Points.com Inc.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Ladies and gentlemen, greetings and welcome to the Points International First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garo Toomajanian. Thank you. You may begin.

[Garo Toomajanian:]

Good afternoon and thank you for joining us today to discuss Points International's financial results for the first quarter of 2017. Joining me on the call are Rob MacLean, Chief Executive Officer; Christopher Barnard, President; and Michael D'Amico, Chief Financial Officer. Before we begin, let me remind you that the remarks on this conference call 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 first quarter 2017 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 for his prepared remarks. Rob?

[Robert MacLean:]

Thanks Garo. We are off to a solid start in 2017 and continue to execute on our strategy to diversify the business as we look to the future. We continue to deliver a strong core business while investing in new opportunities to contribute to our long-term growth and profitability. To give you better clarity into our business dynamics, we have broken out revenue, gross profit, adjusted operating expenses, and adjusted EBITDA by our three business segments in our filings. Loyalty currency retailing, where our Buy, Gift, and Transfer services represent the bulk of the activity, Points Travel and Platform Partners which also increased the Points Loyalty Wallet. As we described in our fourth quarter prior six weeks ago, this breakout demonstrates that our core loyalty currency retailing segment continues to be strong with topline revenue growth of 12% in generating nearly 5 million of adjusted EBITDA on the first quarter. This core business represents 81% of our consolidated gross profits in the quarter. We've been pleased with our continued progress in this business segment with several new relationships into launches in the quarter and a growing pipeline of new opportunities that we are actively pursuing. We continue to see significant growth opportunities in this our core business as we look into the future. Our newer growth initiatives are currently operating at the early stages of development as we expected. As we discussed in our last call, in Points Travel we've identified a large segment of the hotel booking market to which we can offer unique value. We are leading an emerging trend whereby large travel industry players are looking to combine the power and size of their loyalty programs with the strength of their booking channel to capture a larger portion of global hotel booking margin. Points Travel enables these large players to accomplish this goal. We believe this market opportunity represents several hundred million dollars of gross hotel bookings today and has the potential to grow to over $1 billion in annual gross bookings over the next five years. While we are at the very early stages of this business opportunity, we continue to see positive indications upon which we can continue to build. Q1 started launch of a large new partner in ANA and we assigned our agreement with Expedia as signaled last quarter. Christopher will provide further details on this progress in a moment. We continued our considerable work ahead of us to achieve our objectives related to Points Travel. However we are seeing strong evidence that suggests we're on the right track with this strategy. As previously indicated, that business line is currently still in an investment phase. However we expect to see gross profit from Points Travel ramp up throughout 2017 and to be accretive to adjusted EBITDA by 2018 and beyond. The Points Loyalty commerce platform is connected to a growing list of now over 60 leading international loyalty programs that allow us unique access to the loyalty industry in almost 1 billion members in the most popular and sophisticated loyalty programs in the world. To reiterate, our Platform Partner strategy is focused on leveraging our unique access to and relationships with the loyalty industry by finding businesses, products, or services that will benefit from tapping into the world's most powerful loyalty programs. We currently has over 15 companies accessing in the loyalty industry via our loyalty commerce platform. This business segment already represents the material percentage of our consolidated gross profit at 18% and will be approaching breakeven this year on an adjusted EBITDA basis. Based on our current momentum and trajectories, we are confident that our strategy of scaling these two segments to become meaningful economic and strategic contributors represents an important opportunity for the company. Our first quarter results demonstrate that our progress towards this goal is on track and we believe that the first quarter performance also puts us on track to achieve our full-year expectations for adjusted EBITDA growth of upto 10% with loyalty currency retailing driving that profitability offset by an expected loss on Points Travel or smaller than in 2016 and by Platform Partners approaching breakeven by the end of this year. In summary, we are encouraged by our results to-date both strategically and financially. We are off to a solid start in 2017 and are tracking towards our full year expectations. I'll now turn the call over to Christopher to give you more insight regarding our recent performance.

[Christopher Barnard:]

Thanks Rob. During the first quarter we made progress in all three of our business segment and are on track to meet our full year targets. In our core loyalty currency retailing business we continue to execute against our new business pipeline in 2017. During the first quarter we launched our previously announced principle partnership with Copa Airlines ConnectMiles on our core by different transfer products, as well as a new relationship with Air Canada's Altitude program. Additionally WestJet joined us as a new loyalty program partner leveraging our core byproduct during the first quarter. Further we have recently gone live with one of the largest middle eastern carriers, Etihad who is also leveraging our core by service advisor program. Lastly we recently launched a Points Pooling capability for Hilton Honors members allowing pool points among friends and family members. This is core health initiative that was announced earlier this year and we are happy to play an integral part in their programs evolution and extend our relationship with this important department. With respect to our newer growth businesses, we are pleased with the progress we have made so far in 2017. In Points Travel we're excited to recently launch the service with ANA, the largest airline in Japan. ANA will be leveraging our full suite of Points Travel functionality allowing members to earn burn loyalty currency for both hotel and car bookings. Additionally, this new deployment will benefit from our growing merchandising experience as we target customer awareness that leads to first-time users and encourages repeat bookings. As we have highlighted in the past, repeat bookings are the major opportunity with the service and we are starting our marketing and segmentation efforts show traction here. So far we have won six loyalty program partners on the Points Travel platform and we continue to develop our robust pipeline. On our last call we highlighted a pending co-sell and product development agreement with Expedia. We are pleased to now have this in place and are keen to working on plans to aggressively take our combined strengths to market over the coming months. All this bolstered our confidence in our Points Travel business segment to grow and become a positive contributor next year. In our platform partner segment we saw gross profit increase to solid 40% year-over-year fueled by growth across multiple products enabled by our loyalty commerce platform. This healthy growth from our in-market partnerships is matched by a healthy pipeline of opportunities. For example, Alaska Airlines began leveraging our loyalty functionality in the first quarter to better manage exchanges of their loyalty programs site. Much like Choice Hotels begin using the service the same function late last year. Based on our progress to-date, we remain confident that we will be able to approach breakeven adjusted EBITDA in our platform partner business segment by the end of the year. So to recap, our core business shows no signs of abatement with strong organic growth, coupled with new partnership additions, as well as expansion of current ones. Built off this foundation our newer growth initiatives are both indicating strong financial and strategic momentum that points to accretive adjusted EBITDA in 2018 and beyond. I'll now turn the call over to Michael, so he can walk through our financial results in a bit more detail.

[Michael D'Amico:]

Thanks Christopher. As I'll review our results for the first quarter of 2017, please note that all of the 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. Revenue in the first quarter was $82.9 million, an increase of 13% from a year ago. Principal revenues were $79.5 million up 12% from the first quarter of 2016. Other partner revenue was $3.4 million, an increase of 21% from last year. Companywide organic revenue growth was 11% in the first quarter, largely driven by the strength of our loyalty currency retailing segment. Gross profit which is an important metric for us was $11.1 million, a 9% increase in the previous year. Breaking it down by business segment on a fully allocated basis, in other words by allocating 100% of our adjusted operating expenses across the operating segments, gross profit from loyalty currency retailing was $8.9 million up 1% from last year. Platform partner generated gross profit of $2 million up 48% from a year ago, and Points Travel produced gross profit of $0.2 million increasing five folds of a small base. Total adjusted operating expenses which consist of employment expenses excluding stock based compensation, marketing, technology and other operating expenses were $8.2 million up 13% in the first quarter. As anticipated, the majority of this increase was due to increased rent expense resulting from our new head office lease, lower capitalization of internal development time, incremental operating expenses related to our Points Travel product, and increased marketing spend in our loyalty currency retailing segment. Adjusted EBITDA is an important metric in evaluating our ongoing profitability. As a reminder, we calculated adjusted EBITDA by taking net income and adding back the following items. Income tax expense, interest expense, depreciation and amortization, foreign exchange gains and losses, impairment charges, and share-based compensation expenses. On that basis, adjusted EBITDA in the first quarter was $2.9 million compared to $3 million during the prior year period. By business segment on a fully allocated basis, adjusted EBITDA from loyalty currency retailing was $4.89 million, an increase from $4.6 million in the prior year. Adjusted EBITDA loss for Points Travel was $1.4 million compared to a loss of $1 million a year ago. Adjusted EBITDA loss from platform partners was $0.5 million compared to a loss of $0.6 million a year ago. Total net income for the first quarter was $0.9 million consistent with the prior year. Overall resulting levels were relatively stable with prior periods. Excluding part-time and contract roles, we ended the first quarter with 190 full-time equivalent employees in line with the 189 at the end of the first quarter of 2016 and slightly down from the 195 at the end of Q4 as we continue to focus on cost containment where possible. As a reminder, while we generate the majority of our revenues in U.S. dollars, the majority of our operating expenses are denominated in Canadian dollars and we are therefore subject to currency exchange rate volatility. To minimize this volatility, we engage in foreign exchange hedging to provide greater certainty around future costs and are typically hedged out 12 months for approximately 50% of our total Canadian dollar based expenses. Turning to our balance sheet, total funds available which is comprised of cash and cash equivalents together with short-term cash investments, restricted cash, and amounts with our payment processors totaled $58 million at the end of the first quarter. Our primary importance to us is our net operating cash which we define as total funds available, less amounts payable to loyalty program partners. As of March 31, net operating cash was $12.3 million compared to $14.2 at the end of the fourth quarter. Keep in mind that changes in total funds available and net operating cash reflects the quarterly variations in revenue and the timing of certain cyclical expenditures including outlays for capital and intangible asset additions, and the timing of partner and operating expense payments. I will now pass the call back to Christopher to review our 2017 guidance and to close out our prepared remarks.

[Christopher Barnard:]

Thank you very much, Michael. We believe our results and performance in the first quarter demonstrate a retracking towards our objective for the year and therefore we remain confident to both total gross profit and total adjusted EBITDA for the full year 2017 will increase up to 10% over 2016 levels. Additionally based on our thought variability and transaction timing, promotions and new launches over the course of the year, our current view indicates a heavier weighting for gross profit and adjusted EBITDA in the second half of 2017 largely due to the expected ramp up of our Points Travel segment. That concludes our prepared remarks thank you for your time today. Operator can you please open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Andrew D'Silva from B. Riley & Company. Please go ahead.

[Andrew D'Silva:]

Hi, good afternoon. Thanks for taking my questions. Just got a few here real quickly, I'll start off of with Expedia. So you mentioned with a core sale and product development relationship maybe you can give a little context as far as why Expedia is looking to partner with you in the space obviously they have a lot of OTA experience is it one because of the relationship that you have or is it more platform related basement technology that you developed thus far?

[Robert MacLean:]

Andy, it's Rob. We're very pleased with kind of migrating from what we indicated six weeks ago that we were in discussions to closing that and signing that agreement. It is very much a partnering and sales oriented relationship I think that as we jointly talked about how we go and attack this opportunity I think we're really, really impressed with Expedia and Affiliate Network in particular Expedia Affiliate Network that is engaged in working with a number of our industry partners. And but I think they recognize that as these big businesses are evolving and looking to the future loyalty is playing a much more significant role in the decision making process on how they grow those hotel booking channels. And I think you'll jointly recognize the strength of Expedia's access to supply to the hotel inventory that they have, some of the great technology they have in matching that up with our great relationships with our loyalty programs and our airlines and hotels in particular from a loyalty perspective. And that as loyalty becomes more a driver of the decision making those two parties together just bring a much more powerful offer to the marketplace. So I think that would be the layout characterize it and say we're really pleased with the progress we made there.

[Andrew D'Silva:]

Two questions kind of following up on the Expedia announcement one, does that change your gross profit pipeline expectation anyway now that may be there is a split there. And then two is there any idea right now that you and Expedia are kind of partners in this endeavor who the other competitors in this space are?

[Robert MacLean:]

On the economics, no material change to what we would in our modeling and kind of how we look at the business going forward. We think it opens up many more opportunities than maybe we would be doing or attacking on our own overall really complex marketplace. But working with Expedia I would say the overall plot of opportunity from a margin standpoint is larger together and so our split largely leave us in a comparable position where we are today so don't anticipate any negative impact there. In terms of competition it's the OTA space it's no surprise there the big guys in the marketplace if you think about where the opportunities have been over the last or while it's been ourselves Expedia and Priceline Group and that really has been the primary competitive environment and so we like the positioning of ourselves and EN as part of Expedia working together to capture more than our fair share.

[Andrew D'Silva:]

All right. And just couple revenue questions here, for the first time provided some breakout on a different segments I believe you said 2 million for the open platform loyalty wallet and gross and then the $200,000 for Points Travel is that trend analogous for revenue as well I mean those are recognized on net basis correct so 2 million in gross profit 200,000 in gross profit its 2 million in revenue 200,000 in revenue?

[Robert MacLean:]

More or less yes, I think for the purposes it doesn't anywhere near to same complexity as the core business where you got the principal and agency relationships so plus and minus you can apply it that way sure.

[Andrew D'Silva:]

Okay, fantastic. And just two more quick ones here are there any meaningful retail BGT customers maybe 10% of revenue or 10% gross profit or greater that have contracts that are rolling off in the next six to 12 months or are all of them still mid contract locked in multi-years right now?

[Robert MacLean:]

We have quite few obviously contract now with 60 plus partners on the platform. So we feel pretty good about where we are on that contracts cycle. I think we mentioned at the last quarter we're 60% plus in the long-term deals. We wouldn't get into any kind of specifics on a contract-by-contract basis but quite comfortable and like where we are in terms of contract and management over the next several years.

[Andrew D'Silva:]

But no meaningful large customer concentration percentage of revenue or gross profit is expiring this year?

[Robert MacLean:]

Yes, nothing that we would speak to you today for sure.

[Andrew D'Silva:]

Okay. And then last question WestJet, Etihad and Copa are they principal or agency?

[Robert MacLean:]

They are all principal I think and - no Copa principal and WestJet and Etihad is ex agency.

[Andrew D'Silva:]

So WestJet and Etihad…

[Robert MacLean:]

Copa has got some full suite of products and so it will be a full-blown principal relationship.

[Andrew D'Silva:]

And other two are commission.

[Robert MacLean:]

Correct.

[Andrew D'Silva:]

Okay. Thanks guys. Good luck going forward.

[Operator:]

[Operator Instructions] Our next question comes from the line of Drew McReynolds from RBC Capital Markets. Please go ahead.

[Drew McReynolds:]

Yes, thanks very much. Good afternoon. Just on the - it's interesting obviously you had a quarter that exceeded my expectations particular on the BGT side and you seem a little bit more cautious six weeks ago in and around some Hilton headwinds and what have you so just wouldn't mind getting an update from you on whether that's an accurate read of where we thought you were six weeks ago versus now and just if there is anything in the underlying business that has evolved since the last quarter?

[Robert MacLean:]

Yes, I think good question. I overall characterized Drew that the quarter was as expected so it is performing really across all segments pretty much the way we would have expected for the first quarter. So no surprises of any significance as you might expect in a business of our size and the nature of it you get a little bit ebbing and flowing but generally speaking I said quarter as performed as we would have expected.

[Drew McReynolds:]

And just with respect to the headwinds that you alluded to did the results reflect what you expected on that front door or did they or not essentially transpire?

[Robert MacLean:]

Pretty much what we would expected and as we pointed out we were cautious on a couple of things coming into the market or coming into the year again no surprises we're kind of seeing things play out as we expected.

[Drew McReynolds:]

Okay. And on the Points Travel side, it's nice to see the segmented breakdown can you just qualitatively speak to some of the milestones you going to be looking for as you ramp up Points Travel and maybe talk to maybe couple of challenges that you've encountered in getting that platform to where you wanted to be?

[Robert MacLean:]

I think milestones for us on this business line are going to mirror in many ways they'll mirror what we've been successful on the core business and that it's a combination of go knock down, new relationships the dollars are an important indicator of success for us and we certainly have been pleased with progress on that front since we started in this name in six, seven different fields that we have in place. And I would say a reasonably strong pipeline both from interesting enough both from targets that we would have expected, some categories that maybe we didn't expect that are having very good conversation in terms of the pipeline and then also very simplistic with what we've done on the platform side of our business as we built these relationship even in these very early days with Points Travel you're seeing us add incremental functionality to those relationships where we go beyond the earned opportunity as members stay in hotels and earn the currency of their choice to adding redemption and functionality which is very kind of interesting margin on that redemption transaction for both us and the industry. And then more recently with ANA and with Miles&More adding in car inventory in addition to the hotel so we like kind of have dynamic is moving as well so pipeline is important adding new relationships broadening the functionality on the product and then really operating very consistent with what we do in the core business. We're getting better and better every day in terms of operating and marketing into those really unique databases of customers to get our penetration rates up and therefore our overall revenues and margins up over time. So we're going to follow it's a very different business for certain. Well almost fairly similar milestones and threshold that will be watching for so. Hopefully that's helpful I think some of the things we're learning here in very, very early days the conversion have been fantastic as we get customers to the product and through the product the conversion rates are great. The basket sizes are very solid, the margin profile is very solid I think there is some really interesting opportunity head of us in increasing the overall unique visits in kind of top of the funnel and you'll see us spending a fair amount of time with our partners on that part of the equation here over the next sort of while.

[Drew McReynolds:]

And just to follow-up to that just as you developed your kind of selling capacity or penetration with Expedia and can you just talk to the scale of Points Travel I know you've spoken about the ultimate gross margin potential of the business. But as yet if it really gets going – how does your cost structure evolve a long side that.

[Robert MacLean:]

Sorry, I'll deal with that a couple ways but I will caveat that - it's pretty early in the process and in the cycle here of capturing that opportunity when we do look at kind of current businesses that are out there and opportunities that are out there. Things that we targeted that were adding to and we have to frank in a pretty regular basis in terms of who might be partners that we would see the opportunity to put this process product and placement continues to grow kind of all in terms of margin profile. We still kind of think about this business is having a similar margin profile to our core business which were putting 40 million to 45 million in terms of gross profit. Obviously it's in very early days and will have to execute flawlessly over the next while to capture all of that but we do think and the size and scale of the Points Travel being in that same neighborhood. Obviously margin profile very different much more interesting from an investor's standpoint the margin profile on Points Travel will be a gross profit level will be significantly higher than what we have in the core business. So we like that proposition as well. In terms of cost structure for us the majority of the activity or the cost structure is gone into building out the platform kind as we acquired equity and Points' team in San Francisco will have build out against that. We had with the addition of ANA which we're really thrilled to launch here in the second quarter and that's just on live kind of happy with that process move that as some call center and customer support prospect really you see that in the first quarter that we think is very scalable. And so they certainly be incremental cost but we don't see the cost significantly increasing during the course of the year on our Points Travel product a lot of that core investment has been put in place already. So now it's really about putting a bunch more of these deals in place and rolling across the platform that's built and dropping some incremental margin to the bottom line.

[Drew McReynolds:]

Okay, that's great. Just two final ones from me, excuse me I haven't gone through the full release but I noticed Europe revenue in terms of your segmented disclosures down year-over-year I am not sure what FX related what's underline but just maybe talk about trend. And then one for you Michael just on the quarterly breakdown, just for 2016 on a quarterly basis, is that in the disclosures anywhere you can provide that or do we just wait for last year's as we roll for this year.

[Robert MacLean:]

The current plan is to just show the comparatives Drew when we bring in out the quarters and we'll provide you with the quarterly disclosures as we roll through 2017 the comparatives to 2016.

[Drew McReynolds:]

Okay.

[Christopher Barnard:]

And then from Europe, I think I caught your question there from a Europe standpoint. Overall obviously the business is good healthy growth in terms of revenues up 12%. Europe was relatively soft year-over-year so again we see that experience over the last 10 years where we like the fact that we've got some diversity in terms of geography as Europe is a bit soft this quarter. We've seen the North American marketplace be quite strong. But certainly if you look at Europe it's been a bit soft right now.

[Drew McReynolds:]

And that's just - that has been slower or is there something more cyclical or structural underneath.

[Christopher Barnard:]

Yes, we've been watching Europe really last three years where we started to see some kind of nice improvements through the last three or four quarters. Some of that is mix and promotional activity that we ran in the first quarter. There is still a little bit of hangover in the European marketplace for sure.

[Drew McReynolds:]

Okay, thanks very much.

[Operator:]

Thank you. Ladies and gentlemen we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

[Robert MacLean:]

Thank you very much for joining us today. We look forward to speaking with you again soon. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.