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Pitney Bowes (PBI) Misses on Q2 Earnings, Cuts Guidance

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Pitney Bowes Inc. (PBI - Free Report) reported second-quarter 2016 adjusted earnings from continuing operations of 39 cents per share, which missed the Zacks Consensus Estimate of 42 cents by 7.1%. Also, on a year-over-year basis, adjusted earnings declined 13.3%.

The bottom-line performance took a beating on account of higher ERP implementation expenses, charges related to new enterprise business platform cutover and absence of earnings from Imagitas that was sold last May. Further, a decline in the top line also proved to be a drag on the earnings performance.

Inside the Headlines

Total revenue in the quarter was $835.8 million, down 5.1% year over year on a reported basis. Also, revenues fell 4% when adjusted for both the impact of currency and market exits.

Poor top-line performance during the quarter under review was largely attributable to exit from direct operations in Mexico, South Africa and five markets in Asia. Furthermore, weak sales in two out of the company’s three segments and temporary transition costs associated with the cutover to the adoption of new enterprise business platform in the U.S. proved to be a drag on revenues.

As for the segments, on a reported basis, Small and Medium Business (“SMB”) Solutions revenues slipped 8% year over year to $428 million. Softness in the North American Mailing business (down 10%) was attributable to temporary impacts from the enterprise business platform cutover in the U.S. Lower daily sales activity and productivity during the cutover period also hurt sales.

Also, the decline in recurring revenue streams hurt the International mailing business (down 4%), worsening the fall. Improving equipment sales on higher sales productivity in certain geographies including France, Italy and Japan arrested the sales decline at this segment to a great extent.

Enterprise Business Solutions (“EBS”) revenues remained flat year over year at $212 million. This segment’s production mail business (down 2%) was hit by in-house mailers shifting their mail processing to third-party outsourcers and recent market exits. However, this decline was totally offset by an uptick in Presort Services (up 2%), mainly driven by higher volumes of First Class and expansion into new markets.

The Digital Commerce Solutions reported an 11% year-over-year rise in sales to $196 million. A fall in sales from Software solutions (down 9%) was more than offset by a rise in sales from global e-commerce business (up 35%), thereby driving an overall increase. Lower licensing and data-related revenues resulted in the lackluster performance of the Software solutions business.

This sub-segment particularly benefited from the Borderfree acquisition, growth in U.K. revenues and launch of new retail storefronts. In addition, robust outbound U.S. package shipments proved to be a major growth driver for the segment. Especially, organic growth in the Cross-Border Ecommerce business grew 11% year over year, adding to the company’s strength.

Notable Activities

During the second quarter of 2016, Pitney Bowes accomplished multiple feats including deployment of its new enterprise business platform in the U.S., launching of Commerce Cloud to aid small and medium businesses and signing of agreements with several systems integrators to sell software solutions. Pitney Bowes believes that the Commerce Cloud platform will act as the foundation for all future products and solutions. It also launched a state-of-the-art location intelligence solution for helping clients enhance the value of business data.

It also showcased the latest intelligent mailing software – Clarity Solutions Suite – a product co-developed with industrial good manufacturing behemoth General Electric Company (GE - Free Report) . Clarity Solutions is expected to harness the power of Industrial Internet to revolutionize production mail industry. Moreover, the company landed a contract from insurance holdings underwriter Markerstudy Group of Companies’ online motor insurer Geoffrey Insurance.

Liquidity and Cash Flow

Exiting the quarter on Jun 30, 2016, adjusted free cash flow was $85.8 million compared with $83.7 million as of Jun 30, 2015.

As of Jun 30, 2016, the company’s cash and cash equivalents totaled $675.9 million compared with the year-ago tally of $754.2 million. Long-term debt as of Jun 30, 2016, was $2,623.8 million, up from $2,473.0 million as of Jun 30, 2015.

Guides Down

Concurrent with the earnings release, Pitney Bowes has revised its guidance downward. The company now expects adjusted earnings in the range of $1.75 to $1.82, down from the previous guidance of $1.80–$2.00. Similarly, revenues are now projected to decline in the range of 1% to 3%, instead of the previous decline range of 1% to 2%.

Despite the downcast outlook, Pitney Bowes is bullish about the prospects in the second half of the year on account of the initiatives that were taken earlier. The company expects new enterprise business platform cutover to particularly aid the North America Mailing business to return to normal levels. Moreover, it believes that a rebound in Software license revenues is on the cards on account of the progress made in channel efficiency and channel partner engagements.

The company believes that a moderate business uptick and declining marketing and ERP expenses will prove conducive to adjusted EPS and free cash flow during the second half of the year. For the second half, the company projects revenue growth of 2% as against the year-over-year decline of 2% projected earlier, on a constant currency basis. Similarly, adjusted EPS is forecasted in the band of $1.03 to $1.10.

Double-digit growth in Digital Commerce Solutions, primarily buoyed by the Borderfree buyout, is expected to be a major catalyst for the second half of the year. Pitney Bowes is bullish that continued transaction volume growth along with acquisition of new and expansion of existing retail clients will strongly offset the negative impact of currency fluctuations and the Brexit referendum.

PITNEY BOWES IN Price, Consensus and EPS Surprise

PITNEY BOWES IN Price, Consensus and EPS Surprise | PITNEY BOWES IN Quote

To Conclude

Pitney Bowes’ second-quarter results were hurt by higher ERP implementation expenses and restructuring charges. In addition, an uncertain global economic environment impacted the production mail and software businesses, marring the top-line performance.

Despite the negatives, the company is confident about a rebound in the second half of the year. The benefits from ERP implementation in the U.S. are expected in the second half, adding to the company’s optimism. Pitney Bowes’ steady transformation process over the past three years, exit from low profit businesses and strength of digital commerce portfolio are expected to drive growth over the long haul, offsetting some of the negatives.

Pitney Bowes currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the sector include Active Power, Inc. and Adobe Systems Inc. (ADBE - Free Report) . Both the stocks sport a Zacks Rank #1 (Strong Buy).

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