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Pitney Bowes (PBI) Q1 Earnings, Revenues Lag; View Intact

Pitney Bowes Inc. PBI reported first-quarter 2016 adjusted earnings from continuing operations of 34 cents per share, which missed the Zacks Consensus Estimate of 41 cents by 17.1%. Also, on a year-over-year basis, adjusted earnings declined 15%.

Incremental advertising expenses and absence of earnings from Imagitas that was sold in May last year proved to be a major drag on earnings. Also, the dismal top-line performance compounded the earnings decline.

Inside the Headlines

Total revenue in the quarter was $844.6 million, down 5.2% year over year on a reported basis. Also, on a constant currency basis, revenues fell 4%. The top line took a beating due to the company's exit from direct operations in Mexico, South Africa and five markets in Asia. Absence of revenues from these geographic segments made year-over-year comparisons difficult. Also, currency fluctuations impacted revenues adversely.

As for the segments, on a reported basis, Small and Medium Business (“SMB”) Solutions revenues slipped 5% year over year to $453 million. Softness in the North American Mailing business (down 3%) stemming from a decline in recurring revenue streams proved to be a major drag.

Also, the decline in recurring revenue streams hurt the International mailing business (down 11%), worsening the fall. However, new go-to-market strategy and improving equipment sales in certain geographies including France, Germany and Japan arrested the sales decline at this segment to a great extent.

Enterprise Business Solutions (“EBS”) revenues declined 2.7% year over year to $215 million. This segment’s production mail business (down 12%) was hit by fewer equipment installations on account of unfavorable timing of deal closures. However, this decline was partially offset by an uptick in Presort Services (up 5%), mainly driven by higher volumes of First Class and expansion into the St. Louis market.

The Digital Commerce Solutions reported an 8.6% year-over-year rise in sales to $176 million. A fall in sales from Software solutions (down 10%) was more than offset by a rise in sales from global e-commerce business (up 30%), thereby driving an overall increase. Smaller number of large licensing deals and lower data-related revenues resulted in the lackluster performance of the Software solutions business.

This sub-segment particularly benefited from the Borderfree acquisition and growth in U.K. revenues. In addition, a surge in retail clients and robust outbound U.S. package shipments proved to be major growth drivers at the segment.

Notable Activities

Pitney Bowes fortified its shipping logistics portfolio with the acquisition of Enroute Systems Corporation, a cloud-based, software-as-a-service enterprise retail and fulfillment solutions company. The deal will help Pitney Bowes enhance the shopping experience for clients across channels by integrating a range of physical and digital processes in the fulfillment management chain.

Moreover, the company launched the Clarity solutions suite that will utilize the power of Industrial Internet to transform the production mail industry. The offering is expected to be commercially available from the first quarter of 2016 in North America and from the second quarter in Europe. The suite will be launched globally in 2017. Also, the company announced that its EngageOne Video solutions are to be deployed by American Family Insurance as well as financial services and technology company – The Bancorp.

Meanwhile, Bancorp announced that it will leverage Pitney Bowes’ EngageOne Video interactive video solution in order to deliver a distinctive educational resource for clients in the company’s Institutional Banking practice.

Liquidity and Cash Flow

Exiting the quarter on Mar 31, 2016, adjusted free cash flow was $60.2 million compared with $84.9 million as of Mar, 31, 2015.

As of Mar 31, 2016, the company’s cash and cash equivalents totaled $613.0 million compared with the year-ago tally of $650.5 million. Long-term debt as of Mar 31, 2016, was $2,775.2 million, up from $2,489.6 million as of Mar, 31, 2015.

Outlook

Pitney Bowes has reiterated its 2016 earnings guidance in the range of $1.80–$2.00, on both adjusted and GAAP basis. Moreover, the revenue projection is maintained in the range of a decline of 1% to 2% growth from the 2015 level.

Double-digit growth in the Digital Commerce Solutions is expected to boost revenues in 2016, excluding the impact of currency. While the company expects flat to modest growth in the Enterprise Business Solutions segment, SMB Solutions is expected to see a low single-digit decline.

In addition, implementation of the new ERP program is expected to slash SG&A expenses in the second half of 2016, which in turn, should drive margins. However, incremental marketing expenses related to the new advertising campaign can prove to be a drag.

Our Take

Expectedly, Pitney Bowes faced the brunt of the weak performance by its software business during the quarter. Additionally, escalating operating and marketing expenses have impacted financials. Meanwhile, the planned ERP implementation in the U.S. is driving operating expenses while aggressive advertising and marketing strategies are also proving be challenging. Benefits from the ongoing ERP materialization in the Canada and the U.S. are expected to materialize in the second half of 2016 while a rise in marketing expenses throughout first-quarter 2016 is likely to hurt margins.

Despite these negatives, improving equipment sales in North America Mailing business during the quarter signals that the restructuring activities undertaken by the company are gradually paying off. Also, Pitney Bowes believes that the implementation of the “go-to-market” strategies in major markets, expansion of the Presort Services network, robust pipeline of product launches and the acquisition of Borderfree, Real Time Content (RTC) and Enroute Systems Corporation are expected to supplement top-line performance in full-year 2016.

Pitney Bowes currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the same space include Broadcom Limited AVGO, Bruker Corporation BRKR and Internet Initiative Japan Inc. IIJI. All three stocks carry a Zacks Rank #2 (Buy).

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