|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|
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
|Entry||09/07/2016 05:09 AM|
Thanks for the questions/thoughts.
On the first one: The NSA agreements were written with good intention in 2009 before aggregators such as Shipstation were launched (in 2011). Prior to any of these issues being made public, the USPS received total volumes from Intuiship and not the underlying number of customers behind this. A large public company showing sudden growth in volume is unlikely to be met with scepticism. Those who oversee the program probably got nice little bonuses while the chief decision makers are likely far removed from this small part of the entire organisation. I would add that the lady who brought the initial NSA’s into operation was pushed out of the USPS for travelling too much. Having desingend the program, it is unlikley that she would have brought nay flaws in it to light. Her replacement may look at things differently.
On your second question: It is probably true that Shipstation was already engaged in this and hence the acquired revenues could only be bolstered by the change in revenue share (a move from 50% to 90% is nearly double by the way). However, the supercharging comes when Stamps.com take ALL its existing volume and funnels it into the Shipstation connection with Intuiship which means that they gain the NSA kickback on a much larger portion of volume.
Let’s assume I am a high volume shipper. I can apply to Intuiship to get the cheap rate, then attach the coupon code I receive to Stamps.com who actually provide me the gateway I need to print stamps. Here the USPS pays both Stamps.com and Intuiship.This is how it was always intended to be.
Now lets assume I am a high volume shipper, although not large enough to earn my own NSA so I use Shipstation and again connect to USPS via Stamps.com. Stamps now earns the same fee 2.3% for providing the link between the USPS software and the customer and ALSO gets a major cut of whatever Intuiship is getting for client that individually doesn't qualify for Intuiship so the USPS ends up paying Stamps and Intuiship a commission for a customer who's volume should only enitle Stamps for a commission and not Intuiship. On a $6.10 flat rate, this means Stamps would get its original 15c (2.3%) cut + the majority of whatever Intuiship gets as well! If Intuiship is getting 20c per postage and gives 75% to Stamps, stamps effectively doubles its revenue per Stamp
|Subject||Re: Re: Questions|
|Entry||09/07/2016 10:08 AM|
Thanks for response, that's helpful.
When you say "ALL its existing volume" do you mean all existing volume of Stamps.com? If that is the case and STMP is now shifting not only the acquired volume (lower incremental revenues) but also its original Stamps.com volume (high incremental revenues) through reseller NSA's, then why were the acquisitions necessary in the first place? Do SW/SS/Endicia play some kind of integral role without which STMP is unable to shift its original volume through resellers.
Also, what makes you think STMP was not already utilizing the reseller NSA's for its existing volume and is only shifting that volume now?
Just trying to understand all the cogs in the wheel, so really appreciate your thoughts.
|Subject||Re: Re: Re: Questions|
|Entry||09/08/2016 07:42 AM|
The USPS gave the resellers the mandate to source ‘high volume’ customers, giving them attractive rates. The USPS gave Stamps the mandate to provide a software method of purchasing and printing stamps (PC Postage). They are not a high volume shipper. Lets say that $1m is the minimum volume a company needs to post to get the reseller discount. Shipstation can effectively aggregate 1,000 x $1k volume companies and then show the resellers that they are a company which meets the minimum volume threshold. Shipping aggregation software was the key tool to enable low volume shippers to repackage themselves as single high volume package shippers which effectively gives them access to a reseller agreement under the old contract (remember shipping aggregation wasn’t a consideration when initial terms were drawn). The small aggregation companies realised this and begun taking advantage of this loophole themselves but the volume was insignificant and probably went unnoticed. Stamps realised that they could use this technology and their significant volumes to extract a tonne more commission from the USPS.
Having an aggregator company is critical for approaching this loophole without obvious suspicion. Their commission rates stopped declining as soon as they acquired their first aggregator.
|Subject||Re: Downside if wrong?|
|Entry||09/08/2016 07:55 AM|
Actually the cash flow numbers you are using perpetualize certain tax benefits that will only last for 1-2 years. If you adjust the cash flow for a normalized tax rate it is $30-40m lower. Looking at consensus EPS of $7.21, ~$2 is from the tax benefit, so the actual underlying adjusted EPS is $5.21 and the stock is ~19x P/E for earnings that are stock comp adjusted...
Adding back stock comp is another ~$1.8 benefit to EPS btw ($30m benefit to CF)...so the real earnings power of this business is barely $3.5/share
Btw, if the USPS eliminates the loophole it will lower its total annual losses by ~10% so it's not immaterial
|Subject||Re: Re: Downside if wrong?|
|Entry||09/08/2016 12:26 PM|
most investors don't care about stock comp. on a modest 5-7% growth and higher take rate on the printed postage, we get to around $7 in fully taxed adjusted EPS. The question is just what is going to be the highest take-rate on printed postage? we are assuming ti maxes out at 4%. Do you have a view on it? This short ultimately works IFF USPS acts to stops STMP.
|Subject||Re: Re: Re: Re: Downside if wrong?|
|Entry||09/09/2016 09:23 AM|
we assumed a base $16/month in ARPU for the printing service and stripped that out from the revenue line. We also adjusted that number for non-service revenue and then divided what was leftover with the reported postage $$ volume.
|Subject||Re: Re: Re: Re: Re: Downside if wrong?|
|Entry||09/09/2016 09:54 AM|
What % of customers do you assume pay the $16?
|Subject||Re: Re: Re: Re: Re: Re: Downside if wrong?|
|Entry||09/09/2016 10:08 AM|
We assumed all of their SMB customers are paying that amount ($15.99). That was the only way to reconcile numbers going back to 2012/2013 before STMPs went on the recent M&A spree.
|Subject||Re: Re: Re: Re: Re: Re: Re: Downside if wrong?|
|Entry||09/09/2016 11:52 AM|
Sorry to say ima, but assuming 100% of customers pay the monthly fee makes no sense at all because it implies that:
a) they get close to nothing from the USPS (e.g. in FY10 they had an avg of 327.5k customers which at $15.99/m equals $62.84m in service revenue vs a total of $64.61m so it implies they got only $1.7m from the USPS)
b) the USPS rate is hugely variable
c) the take rate miniscule (c.10bps vs Endicia's 2.3%)
d) the take rate has been gradually declining
e) the rake rate was never anywhere close to the 4% you are modeling
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Downside if wrong?|
|Entry||09/09/2016 03:47 PM|
What the company specifically said on their latest roadshow is: (i) the vast majority of customers is paying $15.99 fixed + they get some minimal USPS commissions, (ii) the remaining small minority of customers is paying $25-160 per month fixed for higher tier service- they dont break out the numbers but our guess is the changes in the subscription tier mix could account for the variability that as you noted the oversimplified $15.99 math produces- and (iii) then there is the new revenue stream which is a sizable % take rate on printed postage, which comes via rev-share agreements with NSAs- is it this new revenue stream (which started appearing post Shipstation/Shipworks and really kicked in post Endicia, and is a much higher % of postage vs pre-deal commissions) that changed the 'take rate on postage ex fixed subscription' from ~50bps average pre deals to current ~350bps on our numbers. So the question is- how high can it go if USPS does nothing. Or, put another way, what is the best NSA discount available as % off Commercial Plus rate (which we can then multiply by rev sharing % and by max penetration of customer base to get to peak take rate). What do you think that number is?
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: Re: Downside if wrong?|
|Entry||09/12/2016 06:39 AM|
The simplified math is actuallly generous to them. If you use a higher ARPU to account for higher payers then the USPS commission rate drops even further...the actual figures do no match the story they are apparently telling...
Also, at $15.99 (which as i said is generous), the highest commission rate in the 7 years prior to acquistions is 13.5bps...your 50bps appears far off the mark.
In my write-up i showed the actual peak take rate achieved by Endicia which is the most accurate commission rate between PC postage and the USPS.
|Entry||09/15/2016 09:35 AM|
Please see link: http://createsend.com/t/j-2AEECDD278451A0D
Apparently, the USPS is very much aware of what STMP is doing (as Stamps.com previously suggested) but they are not happy at all about it. The articles goes on to suggest they are pretty "pissed" at Stamps.com. Very interesting
|Subject||Re: Re: To Novana|
|Entry||09/15/2016 11:01 AM|
We have the report but for company policy reasons / IP protection we can't post it in its entirety. It is pretty damning though. The USPS is pissed to the point they threatened to pull Stamps.com license and anyway the IntuiShip NSA deal is up for renewal in early 2017. Also, the USPS is apparently considering granting additional licenses to other players
|Subject||Re: CEO sold nearly 50% of his holdings ($9m), CFO sold 100% of his ($19m), USPS threatened Intuishi|
|Entry||03/17/2017 10:28 AM|
I am also short. I have known Kyle for many years, he is a very smart guy and the sale reinforces being short. The biggest issue (imo) is the magnitude of short interest and therefore sized accordingly. Btw, good write-up.
|Subject||Re: Re: Re: Re: CEO sold nearly 50% of his holdings ($9m), CFO sold 100% of his ($19m), USPS threate|
|Entry||03/17/2017 01:28 PM|
What do you make of management's guidance for 20% revenue CAGR over next 5 years? Add in likely margin expansion and stock buybacks that should at least offset dilution, seems like substantial EPS growth. If this short case continues to lose steam, which objectively appears to be the case, it will be an expensive ride on the short side no? Also it appears this management team has been pretty conservative with guidance historically. Just think that's worth pointing out. Curious on thoughts
|Subject||Re: Re: Re: CEO sold nearly 50% of his holdings ($9m), CFO sold 100% of his ($19m), USPS threatened|
|Entry||03/17/2017 01:41 PM|
Interesting write-up and discussion. Is the USPS renewal on a hard timeline (e.g. due 6/30/2017) or just expected sometime soon? Thanks.
|Subject||Re: Re: Re: Re: Re: Re: CEO sold nearly 50% of his holdings ($9m), CFO sold 100% of his ($19m), USPS|
|Entry||03/17/2017 02:22 PM|
Yea seems like a stretch. They stopped giving LT guidance when the m&a started in 2014. Now that they're basically through it, they're back to LT guidance. What is the 'surprise history' you're referring to? Also management has a long history of selling stock. I don't read into it much / at all. Think it's a total red herring. Objectively, it seems like you have a dominant business, with massive secular tailwinds, excellent management and cheap stock price relative to guided earnings (which if history is any guide are also consevative). I'm just taking a fresh a look at this as I've followed the company for a long time. Honestly seems more like a gigantic long here. Shorts have created opportunity to buy stock cheap.
|Subject||Re: Re: Re: Re: Re: Re: Re: Re: CEO sold nearly 50% of his holdings ($9m), CFO sold 100% of his ($19|
|Entry||03/17/2017 03:16 PM|
That's true and somewhat coincidental / part of the logic of doing these deals. Business looks like it has gone from 10% to 70% shipping so yea all of this is true about reseller agreement importance and I get it. It's interesting that management is so heavily criticized here instead of being praised for capitalizing on the industry structure and creating a big win/win for both STMP and the USPS by accelerating volume growth for them.
The crux of the short is these agreements / pricing structures changing. I'm just obersving that the stock is less than 20x 2017 EPS guidance and company is iimplicitly guiding to 20%+ compounded earnings growth for 5 years. And they are conservative.
So again main point here is in the absence of any substantial changes in these agreements, STMP stock seems likely to continue to do quite well. And frankly it seems to me that these calls for reseller agreements changing or USPS taking action seem like a stretch. And if something were imminently negative you would not see management selling stock illegally on that information. I mean come on. Danergours short from my perspective is all I'm saying. Likely a gigantic long.
|Subject||Revenue through intuiShip|
|Entry||03/22/2017 08:35 AM|
On the company’s August 2016 earnings call, STMP Management said at least three different times that business through intuiShip represents less than 10% of total revenue. 10% of 2016 revenue is $36M, which is much less than the $90M cited in this write-up. What do you make of this? Is the company somehow misleading?
|Subject||Re: Re: Revenue through intuiShip|
|Entry||04/03/2017 05:32 PM|
avahaz - where did you see that management backtracked on their statement on revenue from Intuiship? Thanks. Its a very interesting situation.
|Subject||Wait until the government acts?|
|Entry||04/04/2017 12:13 PM|
I wonder if the best way to play this is to wait until the government acts? If it doesn't, I don't think you want to be short this. And if it does, you might miss a 25% gap down -- but there will likely be much more to come. Good analogies would be LL AFTER the 60 Minutes story aired: the stock dropped from ~$60 to ~$37, but I was doubling down on my short because the market was UNDER-reacting (it later went under $10). Or the for-profit colleges: as the DOE began cracking down on abusive practices, the companies and their Wall St. lackeys said over and over that they'd be fine ("nothing to see here, move along...") all the way down, over many years.