share agreements in place. We’re also in various stages of discussions, some of which are very advanced, with both traditional and nontraditional carriers, both domestically and internationally.

The discussions are generally favorable regarding our strong value proposition, driven by the strength of our multicarrier properties, the level and number of our partnerships and our integrations, the size and strength of our national sales force and the scale and the success of our broad marketing programs. Severing our exclusive relationship with the USPS has opened up our ability to partner more deeply with other, more strategic carriers. Three, we will also bring our multicarrier offerings into the forefront of our sales process. This is ShipStation, ShippingEasy, ShipWorks and Metapack, and we will be leading with those solutions in the sales calls we make.

Finally, we will continue the business — continue to sell and market our global advantage program. And that results in revenue to us as we participate in the work share discount offered by the USPS for international packages. To sum it up, we have built an extraordinary company that is exceptionally well-positioned to continue to succeed in the multicarrier e-commerce shipping industry worldwide. And our decision to discontinue our exclusive partnership with the USPS will have a short-term negative financial impact.

However, we have always and will continue to always run the company for the benefit of our customers and our long-term shareholders. And we firmly believe that evolving our strategy to more fully embrace a multicarrier partnership model is absolutely in the best long-term interest of this company. With that, let me hand the call over to Jeff for a more detailed discussion of our financial results and our guidance.

Jeff CarberryChief Financial Officer

Thanks, Ken. We’ll now review our fourth-quarter and fiscal 2018 financial results. The discussion of our financial results today includes non-GAAP financial measures. As Ken described, a reconciliation of non-GAAP financial measures to the corresponding GAAP measures can be found in our earnings release and in our 2018 metrics on our investor website.

Total revenue was 170.2 million in Q4, that was up 29% year over year versus Q4 of ’17, and was 586.9 million in 2018, up 25% versus 2017. Total revenue excluding Metapack was 155.1 million in Q4, and that was up 17% year over year versus Q4 ’17 and was 566.6 million in 2018, and that was up 21% versus ’17. The strong growth in revenue in the fourth quarter and for the year was primarily driven by strong growth in our mailing and shipping business, combined with contributions from Metapack. Mailing and shipping revenue was 165.4 million in Q4, that was up 29% year over year versus Q4 of ’17, and was 567.3 million in 2018, and that was up 26% versus 2017.

Mailing and shipping revenue excluding Metapack was 150.3 million in Q4, and that was up 17% year over year versus Q4 of ’17, and was 547.0 million in 2018, and that was up 22% versus 2017. The growth in mailing and shipping revenue was driven by an increase in ARPU, which was primarily driven by strong growth in our mailing and shipping business, combined with contributions from Metapack. We estimate that revenue derived from our shipping customers as a percentage of total revenue in Q4 was in the low 80% range and for the year over year, in the mid-30% range. We estimate that shipping revenue excluding Metapack in Q4 was in the low 70% range as a percentage of total revenue and grew year over year in the low 20% range.

We also estimate that our mailing and shipping revenue derived from our SOHO mailers, as a percent of total revenue, was in the mid-teens and was approximately flat year over year. Mailing and shipping gross margin was 79.4% in Q4 versus 86.7 in Q4 ’17 and was 81% in 2018 versus 86.3% in 2017. The decrease in gross margins was primarily attributable to the scaling of our international offerings, including global advantage, which can have lower gross margins than our other service fee revenue components. Gross margins were also negatively impacted by the inclusion of Metapack, which under U.S.

GAAP generated a gross margin of approximately 71% in Q4 and approximately 68% for the period August 15th 2018 through December 31, 2018. We experienced year-over-year increases in our Q4 costs of sales and marketing, R&D and G&A, primarily related to the strategic investments to support the strong growth and innovation in our mailing and shipping business and to the inclusion of Metapack. Sales and marketing and R&D increased at rates greater than the rate of growth in revenue, reflecting our strategic investments, while G&A increased at a lower rate due principally to the catch-up accruals of sales tax that we had in the fourth quarter of ’17. Without the catch-up accrual in the fourth quarter of ’17, G&A would have also increased at a rate greater than that of revenue.

Non-GAAP operating income was 59.6 million in Q4, and that was up 11% year over year versus Q4 of ’17, and was 252.2 million in 2018, up 12% versus ’17. Adjusted EBITDA was 71.3 million in Q4, and that was up 11% year over year versus Q4 of ’17, and was 258 million in 2018, and that was up 12% on ’17. Adjusted EBITDA margin was 41.9% in Q4 versus 48.4 in Q4 of ’17, and was 44% in 2018 versus 49.1% in ’17. The decrease in adjusted EBITDA margin was primarily attributable to the following: lower gross margins associated with the scaling of our international offerings, higher operating expenses associated with our shipping-related investments, and finally, the inclusion of Metapack, which has lower gross margins and EBITDA margins.

Non-GAAP adjusted income per fully diluted share was $3.73 in Q4 based on a non-GAAP tax benefit rate of 0.7%. That was down 20% year over year versus $4.68 per share in Q4 ’17 based on a non-GAAP tax benefit rate of 41.1%. Non-GAAP adjusted income per fully diluted share was $11.78 in 2018 based a non-GAAP tax expense rate of 11.7%, and that was up 4% versus $11.33 in ’17 based on a non-GAAP tax expense rate of 6%. Fully diluted shares used in the EPS calculation was 18.6 million for Q4 and 18.8 million for 2018.

Q4 ’18 benefited from a reduction of our tax rate for 2018 from our previously estimated 15% to the lower actual tax rate for the year of 11.7%, which was primarily driven by option exercises in the fourth quarter. We ended Q4 with 114 million in cash and investments, which was up 35 million from the 78 million at the end of Q3 of ’18. The increase in cash and investments was primarily driven by the following: strong operating cash flow and changes in net working capital and cash from option exercises. And this was partially offset by share repurchases and the scheduled debt repayment.

During Q4, we made the required principal repayment of 2.6 million, resulting in total debt under our credit agreement, excluding debt issuance costs, of 61.4 million. During Q4, the company repurchased approximately 531,000 shares at a total cost of approximately 89 million. And for 2018, the company repurchased approximately 755,000 shares at a total cost of approximately 137 million. On January 18, 2019, the company completed its current board approved repurchase plan, with the purchase of approximately 152,000 additional shares at a total cost of approximately 25 million.

The current plan expired upon completion of the authorized repurchase plan of 90 million of stock, and the board has not authorized a successor plan to the currently expired plan. With that, let’s turn to guidance. We expect the 2019 revenue to be in the range of 540 million to 570 million, which reflects the elimination of the USPS commission revenue for the entirety of 2019. We expect 2019 revenue to continue to be driven by our continued focus on our e-commerce driven shipping business.

However, with the elimination of the USPS commission revenue, shipping revenue is expected to decline year over year. We would also expect mailing and shipping revenue derived from our SOHO mailers to continue to grow in the flat to low single-digit range year over year. Finally, we would expect our customized postage revenue to be down 30% to 40% year over year as we expect the 2019 postage rate increase to have a meaningfully negative impact on customer orders for this discretionary product. We expect operating expenses to increase in 2019, reflecting the strategic investments we made in 2018, as well as the additional investments we anticipate making in 2019, as well as the inclusion of Metapack, of course.

On a common stock basis, we expect to see operating expenses as a percent of total revenue to increase from approximately 36% in 2018 to 45 to 50% in 2019. We would also expect to see the impact of the investments to be frontloaded given the effect of 2018 headcount investments and Metapack’s operating expenses, deeply impacting 2019. while the effect of additional investments in 2019 we intend to make, will occur throughout the year. We expect fiscal 2019 adjusted EBITDA to be in the range of 145 million to 165 million, which implies a full-year adjusted EBITDA margin in the mid- to upper 20% range.

And that reflects our headcount investments, the inclusion of Metapack and our lower revenue expectations associated with the elimination of the USPS commission revenue. Similar to our operating expenses, we would expect the adjusted EBITDA margin impact to be frontloaded for the same reasons as we just discussed and accordingly expect EBITDA margins in the first half of 2019 to be lower than in the back half of 2019. We expect non-GAAP tax expense will be approximately 30% of non-GAAP pre-tax income for 2019. Our full-year 2019 effective tax rate could differ from our current estimates based on a number of factors, including option exercises.

We expect fully diluted shares to be between 18.3 million and 19.1 million in 2019. We expect fiscal 2019 non-GAAP adjusted income per fully diluted share to be in the range of $5.15 to $6.15. With our increased focus on shipping, we expect our revenues and adjusted EBITDA to exhibit seasonality reflective of our customers’ shipping usage during the year. In particular, we would expect fourth-quarter revenue and adjusted EBITDA to be meaningfully higher than other — the other three quarters due to the seasonally strong Q4 holiday shipping period and the scaling of our operating expenses.

Finally, we expect capital expenditures to be in the range of 2 to $4 million in 2019. So with that, let me hand the call over to Kyle for some additional comments.

Kyle HuebnerPresident

Thanks, Jeff. Having recently reached my 20th anniversary with the company, I’ve made the decision to retire as president. I wanted to thank the Board of Directors, Ken, the senior management team and all the employees and the people who worked in my groups for the past 20 years. It’s been an honor to work with Ken for that period and with an amazing group of people overall.

I also want to thank our analysts and investors. It was a privilege working with the investment community while serving as CFO for 14 years. I’m excited to stay involved with the company and to help drive the company toward its great future in worldwide multi-carrier shipping. And with that, we’ll open it up for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from George Sutton from Craig-Hallum. Your line is now open.

George SuttonCraig-Hallum Capital Group LLC — Analyst

Thank you. First, Kyle, congratulations. I enjoyed working with you. Good luck.

Kyle HuebnerPresident

I enjoyed working with you as well.

George SuttonCraig-Hallum Capital Group LLC — Analyst

So Ken, in your negotiations with the U.S. Postal Service, I assume your concerns of their capacity to perform in the future was met on their side by an inability or a lack of willingness to pay for your performance. Can you discuss the push and pull of those two points in the negotiation? And I assume you did an analysis of the line of benefits from your new partnership opportunities versus the impact you may see from this move. Kind of a breakeven analysis and I’m curious if you did that analysis and what sort of time point you reached on that?

Ken McBrideChief Executive Officer

Sure, George. I mean, I think, generally speaking, for us, as we see the market direction going the way it is, and we really see things changing so rapidly, we really see a dramatically different landscape in five years. And so our goal in this negotiation was first and foremost and overall to set this company up for success in the next five years. And so in every discussion we have with the USPS, we were asking for things in our various terms that we were asking for, which supported our long-term strategic view.

And of course, that included the financial compensation, which we did a trade-off between the different revenue share relationships we already have in place with some of the other carriers and a potential revenue share, our relationship with the USPS, and we did that financial trade-off with the understanding that exclusivity with the USPS was off the table. That was a deal killer, if that happened. So we would walk based on that alone, because our customers can no longer survive on just USPS. And we don’t see that as a viable option for the next five years.

Right now, as you know, we are exclusive to the USPS in our sales efforts when we offer the Stamps and Endicia solutions in our sales process. So it’s basically that was our premise is like, no matter what, this company can no longer be exclusive given the trends in the shipping market. And with all the various asks we had, that was No. 1.

Obviously, the financial trade-offs and everything else were in there. But in the end, our offer was not accepted. And so we decided that it’s best to go our own separate ways. We remain partners, so we remain friends and we’re still working with the USPS.

Their products still make sense in certain segments of the market, with certain customers, so we haven’t severed our partnership per se in working with them in the segments of the market where they offer solution that’s in the best interest of the customer. But in other segments where their solution is not in the best interest of the customer or where perhaps another solution may be as good or better, we are no longer exclusively going to push customers to the USPS. We’re now going to push them to other carriers based on essentially the overall goal of always focusing on the customer.

Kyle HuebnerPresident

The other thing I would add, George, is, I think, in terms of the breakeven, that’s really less relevant than where are we five years from now. And are we better off in this new strategic direction? So I think we always look at the company and the strategy five years out, and so that was really the focus of where things are going to be in five years and are we going to be better positioned and better off five years from now.

George SuttonCraig-Hallum Capital Group LLC — Analyst

Now you mentioned you were in late-stage negotiations with a variety of different partners and carriers. I’m curious, with your billions of dollars of postage shipped, I would assume there is somewhat of a feeding frenzy if I’m a potential partner wanting to go after that kind of volume. Can you give us a sense of your relative position of strength or weakness in these negotiations? Again, I’m assuming strength given the volume.

Ken McBrideChief Executive Officer

Yes. No, I mean, $11 billion in volume worldwide, that’s pretty significant asset that I think any carrier anywhere would be more than happy to accept and covet that type of volume. So that’s really been the day we have built the business to have that enormous volume by doing the acquisitions and the developments and the customer acquisition over the last 20 years, and we’re now in the position where we have that volume. And other carriers are certainly very interested in that volume.

So in the end, our financial incentives have to be aligned with our customer-focused business model so that, in the end, you never win by doing anything other than what’s right for the customer. But if the — what’s right for the customer aligns up with what the financial incentives are to the company, certainly we will move that volume to the right customer solution, as well as whatever provides the best financial incentive for the company.

Jeff CarberryChief Financial Officer

The only thing I’d add to that is the fact the in addition to the volume that is obviously quite attractive, it’s the underlying technology, the integrations, the partnerships — the level of involvement we have within the e-commerce ecosystem through our acquisitions and through our technology development and through our marketing effort, that is also critically important and quite attractive obviously, for the other carriers. It’s that fundamental aspect that facilities our customer’s businesses, that’s also what’s also fundamentally attractive.

Ken McBrideChief Executive Officer

And one more thing to add to what Jeff just said, which is one of our key assets is our sales team, our national sales team, over 100 people and these people are experts in shipping and logistics and software and technology. And that capability we can turn and focus on any carrier. So to the extent that we decide that a certain carrier has a better solution in a certain segment, or that it is financially beneficial for us to drive another carrier’s solutions and products, we can take 100 people and we can change their commission plan and drive them to drive another carrier tomorrow. So that team and that capability is the key asset and one of our big strengths.

It took a long time to develop that team, and they are very, very good and it’s a very strong asset.

George SuttonCraig-Hallum Capital Group LLC — Analyst

Last question relative to Amazon. You spent a fair amount of time discussing their opportunities in the shipping space, which are obviously, well documented. You have previously served them as a vendor. You’ve been a partner of theirs, they’ve been a competitor at times.

Where is your potential relationship or current relationship with Amazon?

Ken McBrideChief Executive Officer

Yes, I mean, I think you heard us say that Amazon is the powerhouse, the gorilla in e-commerce. And so we need to work with Amazon. And really everybody needs to work with Amazon. Amazon has an amazing network they built worldwide despite only having 27 going to 40 planes, they are one analyst report put it as “they’re punching way above their weight” in terms of their impact of being able to carry the packages across the country and across the world.

Because really, when you look at what they’ve done is they built their network from scratch, and they built it in the last few years and they built it with e-commerce in mind. And a lot of these other carriers have networks that are much older. And so when Amazon built their network, they focused on e-commerce, and it’s a very powerful network. And so they are going to take that network and they are going to offer up the capacity, the excess capacity above their own packages to customers.

It’s just exactly like they did with AWS. And so we are going to work with Amazon. We want to work with Amazon in our multicarrier solutions. We want them to be one of our portfolio of 40 carriers in the U.S.

We want them to be one of our portfolio of 450 carriers worldwide. And like we said, we would expect over the next five years that Amazon is going to become a significant force in the shipping business. They’re going to do so by coming in with very aggressive pricing. And so we have to bring that solution to our customers.

They need that solution. If we don’t bring the lowest cost solution to our customers, our customers will leave and go somewhere else to get it. So Amazon is a key strategic partnership for us to court and to have in our multicarrier solutions.

George SuttonCraig-Hallum Capital Group LLC — Analyst

OK. Thanks guys.

Operator

Our next question comes from Zach Cummins from B. Riley FBR. Your line is now open.

Zach CumminsB. Riley FBR — Analyst

Hi. Good afternoon. Could you provide a little more color around some of the potential fees or surcharges that you may have to charge some of these vendors that have NSA agreements in place at this point?

Ken McBrideChief Executive Officer

Sure. Yes, I mean, it comes down to all the other — all the carriers in the market, they offer free software. They go in to pitch the customer on their shipping capabilities, their logistics capabilities, their delivery times, the value of what they bring in terms of the cost of the shipping versus the delivery time, the guaranteed delivery. They come in and they pitch their shipping capabilities.

And then when the customer agrees to use that, they do not say, “And oh, by the way, it’s going to cost you X for our software.” They say, “Here, install this on your computer and you’re up and running.” It’s a free software solution from all the carriers. And up until now, USPS has been free as well because we have made it free for these larger customers, in particular, because the USPS has paid us that rev share. Of course, when they stopped paying for the rev share, we can no longer offer free solutions. So we need to go back and basically tell these customers like since the USPS stopped subsidizing your technology, you now have to pay for it.

And in the end, you kind of look at how UPS and FedEx and other organizations get paid for that technology. They just bundle it into their price. And that’s what USPS was effectively doing as well — they were bundling into their price and they were taking, they turn around and pay us a percentage of their shipping. So their shipping costs were a little bit higher so they could pay us.

So what we’ve done is basically decide not to pay us that fee, so effectively, the customer’s cost is going up by more than their rate increases this year, by an additional 3%. So that’s just going to be the technology fee that we have to charge, because with our significant spend on development and technology, and onboarding and sales, we can’t afford to give it away for free if we’re not being paid.

Zach CumminsB. Riley FBR — Analyst

Understood. And in terms of your guidance for the upcoming year, is there anything from other carrier partnerships that’s baked into the guidance? Or potential relationships that could materialize, that could present some potential upside to the guidance you provided?

Jeff CarberryChief Financial Officer

Well, Ken mentioned, we have some revenue relationships with some carriers. That, of course, is already baked in. Things that are currently still in negotiation, obviously, are not baked in any probability-weighted basis. So I think that, obviously, as we execute on the strategies that Ken kind of went through today, that certainly represents upside for the business for ’19 and beyond.

But the budget incorporates really what we currently have on the table in terms of agreements and revenue arrangements. And not what we don’t currently have or what we expect to have.

Zach CumminsB. Riley FBR — Analyst

Understood. And then finally for me. To just clarify, is all the USPS transaction revenue that you had in place, is that all gone at this point? So is it fair to almost consider you as a pure subscription business?

Jeff CarberryChief Financial Officer

No. So as we have talked about in the past, there are two components to the revenue with regard to USPS volume. The first is our direct arrangement with the USPS, which is the commission agreement that we talked about that we’ve walked away from, that is terminated. The other are commercial arrangements with various parties in the ecosystem that support the USPS, principally the resellers.

So those revenue sharing arrangements still exists, so there is still transactional revenues, to use the term that you used, that’s still in our guidance and our numbers. But to be clear, the commission component, which is our direct relationship with the post office on a revenue basis, that is now gone.

Zach CumminsB. Riley FBR — Analyst

That’s helpful. Well thanks again for taking my questions.

Operator

Our next question comes from Tim Klasell with Northland Securities. Your line is now open.

Tim KlasellNorthland Securities — Analyst

Hey, guys, and congratulations, Kyle. Good to hear you’ll still be around for a little while. First question around the — the way I understand it is you had multiple contracts with the USPS, it came up for negotiation at various different times. Have all those been bundled, are all those sort of the direct feeds from the USPS, all being terminated at the same time? Or will that be sort of a phased or gradual thing?

Jeff CarberryChief Financial Officer

There are a variety of engagements — agreements with USPS. The principal revenue agreements is the commission agreements, and that is gone. There are other more, I would call, more operating agreements. And to be clear as well, our PC Postage license that, of course, continues.

That’s completely separate. So this is really just the direct revenue sharing arrangement with the USPS that is at issue today. The other agreements, I would not expect to have any issue with.

Tim KlasellNorthland Securities — Analyst

OK. And is it possible in the back and forth that the USPS comes to some form of agreement with you? Or do you think it’s a done issue at this point?

Ken McBrideChief Executive Officer

Well, I mean, like I said, it’s a done issue for us unless exclusivity is taken off the table because we have to embrace other carriers now. We can’t afford to continue to just be exclusive to the USPS. It’s just not in the best interest of our customers, and in the end, if our customers can’t receive the best solution, don’t get the best offer in the market, then they will leave us. And in the end, we will lose, no matter what.

So exclusivity is off the table. That’s been a real sticking point. And you can always — somebody can always come back to the table, but at this point, we’ve walked and we have no expectations that we will have an agreement going forward.

Tim KlasellNorthland Securities — Analyst

OK. Good OK. Good OK fair enough. Then you mentioned the fee, the volume fee that you are going to charge for some of the larger shippers.

I believe it was 3%, if I wrote this down correctly. Do you think the USPS will compensate them for that so it’s relatively neutral to those large volume — those large shippers? Or do you think they will basically get hit with the next 3% fee?

Ken McBrideChief Executive Officer

I mean, they certainly, they could go start paying those customers direct and they could turn around and sign the check over to us. It seems kind of an odd thing to do. But, certainly, they could approach it that way. In the end, in order to compete in the market, you really need free software.

And so it will confuse the sales process for the USPS to have to say, “Hey, use our solution, and these are all the reasons why we’re better than other carriers, but once you agree to use it, here’s another fee on top of that that you will have to pay because the technology isn’t free.” Certainly a more confusing sales cycle. And I think that that will cause them to have more issues when they go into accounts up against FedEx and UPS that don’t have to say that. So certainly, it will be an encumbrance to their sales process. It really makes no sense, but in the end, UPS and FedEx paid for their solutions by spending money on development, and then they’ve bundled the cost of that solution into their shipping rates.

And up until now, that’s what the USPS did as well, but they’ve decided to walk away from that. And so there will be a little more of a confusing message in the market. But that’s what they’ve decided to do.

Tim KlasellNorthland Securities — Analyst

OK, great. And then sort of as we jump over to the other carriers out there, UPS, FedEx and others, will you believe that they will ultimately sort of use your software as their solution you would, in essence, be developing for free? And then will, sort of a follow-on to that, could there — what sort of a rev share, if you will, are they proposing, are you guys negotiating with them? Is it similar to what you’ve been — the agreement you had with the USPS? Or similarly, maybe you help us understand how those commercial relationships will develop.

Ken McBrideChief Executive Officer

Yes. I mean, I think as you look at what offering in the market makes the most sense for e-commerce, it’s really our multicarrier solutions. Depending on who you are, it could be ShipStation, it could be ShippingEasy, it could be ShipWorks. And if you’re a large retailer, it could be Metapack for that type of segment.

So I think the carriers will want to offer the best solution to the customer, and the best solution for e-commerce is ShipStation, ShippingEasy, ShipWorks and Metapack. And so when we go into these accounts with UPS or FedEx or any of these other carriers, Amazon or the regional carriers, all of the carriers, as we approach these accounts, if that shipping solution makes sense for that customer and we sell them on moving their volume to that carrier, we will couple that with an offer for utilizing ShipStation or ShippingEasy or ShipWorks, depending on what the customer need in their operations is. So ultimately, we expect that the offer for technology will be one of our multicarrier solutions.

Tim KlasellNorthland Securities — Analyst

OK. And I have one final question. Why now? Obviously, this is something that’s been percolating out there for a while. Was there a specific event that caused you to make this move now? Or maybe you can help us understand that.

Ken McBrideChief Executive Officer

Well, yes, I mean, something pretty significant happened in the last month, which is Amazon came out and they said, “Hey, we’re going after shipping.” And it was the first time they have publicly acknowledged that. There were some rumors and questions and statements and Wall Street Journal articles that kind of hinted that this may happen. But then Amazon came out and said it point blank. “This is one of our four focus areas.

And we are now competing in the shipping market.” And in fact, in their 10-K, for the first time, the included shipping and logistics as one of the markets that they compete in, and that got filled last week. So Amazon has announced that they are now — they are in shipping. And we expect them to be, based on their track record and the industries they’ve gone after and the mile-long list of companies that they’ve managed to disrupt and drive down to, in some cases, 0 revenue, we expect them to be very successful in the market. So that is a big catalyst for us demanding that we remove the exclusivity from our agreement, and that’s where the talks broke down.

Tim KlasellNorthland Securities — Analyst

That’s very helpful. Thank you.

Operator

Our next question comes from Allen Klee with Maxim Group. Your line is now open.

Allen KleeMaxim Group — Analyst

Yes, hello. If you could take a shot at this new base revenue run rate, if we were to look out five years and you were able to meet your goals, what do you think kind of a revenue growth rate and margins, how margins could be? How would you view that?

Jeff CarberryChief Financial Officer

Yes. That’s a very good question. I think at the end of the day, when you look at what fundamentally underpins our business are e-commerce trends, that’s what we’re correlated with. So if you are looking longer term, once we have additional revenue deals in place, whatever those economics may be, ultimately what that growth in revenue is going to be predicated on is and correlated with, is going to be e-commerce trends.

And those look to be systemically quite strong. I mean, we are seeing e-commerce trends in the U.S. in the mid-teens. According to Eurostat, the European Union is growing sales at about 17% last year and it has been growing in the mid-teens as well for the last several years.

So you’re looking at strong fundamentals that underpin our business, that being e-commerce consumption. So you also look at our business when we were purely subscription based. This is quite a bit of time in history now, but we were growing 10% to 15% and had EBITDA margins of around 30%. So if you look at the fundamentals of our business, and the underpinnings of what else might drive the business with our laser focus on shipping, I think the future of the business is extraordinarily bright.

As Ken mentioned, there is going to be a few years here where obviously things are going to be challenged from a financial standpoint relative to our historical performance given the realignment of our strategies, which will take time to effectuate and given the size of the commission revenue, obviously, it will take some time. But in terms of the 5-year window and growth rates and margin profile, I think that window looks extraordinarily bright.

Ken McBrideChief Executive Officer

I would just add that I think there’s a new, over the next five years, U.S. market aside, which we have all the trends that we talked about in the U.S. market, the entrance of Amazon and the other carriers getting much more aggressive, the uprising of regional carriers and the new entrants into the market, a lot of dynamics happening in just the U.S. market.

When you look at the international market, it’s kind of a greenfield for us. There is no solution out there like ShipStation or ShippingEasy or any of our multicarrier properties. There is nothing. As we look worldwide, that solution doesn’t exist.

And so — and like I mentioned, in order to have that solution and market that solution in all of the European countries and really worldwide, you can’t do that unless you have a very broad carrier portfolio. For instance, in the U.K. in order to market a product like ShipStation, we have to support those 85 carriers for that specific market. And we also have to support all the consumer demands and preferences like the pickup, drop-off and the ship from store.

That market in the U.K., as an example, is a lot more complicated from just the sheer number of players and the way the network works and the customer preference , the market is very different. And because of our Metapack acquisition, we think we have an incredible first-mover advantage in that market. As we pair ShipStation and its incredible UI and capabilities on the front-end, with Metapack and it’s very broad carrier library on the back end, we put those two together and we have a solution for really every market in the world where we want to go after where it make sense. And so that, in the next five years, is a brand-new opportunity.

If you look at the U.S., like where we are today really USPS-focused, USPS does $20 billion a year in shipping. And as you look worldwide, the worldwide market for shipping is $260 billion. So you can see the total addressable market going up dramatically for this company as we focus on worldwide multicarrier shipping.

Allen KleeMaxim Group — Analyst

And then, I’m not sure if you mentioned this, but what does your guidance imply then for gross margins and operating margins?

Jeff CarberryChief Financial Officer

So for EBITDA margins, it implies mid- to upper 20% range, and then, obviously, compression on the gross margin side as well given the elimination of the commission revenue, as well as the lower gross margin profile of Metapack. So compression on both.

Allen KleeMaxim Group — Analyst

OK. And then you used up your buyback and you didn’t reauthorize it. Is there — what’s the rationale behind that? Was there a consideration maybe to up it again?

Ken McBrideChief Executive Officer

Yes. No, I think the board is — there was no sense of urgency in terms of upping it again. I think some of the changes in the business model, I think we just wanted to kind of get those out there and explain them given some of the dramatic changes, we didn’t feel like we could really implement a new repurchase plan until those changes are discussed publicly. So now that they are, we’ll go back and revisit our repurchase plan with the board.

Allen KleeMaxim Group — Analyst

Thank you so much.

Operator

And our next question comes from Kevin Liu with K. Liu & Company. Your line is now open.

Kevin LiuK. Liu and Company — Analyst

Good afternoon. A point of clarification. When you’re talking about the exclusivity that was in place with the USPS, was that something that has always been present or are you now only reaching agreements with other carriers because you terminated the contract?

Ken McBrideChief Executive Officer

That’s always so — we have five brands well, six, I guess. We have Stamps.com, we have Endicia, ShippingEasy, ShipWorks, ShipStation and now Metapack. And so the exclusivity we had was for the offering of our USPS only solutions, which are offered under the brands Stamps.com and Endicia. And so those are the solutions we led with and the sales process with our 100 salespeople.

Those are the solutions that we offered to the customer, we would go into these accounts, and once we convinced them to use the USPS, the offer would be, and here is your Stamps.com our Endicia software in order to implement that for free, of course. And so as we go forward, we will be leading with other carriers and ShipStation or ShippingEasy or ShipWorks, like I mentioned, each of those products has a different feature set and a different capability. But we weren’t able to do that with under the exclusivity: our products, our Stamps and Endicia products had to be USPS only. And so now as you go into these accounts, we can lead with any of our brands that include any carriers, and it’s really whatever suits the customer best in our sales process.

As we push other carriers, we offer whatever product suits that customer best. We can now support other carriers within the Stamps.com and Endicia products. And so it really untied our hands to be able to focus on what is really in the best interest of the customer, both from a package perspective and also from a technology perspective.

Kevin LiuK. Liu and Company — Analyst

Understood. And for one of you multicarrier solutions, you guys do have a USPS NSA. Would you anticipate being able to do that for the remainder of the multicarrier solutions? Or does the kind of the current status of your relationship with the USPS put that in doubt?

Ken McBrideChief Executive Officer

Yes. No, we do and we’ve been transparent about one of our properties, ShippingEasy has a NSA agreement with the USPS. And that agreement is really between ShippingEasy and the USPS. In our other properties, we work with the third-party resellers, and we receive revenue shares in working with them like any other partner in order to align our interest with our partnerships in the reseller market, we get a share of their revenues.

So it’s really only the ShippingEasy solution where we have a direct negotiated service agreement with the USPS. And by the way, that product is primarily, the volume in that product is almost exclusively USPS. So that organization, even though it’s multicarrier, really focuses on driving USPS volume.

Kevin LiuK. Liu and Company — Analyst

Understood. And I’m sure you probably won’t provide the specific number on this. But any sense you give us in terms of what percentage of your customers’ postage printed is tied to the larger folks with negotiated service agreements that you have to pay the surcharge?

Jeff CarberryChief Financial Officer

I’m afraid, Kevin, we really can’t break that detail out.

Kevin LiuK. Liu and Company — Analyst

And then just lastly for me, what is kind of assumed for Metapack’s contribution to your fiscal ’19 revenue guidance?

Jeff CarberryChief Financial Officer

Yes. So we don’t break it up separately in guidance, but if you look at the results, and you kind of annualize the results, which obviously, is public as a segment, and our filings — it will be in the upcoming K — you’re looking at revenue between 50 and $60 million on a U.S. dollar basis assuming static FX rates. So we don’t break it out separately but looking at year-to-date results, one can extrapolate a 50 to $60 million business.

Operator

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Ken McBride, CEO, for any closing remarks.

Ken McBrideChief Executive Officer

Thanks, everyone, and thanks for sticking with us for one hour and 40 minutes. And so if you have any follow-up questions as always, you can contact us through our investor relations website, investor.stamps.com, or you can call our customer — or sorry, our investor relations number at 310, 482-5830. Thank you. And congratulations, Kyle.

Kyle HuebnerPresident

Thank you, Ken.

Operator

[Operator signoff]

Duration: 90 minutes

Call Participants:

Suzanne Park — Senior Director of Finance

Ken McBride — Chief Executive Officer

Kyle Huebner — President

Jeff Carberry — Chief Financial Officer

George Sutton — Craig-Hallum Capital Group LLC — Analyst

Zach Cummins — B. Riley FBR — Analyst

Tim Klasell — Northland Securities — Analyst

Allen Klee — Maxim Group — Analyst

Kevin Liu — K. Liu and Company — Analyst

More STMP analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Stamps.com
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Stamps.com wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 31, 2019





Source link

WP Twitter Auto Publish Powered By : XYZScripts.com
Exit mobile version