Points.com Inc.
Q4 2018 Earnings Call Transcript

Published: 7 Mar 2019

[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, 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, 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 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 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 2018 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 MacLean. Rob?

[Rob MacLean:]

Thank you, Sean, and good afternoon, everyone. 2018 was another record year for Points, marked by executing our three core growth drivers

[Erick Georgiou:]

Thank you, Rob, and thanks for joining, everyone. As I review our results for the fourth 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. 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. Turning to the fourth quarter results, revenue in Q4 increased 8% to $94.9 million compared to the prior year quarter, primarily led by our Loyalty Currency Retailing segment. Also worth noting, other partner revenue increased 18% to $6.6 million relative to Q4 2017, reflecting strong growth and overall sales activity across the platform and our LCR segment. Gross profit for the fourth quarter was $14.1 million, an increase of 8% on a year-over-year basis and a quarterly record for us. This was again driven by strong growth in LCR as a result of new partner launches in 2018, despite some headwinds faced with one of our Middle Eastern partners. In a very frustrating development, we were recently forced to shut down the LCR service of a long tenured Middle Eastern partner that we had strong ties with after geopolitical issues between Canada and the Kingdom of Saudi Arabia trumped rational business decisions. While they were not a top-10 partner in this segment or on a consolidated basis, it represents a modest headwind for us going into 2019. In Platform Partners segment, gross profit was up year-over-year, while Points Travel gross profit was flat. As noted on previous calls, our largest partner in the Points Travel segment shutdown their site for approximately 10 weeks due to internal GDPR issues they were experiencing with a third-party. Since bringing the site back online in Q3, we have continued to feel the effects of the shutdown into the fourth quarter. We're starting to see some encouraging transactional metrics with this partner resulting from our marketing and customer acquisition effort. However, we are still using the considerable portion of our margin to fund this effort. On that note, we expect this to have an impact on first quarter gross profit from a year-over-year comp perspective. Overall, though, we are pleased to see this partner returning to its growth trajectory. It is simply a matter of timing here. From an expense standpoint, total adjusted operating expenses increased to $9.3 million in the fourth quarter compared to $9 million one year ago. This was driven by increased personnel-related expenses as overall resource levels increased as we continue to grow. We ended the fourth quarter with 217 fulltime equivalent employees, excluding contractor and part-time resources, which is flat from last quarter and up from 211 one year ago. Total net income for the fourth quarter increased almost 90% to $2.2 million compared to $1.2 million in the prior year again driven primarily by strong growth in LCR. We generated record adjusted EBITDA in the fourth quarter, which increased 24% to $5 million. Our effective margin, which we calculate as adjusted EBITDA as a percentage of gross profit improved to 35.7% compared to 31.1% in the year-ago quarter, reflecting continued improvement in our operating leverage. As a reminder, in 2018, we introduced a new view on segmented reporting that emphasizes the contribution line in place of adjusted EBITDA. To calculate this metric, we subtract the cost from gross profit generated by each segment. On that note, contribution from LCR segment continued to be strong generating $8.5 million, up 14% compared to the prior year quarter. Platform Partners contribution also improved 37% to $962,000. And as expected, Points Travel contribution was a loss of $1 million compared to a loss of $793,000 in the fourth quarter of last year, as cost increased while fourth quarter gross profit was adversely impacted by the aforementioned impact of the shutdown earlier in 2018. Quickly running through the full year numbers, total revenue in 2018 was $376.2 million, up 8% from 2017. Principal revenue increased 6% to $352 million, while other partner revenue increased 50% to almost $25 million. The high growth rate in other partner revenue was indicative of strong overall growth sales across our platform, particularly with our agency partners in the LCR segment. Given the growth - gross versus net accounting dynamic we have with our principal and agency partnerships, the impact of this growth had a far more pronounced impact on gross profit. We generated record annual gross profit of $53.9 million, up 16% from 2017 and landing us in the upper half of our guidance range. The LCR segment was the largest contributor to the strong performance with gross profit growing 17% or $6.6 million relative to last year. Total adjusted operating expenses in 2018 was $36 million, a modest increase of 7% over last year, included in this increase or realized foreign exchange losses of approximately $400,000, which resulted from realized losses on hedges due to less favorable hedge rates. Adjusted EBITDA in 2018 was $18.6 million, up 41% year-over-year beating our annual guidance range of 30% to 40%. Net income for the year came in at $7.8 million, up 131% compared to 2017. Looking at our profitability by segment, LCR contribution for 2018 was up 20% to $31.9 million. Platform Partners was up 44% to $3.6 million. And Points Travel contribution was a loss of $3.8 million compared to a loss of $3 million in 2017. Turning to our balance sheet, total funds available, which is comprise of cash and cash equivalents, restricted cash and amounts with our payment processors, totaled $83.1 million at the end of the fourth quarter compared to $63.7 million at the end of the third quarter. 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 activity. We also continue to remain debt-free. During the fourth quarter, we repurchased approximately 112,000 shares at an average cost of $11.64 per share, bringing our total share repurchases for 2018 to 569,000 at an average cost of $13.45 per share. In total, we spent $7.7 million on share repurchases during 2018, and we remained active in the market in the first quarter of 2019, which reflects our confidence in future growth and our commitment to building shareholder value through appropriate capital allocation. Lastly, please note, we will be implementing a new accounting standard in 2019 regarding the treatment of operating leases. Going forward, all operating leases will be capitalized on our balance sheet, thus reducing rent expenses from our income statement while adding interest and depreciation expenses, resulting in increased adjusted EBITDA on a go-forward basis by approximately $1.3 million in 2019. From a balance sheet perspective, the new standard will increase both assets and liabilities. Our guidance for 2019 incorporates the impact of this new standard. On that note, I'll turn it over to Christopher to provide our 2019 guidance and more details on our growth strategy. Chris?

[Christopher Barnard:]

Thank you, Erick, and good afternoon, everyone. It's certainly an exciting time for us at Points. Coming off a record 2018, we have laid the groundwork for aggressive growth plans ahead. Looking at the near-term to start, for 2019, we expect gross profit, which some consider to be a revenue proxy to be between $56.5 million and $62.5 million, reflecting approximately 5% to 15% growth range from 2018. We also expect adjusted EBITDA to be between $19.5 million to $22.5 million, reflecting approximately a 5% to 20% year-over-year growth. What makes us especially encouraged by our growth expectations this year is that they come after especially strong results in the first half of 2018. As a reminder, Q1 2018 year-over-year adjusted EBITDA growth was 66%, while Q2 2018 year-over-year adjusted EBITDA growth was 51%. During the first half of the year, we benefited from strong performance across the board as well as one of our large hotel partners over performing, leading to a mid-year merger. Typically, we see more opportunity in a larger program post the merger. However, the second half of 2018, some many integration complexities dominate the news for this particular partner and considerably reduced performance versus the first half of the year, a dynamic we expect to carry over into 2019 for this partner as they work through their program re-launch. As Erick already mentioned, we're also starting the year without the contribution of a long time Middle Eastern partner. So given these first half dynamics, we expect the majority of our 2019 comparative growth to be realized in the back half of the year. While neither individual event is typical for us, varying partner dynamics across such a broad portfolio are to be expected, and we are encouraged that the underlying strength of the business will not only lead to another year of solid growth, but also set us up for an accelerated trajectory over the next few years. Moving to a longer-term view. By 2022, we have two clear goals

[Operator:]

Thank you, sir. [Operator Instructions] While we poll for questions, I would like to turn the conference back over to Mr. Mansouri for questions that were received through e-mail from investors for the last few weeks. Mr. Mansouri.

[Sean Mansouri:]

Thank you, Sherry. We're very appreciative of all the questions that came in over the last month and even the last hour following our earnings PR. But please understand that we cannot address every single one in a sufficient amount of time, as such we group them into a few relevant themes. So with that, I'll kick it off with our first question. Rob, Chris, Erick, what was the motive behind this new strategic outlook, why now?

[Rob MacLean:]

Thanks, Sean. Simply put, we're trying to be a bit more transparent with our shareholders in general. We're often asked about our ability to keep up our growth. And certainly, as we move through the year, investors are often asking us about the following years' prospects. So while we typically relied on kind of solid long-term track record of growth to address these questions, we just wanted to complement that with a view of our longer-term goals in addition to our annual guidance. So I mean, ultimately, our expectation is that by providing this longer-term view, we can help to inform investors on the size of the opportunity in front of us.

[Sean Mansouri:]

Got it. Thanks. What's the financial nature of your agreement with Amadeus? And how much of your growth expectations are reliant upon this partnership?

[Christopher Barnard:]

Thanks, Sean. It's Chris. The Amadeus partnership certainly firms up our pipeline over this longer term that we've talked about today. And we believe, obviously, it enhances our market position given their size and breadth in the industry. It also significantly adds to our resources, so obviously, a very strong opportunity for us. As Rob mentioned, we consider partnerships like this and potentially others in the future to be a component of several that'll get us to those four year long-term targets. We don't typically comment on individual financial arrangements per partner, but we do have a pretty favorable revenue share agreement in place with Amadeus.

[Sean Mansouri:]

Got it. Thanks. And lastly, for our inbound Q&A, regarding capital allocation, given the stock pullback last year why haven't you been more aggressive with your buyback?

[Erick Georgiou:]

Hey, Sean. It's Erick here. So really at a high level, right, I think of the NCIB as one year process. So it started in August of 2018 and it runs until August of 2019. So we really got 12 months to execute on the share buyback. We tend not to time the market here and rather just spread the purchases throughout the year. That's been consistent with what we've been doing since 2015. With that said, we were active throughout Q1. We did accelerate our daily run-rate. As of today, we're sitting at roughly 45% of the authorized amount. So we're feeling pretty good about where we sit right now and you should continue to see us active in the second quarter.

[Sean Mansouri:]

Got it. Well, that wraps up the e-mail Q&A. Sherry, you want to take it back for the participant Q&A?

[Operator:]

Yes, thank you. [Operator Instructions] Our first question is from Caleb Ho, RBC Capital Markets. Please proceed.

[Caleb Ho:]

Yeah, thanks. I'm on for Drew here. So a couple of quick ones, do you have the organic revenue growth number for Q4? There were a few timing issues in Q3. So I was wondering if everything was back on track. And our second question would be, would you have the IFRS 16 impact for 2019, given your guidance incorporates it, so I was wondering what the impact was. Thanks.

[Erick Georgiou:]

Yeah. Hey, it's Erick here. Thanks for joining Caleb. Maybe I'll start with the least question first. So the impact from IFRS 16 is $1.3 million on a year-over-year basis, so I would just apply that to the appropriate guidance range that we have provided. From an organic growth standpoint on - and I really say this from an accounting revenue standpoint, the fourth quarter was 4%, the full year was sitting at 6%, and just a few comments on that. A lot of the growth we saw, particularly in LCR and across the platform was with our agency partnerships. And so, as you know we do have that accounting dynamic with the gross versus net. So a lot of the growth we saw this year was with the net accounted for a partner, so that really the organic growth rate in the gross sales number. So what I mean by that is the gross value of sales moving across the platform was well north of 10%. It was actually sitting at 13% for the year. So we feel pretty good about the health of LCR today. And hopefully, that adds some perfect context to it.

[Caleb Ho:]

Yeah, yeah, thanks. Second question here, on the 2022 gross profit and EBITDA targets, how do you balance revenue growth and EBITDA margin expansion, gross profit expansion? I know you mentioned a two year CAGR revenue kind of springboard from the previous two years. And also, given the Saudi Arabia headwinds maybe some more detail there. And on the margin expansion, is this a good time to be seeing the operating leverage coming through? And if yes, over the next 3 or 4 years, will it kind of be a steady uptick or will it be an acceleration? How will that kind of play out? Thanks.

[Christopher Barnard:]

Hey, Caleb. It's Chris. Just on the space between here and the 2022 goals that we put forward today, obviously, it does imply some acceleration, and we think we have put in place lots of good things in the business over the last couple of years. And again, just to reiterate some of my talking points, if you take our growth rate in the last few years and add it the implied growth rate from this year, we don't have to make dramatic improvements in our growth rates to get there over a four-year period. I think what you also see is some of the expectations in that period does come from increased activity in some of the higher-margin portions of our business. And that's obviously where you see some of the margin improvement come in between now and a bit more of a long-term view.

[Caleb Ho:]

All right, perfect. Thanks, very helpful.

[Operator:]

Our next question is from Ed Woo with Ascendiant Capital. Please proceed with your question.

[Edward Woo:]

Yeah, thanks for taking my question. My question is more on the outlook on the travel industry. Obviously, you're still very tied to loyalty programs, particularly with hospitality and travel. How much of it is going to impact the baseline, the current macro-environment? And what do you see for travel next year and how would it impact the business?

[Rob MacLean:]

Yeah, Ed, it's Rob. Yeah, we continue to be very bullish on travel. In general, we're seeing - and our business is being specifically dealing with the loyalty programs. But right now, when we speak - spend time with our partners, all feel fairly buoyant about the travel market. Loyalty programs themselves inside of travel continue to be growing in a very robust way. We - I think, we referenced in the past some of our partners are adding 1 million-plus members a month, and that's continuing. We're seeing big hotel programs continue to add partners, continue to see this as an asset, but their loyalty programs is an asset that they want to both monetize and grow in importance. So we really continue to see a ton of opportunity as the loyalty industry continues to grow globally, so continue to be very bullish.

[Edward Woo:]

There's a continued focus by hotel properties to take their bookings direct. Has that impacted your hotel booking platform?

[Rob MacLean:]

No. No. We wouldn't look to that at all. We work with, obviously, with all of these big loyalty programs in the hotel space. And that just goes to strength - overall strength in their loyalty programs. So we see that as kind of a natural channel for members to earn airline - sorry, hotel points, when they book directly. And if they're inclined to earn airline miles, they can go through a product like our Lufthansa or ANA or Air France-KLM loyalty sites, and really they're largely a different audience that are speaking to - those products are speaking to.

[Edward Woo:]

Great. Well, thanks for answering my questions, and good luck.

[Rob MacLean:]

Thanks, Ed.

[Operator:]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to Rob for closing remarks.

[Rob MacLean:]

Okay. Thanks everyone for listening to today's call, and we look forward to speaking with you at our upcoming investor event on March 28. If you can't make it, be sure to tune into the webcast link that will be provided in the press release next week. Thanks again for joining us.

[Operator:]

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