Stamps.com's (STMP) CEO Ken McBride on Q2 2016 Results - Earnings Call Transcript

Stamps.com Inc. (NASDAQ:STMP) Q2 2016 Earnings Conference Call July 28, 2016 5:00 PM ET

Executives

Jeff Carberry - Vice President, Finance

Ken McBride - Chief Executive Officer

Kyle Huebner - Chief Financial Officer

Analysts

Kevin Liu - B. Riley & Company

George Sutton - Craig-Hallum

Allen Klee - Sidoti

Tim Klasell - Northland Securities

Darren Aftahi - ROTH

Allen Klee - Sidoti

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Jeff Carberry, VP of Finance. You may now begin.

Jeff Carberry

Thanks very much. Good afternoon everyone and thanks for joining us today. On the call today is Ken McBride, CEO; and Kyle Huebner, CFO. The agenda for today’s call is as follows. We will review the financial and business results of our second quarter 2016; then we will talk about our business outlook; and finally we’ll discuss elements of our business model and partnership arrangements.

But first, 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 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, 2015, quarterly reports on Form 10-Q and the 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.

As a reminder today, the financial results include income and adjusted EBITDA measures we discussed on the call, are on a non-GAAP basis and exclude the following second quarter 2016 items: $8.4 million of non-cash stock-based compensation expense, $3.3 million of non-cash amortization expense from acquired intangibles and debt issuance costs, $0.5 million of expenses related to the ShippingEasy acquisition, and finally $8.7 million of non-cash income tax expenses. Please see our second quarter 2016 earnings release and past 8-K filings for a reconciliation between GAAP and non-GAAP measures.

Now with that, let me hand the call over to our CFO, Kyle Huebner.

Kyle Huebner

Thanks Jeff. Thank you for joining us today. Today, we again announced record quarterly results including record total revenue of $84 million, which was up 74% year-over-year. Non-GAAP adjusted EBITDA of $38.2 million, which was up 116% year-over-year and non-GAAP earnings per share of $1.94, which was up 100% year-over-year.

On July 1, we completed the acquisition of ShippingEasy, an Austin based company that offers web based multi-carrier shipping software that allows online retailers and ecommerce merchants to organize, process, fulfill, and ship their orders quickly and easily. This acquisition represents another strategic investment for us and our shipping business.

ShippingEasy augments our portfolio of shipping solutions to better meet the needs of our customers and help grow USPS package volumes. In addition to a very impressive web based technology platform, ShippingEasy focuses on providing simple and efficient value-added features for shippers.

ShippingEasy targets customers that can benefit from sophisticated features in an easy to utilize interface to help them grow their business, which in turn helps grow package volume. ShippingEasy has an inside sales force, which has proven very effective in acquiring customers. The purchase price was $55 million in cash, which was funded from current cash balances and will be reflected in our Q3 results.

Now that the acquisition is closed, we will start the process of leveraging our company’s collective resources and expertise and sales and marketing, customer service, product development, and technology innovation to help accelerate their growth. Now let’s turn to a discussion of our mailing and shipping metrics.

Mailing and shipping revenue was $81.5 million in Q2, up 72% compared to Q2 of 2015. Paid customers in Q2 were 646,000, up 14% versus Q2 of 2015. Average monthly revenue per paid customer, or ARPU, was $42.06 in Q1, up 51% versus Q2 of 2015. Paid customer churn in Q2 was 3.2%, which was down versus the 3.6% in Q2 of 2015. USPS postage printed through our solutions was $1.2 billion in Q2, which is up 114% versus Q2 2015.

Our metrics reflect the continued evolution of our business as we have increased our focus on our shipping business as compared to our traditional small business. Shipping customers are more expensive to acquire, they yield higher long-term ROIs as they typically achieve higher ARPUs, lower churn rates, and higher postage printed, so we have shifted more of our focus of our sales and marketing spend to acquiring shipping customer.

Now turning to the financial results. Total revenue was $84 million in Q2, up 74% versus the second quarter of 2015, and total revenue excluding our recent Endicia acquisition was up 30% versus the second quarter of 2015. Mailing and shipping revenue was $81.5 million, up 72% versus the second quarter of 2015. Mailing and shipping gross margin was 86.1% in Q2 versus 81.3% in Q2 of 2015 and customized postage gross margin was 20.8% in Q2 versus 17.9% in Q2 of 2015.

We experienced year-over-year increases in our Q2 costs of sales and marketing, R&D, and G&A, primarily related to our acquisitions and our investments to support the growth in our mailing and shipping business. However, these costs as a percent of revenue have all declined and remain flat as we scale our business.

Non-GAAP operating income was $37.1 million, up 121% versus Q2 last year. Adjusted EBITDA was $38.2 million in Q2, up 116% versus Q2 of 2015. Adjusted EBITDA margin was 45.5% compared to 36.6% in Q2 of 2015. Non-GAAP adjusted income per fully diluted share is at $1.94, up 100% versus $0.97 per share in Q2 last year.

We ended with $123 million in cash and investments, up $2 million from the $121 million at the end of Q1. Free cash flow generated by the business was approximately $36.3 million in Q2. Free cash flow is calculated as non-GAAP adjusted income of $35.3 million plus D&A contained in operating expenses of $1.1 million less capital expenditures related to the business of $0.2 million.

During Q2, we made debt repayments of approximately $11 million and ended the quarter with approximately $151 million in debt under our credit agreement as of June 30, 2016, and our current interest rate is approximately 1.9%. During Q2, the company repurchased approximately 305,000 shares at a total cost of $26.6 million. On July 27, 2016, the Board of Directors approved a share repurchase program that authorizes the company to repurchase up to $40 million of stock over the next six months.

Now turning to guidance. We expect fiscal 2016 revenue to be in the range between $320 million to $345 million. This compares to previous guidance of $310 million to $330 million. We expect fiscal 2016 non-GAAP EPS to be in the range between $7.00 to $7.50 per diluted share. This compares to previous guidance of $6.00 to $6.50. Non-GAAP EPS exclude certain non-cash and non-recurring items as outlined in our earnings release.

Our guidance includes the ShippingEasy acquisition starting in Q3, but does not assume any other potential future acquisitions or other unanticipated events. We expect – estimate sales and marketing, R&D, and G&A to be up 2016 versus 2015 as we continue to invest in the business, and we will have a full year of Endicia results and half a year of ShippingEasy results.

We expect fully diluted shares will in the range between 18 million to 19 million shares in 2016. We expect capital expenditures in the business to be approximately $3 million to $5 million in 2016. With our increased focus on shipping, we expect our revenue and financial results to exhibit more pronounced seasonality as compared to past years. We did see Q1 seasonal strength carry over into Q2. However, Q3 is our slowest seasonal quarter of year. So, we do expect Q3 results to be down versus Q2 reflective of shipping seasonality patterns.

With that let me hand the call over to Ken.

Ken McBride

Thank you, Kyle. So at this time I’d like to spend some time giving the company’s perspective on some of the misleading and inaccurate material that’s been released by the various sources, which have been attacking Stamps.com’s business and the practices of its business partners.

Most of the focus is going to be on the subject of US postal service negotiated service agreements or NSAs in a segment of that category called USPS resellers and how these NSAs and USPS resellers relate to Stamps.com’s business. This is a really complicated topic, so I am going to – and I’m going to go into a lot of detail in order to explain it. So please bear with us as we work with this.

First, let me give a brief history of the NSAs reseller programs and the pricing structures in our industry. The USPS pricing structure names change over time, but the main group of rates for packages as of today includes four categories. First, retail rates are those available to consumers a post office or at USPS.com.

Second, commercial base is a standard discount business rate offered by many online solutions and it averages approximately 13% of the retail rates. This is the standard discount that is offered to the vast majority of our customers.

Third, commercial plus rates provide an additional average discount of approximately 3% versus commercial base. Customers can receive these discounts directly from the USPS with a volume commitment or they can receive these rates through a reseller arrangement without a volume commitment.

Fourth, negotiated service agreements or NSA's are customized negotiated contracts between the Postal Service and an individual customer reseller, which provides discounted rates. That vary based on each agreement and where the discounts are typically below commercial plus rates. Before each NSA is submitted by the USPS for regulatory approval, the Postal Service has made a business determination that the proposed NSA is a good deal for the Postal Service, helping their the overall profitability picture.

The USPS is not supported by tax-payer dollars and there are requirements that all NSA's are profitable for the USPS. Reseller rates are a form of NSA where the USPS signs an agreement that allows a reseller partner to buy postage at one great and then resell that postage to another USPS customer at a higher rate.

Companies with reseller NSA's come in many forms from companies that are just in the business of being resellers like to internship to marketplaces like eBay and to third-party logistics provider like fulfillment houses. The USPS process for setting rates for customers is very complex and difficult, which limits their ability to negotiate individual rates with smaller customers.

Private carriers such as UPS and FedEx on the other hand are able to offer individual customers negotiated discounts in a flexible and highly responsive manner. The USPS made reseller rates available as a deliberate strategy to drive package growth and accomplish its business goals of competing more effectively with the private carriers. And through the reseller partnerships the USPS is able to streamline its administrative burden creating a more efficient mechanism to provide competitive rates to a greater number of customers.

Without the reseller program, in order to provide discounts to smaller shippers, the USPS will be forced to individually negotiate contracts and renewals and obtain regulatory approvals with tens of thousands of customers. So, with that background here are the main arguments that are being advanced in the materials attacking Stamps.com and its partners as we understand them.

First, that the reseller programs are being misused by Stamps.com and its business partners. Second that the USPS is unaware of the alleged misuse of the reseller program and once they become aware, they or other agencies related to the USPS will investigate. Third, investigations will determine that the reseller program isn't adding value, but is solely cannibalizing volume. Fourth, once they determine this, they will shut down the program in 30 days. And finally, when that happens Stamps.com will lose a significant portion of its revenue and its EBITDA.

A similar but alternative point also being advanced is that the USPS will change rate structures in 2017 in a way that will shut down or cripple the reseller program. Clearly the goals of those circulating these theories is to create doubt around our business and our financial model and then to capitalize on the negative impact on our stock price.

So we're going to examine each of these arguments in turn and explain why they are without merit. First main argument is that the reseller program is being misused because, one, reseller discounts are being improperly given to low volume shippers; two, reseller discounts are being improperly given to existing customers; and three, because Stamps.com and IntuiShip are so closely tied that they are perhaps even one company. So let us now address each of these.

First contention that is without merit is that reseller discounts are solely meant for high volume shippers, but instead being properly provided to lower volume shippers by Stamps.com and its partners. In reality, highpoint shippers do not need to work with resellers at all. They're able to qualify for discounts directly from the USPS either through a direct commercial plus agreement or via a direct NSA of their own. The segment and the market that is explicitly not addressed through direct U.S. guest discounts are lower volume shippers such as early stage e-commerce merchants that are very valuable to the USPS, but who are unable to qualify for direct USPS discounts. For these lower volume shipping customers, the USPS purposefully decided to address and serve that statement through its reseller partnerships. The resellers are explicitly authorized by the USPS to offer discounted rates to smaller shippers at rates below commercial base pricing.

The second meritless contention is that the reseller rates were only meant for new customers. An important goal of the reseller program is in fact acquiring new customers, but another important goal is the retention of existing customers. In other words, the true purpose of the reseller program is the generation and the retention of package volume for the USPS. It may be helpful now to explain a typical life cycle progression of an e-commerce shipper. Small ecommerce shippers typically start out using the USPS as their one and only carrier.

The reasons that USPS becomes the first carrier maybe because the USPS is familiar and easily accessible with its ubiquitous retail network, it may be because the shipper starts off selling in a single marketplace like Amazon or eBay where the USPS is the featured carrier, it may be because the USPS offers many attractive benefits to small shippers such as convenient package pickup at a home office or it could be many other reasons. As the shippers business continues to grow, they begin to generate enough volume to consider optimizing their costs by adding a second private carrier such as, for example, FedEx or UPS.

At this point in their life cycle, they may adopt a multicarrier solution or they may simply use several single carrier solutions in conjunction. For example Stamps.com’s USPS mailing and shipping client along with FedEx.com. Once the second carrier is adopted in the shippers business, USPS volume doesn't typically shift in a binary fashion, but rather chips package by package based on the best price and service available from each carrier. In this case, whether or not the customer is labeled a “existing USPS customer, the USPS has lost package volume on that next shipment where they're not competitive and they may continue to lose package volume”.

By partnering with resellers and offering these existing USPS customers discount at this point in their life cycle, the reseller rates are able to retain package volume, which the USPS may have otherwise lost to private carriers. Whether you label a package as new volume or existing volume, each and every package is critical to generating USPS growth and every package is financially import to the USPS. We like to additionally note here that while retaining USPS shipping volume is an important goal, it is also not a common practice of ours as only approximately 3% of our customers have been offered discounts with the reseller rates in order to retain their volume with the USPS.

The third incorrect contention supporting the alleged misuse of the reseller program is that Stamps.com and IntuiShip are so closely tied that they are perhaps even one company. The evidence for this is apparently that new customers signing up for IntuiShip are first directed to create a Stamps.com account. In fact the reason this occurs is because IntuiShip customers like all reseller customers need a PC postage account in order to pay for their postage.

We would note that it is very common among our over 400 partners for them to acquire new customers to immediately signup for a Stamp.com or an Endicia account. Additional evidence is that IntuiShip and Stamps.com co-brand their marketing materials. However, working together to gain new customers through joint marketing is a very common practice with many of our partners. It’s a practice that’s common in any industry where partnerships are important.

The final point is that IntuiShip does all of its domestic small parcel business through Stamps.com. This is simply because the vast majority of all reseller volume not just IntuiShip runs through either Stamps.com or Endicia. IntuiShip operate independently as Stamps.com with their own management team and their own sales force. Finally, we would note that our business with IntuiShip represents less than 10% of our total revenue.

Second main argument – negative argument being advanced in the investor community and which follows on the prior argument is that the USPS management is unaware of the alleged misuse of their reseller program and now that they have been made aware of it, they or other agencies related USPS will proceed to investigate it. In our view, the USPS management has a very thorough knowledge of the reseller market and the USPS management is very deliberate in the steps it has taken in the market; they audit data, they hold regular business reviews with all of the resellers.

Furthermore, NSAs and reseller agreements are negotiated, endorsed and promoted by the U.S. Postal Service under strict regulatory oversight and each one is approved by both the Postal Regulatory Commission and the USPS Board of Governors. We worked very closely with senior members of the USPS management team on a weekly basis. In our view, the NSAs and the reseller programs are well known throughout the USPS organization, are encouraged by USPS management and are viewed as having been successful in driving growth for the USPS.

USPS thoroughly understands and encourages the application of reseller rates both for generating new volume and for the retention of existing volume. The USPS also has authorized and understands that resellers are giving discounts to smaller shippers. When trying to ascertain the views of USPS management and their regulator with regard to the reseller program, the key indicative fact is that since the inception of the program, the USPS has consistently extended the program and the Postal Regulatory Commission has continuously approved the program for seven years. We expect both of them to continue extending the program in the future.

The third main negative argument being advanced in the investor community, which falls on the prior arguments is that once the USPS has investigated the reseller program, they will then determine that it is not helping you USPS growth and it is solely cannibalizing existing volume. This argument is based on a single data point, which is that Priority Mail volume growth in the first calendar quarter of 2016 was flat. This argument cherry-picks the data, distort the facts, misuses several underlying trends and is logically flawed and false for many reasons.

First, the lack of volume growth in Priority Mail during the first quarter is a clear result of the significant price increase and the rate structure modifications that the USPS made in January of 2016. The USPS increased its price on average 9.8%, which is the largest increase it has made in many years and that price increase caused the clear flattening of their volume growth. The USPS also made a significant structural change in its new rates in January 2016, which made its first class package services more competitive by allowing first class packages to expand to include 1 pound rates. Whereas before the first part packages rates stopped at 13 ounces. And the only option for 1 pound packages was priority mail. This caused substitution of first class for the popular 1 pound priority mail package, that drover a 22% increase in first class package services revenue for the first quarter.

Really the more meaningful long-term data point is that the USPS reported priority mail volume growth of 10.5% in its last fiscal year ending September 2015, and it grew 8% in the fourth quarter, fourth calendar quarter ending December 2015. Second, the USPS package growth is made up of many components, which have nothing to do with the reseller program. For example, approximately 25% of priority mail is sold to consumers at retail post offices, all at full retail rates.

There is also a significant volume of priority mail through direct customer discounts via USPS and essays or commercial plus agreements, which have nothing to do with the reseller program. Finally and most importantly, we estimate that total package volume trough all of the primary resellers, while an important profitable and growing component is a small component of all USPS shipping and package volume.

Since reseller is such a small part of USPS's overall business the total priority mail growth statistic provides absolutely no indicative evidence of the underlying growth in the reseller market. This makes it impossible to ascertain a success or failure of the reseller program based on publicly available total priority mail volume statistics.

However, based on our knowledge we believe the reseller program has been very effective in growing the USPS’ revenue. The fourth main negative argument being advanced which follows the prior arguments is that once USPS learns that the reseller program is not adding value, they will shut it down by exiting their NSAs in 30 days.

To provide some context as of the last publicly available number in November 2015, 648 negotiated service agreements have been approved by the USPS and the postal regulatory commission. It is true that many NSA contracts do have a 30-day termination for convenience cause that many others have other termination structures. For example, longer periods or no termination for convenience caused at all and each NSA is individually negotiated.

When an NSA is filed with the Postal regulatory commission, significant sections of the agreement are redacted to provide confidentiality to that partner. It’s impossible to make any statements that encompass all NSAs as the information is simply not available. Irrespective of the variety of termination rights which exist in NSAs, as previously mentioned the USPS is highly supportive of the NSA program and the reseller program specifically.

The next negative argument being advanced concludes that a significant portion of our revenue and EBITDA will disappear when the USPS cancels a reseller NSA agreement. It is true and has always been true that we rely on the USPS as our most important partner for many reasons. Also, working with the USPS to implement discount rates for our customers is very important to us and are building to provide competitive services in the market.

In addition, the total number of customers currently utilizing reseller rates within our entire customer base is less than 10%. A vast majority of these customers were new customers acquired onto our multicarrier solutions ShipStation, ShipWorks, and ShippingEasy. All three of these organizations offered reseller customer discounts before we acquired them.

Note that within an e-commerce multicarrier solutions the practice of offering reseller customer discounts is in our view nearly ubiquitous. As noted previously, the package by package decisions made in the multicarrier environment make customer discounts critical. And those discounts are typically offered through reseller partners.

As with all of our business partners, we offer significant value to our reseller partners including technology, sales, marketing, and support. The report also asserts that revenue from our reseller partners is at a 100% EBITDA margin, but this is not the case. We invest significant amounts of money in sales and marketing to acquire and retain customers. We also invest significant amounts of money in customer service and support, product development, technology, and technology infrastructure.

Our cost of providing these services to our reseller partners is significant and thus impacts the profit that we generate through these partnerships. In an alternative argument being advanced is, some of the material - in some of the material that attacks us is that the USPS will change its rate structure in 2017, in a way that will shut down or cripple the reseller program. It is true that the USPS has publicly stated that it intends to combine its two commercial rates, commercial base, and commercial plus into a single published commercial rate.

However, we believe that the primary motivation for the USPS is simplification of their published commercial rate structure, not trying to eliminate their partnerships with resellers. Regardless of what they may call the various tiers of discounted rates, they have made it clear and that they intend to continue offering customers discounts below any new published standard commercial rate. Just last week, the USPS filed an amendment to an existing negotiated service agreement at the postal regulatory commission based on a discount below commercial plus pricing that provides for discounts to continue even if the USPS does not maintain the commercial plus pricing concept in 2017.

Based on our discussions with the USPS, we believe that they will simply adapt reseller NSAs so that they can continue offering discounts of any published commercial rate to their customers. It’s in the best interest of the USPS to do so. Looking at the bigger picture, the discounts that the USPS provides through its commercial base and commercial plus two tier rate structure make these advantageous discounted rates broadly available in e-commerce.

For example, eBay relies on the discounts and it’s NSAs in order to make discounted USPS commercial plus rates broadly available to its customers and we believe eBay views these discounts as an important benefit that it offers to its customers. We believe several other marketplaces also have reseller NSAs, which incentivizes companies to offer USPS as a solution in their marketplaces.

The reseller discounts have also driven innovation in the e-commerce marketplace, resulting in a significant number of new software solutions that are focused on USPS e-commerce shipping. We are aware of more than 100 e-commerce software tools and multicarrier solutions available on the Internet that have had as part of their business model the ability to offer attractive USPS rate discounts.

All of these companies are able to offer these discounted rates by partnering with resellers. Thus the USPS reseller program is instrumental in creating an ecosystem where USPS is a prevalent carrier and is able to gain an early beachhead with smaller e-commerce shippers. Hypothetically, if the USPS were to discontinue the types of customer’s discounts it offers through its current commercial plus rate structure, they would risk alienating the entire ecosystem of innovative e-commerce solutions and they would risk alienating several marketplaces such as eBay and others and they would stifle innovation in this area.

Less attractive USPS rates, the customers of all of these solutions would inevitably defect to other shipping solutions and other carriers and USPS would lose a very large set of strong company allies and they would stand to lose a large amount of volume.

In summary, the reseller program was meant to provide attractive rates to lower volume shippers, which are too numerous for the USPS to support with their own individual discounts. The reseller program is meant both for the acquisition of new volume and for the retention of existing volume, both of which must happen in order for the USPS to generate growth.

Stamps.com has an important partnership with IntuiShip, but Stamps.com and IntuiShip are not a single company, and IntuiShip represents less than 10% of our revenue. The USPS regulates us and they regulate the resellers very closely and they understand and support the business practices of both of us. The USPS grew its overall shipping and packaging volume by over 14% last fiscal year, including 10% growth in domestic priority mail. And Stamps.com and the resellers were significant factors in helping the USPS generate this growth.

Reseller rates are instrumental in making the USPS more competitive versus private carriers and in driving significant innovation in over 100 e-commerce software tools, which use them to feature attractive USPS rates and which in turn drive USPS growth. Discontinuing customer discounts such as those offered to resellers would alienate this entire e-commerce ecosystem that includes marketplaces such as eBay and more than a 100 e-commerce solutions.

Finally, the USPS has made a clear statement on its view point of the reseller program through the continued extensions it has provided to the reseller companies for the past seven years. We expect them to continue to do so and to extend the reseller program into the future.

With that we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Kevin Liu with B. Riley & Company. Your line is now open.

Kevin Liu

Hi, good afternoon. I appreciate the thorough discussion of the reseller arrangements, I guess the big question everyone kind of once answered is what percentage of your revenues today come from resellers in the form of, kind of the referral fees or revenue share arrangements that you have in place? And since all these allegations have come out, have you had conversations with the USPS regarding the future and therefore you feel like you are very justified in terms of your ability to offer these discounts?

Ken McBride

Sure. So, Kevin we wanted to provide some inside into some of the metrics in the business and in order to help explain the reseller program, we don’t like to disclose specific partner information beyond that, and there is very confidential competitive information so we – IntuiShip is less that 10% and that’s the main bullet point we like put out there. Can you repeat your second part of the question?

Kevin Liu

The other piece was just whether you’ve have conversations with the USPS since these reports came out just to ascertain how they feel or verify how they feel about the extension of these discounts?

Ken McBride

Yeah, I mean like I said, we’re in constant contact with the USPS all the way up to the senior management level. We work directly with their sales team, our sales force and their sales force work together constantly, so you know the USPS organization from bottom to the top is very aware of the reseller program and they are very supportive of the business practices of both Stamps.com and the resellers.

Kevin Liu

Got it. And the one other point you mentioned was how ubiquitous these discounts are across a lot of the newer technology platforms out there. How do most of these relationships come about, was the USPS encouraging all of these vendors to go and partner with resellers in order to offer these rates or did the marketplaces kind of develop on them naturally?

Ken McBride

Yeah, I mean both ways the resellers have their own sales teams and their own business development teams, which are very active in pursuing the relationships that they have out there. Through our partnership we also worked with the resellers to help them gain placement in these more than 100 e-commerce and other partners. So those are the main two activities that really drive the market.

Kevin Liu

Got it. And just switching gears from my last question here, since the acquisition of Endicia, you guys do tend to carry a higher level of receivables as well as payables, can you just talk about what the nature of those are, I would assume Endicia was fairly similar to kind of the legacy Stamps business, I just want to better understand the working capital changes.

Kyle Huebner

I think the Endicia’s customers are as we had talked about higher volume shippers and so in certain instances, circumstancesm, we will offer customers invoicing for postage, so that the USPS and postage can be competitive with FedEx and UPS, which offer those terms. So some of the receivables are actually not related to revenue, they're related to seasonal fluctuations in postage as part of the service that we provide to customers to help the USPS to remain competitive.

Kevin Liu

Understood. Well, that’s all I had, congrats on yet another strong quarter.

Ken McBride

Thanks, Kevin.

Kyle Huebner

Thanks.

Operator

And our next question comes from a line of George Sutton with Craig-Hallum. Your line is now open.

Ken McBride

Hi, George.

George Sutton

Thank you, Ken. That was very, very helpful and frankly quite confirmed by our channel check. So as we look at the Q2 results specifically, I wondered if you could discuss the ARPU increase sequentially that you saw from Q1 and can you also talk about anything that might have been unusual in the quarter that would necessarily recur into Q3 understanding you could lose some customers in Q3 because of the slower seasonal period?

Kyle Huebner

Yeah, George. So, on the ARPU number, the sequential increase was a lot smaller than we've seen in the past few quarters, $42.06 up from $40.65, but that was up from $35 in Q4 and $28 in Q3. So I think a lot of the ARPU is attributable to Endicia and as we talked about their customers, they have a smaller number much higher volume shippers, and we've always said that in the shipping space you have a better ability to get higher revenue based on postage volume as opposed to the small business flat rate subscription pricing at $15.99. And so, as we acquire these customers and we're working with Endicia to grow the business, we've seen the corresponding increases in ARPU in the business. So in Q2, it was more, I would say, as I mentioned some seasonal strength carried over and then as you move into the summer months it tends to slow down and then picks back up in the fall as you approach the holiday season.

George Sutton

You mentioned that you are beginning to or continuing to emphasize shippers and therefore by definition de-emphasizing SMB, that's not at all obvious in the sales and marking line, which continued to be very high relative to our estimates and encouraging because I know you work off of a demand, so you're seeing the demand from the spend. Can you talk about that de-emphasis on the SMB is – are you actually reducing spend there or is it just your not increasing it as much as you're increasing it for the shippers?

Kyle Huebner

Yeah, I think it's always a constant process to what gets the different spend, opportunities and how you allocate your dollars. And I think when it was – the small business was really the main focus, you're making decisions across small business programs, a lot of them have very similar type ROIs because of the flat rate $15.99 pricing. As you move into the shipping world, you get a much broader range of economic outcomes in terms of the ROIs. So, as I mentioned, the shipping customers are more expensive to acquire, but you have an opportunity to get higher ROI.

So, I think – there’s a lot more opportunities in the shipping space versus kind of the small business programs, which are – the economics are more similar. So I would say on the [indiscernible] we're getting out of this traditional small business, but as we look at increasing spend and opportunities across ShipStation, ShipWorks, Endicia, Stamps shipping business, we see a lot of opportunities that the sales force is a big factor in the shipping world than that sales – direct sales are more expensive but produced these higher type volume shippers. So I think where you see it in the metrics is more – seasonal paid customers was down slightly in Q2 from Q1 because you are acquiring more few of these lower value small business customers and fewer or more shippers, which are smaller in number, but higher in value.

George Sutton

Got you. Lastly, did you provide an organic growth rate? You mentioned 30%, I wasn’t sure if you were pointing to that as an organic growth rate?

Kyle Huebner

Yeah, I mean I think we’ve said in the past that the term organic, we don’t really see as applicable here, you know all our acquisitions are in the – have been in the shipping space and the same mailing and shipping business that we’re in, so it is not like we acquired a company and a completely different industry, and so we’ve integrated ShipStation and ShipWorks over the last two years. And you know it’s one sales force selling all suite of products, so what we gave, which is what I gave, you know we gave before is that if you look at our total revenue excluding Endicia because they are the only acquisition in the last four quarters, the revenue was up 30% year-over-year.

George Sutton

Understood. Okay. Thanks, guys. Great results.

Kyle Huebner

Thank you.

Ken McBride

Thanks George.

Operator

And our next question comes from the line of Allen Klee with Sidoti. Your line is now open.

Allen Klee

Yes, hi, can you tell me where your NOLs stood at the end of the quarter?

Kyle Huebner

Yes, I think the better way to look at it is, since we don’t have any valuation allowance against our differed tax assets, the differed tax assets are the more appropriate measure to look at and they include not only NOLs, but R&D tax credits and other tax credits that we have. So the deferred tax asset was about $41 million as of June 30 on the balance sheet.

Allen Klee

Okay. Can you comment on for Endicia how you feel you've been doing with getting expense synergies and do you think that business once you accomplish you can get margins similar to where Stamps.com is?

Ken McBride

Sure. I think we are continuing - we’re about nine months into the integration process and we continue to be really pleased with the progress we're making. We’re definitely seeing the benefits of the acquisition. We've centralized the marketing we've seen a lot of scale economies there and efficiencies that we've been able to gain in the marketing spend that we're doing against each of the brands. We combined the sales team and we align the combined teams around the corporate goals. We are selling all the brands to different customer segments through the sales team and we've achieved lots of cost reductions.

We’ve eliminated duplicate efforts and we’ve eliminated duplicate vendors, we’ve eliminated duplicate spend and we've really been able to cross utilize the expertise between the two organizations, really being able to work together closely, find ways to utilize the expertise across the organizations to increase the innovation. Customer support we've been able to bring that together, and so I think overall things have gone really well, like I said we’re less than nine months into it, but I think we’re ahead of where expected we would be at this point in time.

Kyle Huebner

I would just add to it. I mean, as you look at our financial results, the benefits of Endicia and the combined company are definitely a factor contributing to the financial results.

Allen Klee

Okay great. And then do you happen to know what your operating cash flow was for the quarter?

Kyle Huebner

I don't have that in front of me. In terms of the cash flow, we - I mentioned we have about $36 million free cash flow. Our changes in networking capital do fluctuate quarter-to-quarter, but overall the longer period of time tend not to be a substantial long-term use of cash and so we look at it as a the $36 million generated and then talked about the uses of the cash, the $27 million for share repurchase, $11 million for debt pay down and then $55 million for the ShippingEasy acquisition which happens just after quarter end.

Allen Klee

Okay. I’m not sure if you can answer this, but could you give us an idea what your top 10 customers would represent as a percent of sales and have you lost any of your top 10 customers in the last quarter?

Ken McBride

Yes, I mean we haven't ever disclosed that information, I don’t, you know the top 10 customers. We have 650, approximately 650,000 customers so we’re very distributed that the top 10 customers wouldn't really represent any significant percentage of the total number.

Kyle Huebner

And in our K, as of the K filing for the year-end there was no individual customer that was over 10%.

Allen Klee

Okay and then you're comment on seasonality, I know when you gave guidance at the end of Q1, you pointed us to Q2 and Q3 to be seasonally slower and Q2 came in wonderful, can you help us understand kind of any of the factors that you think caused that out performance?

Kyle Huebner

Yes, I mean I think some of that was as I mentioned before, you know Endicia integration and synergies are not seasonally related, it’s really related to operational execution and so I think we also, I mentioned saw some of the Q1 strength carryover into Q2 a lit bit more than in past years. So, I think we definitely did see the seasonal slowness, but some other things like the Endicia, synergies were able to offset that.

Allen Klee

Okay, thank you so much.

Kyle Huebner

Thank you.

Operator

And our next question comes from the line of Tim Klasell with Northland Securities. Your line is now open.

Tim Klasell

Hi, good afternoon guys and congratulations on the quarter.

Ken McBride

Hi Tim.

Tim Klasell

Just a few quick questions here, first of all the margins have continued to decline quite steadily is that just a reflection of the ARPU or maybe you can sort of walk us through that, getting a few questions around that?

Kyle Huebner

Yes, I mean I think it’s a reflection of the investments that we make in the shipping business. As I mentioned, the long-term economics of those customers are better and the churns lower, the customer life this longer. So, as you increase your investment you get the benefit of that over a much longer future period, and so as we’ve invested in the shipping space and expanded into the multicarrier, the more we invest and fill that base of high volume shipping customers, you get the benefit and the reward of that in the future going forward. And so, I think that’s some of what we’ve seen and then again as I mentioned with Endicia synergies and just creating better scale economics of the combined company has contributed to the margin expansion.

Tim Klasell

Okay great. And then I believe you mentioned that only 3% of your customers get the commercial plus or NSA discounts, is that correct? Or NSA discounts I should say.

Ken McBride

Well we mentioned that 10% of total customer base is less than 10% and most of those customers are really new customers that have been acquired through the multicarrier programs that we heard there are companies that we have shipping ShipStation, ShippingEasy, and ShipWorks. So when we mention the 3%, it was really related to the number of customers that have been retained using the - in partnership with the resellers.

Tim Klasell

Okay great. And then can you sort of give us, I don’t know if you have the information of, what percentage of the business flowing through your platform gets, let’s say an NSA discount, just on a dollars basis.

Ken McBride

Well, I mean we have a significant number aside from the reseller, which we talked about for 30 minutes just now, we have a significant number of customers who have either direct NSAs or have the direct discount with the postal service for the commercial plus program and so those customers tend to be the very large customers as we mentioned and they are significant, but I don’t, in front of us I don’t think we – we don’t have that data handy right now.

Kyle Huebner

Yes, I mean just to add on that, I mean our solutions do support NSA customized rates that customers get from the USPS, so there is a material or a decent portion of the volume through our system at that discounted rates that are totally unrelated to the reseller program.

Tim Klasell

Okay great. And then one final question, jumping over to the SOHO part of the business, obviously churn is coming down, I am sure the high volume shippers have something to do with that, but how has the churn been holding up on the SOHO business, the traditional business?

Kyle Huebner

I mean we, we don’t breakout the churn by different segments, I think as you are familiar when we acquired Endicia, our view was that there is such a range of different types of customers from small home users to traditional small business to the whole universe of different types of shippers and so we felt like the churn rate that we have been reporting wasn’t really representative of any one segment, but – so we stopped reporting it and there were some feedback from the investor community and concern, so we decided to keep providing that metric just because it is coming down and it is reflective of the shippers, but that’s really our primary focus and we don’t break it out between different segments.

Tim Klasell

Okay, fair enough. Thank you very much. Helpful.

Ken McBride

Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Darren Aftahi with ROTH. Your line is now open.

Darren Aftahi

Hi guys, thanks for taking my questions. Just a few if I may. Can you talk to the 2Q because your paid customer numbers dipped slightly was that more due to seasonality?

Kyle Huebner

Yeah, I mean that – it’s two factors, one is seasonality. If you look over our metrics for the last 10 years it’s a very common pattern to see, you know and quite a number of the years where Q2 has dipped sequentially by a little bit. The other factor as I mentioned is that from a customer acquisition perspective and sales and marketing allocation we’re focusing more of our resources, time and spend on shippers where you might acquire a fewer number of shippers, but they are much more valuable and fewer small businesses, which are valuable but less so when you compared to the shippers. So, I would say it’s those two factors.

Darren Aftahi

Great. And then on your bump in sales guidance, what portion of that is related to ShippingEasy and the acquisition?

Kyle Huebner

Can you repeat the question?

Darren Aftahi

What portion of your sales bump is related to the ShippingEasy acquisition in the second half of the year?

Kyle Huebner

Yeah, I mean we, you know we’ve never broken out our acquisitions separately. Again, it’s all in the mailing and shipping solution space and so it is a factor, but we don’t break out what should view to that versus the growth in the business.

Ken McBride

Just to follow-up on that, I mean I guess we perhaps like, are you asking how much revenue in the second quarter, which is related to ShippingEasy?

Darren Aftahi

Yeah, I mean, more for the run rate of ShippingEasy on an annual basis just to understand kind of what sorts organic from the pre-ShippingEasy business versus what’s kind of layered on top, I guess, is one of the question.

Kyle Huebner

Okay. Yeah, I mean, as I said, we don't break it out specifically.

Darren Aftahi

Fair enough. Two more, if I may. Any reason you guys don't get your own NSA and try and cut out the resellers? And then my last one on EBITDA margins, obviously, you need to trend up. Where do you see these on kind of a longer term basis, multi-years out? Thanks.

Kyle Huebner

So, I mean, in terms of our own NSA, traditionally, USPS has really viewed us as a technology partner and they've really choose to compensate us for that – our role as a technology partner. As I mentioned, just a few minutes ago, they do provide NSAs to a significant number of our largest customers. And a lot of our customers also have direct CPP rates from USPS, but they decided to partner with the resellers in order to address the lower volume customers. And they require the resellers originally to work with PC postage companies in order to provide the technology platform. And on the flip side, they also encouraged the resellers to work with the PC posts posted companies in order to address that lower volume segment of the market. So they really just wanted to encourage a partnership between the PC postage industry and the reseller industry. Was there a second question? Can you repeat your second question?

Darren Aftahi

Yeah, thanks for that. Last one on EBITDA margins, where do you guys kind of see those longer term?

Kyle Huebner

Yeah, I mean we – you know, as I mentioned, it’s related to our investments in the business and especially the shipping business. I think we're – as Ken mentioned with Endicia, we’re only nine months in, so we feel like there's still opportunity there. So we've never given out a specific number, but I think our goal is to grow the business and continue the investments and try and continue to achieve EBITDA margin expansion.

Darren Aftahi

Great, thank you.

Ken McBride

Thank you.

Operator

And our next question comes from the line of Allen Klee with Sidoti. Your line is now open.

Allen Klee

All right. Yeah, hi. Just two follow-ups. The first one was for your multicarrier businesses, I guess now you have three of it, how do you think of the relative profitability of them compared to the average margins of the company?

Ken McBride

Well – and this is kind of what I always alluded to, it’s that we are integrating these efforts. So we have one sales force that sell all the solutions and in reality the goal is what best meet the need of the customer and so, if that’s ShipStation grade, if it’s Endicia grade, and so you have this one sales force, we have our marketing effort where we're spending money across the portfolio of brands. So, I think, it is all mailing and shipping and we’ve done a lot to integrate and unify the different efforts. It's very hard to break-out the individual profitability of an acquisition because the goal is to, again, achieve the synergy advantages and benefits of running it as combined company.

Allen Klee

Okay, thanks. And lastly, for your reseller exposure what percent of that is that of a either revenues or EBITDA?

Ken McBride

So, I think as we mentioned a few minutes ago, our reseller partnership with IntuiShip is less than 10% of our revenue and with regard to the EBITDA, I think that – we also mentioned there's a significant amount cost involved with providing these partners with the support including technology, sales, marketing. And so we invest that money and so our cost of providing that – those services to our resell partners is significant and thus it impacts the profit that we generate through those partnerships.

Kyle Huebner

And I guess I would add to it, it’s just not really how we look at the business, we look at the business on a customer basis and working with the end user customer to grow their business and generate revenue through our solutions. And so to the extent that a customer through our business partnerships with the reseller generates revenue, they also could be generating insurance or service fee revenue. So we really look at it on a customer basis in growing the customers and that’s – we did choose – I mean, we typically don’t breakout these – those types of numbers, but we did want to address the – what Ken is addressing in the script by giving a couple of other customer data points to give you context for it.

Allen Klee

Thank you, Ken.

Ken McBride

Thank you.

Operator

And I’m showing no further questions at this time. I would now like to turn the call back over to Mr. Ken McBride, Chairman and CEO.

Ken McBride

Thanks for joining us. We appreciate it. If you have follow-up question, contact us. It’s 3104-825-830. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.