Good morning, and welcome to the Pitney Bowes First Quarter Earnings Conference Call [Operator Instructions]. 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. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, 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.

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-K 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 and 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, Marc Lautenbach, will start with a few opening remarks. Marc?

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 of the charts that we recorded in the North American Mailing segment related to a tablet replacing program to address a battery longevity issue, which also included upgraded technology and our SendPro C. Stan will take you through the details, but this resulted in a $9 million or $0.03 charge in the quarter and was not anticipated at the start of the year. It is important to note that 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 their 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. The 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…

Thank you, Marc, 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 842, 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&D should be classified as the cost of revenue or SG&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 6 smaller European markets. This transaction does not qualify for discontinued operations treatments. And as such, prior year has not been recast. It will therefore negatively impact our revenue comparison to prior year by about 1 point, which is reflected in our guidance. Turning to our results. We continued 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 1/3 of…

[Operator Instructions]. Your first question comes from the line of Ananda Baruah from Loop Capital.

A couple if I could. Marc, how are the Presort - and thanks for the context on the quarters through the years with the dynamics. Specifically to the Presort, how long do you think or what time - how should we think about those actions layering in over the next couple of few quarters? And based on what you can see, when do you think that business gets back to kind of stable? Or as you - as the actions that are intended to [indiscernible]?

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, and I'd stress that, that's work that began last summer. So this is something that in some way is 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 are starting to layering out, and that will be some of the benefits we realized 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 can kind of get lost in a sea of numbers in Presort. But in essence, there's a couple of things that have happened. One is - and it's not - for those of you who have followed the company for a while, dissimilar to what would happen into 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 we had hoped, but volume is increasing, the volume is moving to customers who have more pricing power as 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&A, where that volume came from where it was more distributed. So a long-winded answer to your question. We spent more time thinking and talking about Presort in the last four weeks and I have in the last four years because it's generally been a business that's performed exceedingly well. So short answer, little by the second quarter, mostly in the second half.

Okay. Got it. That's actually helpful context. And then just as regards to the transportation and labor costs, I know you're not the only one, obviously, that are experiencing that dynamic. Are you - do you guys - do you have the visibility to - like if that continues to sort of be as pronounced as it was, do you have the visibility - I guess really my question is, how - for how long do you think you will need to address that? Is that more like a onetime 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 things remain pronounced to have to adjust the cost structure to address it?

Ananda, 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 marketplace. That certainly has cost us on a cost basis on a year-over-year basis, we'll wrap on that, in Q2. But we come at this from different angles. One of the pieces that work with our consultant is to go through things like scheduling, labor productivity, time studies, et cetera, 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 in 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 way to go to capture all of that, but the concept's relatively simple and that is full trucks are much cheaper to run.

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 these wage pressures. And listen, there's aspects of that, that's good from a societal perspective. To Stan's point, there's a bunch of things that we have in place that will mitigate that. As you 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. Presort on the other hand wasn't. A part of that is a function of what's going in the marketplace, but candidly part of it was a function of what I have said before. When your volume consolidates, you should be able to get transportation segment. And we didn't get those as quickly as we would have liked.

Got it. That's all helpful. And then just one quick wrap-up and then I'll cede the floor here. So just given the handful of actions that are taking place and you already spoke to the guy, but let me ask it this way too. Should we now anticipate that the December quarter will be more weighted towards the profit targets for the year than in typical - as it sounds like really it's not going to be until Q3, where I think a bunch of these actions kind of get hold?

The short answer is, yes. If mean if you think about - we kind of glossed over 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 the 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.

Ananda, you saw from '17 to '18 that fourth quarter became a bigger part of the year. And I think you'll see that increase again as you look '18 to '19. Just simply mix of the business and the underlying dynamics like Presort.

Just I would say is, we don't - we spent a lot of time in prepared remarks is, the software business is starting to behave like a proper software business. I would say, in my first several years here, it was the only software business I have ever seen that actually was 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 it - there's a bunch of different dynamics that will push profit into the fourth quarter.

Your next question comes from the line of Kartik Mehta from Northcoast Research.

Marc, just a big picture thought on the Presort business. As you look at profitability of this business over the next 2 to 3 years, how would you - what do you think about the margin profile for this business as we go over the next 2 to 3 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?

Yes. I mean so last time we provided long-term guidance for Presort that was in the 15% to 20% range. We'll update long-term guidance here in a couple of weeks at the Analyst Meeting, which I believe we've announced. So I would say 15%-ish. I mean I don't think it's going to be a material departure from where we've been. And 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 is just a reasonable offset. And then - by the way, that was reaffirmed by the third party. So it's - that's not something that we're starry-eyed about, that's something that we've worked with outsiders to get an affirmation of.

And look - as you look at the e-commerce business, that business is going to do again probably north of $1 billion. Yet, it's right now being challenged profitability-wise. I know you said you are investing in the business. But at what point, do you think this business starts really generating operating profits rather than all the investment that's needed?

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 points. So last year in the first quarter, we talked about the churn in Newgistics business. So if you think about the Newgistics acquisition, we consummated the acquisition in the fourth quarter of '17. So you were - 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 '18, 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 12 months later, the level of churn that we experienced in Newgistics 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 - the Newgistics network in particular, I think we've got 5x the level of capacity. So this dynamic, so one 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 in this business is scale. We'll talk about this in some level of depth in a couple of weeks, but - and we think we need 250 million to 300 million 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 6 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 as well. Everyone's is adding to their network to take advantage of what this opportunity is. And we all kind of look at the opportunity from slightly different ways, but we're - at large, shipping is a heck of an opportunity.

To be more - just one question follow-up on that. You talked about 250 million to 350 million parcels. Where are you today in relationship to that number?

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 the level of scale. I'd say as we look at the [indiscernible], fourth quarter of next year we kind of feel like we're operating at scale, and then you got to sustain that going forward.

[Operator Instructions]. We will go to the line of Glenn Mattson from Ladenburg.

I believe it was on the e-commerce business you talked about strength and adding new logos and reducing churn in subs. Can you kind of give us any sense of what the churn has been historically and what the change was?

Yes. So let me - first, I'll talk to the new logos point because I think it speaks to the demand. We've added 270 new logos in our Global Ecommerce business over the last 12 months. And again, I mean, you guys have followed the company for a bit - Glenn, for a long time. You think about what this business was 4 years ago. It was one client, and we've added 270 new clients in the last 12 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 are in a fraction of that this year. But again, that's - it's - we talk about these things as disparate things. We always have been able to do that as we're investing in front of the volume.

All right, all 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 bit more, and talk about the outlook for software for the rest of the year?

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've referenced back to the large deal that we recognized last year in the first quarter that was $7 million-ish. If you look at the first quarter this year, we had several deals that were $500,000 to $1 million, so good size deals, but nothing of 7-figure or not many 7-figure deals. That's important because 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 waves, if you will, of $500,000 to $1 million deals. So we feel good about the business going forward. We've got some larger chunky deals that are in front of us.

They'll tend to skew, obviously, through the year. But let me give you a 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 2/3 of those deals in the pipeline now are lift deals versus shift deals.

So in layman's language, 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 hard time getting to new logos. What we're now starting to see is affirmation of that hypothesis. So when partners start bringing in new deals, that tells you they are confident with what you've got. And that lift has just flat out incremental to what that direct sales force produces. So it's taken way too long to get to that point, but we are now starting to see the benefits of what we've done for the last several years.

Next, we'll go back to the line of Allen Klee from the Maxim Group.

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?

Allen, it's relatively in line with our previous arrangement.

Allen, just broadly, our relationship with the postal service has never been better. And so that was 1 NSA out of 7 and candidly probably a dozen different initiatives. We're very pleased with that relationship and it's - and it continues to be an important...

Yes. Remember, this is wide-ranging relationship, right? So it's everything from meters to workshare and Presort to the initiatives through Newgistics that inject parcels into their network. So this is far broader than any one NSA.

This particular NSA was - kind of [indiscernible] the same as what we had experienced.

Okay. And when you said part of the reason that you factored into your guidance, new guidance was a slower ramp in Global Ecommerce. 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?

So let me split that because I think it's important to dissect it. So we are 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 Ecommerce will go back to a double-digit growth. Now from our profitability side is really the comment on the ramp. We continue to invest in new facilities. We've opened 2 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.

I'll make an additional point on Global Ecommerce. I know there has been a concern by some of our investors, and I understand that we've been chasing revenue at any cost in that marketplace. To 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, they don't see acceptable margins. So I understand people like this business to be profitable sooner versus later, and with the growth that we have seen there's always a concern that you're chasing revenue than 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 opportunity for long-term profitability.

Your CapEx in the quarter was around $29 million. Does - is that sort of a reasonable quarterly run rate going forward?

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 will increase slightly year-to-year not dramatically.

Okay. And then lastly - this is just something I missed if you could clarify. In the guidance, you said that something would be 1 point lower year-over-year for the next - for the second quarter. Could you just clarify what that was?

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 1 point lower than it was prior year.

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 1 point less?

Yes, we were - it was kind of specifically to earnings.

Oh, to earnings?

Yes.

[Operator Instructions]. Next we'll go back to the line of Ananda Baruah from Loop Capital.

Just was wondering with Stamps.com's announcement to discontinue the preexisting nature of its relationship with the USPS. If you've seen any structural changes in the market environment? I know you have a business that sort of gets the things the same way. And then secondarily , if you believe if there's any opportunity there for you in incremental way given the change of your relationship with Stamps and the USPS?

So we've honestly followed that fairly closely, as you might imagine. So far, we have not seen, to your point, structural changes in the market. So let me be clear about that. Stamps did talk about 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. And as well as, I mean, to be candid, I mean, there's also threats in that as well. But we like how we're situated.

Yes, and look, our competitive offerings are pretty wide and our approach to market through parcel through all the things we offer through Global Ecommerce and returns, et cetera. So we like our position in the competitive market. And I think if you look at the growth we have had in Global Ecommerce, that manifests itself into good client acceptance.

One of the strategic beliefs that Lila has had about that business and I think that'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. Obviously, physically touching the parcels come 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 is 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, the logistics provider networks, that's even more advantageous. So I think you're seeing the wisdom of some of the strategic beliefs bearing out.

And at this time there are no further questions. I'd now like to turn the call back to Mr. Lautenbach for any closing remarks.

Great. Thank you. Let me just reaffirm what I said at the onset. 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 our Presort, candidly, are disappointing, but it's also a business that's got a proven track record of execution. As you contemplate those 3 dynamics together, I don't presume any of them have anything to do with the long-term vibrancy or the 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 the software in terms of the channel dynamics and candidly, the pipeline that's in front of them and Global Ecommerce from exit rate in terms of revenue and some of the productivity initiatives, the long-term theory from my respective here is intact. So first quarter was disappointing. It was a bump in the road. That being said, it doesn't change my view when I heard the long-term prospects of the company. So we'll talk more in Analyst Day, and we'll render some of these dynamics more explicit, particularly around Global Ecommerce and profitability. Because I know that's something that appropriately is ways on people's minds, but we like our long-term positioning, and nothing has changed about that.

So just a matter, Analyst Day is May 29, and we look forward to seeing you there.

Thanks.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.