Points.com Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Points International's financial results for the first quarter ended March 31, 2020. Delivering today's prepared remarks are Chief Executive Officer, Rob MacLean; President, Christopher Barnard; and Chief Financial Officer, Erick Georgiou. Following their prepared remarks, the management team will open the call up for any questions. Before we go further, I would like to turn the call over to Cody Slach of Gateway Investor Relations, Points International's IR Advisor, as he reads the company's Safe Harbor that provides important cautions regarding forward-looking statements. Cody, please go ahead.

[Cody Slach:]

Thank you. Please be reminded that the remarks on this conference call may contain or refer to forward-looking statements within the meaning of Canadian and US securities laws. Management may also make additional forward-looking statements in response to your questions. Although management believes these forward-looking statements are reasonable, such statements are not guarantees of future performance or action and are subject to important risks and uncertainties that are difficult to predict. Certain material assumptions are applied in making forward-looking statements and may not prove to be correct. Important factors that could cause actual results to differ materially and the assumptions used in making such statements are included in our first quarter financial results press release issued prior to this call, as well as other documents filed with the Canadian and US securities regulators. Except as required by law, the company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that said, I will turn the call over to Points' Chief Executive Officer, Rob MacLean. Rob?

[Rob MacLean:]

Thanks, Cody. And good afternoon, everyone. As our broader industry works towards recovery, we are pleased to have carried our momentum from last quarter through Q1. Our first quarter results exceeded our expectations as we continued to deliver sequential improvements across key financial metrics, achieving three times the adjusted EBITDA we generated last quarter. In addition, we have further enhanced our strong liquidity position through the successful completion of our CAD 31.6 million public bond deal offering in March. Our team has remained dedicated to not only supporting our current partners, but also driving new business development opportunities across our growing partner base. Though we continue to operate with caution in the near term, the resilience and flexibility of our platform has made us well prepared for longer-term growth in our industry. With COVID-19 vaccinations becoming more widespread, the travel and hospitality industry has begun to see the return of consumer confidence in travel. In the United States, the CDC recently deemed domestic travel a low risk activity for people who are fully vaccinated and throughput at TSA checkpoints nationwide has remained at well over 1 million travelers per day since the middle of March. Many countries around the globe are also using their pandemic-related restrictions and putting new travel policies in place.

[Erick Georgiou:]

Thank you, Rob. And good afternoon, everyone. Unless noted otherwise, all figures on today's call are in US dollars and presented in accordance with IFRS. In advance of walking through our quarterly results, I wanted to provide a brief overview on some changes to our financial reporting that are taking effect this quarter. First, and as Rob mentioned, we have made some internal changes to our organizational structure to drive efficiencies as we grow out of the COVID-19 pandemic. To better align our reporting with a move to a platform-focused approach to operating the business, starting this quarter, our revenue, gross profit and expenses will be reported on a consolidated basis only without the separate breakouts for each of our three legacy lines of business. Second, we have added additional transparency to our cost base in our financial statements starting this quarter. Our operating expenses on our income statement will be classified by functional areas, including research and development, sales and marketing and general and administrative. In addition, the notes to our financials provide additional details on our employment costs.

[Christopher Barnard:]

Thanks, Erick. Our consistent focus on our three core growth drivers has helped us build momentum into 2021. We've continued working to develop new relationships with additional partners around the globe, launch net new services as we deepen our current partnerships and leverage our growing automated marketing capabilities to further enhance and expand the services we have in market. To reiterate Rob's earlier remarks, these drivers help us adapt and optimize our platform to meet our partner's evolving needs. As our portfolio of services deployed on our platform grows, the value of the network of opportunities we offer our loyalty program expands. As a great example of new launches with existing partners, we recently announced deepening our long-running partnership with Southwest Airlines with the launch of the Rapid Rewards points subscription plan. Under this offering, Rapid Rewards members can choose between three different subscription plans that enabled them to build a balance of either 30,000, 40,000 or 80,000 points over the course of a 12-month period. Once members choose a plan, their points will be automatically deposited in their account on a monthly basis, with quarterly bonus points awarded along the way.

[Operator:]

. Our first question comes from the line of Drew McReynolds with RBC Capital Markets. Please proceed with your question.

[Drew McReynolds:]

A couple for me. I think maybe starting with you, Erick. When we look at quarterly OpEx and certainly understand your comment on further subsidies in Q2, but as we kind of reopen here into the back half of this year and, obviously, into next year, how do you see that that trend in OpEx? How do we begin to think about what we should be adding here as the top line improves? And then secondly, at a high level, when we look at the LCM part of the business and really keeping it at a high level, as you come out of this, are there any structural changes to that business with respect to what was there before, how these agreements were contracted, the gross margin profile, all of years of work that went into this segment? Is there anything we should be aware of that that would change coming out of COVID here? And then I've got a couple of housekeepings after.

[Erick Georgiou:]

On the expense side, we had wage subsidies of roughly $1.2 million in the first quarter. And so, I think I mentioned in our prepared remarks, we'd expect that to come down pretty significantly in the second quarter. So, I'd expect certainly some ramp up just from that. I think I mentioned as well, the subsidies have been proposed, at least extend out until September. I think the eligibility criteria on that is still a little bit of a question mark. So, that's not something we're banking on at this time, but we're certainly monitoring it. I'd say the other thing that we're looking at from Q2 to Q4 is some modest headwinds on the Canadian dollar. It's looking like it strengthened about 7% or so to what we would have seen last year. So, certainly, some headwinds in those two areas. I think on the LCR side, I'll touch on it quickly and pass it off to Rob, but we haven't seen any structural changes to our pricing. Most of that's contracted upfront in our contracts. And certainly, a lot of the net new deals we've launched are very characteristic of what we've seen historically. Maybe Rob, if you want to add some context on that.

[Rob MacLean:]

I think what's probably come out of the pandemic in terms of LCR in general, when I think of its kind of structure, the potential of the business is much more significant than I think probably even us as optimists felt like going into the pandemic. We had been on a really nice trajectory through 2019. What I saw over the last 12, 18 months, the value of the monetization part of these loyalty programs, just the importance of that for our loyalty program operators and the airlines and hotels that own them. So, I do see a significantly greater amount of attention being spent on how these programs can actually help the parent companies generate economics and be monetized. So, I think that's really positive for us inside an industry that's getting recognized as having really, really substantial revenue generating and profit generating potential. So, I think that'd be the first thing. I think part of what comes out of that is these are big businesses now. I think I mentioned in my prepared remarks, you seeing companies like American Airlines and United and Delta leveraging their loyalty programs to generate huge capital raises, whether it's through debt or bonds, et cetera. $7 billion to $10 billion. That's because these are big, strong, solid businesses. They're also managed by much more sophisticated management teams than then probably five or six years ago. That's also leading to a more, I'd say, aggressive stance for these loyalty programs. I think that's only going to accelerate post the pandemic. I think they've gotten a taste of what these programs can do and I think they'll build on it. And we're seeing the products expand now with new distribution channels. Christopher talked about our launches on Accelerate Anything and with our subscription launch with Southwest here just recently. Those are just good examples of our partners, saying, 'hey, this is a really strong business, let's push it as hard as we possibly can. Let's maybe be a little a little bit more courageous, let's be a little bit braver in terms of how we can grow this business'. And we love that. Right? That's the innovation and the ideation that translates to all kinds of really interesting growth going forward. So, I don't know, I think those are elements of structural change that we'll see going forward and all feel very positive from our stance.

[Drew McReynolds:]

Two tidy-ups here. You've obviously done the raise. You've paid down the balance on the facility. I don't think you can do a buyback until the end of Q2. So, just a good time, maybe for you, Erick, just to provide an update here on free cash flow priorities as we get back to normal beginning here in the back half of 2021. And I'm assuming if there's any administrative or technical or timing breach of covenant in Q3 that that's largely a -issue. But maybe can you comment on that as well?

[Erick Georgiou:]

I think, on the last part, from a covenant standpoint, we're not sure we're there. I think it's a very moot point with no borrowings on the books now. So, we have great relationships with our lenders and not overly concerned there. From a priority standpoint, in terms of spending, I think what the bond deal has done for us, certainly has provided us a bunch of flexibility, start investing in some of those areas we had put on pause, pre COVID. So, advancing our product roadmap and marketing automation capabilities. So, I think you'll see us start to focus in those areas in probably the second half of 2021.

[Operator:]

Our next question comes from the line of Gary Prestopino with Barrington Research.

[Gary Prestopino:]

Erick, are you going to be able to prepare or offer to us a recast of the expenses on a quarterly basis throughout 2020 just for modeling purposes, so it's a little bit easier for us to compare year-over-year changes?

[Erick Georgiou:]

Let me think on that one. That one really should come out with our quarterly numbers as we issue it to the public. So, I think it's not something we can do on a one-off basis. So, let me take that back internally, and we can think on that one. It certainly wasn't in our plans to do so. But I can try and help guide you on that.

[Gary Prestopino:]

Could you maybe, if you would, talk about how the – can you talk about the cadence of your sales growth sequentially throughout the quarter? Did it pick up, obviously, from February to January, March to February? And then, can you maybe give us a little bit of visibility on how April and May compared to maybe March?

[Erick Georgiou:]

I can certainly touch on the trending in the first quarter. And Chris and Rob, want to chime along the way. So, we ended Q4, all things considered, pretty strong in a COVID environment. Q4 has been traditionally our strongest quarter, so heavier marketing activity. And so, when we enter the first quarter, we've set our expectations a little bit lower on the basis of a lighter marketing calendar and also just from a seasonality standpoint. So, we've factored kind of the trending of Q3 Q4 from a baseline metrics standpoint, overlaid with a lighter marketing calendar. And so, we entered that quarter with, I would say, generally expecting some smaller numbers than Q4. What we saw in the quarter – we started out that way. When we hit March, I would say, we saw a very steep acceleration in our metrics. And I'd say that was twofold. It was across that marketing activity that we've been relying on so much in the pandemic, but it was also in what we call our baseline metrics, so that non-promotional activity. I wouldn't say that's back to pre-COVID levels yet by any means. But I would say it really was the first indication to us of some meaningful improvement in that area.

[Rob MacLean:]

I'll jump in. The CFO wants to hand the forward-looking stuff off to me. I do think, as Erick indicated, we saw a really good progression through the quarter. That has continued into the kind of April and May period. And that's not surprising. When you think about our business, we've said a number of times previously that we feel like we will be on the early side of the recovery curve. And every metric you look at, particularly in the US, every metric you see in terms of airline travel, hotel, occupancy, et cetera, those are really positive signs that have really picked up here in the last 30, 60, 90 days. So, I would expect to see us track with that. I think we're going to be in advance of that. And we're going to actually – given the progress we made with all the new launches we had in 2020 and then continued through Q1, all of that is helping us to have a bigger footprint to capture more of this recovery. And I believe that ultimately leads to kind of a continued acceleration of our growth. So, we feel pretty good about what we saw the first quarter and what we're seeing now.

[Gary Prestopino:]

In a normal environment pre-COVID, could you kind of give us the mix of what your business was between marketing and baseline and where you are right now?

[Rob MacLean:]

Good question. One of the things we love about this business, it is remarkably responsive to smart marketing and merchandising, and we've built up our team over the last several years to just take our learnings around the data and analytics and just get smarter and smarter in terms of how we target and segment these hundreds of millions of loyalty program members that we'd have access to, obviously, in concert with our partners. And so, pre-COVID, we were seeing some really good work being done about, obviously, putting great offers in front of people that was driving great conversion and great results, and you saw that in our performance through 2019. Part of our strategy is to actually get that first time buyer on the flywheel and into the cycle. And so, there was some really good work being done on that because you want to get these hundreds of millions of consumers aware of the opportunity to purchase these miles and get that travel that they want, but then get them back with good offers and keep them engaged. I would say we were seeing really good growth on the baseline activity as we were being effective in the programs in terms of awareness and getting engagement up. Obviously, with COVID, when people weren't traveling, the promotional response – what I mean by that is not just on purchasing miles to take – to supplement a trip I'm doing, but the offer being in front of somebody to incent them to make a purchase, we skew more towards that during COVID, and for obvious reasons. I think now as we're seeing more members jumping on airplanes and staying in hotels, it's reverting back to some of the more traditional levels. It's not there yet, but I would expect it to continue to improve. We are seeing baseline or non-campaign or non-promotional transactions improving nicely here as the travel recovery takes place. So, I think we're heading back in the right direction.

[Gary Prestopino:]

Would skewing more towards your traditional non-promotional business, does that improve margins overall?

[Rob MacLean:]

Absolutely.

[Operator:]

. Our next question comes from the line of Ed Woo with Ascendiant Capital.

[Edward Woo:]

Congratulations. Do you notice any significant differences between geographies with other European carriers versus your North American versus your Asian versus your Middle East?

[Rob MacLean:]

Certainly, we're seeing the most robust recovery in the US, for sure. Again, I think the domestic market in the US, there's been lots of coverage about volumes picking up there, Americans traveling within the country. So, certainly, that would be the strongest. We're seeing good signals out of Europe. I think the UK vaccine rollout, vaccine confidence is going to be helping there. Middle East is in the earlier stages of recovery, although those airlines in particular have been perhaps more active than other regions, even in the depths of the pandemic. So I think, contextually, that would be a way we see our partners rolling out based on the transactional activity. And again, it mirrors largely what we're seeing in travel, which is broadly reported.

[Edward Woo:]

Going back to seeing all these, I guess, green shoots of improvements and people going back to travel, have you seen it in terms of your partners in terms of the pipeline of people back to work in office and just focusing on plans for more programs or more services or more partnerships with you guys for the back half of this year into next year?

[Rob MacLean:]

Yeah, I think a couple of pieces to that. We had a fantastic 2020 in terms of new partnerships and new deployments. I think we reported on that over the last 12 months. Really solid pipeline, lots of delivery, lots of launches into the market, which has been great. I think our expectation is that continues. Our pipeline has continued to be very strong. Again, as I mentioned in answering Drew's question, there's more – I sense more confidence in our loyalty program operators that they have a really powerful asset that they're managing. And so, ways to try to find opportunities to monetize that asset, it's moved up the priority for those programs. So, I think that's going to continue to be very positive. I think it's not only the new partnerships and the new products that we've been really happy with, the launch profiles on that, I think you'll continue to see more of it. Importantly, to me, I think we're just going to see all of these programs push a little bit harder to see how much potential these programs really have in terms of generating revenue and profitability from the products and services that we provide. That's where we want to be. We want to be moving quickly and kind of helping these partners generate as much revenue and profitability as possible.

[Operator:]

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn it back to Rob MacLean for closing comments.

[Rob MacLean:]

Thank you. I would just like to thank everyone for listening in on today's call. I look forward to speaking with you all when we report our second quarter results. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.