Points.com Inc.
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Greetings and welcome to the Points International Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Garo Toomajanian, Investor Relations. Please go ahead sir.

[Garo Toomajanian:]

Good afternoon and thank you for joining us today to discuss Points International's financial results for the third 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 second 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 now turn the call over to Points' Chief Executive Officer, Rob MacLean for his prepared remarks. Rob?

[Robert MacLean:]

Thanks Garo. We are pleased to report our record third quarter as we continue to make progress towards our targets for 2017 and into the future. As expected, each of our business segments continues to generate gross profit growth and coupled with prudent expense management, we saw a 40% plus improvement in our adjusted EBITDA in the quarter. During the third quarter, we built on a year-to-date success of our loyalty currency re-selling business and also saw meaningful gains, both financial and strategic in our Platform Partners and Point’s Travel segments. These results reinforce short term confidence in our full year outlook as well as our long term strategy to balance the growth and profitability we are seeing in our core business with these two new business segments. Looking at our performance by segment, our core loyalty currency retailing business saw revenue growth of 10% with a gross profit increase of 8% from a year ago. With a $5 million contribution to adjusted EBITDA in the third quarter we continue to anticipate that loyalty currency retailing will contribute approximately $20 million to our overall adjusted EBITDA this year. Furthermore, we continue to see significant opportunities with both current and new partners in this area. In the Platform Partners segment, we saw gross profit increase 23% and trimmed our adjusted EBITDA loss by more than 50% compared to a year ago. With recent new launches in this area, we continue to make progress towards our target of approaching breakeven adjusted EBITDA by the end of the year. Finally, our Points Travel segment continues to be on a strong revenue and gross profit trajectory albeit of a smaller base. Gross profit for Points Travel increased almost 250% from a year ago and 24% from the second quarter. While still in its investment stage, we continue to anticipate improvements in revenue, gross profit and profitability as the Points Travel segment scales. New business development efforts in this segment continue to be very encouraging as well. To expand on that, I should note that we have made meaningful progress with our pipeline of new opportunities in all segments over the last quarter. We have advanced a number of opportunities and as Christopher will detail later in the call, we are currently in the technology development stage on several new relationships. We will be announcing and watching these new deals in all three segments over the coming months, and I continue to be very pleased with our business development execution this year. From a bigger picture perspective, one of our strategic motivations for investing in these new segments was to drive faster growth in gross profit. Therefore we are pleased that we are starting to see them have a meaningful impact with our faster growing segments of Platform Partners and Points Travel constituting 19% of our gross profit in the third quarter, up from 15% a year ago. We achieve this result was still growing gross profit for the loyalty currency retailing Segment by 8% for a combined gross profit growth of 14% year-over-year. We are confident that as we continue to scale we’ll see this success reflected in continuing adjusted EBITDA growth as well. In summary, we are excited our results in all main financial categories, revenue, gross profit and adjusted EBITDA were the best in our 17 years for third quarter and this strong momentum will set us for success in 2018 and beyond. While we continue to focus on growing current partnerships we are also seeing the benefits of our efforts to cultivate a rich pipeline of new activity across all of our business segments. These two activities growing current partnerships and launching new ones have clearly benefited from our recent diversification efforts and we look forward to sharing our continued progress with you in the months ahead. I’ll now turn the call over to Christopher to give you more insight regarding our recent performance.

[Christopher Barnard:]

Thank you. As Rob indicated the third quarter showed us making great progress toward our full year targets. Most importantly in our loyalty currency retailing segment the third quarter showed strong execution across our current partner base with impressive results coming from across various size partners as well as from both the North American and international regions. We’ve also seen success with deployment in the segment. This year we’ve already launch currency retailing services with Copa Airlines, WestJet, Eithad and Air Canada. Early in the third quarter we announced a new partnership with Air Europa, a regional Spanish carrier and as recently as last week we’ve expand our relationship with Shangri-La Hotel in China. Adding to this activity we are hard at work completing deployment with two net new international partners as we prepare to kick off with them in the next 90 days and look forward to updating you with more details upon each upcoming launch. We encouraged their momentum and this important to continues unabated and offers up a stable base also grow our other two operating segments. Turning to those in our platform partner segment we were excited to announce our partnership with Groupon, the leading daily deals service a couple weeks ago. Through its integration with Points Loyalty Commerce platform and our Loyalty Wallet Service, Groupon customers now qualify for incentives about the 10 points or miles for dollar spent across a wide range of popular loyalty programs including Alaska Airlines mileage plan, Choice Privileges, Intercontinental Hotel Group, Rewards Club, JetBlue TrueBlue, La Quinta Returns and United MileagePlus programs. We believe this initiative demonstrates the benefits that our Loyalty Commerce platform provides to partners, Loyalty programs and of course Loyalty program members, while our initial agreement with Groupon is limited to shoppers in the U.S. We do look forward for the potential expanding our relationship to cover multiple international markets in the future. Further, we expect that our initial launch with Apple and Intercontinental hotels in the second quarter will soon be complemented by leading hotel brand offering the same accelerated earning opportunity to its members to our platform services. As we highlight on previous calls, we also have a number of new initiatives in latter stage development. These include a couple of oncoming launches with financial services app and launch plans for fewer retailing program that are on-track for early next year. So we continue to pursue a range of potential opportunities in this area and look forward to additional announcements in the near future. Moving on to the Points travel segment, with the launch of ANA earlier this year, our six Points Travel partners saw significant activity in the third quarter. We continue to look with each of our loyalty program partners to refine and expand the marketing efforts to drive performance. Furthermore, we are currently working on a number of net new deployments across different industries and geographies. We previously announced a pending launch for Carlson Hotels and we are also close to launching with another notable U.S. travel brand. Internationally, Air Europa who I also mentioned that the new Loyalty Currency Retailing partner will be deploying at Points Travel service in the coming weeks. Additionally, we are in the technology development phase with two new international partners as we’re prepared to get them in the market over the next 90 to 120 days. As a result while we ended Q3 with six loyalty partners in market, we now expect to have an additional five deployments by the first half of 2018. So with the momentum driven by a total of 11 loyalty programs seem to be in market with our service. We continue to be enthusiastic about the long-term prospect of our Points Travel business. In summary looking at the quarter as a whole we’re very pleased at our overall performance and as anticipated see our second half shaping up stronger than the first. Looking beyond 2017 we expect to continue leveraging our dominant position in Loyalty Currency Retailing to drive gross profit and profitability, while our newer segment gain additional traction and become more meaningful contributors to our financial performance. 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 review our results for the third quarter of 2017, please note that all the numbers mentioned in our today are in U.S. dollars and unless otherwise noted all amounts are presented in accordance with international financial reporting standards. Revenue in the third quarter was $91.2 million, a record level for the company and an increase of 11% from a year ago. Principal revenues were $87.2 million, up 9% from the third quarter of 2016. Other partner revenue was $3.9 million, an increase of 44% from last year primarily due to will grow from our platform partners and Points Travel segment. Gross profit which as we dressed in the past is one of our most important operating metrics with $11.4 million in the third quarter, up 14% from a year ago and one of the best quarters in our history showing year-over-year growth from all three of our business segments. Total adjusted operating expenses which consist of employment expenses excluding stock-based compensation, marketing, technology and other operating expenses were $8.2 million in the third quarter, up 5% over the prior year. Overall resourcing levels were relatively stable with prior periods excluding part time and contract role, we ended the third quarter with 205 full-time equivalent employees, slightly up from the 199 at the end of the third quarter 2016 and 188 at the end of Q2 As we continue to focus on managing costs appropriately while driving growth. Adjusted EBITDA is an important metric evaluating our ongoing profitability. As a reminder, we calculate adjusted EBITDA by taking net income and adding back the following item; 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 third quarter was $3.2 million, a 42% improvement from the prior year. While business segment on a fully allocated based, in other words by allocating 100% of adjusted operating expenses across our operating segments, adjusted EBITDA for the Loyalty Currency Retailing with $5 million, an increase of 13% from the prior year. Platform partners and Points Travel both generated adjusted but the losses in the quarter as expected with the adjusted of the loss from platform partners narrowing to $0.5 million and Points Travel at a loss of $1.4 million. Total net income for the third quarter was $0.6 million increasing from $0.3 million in the prior year. As a reminder, while we generate the majority of our revenues in US dollars the majority of our operating expenses are denominated in Canadian dollars and we are therefore subject to currency exchange rate volatility. To minimize the volatility we engage in foreign exchange hedging to provide greater certainty around future costs and are typically hedged out 12 months were approximately 50% of our total Canadian dollar-based expenses. Our financial strength is clearly reflected in our balance sheet. Total funds available which is comprised of cash and cash equivalents together with short-term cash investment restricted cash and amounts with our payment processors totaled $67 million at the end of the third quarter. A primary importance is our net operating cash which we defined as total funds available less amounts payable to loyalty program partners. As of September 30 net operating cash was $13 million compared to $13.7 at the end of the second quarter. Keep in mind that changes in total funds available and net operating cash reflect the quarterly variations in revenue and the timing of certain cyclical expenditures including outlays for capital and intangible asset edition and the timing of partner and operating expense payments. Our Loyalty Currency Retailing business continues to be a strong cash flow generator for us enabling us to fund current operating and capital expenditures, as well as our share buyback activity through working capital. During the quarter our automatic share purchase plan was in effect as part of our normal boards that you were bid which allows us to automatically repurchase shares within quiet periods. Rerepurchases during the third quarter totaled approximately 153,000 shares at an average price of $9.41 per share, for a cost of $1.4 million. Our automatic share purchase plan continued into the fourth quarter with the opportunity to purchase up to an additional 500,000 shares under the current NCIB program. This repurchase program reflects both our confidence in our medium and long-term prospects for growth and profitability and our commitment to building shareholder value through appropriate capital allocation. I will now pass the call back to Christopher to review our 2017 guidance and to close off our prepared remarks.

[Christopher Barnard:]

Thanks very much, Michael. We are very pleased with the third quarter results which keep us on track for our prior guidance including our expectation that will see more meaningful gains in the gross profit and adjusted EBITDA on the second half of year mainly driven by our new initiative. Therefore, we are reiterating our prior guidance which calls for an increase in both total gross profit and total adjusted EBITDA for the full year up to 10% for 2016 levels and at this juncture we expect to be near the upper end of the range in both metrics. That concludes our prepared remarks for today. Operator, could you please open the call up for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Drew McReynolds with RBC Capital Markets. Please go ahead and ask your question sir.

[Drew McReynolds:]

Good afternoon. Couple of questions from me, on the – I think it was 9% organic growth in the quarter, a good number certainly and underpinning that presumably is currency retailing which was obviously pretty strong. Rob, Michael or Christopher, can you just kind of give an update on what was driving that strength in Q3? Was it a function of kind of the quality and uptake of the promotions are or more the volume of promotions? And I know you’re not going to give 2018 guidance, but when you look at sustainability of that kind of organic growth in the 2018, how do you see that unfolding?

[Robert MacLean:]

Yes. Drew, it’s Rob. We’re very pleased with the organic growth in the quarter. It is as you described primarily driven by successful promotional activity that we had in the market and [Indiscernible] promotional generally successful marketing and merchandising activity primarily focused on the Loyalty Commerce Retailing – Loyalty Currency Retailing business, so pretty happy with that. I think as we look forward we feel pretty good about those organic growth numbers into the near future as well.

[Drew McReynolds:]

Okay. And just on Points Travel, just looking at kind of the profitability there in the segment. You are investing in the platform, maybe just give a little bit of an update on kind of those level of investments, what’s incrementally required from here just given what to try and do with that platform. Do you take a couple of steps back on profitability before getting to where you kind of think you need to be. Is there any change there? Obviously we had a kind of target of breakeven exiting 2018. Is that still kind of in your sight?

[Robert MacLean:]

It’s a great question. I think as we indicated and Christopher's prepared remarks highlighted what we’re seeing in Points Travel that we’re very, very encouraged about is how the product is being received in the marketplace from the industry. I think we flag three new – a couple that we’ve named, Carlson and Air Europa, and then three additional deals that we’ve done, that were in the build mode right now. So we are pretty pleased that we almost doubled our deployments in the last quarter or thereabouts by adding these new deals, so we are – I’ll be very frankly – we’re juggling to figure out how we can get all of this activity launched here in the near term as we indicated and we’re in the business of getting to business to market, so very pleased with the pipeline. And that’s really broad statement, not just on Points Travel, but really across the board I think you probably picked up in the prepared remarks, we’ve knocked down five new deals that we’ve named across the three segments and indicated there is seven more deals that were actually built to note [ph] that we weren’t yet able to name typical to do that when we launch, so generally pipeline has been very -- execution in this quarter has been exceptionally strong. On Points Travel, we will I think given that how encouraged we are and the pipeline activity, we will be having a look at how do we get all of that into market, what’s that going to be from – what the implication of that from short term performance. We feel very optimistic of all of that being really good news on the midterm to the long term and will be kind of working through that over the next 30, 60 days.

[Drew McReynolds:]

Okay, that makes sense. Just on the Groupon impact on Platform Partners how does that phase in, in terms of seeing kind of some of the growth from that announcement?

[Christopher Barnard:]

Hey Drew, it’s Chris. It’s just announced a couple of weeks ago and so they are like the strategy that we’ve talked about in the past from a Platform Partners perspective, they are tapping into our Platform adding out functionality into their offering, and they are responsible for the marketing program. So, we are working with them on how they push out the offering and their cadence. You know we don’t expect a huge amount of impact this year obviously with the net new relationship, but you know Groupon’s plans are to roll out over the course of a longer term and we chat with them on the international market as well down the road, so we are working closely with them on their marketing plans.

[Drew McReynolds:]

Okay, that’s great. That’s it for me for now, so thanks for that.

[Operator:]

Thank you. There are no further questions at this time. I’ll turn it back to Mr. Rob MacLean for closing remarks. Thank you.

[Robert MacLean:]

Well thank you for joining our call today. As you’ve sensed we are pleased with our results so far this year and look forward to further updating you on our progress on our next call. Thank you and good bye.

[Operator:]

This concludes today’s conference. All parties may disconnect. Have a great day.