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Pitney Bowes (PBI) Q2 Earnings Lag Estimates, Sales Down Y/Y

In second-quarter 2017, Pitney Bowes PBI reverted to its dismal earnings miss trend after posting a solitary earnings beat last quarter. The company’s adjusted earnings of 33 cents per share missed the Zacks Consensus Estimate of 36 cents. Also, on a year-over-year basis, adjusted earnings fell 15.4%.

On a GAAP basis, the company reported earnings per share of 26 cents, down 7.1% compared with the year-ago figure. A rise in total costs, along with a drab revenue performance proved to be a drag on the earnings performance.

Inside the Headlines

Total revenue in the quarter was $821.4 million, down 1.7% year over year on a reported basis. Revenues were flat, when adjusted for currency impact.

Two of the company’s three segments, namely, Small and Medium Business (“SMB”) and Enterprise Business Solutions (“EBS”), declined year over year, proving a drag on the top-line performance.

On a reported basis, Small and Medium Business (“SMB”) Solutions revenues dipped 3% year over year to $436.4 million. The tepid performance was due to softness in the North American Mailing business (down 1%) and International Mailing Business (down 11%). Lower recurring revenue streams and rental revenues led to the lackluster performance of the North American Mailing business. Additionally, decline in recurring revenues and poor equipment sales proved to be a drag on the International Mailing Business.

Enterprise Business Solutions (“EBS”) revenues were down 4% year over year to $204.0 million. While Presort Services (up 2%) drove top-line growth of this segment, it was more than offset by the drab performance of the production mail business (down 11%). Lower sorter equipment sales and support service revenues weighed down on sales of the production mail business. Higher “Standard Class” mail volumes drove sales of this segment.

Digital Commerce Solutions reported 4% year-over-year growth in sales to $180.9 million, supported by strong Global e-commerce business (up 14%), and slightly offset by decline of Software business (down 4%). Robust volumes in the UK outbound marketplace and growth in domestic shipping volumes acted as tailwinds for the Global e-commerce business. Lower license revenues played a spoilsport for Software solutions sales.

Pitney Bowes Inc. Price, Consensus and EPS Surprise

 

Pitney Bowes Inc. Price, Consensus and EPS Surprise | Pitney Bowes Inc. Quote

Liquidity and Cash Flow

As of Jun 30, 2017, free cash flow was $18.4 million compared with $85.9 million as of Jun 30, 2016.

As of Jun 30, 2017, the company’s cash and cash equivalents totaled $840.6 million compared with $764.5 million at the end of Dec 31, 2016. Long-term debt as of Mar 31, 2017, was $2,543.5 million, down from $2,750.4 million as of Dec 31, 2016.

Guidance

The company tweaked its guidance for full-year 2017. Currently, it expects 2017 adjusted earnings per share to lie in the range $1.70–$1.78 compared with the earlier guided range of $1.70–$1.85. Revenues, on a reported basis, are expected to see flat to 1% growth year over year compared with the previous guidance of 2% decline to 1% growth. Further, the company revised its free cash flow for 2017 to be in the range of $400-$430 million compared with the earlier range of $400–$460 million.

On a positive note, Pitney Bowes believes that new products and digital capabilities of SMB, expansion of the Presort Services network and robust increase in e-commerce volume will act as major catalysts, raising the top line for full-year 2017. Moreover, the company’s focus on operational excellence will help it trim to costs and expenses, thus supplementing growth.

Our Take

Pitney Bowes reported dismal second-quarter 2017 results, with both top- and bottom-line misses. The company’s restructuring actions were not sufficient to cushion it against the broader macroeconomic concerns, which have plagued its financials for quite some time now. Though the global ecommerce business continues to be a major profit churner, the prolonged softness in the SMB business remains a major concern.

In addition, escalating marketing expenses in relation to the ERP implementation program is likely to act as an overhang. Also, the Zacks Rank #3 (Hold) company expects incremental marketing expense in the ERP program, related to digital capabilities enhancement for entire 2017. We believe capital expenses associated with the ERP project will continue to inflate costs, thus hindering growth.

Stocks to Consider

Some stocks in the broader sector include Applied Optoelectronics, Inc. AAOI, Red Hat, Inc. RHT and Applied Materials, Inc. AMAT. While Applied Materials and Red Hat sport a Zacks Rank #1 (Strong Buy), Applied Materials holds the same Zacks Rank #2 (Buy).

Applied Optoelectronics has a whopping average earnings surprise of 118.3% for the trailing four quarters, beating estimates all through. You can see the complete list of today’s Zacks #1 Rank stocks here.

Red Hat, Inc. has a robust earnings surprise history, with an average positive surprise of 11.1%, driven by consecutive earnings beats over the trailing four quarters.

With four back-to-back beats, Applied Materials has an average positive surprise of 3.5% for the trailing four quarters.

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