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Pitney Bowes Inc  (NYSE:PBI)
Q1 2019 Earnings Call
May. 01, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Pitney Bowes First Quarter Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today's conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations.

Mr. David will now begin the call with a Safe Harbor overview.

Adam David -- Vice President-Investor Relations

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2018 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments.

Also for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations website.

Now our President and Chief Executive Officer, Marc Lautenbach will start with a few opening remarks. Marc?

Marc Lautenbach -- President and Chief Executive Officer

Thank you Adam, and good morning everyone. I'd like to focus my comments on our performance in the quarter. As with every quarter there were pluses and minuses. Stan will take you through the financial details, but I'd like to address our performance versus our expectations, starting with revenue. Revenue was down 1% to prior year excluding impacts of currency and previously announced international SMB market exits. Overall, revenue was in line with our expectations.

Looking at earnings. Our overall results were not where we wanted them to be to start the year. Our operational profit performance was largely what we expected in SMB and Software, however, there were a few areas that impacted earnings that I'd like to drill down on and discuss as they were the material deviations from what we expected in the quarter.

The first was a charge that we recorded in the North America Mailing segment related to tablet replacing program to address a battery longevity issue which also included upgrade technology in our SendPro C. Stan will take you through the details, but this resulted in a $9 million or $0.03 charge in the quarter and was not anticipated at the start of the year. It is important to note that excluding this charge, North America Mailing EBIT margins would have been 37.8%, which is more in line with our performance over the last four quarters.

Turning to Global Ecommerce. To a smaller degree profit underperformed our expectations in the quarter. Part of the miss was due to a delay in the approval of one of our National Service Agreements or NSAs with USPS. The USPS is an excellent partner and this NSA has subsequently been approved. It just took longer than we thought and as a result we incurred higher-than-expected shipping rates in the quarter.

Additionally, productivity around labor and transportation were not where we expected in the first two months, but improved upon exiting the quarter. As a reminder, when we opened our Greenwood, Indiana facility last September, productivity was understandably well. That said, productivity has subsequently increased and is higher than earlier in the year. This is a positive harbinger for the power of automation across the rest of our network, particularly as we continue to expand operations and open new sites.

Business mix also impacted Global Ecommerce in the quarter. This segment is comprised of different capabilities Cross-Border, fulfillment, delivery, returns and APIs. And these all come with different margin structures. We continue to balance getting the scale and managing the mix of these different businesses. I would characterize the profit dynamics in Ecommerce partly as one-time in nature and the balance being growing pains, however they were not structural. Going forward, we'll take actions to be more purposeful and driving mix and productivity. We remain focused and excited about the long-term opportunity for us within this business. Ecommerce is a large and growing market where we have strong value proposition.

The other item impacting earnings which drove the preponderance of the shortfall from expectations in the quarter was around execution of steps within our Presort business. Last year we engaged a third-party consultant to help address issues around productivity and pricing within the Presort business. This business continues to be pressured by the transportation and labor market. We have talked about investments and automation in this business and leveraging our Newgistics network to help address the higher costs. We are confident that our work with the consultants along with these investments will yield future benefits.

Also within Presort in the first quarter, our volume of mail processed went up, but our revenue per piece went down as we're seeing a mixed of mail shifting to higher volume of clients. The third-party consultants are working with us to ensure that we are capturing value commensurate with the value that we're delivering to our clients. As the quarter progressed, we began to successfully layer in a new pricing strategy, although some of the changes came too late in the quarter to make a difference. We'll continue to layer in our pricing strategy over the coming months. I will squarely identify the issues we experienced within Presort in the quarter as execution issues, I'm confident that over time our actions will take hold and improve performance to move this business back to the long-term margin profile, but it's taking longer than expected.

I now want to go back to the topline because that is the best indicator of our long-term success. In SMB, we continue to place our SendPro C in the market and since launching now we have nearly 85,000 units placed with scheduled launches in several international markets over the next few quarters. During the quarter we also announced the launch of Wheeler Financial, a subsidiary of the Pitney Bowes Bank. We've been working on this for a year, getting the right talent, network and operations in place and building pipeline.

Wheeler Financial will help clients purchase equipment critical to their industry in which they operate. Leveraging our economies of experience with 40-plus years of equipment financing and 20 years in banking, we're expanding our offering to help our clients grow their businesses. Similar to what we're doing in the shipping space, this is a natural adjacency and truly representative of the company's long-term strategy.

In our Software business, last year where we recognized a very large deal in the first quarter. This year we did almost the same amount of revenue without the benefit of a large deal of last year's significance and our channel efforts are continuing to pay off. It's worth noting that our Commerce Services business is now our largest revenue segment group. In our Global Ecommerce business revenue ramped through the quarter and we exited the quarter with a strong revenue performance which should continue in the second quarter.

Likewise, we continue to add new logos and a churn in our Newgistics business to climb substantially on a year-to-year basis. Both of these dynamics indicate we have something that the market wants. To that end, there were meaningful advances to our capabilities in our Global Ecommerce business. We added to a network and announced two differentiated capabilities that the market has been clambering for.

The first was we announced a pilot to create a two-to-three-day guarantee delivery product that'll be fast and much more affordable than alternative offers. This will help retail clients to better compete in an increasingly competitive marketplace. This capability is based on our decades of knowledge of moving mail and deep data science capability, which we have developed over the last several years. This is what we mean when we talk about leveraging our scale and our experience.

Secondly, we announced a branded experience for our clients as it relates to tracking shipments. Simply put, this will help clients to put their brand in front of customers activities to track their shipments. Today, this is primarily done through the logistics providers' websites. Result is the retailer marketplace loses control of what is one of the most important experiences in the world of Ecommerce. The combination of these two capabilities will be a game changer for our clients as a meaningful step forward in our ambition to take the complexity out of shipping.

On a side note, a few weeks ago I had the opportunity to participate in our Ecommerce client, event Retail Revolution. There were over 200 attendees and it was a Who's Who of retailers and marketplaces. They were only there for one reason, Pitney Bowes is building something that the market needs and wants. It was remarkable to reflect that four years ago our Global Ecommerce business was one capability with one client.

To summarize, we expect revenue to grow this year and making the third consecutive year of growth which is an indication of the capabilities we've created and the future we're aspiring to. I'm not pleased with our profit performance for the quarter, however, the execution issues we encountered are within our control to fix and going forward we will fix them. Some are easy and some will take longer, as a result, we're updating 2019 guidance which Stan will take you through in more detail.

With that, let me now turn the call over to Stan.

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Thank you Marc and good morning. Our first quarter overall revenue results were in line with our expectations. However, our earnings performance fell short. Before I discuss the details of our first quarter, it's important to note a few items. First, as in the past, unless otherwise noted, my statements going forward will be on a constant currency basis for talking about revenue comparisons and on an adjusted basis when talking about earnings related items including cash flow. Reconciliations of all non-GAAP to GAAP measures can be found in the financial statements posted with our on earnings press release and on our Investor Relations website.

Second, our results reflect the new lease accounting standard or ASC 842, which was implemented on January 1st. Results in both current and prior periods reflect this new standard. We have posted a file on our Investor Relations website with the recast financials as they relate to this lease accounting change. Additionally, we also determined that certain costs previously classified as R&D should be classified as the cost of revenue or SG&A expense. Prior period financial statements have been recast to conform to the current period presentation. And finally, we previously announced the sale of our direct operations in six smaller European markets. This transaction does not qualify for discontinued operations treatment. And as such, prior year has not been recast. It will therefore negatively impact our revenue comparison to prior year by about a point which is reflected on our guidance.

Turning to our results. We continue to make progress against our long-term objectives in the first quarter. The portfolio continues to shift to higher growth market. Commerce Services comprise 46% of revenue which is the second consecutive quarter where it was the largest component of our overall revenue. Our shipping-related revenues made up roughly one-third of the total revenue in the quarter and that contribution continues to grow. For the first quarter revenue totaled $868 million which was a decline of 2% from prior year. When you take the market exits into consideration, revenue declined 1% from prior year.

Looking at revenue by Group. Commerce Services grew 6%, Software declined 2%, and SMB declined 7% when you exclude the impact of currency and market exits. Adjusted EPS was $0.12 for the quarter. GAAP EPS was a loss of $0.01. GAAP EPS includes a $0.10 loss related to the market exits which was primarily driven by the write-off of cumulative translation adjustments. GAAP EPS also includes charges related to discontinued operations transaction restructuring costs, each charge being about $0.01 per share. First is our expectations, EPS for the quarter was impacted predominantly by a weaker performance in our Presort business due to execution around productivity, as well as pricing. And to a lesser extent Ecommerce fell short of our expectations.

In addition, there were two unusual items impacting the quarter, the first being a charge of $0.03 per share related to a tablet replacement program to address a battery longevity issue for our SendPro C. The replacement not only addresses the battery longevity, but also provides clients with our latest technology including a memory upgrade and a better user interface. This issue was identified during the first quarter and we continue to work through this item both with battery experts and suppliers. Through analytics, we can predict the lifecycle of the battery and to head off any potential disruption, we are upgrading the displays resulting in a $9 million or $0.03 per share charge. The other item impacting EPS, albeit to a lesser degree, was the delay in the approval of one of our NSAs with the USPS, which has subsequently been approved.

Free cash flow was $32 million and GAAP cash from operations was $70 million. Compared to prior year free cash flow was lower partly due to the decline in net income and the timing of reserve account deposits which was offset by the timing of working capital.

Looking at capital allocation, at the end of the quarter we had $904 million in cash in short-term investments on our balance sheet. During the quarter we used free cash flow to return approximately $49 million to our shareholders. We repurchased 5.6 million shares for $39 million and we paid $9 million in dividends to our common shareholders. We also made $8 million in restructuring payments and spent $29 million on capital expenditures. From a debt perspective we ended the quarter with $3.25 billion in total debt which is $321 million lower than the prior year.

Let me give you a little bit more context on our debt composition. Overall debt was $3.25 billion. And if you take the implied debt of $1.1 billion associated with our finance receivables along with the $0.9 billion of cash and short-term investments on the balance sheet into account, our implied net debt position on an operating company basis was about $1.2 billion at the end of the quarter.

Looking at the P&L, starting with revenue performance by line item as compared to prior year. Business Services revenue grew 5%. We had declines in Software and Financing revenues of 2%, Support Services of 7%, rentals of 9%, supplies of 13%, and equipment sales of 14%. Gross profit was $389 million with a margin of 44.8%. This is a decline of about four points from prior year which is largely reflective of the shifting mix of our portfolio. Gross profit was also negatively impacted by a one point due to the tablet replacement charge. SG&A was $299 million which was a decline of about $3 million from prior year. SG&A as a percent of revenue was 34.5%, which was approximately one point lower than the prior year and largely a result of the lower revenue.

R&D expense was $22 million or 2.5% of revenue. Compared to prior year, R&D expense declined about $3 million and improved slightly as a percent of revenue. EBIT was $69 million and EBIT margin was 7.9%. Compared to prior year, EBIT declined $46 million and EBIT margin declined by five points driven primarily by the gross profit decline. Interest expense, including financing interest expense was $39 million which was $4 million lower than prior-year as a result of the debt we have paid down over the course of last year. The provision for taxes on adjusted earnings was $8 million.

Our tax rate was 26.6% and relatively flat to the prior year as we normally experience a higher tax rate in the first quarter. Average diluted weighted shares outstanding at the end of the quarter were $188 million, which is about 600,000 shares lower than the prior year.

Let me now discuss the performance of each of our business segments this quarter. Starting with Commerce Services revenue was $401 million which was growth of 6% over prior year. EBIT and EBIT margin was essentially breakeven. EBITDA was $24 million and EBITDA margin was 6%.

In Global Ecommerce revenue was $266 million which was growth of 9% over prior year. Within Global Ecommerce, our domestic parcel services delivered strong double-digit revenue growth as volumes continue to ramp up through our network. We continue to grow volumes both through our services in China, as well as expanding our domestic client base.

Shipping Solutions also delivered strong double-digit revenue growth as volumes through our shipping APIs and delivery services accelerated in the quarter. The segment's revenue growth was partially offset by a decline in our Cross-Border business, largely due to weakness in volumes, the strength in US dollar, as well as regulations and taxes in some of our larger inbound markets. EBIT was a loss of $15 million and EBIT margin was a negative 5%. EBITDA was $2 million and EBITDA margin was 1%.

We continue to invest in market growth opportunities which includes marketing program and facilities as well as operational excellence initiatives. We have not lost sight of the long-term growth opportunity here and we will continue to invest in this area to drive long-term value. Higher labor and transportation cost continue to be an area that we are addressing. We continue to leverage resources across our network to partly offset these incremental costs. And we experienced higher than normal domestic shipping rates due to a delay in the approval of one of our NSAs with the USPS, which has since been approved. Additionally, margin was also impacted by product and client mix. In the quarter we saw a majority of the revenue growth coming from faster growing, but lower margin services. We expect that unit costs across the portfolio will improve over time through scale.

Within Presort Services revenue was $135 million which was flat to prior year. Compared to prior year, we processed higher volumes of First Class and Standard Mail, as well as Flats. The growth in volumes processed is a positive sign that we are gaining share. However, a change in client mix toward larger clients drove a lower revenue per piece. As Marc mentioned, we have begun layering in productivity actions and a new pricing strategy. EBIT was $15 million and EBIT margin was 11%. EBITDA was $22 million and EBITDA margin was 16%.

Presort margins this quarter were lower than what we expected. EBIT continues to be impacted by higher transportation and labor costs along with the lower revenue per piece. Compared to prior year, margins were also impacted by higher employee wages related to the increase we initiated early in the second quarter of last year, as well as higher bad debt expense and consulting fees associated with our productivity and pricing work.

Turning to SMB. Revenue was $394 million which was a decline of 9% from prior year, excluding the impact of our market exits revenue declined 7%. EBIT for the Group was $122 million and EBIT margin was 31%. EBITDA was $131 million and EBITDA margin was 33%.

In North America Mailing, revenue was $315 million a decline of 7% from prior year. Equipment sales declined largely due to lower top-of-the-line and bottom-of-the-line product sales, partly offset by growth in our SendPro C unit placements. Since launching we have placed nearly 85,000 SendPro C units and are on track in transitioning our client base into the new product. Recurring revenue streams declined in line with the average of the last four quarters.

As mentioned previously, we recorded a $9 million charge related to a tablet replacement program for our SendPro C in the quarter. When you exclude this item, gross margins improved one point over the prior year and continue to perform within a tight range as they have over the last several quarters. EBIT was $111 million and EBIT margin was 35% which is 2.6 points lower from prior year. Excluding the tablet replacement charge, EBIT margin would have been 37.8% which is in line with the last four quarter. EBITDA was $117 million and EBITDA margin was 37%.

In International Mailing revenue was $79 million, a decline of 14% from prior year. Excluding the impact of our market exits, revenue declined 6%. Equipment sales decline largely driven by weakness in Germany and France, but partly offset by growth in the UK and Japan. Recurring revenue streams also contributed to the overall decline. EBIT was $12 million and EBIT margin was 15% which was a decline of one point from prior year mostly due to the decline in revenue. EBITDA was $14 million and EBITDA margin was 18%.

Turning to Software Solutions. Revenue was $73 million which was a decline of 2% from prior year, driven by lower license revenue but partly offset by higher data updates, SaaS and Services revenue. Smaller deals grew double digits in the quarter marking the sixth consecutive quarter of double-digit growth. Additionally, prior year benefited from a $7 million Location Intelligence deal which created a tough comparison for the quarter. EBIT was $2 million and EBIT margin was 2%, which was a decline of one point from prior year mostly due to a decline in license revenue. EBITDA was $4 million and EBITDA margin was 6%.

Let me now address our 2019 guidance. We are updating the full year based largely on Presort Services performance and to a lesser extent a slower profitability ramp in Global Ecommerce, as well as the expected charges to be incurred in first quarter. Our updated 2019 guidance is as follows. Revenue excluding the impacts of currency to grow in the range of 1% to 3% as compared to prior year. Adjusted EPS to be in the range of $0.90 to a $1.05 and free cash flow to be in a range of $200 million to $250 million.

Let me also address timing through the year. As the portfolio continues to shift to growth, particularly around shipping, the fourth quarter will increasingly be our largest revenue and earnings generating quarter. Our second quarter revenue and adjusted EPS will be impacted by this portfolio shift. Additionally, we are investing in our third-party financing initiatives as we begin to originate loans and leases which will impact expense ahead of the streamed revenue that will be recognized over time.

We also expect our spend reductions to ramp throughout the year. Therefore, we expect the second quarter's EPS attainment to the full year to be approximately one point lower than prior year's second quarter EPS attainment. As a reminder, we have recast our financials for the new leasing standards and have posted a file with the eight quarter history on our Investor Relations website.

With that, operator, please open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Ananda Baruah from Loop Capital. Please go ahead.

Ananda Baruah -- Loop Capital -- Analyst

A couple if I could. Marc, how long on the Presort -- and thanks for the context on the quarters through the years with a bit of dynamics. Specifically to the Presort, how long do you think or what time -- how should we think about those actions layering in over the next couple of few quarters? And based on what you can see when do you think that business gets back to kind of stable? Or as the actions are intended to have it become?

Marc Lautenbach -- President and Chief Executive Officer

Sure. So Stan will keep me honest on this because he's got the scheduled in front of him. As you look at the work that we've done with the third-party and I'd stress that that's work that began last summer, so this is something that in some ways anticipated. We saw, I would say, de minimis benefit from that in the first quarter, we'll see a little bit in the second quarter and principally in the second half. The benefits come in, what I would say, two buckets; one is pricing which we are starting to layering out and that will be some of the benefits we realize in the second quarter. But the productivity benefits which are an important part of getting that business back on track are the second half.

In addition, what we're are staring at and you can kind of got lost in this year's numbers in Presort. But in essence there's a couple of things that have happened. One is -- and it's not for those of you who followed the company for a while, dissimilar to what was happening to the Production Mail business. The customer base is consolidating and as the customer base consolidates, while volume continues to increase, albeit not quite as much we had hoped, but volume is increasing. The volume is moving to customers who have more pricing power, they say deeper discounts.

So to a degree we can fine-tune that, but that is what it is. But it also gives you an important opportunity to offset transportation costs, SG&A where that volume came from, where it was more distributes. So, a long-winded answer to a question. We spent more time thinking and talking about Presort in the last four weeks than I have in the last four years, this has generally been a business that's performed exceedingly well. So short answer, a little bit in the second quarter, most in the second half.

Ananda Baruah -- Loop Capital -- Analyst

Okay. Got it, that's actually helpful context. And then just in regards to the transportation and labor costs, and I know you're not the only one obviously that are experiencing that dynamic. Are you -- you guys, you have the visibility to, like if that continues to sort of these announced with those, you have the visibility, I guess really my question is, how -- for how long do you think you'll need to address that? Is that more like a one-time we can get the cost structure sort of addressing dynamic? Or is this something where for this year and to next year, as well as these things may turn out you'll have to adjusted the cost structure to address it?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Ananda, let me take that from a couple of different angles here. First, let's talk about labor. My view is any business that has this much of a labor base with significant amount is always going to be driving productivity. If you recall last year and early in the second quarter, we actually took part of the savings from tax reform and increased the hourly wages to be more competitive in the marketplace. That certainly has cost us on a cost basis on a year-over-year basis, we'll wrap on that in Q2. But we come at this from a different angles.

One of the pieces that work with our consultant is to go through things like scheduling, labor productivity, time studies et cetera that will help us gain productivity overall. But we've also invested heavily in automation. As we start to roll that out, we'll come at this from both angles, becoming more efficient with the labor we have and then being able to automate more of that activity. So I think from a labour point of view that productivity mission is never going to end, it might have different flavors as you go through time. I think on a year-to-year basis we'll see some easing of that as we go through 2Q and into the back half of the year from actions that we've put in place.

On transport you are more suspect to the market where you go out into the spot market. And we keep rebalancing what we do internally with what we do through third parties. We've also taken additional steps to gain synergy between our Newgistics acquisition and Presort through the labor, I'm sorry, and transports. Now I still think we have a ways to go to capture all of that, but the concept is relatively simple and that is full trucks are much cheaper to run.

Ananda Baruah -- Loop Capital -- Analyst

Got it.

Marc Lautenbach -- President and Chief Executive Officer

A thumbnail version of that. I think labor is going to be a chronic problem not for -- just for Pitney Bowes, but for the country as you continue to have low unemployment and there's wage pressures. And listen, there's aspects of that, that's good from a sessile (ph) perspective. To Stan's point, there's a bunch of things that we have in place that will mitigate that. As you think about transportation costs, it's a little bit different dynamic between Presort and Global Ecommerce. Global Ecommerce actually exited the quarter kind of on the transportation cost line that, that've had planned more or less and it was close enough to govern. Presort on their other hand wasn't, part of that is a function of what's going on in the marketplace, but candidly part of it was a function of what I said before, when your volume consolidates, you should be able to get transportation savings and we didn't get those as quickly as we would have might.

Ananda Baruah -- Loop Capital -- Analyst

Got it. That's all helpful. And then just one quick wrap up and then I'll leave the floor here. So just given the handful of actions that are taking place and you already spoke to the guide, but let me ask it this way too. Should we now anticipate that the December quarter will be more weighted toward the profit targets for the year than the typical, as it sounds like, really it's not going to be until Q3 where I think a bunch of these actions kind of get hold? That's it from me, thanks.

Marc Lautenbach -- President and Chief Executive Officer

The short answer is, yes. If you think about, we kind of glossed over in one sense, but now Commerce Services is the largest segment that we have. If you think about the way that companies participates in the Commerce Services, so much of their revenue is in the fourth quarter because of the obvious reasons of the holiday seasons and whatnot. So the profit will follow that, but it's just a change in nature of the company, but --

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Ananda, you saw from 2017 to 2018 that fourth quarter became a bigger part of the year. And I think you'll see that increase again as you look 2018 to 2019, just simply mix of the business and underlying dynamics like Presort.

Marc Lautenbach -- President and Chief Executive Officer

Yes, I would say is, we don't -- when -- we spend a lot of time in the prepared remarks is, the Software business is starting to behave like a proper Software business. I would say in my first several years here, it was the only Software business I have ever seen that actually has kind of balanced first half, second half in terms of revenue. Most Software businesses are very skewed to the second half and particularly the fourth quarter. So there's a bunch of different dynamics that will push profit into the fourth quarter.

Ananda Baruah -- Loop Capital -- Analyst

Okay, great. Thanks a lot guys.

Operator

You're next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.

Kartik Mehta -- Northcoast Research -- Analyst

Marc, just a big picture thought on the Presort business. As you look at profitability of this business over the next two years to three years, how would you -- what do you think about the margin profile for this business as we go over the next two years, three years, with these labor costs having a negative impact and obviously transportation because of the economy so strong. Just to get your thoughts on that?

Marc Lautenbach -- President and Chief Executive Officer

Yes. So last time we provided long-term guidance for Presort, it was in the 15% to 20% range. We'll update long-term guidance here in a couple of weeks at Analyst Meeting, which I believe we've announced. So, I would say 15%-ish. I mean I don't think it's going to be a material departure from where we've been. And it's to the point that I said, I mean most of the issues that you're looking at is not controllable totally by us, there is just the reasonable offsets. And then by the way that was reaffirmed by the third parties. So it's -- that's not something that we're (inaudible) about, that's something that we've worked with outsiders to get a affirmation of.

Kartik Mehta -- Northcoast Research -- Analyst

As you look at the Ecommerce business, that business is going to do again probably north of $1 billion. Yet, it's right now being challenged profitability-wise. I know you said you are investing in the business. But at what point do you think this business starts really generating operating profits rather than all the investments that's needed?

Marc Lautenbach -- President and Chief Executive Officer

Yes. We'll say more at Analyst Day. But let me kind of draw a line between a couple of things that helps illustrate the points. So last year in the first quarter we talked about the churn in Newgistics business. So if you think about the Newgistics acquisition, we consummated the acquisition in the fourth quarter of 2017. So for all practical purposes in a shutdown period in terms of making changes to the network. As we role that business into the first quarter of 2018, we had a fair amount of issues servicing clients. And the short story was we just simply didn't have enough capacity to accommodate the volume. Fast-forward 12 months later the level of churn that we experienced in Newgistics in the first quarter depending on how you want to look at it, it was either 50% or you could say 10% of the churn that we had achieved in the previous quarter. Why is that? Because we build capacity ahead. So if you look at the network, the Newgistics network in particular, I think we've got five times the level of capacity.

So this dynamic, so one way of saying it is, as long as you've got this ball (ph) wave of volume that we're continuing candidly to enjoy, you're going to invest capacity in front of that or you're not going to keep it. So that's important because the long-term -- the most important long-term factor and profitability of this business is scale. We'll talk about this in some level of depth in a couple weeks, but we think we need 250 million to 300 million parcels to get to our long-term targets. Now, we'll get to profitability before then. But for sure as you're thinking about this business, as long as we're kind of growing as much as we have for last six quarters, you got to invest capacity or you're not going to keep the clients. And by the way, it's no different than what UPS and FedEx have said and they've announced as well. Everyone is adding to the network to take advantage of what this opportunity has and we'll come at the opportunity from slightly different ways, but we at large shipping as a heck of an opportunity.

Kartik Mehta -- Northcoast Research -- Analyst

Marc, just one question, a follow-up on that. You talked about 250 million to 300 million parcels. Where are you today in relationship to that number?

Marc Lautenbach -- President and Chief Executive Officer

We'll talk about that more in a couple of weeks. But we got a year or two to go to kind of get the level of scale. I'd say, as we look at the estimates now, fourth quarter of next year we kind of feel like we are operating at scale and then you got to sustain that going forward.

Kartik Mehta -- Northcoast Research -- Analyst

All right, thank you very much. I appreciate it.

Operator

Your next question comes from the line of Allen Klee from the Maxim Group. Please go ahead. Allen Klee, your line is open, check your mute button.

Okay, we'll move on, we'll go to the line of Glenn Mattson from Ladenburg. Please go ahead.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

The -- on the -- I believe on the Ecommerce business you talked about strength in adding new logos and reducing churn in subs. Can you kind of give us any sense of what the churn has been historically and what the change was?

Marc Lautenbach -- President and Chief Executive Officer

Yes. So, let me -- first, I'll talk to the new logos point, because I think it speaks to the demand. We've added 270 new logos in our Global Ecommerce business over the last 12 months. And again, I mean you guys have followed the company a bit, Glenn, you for a long time. You think about what this business was four years ago? It was one client and we've added 270 new clients in the last 12 months. In terms of the churn, I think the industry trend in this business is kind of, I'd say, high single digit and we were kind of in that range last year, we're at a fraction of that this year.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Great. And --

Marc Lautenbach -- President and Chief Executive Officer

But again that's -- it's -- we talk about this (inaudible). We always weren't able to do that as we are investing in front of the volume.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

All right, all right. Okay. And on the Software side, it was -- I think the second quarter where you highlighted kind of small deals kind of helping to carry the day. Maybe you could just kind of expand on that a little bit more? And talk about the outlook for Software for the rest of the year.

Marc Lautenbach -- President and Chief Executive Officer

So let me start with the bottom line up. I'm bullish about the outlook for Software for the rest of the year. As you look at the first quarter, we reference back to the large deal that we recognized last year in the first quarter that was $7 million-ish. If you look at the first quarter, sure we had several deals that were $500,000 to $1 million, so good size deals, but nothing of seven-figure or not many seven-figure deals. That's important because our scale, this is always going to be a lumpy business, but what inoculates you against the true lumpiness is that you build this broad ball wave, if you will, of $500,000 to $1 million deals. So, we feel good about the business going forward. We've had some larger chunky deals that are in front of us.

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Still take this skew (ph) obviously through the year. But let me give a little bit more color. So small deals grew double digits this quarter, that's actually the sixth consecutive quarter of double-digit growth. And if you look at the indirect channel, we've talked about that, that also grew nice double digits here. What I think more interesting is, we are seeing the composition of that pipeline shift and roughly two-thirds of those deals on the pipeline are lift deals versus shift deals.

Marc Lautenbach -- President and Chief Executive Officer

That said, in layman's language, that means partners are bringing us deals which again is -- was always the theory of the case. We always thought we had good products, but we had a hard time getting to new logos. What we're now starting to see is affirmation of that hypothesis. So when partners start bringing in the deal, that tells you they are confident of what you've got and lift is just flat out, incremental to what that direct sales force produces. So it's taken away too long to get to that point, but we are now starting to see the benefits of what we've worked on for last several years.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Okay, great. That's it from me.

Operator

Next, we'll go back to the line of Allen Klee from the Maxim Group. Please go ahead.

Allen Klee -- Maxim Group -- Analyst

For the NSA that you mentioned that got approved, but was delayed. Can you tell us if the terms that it got approved on will have a material -- were relatively similar to what they were in the past or is there something that's changed in it that could have a meaningful impact on the profitability you expect from that business?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Allen, it's relatively in line with our previous arrangement.

Marc Lautenbach -- President and Chief Executive Officer

Allen, just broadly, our relationship with the Presort Service has never been better. And so that was one NSA out of seven and candidly probably a dozen different initiatives. We're really pleased with that relationship and it's -- it continues to be --

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Remember this is a wide-ranging relationship, right? So it's everything from meters to work share in Presort to the initiatives for Newgistics that inject parcels into their network. So this is far broader than any one NSA.

Marc Lautenbach -- President and Chief Executive Officer

But this particular NSA was kind of (inaudible) same as what we had experienced.

Allen Klee -- Maxim Group -- Analyst

Okay. And when you said part of the reason that you factored into your guidance, new guidance was a slower ramp in Global Ecommerce, by that did you mean this slowness that we saw in this current quarter or do you mean that in the next couple of quarters, in the next two quarters until we get to 4Q it also be at a slower ramp?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

So let me split that, because I think it's important to dissect it. So we're still investing ahead of this curve. From a revenue perspective, we believe revenue will perform better than it did in the first quarter. So in the first quarter Global Ecommerce grew 9%, the exit rate was 16%. So coming out of March, the month of March was 16%. So we expect that Global Ecommerce will go back to a double-digit growth. Now from a profitability side it's really the comment on the ramp. We continue to invest in new facilities. We've opened two so far this-year. We continue to invest in automation capability and new offerings and to go through investments in technologies. So those have a front-end load to them, but we think they're important, both comment back to churn and serving clients better, but also to expand that marketplace for us.

Marc Lautenbach -- President and Chief Executive Officer

To make an additional point about Global Ecommerce, I know there has been a concern by some of our investors and I understand that we've been chasing revenue at any cost in that marketplace. Two, Global Ecommerce teams' credit, they are actually starting to get out of some of the businesses that they were in, where they are not -- they don't see a path to acceptable margins, some of the relationships depending on to separate margins. So, I understand people like this business to be profitable sooner versus later. And with the growth that we have seen, there's always a concern that you're chasing revenue than growth. I would just highlight to our investors and to our analysts that they're getting out of particular businesses where they don't see the opportunities for long-term profitability.

Allen Klee -- Maxim Group -- Analyst

Thank you. Your CapEx in the quarter was around $29 million. Is that sort of a reasonable quarterly run rate going forward?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

You're going to see that shift around. So we typically look -- we'll give you an update on CapEx in total on Analyst Day. If you look at last year, I think you'll see that'll increase slightly year-to-year, not dramatically.

Allen Klee -- Maxim Group -- Analyst

Okay, thank you. And then lastly, and this is just something I missed, if you could clarify. In the guidance you said that something would be one point lower year-over-year for the second quarter. Could you just clarify what that was?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Sorry, we were talking about the skew of the year, this goes a little bit back to the earlier question. And when you go look at the attainment, we are going to continue to shift to be more back-end-loaded. So when you look at 2Q as a percent of the year, we think that attainment will be about a point lower than it was prior-year.

Allen Klee -- Maxim Group -- Analyst

So you mean if you take the percent that it is of the year's --

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Correct.

Allen Klee -- Maxim Group -- Analyst

-- revenue, whatever percent that was in 2018, it'll be one point less?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Yes. We were -- it was kind of specifically to earnings.

Allen Klee -- Maxim Group -- Analyst

To earnings?

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Yes.

Allen Klee -- Maxim Group -- Analyst

Okay, thank you so much.

Operator

(Operator Instructions) Next, we'll go back to the line of Ananda Baruah from Loop Capital. Please go ahead.

Ananda Baruah -- Loop Capital -- Analyst

Hey, just was wondering with stance.com's announcement to -- sorry, just continue, the pre-existing those -- it's relationships with the USPS. If you've seen any structural changes in the market environment on the business that sort of gets it in the same way? And then second, generally, if you believe if there's any opportunity there for you in an incremental way given the change of the relationship with Stance and the USPS? Thanks.

Marc Lautenbach -- President and Chief Executive Officer

So, we've honestly followed that fairly closely as you might imagine. So far we've not seen to your point structural changes in the market. So let me be clear about that. Stance did talk about 3% price increase for aspects of the customers. We've not seen evidence of that yet, so hard to know. If and when that does occur, then that potentially would create an opportunity for us to have conversations with clients where we have had the opportunity before. Suffice it to say with the changing dynamics of USPS, this will create opportunities. And as well as, I mean to be candid, I mean there's also threats in that as well. But we like how we are situated.

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Look, our competitive offerings are pretty wide and our approach to market through parcel through all of the things we offer through Global Ecommerce and returns et cetera. So we like our position in the competitive market. And I think if you look at the growth we've had in Global Ecommerce that, that manifests itself into good client acceptance.

Marc Lautenbach -- President and Chief Executive Officer

Well, strategic belief that I had about that business and I think it's been borne out to be true is that there's an advantage that physically touching the parcels as opposed to just printing the labels. Obviously physically touching the prices comes with a different margin and a different set of investment structures. But that said, as you contemplate, was it's meaningful to USPS? I won't say that printing labels as in unimportant, we certainly print a lot of labels as well, we're happy to do that. But if you can do things actually with the parcel that helps in just into the postal service and other networks, the logistics from our networks, that's even more advantageous. So, I think you're seeing is, the wisdom of some of the strategic beliefs spearing out.

Ananda Baruah -- Loop Capital -- Analyst

That's great, thanks a lot guys.

Operator

And at this time, there are no further questions. I'd now like to turn the call back to Mr. Lautenbach for any closing remarks.

Marc Lautenbach -- President and Chief Executive Officer

Great. Thank you. Let me just reaffirm what I said at the outset. We're not pleased with the first quarter performance. It's not something that we anticipated, not something we're pleased about, but it is something we can recover from. If you contemplate the dynamics in the first quarter and you kind of isolate the things that went wrong, the battery issue is a one-time issue that we get through, the NSA deferral, we're already through it. And the dynamics inside of Presort candidly are disappointing, but it's also a business that has got a proven track record of execution. As you contemplate those three dynamics together, I don't think with any of them we have anything to do with the long-term vibrants here as a long-term opportunities company.

On the other side of it, if you look at SMB at the margin structure, if you look at the Software in terms of the channel dynamics, and candidly the pipeline that's in front of them. And Global Ecommerce from a exit rate in terms of revenue and some of the productivity initiatives, the long-term theory from my perspective here is intact. So the first quarter was disappointing, it was a bump in the road. That being said, it doesn't change my view when I hear the -- of the long-term prospects of those company. So, we'll talk more on Analyst Day and we'll render some of these dynamics more explicit, particularly around Global Ecommerce and profitability, because I know that's something that appropriately is weighs on people's minds, but we like our long-term position and nothing has changed about that.

Stanley Sutula -- Executive Vice President and Chief Financial Officer

So, just a reminder, Analyst Day is May 29th, and we look forward to seeing you there.

Marc Lautenbach -- President and Chief Executive Officer

Thanks.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

Duration: 51 minutes

Call participants:

Adam David -- Vice President-Investor Relations

Marc Lautenbach -- President and Chief Executive Officer

Stanley Sutula -- Executive Vice President and Chief Financial Officer

Ananda Baruah -- Loop Capital -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Allen Klee -- Maxim Group -- Analyst

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