Points.com Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Points International Financial Results for the First Quarter ended March 31, 2019. Delivering today's prepared remarks are Chief Executive Officer, Rob McLean; President, Christopher Barnard; and Chief Financial Officer, Erick Georgiou. After their prepared remarks, the management team will take your questions and will also address questions from investors received via e-mail over the last few weeks. Before we go further, I would like to turn the call over to Sean Mansouri 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. Sean, please go ahead.

[Sean Mansouri:]

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 U.S. 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 actions 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 can cause actual results to differ materially and the assumptions used in making such statements were included in our first quarter financial results press release issued prior to this call as well as other documents filed with the Canadian and U.S. 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'll turn the call over to Points' Chief Executive Officer, Rob McLean. Rob?

[Robert MacLean:]

Thank you, Sean, and good afternoon, everyone. As is often the case with our first quarter conference calls, not much time has lapsed since the fourth quarter call in March and even less time since our investor event held in Toronto on March 28. For those of you that could not attend, we presented a very detailed overview of our business and industry and would encourage you to listen to the webcast replay posted on the Investors section of our website. Now instead of repeating many of the same points made in those communications, today we're going to generally focus on key updates from the first quarter with the exception of reminding listeners about the key growth initiatives introduced in on our last conference call. These growth drivers can be broken down into three key elements

[Erick Georgiou:]

Thank you, Rob, and good afternoon, everyone. As I review our results for the first quarter, please note that all numbers mentioned on our call today are in U.S. dollars and, unless otherwise noted, are presented in accordance with International Financial Reporting Standards. Total revenue in Q1 increased 8% to $95.9 million compared to the prior year quarter as we generated strong growth across our principal partnerships and Loyalty Currency Retailing or LCR for short. Gross profit of $13.4 million for the first quarter was relatively flat on a year-over-year basis, which was anticipated and factored into our annual guidance expectations. We have two dynamics at play when comparing our current year gross profit to the prior year period. First, we experienced exceptionally strong performance in the first half of 2018 from one of our hotel partners resulting from heightened promotional activity in advance of an upcoming work merger. Second, and as we mentioned on our last call, we lost the contribution from Saudia Airlines who departed in the back half of 2018 for geopolitical reasons that were out of our control. These two factors mapped otherwise solid underlying growth in the LCR segment from in-market partners in the first quarter. As Rob pointed out, most of our top LCR partners are growing solidly year-over-year from a gross profit standpoint. In our Platform Partners segment, gross profit was down slightly year-over-year largely due to timing differences. We recently renewed a contract with one of our larger partners in this segment and converted our economics to be more heavily weighted towards a transaction fee structure versus a fixed fee model. This change lowered revenue and gross profit in the segment in the first quarter, and we do believe there is greater longer-term economics for us under this new structure. In Points Travel, gross profit was down 5% on a year-over-year basis. In the first quarter of 2019, we continue to fund additional customer acquisition efforts with a higher-than-normal portion of our available margin, which compressed our margins on a per-transaction basis and muted overall gross profit in the quarter. With that said, we are still seeing improvements across transaction metrics with double-digit growth and overall transactions and gross booking values across the segment. From an expense standpoint, total adjusted operating expenses continue to be managed tightly, increasing slightly by 2% to $9 million in the first quarter. The majority of this increase was driven by personnel-related expenses as we added additional growth-focused resources throughout 2018. We ended the first quarter with 243 employees, which includes contract and part-time resources, up from 225 one year ago. Adjusted EBITDA in the first quarter was $4.6 million compared to $4.8 million in the year ago quarter. Our effective margin, which we calculate as adjusted EBITDA as a percentage of gross profit, was 35% compared to 36% in the prior year quarter, which remains on our expected range. Lastly, total net income for the first quarter was $1.8 million compared to $2.3 million in the prior year period. This decrease was primarily driven by the slight decline in adjusted EBITDA combined with increased depreciation and stock-based compensation charges. Moving on to segmented reporting. Our LCR segment continued to be a strong contributor to bottom line performance, generating contribution of $8 million in the first quarter, up slightly over the prior year period. Platform Partners' contribution was $804,000 compared to $888,000 in the prior year quarter. For both of these segments, the year-over-year changes in contribution were largely driven by the changes in gross profit, which I outlined earlier. As expected, Points Travel contribution was a loss of $1.1 million compared to a loss of $816,000 in the first quarter of last year largely due to increased cost attributable to this segment. Turning to our balance sheet; total funds available were $76.4 million at the end of the first quarter compared to $83.1 million at the end of the fourth quarter. This decline in cash was largely the result of the normal ebbs and flows of our sales activity, which can fluctuate with the timing of promotional activity across our targeted base. In the first quarter of 2019, we repurchased approximately 220,000 shares at an aggregate cost of just under $2.5 million under our NCIB program. As of March 31, we have repurchased 52% of the authorized amount under the NCIB program and remained active in repurchasing shares subsequent to the quarter. Lastly, effective January 1, 2019, we adopted IFRS 16, a new accounting standard which outlines how to measure, recognize and disclose operating leases. Going forward, operating leases will be capitalized on the balance sheet. As a result of this adoption, we have recognized the right-of-use asset with corresponding short- and long-term liabilities on our balance sheet. The new standard also reduces rent expense on our income statement while adding interest and depreciation expenses. The impact of the standard on Q1 2019 adjusted EBITDA was a benefit of approximately $300,000 compared to the first quarter of 2018. With that, I'll turn it over to Chris to provide more details on our growth strategy. Chris?

[Christopher Barnard:]

Thanks, Erick, and good afternoon, everyone. Today, we reiterated our annual guidance and continue to expect solid annual growth in 2019. Furthermore, we're making progress on key elements of our long-term strategic plan to significantly grow our business in the years ahead. As we indicated in March on our call, 2019 is very much a first half/second half story from a year-over-year growth perspective. This is due to rapid growth we realized in the first half last year resulting from strong performance across the board as well as the impact of an unpredictable dynamics of two large hotel partners merging. Added to this, as Erick mentioned, 2019 will not include contribution from a long-time Middle Eastern partner that severed ties as a result of political tensions between Canada and Saudi Arabia. Other than these two headwinds, we are seeing very solid growth across the breadth of our business with most of our top partners delivering gross profit growth as the industry continues to grow membership and engagement across the board. Our data-led marketing initiatives are producing very impressive results across more and more of our partnerships, and our pipeline continues to grow as strongly as we've seen it in the recent years. Expanding on some of Rob's comments earlier, during the first quarter, we made progress on several key growth initiatives. In the LCR segment, we recently renewed our long-term partnership with Air France-KLM's Flying Blue program. Flying Blue has one of the year's largest Frequent Flyer programs, and we're pleased to be able to continue our long-standing LCR implementations as well as our newer Points Travel deployment over the years to come. Well, in newer and smaller partnership, our recent extension of Shangri-La Hotels LCR contract is another good indication of our Asian growth opportunity. Continuing in the hotel vertical, extending our LCR services with the world of highest programs by enabling loyalty program members the ability to use their Points balances plus cash to top up seamlessly for hotel rewards shows our continued success in upselling new services to current loyalty program partners. As a reminder, this is one of our three key growth drivers going forward. Turning to Points Travel and from a cross-selling perspective. In February, we launched hotel redemption capabilities with Frontier Airlines, a longtime partner we first engaged in 2011 with a number of LCR services. With this new offering, Frontier will leverage our Points Travel service to provide their members with access to over 300,000 hotels at the click of a button, ensuring redemption of miles is made even easier and more rewarding. Within the Points Travel service, we're also focused on upselling the full breadth of our transaction types available to current partners. In support of this, during the quarter, we began working towards the introduction of hotel burn or the ability to use loyalty points as a form of payment for hotel bookings with one of the larger programs currently using only hotel earn. We'll provide further details of this deployment once it is launched in the second half of this year. Kicking off the year by further expanding our Points Travel offering into the loyalty industry continues to indicate to us that there is significant market opportunity in this competitive space. Ensuring that this service is both a core service to attract new partners as well as a valuable cross-sell opportunity for us remains an internal aspect of our strategic plan going forward. We also have some good business development momentum in Platform Partners segment. As Erick mentioned, we've refocused one of our largest partners in this segment from a fix fee to more of a transaction-based model. While this does briefly lessen our economics during the transition, we're confident that there is long-term value in the structure and look forward to assisting this partner in growing volumes by leveraging our data and marketing expertise. During the quarter, we also expanded our Wyndham hotel partnership by launching an online earn mall as well as adding them to the Marathon Fuel program. Additionally, we launched a new initiative with FTD Flowers starting by powering a bonus mile offering with United MileagePlus, and we look forward to expanding this program in the future. We're also excited to be working on launching a number of new initiatives to see our platform linking strong retail brands with their extensive portfolio of world-leading loyalty program partners. These initiatives include a ride-sharing company incentivizing riders with hotel points, a leading meal box delivery service offering multiple program currencies as an incentive and rolling out an exchange offering for an international financial services coalition program. All of these prospective initiatives not only show the value of our Loyalty Commerce Platform but are also important steps in adding and increasing range of transaction types to our service offerings. So in summary, I think it's important to reiterate a few things that we're seeing to start this year. First is that we have a strong underlying growth in current deployments being driven by our data-led marketing and investments in that area. This enables us to absorb the impact of industry events that are out of our control and still maintain our healthy annual growth story as evidenced by our reiterated 2019 guidance of gross profit between $56.5 million and $62.5 million and adjusted EBITDA between $19.5 million and $22.5 million. It also offers concrete evidence that continues to build on this track record as one of our three core growth drivers will assist us in meeting our long-term financial goals of substantial gross profit and adjusted EBITDA growth. Second, we've seen continued progress in our other two growth drivers of adding new partners to the platform and upselling and cross-selling services to existing partnerships. As we reviewed in our March investor event, the 5-year average combined track record here is approximately 17 new deployments per year. On this call, we've already reviewed 8 opportunities, which are nicely distributed across our three operating units. Backing this up is an active list of pipeline activity that again gives us confidence that these two important growth drivers are on track to help us deliver our aggressive long-term growth targets. And lastly, we are seeing concrete evidence of our accelerant strategies at work, whether it's renewing an Asian partner and continuing progress on our regional office there, new deployments in the works with leading retail and financial services brands along with progress on our new Amadeus strategic partnership. We believe these activities point to our ability to steepen our growth curve in order to achieve our long-term corporate goals of 2022 gross profit in the high $90 million range, driving mid-$40 million of adjusted EBITDA. With that, I'll turn the call back over to Sean from Gateway IR.

[Sean Mansouri:]

Thanks, Chris. Before turning it over for a live Q&A, we'd like to review some of the questions we received from investors via e-mail over the last couple of weeks. While we're very appreciative of all the questions that came in, please understand that we cannot address every single one in a sufficient amount of time. As such, we grouped them into a few relevant themes. So I'll kick it off with this. Rob, Chris, Erick, can you provide a little more color on the ramp with Amadeus? Have you begun to speak with any client prospects?

[Christopher Barnard:]

Yes. Thanks, Sean. It's Chris. Yes, we're really please how this relationship has kicked off. As we mentioned before, we are dedicating specific resources to ensuring as much as we can versus a large company like Amadeus success in this new partnership. We've started by focusing on introducing our services to their sales and account management teams. And we've, as Rob mentioned, been in front of active partner discussions already, including rolling it out to the broader Amadeus population in their company. So excited at the progress we're making there. The second aspect of the relationship will be working with their products integration teams to ensure there are services that are tightly integrated into their various service offerings. And we're balancing the desire to move as fast as we can with lining up on the market opportunity with some of these new customer discussions. But encouraged on the progress there. So we're happy in general how the Amadeus relationship has kicked off.

[Sean Mansouri:]

Great. And do you guys have any major contract renewals with your top 10 partners in 2019 or even before 2022?

[Robert MacLean:]

Thanks, Sean. It's Rob. I'd say we don't typically make a practice of discussing individual contract timing. But given the fact that our contracts are typically three to five years, it's pretty safe to assume many of them are being renewed every year. And we're pretty happy to have announced -- Christopher announced Flying Blue was extended today as well as several others in our prepared remarks. And it is worth pointing out that we've got a great renewal track record of over 95% of our contracts renewing. And frankly, we expect that to continue going forward over the next number of years. So pretty pleased with how that process is going for us.

[Sean Mansouri:]

Got it. And from a cash perspective, how much of your balance is attributable to future client payments? How can we get a better sense of the predictability around your cash as it seem to move around quite a bit quarter-to-quarter?

[Erick Georgiou:]

Sean, it's Erick here. So really total cash can vary a lot with the underlying promotional activity of in-market partners. And our marketing team here really runs a series of promotions across a number of large partners, and the timing of those promos can tend to move around from month-to-month and quarter-to-quarter. So our quarterly cash tends to be tied to that movement. Other things affecting our cash balances would be things like corporate activities, so the stock buyback under the NCIB program and our RSU program for employee incentives. We do have a large partner payable at the end of every month. It's frankly straight off the balance sheet, but we are also replenishing cash on a daily basis. Either real-time transactions, we are the merchant of record on all of these transactions. And so when I think of our average daily cash balances, it's quite high on a daily basis. Lastly, I would say just looking back over the years, generally speaking, our cash balance tends to grow year-over-year in spite of those quarterly variations.

[Sean Mansouri:]

Got it. Well, that wraps up the inbound investor inquiries over the last couple of weeks. Operator, we'll turn it back over to you for live Q&A.

[Robert MacLean:]

Thanks everyone for listening to today's call, and we look forward to speaking with you when we report our second quarter results in August. Thanks again for joining us.

[Operator:]

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