Points.com Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Points International's financial results for the third quarter ended September 30, 2018. Delivering today's prepared remarks are

[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 third 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'll turn the call over to Points' Chief Executive Officer, Rob MacLean. Rob?

[Robert MacLean:]

Thank you, Sean, and good afternoon, everyone. Q3 was highlighted by another solid quarter of gross profit and adjusted EBITDA growth. In fact, this was our fifth consecutive quarter of double-digit growth for both metrics, driven by the continued momentum in our core Loyalty Currency Retailing segment, or LCR, which was up 13% in gross profit and 15% in contribution compared to the prior year. We continue to benefit from the investments we've made and remain committed to consistently improving our Loyalty Commerce Platform to ensure we can scale the business effectively while continuing to deliver an industry-leading level of performance. These investments have positioned us to capitalize on the many opportunities we see across the broader loyalty industry and were one of the contributory factors to our solid year-to-date financial results. Our continued focus on data analytics, enhanced marketing and merchandising capabilities and machine learning has led to a best-in-class service that optimizes our partners' marketing channels and enhances our ability to drive profitable growth for our loyalty program partners. As our metrics demonstrate, we are starting to see significant improvements in our operating leverage compared to prior years. Looking back at the last 9 months of 2018, I am encouraged that we have continued to execute against our pipeline across all 3 segments in 2018, building on the solid momentum we built up in 2017. Within LCR, we launched a long-term partnership and broad set of services with the Emirates Skywards program and expanded our service offering with LATAM Airlines. In Points Travel, we launched new travel services with Singapore Airlines, the Amtrak Guest Rewards Program and the Etihad Guest program, to name a few. And in Platform Partners, we connected major retail brands, like Marathon Gas, with leading loyalty programs like Southwest Rapid Rewards and La Quinta Returns. We continue to benefit from the impact of these new partner and product launches as the new program ramps complement our strong organic growth from existing partners, leading to strong year-to-date gross profit and profitability metrics. We continue to deliver growth in revenue and gross profit and with year-over-year improvements in our margins, we are seeing consistently improving adjusted EBITDA, up 29% in the quarter, and net income resulting in the third quarter -- third consecutive quarter of over 140% improvement. I'd like to quickly remind listeners about the new form of financial reporting for our business segments. As you may recall from last quarter, we've introduced the new contribution line item to our financials, which is calculated by subtracting direct costs attributable to each segment from the gross profit generated by each segment. This was done in an effort to provide additional clarity into the effect each business segment has on our overall performance. We plan to consistently report and speak to this contribution line going forward as we believe it serves as an effective barometer for investors to gauge the success and improvement of each segment, particularly for our newer platform partners in Points Travel segments. Adjusted EBITDA on a segment basis will continue to be available in our MD&A. With that, I'd like to turn the call over to our Chief Financial Officer, Erick Georgiou, who will provide more color on the rest of our financial results for the quarter. Erick?

[Erick Georgiou:]

Thanks, Rob, and good afternoon, everyone. As I review our results for the third quarter, please note that all numbers mentioned in our call today are in U.S. dollars, and unless otherwise noted, are presented in accordance with international financial reporting standards. Also, recall 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 reported revenue figures and marginally reduced gross profit. However, net income and adjusted EBITDA remain unchanged. And now for the quarterly results. Revenue in Q3 increased 3% to $94.4 million from a year ago, with our LCR segment being the primary driver. The majority of this growth came from our agency relationships, which is reflected in the other partner revenue line, which increased 48% to $5.7 million relative to the third quarter of 2017. The growth in this line was the primary reason for the improvements in our gross margin profile, which increased to 13.3% compared to 12.4% from a year ago. As expected, the impact of this growth from our agency relationships was more impactful on our gross profit line, which we consider to be a more meaningful metric. Gross profit for the third quarter was $12.6 million, an increase of 11% on a year-over-year basis, primarily driven by the LCR segment. LCR gross profit increased a solid 13% in Q3, resulting from continued organic growth from existing partners as well as the benefit from new partnerships launched over the last 12 months, including our new Emirates partnership, which launched in Q2. Gross profit in our platform partners' segment increased 6% year-over-year, while Points Travel gross profit increased only 1% from a year ago. As we noted on our previous call, our largest loyalty partner in the Points Travel segment temporarily shut down their Points Travel site for 10 weeks as they dealt with internal GDPR compliance matters. We are pleased to report this partner is back online but note that it will take some time to get it back to full ramp as we are working through a series of marketing programs and customer acquisition efforts. As a result, we expect the impact of this shutdown to continue into the fourth quarter, but are optimistic that we will have transaction volumes fully ramped as we enter 2019. From an expense standpoint, adjusted operating expenses increased a moderate 6% to $8.7 million in the third quarter of 2018. This was largely driven by increased personnel-related expenses as resourcing levels have generally increased as we continue to grow our business. We ended the third quarter with 217 full-time equivalent employees, excluding part-time and contract roles, up from 210 at the end of Q2 and up from 205 1 year ago. We remain committed to prudently manage costs, but we will continue to add resources that are focused on driving growth and capture more of the opportunities that we see in the broader industry. After taking into account the impact of our currency forward contracts, foreign exchange did not have a material impact on the quarter. Adjusted EBITDA for the quarter increased a solid 29% to $4.1 million. As Rob noted earlier, we continue to show meaningful improvements in our operating leverage. As a percentage of gross profit, adjusted EBITDA improved to 32.8% compared to 28.2% in the year ago quarter. And now turning briefly to the segmented performance. We continue to see year-over-year improvements in LCR, with Q3 contribution increasing 15% to $7.3 million. Similarly, platform partners' contribution improved 65% to $942,000 compared to $572,000 in the prior year period. As expected, Points Travel contribution was a loss of $959,000 compared to a loss of $693,000 in the third quarter of last year. As previously noted, this segment was adversely impacted by the temporary shutdown with our largest partner in that segment referenced earlier. Total net income for the third quarter increased 144% to $1.5 million compared to 605% in the prior year, the third straight quarter where we have increased net income by over 140%. Moving on to our balance sheet. Total funds available, which is comprised of cash and cash equivalents, restricted cash and amounts with our payment processors, totaled $63.7 million at the end of the third quarter compared to $78.6 million at the end of the second quarter and $67 million at the end of Q3 2017. This decline versus previous periods was largely due to the timing of partner sales, driven by the ebbs and flows of our promotional calendar. Our balance sheet remains strong, and we continue to remain debt-free. During the third quarter, as part of our normal course issuer bid, we repurchased approximately 39,000 shares at an average cost of $14.28 per share. In addition, through our automatic share purchase plan, we remained active in the market with share repurchases subsequent to the quarter in October and November, reflecting both our confidence in future growth and our commitment to building shareholder value. With that, I will turn it over to Christopher to provide some more insight on our quarterly results and business highlights. Chris?

[Christopher Barnard:]

Thanks Erick, and good afternoon, everyone. As highlighted throughout our call and reflected in our financial results, we generated another solid quarter of growth in Q3. With a combination of steady organic growth from existing clients and new partner ramps this year, we remain in a strong financial position to finish the year within our guidance range and potentially at the higher end. Loyalty Currency Retailing continues to be the main driver of our gross profit and adjusted EBITDA performance. Of note in the quarter, we were very pleased to recently renew our relationship with Etihad Airways with a multiyear extension, coming off the back of a successful launch and expansion of the Points Travel services. This extension provides us an opportunity to not only continue growing current activity but also building on this valuable partnership by introducing even more of our suite of available services. By locking in the LCR activity for another period, we're continuing our strong renewal track record and also committing to build our presence in the Middle Eastern region. Further to that, our rollout of the Emirates Skywards program's Loyalty Currency Retailing suite of services continued through the first -- through the quarter. First, we broadened our service offering with this leading carrier by launching the Extend service, offering Skywards members the flexibility of reinstating expired miles. Further, we're expanding the reach of our Buy service by tying it even more closely to the booking flow and allowing a more seamless experience when topping up for a new flight reward. We're encouraged by our early progress with this new partner as we continue to roll out our services through their various channels and ramp up our marketing efforts in coordination with their team. We're excited with the continued strong growth of the LCR segment across our portfolio of existing loyalty partners. More and more, this growth is being driven by our data-led marketing capabilities. As we've discussed in the past, our recent and ongoing investments in this area are an important part of our growth strategy as we continue to focus on automated data-driven marketing processes that will be a key competitive factor going forward, not only in the LCR segment, but also for the rest of our business. On to Points Travel. Coming off a successful launch with Singapore Airlines last quarter, we were excited to expand our Points Travel service with Etihad to also include the ability for members to earn more miles when booking through the Etihad channels. This follows our consistent strategy of ensuring where possible, we are offering our full spectrum of earning and redemption capabilities for the programs to better engage their members. As an interesting gauge of this, in fact, we recently saw our largest ever single earned transaction with one of our European partners, for a member earned a bonus of over 450,000 miles from booking just 1 night at a five-star Vienna hotel. This is a prime example of the Points Travel service being amongst the most valuable customer engagement tools available to the loyalty program. Moving on to platform partners. We continue to see improving results in this segment, primarily driven by the established base of customers and the recent on boarding of Marathon Gas and Groupon. We're happy to have added Frontier Airlines as another participating program in the Groupon loyalty initiative. And as we've mentioned in the past, we're working hard with Groupon to fully realize this program's potential by leveraging more of our marketing resources in addition to Groupon's assets. In this segment, we continue to engage in several later-stage business development discussions in the retail, travel and financial service industries, which gives us confidence that this segment will continue to perform well moving into next year and beyond. In summary, across all three of our segments, we have successfully driven organic growth through the integration of our newest partnerships while expanding other existing client programs. We plan to continue executing across our various business lines and carry our strong year-to-date results into next year. As noted in our press release today, we are reiterating our guidance for 2018 and continue to expect 10% to 20% gross profit growth, with 30% to 40% adjusted EBITDA growth compared to our 2017 results. This concludes the prepared remarks, so I'll now turn it back over to the operator for questions.

[Operator:]

[Operator Instructions]. Our first question is from Drew McReynolds from RBC Capital Markets.

[Drew McReynolds:]

Just starting out with the organic revenue growth of 1% in the quarter. My assumption simply would be on a year-over-year basis, that's a timing thing, just if you could confirm that and also just comment on an organic revenue growth rate overall that you expect, going into 2019.

[Erick Georgiou:]

Yes, sure. It's Erick here, Drew. So that 1% number's correct. That was the Q3 number, and that is really timing. We've talked about the ebbs and flows on a quarterly basis, so as an example, we saw 12% last quarter. I'd actually point to the organic gross profit growth, and we don't speak to that metric very often. But even on a year-to-date basis, we're seeing about 14% growth in that number, so we're much more focused on gross profit dollars as we've talked about. I don't want to guide to a number on 2019 for that right now, but we're happy with how '18's shaping up.

[Drew McReynolds:]

Yes, okay. That's fine. On the EBITDA disclosure by segments, I didn't see it. I'm not focused on it, but just wanted to make sure I didn't miss anything.

[Erick Georgiou:]

Yes, it should be in our MD&A.

[Drew McReynolds:]

Okay. I'll double-check on that. And then maybe a bigger picture question. I guess maybe for you, Rob, on the Loyalty Currency Retailing business, you continue to have great momentum, I think, by any measure in there. Without kind of getting too far into the weeds, just in your opening remarks, you commented on getting smarter with the data, et cetera. As you look into 2019 and '20, what are the kind of key objectives that you have for this business in terms of doing things better that can kind of move the needle by partner? And then maybe just an update on what the pipeline of new partners looks like.

[Robert MacLean:]

Thanks, Drew. Yes. The LCR business, the retailing business continues to be very strong. We've been, obviously very happy with how that's performed over the years, and this year's been no different. Every day, we get a little bit smarter on this business line. And I would say a lot of that comes from continuing to add new distribution channels and new currencies. So every time we are running a promotional or merchandising type of activity, as we get great results, we're able to take that and port it across the rest of our portfolio of partners that are using that platform. We've often talked about the LCR business as really being, add new currencies, get deeper into the databases of customers as being 2 primary drivers. And that really hasn't changed, it hasn't changed in many years. It does feel to me like we're able to accelerate some of that organic growth on this business as we continue to invest and do more, kind of machine learning and data analytics against the database of customers. So that's not a new lever, to your question, but it's one that we continue to see a tremendous amount of upside on. The second part of the question is around pipeline. Pipeline continues to be very robust on this side of the business. We had a really good last year or so in terms of bringing new partners onboard. We do continue to see opportunities, particularly in some of the international markets, Asia in particular is a very interesting set of partners for us. We put resources in the region. We'll beef up some of those resources in the future, just given our confidence level in terms of pipeline activity in Asia, Middle East and some of these international markets. I think that probably is the wrap-up on kind of organic growth and getting into the data and analytics and getting more penetrated into the database of customers. The kind of last thought on that probably is around the fact that we continue to see really significant buoyancy in the loyalty space, so continue to see members -- sorry, programs of our partners adding upwards of a million new members every month. That's just, at the end of the day, just makes the marketplace bigger and stronger and more robust for us. So a lot of what we've been doing over the last 4, 5 years, we'll continue to see that enhance into the future.

[Drew McReynolds:]

Okay. That's a great summary there. Maybe lastly on the Points Travel. Maybe Christopher, you can talk a little bit about, I guess, a strategy to continue to incentivize or get consumer traction with the offering, with the service. Just what are your objectives as you look into 2019? And can you kind of provide any goalpost that investors should be looking forward to kind of track and measure that progress there?

[Christopher Barnard:]

Yes. Hey, Drew. So I would add, Points Travel follows the same growth profile as what, more or less what Robert's walked through on LCR and to a great extent, the pop-in partners as well. And it just starts with the new partnerships. I know that's outside your question, but it's just still a very significant focus of ours in adding new partnerships, just so we have more ability to dig into those databases underlying, one. Two, they become beachheads with new partners and a better outpoint to call out our success in landing ANA in the middle of last year, a program, like a Singapore Airlines this year, Etihad, for example, are all programs that have Points Travel installed. And we fully expect, like in Etihad, that we can expand those to other parts of the business over time. The second part on the Points Travel, specifically, is to make sure that we have each partner using the full breadth. So sometimes programs launched with just the ability to earn more miles by spending cash, and sometimes and they launch with just the ability to use your miles to pay for a hotel room. What we want to try to get through these partnership having the full breadth, the earn and the burn. And again, pleased that we are able to deliver that recently on Etihad as a good example. And so we can expand the merchandising marketing opportunities in each program when we get them on to the boat or the earn and the burn. We have experienced that, for example, with our largest European partner. And so that we can see the leverage that, that kind of full breadth of product gives us. The last part to your question is just continuing to work with the program, to ramp up the marketing activities. In many cases, we're replacing, historically, not nearly as lucrative or attractive hotel offers, so there's a whole process of getting those down and turning our service up. And then there's the ongoing activity of getting our communication into the various marketing channels with each of our partners. I'd point out one, we just started marketing PointsHound, for example, through one of our European earn models, which is a brand-new merchandising channel, as just another example. So just like the LCR, we're looking for new marketing distribution channels to market that through. And then at the last one is, again, considering the track of the data analytics and some of the machine learning, where we're using machine learning right now in hotel selection, in inventory selection to make it as quick and as smart as possible, to give the best offer on the fly. That's one example. And then the next is, again, more data we can get into the system, the more effective we can work the partner's marketing channels to drive activity. What we found is our longer-term partnerships are getting to a curve that match our expectations, as we've talked about in previous calls, certainly a little bit later than we had thought out of the gate, but now the longer-term partnerships are starting to show the kind of transaction size and frequency that we were expecting. And so it's really just an effort on a partner by partner basis to, again, add the full breadth of services, get in as many channels as we can and then add our ongoing -- our developing expertise in the targeted marketing capabilities through the platform.

[Drew McReynolds:]

Okay, that's pretty extensive. And so Christopher, thank you for that, and as you look at financial targets, obviously, you're focus for Points Travel is building the business, fully understand that. Do you have, just maybe as an update on growth versus profitability? How you balance the 2? Is there a point in time where you put more emphasis on profitability? And maybe a time frame around that, or is not contingent on how the business ramps up effectively?

[Christopher Barnard:]

I think closer to the latter part of your comment, but really, again, our main focus still is adding many logos as possible to grow the Points Travel business. And as we're finding, it's an entree into new partnerships, especially in some international markets. So we're going to keep the pedal to the metal, so to speak, on that part of the focus for as long as we maintain a strong pipeline of prospects. And I think, when we get more experienced with each of these partners in rolling out, we can really then focus on the profitability on a partner by partner basis as repeat purchasers, for example, become a bigger part of the mix as partners had in Points Travel in place for a longer period of time.

[Operator:]

Our next question is from Ed Woo from Ascendiant Capital.

[Ed Woo:]

My question is more on the macro outlook for Travel, and how they impact your business, good or bad.

[Robert MacLean:]

Macro -- sorry, it's Rob, Ed. The question around macro, like airline travel [indiscernible]?

[Ed Woo:]

Yes. Just the travel industry in general, what you're seeing, what the travel providers -- to obviously, airlines, you're very big on to your core loyalty programs and also Points Travel. Just wondering people saw. We had a pretty strong holiday or a strong summer, but just curious what people are thinking about heading into next year and how it may impact your businesses.

[Robert MacLean:]

Yes. I think, we're not expert in all the travel metrics, but I think you hinted at it -- I think you've asked this question or a version of this question last quarter as well. Travel sector continues to be very buoyant. I think we tend to see that as a good sign. We tend to spend more of our time around how is the loyalty sector inside of travel working, and how is that behaving. We clearly feel very good about customer acquisition strategies of our loyalty program partners. And again, mostly that's in hotel and airline. So those are great -- we're seeing good evidence there of good, healthy markets in terms of the loyalty space. And I think that's probably a bit of a trickle down from how well the overall travel market is doing globally.

[Operator:]

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

[Robert MacLean:]

Great. Thanks, Matt. Just like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our fourth quarter and full year results in March. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.