Shares of Stamps.com are down significantly (as much as -50%) in pre-market trading following the termination of its agreement with the USPS. Using our text analytics platform to track the chain of events that led to the blow-up, we find an ominous SEC 10-Q disclosure last year that was also accompanied by an increase in STMP’s “Deception Score”, which flags vague and potentially evasive commentary from management on earnings calls. 

Warning signs first appeared on the September earnings call, while the December call was more benign. However, one emerging hot button issue may have been the culprit.

1. August 2018: The New 10-Q Disclosure

The following text was taken from the Risk Factors section of Stamps.com’s 10-Q filed on August 8, and processed through Amenity's NLP text analytics platform. SEC filings contain hundreds and thousands of pages of legalese, boiler plate hypotheticals, and general financial information already widely known. At times they also contain the seeds of a stock’s future destruction.

In the below NLP extraction we italicized and made bold the text that represents the new disclosure in Stamps.com's 10-Q filing for 2Q18:

2. Deceptive Language Analysis: The "Risk Factors" of Earnings Calls

Amenity’s deceptive language analysis identifies patterns of language that may indicate evasive language, vague commentary, attempting to spin a negative, tension with the analyst community, etc. This language often appears when management is discussing topics harboring the most uncertainty and risk. We look at the Deception Analysis as the “risk factors” of earnings calls.

As the following chart shows, there was a significant spike in STMP’s Deception Score on the 2Q18 call, just a week before the new 10-Q disclosure was filed. On an absolute basis, STMP’s Deception Score was often minimal, but we primarily look for meaningful changes in the linguistic patterns. In this case, the change appeared at the same time as these ill-fated negotiations were taking place, meaning that our Deception model identified that the risk in USPS negotiations was being understated in the Stamps.com commentary:

The score remained elevated on the 3Q18 call, where the majority of Deceptive language was found in this answer to a question onthe 10-Q disclosure:

Stamps.com (10/31/18):

• "I think that, in general, like I mentioned in the prepared remarks,these types of agreements, these types of negotiations are very common for us. We’ve had – over the span of 20 years, we’ve had dozens of these types of negotiations. I think it’s simply this time it’s an example of us deciding to provide some additional insight into the negotiations. As I mentioned earlier, the negotiations with the USPS take many months to finalize, and so the USPS, obviously, has a lot on their plate.There’s a lot of things going on in the USPS world, and so we’reworking with them closely on the negotiation but it’s just going to take sometime. So I think we just felt like, in terms of the 10-Q, making that update was appropriate at this time."

3. New Mid-Year Risk Factor Disclosure + Uptick in Deceptive Language = ???

What was the outcome of a new mid-year Risk Factor disclosure accompanied by an uptick in evasive language? On its 4Q18 earnings call last night, Stamps.com disclosed they had terminated the USPS agreement, resulting in a substantial shortfall in guidance:

Stamps.com (2/21/19):

• "Obviously,the financial trade-offs and everything else were in there. But in the end, our offer was not accepted. And so we decided that it’s best to go our own separate ways."
• "We expect the 2019 revenue to be in the range of $540 to $570 million, which reflects the elimination of the USPS commission revenue for the entirety of 2019. We expect 2019 revenue to continue to be driven by our continued focus on our e-commerce driven shipping business.  However, with the elimination of the USPS commission revenue, shipping revenue is expected to decline year-over-year."

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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