Stamps.com (STMP), which is the leading provider of postage online and shipping software, is trading sharply lower today after reporting Q1 results last night and slashing guidance for the full year. The company's Q1 results were actually quite good as non-GAAP EPS dropped 51% yr/yr to $1.23. While this result was a big drop-off on a yr/yr basis, it was better than expected. Revenue rose 1.8% yr/yr to $136.0 mln. This also was better than expected, as analysts were expecting a revenue decline.
So, what's causing the huge sell-off in the stock today? It's the guidance for 2019. STMP slashed its non-GAAP EPS guidance to $3.35-$4.85 from prior guidance of $5.15-6.15. Revenue was also cut, although not to the same degree, but it was still pretty substantial: to $510-560 mln from prior guidance of $540-570 mln.
In case you have not been following the story, STMP announced a huge change in February. The company is moving away from an exclusive partnership with the US Post office (USPS) as it will now use other carriers. These new carriers include UPS, FedEx, DHL, and Amazon.
Why would it do this? As we said in our preview, STMP said it needs to change with the times. The shipping industry is changing rapidly. Consumers are expecting 2-day delivery and same day delivery for some items and USPS just is not capable of doing this. That's not to say STMP is completely abandoning USPS, it will still use USPS for some shipments.
The problem is that STMP has been using USPS for 20+ years and is deeply entwined with USPS and STMP has not yet developed a strong relationship with other carriers. There are lots of unknowns here. What rates will STMP's platform get charged by other carriers? How will customers react to the change away from USPS, especially its resellers, as we discuss below? This is a big change to the business model and it's not entirely clear how it's all going to play out at this point.
Another big part of the story is that many of STMP's customers/partners are what are known as resellers. These resellers have agreements with USPS where they get a discounted postage rate from USPS and then they re-sell that postage at a higher rate to their customers. There are various types of resellers, some that focus only on re-selling and it includes platforms like eBay and Etsy that do a high volume of shipping small items.
STMP says it just recently learned that a number of these reseller agreements are in the process of being renegotiated and it's leading to tighter margins for the resellers. This will, in turn, impact margins for STMP as resellers account for a significant amount of STMP's business although the company declined to quantify this.
So, while STMP is going through a big change as it transitions to a multi-carrier strategy, it's also going to feel the pinch from these reseller renegotiations. The downward guidance is really spooking investors. Recall that STMP slashed guidance in February when it announced its new multi-carrier strategy and to slash guidance again just three months later is causing much concern. Investors must be wondering if there is even more downward guidance on the way.