Points.com Inc.
Q4 2019 Earnings Call Transcript

Published: 5 Mar 2020

[Operator:]

Good afternoon, everyone. And thank you for participating in today’s conference call to discuss Points International Financial Results for the Fourth Quarter and Full Year Ended December 31, 2019.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'd 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 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 were included in our fourth quarter and full year 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, I'll turn the call over to Points' Chief Executive Officer, Rob MacLean. Rob?

[Rob MacLean:]

Thanks, Sean, and good afternoon, everyone. This year marks our 20th anniversary and while we're extremely proud of what we built as a team over that period, we're even more excited about the tremendous foundation we laid as a company for the growth ahead of us.Looking back at last year, we not only closed out 2019 with another exceptional quarter, highlighted by record gross profit and adjusted EBITDA, which were respectively up 25% and 43% compared to the prior year quarter, but we also made some important headway in achieving our long-term objectives.As a reminder, early in 2019, we introduced our long-term growth expectations of generating gross profit in the high $90 million range and adjusted EBITDA in the mid-$40 million range as we exit 2022.Our confidence in these targets is largely based on the many years of executing a few core growth strategies, signing new partnerships, cross selling current partnerships and continuing to drive increased performance in our deployed services.Our partnership with Southwest Airlines Rapid Rewards program is a terrific case study. In 2013, we initiated our relationship with their program by taking over their buy miles program that had been internally run for the prior few years. We quickly and steadily added new services to the mix, and are now collaborating on eight initiatives with them with a number more in the works.Every year, we not only work closely with their team, but we also continue to invest in our data-led and automated marketing capabilities. This combination has allowed us to either focus on aggressively growing revenue or enhancing profitability, whichever meets their strategic needs during the period.Probably the best testament to the value we bring to Southwest, one of the world's leading airlines that has built its brand on outstanding customer engagement is that in Q4 last year, we entered into our third long-term renewal.Over the years, the foundation of our growth has been managing this launch, expand, grow partnership cycle, dozens of times around the world with some of the largest brands in travel, hospitality and financial services, and we certainly see tremendous opportunity to continue this trend over the next few years and beyond.In fact, our plan contemplates accelerating our growth over that time. 2019 saw us lay part of the foundation for this more aggressive growth with new offices and staff in both Singapore and in Dubai. Bolstering our Middle Eastern presidents will allow us to capitalize on the momentum we are seeing there with both current and prospective partners.Out of Singapore, our new team enables us to both service our existing relationships in the APAC region more effectively and accelerate our business development efforts to bring in new loyalty program partners. The new hires bring a wealth of loyalty and travel-related experience, and we're excited about leveraging their regional knowledge.Discussions about Asia are certainly impacted by the ongoing situation with the COVID-19 virus that has dominated headlines over the last couple of months and has clearly affected travel in the region.Over the years, we've seen a number of stressful situations affect the travel industry. Some are more local, such as severe weather events and some are much broader like the virus or the 737 MAX grounding.It's been our experience that as our travel related partners managed their way through these various challenges, they often look to their other assets such as their loyalty programs to financially contribute more significantly during these periods.As a result, our partners frequently look to us to partner on more immediate revenue growth opportunities, as they seek to mitigate the impact of lower flight and related ancillary revenues. Our recent investments in marketing technology and a clear record of success in driving results puts us in a good position to assist our partners during these stressful times for their businesses.At this point, we've not seen any material impact on our existing business results, and as a result, we have not included any impact positive or negative from the COVID-19 virus in our 2020 outlook. But we will update that as appropriate in the coming months as the longer term impacts become more clear.We are pleased to have had a very strong 2019 and exited the year on record footing. We're happy to project continued strong growth in our business in 2020 with gross profit coming in between $67 million and $73 million and adjusted EBITDA between $23 million and $27 million for the year.As a reminder, excluding last year's tax rebate that we outlined on our Q2 2019 call, gross profit in 2019 was $59.4 million. So we're expecting double-digit gross profit growth at the low end of our guidance range with up to 26% growth in adjusted EBITDA at the high end. Our projected top and bottomline growth is a clear indication that we plan to continue executing on our various initiatives and progress towards our longer term financial targets.Now I'll hand it over to Erick to review our financial performance for the fourth quarter and full year in more detail before Christopher highlights some of our strategies to accelerate growth and how they will impact our expected performance this year. Erick?

[Erick Georgiou:]

Thank you, Rob, and good afternoon, everyone. Unless noted otherwise, all figures on today's call are in U.S. dollars and presented in accordance with IFRS. Starting with our fourth quarter results, total revenue increase 13% to $107 million in the fourth quarter. Gross profit, which is our more appropriate proxy for our topline increased 25% or $3.5 million to a quarterly record $17.6 million. LCR and Points Travel were the primary drivers of the strong performance, with both segments posting quarterly records in Q4, which I'll touch on briefly.Starting with LCR, gross profit increased 25% to $14.7 million in the fourth quarter, with contribution growing 30% to $11 million. LCR performance in Q4 was largely an organic growth story, as we benefited from improved consumer response to our marketing campaigns, as well as seasonally strong volumes associated with our tier status product, which also saw growth compared to last year.We continue to see consistent improvements in our marketing campaigns, which underscores the benefits we have seen from our investments in data and marketing technology over the last couple years.In Points Travel, gross profit more than doubled over Q4 of 2018, increasing 139% to just over $1 million for the quarter. This increase was due to a few factors, including increased booking volumes, improve transaction margins among existing partnerships, as well as the full quarter benefit of the AIR MILES Hotel redemption product, which was launched in the third quarter of 2019.Contribution of Points Travel was a loss of roughly $790,000, a 24% improvement compared to the year ago quarter, which reflected the increased gross profit in Q4.From an expense standpoint, total adjusted operating expenses in Q4 increased 14% to $10.6 million compared to the year ago quarter. Most of the increases from higher personnel related expenses as we continue to add resources throughout 2019 that are focused on achieving our longer term growth. We ended the fourth quarter with 273 employees, including contract and part time resources, up from 236 one year ago.Adjusted EBITDA in the fourth quarter increase 43% to a quarterly record of $7.2 million, compared to $5 million in the fourth quarter of 2018.Our effective margin, which is calculated as adjusted EBITDA as a percentage of gross profit, and as our internal measure for operating efficiency increased from 35.7% in Q4 of ‘18 to 40.9% in the current quarter.And lastly, net income increased 23% to $2.8 million, compared to $2.2 million in the prior year quarter.As Rob mentioned, we are confident and our previously issued 2022 financial outlook, including the operating leverage it implies. As we look to 2020, we will continue to invest in our business to not only accelerate topline growth, but to drive further operating efficiencies by the end of 2022.Turning to our balance sheet, total funds available were $86.8 million at the end of the fourth quarter, compared to $63.4 million at the end of the third quarter and $83.1 million at the end of 2018.Our balance sheet remains strong with increased cash levels compared to the end of 2018, despite spending over $10 million on our NCIB program during the year. In the fourth quarter, we repurchased approximately 200,000 shares for a total of $2.5 million bringing the total amount of shares we purchased in 2019 to roughly 872,000 for approximately $10.3 million.Lastly, I'll briefly talk about a move we made in December to further strengthen our balance sheet. We entered into a new three-year $15 million revolving credit facility that includes a $15 million accordion with RBC and the Bank of Nova Scotia.Although, we are comfortable with our current cash on the balance sheet, this new facility provides additional liquidity for working capital, general corporate purposes, along with providing dry powder for future strategic opportunities. This credit facility also strengthens our banking relationships, as we are constantly looking to improve visibility with our investor and analyst communities.With that, I'll turn it over to Christopher. Chris?

[Christopher Barnard:]

Thanks, Erick. The fourth quarter and full year were filled with many significant accomplishments. And as Rob mentioned, many of these provide a strong foundation for the long-term growth objectives we introduced early last year. I’d like to highlight a few of the points of continued success in both our core growth and our acceleration initiatives.Our core growth is delivered by historically strong three-prong approach of launching new partnerships, expanding them over time with additional services and focusing on growing each deployment as more and more data feeds or marketing algorithms.It was the execution of the ladder initiative that really drove our 2019 success, because we generated strong organic growth -- profit growth with nine of our top 10 partners for the year. More specifically in LCR, we generated double-digit gross profit growth for both the fourth quarter and the full year, as this segment continues to benefit from our various investments in marketing technology and automation.Our long-term goal of exiting 2022 with gross profit in the high $90 million range and adjusted EBITDA in the mid-40s is predicated on continuing our successful launch, expand and grow partnership strategy, while focusing on accelerating growth by more aggressively expanding into international markets, continuing to diversify our partnership based into both the financial services and retail verticals, and being more proactive on corporate development. While these three acceleration tactics are important to our plans over the next few years, it's great to have seen some early success in 2019.Last year, a good example of our progress in the retail vertical was the launch of a new integration between Hilton and Lyft, which enables shared customers to earn more Hilton points for every Lyft ride or use their Hilton points to pay for any Lyft ride.Also in 2019, we signed a multiyear agreement with leading meal-box-delivery service, Home Chef to offer frequent flyer miles when a consumer signs up or makes ongoing purchases. We plan to continue adding new loyalty options to the Home Chef offering, such as the Alaska Airlines Mileage Plan, which was integrated just a few months after launch.In this week, we're pleased to announce that we have also added American Express' membership rewards to this offering. Another great example of our unique offering, attracting leading loyalty programs, as well as an important crossover between our retail and financial services initiatives. While we expect to continue the momentum of both of these offerings, they also act as good precedents for our strategy to expand more aggressively into the non-travel verticals.As I mentioned, we're ramping up our focus on financial services going forward, but it isn't a new vertical for us. We had a relationship with City Bank since 2015 and last year we were very pleased to announce a long-term renewal of our Chase Bank Ultimate Rewards relationship that began all the way back when they launched the program in 2010.Both these banks increased their member engagement by leveraging our exchange services to allow their card holders to exchange bank branded points into travel program currencies, typically on a one-to-one basis.During the fourth quarter of ’19, we also launched a new relationship out of our Dubai office, with AIR MILES Middle East and its banking partner HSBC, Middle East that will see exchanges with two of our current regional partners in Etihad and Emirates frequent flyer programs, another great example of early success in both our international expansion and our industry diversification initiatives.Our third area of focus aimed at accelerating our business in a more proactive approach to corporate development, which we view broadly as both including strategic partnerships, as well as potential acquisitions.We spent 2019, establishing our working relationship with Amadeus and continue to make progress on moving our pipeline of both mutual and new partnerships forward. We feel that our relationship with Amadeus is an important element in both our regional focus, as well as our core strategy of signing more high value partnerships with airlines. We expect to disclose more details of our progress in the near future with pending launches.Further, Erick mentioned, we have recently bolstered a balance sheet and are working more closely with our banking partners uncover appropriate targeted opportunities to deploy our capital to further accelerate our growth.Overall, our team is extremely proud of what we accomplished last year, but we're even more excited what's in store for us in the years ahead. In 2020, we expect to deliver another strong year of growth, both on top and bottomlines, with gross profit range between $67 million and $73 million and adjusted EBITDA ranging between $23 million and $27 million. Again, to reiterate Rob's commentary, we have not built in any upside or downside in this range based on the COVID-19 virus dynamics and we will update you along the way as appropriate.We're also reiterating our long-term targets as exiting 2022 with gross profit in the high $90 million range and adjusted EBITDA in the mid-$40 million range. Our continued confidence in achieving these goals based on our proven track record for growth.As an example, most scenarios created by taking our applied gross profit growth rate from 2018 through 2020 and applying it to 2020 through 2022 showed a high $90 million range is well on track as we continue to execute on launch, expand and grow partnership strategy to drive gross profit.As Erick mentioned, our plan is predicated on increasing our operating leverage over the next few years as well as we manage our aggressive growth. As we continue to make progress here, many of our shareholders have been focusing on our return on invested capital as an indication of management's effectiveness.With our three year average of approximately 15% ROIC, we're confident that we'll be able to continue our strong executional track record over the coming years and we look forward to updating you on our progress along the way.So, with that, I'll turn the call back over to the operator for Q&A. Thanks very much.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Drew McReynolds with RBC Capital Markets. Please state your question.

[Drew McReynolds:]

Yeah. Thanks very much. Good afternoon. Rob, maybe one for you on the impact of the virus. I appreciate your comments and obviously pretty clear on your guidance, which looks great. I want to drill down a little bit more into the lagged impact here presumably your comment on no material impact thus far is -- as of today, I just want to clarify that and as you kind of look at the longer term impact just not to believe there won't be some kind of impact on the volume side of bookings just in general across at least that part of the region, but probably across the globe. Just any further granularity you can add here on this lagged impact?

[Rob MacLean:]

Yeah. It kind of what I said in the prepared as they – we are walking a bit of a balance here. It's obviously a situation where we don't have absolute clarity. Let's be clear on that. But I think when I reflect on the business we've been in for a while, the industry's hospitality and travel have had a bunch of stresses over the years. There's no question. We've seen that early 2000 to 2008 and more recently with kind of big weather issues and then things like the 737 MAX issues.So what we did see in behaviors in those situations over a long time timeframe is the industry generally and pretty consistently looks to other parts of their business and other assets to kind of squeeze them harder, but be more aggressive, try to have these programs or these assets, like the loyalty programs, which are typically front and center, contribute more financially to the overall situation. So we've seen that over and over.For us in those situations very often and this is happening today. We have the partners coming to us to ask us to assist on more immediate revenue growth opportunities. So, again, that's pretty consistent with what we've seen in the past. They want to generate more economics that are these other assets and we're really a partner that allows them to do that. So we get in those conversations pretty quickly.I would say that, a lot of what we've been doing over the last number of years, investing in marketing technology, kind of a track record to be able to drive real solid growth in the revenue generating products that we work with the industry on. It's put us in a good position to help. Now we can all help a certain amount, but we're definitely in a position where we can help and we can answer the bell, so to speak on those in those moments.So, when I look at that track record over the last number of years. At this stage, we're not seeing any material impact on our business results and so I think it's just prudent for us, we haven't put any positive or negative into -- impact into our 2020 outlook as I said in the prepared remarks, but we're going to be watching it closely.We've got some positive things in terms of conversation today, but just not that lack of clarity. That means I think it's prudent for us to kind of -- just kind of keep an eye on we will most certainly update the market and you guys if and when we see anything material impacting over the next little while. But that's really the situation we're in and what we've seen in the past around situations like this.

[Drew McReynolds:]

Okay. That's helpful. One question I do get sometimes is just with respected some of the minimum guarantees that you provide these partners, normal times you far exceed those guarantees year in year out, you don't for see a situation where activity potentially drops to that kind of extent presumably at this point?

[Rob MacLean:]

I think that's a good question. But we -- as you would expect, we sent those guarantees with to account for any type of kind of significant situation.

[Drew McReynolds:]

Yeah.

[Rob MacLean:]

So, we're not worried about that. We're partners with the industry, so we work well together on those kinds of conversations…

[Drew McReynolds:]

Yeah.

[Rob MacLean:]

… no concerns were in that.

[Drew McReynolds:]

Okay. That's great. On the 2022 targets nice to see those reiterated just in terms of exiting 2022 is these targets are run rate kind of looking at a Q4 in 2022 not to get too cute here. Just for clarification?

[Rob MacLean:]

Yeah. That's a safe assumption.

[Drew McReynolds:]

Okay. Okay. Last one for me, maybe Christopher for you on Amadeus, in terms of that partnership progressing. Just remind us maybe in 2020 what kind of milestones if you can -- you hope to achieve on under that partnership and then that's it for me. Thanks.

[Rob MacLean:]

Yeah. So there is three aspects of the Amadeus partnership that we're excited and focused on. The first is just closing deals of current and net new brands in the airline industry. And you'll see some announcements with respect to that activity over the coming couple few months.The second is us kind of integrating our services into their platform and we are working actively on that right now. So we should in the second half of the year has that capability in place to continue to kind of execute the sales strategy, but with even a more robust and integrated offering.And then the third is to really collaborate on that new product, and again, that's in flight now. So that might be a little bit harder to pin down timing on when those will hit the market, but certainly have that's not a theoretical aspiration of ours, that we're working on things together now. So we're continued to be committed and excited about the Amadeus partnership.

[Drew McReynolds:]

And on that integration, is that into their platform, is there an actual kind of completion timeframe for that then presumably that's this year?

[Rob MacLean:]

Yes.

[Drew McReynolds:]

Okay.

[Rob MacLean:]

That is this year.

[Drew McReynolds:]

Fantastic. Okay. Thank you very much.

[Rob MacLean:]

Great. Thank Drew.

[Operator:]

Our next question comes from Ed Woo with Ascendiant Capital. Please state your question.

[Ed Woo:]

Yeah. Congratulations. My question is more on the backlog. Have you have any current comments about your current backlog?

[Rob MacLean:]

Yeah. And it's Rob, so, pipeline, I think, we spoke last quarter around pipeline and feeling pretty good about that. I think we're starting to see some of that clear, as Christopher indicated, and it kind of links in with some of the Amadeus update as well. You'll see us launch some of that backlog here in the next 30 days to 60 days, some pretty material relationships that the development is all done, we're just going to do the finer details on the development.So feel pretty good about how that backlog is moving. I would say just kind of overlay on top of that the pipeline itself continues to build from my earlier comments in response to Drew, I think we're seeing indications there as well that that pipeline just continues to be added to really across all three segments of the business.

[Ed Woo:]

Great. And then I'll following up on that, I know you guys recently expanded into Asia a little bit, so this virus impact any of that growth plan?

[Rob MacLean:]

Yeah. Right now, it continues to be fairly small in our overall footprint. We've already made some investments, because we think the long-term opportunities in Asia are very interesting to us. So, again, no perfect crystal ball on that end, but I don't think it's going to speed things up from a net new business development standpoint. But we're still committed to and have people on the ground in the region pursuing that, that market is quite distracted right now. That's no surprise to anybody.

[Ed Woo:]

Great. Well, thank you. I wish you guys good luck.

[Rob MacLean:]

Thanks Ed.

[Erick Georgiou:]

Thanks Ed.

[Christopher Barnard:]

Thank you.

[Operator:]

Thank you. At this time, this concludes our question-and -answer session. I would now like to turn the call back over to Mr. MacLean for closing remarks. Thank you.

[Rob MacLean:]

Thank you, Operator. We'd like to thank everyone for listening to today's call and we look forward to speaking with you when we report our first quarter results. Thanks again for joining us.

[Operator:]

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