Stamps.com (NASDAQ:STMP) announced solid fourth-quarter results for 2018 on Thursday, handily beating earnings expectations as the company's strategic focus on its highest-value customers continues to play out. However, the online postage and shipping solutions leader also stunned investors with weak forward guidance, driven by its decision to terminate its exclusive partnership with the United States Postal Service.

With shares down nearly 58% on Friday in response, let's dig deeper to see both how Stamps.com ended 2018 and what investors should expect in the coming year.

Hand putting a stamp on a white envelop

Image source: Getty Images.

Stamps.com results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Growth

Revenue

$170.2 million

$132.5 million

29%

GAAP net income

$42.7 million

$40.2 million

6%

GAAP net income per diluted share

$2.30

$2.15

7%

Data source: Stamps.com. GAAP = generally accepted accounting principles. 

What happened with Stamps.com this quarter?

  • Mailing and shipping segment revenue grew 29% to $165.4 million, and customized postage revenue climbed 23% to $4.8 million.
  • Adjusted for items like stock-based compensation and acquisition expenses, (non-GAAP) net income declined 20% year over year to $3.73 per share -- above the $2.90 per share most investors were expecting.
  • Adjusted EBITDA grew 11% to $71.3 million.
  • Paid customers were flat compared to year-ago at 736,000, which is consistent with Stamps.com's strategic focus on acquiring fewer customers with higher lifetime values. As far as that goes, average monthly revenue per paid customer grew 29% to $74.93.
  • Average monthly churn was 2.9%, down slightly from 3% in last year's fourth quarter.
  • Stamps.com repurchased 531,000 shares for $88.5 million during the quarter. 

What management had to say 

Stamps.com chairman and CEO Ken McBride stated:

We are pleased with our fourth quarter and fiscal 2018 financial performance. We achieved strong financial results driven by exceptional execution in our shipping business and we completed our strategic acquisition of MetaPack which has positioned Stamps.com as the leading global e-commerce shipping software company. We are well positioned to successfully compete on a global scale with a focus on driving long-term value for our customers, partners and shareholders.

During the subsequent conference call, however, McBride dropped this bombshell:

When our customers are offered services, such as Shipping with Amazon, FedEx One Rate, UPS' new products, regional carriers, Uber shipping, ship from store and everything else, we have to bring those solutions to our customers so that they can always choose the best alternative for their business. The USPS is working hard to compete in the e-commerce shipping industry. But ... they have many constituents and they have many issues to deal with that the more nimble private carriers do not. As everyone knows, we've been in discussions with the USPS about a renewal of our long-standing revenue share agreement that we utilize to drive their shipping business. We have proposed our terms of renewal to the USPS. One of our nonnegotiable items is that ... we will no longer be exclusive to the USPS. And that's nonnegotiable. USPS has not agreed to accept these terms or any other terms of our partnership proposal. So at this point, we've decided to discontinue our shipping partnership with the USPS so that we can fully embrace partnerships with other carriers who we think will be well positioned to win in the shipping business in the next five years.

In short, given the direction of the broader shipping industry and a plethora of superior options for customers -- as well as the USPS' refusal to accept Stamps.com's terms for renewal -- Stamps.com will no longer partner with USPS exclusively.

Looking forward

Therefore, McBride warned that Stamps.com will experience "some short-term pain ... over the next few years" as it sacrifices its shipping revenue share with the USPS.

In the meantime, Stamps.com expects full-year fiscal 2019 revenue in the range of $540 million to $570 million -- down 5.4% from 2018 at the midpoint and far below the 16% growth most analysts were modeling. That should translate to adjusted net income per share of $5.15 to $6.15 -- down from $11.78 per share in 2018, and a little more than half the $10.79 per share Wall Street was expecting.

To be fair, this might be exactly the right move to ensure Stamps.com can survive and thrive over the long term in our fast-changing shipping industry. But given the financial pressure it must endure until then, it's no surprise to see the stock plummeting in response.