stamps.com | nasdaq: stmp | analyst report | march 2018 · stamps.com endicia ups fedex dhl ......

Stamps.com | NASDAQ: STMP | Analyst Report | March 2018

Student Managed Investment Fund | 1

Analysts

Justin Chang, [email protected] Megan Dias, [email protected] Jesse Heatherington, [email protected] Darin Ostrowski, [email protected]

STMP vs. S&P 500 Price Chart

Investment Rationale

Stamps is poised to benefit from favorable industry tailwinds, accelerating revenue growth and strong fundamentals.

• Undervalued on a relative and absolute basis

• Growing market opportunities and industry leadership

• Accelerating revenue growth

• Domestic and global e-commerce growth

• Strong EPS and EBITDA growth

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3/4/2013 3/4/2014 3/4/2015 3/4/2016 3/4/2017

S&P 500 STMP

Recommendation: Buy March 6th, 2018

Current Price: $199.75 Fair Value: $252.39 2-Year Target: $294.16

Market Data

Ticker: STMP Sector: Technology Shares Out.: 17.48M Market Cap: 3.2B 52 Wk High: $233.13 52 Wk Low: $100.55 Financial Data

P/E Ratio: 22.68 P/S Ratio: 7.32 PEG Ratio: 0.73 ROA: 23.36 ROE: 34.60 ROIC: 27.45 Debt/Equity: 0.12

Company Description: Stamps.com Inc. is a provider of Internet-based mailing and shipping solutions in the United States. It offers products and services to its customers through the Internet Mailing and Shipping Services segments. The company was founded in 1996 and is headquartered in El Segundo, CA.

Stamps.com (NASDAQ: STMP) Equity Research Report USF Student Managed Investment Fund



Business Overview

Stamps.com (hereafter referred to as “Stamps” or “the company”) is a multi-segment software and technology company that supports and operates in the postal, shipping, and logistics industry. Stamps is comprised of five business subsidiaries: Stamps.com, Endicia, ShipStation, ShipWorks, and ShippingEasy.

• Stamps.com launched in 1999 and was the first ever USPS-approved PC Postage vendor. Its USPS mailing and shipping solutions target small business and home office mailers (SOHO) and enterprise mailers, e-Commerce shippers and high-volume shippers with over 75 third party software integrations.

• Endicia was recently acquired by Stamps.com in 2015 to strengthen its product portfolio. Its software and web solutions target e-Commerce and high-volume shippers, with over 240 third party software integrations.

• ShipStation was acquired in 2014 and offers web-based multi-carrier solutions under the brand names ShipStation and Auctane ® to e-Commerce shippers, and currently has over 170 third party software integrations and over 30 parcel carriers.

• ShipWorks was also acquired in 2015 and offers software-based multi-carrier solutions to high volume shippers and boasts over 100 third party software integrations and over 15 parcel carriers.

• ShippingEasy was the Company’s most recent acquisition in 2016 which offers web-based multi-carrier solutions to e-Commerce shippers with over 45 third party software integrations and over 5 parcel carriers.

The acquisition timeline is highlighted above, and through Stamps.com’s branded solution and these acquired platforms, the company possesses a well-diversified and competitive portfolio to meet the needs of its target customers.



Customer Overview

Through the segments covered above, Stamps targets a broad base of customers, from individual shippers to high-volume shippers.

Stamps’ main service offering is its software and web-based applications that allow users to print USPS-approved shipping labels for a range of products. The company was the first entrant into the PC postage market in 1999 and has since scaled that business through organic growth and strategic acquisitions to become the leader in PC postage. Stamps’ target customer segments are broken down below:

• Individual Mailers § Single users who are primarily mailers but also send some packages

• Small Business and Home Office Mailers (SOHO) § Single home office or small businesses with one or few employees who are primarily mailers but also

send some packages • Enterprise Mailers

§ Larger organizations with distributed office users who are primarily mailers but also send some packages

• E-commerce Shippers § Individuals and businesses that sell online and send packages in medium to high volumes

• High-Volume Shippers § Large production shipping environments (warehouses, fulfillment houses, large retailers)

Below is an example of how Stamps integrates its software and service into partner companies. Their software is offered through the form of an application program interface, or API, that helps boost efficiencies through shipping label customization, online shopping cart software, hierarchical sorting of shipments, timing optimization, address data pooling, and more. Through its business segments, Stamps can cater to the needs of the company utilizing its services. For example, Amazon can use one of Stamps access methods, integrate Stamps’ API into its platform, and unlock access to primary carriers like FedEx. In this example, Stamps’ software is the middle-man between Amazon and FedEx, allowing Amazon to seamlessly print labels for shipping through FedEx.

Primary Carriers

USPS UPS FedEx DHL

Carrier APIStamps.com Endicia UPS FedEx DHL

Customer Access Method

Stamps.com Endicia ShipStation ShipWorks ShippingEasy

E-commerce and High Volume Shippers

eBay Amazon Etsy Google Shopify Warehouses Retailers



As evidenced by the charts above, Stamps has been successful in onboarding new paid customers. From 2013 to 2017, new customer CAGR was 10%. Forward looking statements by Stamps management, primarily referencing 2018 initiatives, have the company focusing on acquiring more high-volume shippers, growing Average Revenue Per User (ARPU) due to the increase in dollar amount that those companies will pay for Stamps’ services. While these initiatives will grow the company’s revenue and high-volume shipper base, the company does not plan to detract focus on smaller and enterprise shippers. Based on historical performance and in-depth, forward looking analysis, we see Stamps customer growth and ARPU increasing in the future, with ARPU increasing faster than customer growth.

Select customers and integrations:

Collectively, Stamps has over 475 unique partnerships and integrations, including partnerships with carriers such as FedEx, UPS and DHL. Carrier-specific integrations utilize Stamps API platform to allow carriers to print and track packages globally.

Customer Growth ARPU Growth



Churn Rates:

An important metric to observe when looking at a company with a subscription-based revenue model is churn rates as slight fluctuations in churn can result in significant bottom-line impact. The formula to determine the churn rate for STMP is given below:

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Churn rates have been on a favorable steady decline since 2010 – indicating that STMP is benefiting from increased customer satisfaction as it focuses on shipping customers who tend to have lower churn rates compared to traditional small business customers.

Industry data typically points to around 5% being a “healthy” average, we analyzed churn rates by different industries to understand where STMP stands compared to industry benchmarks based on Recurly Research.

When comparing STMP against SaaS, Consumer and Business Services, STMP posts an average annual churn rate well below 6.19%, 7.91% and 6.92% with a 2017 churn of 2.80%.

3.90%3.50% 3.50% 3.50% 3.40% 3.30%

3.00% 2.80%

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%

2010 2011 2012 2013 2014 2015 2016 2017

Average Churn Rate



Investment Rationale

According to our analysis, we have outlined below some of the major factors that support our valuation and investment rationale for Stamps:

Undervaluation

Relative Basis

Stamps operates in a niche segment of the Software and Service market, with little direct competition to use as a basis for relative valuation. Stamps’ main competitor, Pitney Bowes, sells and markets postage meters, with only limited market penetration of PC postage services. Stamps has been able grow its competitive moat, as the industry has high barriers to entry even with low capital requirements. The reason for this is because of Stamps’ long-standing relationship with the USPS (over 18 years) and its continuing investments into R&D to keep pace with the changing market.

Compared to the broader Software and Services market, Stamps is undervalued on a relative basis by almost all metrics, as shown in the table to the right.

Absolute Basis

On an absolute basis, Stamps looks attractive based on our FCF, P/E and EV/EBITDA models, which are discussed in-depth below. Stamps is undervalued on an absolute basis by 25% due in part to a 20% drop in Q3 2017. The reason behind this drop can be attributed to lower than expected growth for mailing services on an industry basis, which only saw weaker than expected growth in 3Q 2017. Overall, mailing and parcel volumes have accelerated over the last 5 years, leading us to conclude that the drop in Stamps stock price was an overreaction by the market, with no change to the company’s fundamentals. We forecast the stock to reach its intrinsic value of $252.39 over the next 12 months and its two-year price target of $294.16 by the end of the holding period.

Growing Market Opportunities and Dominance

Currently, Stamps has over 735,000 customers, ranging from SOHO operations to multinational e-commerce companies. The total addressable market size is over 31 million, with Stamps controlling only 2.4%. The substantive customer growth that Stamps has seen, coupled with a downward trending churn rate and increasing global e-commerce sales lends credence to our thesis that Stamps will continue to grow its base. As previously discussed, Stamps’ shift towards onboarding higher volume shippers will continue to accelerate the company’s revenue growth and ARPU.

Relative Valuation STMP IndustryP/E 22.68 54.5P/S 7.32 10.2P/B 7.1 9.2P/CF 18 42



Accelerating Revenue Growth

Due to contributing factors such as growth in e-commerce, global parcel volume increasing, and added partners and integrations, Stamps has seen accelerating revenue growth with a historical 5-year CAGR of 30%. Projected revenue CAGR is 18% and is based on a market with ample growth opportunities, as well as Stamps’ competitive positioning within the market. Due to its industry leading software and reputation for performance and reliability, Stamps is able to attract the very best high-volume shippers whose postage and revenue growth exceeds the overall market. 2017 revenue growth of 28.7% was mainly organic, as 3 of the companies 4 acquisitions were fully integrated heading into 2016.

Domestic and Global E-commerce Growth

U.S. e-commerce growth increased from $260 billion in 2013 to $453 billion in 2017, a CAGR of 12%. According to a study conducted by the International Post Corporation, global e-commerce sales are to grow 141% by 2021. The growth in e-commerce sales and the growth in parcel volume will drive Stamps’ revenue higher as more carriers and shippers utilize its software to process and track shipping labels. We have incorporated these trends in our valuation models to better forecast Stamps’ future growth.

Strong EPS and EBITDA Growth

STMP has exhibited strong EPS and EBITDA growth over the past 5 years with a CAGR of roughly 30% and 38% respectively, driven by accelerating revenue and long-term margin expansion with a focus on growing revenue to reinvest into the company’s shipping segment. Historically, Stamps has also consistently beat analyst estimates, and due to the prevailing macro and company-specific trends analyzed, we believe this pattern will continue into the future.

U.S. E-commerce Growth (millions)

Revenue Growth

EPS Growth EBITDA Growth



Industry Analysis

Stamps.com is in a favorable position to take advantage of rapid e-commerce growth. The expansive trend of online retail activity brings higher shipping volumes and returns, incurring higher demand for shipment labeling and logistics among e-commerce businesses.

Shipping Industry Trends

The shipping industry, specifically parcel shipment trends, has seen 2-year growth of 48% in 2017, with an estimated 17-28% growth rate YoY for the next four years. The U.S. has the largest parcel shipping market with $95.8 billion USD, rising 8.2% YoY. Brazil has seen a 13% rise and Canada 2.6% in parcel traffic. The U.K. lead the charge as the European regions saw growth ranging from 3%-12% in parcel shipping, with Australia seeing 13% growth accompanied by 4% growth in parcel spending. As the largest and leading provider of online shipping solutions, Stamps can best benefit from parcel shipping growth with its shipping label API solutions. These projections were incorporated into our revenue build assumptions.

B2C Market Trends

Stamps strives to better target the global business to consumer e-commerce market as it has shown promising growth and profitability prospects. The B2C market was valued at $2.12 trillion USD in 2017 with a compounded annual growth rate of 13.18% to reach $3.94 trillion USD by 2022. Its growth is being driven primarily by growth in smartphone/computer users around the world and internet subscriptions to e-commerce websites. With the improvement of e-commerce infrastructure in regions of the world previously without large amounts of technological participation, B2C e-commerce can enter untapped markets to realize demand never before seen in the industry.

Industry Players Adapting to E-commerce Growth

Notable players within the industry are already implementing plans to better improve their logistics, thereby improving their sales. Amazon plans to expand their number of warehouses to better position inventory closer to the consumer. With this, shipping time is greatly reduced, improving customer satisfaction and increasing product turnover. Traditional brick and mortar stores like Wal-Mart and Best Buy are also exploring similar plans to reduce the distance between customers and the inventory they order. In this way, traditional retailers are forced into re-logistification, a term that describes the shift towards sophisticating logistics to better meet the trend of retail going to the consumer as opposed to consumers originally going to retail locations. This practice reduces the demand for traditional inventory centers that sit at the center of revenue streams for companies like FedEx and UPS. The involvement of technology in logistics reduces the need for warehousing by improving efficiencies and inventory flow. Luckily, Stamps is at the forefront of logistics technology, with its creation of application program interfaces (API) that help boost efficiencies through shipping label customization, online shopping cart software, hierarchical sorting of shipments, timing optimization, address data pooling, and more.



Total Retail E-commerce

Total Retail E-commerce Total Retail E-commerce

14.3% 19.0%

Annual Retail & E-commerce Sales Data Comparisons / Compounded Annual Growth Rates

2.2% 9.7%

7.7% 14.3%

3 year CAGR 5 year CAGR

10.0% 11.7%

9.4% 11.1%

11.1% 7.9%

6.3% 8.4%

9.0% 11.9%

9.3% 12.4%

9.3% 11.3%

10.7% 10.2%

-0.4%

2.5%

4.1%

2.8%

4.1%

4.3%

-1.0%

-3.3%

0.5%

2.4%

1.6%

2.0%

2.6%

2.5%

2.9%

4.0%

4.3%

1.8%

0.5%

-0.3%

2.7%

2.5%

10.6%

10.0%

11.1%

11.0%

5.3%

17.2%

Difference in Annual Sales Change (E-commerce -

Retail)

11.6%

12.0%

12.1%

10.4%

9.6%

2.8%

3.8%

20.4%

8.4%

7.3%

16.0%

14.9%

14.0%

14.5%

13.2%

15.4%

17.5%

16.8%

-8.2%

-1.5%

3.2%

4.0%

3.6%

3.4%

145,507

141,592

136,470

4.9%

7.5%

5.7%

3,612,471

3,935,315

3,995,182

4.4%

2.9%

1.9%

4.1%

3.6%

3,818,048 169,921

8.9%

8.0%

7.2%

6.4%

5.9%

5.4%

4.9%

4.5%

260,950

4,302,229 230,474

4,102,952 199,673

5,075,914 453,457

4,862,853 390,987

4,727,427 340,415

4,639,440 298,682

4,458,450

Annual Sales (in millions) E-commerce as a Percent of

Total Retail

6,120,000 765,000 12.5% 7.7% 16.1%

8.2%

Total Retail Sales Change from Previous

Year

E-commerce Sales Change from Previous

Year

2.8%

4.1% 9.6% 3.8% 11.0%

5,681,897 659,100 11.6% 4.7% 13.5% 8.8% 2.8% 8.8% 3.2% 11.0%

2018

11.3%

5,228,571 512,400 9.8% 3.0% 13.0% 10.0% 2.4% 9.4% 2.4% 11.4%

5,428,037 580,800 10.7% 3.8% 13.3% 9.5% 2.3% 8.6%

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2.8% 7.9% 3.4% 10.1%

Year

2022

2021

6,179,104 828,000 13.4% 1.0%

2020

2019



E-commerce Growth

The e-commerce industry has continued to capture total retail sales growth starting at 4.5% of total retail in 2010 to almost double at 8.9% in 2017. Its expansion is almost four times faster than total retail, with 16% growth in 2017 YoY compared to total retail’s 4.4% growth. It is estimated that e-commerce will continue to outperform the industry well into 2022 with higher sales growth numbers, 3-year CAGR’s, and 5-year CAGR’s. This trend was further projected into 2022 using e-commerce as a percentage of total retail sales trends. 2011 to 2014 saw constant 0.5% YoY growth, 2014 to 2016 constant 0.8% YoY growth, and 2016 to 2017 0.9% YoY growth. The most recent 0.9% growth was straight lined into 2022 to reflect strong current performance while avoiding overly optimistic growth estimations. The projections resulted in a 13.4% command of total retail growth in 2022 sanity checked by rough industry projections and the tapering difference in positive sales changes between e-commerce and total retail.

In the past, e-commerce growth has been resilient during an economic downturn due to the high adoption rate of e-commerce into consumer habits and lifestyles. This integration spurs the rising number of e-commerce users, which in turn increases the growth of e-commerce business to consumer markets detailed later in this analysis. In our Annual Retail & E-commerce Sales Data Comparisons / Compounded Annual Growth Rates table, total retail sales saw negative growth from 2007 – 2009, dropping as low as -8.2% in 2009. Meanwhile, e-commerce saw 20.4%, 3.8%, 2.8%, and 16.8% growth from 2007 – 2010 respectively, avoiding any negative growth numbers while consumer confidence weakened. Although rates were slowed in 2008 and 2009, e-commerce still grew during the recession, continuing their historical retail outperformance during the same period.

From a global e-commerce perspective, sales will continue to grow from 2.3 trillion in 2017 to 5.2 trillion dollars in 2022 while the U.S. portion of global sales steadily decreases from 22% of global sales in 2015 to 16% in 2022. This trend can still benefit Stamps due to their expansion overseas into markets like the U.K. and Australia.

With Stamps’ shift to better accommodate e-commerce shipping businesses as a larger portion of its revenue stream, they’ll be able to better realize e-commerce growth of this magnitude. These positive projections contributed to the decisions regarding our revenue build assumptions.

(See ‘Annual Retail & E-commerce Sales Data Comparisons / Compounded Annual Growth Rates’ Table and ‘Global & U.S. E-commerce Sales Data & Forecasts’ Table)



Percentage of Services Conducted Online

This driver represents the increasing use of the internet by consumers and businesses for services they previously paid form in tangible form (eg: the use of postage meters vs. PC postage solutions). As internet infrastructure increases and more companies integrate cloud-computing and software solutions into their business models, internet service adoption has grown 7.9% over the past 5 years and is projected to increase 730 bps over the next 5 years.

Carrier Pressures

Companies such as FedEx and UPS have more difficulty delivering across a scattered range of residential homes. With the rise of e-commerce, these companies have been forced to make far more stops for deliveries than before, costing them a lot more in operating costs. These current operations, named SurePost (UPS) and SmartPost (FedEx) have not effectively addressed this problem. Also, their duopoly pricing strategy pertaining to certain package sizing and DIM factor divisors increase fees and overall shipment pricing.

The USPS has had a better time coping with e-commerce shipments to residential areas thanks to its current operating model in which it already services residential areas, thereby avoid the increase in operating costs. They can also effectively avoid the duopoly pricing strategy pressure by keeping prices low and cutting out surcharges that FedEx and UPS normally employ. Because of this, they capture small parcel shipping from the growing number of e-commerce business.

Of the 2013 – 2015 e-commerce growth of 26%, USPS saw 22% increase in shipping volume while FedEx and UPS saw 7% and 9% increases in shipping respectively. Stamps’ agreement with the USPS helps generate its competitive shipping volume among competitors. Also, FedEx and UPS utilize Stamps’ API software to keep up with the changing environment of the industry.

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25.00%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

% of Services Conducted Online



Carrier Shipping and Mailing Rate Increase

Major carriers have announced the following rate changes for 2018:

UPS Effective December 24, 2017, UPS Ground, UPS Air and International services rose by an average net 4.9 percent. UPS Air Freight rates, within and between the U.S., Canada and Puerto Rico, also rose an average net 4.9 percent.

FedEx Effective January 1, 2018, FedEx Express package and freight standard list rates rose by an average of 4.9 percent for U.S., U.S. export and U.S. import services. FedEx Ground and FedEx Home Delivery standard list rates also rose by an average of 4.9 percent.

USPS

Effective January 21, 2018, mailing services products will increase 1.9 percent on average and shipping services products will average a 3.9 percent increase. First-Class 1 ounce letter stamp will rise to $0.50 (from $0.49), and metered letters rise to $0.47 (from $0.46).

As these prices increase, meter and postage solutions provide favorable savings alternatives, leading businesses with cloud-based shipping and mailing solutions to be a more attractive option.

Post Office/Retail Rates Stamps.com 2018 Postage Rates 2017 Postage Rates 2018 Postage Rates 2017 Postage Rates

First-Class Mail Letters

$0.50 $0.49 $0.47 $0.46

Priority Mail Express Flat Rate Envelope

$24.70 $23.75 $21.98 $21.18

Priority Mail Small Flat Rate Box

$7.20 $7.15 $7.05 $6.45

Global Express Guaranteed International

$64.50 and up $62.00 and up $61.28 and up $58.90 and up



Financial Highlights and Valuation

Aggregated Financial Info

Ratio Analysis

Segment Revenue Build

For our segment revenue build, we considered company specific and industry level drivers of growth such as e-commerce growth, shipping industry performance, and company optimization. Service revenue makes up a significant portion of total revenues and is expected to increase at considerable digit growth into the near future. Because it is growing faster than any other segment, it is contributing an increasing amount to total revenues annually, reaching 95% by 2021.

Financial Data 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F 2022FROE 31.0% 19.6% -1.9% 24.6% 34.6% 29.9% 32.8% 34.9% 34.0% 32.2%ROA 27.77% 16.69% -1.07% 13.21% 23.36% 22.25% 25.21% 27.65% 28.18% 27.51%Total Asset Turnover 0.80 0.67 0.55 0.64 0.73 0.81 0.86 0.91 0.91 0.88Financial Leverage 1.16 1.09 1.24 2.21 1.64 1.36 1.33 1.28 1.25 1.17Current Ratio 6.33 1.94 1.04 1.91 2.35 3.07 3.76 3.47 5.20 5.71Gross Margin 78.5% 77.7% 79.5% 82.7% 83.1% 84.4% 85.5% 86.2% 86.6% 86.9%Operating Margin 26.7% 16.2% -2.5% 33.0% 34.9% 34.5% 36.6% 38.1% 38.5% 38.8%Net Margin 34.5% 25.0% -2.0% 20.7% 32.1% 27.4% 29.2% 30.5% 30.9% 31.2%

Snapshot 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F 2022FRevenue 127,819 147,269 213,957 364,305 468,709 597,146 754,475 943,359 1,156,578 1,387,954 Gross Profit 100,319 114,363 170,022 301,333 389,483 503,699 644,710 813,100 1,001,393 1,205,653 Operating Income 34,118 23,810 (5,320) 120,220 163,503 205,723 275,772 359,344 445,079 538,047 Net Income 44,153 36,882 (4,198) 75,229 150,598 163,469 220,028 287,488 357,872 432,817 EBITDA 36,656 28,643 2,382 139,372 184,948 227,022 297,180 380,985 464,719 548,902 FCF 30,474 48,867 43,825 140,297 191,006 222,676 256,837 317,703 378,127 437,093 EPS $2.40 $2.81 $2.30 $2.55 $4.36 $8.81 $8.93 $11.28 $14.08 $16.54

Revenues: 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Service 88,173 99,013 115,696 176,672 313,057 411,272 538,766 695,009 882,661 1,094,499 1,324,344 % of Total 76.23% 77.46% 78.56% 82.57% 85.93% 87.75% 90% 92% 94% 95% 95%Growth 12% 17% 53% 77% 31% 31% 29% 27% 24% 21%

Product 14,710 16,580 16,883 18,283 20,234 20,715 21,751 22,838 23,980 25,179 26,438 % of Total 12.72% 12.97% 11.46% 8.55% 5.55% 4.42% 3.64% 3.03% 2.54% 2.18% 1.90%Growth 13% 2% 8% 11% 2% 5% 5% 5% 5% 5%

Insurance 7,120 7,515 9,217 11,732 17,300 17,385 18,254 19,167 20,125 21,132 22,188 % of Total 6.16% 5.88% 6.26% 5.48% 4.75% 3.71% 3.06% 2.54% 2.13% 1.83% 1.60%Growth 6% 23% 27% 47% 0% 5% 5% 5% 5% 5%Mailing & Shipping Revenue 110,003 123,108 141,796 206,687 350,591 449,372 578,771 737,014 926,766 1,140,810 1,372,971

Customized postage 5,651 4,710 5,450 7,229 13,615 19,244 18,282 17,368 16,499 15,674 14,891 % of Total 5% 3.68% 3.70% 3.38% 3.74% 4.11% 3.06% 2.30% 1.75% 1.36% 1.07%Growth -17% 16% 33% 88% 41% -5% -5% -5% -5% -5%

Other 7 1 23 41 99 93 93 93 93 93 93

Total Revenues 115,661 127,819 147,269 213,957 364,305 468,709 597,146 754,475 943,359 1,156,578 1,387,954



ARPU Revenue Build

In addition to a segment revenue build, we utilized an Average Revenue Per User (ARPU) model to estimate growth. Stamps has seen double digit paid customer growth for the last 5 years, and based on our analysis, we expect this trend to continue over the next five years. Stamps seeks to zone in on B2C companies engaged in frequent shipping by expanding its product and service offerings to aid said companies in their operations. With the focus on high-volume shippers and higher ARPU from acquisitions, ARPU growth has exceeded, and will continue to exceed paid customer growth into the near future. Revenue from this model slightly outpaces revenue based on segment analysis.

Free Cash Flow Model

We computed Free Cash Flow by adding Cash Flow from Operations and Capital Expenditures. For 2018, company guidance for capital expenditures is in the range of $2-$3M. We used the middle of that range and have capital expenditure back at 2016/2017 levels in 2019 and increasing at $1 million annually thereafter. Our WACC of 10.8% was calculated by computing weight of debt and equity and utilizing a market return of 14%.

CAPMRisk-Free Rate 2.80%Beta 0.85Market Return 14%CAPM 11.9%

Tax Rate 25%

Equity Value/ShareEnterprise Value 4,601,498 Less: Net Debt 0Equity Value 4,601,498 Diluted Shares Out. 18,387 Equity Value/Share 250.26 Current Price 199.75Discount to Market 25%

Terminal ValueLT Growth Rate 3%WACC 10.82%FCF (T+1) 450,205 TV 5,758,724 PV of TV 3,445,710

WACCAfter-Tax Cost of Debt 1.98%Cost of Equity 12%Debt Weighting 11%Equity Weighting 89%WACC 10.8%

Discounted Cash Flow 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Net Income 44,153 36,882 (4,198) 75,229 150,598 163,469 220,028 287,488 357,872 432,817 Adjustments (8,397) 14,843 50,314 72,818 47,221 61,707 43,808 38,216 29,255 14,275 Cash Flow From Operations 35,756 51,725 46,116 148,047 197,819 225,176 263,837 325,703 387,127 447,093 CapEx (5,282) (2,858) (2,291) (7,750) (6,813) (2,500) (7,000) (8,000) (9,000) (10,000) FCF 30,474 48,867 43,825 140,297 191,006 222,676 256,837 317,703 378,127 437,093

WACC 10.8% 10.8% 10.8% 10.8% 10.8%PV of FCF 200,939 209,140 233,450 250,726 261,533 Sum PV FCF 1,155,788



Sensitivity Analysis

To better understand the drivers behind Stamps’ valuation, we constructed sensitivity analyses based on revenue growth, operating expenses, and cost of revenue. For revenue growth, each 1% drop on the sensitivity analysis table corresponds to a 1% decrease in the revenue growth rate during all five forecasted years. Similarly, for operating expenses and costs of revenue, a 1% increase corresponds to a 1% increase in that category of expenses in each of the five forecasted years. The colors are centered on the valuation based on our currently projected numbers.

250.26 -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%-3.0% 280.62 278.64 276.67 274.69 272.71 270.74 268.76 266.79 264.81 262.83 260.86 258.88 256.90-2.5% 277.53 275.56 273.58 271.61 269.63 267.65 265.68 263.70 261.73 259.75 257.77 255.80 253.82-2.0% 274.45 272.47 270.50 268.52 266.55 264.57 262.59 260.62 258.64 256.67 254.69 252.71 250.74-1.5% 271.37 269.39 267.41 265.44 263.46 261.49 259.51 257.53 255.56 253.58 251.61 249.63 247.65-1.0% 268.28 266.31 264.33 262.35 260.38 258.40 256.43 254.45 252.47 250.50 248.52 246.55 244.57-0.5% 265.20 263.22 261.25 259.27 257.29 255.32 253.34 251.37 249.39 247.41 245.44 243.46 241.490.0% 262.11 260.14 258.16 256.19 254.21 252.23 250.26 248.28 246.31 244.33 242.35 240.38 238.400.5% 259.03 257.05 255.08 253.10 251.13 249.15 247.17 245.20 243.22 241.25 239.27 237.29 235.321.0% 255.95 253.97 251.99 250.02 248.04 246.07 244.09 242.11 240.14 238.16 236.19 234.21 232.231.5% 252.86 250.89 248.91 246.93 244.96 242.98 241.01 239.03 237.05 235.08 233.10 231.13 229.152.0% 249.78 247.80 245.83 243.85 241.87 239.90 237.92 235.95 233.97 231.99 230.02 228.04 226.072.5% 246.70 244.72 242.74 240.77 238.79 236.81 234.84 232.86 230.89 228.91 226.93 224.96 222.983.0% 243.61 241.64 239.66 237.68 235.71 233.73 231.75 229.78 227.80 225.83 223.85 221.87 219.90

Op

erating Exp

enses

Cost of Revenue

250.26 -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5%-3.0% 228.50 236.08 243.88 251.93 260.22 268.76 277.56 286.61 295.93 305.53 315.40-2.5% 225.91 233.39 241.10 249.05 257.24 265.68 274.37 283.31 292.52 302.00 311.75-2.0% 223.31 230.71 238.32 246.17 254.26 262.59 271.17 280.01 289.10 298.46 308.09-1.5% 220.72 228.02 235.54 243.30 251.28 259.51 267.98 276.71 285.69 294.93 304.44-1.0% 218.13 225.34 232.76 240.42 248.30 256.43 264.79 273.40 282.27 291.39 300.78-0.5% 215.54 222.65 229.98 237.54 245.32 253.34 261.60 270.10 278.85 287.86 297.130.0% 212.94 219.97 227.20 234.66 242.34 250.26 258.41 266.80 275.44 284.33 293.470.5% 210.35 217.28 224.42 231.78 239.36 247.17 255.22 263.50 272.02 280.79 289.821.0% 207.76 214.59 221.64 228.90 236.38 244.09 252.03 260.19 268.60 277.26 286.171.5% 205.16 211.91 218.86 226.03 233.41 241.01 248.83 256.89 265.19 273.73 282.512.0% 202.57 209.22 216.08 223.15 230.43 237.92 245.64 253.59 261.77 270.19 278.862.5% 199.98 206.54 213.30 220.27 227.45 234.84 242.45 250.29 258.36 266.66 275.203.0% 197.39 203.85 210.52 217.39 224.47 231.75 239.26 246.99 254.94 263.12 271.55

Revenue Growth

Operating Expenses

250.26 -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5%-3.0% 223.55 230.82 238.30 246.01 253.95 262.11 270.52 279.17 288.08 297.23 306.65-2.5% 221.78 229.01 236.45 244.12 252.01 260.14 268.50 277.11 285.97 295.08 304.45-2.0% 220.02 227.20 234.60 242.23 250.08 258.16 266.48 275.05 283.86 292.93 302.26-1.5% 218.25 225.39 232.75 240.34 248.15 256.19 264.47 272.99 281.76 290.78 300.06-1.0% 216.48 223.58 230.90 238.44 246.21 254.21 262.45 270.92 279.65 288.63 297.87-0.5% 214.71 221.77 229.05 236.55 244.28 252.23 260.43 268.86 277.54 286.48 295.670.0% 212.94 219.97 227.20 234.66 242.34 250.26 258.41 266.80 275.44 284.33 293.470.5% 211.17 218.16 225.35 232.77 240.41 248.28 256.39 264.74 273.33 282.18 291.281.0% 209.41 216.35 223.50 230.88 238.48 246.31 254.37 262.67 271.22 280.03 289.081.5% 207.64 214.54 221.65 228.99 236.54 244.33 252.35 260.61 269.12 277.87 286.892.0% 205.87 212.73 219.80 227.09 234.61 242.35 250.33 258.55 267.01 275.72 284.692.5% 204.10 210.92 217.95 225.20 232.68 240.38 248.31 256.49 264.90 273.57 282.503.0% 202.33 209.11 216.10 223.31 230.74 238.40 246.29 254.42 262.80 271.42 280.30

Revenue Growth

Cost of Revenue



Segment P/E Model

For our P/E Model, we utilized bull, bear, and base case scenarios. For each scenario, we adjusted P/E based on the company’s EPS growth, along with expected industry and market conditions. EPS was determined using a combination of decelerating or accelerating revenue growth and expanding or shrinking margins. Bull and bear case assumptions are based on both company and economic strengths and weaknesses observed due to operations within a dynamic economic environment.

ARPU P/E Model

The same techniques for the segment P/E model were utilized for the ARPU P/E Model. Because of the larger top line growth based on the ARPU model, EPS is slightly higher in the scenarios.

EV/EBITDA Model

As another way to value Stamps, we utilized an EV/EBITDA model. EBITDA forecasts were calculated using our base case for revenue growth, margins and multiples. Historical EV/EBITDA data for Stamps was calculated and used in conjunction with industry data to determine appropriate multiples. These multiples were based on performances of players within the industry and macro-industry trends within the last several years. Once again, the value based on EV/EBITDA backs up our DCF valuation.

Multiple Model 2018 2019 2020 2021 2022EBITDA 227,677 297,980 382,285 466,219 550,602 EV/EBITDA 21 21.5 22 21.5 21EV 4,781,214 6,406,566 8,410,277 10,023,704 11,562,645 Debt - - - - - MV 4,781,214 6,406,566 8,410,277 10,023,704 11,562,645 Shares Outstanding 18,717 19,302 19,707 20,104 20,580 Share Price 255.45 331.91 426.76 498.60 561.85



Competitor Analysis

Pitney Bowes Inc (PBI) is identified as Stamps.com’s biggest competitor, operating in the technology industry within Small & Medium Business Solutions, Enterprise Business Solutions and Digital Commerce solutions. The legacy company was incorporated in 1920 and prides itself on providing innovative solutions to its clients in commerce with a portfolio including SendPro, SendSuite and Complete Shipping. The company also created the Pitney Bowes Parcel Shipping Index, due to its large customer base and volume of parcels shipped. It most recently acquired Newgistics which enables the company to expand its residential shipping offerings in the growing and dynamic e-commerce space.

We conducted a comparable analysis of the two companies on various metrics, as shown in the table.

We additionally included a comparison of postage meter solutions MailStation 2 vs Stamps.com where the latter was found to be a more robust option. Stamp’s system is cheaper at a monthly cost of about $15.99 whereas Pitney’s is $19.99; it supports a variety of features like the creation of mailing lists from one’s online address-book, possesses enhanced customer support and is easier to use.

Others:

Shippo, founded in 2013, is a provider of multi-carrier API designed to help businesses get real-time rates, print labels and track packages. Shippo does not have a PC Postage license, and instead competes with Stamps.com through its ePostage solution through its API platform, connecting companies directly to USPS.

Circle, founded in 2012, is a provider of web-based shipping software to aid in streamlining the post-order process to integrate with multiple selling channels and bulk label tools.



Risk Analysis

Barriers to Entry

The fact that Stamps’ only has 2 other relevant competitors questions the exclusivity of the shipping and logistics industry. However, the barriers to entry are higher than many believe. In order to effectively compete within this industry, a company must have a sophisticated application program interface (API) to manage logistics solutions in the most efficient manner, requiring extensive research and development that costs time and money. Only then can they start doing business through building relationships with businesses and growing their logistics network size. For new entrants, this is a daunting task because even after the financial groundwork is laid out for a successful startup within the industry, the company must forge lasting relationships with businesses to implement their services. These businesses often times have pre-existing relationships with more experienced, economically scaled, and innovative companies such as Stamps.

However, pre-existing e-commerce giants could pose as big threats as entrants. E-commerce giants such as Amazon have considerable financial strength, existing R&D initiatives that can be refocused to logistics solutions, and reputations that can be easily leveraged into business agreements with other e-commerce companies. This is a threat of which Stamps has no immediate or direct response to besides continued R&D initiatives into the sophistication of their API software to strengthen its competitiveness and maintenance of healthy relationships with current consumers.

USPS Termination of Agreement

The agreement of which Stamps.com has with the United States Postal Service can be best described not as a mutual agreement, but as a U.S. Government set of standards to which online shipping and logistics providers must follow called the Information-Based Indicia Program (IBIP). To be eligible under the IBIP as a USPS partner, the provider’s infrastructure must have capabilities including accurate date and time processing between the 20th and 21st century, comply to the USPS Intellectual Property Requirements, provide legible barcodes, manage customer payments in a timely and organized fashion, and more. If followed, the online shipping and logistics company gains permission to serve as an online middle man between the traditional postage format of the USPS and consumers in an ever-changing technological landscape. The program normally seeks mailing and shipping partners within the printing technology alternatives, machine readable, standard ink, fraud mitigation, and support for future services subsections. The leftmost figure above illustrates the IBIP partner processing a customer request through the USPS provider to create mailing and shipping labels. The rightmost figure above illustrates the certification and fund transfer process between the IBIP partner’s infrastructure, the USPS financial and certification authority, and postage customers.



Appendix

Income Statement 2012A 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F 2022FRevenue

Service 88,173 99,013 115,696 176,672 313,057 411,272 538,766 695,009 882,661 1,094,499 1,324,344 Product 14,710 16,580 16,883 18,283 20,234 20,715 21,751 22,838 23,980 25,179 26,438 Insurance 7,120 7,515 9,217 11,732 17,300 17,385 18,254 19,167 20,125 21,132 22,188 Customized postage 5,651 4,710 5,450 7,229 13,615 19,244 18,282 17,368 16,499 15,674 14,891 Other 7 1 23 41 99 93 93 93 93 93 93

Total Revenue 115,661 127,819 147,269 213,957 364,305 468,709 597,146 754,475 943,359 1,156,578 1,387,954

Cost of RevenueService 15,720 15,422 19,687 27,967 39,999 51,931 66,807 83,401 104,154 129,151 156,273 Product 5,435 5,694 5,516 5,971 6,695 6,618 6,830 7,126 7,434 7,806 8,196 Insurance 2,334 2,685 3,210 3,984 5,432 4,637 4,564 4,753 4,911 5,156 5,414 Customized Postage 4,267 3,699 4,493 6,013 10,846 16,040 15,247 14,485 13,760 13,072 12,419

Total Cost of Revenue 27,756 27,500 32,906 43,935 62,972 79,226 93,447 109,765 130,259 155,185 182,301

Gross Profit 87,905 100,319 114,363 170,022 301,333 389,483 503,699 644,710 813,100 1,001,393 1,205,653

Operating ExpensesSales and marketing 38,755 39,449 43,659 56,144 78,830 91,220 119,429 148,631 183,955 225,533 270,651 Research and development 10,243 10,958 13,309 20,711 35,158 46,210 62,103 75,447 91,506 112,188 134,632 General and administrative 14,749 15,794 25,147 42,399 67,125 88,550 116,443 144,859 178,295 218,593 262,323 Contingent consideration charges - - 8,438 46,088 - - - - - - Litigation settlement - - - 10,000 - - - - - -

Total Operating Expenses 63,747 66,201 90,553 175,342 181,113 225,980 297,976 368,938 453,756 556,314 667,606

Income from Operations 24,158 34,118 23,810 (5,320) 120,220 163,503 205,723 275,772 359,344 445,079 538,047

Interest expense - - - (397) (3,552) (3,669) (2,167) (1,918) (1,557) - - Interest and other income 541 480 375 146 306 414 781 1,182 1,572 2,261 2,974 Income (loss) before income taxes 24,699 34,598 24,185 (5,571) 116,974 160,248 204,337 275,036 359,360 447,340 541,021

Income Tax Expense (Benefit) (13,859) (9,555) (12,697) (1,373) 41,745 9,650 40,867 55,007 71,872 89,468 108,204 Net Income (Loss) 38,558 44,153 36,882 (4,198) 75,229 150,598 163,469 220,028 287,488 357,872 432,817

Balance Sheet 2012A 2013A 2014A 2015A 2016A 2017A 2018F 2019F 2020F 2021F 2022F Current assets: Cash and cash equivalents 29,576 66,674 40,933 65,126 106,932 153,903 290,309 439,318 584,490 840,617 1,105,710 Short-term investments 6,323 6,524 6,482 8,553 1,511 - - - - - - Accounts receivable, net 14,432 17,504 12,325 55,052 62,756 80,797 105,844 136,539 173,404 215,021 260,176 Deferred income taxes 22,344 - - - - - Other current assets 5,602 6,541 6,071 8,345 13,081 14,449 16,820 20,326 23,922 30,120 36,824 Total current assets 55,933 97,243 65,811 137,076 184,280 271,493 412,973 596,183 781,816 1,085,758 1,402,709

Property and equipment, net 28,631 29,763 30,427 31,707 36,829 37,507 34,562 35,762 37,562 39,962 42,962 Goodwill - - 66,893 197,807 239,705 239,705 239,705 239,705 239,705 239,705 239,705 Intangible assets, net 1,262 1,047 19,570 95,950 97,027 80,990 65,136 49,528 34,087 21,047 17,192 Long-term investments 10,720 14,012 10,215 1,529 - - - - - - - Deferred income taxes, net 30,549 40,262 53,816 57,224 48,782 43,148 38,148 34,148 31,148 29,148 28,148 Other assets 3,757 4,791 7,999 7,321 3,506 6,261 - - - - - Total assets 130,852 187,118 254,731 528,614 610,129 679,104 790,524 955,326 1,124,318 1,415,620 1,730,716

Current liabilities: Accounts payable and accrued expenses 16,366 13,928 22,521 60,816 86,205 103,076 121,579 142,808 169,472 201,902 237,181 Deferred revenue 1,532 1,425 2,164 4,000 3,858 3,871 4,089 4,725 5,527 6,740 8,374 Current portion of debt, net of debt issuance costs - - - 4,267 6,329 8,392 8,766 10,828 50,531 - - Contingent consideration - - 9,225 63,209 - - - - - - - Total current liabilities 17,898 15,353 33,910 132,292 96,392 115,339 134,434 158,361 225,530 208,642 245,554

Long-term debt, net of debt issuance costs - - - 157,353 141,025 60,642 61,359 50,531 - - - Contingent consideration, long term - - 15,790 - - 5,310 - - - - - Total Long-term Liabilities - - 15,790 157,353 141,025 65,952 61,359 50,531 - - -

Total liabilities 17,898 15,353 49,700 289,645 237,417 181,291 195,793 208,892 225,530 208,642 245,554 Commitments and contingencies

Stockholders' equity: Common Stock 50 51 51 52 53 55 58 60 64 67 71 Additional paid-in capital 649,694 668,724 678,075 716,253 855,344 962,227 1,195,673 1,427,345 1,592,208 1,842,523 2,087,886 Treasury stock, at cost, 13,610 shares in 2016 and 12,766 in 2015 (155,260) (159,522) (172,410) (172,410) (252,981) (387,545) (537,545) (687,545) (837,545) (987,545) (1,187,545) Accumulated Retained Earnings (deficit) (381,781) (337,628) (300,746) (304,944) (229,715) (76,930) (63,461) 6,568 144,056 351,928 584,745 Accumulated other comprehensive income 251 140 61 18 11 6 6 6 6 6 6 Total stockholders' equity 112,954 171,765 205,031 238,969 372,712 497,813 594,731 746,434 898,789 1,206,979 1,485,162

Total liabilities and stockholders' equity 130,852 187,118 254,731 528,614 610,129 679,104 790,524 955,326 1,124,318 1,415,620 1,730,716



Statement of Cash Flows 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Operating activities: Net income (loss) 38,557 44,153 36,882 (4,198) 75,229 150,598 163,469 220,028 287,488 357,872 432,817

Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,649 2,538 4,833 7,702 19,152 21,445 21,299 21,408 21,641 19,640 10,855 Loss on disposal of assets - - - - 22 - - - - - - Stock-based compensation expense 3,991 4,492 4,799 15,895 33,949 40,829 48,000 35,000 30,000 25,000 20,000 Deferred income tax expense (benefit) (14,424) (9,713) (13,554) (3,408) 33,623 7,816 Stock option windfall tax benefit - - - (618) (26,784) - - - - - - Accretion of debt issuance costs - - - 31 372 372 372 372 372 Contingent consideration - - 8,773 47,419 - - - - - - -

Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable (3,966) (3,072) 5,787 (32,480) (6,510) (18,041) (25,047) (30,695) (36,865) (41,617) (45,154) Other current assets 110 (834) 557 (1,737) (4,761) (1,368) (2,371) (3,506) (3,596) (6,198) (6,704) Current income taxes, net of excess tax benefit from stock-based award activity (22,344) - - - - - Other assets (209) (1,034) (3,208) 678 3,815 (2,755) 6,261 - - - - Deferred revenue (366) (107) 210 779 (195) 13 Accounts payable and accrued expenses 1,948 (667) 6,646 16,053 20,135 15,944 18,503 21,229 26,664 32,430 35,279 Other liabilities 5,310 (5,310) - - - - Net cash provided by operating activities 27,290 35,756 51,725 46,116 148,047 197,819 225,176 263,837 325,703 387,127 447,093

Investing activities: Sale of short-term investments 1,621 6,159 6,556 6,424 8,484 1,502 - - - - - Purchase of short-term investments (6,473) (6,454) (6,536) (2,438) - - - - - - - Sale of long-term investments 8,254 6,949 6,627 2,586 95 10 - - - - - Purchase of long-term investments (5,703) (10,258) (2,887) - (15) (4) - - - - - Acquisition of property and equipment (26,481) (5,282) (2,858) (2,291) (7,750) (6,813) (2,500) (7,000) (8,000) (9,000) (10,000) Net cash used in investing activities (28,782) (8,886) (69,130) (209,884) (55,206) (5,305) (2,500) (7,000) (8,000) (9,000) (10,000)

Financing activities: Proceeds from short term financing obligation, net of repayments - - - 13,313 2,241 1,653 - - - - - Proceeds from debt, net of debt issuance cost - - - 162,620 - - - - - - - Principal payments on term loan - - - (1,031) (4,639) (6,703) (8,766) (10,828) (50,531) - - Payment on revolving credit facility - - - - (10,000) (71,990) - - - - - Proceeds from exercise of stock options 7,306 13,425 3,314 10,887 12,969 63,119 70,000 50,000 25,000 25,000 25,000 Issuance of common stock under Employee Stock Purchase Plan 915 1,114 1,238 1,554 2,181 2,937 3,000 3,000 3,000 3,000 3,000 Stock option windfall tax benefit - - - 618 26,784 - - - - - - Repurchase of common stock (31,740) (4,311) (12,888) - (80,571) (133,764) -150,000 (150,000) (150,000) (150,000) (200,000) Shares withheld to satisfy statutory income tax withholding obligations - - - - - (799) - - - - - Net cash provided by (used in) financing activities (23,519) 10,228 (8,336) 187,961 (51,035) (145,547) (85,766) (107,828) (172,531) (122,000) (172,000)

Net increase (decrease) in cash and cash equivalents (25,011) 37,098 (25,741) 24,193 41,806 46,967 136,910 149,009 145,172 256,127 265,093 Cash and cash equivalents at beginning of period 54,087 29,076 66,174 40,433 64,626 106,432 153,399 290,309 439,318 584,490 840,617

Cash and cash equivalents at end of period 29,076 66,174 40,433 64,626 106,432 153,399 290,309 439,318 584,490 840,617 1,105,710

Depreciation Schedule 2012A 2013A 2014A 2015A 2016A 2017 2018F 2019F 2020F 2021F 2022FProperty and equipment, beginning 28,631 29,763 30,427 31,707 36,829 37,507 34,562 35,762 37,562 39,962 Capital Expenditures 26,481 5,282 2,858 2,291 7,750 6,813 2,500 7,000 8,000 9,000 10,000 Depreciation (1,380) (2,323) (3,233) (3,902) (4,552) (5,445) (5,445) (5,800) (6,200) (6,600) (7,000) PP&E, end 28,631 29,763 30,427 31,707 36,829 37,507 34,562 35,762 37,562 39,962 42,962

Amortization 269 215 1,600 3,800 14,600 16,000 15,854 15,608 15,441 13,040 3,855 D&A 1,649 2,538 4,833 7,702 19,152 21,445 21,299 21,408 21,641 19,640 10,855

Cost as % of Total Revenue 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022FSales and marketing 33.5% 30.9% 29.6% 26.2% 21.6% 19.5% 20.0% 19.7% 19.5% 19.5% 19.5%Research and development 8.9% 8.6% 9.0% 9.7% 9.7% 9.9% 10.4% 10.0% 9.7% 9.7% 9.7%General and administrative 12.8% 12.4% 17.1% 19.8% 18.4% 18.9% 19.5% 19.2% 18.9% 18.9% 18.9%Contingent consideration charges 0.0% 0.0% 5.7% 21.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Litigation settlement 0.0% 0.0% 0.0% 4.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Cost of Revenue per Segment 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022FService 17.8% 15.6% 17.0% 15.8% 12.8% 12.6% 12.4% 12.0% 11.8% 11.8% 11.8%Product 36.9% 34.3% 32.7% 32.7% 33.1% 31.9% 31.4% 31.2% 31.0% 31.0% 31.0%Insurance 32.8% 35.7% 34.8% 34.0% 31.4% 26.7% 25.0% 24.8% 24.4% 24.4% 24.4%Customized postage 75.5% 78.5% 82.4% 83.2% 79.7% 83.4% 83.4% 83.4% 83.4% 83.4% 83.4%

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