Pitney Bowes - Earnings Call - Q1 2019
May 1, 2019
Transcript
Speaker 0
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.
Mark Lautenbach, President and Chief Executive Officer Mr. Stan Sattula, Executive Vice President and Chief Financial Officer and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the safe harbor overview.
Speaker 1
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 ks 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, Mark Lautenbach, will start with a few opening remarks. Mark?
Speaker 2
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 American Mailing segment related to a tablet replacement program to address a battery longevity issue, which also included upgraded technology in our SendPro C.
Stan will take you through the details, but this resulted in a $9,000,000 or 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. 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 what 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 low. 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 e commerce 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 scale and managing the mix of these different businesses. I would characterize the profit dynamics in e commerce partly as one time in nature and the balance being growing pains. However, were not structural.
Going forward, we will take actions to be more purposeful in driving mix and productivity. We remain focused and excited about the long term opportunity for us within this business. E commerce is a large and growing market where we have strong value proposition. The other item impacting earnings, drove the preponderance of the shortfall from expectations in the quarter, was around execution missteps 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 in automation in this business and leveraging our logistics 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 mix of mail shifting to higher volume 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 would 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 is taking longer than expected. I now want to go back to the top line as 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 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 industries in which they operate. Leveraging our economies of experience with forty plus years of equipment financing and twenty 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 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 is 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 the churn in our Newgistics business declined 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 our network and announced two differentiated capabilities that the market has been clamoring for. The first is we announced a pilot to create a two three day guaranteed delivery product that will be fast and much more affordable than alternative offers.
This will help retail clients better compete in an increasingly competitive marketplace. This capability is based on our decades of knowledge of movie 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 allow 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 e commerce business was one capability with one client. To summarize, we expect revenue to grow this year, making the third consecutive year of growth, which is an indication of the capabilities we have created and the future we are 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 our 2019 guidance, which Stan will take you through in more detail. With that, let me now turn the call over to Stan.
Speaker 3
Thank you, Mark, 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 when 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 earnings press release and on our investor relations website. Second, our results reflect the new lease accounting standard or ASC eight forty two which was implemented on January 1. 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 and D should be classified as a cost of revenue or SG and 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 in 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 markets. Commerce services comprised 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 $868,000,000 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 six percent, software declined 2% and SMB declined 7% when you exclude the impact of currency and the market exits. Adjusted EPS was $0.12 for the quarter. GAAP EPS was a loss of $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 $01 per share.
Versus our expectations, EPS for the quarter was impacted predominantly by weaker performance in our pre sort business due to execution around productivity as well as pricing. And to a lesser extent, e commerce fell short of our expectations. In addition, there were two unusual items impacting the quarter. The first being a charge of 3¢ per share related to a tablet replacement program to address a battery longevity issue for our SenPro 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 suppliers. Through our analytics, we can predict the life cycle of the battery and to head off any potential disruption, we are upgrading the displays resulting in the $9,000,000 or $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 32,000,000 and GAAP cash from operations was $70,000,000 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 $9.00 $4,000,000 in cash and short term investments on our balance sheet.
During the quarter we used free cash flow to return approximately 49,000,000 We repurchased 5,600,000.0 shares for $39,000,000 We paid $9,000,000 in dividends to our common shareholders. We also made $8,000,000 in restructuring payments and spent $29,000,000 on capital expenditures. From a debt perspective, we ended the quarter with 3,250,000,000.00 in total debt which is $321,000,000 lower than prior year. Let me give you a little bit more context on our debt composition. Overall debt was 3,250,000,000 If you take the implied debt of $1,100,000,000 associated with our finance receivables along with the $900,000,000 of cash and short term investments on the balance sheet into account, our implied net debt position on an operating company basis was about $1,200,000,000 at the end of the quarter.
Looking at the P and 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 percent and equipment sales of 14%. Gross profit was $389,000,000 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 one point due to the tablet replacement charge. SG and A was $299,000,000 which was a decline of about $3,000,000 from prior year. SG and 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 and D expense was 22,000,000 or 2.5% of revenue. Compared to prior year R and D expense declined about 3,000,000 and improved slightly as a percent of revenue.
EBIT was 69,000,000 and EBIT margin was 7.9%. Compared to prior year EBIT declined 46,000,000 and EBIT margin declined by five points driven primarily by the gross profit decline. Interest expense including financing interest expense was $39,000,000 which was $4,000,000 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 $8,000,000 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 188,000,000, which is about 600,000 shares lower than prior year.
Let me now discuss the performance of each of our business segments this quarter. Starting with commerce services, revenue was $4.00 $1,000,000 which was growth of 6% over prior year. EBIT and EBIT margin were essentially breakeven. EBITDA was $24,000,000 and EBITDA margin was six percent. In global e commerce, revenue was $266,000,000 which was growth of 9% over prior year.
Within global e commerce, 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 U. S.
Dollar as well as regulations and taxes in some of our larger inbound markets. EBIT was a loss of 15,000,000 and EBIT margin was negative 5%. EBITDA was 2,000,000 and EBITDA margin was 1%. We continue to invest in market growth opportunities which includes marketing programs 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 costs 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 $135,000,000 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, the change in client mix towards larger clients drove a lower revenue per piece.
As Mark mentioned, we have begun layering in productivity actions and a new pricing strategy. EBIT was $15,000,000 and EBIT margin was 11%. EBITDA was $22,000,000 and EBITDA margin was 16%. Presort margins this quarter were lower than 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 $394,000,000 which was a decline of 9% from prior year. Excluding the impact of our market exits, revenue declined 7%. EBIT for the group was $122,000,000 and EBIT margin was 31%. EBITDA was $131,000,000 and EBITDA margin was 33%.
In North America mailing, revenue was $315,000,000 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 $9,000,000 charge related to a tablet replacement program for our Sempro C in a quarter.
When you exclude this item, gross margins improved one point over prior year and continue to perform within a tight range as they have over the last several quarters. EBIT was $111,000,000 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 quarters. EBITDA was $117,000,000 and EBITDA margin was 37%. In international mailing, revenue was $79,000,000 a decline of 14% from prior year.
Excluding the impact of our market exits, revenue declined 6%. Equipment sales declined largely driven by weakness in Germany offset by growth in The UK and Japan. Recurring revenue streams also contributed to the overall decline. EBIT was $12,000,000 and EBIT margin was 15% which was a decline of one point from prior year mostly due to the decline in revenue. EBITDA was $14,000,000 and EBITDA margin was 18%.
Turning to software solutions, revenue was $73,000,000 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 digit in the quarter marking the sixth consecutive quarter of double digit growth. Additionally, prior year benefited from a $7,000,000 location intelligence deal which created a tough comparison for the quarter. EBIT was $2,000,000 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 $4,000,000 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 e commerce as well as the unexpected charges we incurred in the 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 $1.05 and free cash flow to be in the range of 200,000,000 to $250,000,000 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 standard and have posted a file with the eight quarter history on our Investor Relations website.
With that, operator, please open the line for questions.
Speaker 0
Your first question comes from the line of Ananda Rua from Loop Capital. Please go ahead.
Speaker 4
Hi, guys. Good morning. Thanks for taking the question. A couple if I could. Mark, how long on the pre sort and thanks for the context on the quarters through the years with the different dynamics.
Specifically to the presort, how long do you think, or what time how should we think about those those actions layering in over the next, you know, couple few quarters? And and based on what you can see, when do you think that business gets back to to kind of stable or as as you as the actions are intended to have it become?
Speaker 2
Sure. So Stan will keep me honest on this because he's got the schedule in front of him. As you look at the work that we've done with the third party, I'd that that's work that began last summer. So this is something that, you know, we've, 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 it will be principally in the second half. The benefits come in what I would say two buckets. One is pricing, which we're starting to layer now 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 staring at, and it's you can kind of get lost in a sea of numbers in pre sort. 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 as we had hoped, but volume is increasing, the volume is moving to customers who have more pricing power.
They just have 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 and A, where that volume came from where it was more distributed. So a long winded answer to a question. We've spent more time thinking and talking about Presort in the last four weeks than I have in the last four years because it's generally been a business that's performed exceedingly well.
So short answer, a little bit in the second quarter, mostly in the second half.
Speaker 4
Okay. Got it. That's actually helpful context. And then just with regards to the transportation and labor costs, I know you're not the only one that's obviously that are that are experiencing that dynamic. Are you you guys do you have the visibility to like, if that continues to sort of be as pronounced as it is, do you have the visibility?
Well, I guess really my question is how for how long do you think you'll need to address that? Is that more of like a one time we can get into the cost structure sort of addressing dynamic? Or is this something where for this year into next year as well as these things we may pronounce, you'll have to adjust the cost structure to address it?
Speaker 3
And 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, a 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 on year basis.
We'll wrap on that in Q2. But we come at this from different angles. One of the pieces of work with our consultant is to go through things like scheduling, labor productivity, time studies, etcetera, 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 labor 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 the actions that we've put in place. On transport, you're 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 transport. Now I still think we have a ways to go to capture all of that, but the concept's relatively simple and that is full trucks are much cheaper to run.
Speaker 4
Got it.
Speaker 2
The 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. Listen, there's aspects of that that's good from a societal perspective. At the Stan's point, there's a bunch of things that we have in place that will mitigate that. As 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 they had planned, more or less. I mean, it was close enough for government. Pretty sure, on the 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. You know, when your volume consolidates, you should be able to get transportation savings.
And we didn't we didn't get those as quickly as as we would have liked.
Speaker 4
Luck. That's that's all helpful. And then just one quick wrap up, and then I'll I'll see the floor here. So just given, you know, given the handful of actions that are taking place, and you already spoke to the guy, but let me ask ask it this way too. Should we now anticipate, that the December, will be more weighted towards the profit targets for the year than typical?
As it seems, sounds like, you know, really it's not going be until Q3 where I think a bunch of these actions kind of get hold.
Speaker 2
That's it
Speaker 4
for me. Thanks.
Speaker 2
The short answer is yes. I mean, if you think about we kind of glossed over it in one sentence, but now Commerce Services is the largest segment that we have. If you think about the way that companies participate in 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.
Speaker 3
And Ana, 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 'eighteen to 'nineteen, just simply mix of the business and the underlying dynamics like presort.
Speaker 2
The other thing I would say is we don't, you know, we spent a lot of time in the prepared remarks is the software business is starting to behave like proper software business. I would say in my first several years here, it was the only software business I've ever seen that actually is 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 's a bunch of different dynamics that will push profit into the fourth quarter.
Speaker 4
Okay, great. Thanks a lot guys.
Speaker 2
Your
Speaker 0
next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.
Speaker 5
Hey, good morning. Mark, just a big picture thought on the pre sort business. You know, as you look at profitability of this business over the next two to three years, you know, how would you what do you think about the margin profile for this business as we go over the next two, three years with these labor costs that are having a negative impact and obviously transportation because the economy is so strong? Just to get your thoughts on that.
Speaker 2
Yes. I mean, so last time we provided long term guidance for pre sort 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 you know, I would say 15 ish. I mean I don't think it's going to be a material departure from where we've been.
It's to the point that I said, I mean most of the issues that we're looking at, if not are controllable totally by us, there's just reasonable offsets. And by the way, that was reaffirmed by the third party. So not something that we're starry eyed about. That's something that we've worked with outsiders to get an affirmation of.
Speaker 5
And as you look at the e commerce business, that business is going to do again probably north of $1,000,000,000 yet it's right now being challenged profitability wise. I know you've said you're 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?
Speaker 2
Yes. We'll say more in Analyst Day, but let me kind of draw a line between a couple of things that helps illustrate the point. So last year in the first quarter, we talked about the churn in the logistics business. So if you think about the logistics acquisition, we consummated the acquisition in the fourth quarter of 'seventeen. So you're, for all practical purposes, in a shutdown period in terms of making changes to the network.
As we rolled that business into the first quarter of 'eighteen, 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 twelve months later, the level of churn that we experienced in logistics in the first quarter, depending on how you want to look at 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 built capacity ahead.
So if you look at the network, you know, the logistics network in particular, I think we've got five times the level of capacity. So this dynamic, it's a long way of saying it is as long as you've got this bow 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 in profitability of this business is scale. We'll talk about this in some level of depth in a couple of weeks but we think we need two fifty million to 300,000,000 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 the last six quarters, you've got to invest capacity or you're not going to keep the clients.
And by the way, it's no different than what UPS or FedEx have said in their announcements. Well, everyone's adding to their network to take advantage of what this opportunity and we'll all come at the opportunity from slightly different ways but writ large shipping is a heck of an opportunity.
Speaker 5
So maybe Mark, just one question follow-up on that. You talked about two fifty million to 300,000,000 parcels. Where are you today in relationship to that number?
Speaker 2
We'll talk about that more in a couple of weeks, but we've got a year or two to go to kind of get to 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're operating at scale and then you've got to sustain that going forward.
Speaker 5
All right. Thank you very much. Appreciate it. Your
Speaker 0
next question comes from the line of Allen Klee from the Maxim Group. Please go ahead. Alan Klee, your line is open. Check your mute button. Okay.
We'll move on. We'll go to the line of Glenn Matson from Ladenburg. Please go ahead.
Speaker 6
Good morning. The on the I believe it was on the e commerce business you talked about strength in adding new logos and reducing churn in subs. Can you kind of give us any sense of what churn has been historically and what the change was?
Speaker 2
Yes. So let me first of talk to the new logos point because I think it speaks to the demand. We've added two seventy new logos in our Global Ecommerce business over the last twelve months. And again, I mean, you guys have followed the company for a bit, Glenn, you for a long time. You think about what this business was four years ago, it was one client.
We've added two seventy new clients in the last twelve months. In terms of churn, I think the industry trend in this business is kind of, I'd say, high single digits. And we were kind of in that range last year. We're at a fraction of that this year.
Speaker 6
Okay.
Speaker 2
And get one back.
Speaker 6
Great.
Speaker 2
But again, that's And It's We talk about these things as disparate things. The only reason we're able to do that is we're investing in front of the volume.
Speaker 6
Right, 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 more and talk about outlook for software for the rest of the year.
Speaker 2
So let me start with the bottom line. I'm bullish about the outlook for software for the rest of the year. As you look at the first quarter, we referenced back to the large deal that we recognized last year in the first quarter that was 7,000,000 ish million. If you look at the first quarter this year, we had several deals that were $500,000 to $1,000,000 so good sized deals, but nothing of 7 figure or not many 7 figure deals. That's important because at 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 bow wave, if you will, of $500,000 to $1,000,000 deals. So we feel good about the business going forward. We've got some large chunky deals that are in front of us.
Speaker 3
They'll affect the SKU obviously through the year. But let me give you little bit more color. So small deals grew double digit 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. But I think more interesting is we're seeing the composition of that pipeline shift and roughly two thirds of those deals in the pipeline are lift deals versus shift deals.
Speaker 2
So in layman's language, you know, 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, you know, a hard time getting to new logos. What we're now starting to see is affirmation of that hypothesis. So when partners start bringing you into deals, that tells you that they're confident of what you've got. And that lift is just flat out incremental to what the direct sales force produces.
So it's taken way too long to get to that point, but we're now starting to see the benefits of what we've worked on for last several years.
Speaker 6
Okay, great. Thanks. That's it for me.
Speaker 3
Thanks, Glenn.
Speaker 0
Next we'll go back to the line of Allen Klee from the Maxim Group. Please go ahead.
Speaker 7
Good morning. 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?
Speaker 3
Alan, it's relatively in line with our previous arrangement.
Speaker 2
I would just broadly add, our relationship with the Postal 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 continues
Speaker 3
this is a wide ranging relationship, right? So it's everything from meters to work share and pre sort to the initiatives through logistics that inject parcels into their network. This is far broader than any one NSA.
Speaker 2
This particular NSA was kind of max the same as what we had experienced.
Speaker 7
Okay. When you said part of the reason that you factored into your guidance, new guidance, was a slower ramp in global e commerce, by that, did you mean the 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 would also be at a slower ramp?
Speaker 3
So let 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 first quarter. So in 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 e commerce will go back to double digit growth. Now from a profitability side is 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 technology. 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.
Speaker 2
I'll make an additional point about Global Ecommerce. I know there's been a concern by some of our investors and I understand it, that we've been chasing revenue at any cost in that marketplace. Two, the Global Ecommerce team's credit, they're actually starting to get out of some of the businesses that they were in where they're not they don't see a path to acceptable margins, some of the relationships that they don't see acceptable margins. So while I understand people like this business to be profitable sooner versus later and with the growth that we've seen, there's always a concern that you're chasing revenue and 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.
Speaker 7
Thank you. Your CapEx in the quarter was around $29,000,000 Is that sort of a reasonable quarterly run rate going forward?
Speaker 3
You're going to see that shift around. So we typically look, we'll give you an update on CapEx in total at Analyst Day. If you look at last year, I think you'll see that it'll increase slightly year to year, not dramatically.
Speaker 7
Okay, thank you. And then lastly, 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?
Speaker 3
Sorry, when 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.
Speaker 7
So you mean if you take the percent that it is over the year's revenue, whatever percent that was in 2018, it will be one point less
Speaker 2
than Yes,
Speaker 3
were it was kind of specifically to earnings.
Speaker 7
Oh, to earnings? Yes. Okay, thank you so much. You're welcome.
Speaker 0
Next we'll go back to the line of Ananda Bruja from Loop Capital. Please go ahead.
Speaker 4
Hey, thanks for the follow-up. Hey, just was wondering with stamps.com's announcement to sort of discontinue the preexisting nature of its relationship with the USPS. If you've seen any any structural changes in the market environment, I know you have a business, that, you know, sort of gets it gets it things the same way. And then secondarily, if you believe that there's any opportunity there for you in an incremental way given the change in the relationship with France and the USPS? Thanks.
Speaker 2
So we've honestly followed that fairly closely as you might imagine. You know, so far we've not seen, to your point, structural changes in the market. So let me be clear about that. Stamps did talk about a 3% price increase for aspects of their 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 haven't had the opportunity before. Suffice it to say with the changing dynamics of USPS, this will create opportunities. As well, mean to be candid, I mean there's also threats in that as well. But we like how we're situated.
Speaker 3
Look, our competitive offerings are pretty wide in our approach to market through parcel, through all of the things we offer through Global Ecommerce and returns, etcetera. 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 manifests itself into good client acceptance.
Speaker 2
One of the strategic beliefs that Lyle has had about that business, and I think it's been borne out to be true, is that there's an advantage to physically touching the parcels as opposed to just printing the labels. You know, obviously physically touching the parcels comes with a different margin and a different set of investment structures. But that said, as you contemplate what's meaningful to USPS, I won't say that printing labels isn't unimportant. We certainly print a lot of labels as well and we're happy to do that. But if you can do things actually with the parcel that helps ingest into the postal service network or other networks, other logistics provider networks, that's even more advantageous.
So, you know, I think what you're seeing is the wisdom of some of the strategic beliefs bearing out.
Speaker 4
That's great. Thanks a lot, guys.
Speaker 3
And
Speaker 0
at this time, there are no further questions. I'd now like turn the call back to Mr. Lautenbach for any closing remarks.
Speaker 2
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 onetime 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's got a proven track record of execution. As you contemplate those three dynamics together, I don't believe any of them have anything to do with the long term vibrancy or long term opportunity of this company. On the other side of it, if you look at SMB at the margin structure, if you look at software in terms of the channel dynamics candidly the pipeline that's in front of them and global e commerce from an exit rate in terms of revenue and some of the productivity initiatives, the long term theory from my perspective here is intact. So first quarter was disappointing.
It was a bump in the road. That being said, it doesn't change my view on iota of the long term prospects of this company. So we'll talk more on Analyst Day and we'll render some of these dynamics more explicit, particularly around global e commerce and profitability because I know that's something that appropriately weighs on people's minds. You know, we like our long term position and nothing's changed about that.
Speaker 3
Just a reminder, Analyst Day is May 29 and we look forward to seeing you there. Thanks.
Speaker 0
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.