Points.com Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[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, 2018. Delivering today’s prepared remarks are Chief Executive Officer, Rob MacLean; President, Christopher Barnard; and Chief Financial Officer, Erick Georgiou. After their prepared remarks, the management team will take your questions. Before we go further, I would like to turn a call over to Sean Mansouri of Liolios Group 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 made 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 first quarter 2018 financial results press release issued prior to this call, as well as other documents filed with the Canadian and U.S. security 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:]

Thank you, Sean, and good afternoon, everyone. We are excited to have started the year off with record performance on our two most important operating metrics, gross profit and adjusted EBITDA. Our ability to manage this growth effectively is a direct function of the investments we have made to continuously develop our capabilities via our Loyalty Commerce Platform or LCP. This is the consolidated infrastructure that we operate the business on and that dozens of large royalty programs around the world are now integrated into. When we sell a mile to a member, let them pay for a hotel using miles or award bonus points for an online purchase, all of this is managed through a common infrastructure. This holds true for not only the mileage debit and credit process, but also for all the financial requirements that happen in parallel with any transaction, like credit card processing, fraud management and international taxes, again all of our services share this common operating infrastructure. Of increasing importance to us on the LCP is our ongoing effort to build more and more marketing intelligence and automation into the platform in order for us to leverage our increasing flow of data and maintain our unique position in the industry. We believe this allows us to deliver a level of performance that any one program could not match on their own. Over the past few years, we focused our investment approach on updating this platform in order to do two things. First, to ensure that we can scale the business to appropriately take advantage of the significant opportunity we see in our core Currency Retailing segment. And second, to leverage both our unique position in the loyalty industry and our growing capabilities to diversify the business and offer our partners additional high-value services. This diversification effort is aimed at increasing our revenue and profit potential, and as importantly, increasing our importance to all of our partners by engaging them across multiple opportunities. We have shown consistent progress in both these endeavors and our strong start to 2018 is built on our success from last year, which saw nine new partners around the world and deployed 24 new services within our growing loyalty program network. In addition, we have been able to consistently drive growth across our portfolio of existing partners and deployed services. Off a strong base of organic growth, thus far in 2018, we have added services to current partnerships and brought our new loyalty program relationships across numerous geographies. In North America, we rolled out our Points Travel service with Amtrak and launched an exciting new initiative for Marathon Fuels, with early participation from La Quinta hotels and Southwest Rapid Rewards. In Latin and South America, we launched an innovative subscriptions service providing miles with Copa Airlines and expanded our LATAM Airlines partnership. In the EMEA region, Air Europa came on as a new partner for both Points Travel and our LCR services, and we recently announced the significant new partnership with the Skywards program from Emirates one of the world’s fastest growing airlines. We expect this to be one of our largest partner relationships in the near-term. Finally, today we are happy to announce a new Singapore Airlines launch with Points Travel, which continues our recent push into Asia. Christopher will walk you through details on some of these new developments later in the call. In parallel with all these new developments, we have continuously improved our underlying technology and operations, while effectively managing our costs. This focus coupled with increasing gross profit, highlights the operating leverage evidence -- evident in our business with over 70% of our gross profit growth flowing through our adjusted EBITDA results. In summary, building up from great momentum from 2017, new partnerships and deployments in the first quarter in all three of our operating segments showing improved results year-over-year, we are very excited with our start to 2018. With that, I’d now like to turn the call over to our new Chief Financial Officer, Erick Georgiou, who will walk through our financial results in more detail. Erick?

[Erick Georgiou:]

Thank you, Rob, and good afternoon, everyone. It’s been a pleasure to join you on this call and I very much look forward to speaking and meeting with investment community going forward. As I review our first quarter results, please note that all numbers mentioned in our call today are in U.S. dollars and unless otherwise noted all amounts are presented in accordance with International Financial Reporting Standards. Also note, that as a result of the new IFRS 15 accounting standard, which came into effect for fiscal 2018, we have restated our 2017 figures for comparative purposes to reflect the requirements of the standard. In summary, this new standard has slightly increased our previously recorded revenue figures, and marginally reduced gross profit. However, net income and adjusted EBITDA remain unchanged. Turning to the financial numbers for the quarter, revenue in Q1 was $89.1 million, an increase of 7% relative to Q1 of ‘17. The majority of the growth was generated in our LCR segment, which had strong performance across both principal and agency relationships. Notably, other partner revenue increased an impressive 75% to $5.8 million relative to Q1 ‘17, with strong organic growth across existing LCR partnerships and the benefit of new partnerships launched throughout 2017. The increase in other partner revenue was the main driver of our gross margin profile this quarter, which increased to 15.2%, compared to 13.3% from a year ago. As noted on other calls, we are primarily focused on growing gross profit dollars. We are pleased, however, to see strong growth across this important metric as well. That said, gross profit for the first quarter was a record $13.5 million, an increase of 22% on a year-over-year basis. This growth was indicative of two main factors that Rob alluded to earlier; one, our ability to consistently grow existing partnerships; and two, our sales success in 2017, which saw us launch nine new partners and 24 products into market. The LCR segment was the primary driver of our year-over-year growth, fueled by solid organic increases and the impact of Etihad, Copa and Air Canada, all brought to market in 2017. In addition, we continue to see strong year-over-year improvement in the Points Travel segment, albeit off a relatively small base in the prior year. Primary drivers here included contributions from ANA and Etihad, which were both launched last year, as well as increases from existing Points Travel partners, which are still in the early phases of their growth trajectories. As expected, total adjusted operating expenses increased a modest 8% to $8.8 million in the first quarter, compared to $8.2 million in the year ago quarter. Increased personnel related expenses and, to a lesser extent, the impact of a strengthening Canadian dollar was the primary drivers of the increase. As expected, our currency forward contracts, which we enter into to minimize P&L volatility helped to mitigate the FX impact during the quarter, which saw the Canadian dollar strengthened approximately 5% relative to the prior year. From a resourcing perspective, we ended the quarter with 216 full-time equivalent employees, excluding part time and contract roles. This was up slightly from 211 at the end of Q4 and up from 190 one year ago. The majority of resources added over the last 12 months were focused on delivering our growth and as our Q1 results demonstrate, we have been prudent in managing cost while growing the business. On that note, adjusted EBITDA one of the most important metrics in evaluating our ongoing profitability increased 66% to a record $4.8 million in the first quarter. As a percentage of gross profit, adjusted EBITDA improved significantly to 36%, compared to 26% in the year-ago quarter, which shows our true leverage in our business. Looking at our profitability by business segment, LCR was the primary driver of growth in Q1, with adjusted EBITDA growing 36% to $6.5 million, backed by solid gross profit growth in the first quarter. As expected, Platform Partners had a slight adjusted EBITDA loss of $264,000 improving significantly from Q1 ‘17. And finally, Points Travel, off the back of gross profit growing almost 2.5 time the prior year period generated an adjusted EBITDA loss of $1.5 million in the quarter, relatively flat with the prior year as the current quarter was focused on launching or upgrading several new partnerships. Total net income for the first quarter increased significantly to $2.3 million, compared to $852,000 in the prior year. Moving on to our balance sheet, total funds available, which is comprised of cash and cash equivalents, restricted cash, short-term investments and amounts with our payment processors totaled $77.8 million at the end of the first quarter, compared to $79.2 million at the end of ‘17 and $58 million from the end of Q1 ‘17. Our business continues to be a strong cash flow generator, enabling us to fund current operating and capital expenditures in addition to our share buyback activities. We also continue to remain debt free. During the quarter, we bought back and canceled shares as part of our Normal Course Issuer Bid. Our repurchases during the quarter totaled approximately 133,000 shares at an average cost of $10.82 per share for a total cost of approximately $1.4 million. This repurchase program reflects both our confidence in our prospects for growth and profitability, and our commitment to building shareholder value through appropriate capital allocation. With that, I will turn it over to Christopher to provide some more insight on our quarterly results and our sales highlights. Christopher?

[Christopher Barnard:]

Thanks, Erick, and good afternoon, everyone. As noted throughout the call and indicated by our financial results, the first quarter kicked off an exceptional start of the year as we realized record level of both gross profit and adjusted EBITDA. We continued to benefit from strong organic growth with existing customers as well as new client wins over the course of 2017 and into 2018. As Rob mentioned earlier, our new business momentum has continued as we recently expanded our LCR services with Copa Airlines to include an innovative subscription service, allowing members to set a fixed monthly amount of mile to purchase automatically. Additionally, we had our accelerator functionality through LATAM Airlines program, which will enable members to receive specialty price offers to double or triple the number of miles earned on a plane. We recently announced our new partnership with Emirates in its Skywards program where we will be deploying most of our suite of LCR services. It’s exciting to now be working with one of the world’s fastest growing airlines. Interestingly, Emirates had offered their own internally managed top-up service for a number of years. Based on our unique industry position, access to data from across our network and enterprise grade Loyalty Commerce Platform functionality, we were able to present an opportunity for Emirates to take advantage of a more robust, targeted and flexible service that will be more profitable than their internal efforts. We are confident that with their brand, size and growth matched with our marketing expertise and robust service, Emirates will soon become one of our top performing loyalty partners. This is another example of the value we continue to create with our LCR services. Moving on to Points Travel, I want to remind you of our three key strategic focus areas for this business segment. Our primary focus is bringing on new partners and ensuring where possible that each one of utilizes the full breadth of our Points Travel services, both the earn and the burn capabilities we offer. We continue to do a great job here in a very competitive environment. As Rob mentioned and noted in our press release, today we announced a new travel redemption service with Singapore Airlines. This flagship Asia-Pacific airline will be leveraging our offering to allow their members to redeem miles for stays in over 250,000 comparatively priced hotel rooms around the world. This is our first direct partnership with Singapore and we look forward to the prospect of expanding our new relationship with other services over time. Also on Points Travel, we launched with Air Europa SUMA program last month. This is a full deployment of the service focused on bidding members a high value offer to either earn more miles or use their miles on hotel stays at any of our available properties worldwide. We are also encouraged to be scheduling two new deployments over the next few months, one to add full redemption capabilities to current Points Travel participant and another with one of our North American low cost carrier partners. Our second strategic priority in Points Travel is to bolster our services in terms of both functionality and inventory access. Given our sales success to-date in a very competitive space, we clearly have a very good product from a functional perspective. However, we still pay attention to continuous improvement in this area. The other important aspect of our competitive position is ready access to high quality wholesales hotel inventory. To-date, our success has been built on partnership with Expedia, Tourico and a few other industry players, so this week’s announcement of us adding wholesale inventory from the Priceline Partner Network is an important addition to our capabilities and makes our offering even more competitive. We will now be able to present any potential loyalty partner with the best access to hotel inventory worldwide. Third, on a strategic priority for Points Travel is to grow each deployment. This is very important for us over the long-term and we are getting better data and experience in this effort, a focus as we integrate new complex offering into our partners channels is to attract program members away from other options with rich initial incentives. Getting them fully engaged in the experience after few bookings, we will ensure that lifetime value of that use becomes profitable over time. Part of this growth strategy in the early days relies on allocating some of our variable economics as part of this marketing activity. Our participating loyalty partners are very engaged with us in this effort and we continue to be encouraged by our success in both landing new partnerships and expanding current ones. We are booking millions of dollars of hotel rooms every quarter and remain confident that the mid to long-term profit prospects of this business are strong. Moving to Platform Partners, building off of strong base of business and the launch of new partnerships with the likes of Scotiabank and Groupon last year, we are excited with our recent announcement of the Marathon Fuels program that went to market with early participation with Southwest Airlines and La Quinta hotels. Our model is attracting large non-Loyalty players like Marathon in this case and flowing our full relationship from our Loyalty Wallet API functionality to our legal structure and our marketing capabilities has found more traction with this success. We are encouraged to be having some standard business development discussions with a number of large brand in the financial services, retail and travel industries, as we continue to roll out this model. As importantly for us, to-date we have also engaged some of our largest loyalty partners to participate in these initiatives. Industry adoption continues to be one of our most important KPIs as we grow these new initiatives. So, in summary, across all three of our business segments, with a healthy pipeline we are continuing to drive organic growth by increasing our data and marketing efforts, and we expect to carry this momentum through the rest of the year. So consistent with our previously issued guidance, we continue to expect gross profit growth in 2018 to range between 10% and 20%, while utilizing the operating leverage in our business to drive between 20% to 40% growth in adjusted EBITDA. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question is from Drew McReynolds with RBC Capital Markets. Please proceed with your question.

[Drew McReynolds:]

Thanks very much. Good afternoon. A couple of follow ups for me, first, just with respect to the Priceline announcement, Christopher, you got into a little bit of the strategic benefit there, et cetera. I guess bigger picture how you see Points Travel kind of ramping up as you add partners here, are you tracking where you think you will end up at the end of this year, does an announcement like this kind of move the needle to that original expectation?

[Rob MacLean:]

Yeah. Drew, it’s Rob. One of the key things for us on Points Travel has been the sales process. We have been really, as we have said this previously, we have been very pleased with how the product is being received in the marketplace, obviously, I think, we have got a dozen or so deployments now just here in the last quarter with Singapore Airlines, Amtrak and Air Europa all coming on in addition to ANA last year. We feel really good about how the product is competing in the market. I think a bit part of our strategy around the Points Travel business was to have the maximum amount of inventory available to our loyalty programs partners and what’s important than that is the more sources of inventory we have; one, we get our breadth hotel opportunity to sell into the membership basis, the tens of millions of consumers that are in these programs; and secondly, the more industry sources or inventory sources we have, the better margin profile we are able to create from those hotel bookings. So, generally, the way our model works is, if a member is searching for a hotel in New York, let’s say, they’re looking for the Sheraton Midtown, New York, we will go to all of our inventory suppliers and look for whoever has a room in that hotel and will surface to the member the hotel that’s paying or the inventory source is in fact paying the highest margin to us and we then are in a position to translate that margin into miles incentives therefore booking conversion. So for us, the addition of Priceline really helps on two fronts. It broadens our reach in terms of how many hotels we can offer members, which is critically important component of the business success; and two, by having an additional industry source we are seeing incremental margin available for us to purchase miles and pass that incentive along to members. So all very good, obviously, having Expedia be there, Expedia affiliation network and all of that inventory, as well as all the inventory now with Priceline and Tourico get a room hotel beds. We feel like we have the best inventory access out there, so that’s all great for us. Obviously, it turned on yesterday, we just announced it yesterday and so we that really positively influencing the business, both on the sales side, as well as the operational side. Second part of your question around how is that business doing. We are pretty pleased again probably ahead of -- consistently ahead of where we would have expected to be on our ability to knock deals down and deploy this product into our loyalty program base and really that’s eating up a tremendous amount of our time and energy right now and that will continue given the pipeline that we have. To be very frank, in 2018, we have got two new guys that are in development now, so we will be continuing to kind of get the footprint out there on this proposition, so we are pretty comfortable with that. In terms of ongoing performance of each of the programs, they’re all at slightly different stages, we are obviously bringing lots of new stuff on, but some of our earlier programs like ANA, Miles & More really starting to hit a curve that’s quite interesting to us, and what we would have expected. I think some of those programs are running quite a bit of ahead of where we would have expected and we are seeing some of our other partners start to follow that curve. I would say that things we consider the most as we look through in 2018 is, if we continue to be in this mode of acquiring new customers and deploying new products that will be more of a focus here in 2018. So we are pretty pleased with where we are at this stage.

[Drew McReynolds:]

Okay. That’s great color, Rob. Thank you for all that. Switching gears just to Loyalty Currency Retailing, two questions, first, looked like a little bit of a bump up certainly in profitability on the adjusted EBITDA basis in the quarter. Just wondering if there’s anything kind of unusual in and around that or was that somewhat indicative of getting a little bit of greater scale leverage in the business? And then second on the Loyalty Currency Retailing partner side, on the retention side, I just want to again confirm that it’s a pretty high retention rate in terms of the group of partners or the base of partners in that segment?

[Rob MacLean:]

Yeah. A couple of things there, our business model particularly on LCR is fairly straight-forward. If we knock down deals to add more supply into the marketplace, add more currencies to put through the system, we tend to grow and that’s a big part of our model. If you think about the success we had in 2017, bringing on nine new partners, 24 new products throughout the course of the year, not all on LCR, but really did pipeline activity and execution in 2017, we are really seeing some of that flow through here in the first quarter. The ongoing business, we are seeing good organic growth on the gross profit line. We see organic growth north of 15%, which is quite high and it’s very, very healthy and we kind of focus on that gross profit level. So it’s doing very well, plus we end up having net new partners on top of it. It’s a pretty straight-forward calculus as to how we have these strong quarters from that standpoint. A lot of what we have been trying to do here over the last couple of years is to again grow existing business, bring new partners in, and do that in a prudent and efficient manner, and I think, we demonstrated some of that in the first quarter with well over 70% of that gross profit growth dropping to the adjusted EBITDA line. That objective that we have as a management team continues to demonstrate leverage and grow the gross profit line and the profit line associated with it. When I speak to the second question around retention, we are really we had a very good track record with our partner retention activity I think, the last -- 62 of the last 63 contract renewals have had in fact renewed, so it is a sticky, very sticky set of relationships. That’s not a number we have talked about broadly in the past, but pretty comfortable with the kinds of relationships we build with partners, what these products actually deliver to the industry and again, if you think about the kind of growth we demonstrated here in the first quarter, that translates to more engagement for loyalty program members with their chosen program, it translates to significantly increased revenues and profitability for our loyalty programs, as we are successful in driving these products and so it’s not that much of a surprise that our retention rates are as high as they are. But we like that combination of retaining the vast, vast majority, 62 of out of the last 63 contracts have renewed and then adding new relationships on the top of that, that’s the right combination for shareholders to get excited about.

[Christopher Barnard:]

Hey, Drew. It’s Chris. I just wanted to add a brief bit of color on Rob’s first answer on Q1 into the rest of the year. As you mentioned, we are benefiting out from full year activity on stuff we launched last quarter, but also that in Q1 Emirates wasn’t present, we just announced that they are launching, so we will get three quarters of Emirates’ activity. Obviously, as a new launch, they will be building in the second quarter through the third and into the fourth, so that will really be we think sort of more fully baked in ‘19 numbers. But we think that will be, as Rob and I both mentioned, one of our larger partners in the whole portfolio. So that will continue to bolster the LCR business for the rest of 2018.

[Rob MacLean:]

And it is a great point, we typically respect the competitive nature of our partners and don’t get into partner-by-partner details on the size and scale of the relationship. But, I think, as Chris said, for shareholders to understand that that’s a relationship that is in fact with one of the fastest growing and most successful loyalty programs on the planet. So that’s -- it’s a very good new relationship for us.

[Drew McReynolds:]

And are you comfortable saying that Emirates could be among kind of the top three, top four programs when you disclose concentration here, is it one of those big elephants is what I’m hearing from you?

[Rob MacLean:]

Yeah. I would be narrative to talk one, two, three kind of number on it.

[Drew McReynolds:]

Sure.

[Rob MacLean:]

What I can say is it’s certainly one of our -- it would be -- we would expect this over the next 12 months to be certainly one of our largest partners.

[Drew McReynolds:]

Okay.

[Rob MacLean:]

It definitely is in the elephant stage, yeah.

[Christopher Barnard:]

And just one last thing on Emirates, just -- I did mention I didn’t want to reiterate but it is important I think for the competitive dynamic. We did take over an internal solution. So they were doing it on their own. We presented them with our credentials, capabilities and expectations, and they realized that the business could be considerably larger handing it over to us. So we were encouraged again by a very large capable company like an Emirates who had some experience on their own realizing the upside in uptaking over that service.

[Drew McReynolds:]

Okay. That’s great. One last question for me just on the OpEx side, we are seeing, obviously, some flow through an operating leverage, et cetera and would expect that to continue. Just wondering with what appears to be little bit of an uptick certainly in kind of pipeline monetization and loading on new partners across each of the three businesses. Is there any kind of forward coming step up in OpEx that we should be aware of across that expense base or is it predominantly normal course in terms of that annual growth going forward?

[Erick Georgiou:]

Yeah. Hey. It’s Erick here. We are not going to provide any annual guidance on OpEx, obviously, but we wouldn’t expect anything major over what you saw in the first quarter, it’s a more just normal course stuff.

[Drew McReynolds:]

Okay. That’s great. Thanks very much for all that.

[Rob MacLean:]

Thank you.

[Operator:]

[Operator Instructions] Our next question is from retailer with Rick Teller with Pemberton Research. Please proceed with your question.

[Rick Teller:]

Yeah. Good afternoon. As you know I’ve been following the company for many years and I recall in the days before you had Platform as a product or Points Travel as a product, you would just talk about your basic business. And at that time, I remember you saying that the growth potential there came from a combination of things, one was just adding new partners; and secondly, was the fact that the partners themselves usually were experiencing growth in members; and the third thing was obviously getting the club members to do some transactions in which that flowed through the company. And I recall, again this is maybe five years ago or so when subject came up, that you said, for a typical loyalty program although, obviously, it varies usually somewhere around 2% of the members would do some kind of transaction. And so one question I have is, is that number still more or less backward or is it going up, going down something like that? And second related question is that in your presentations to investors in the last year in explaining how the mileage sales operate, you would go through a supposedly typical transaction in which a customer bought $200, I believe it was worth of miles. Now the margin you would make on that obviously depends on, which customer, which corporate number of. But is it still somewhere around 2% to one transaction a year and -- or more presumably and now is a reasonable number?

[Rob MacLean:]

Yeah. Again it’s Rob, Rick. Good to hear from you again. I’m recalling what you’re talking about in terms of growth drivers on the LCR business being new partners, penetration or getting consumers of the programs engaged and then the third component would be really cross selling incremental products and services into that partner. So those have historically been drivers of our growth and that continues today and I think you’re seeing pretty good progress against all of those. The 2% number is a bit of an interesting one, because we -- the short answer is, yes. We are, kind of, in and around that same range. Partners that have been with us for some time are obviously much higher than that. We are seeing a lot of the kind of data analytics, marketing and merchandising activity get to some of those higher numbers that we would -- that would help us have quarters like you’re experiencing right now. But we -- and coupled with that is we are bringing a number of new partners over a period that is actually at a lower end of that. So on average we still are kind of in that neighborhood, a little bit higher perhaps. But back into the whole bunch of net new opportunities, Emirates being a good example, whereas we deploy our marketing and merchandising data analytics against those that kind of book of business, we see a really interesting opportunity to kind of move the penetration rates and engage rent rates with members up from the 2% to some of the areas of 4%, 5% 6% where we have some of our other partners. So, absolutely the case, your memory is actually pretty sound on that and as we bring more partners in it just gives us more opportunity that kind of move people into those penetration rates. I’m not sure I quite understood the second question around the $200, but Christopher maybe?

[Christopher Barnard:]

Yeah. Hey, Rick. Our average transaction value is around $200, maybe a little bit below that, but it is in that range.

[Rick Teller:]

Okay. Good. Well, thank you.

[Rob MacLean:]

Thanks, Rick. For sure that was going to be a Points Travel question around our recent news today. So I know you like that one as well.

[Operator:]

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

[Rob MacLean:]

Great. Well, thank you all for joining the call today. We do look forward to updating you on our continued success as the year progresses. Thank you.

[Operator:]

Ladies and gentleman, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.