|Shares Out. (in M):||17||P/E||0||0|
|Market Cap (in $M):||1,720||P/FCF||0||0|
|Net Debt (in $M):||40||EBIT||0||0|
|Borrow Cost:||General Collateral|
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Stamps.com has been written-up 4 times before on VIC, 3 times as a long and most recently, in February, as a short. Therefore, we won’t spend time going through the background etc.
In July, Prescience Point published a 26 pages short thesis on Stamps.com (http://www.presciencepoint.com/uncategorized/stamps-com-stmpi-july-14-2016/) alleging that the company is gaming the USPS postage reseller program and that this may soon stop , putting a large proportion of company’s current earnings power at risk.
This was followed by a compelling rebuttal from Copperfield Research that was at least in part responsible for a nearly 40% rally in STMP shares.
In this write-up we disprove Copperfield’s rebuttal and demonstrate why we think STMP is a highly attractive short at these levels.
Summary of our key findings are as follows:
From the moment Stamps embarked on its acquistion spree, it began taking a higher percentage commission from the USPS
We show that despite competitor Endicia doing much higher volumes than Stamps.com it achieved significantly lower revenues. This was because a large portion of Stamps revenue comes from monthly fees and not commissions from the USPS.
We estimate that after the acquisition spree began, Stamps.com increased its take rate by up to 60% likely by funnelling volumes through Intuiship and taking a larger cut of the postage rate by taking advantage of a loophole in its USPS contract
Stamps’ service revenue as a % of sales was in decline from 2006 until it began acquiring companies, when this decline ceased. We believe that the drop in monthly fee paying subs was offset by taking money from the USPS
Stamps publically available finances support the bears assertion that they have improperly used reseller agreements to gain this increased commission
We estimate that $90m of EBIT is at risk (75% of FY16e)
If we assume that Endicia’s 2.3-2.5% revenue share from the USPS applies to Stamps as well (identical business models at the time), $90m of revenue has come from loopholes and oversights from the complex USPS negotiated service agreements. This additional revenue will have little in associated costs and if removed, will fully hit the EBIT line.
Despite stating on their website that customers need to be doing minimum volumes to get commercial plus rates, they are offering these rates to new customers with no volume commitments
Simply by using the site, you can see that Stamps.com is offering Commercial Plus rates (reserved for volume users only) to every customer, which is a contravention of the USPS own policies.
It is our opinion that Stamps.com have clearly used loopholes and incorrect selling practices to maximise their revenue and we believe that the USPS internal audit (ongoing according to Capital Forum) will lead to a wider audit and an amendment to the Stamps.com contracts which will remove up to 75% of EBIT.
After the Capital Forum and Prescience Point’s studies on how Stamps.com was taking advantage of the USPS, Copperfield Research made a very interesting rebuttal which on the face of it seemed to completely disprove the bear thesis.
Mr. Copperfield stated that if it were true that Stamps were taking more money from USPS, then the company should be making more revenues for each $ of postage. However, if we looked at Stamps revenue as a % of USPS postage printed over the last few years, the take rate has been flat.
This chart outlines the data, which he refers to:
Over the next few pages we will walk through the economics of the business and prove beyond reasonable doubt that Stamps.com is taking more money for each $ of postage and has been doing so since it started its acquisition spree.
Whether or not the USPS will do anything about this abusive situation remains to be seen (read Capital Forum to follow) but proving they are being abused is a good start.
STMP’s take rate is 3x Endicia’s
Back in the day, before the USPS had understood how to use the internet, they entrusted three companies with selling their services online: Stamps.com, Endicia and Pitney Bowes.
Each company could give you access to the USPS and received commission from the USPS each time they sold a stamp.
The above chart, (which is from an Endicia marketing presentation dated December 2014) shows that Endicia was the largest postage printer in the market.
We know from the Stamps acquisition announcement and Newell’s old accounts that Endicia generated $60m in revenue for FY14 and FY15. If we conservatively assume that Endicia suddenly stopped growing in 2014, their $60m in revenue would correspond to a 2.3% take rate of the $2.6bn in postage printed compared to STMP’s take rate of >6%!
It is extremely unlikely that Stamps.com had a better deal than Endicia in place, especially because Endicia was doing significantly more volume.
The main difference between the two companies was that Endicia focussed on fewer high volume customers with a significant physical sales force, while Stamps.com focussed on the smaller volume customer. Although both companies listed themselves as charging a a monthly fee of $15.99, this was waived once a customer had achieved certain level of postage volume.
Due to Endicia’s concentration of high volume shippers, its revenue will have had a significantly lower contribution from monthly fees and its take rate is therefore much more indicative of the USPS commission structure than Stamps.com which includes a lot of monthly fees.
Take rate inflated by monthly sub fees
So Stamps.com’s take rate was much higher than Endicia’s because its revenue contained a much larger proportion of monthly fees relative to USPS rebates. However, over time, as Stamps’ customer base printed more per user, the amount of monthly fee waivers increased and so the take rate decreased. This can be seen in the following chart:
Starting in 2014, the take rate stopped declining, despite the fact that it was still nearly triple Endicia’s commission rate. Coincidentally, this happened to be the same year Stamps embarked on its acquisition spree.
This is where the Copperfield rebuttal fails. They’re argument is that the flat rate over the past 3 years proves that Stamps has not increased its take from the USPS. In reality, if Stamps had continued doing business as usual, its take rate would have continued declining. But it has stabilised because it began offsetting the decline in monthly fees by increasing its take from the USPS. Below we calculate this in more detail and attempt to assess the magnitude of it.
Putting it into numbers
Let’s start in FY 2013. We know how many paid subs the company had, the monthly fee ($15.99) and how much the company earned in service revenues. The numbers in green are hard numbers given by Stamps.com, those in black are our calculations explained below the table.
Looking at Q1, using Endicia’s USPS rebate rate of 2.38% and applying that to the Stamps’ $378m of postage printed implies that Stamps.com earned $9m in commissions from the USPS. The remaining $15.9m would therefore be money earned from monthly fees .Dividing this by 3 months of $15.99, we find that 330,000 customers must have paid this fee. This means 71% of subs paid the monthly fee and the other 29% didn’t as they were printing large enough quantities to waive the fee.
If we apply this methodology back to 2006, we can see that fewer and fewer subs are paying the monthly fee because more and more are passing the volume threshold. We therefore assume this trend continues as we already know that postage paid per member is increasing.
Moving forward, we have to take into account the acquisitions for which we have assumed that all the aggregators are paid subs (at the aggregators announced rates) and 20% of Endicia customers are also paid subs.
As the company starts acquiring businesses, one thing is clear: the USPS commission rate begins to increase demonstrating that since the acquisition spree began, Stamps.com has earned an increasingly large share of the USPS revenue stream.
What happens if the USPS fixes the contract?
We believe it is likely that the USPS eventually moves Stamps.com back to the fee structure that was intended when the relationship started:
This would mean that they would lose around $90m of revenue (24%) on a continuing basis and perhaps pay a fine.
Given that most of Stamps’ costs are fixed, this will flow almost entirely to the bottom line, destroying 2/3 of the company’s EBIT.
If we generously value this business on 10x EBIT (generous considering the implications for the trustworthiness of the business), its market value would be $400m, implying nearly 80% downside from current levels.
Wrapping it up
We believe we have proven that Stamps.com has been taking an increasing percentage of each postage sale, validating the bear case.
Whether or not the USPS decides to make any changes to the mechanism STMP uses to take money out of its pocket mechanism is yet to be seen, but we would think that a government agency which is strapped for cash may look into this, especially considering the increasing attention it has been receiving.
We leave you with an exercise (it takes 2 minutes):
Sign up for Shipstation
Connect to USPS by creating a new Stamps.com account to do so
Print a label for a USPS Flat Rate Small Box
Shipstation will offer this to you for $5.90
Go here http://pe.usps.com/text/dmm300/Notice123.htm#2517977 and you will see that this $5.90 is a Commercial Plus rate
Shipstation themselves have told you that you cannot get Commercial Plus pricing as you haven’t printed one single stamp, yet they are offering you a rate exclusive to high volume customers.
In other words, not only are they using their Intuiship relationship to generate supernormal profits for themselves but they are also helping consumers beat the system, ensuring everyone wins…apart from the USPS….these marriages don’t tend to end well
USPS closes loopholes in its relationship with Stamps.com
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