Points.com Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Mar 2018

[Operator:]

Greetings and welcome to Points International Fourth Quarter and Full Year 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. I would now like to turn the conference over to your host, Garo Toomajanian. Please go ahead sir.

[Garo Toomajanian:]

Good afternoon and thank you for joining us today to discuss Points International's financial results for the fourth quarter and full year of 2017. Joining me on the call are Rob MacLean, Chief Executive Officer; Christopher Barnard, President; and Michael D'Amico, our 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 fourth quarter 2017 financial results press release issued prior to this call, as well as other documents filed with the Canadian and US 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?

[Rob MacLean:]

Thanks, Garo. 2017 was a strong year for Points. We continued to perform well in the fourth quarter, enabling us to generate record revenue, gross profit and adjusted EBITDA on a full year basis. For the full year, revenue increased 8% over 2016, while gross profit and adjusted EBITDA increased 7% and 9% respectively, with both these key operating measures coming in near the high end of our guidance ranges. These results clearly demonstrate the progress we're making against our long term plans to diversify the business and we've continued to deliver a strong core business while investing in new opportunities to contribute to our long term growth and profitability. While we still have a lot of work to do, we are pleased with the performance and trajectories of both our more established loyalty currency retailing business as well as our two newer business segments in 2017. We're also very enthusiastic that this momentum is carrying through to 2018 since as we indicated in our preliminary results, we expect growth rates in both gross profit and adjusted EBITDA to accelerate materially in 2018. As I assess our performance on a full year basis, we're pleased that all three business segments continued to see growth in gross profits. Our loyalty currency retailing segment saw a 4% increase to 38 million, while platform partners grew 13% to 7 million and Points Travel delivered growth of almost five times to 1.5 million. From a profitability perspective, loyalty currency retailing performed strongly to deliver almost 21 million in adjusted EBITDA for the year, as we continued to develop both our platform partners and Points travel segments in 2017. With our momentum in business development success in 2017, we're very busy with completing and launching new deployments in the first half of 2018. Capturing this increased sales momentum for our platform partners and Points travel segments in particular is a priority in order to maximize growth over the near to medium term. Bringing these recently won deals to market as quickly as possible in the first half of 2018 does not detract from our overarching goal of increasing both total gross profit and adjusted EBITDA in the medium term, though we will likely see segment profitability delayed in the short term at least for the Points travel segment. Nonetheless, we believe this is the right strategic move to optimize our long term profitability for these segments, ultimately building greater shareholder value over time. In summary, we are encouraged that our strategy is working as continued focus on leveraging our loyalty currency retailing business has enabled us to continue to develop our new high growth opportunities, resulting in strong growth in key metrics for '18. As we indicated in our 2018 preview and we are reiterating today, we expect gross profit to accelerate materially in 2018, increasing in the range of 10% to 20%. We also anticipate driving continued improvements in probability, reflecting the leverage inherent in our operating model with adjusted EBITDA expected to grow 20% to 40% in 2018. Finally, as you saw in our press release today, Michael D'Amico will be retiring from his position as Chief Financial Officer. Michael joined us in November 2015, has been a strong contributor to the company's current trajectory and will remain with Points on a full time basis through the end of the year, ensuring a smooth transition of leadership in the finance group. We're grateful to Michael for his contributions over the past few years that include strengthening our finance organization to support our growth as well as working with and preparing his successor Erick Georgiou, who's been our VP of Finance for the past three years and is a ten year Points veteran. I've worked closely with Erick during these past ten years and I'm thrilled he will be so capably stepping into the CFO role effective April 2. We'd like to congratulate Michael on his retirement and Erick on his new leadership role. I'll now turn the call over to Christopher to give you more insight regarding our recent performance.

[Christopher Barnard:]

Thanks, Rob. As Rob described, our 2017 performance indicates that our strategy continues to gain traction and we're very pleased that this is driving our anticipated acceleration in both growth and profitability through 2018 and beyond. In 2018, we'll benefit from a full year of revenue from the multiple new programs we launched in 2017 that we highlighted in our January 17 release as well as benefiting from new initiatives we plan on launching throughout the year. For the loyalty currency retailing segment, in addition to various product extensions with current partners, we launched new partnerships with eight leading loyalty programs around the world in 2017. Furthermore, we're excited to be in the final stages in preparation to launch a new initiative with a major Middle Eastern carrier on which we will update you shortly. Our pipeline of new business continues to be a strong mix of different sized opportunities across North and South America, Europe and the Middle East and the Asia Pacific region. So we're confident that the momentum we're carrying into this year has still a lot of legs over the mid to long term. In 2018, we also benefit from several new platform partner programs launched in 2017, which included new partnerships with the banking, retail and online verticals. As we previously mentioned, we're close to launching a new initiative in the fuel retailing space as well as another in the financial services industry. While these deployments are heavily reliant on the development partners work and resources, we are pleased with our loyalty partner's engagement in these exciting new offerings and see their enthusiasm growing with each new opportunity that we can deliver through our unique capabilities of the loyalty commerce platform. Much like the other business segments, our pipeline of opportunities is also well spread out over both industries and geographies. Our third operating segment, Points Travel continues to show impressive market adoption by the international loyalty community. We added notable international carrier, All Nippon Airways and Etihad Airways to our roster of launch partners in 2017 and highlighted a number of new wins that we'll be launching this year. Along with pending deployments, we have previously discussed with Air Europe and Club Carlson, last week, we were pleased to launch with Amtrak as our newest Points Travel partner. This expands our longstanding relationship with this leading North American Travel brand. As we indicated, next in the launch queue later this spring, another notable Asian flag carrier will be launching with our Points travel service and continue to build our presence in the important Asia Pacific region. In summary, we're entering 2018 with a lot of enthusiasm and our strong momentum from 2017 is expected to accelerate this year. We believe our growth in 2017 and our strong outlook for '18 validates the strategy we've been executing over the past couple of years and we look forward to sharing further success with you as we go forward. As I pass the call to Michael to discuss our financial results in more detail, I wanted to also express my personal gratitude for his contributions and support over the past few years and also to congratulate Erick on and welcome him to his well-deserved role as our new CFO. Over to you Michael.

[Michael D'Amico:]

Thank you, Christopher and Rob for your kind words. I look forward to helping ensure a smooth transition over the next several months. Over the past three years, my goal has been to strengthen the finance organization and I feel now is the right time for me to retire as CFO and hand the reins over to Erick who is a talented, capable leader with a strong understanding of Points business. It's been a pleasure serving as CFO for a company with highly motivated competence and dedicated people. I've also enjoyed interacting with our analysts and investors and look forward to my continued involvement over the remainder of the year. As I review our results for the fourth quarter and full year of 2017, please note that all of the numbers mentioned in our call today are in US dollars. And unless otherwise noted, all amounts are presented in accordance with International Financial Reporting Standards. Revenue in the fourth quarter was 87.7 million, an increase of 7% from a year ago. Principal revenues were 82 million, up 5% from the fourth quarter of 2016. Other partner revenue was 5.7 million, an increase of 46% from last year, primarily due to growth from our loyalty currency retailing and Points travel segments. Gross profit, which as we stressed in the past is one of our most important operating metrics, was 13.1 million in the fourth quarter, up 10% from a year ago and was a record quarterly level. Total adjusted operating expenses, which consist of employment expense, excluding stock based compensation, marketing, technology and other operating expenses, were 9 million in the fourth quarter, up 9% over the prior year. Adjusted EBITDA is an important metric in evaluating our ongoing profitability. As a reminder, we calculate 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 fourth quarter was 4.1 million, an 11% improvement from the prior year end period. By business segment, on a fully allocated basis, in other words by allocating 100% of adjusted operating expenses across our operating segments, adjusted EBITDA from loyalty currency retailing was 5.9 million, an increase of 1% from a year ago. Platform partners approached breakeven in the fourth quarter with an adjusted EBITDA loss of 370,000 and as anticipated, Points Travel generated an adjusted EBITDA loss of 1.5 million in the quarter. Total net income for the fourth quarter was 1.2 million, a significant improvement from the net loss of 3.7 million in the prior year. For the full year, revenue was 347.6 million, an increase of 8% from 2016, driven by strong growth in our loyalty currency retailing segment. Principal revenues were 330.6 million, up 7% from 2016. Other partner revenue was 16.8 million, an increase of 30% from last year, primarily due to strong growth across all three segments. Gross profit for the year of 47 million increased 8% from a year ago, an all-time record performance representing a gross margin of 13.5%, which is in line with gross margin from a year ago. By business segment, loyalty currency retailing generated a gross profit of 38.4 million, with platform partners generating 7.1 million and 1.5 million from Points Travel. Total adjusted operating expenses were 33.8 million, an 8% increase over 2016 and adjusted EBITDA was 13.2 million, an increase of 9% compared to the 12.1 million a year ago and a record level for the company. By business segment, adjusted EBITDA was 20.7 million for loyalty currency retailing, a loss of 1.8 million for platform partners and a loss of 5.8 million for Points Travel. For the full year, total net income was 3.4 million versus a net loss of 1.5 million in 2016, which included the impact of the non-cash expense related to the China rewards write-off. Overall, reserving levels were relatively stable with prior periods. Excluding part time and contract roles, we ended the fourth quarter with 211 full time equivalent employees compared to 195 at the end of the fourth quarter of 2016 and 205 at the end of Q3, as we continue to focus on managing costs appropriately while driving growth. 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 this volatility, we engage in foreign exchange hedging to provide greater certainty around future costs and are typically hedged to 12 months for 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 investments, restricted cash and amounts with our payment processors totaled 79.2 million at the end of the fourth quarter. 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 course issuer bid, which allows us to automatically repurchase shares within quiet periods. Our repurchases during the fourth quarter totaled approximately 172,000 shares at an average price of $11.04 per share for a total cost of $1.9 million. For the year, total repurchases were approximately 334,000 shares at a weighted average price of $10.19 for a total of $3.4 million compared to repurchases of 428,228 shares at a weighted average price of $7.43 for a total of $3.2 million in 2016. This repurchase program reflects both our confidence in our medium and longer term prospects for growth and profitability and our commitment to building shareholder value through appropriate capital allocation. As of December 31, approximately 404,000 shares remain in our NCIB authorization. I will now pass the call back to Christopher to review our 2018 guidance and to close off our prepared remarks.

[Christopher Barnard:]

Thanks, Michel. As Rob mentioned earlier, we have increased confidence as we enter 2018 and consistent with the preliminary results we issued in January, we expect gross profit growth to improve again in 2018 in the range of 10% to 20%. Furthermore, demonstrating the operating leverage inherent in our model, we expect adjusted EBITDA to increase even faster at between 20% to 40% on a year-over-year basis. We're pleased with the progress of the strategy of continuing to grow our loyalty currency retailing business, while in parallel, developing the high growth longer term opportunities of platform partners and Points Travel. Our 2017 results and current momentum validate the strategy and we're excited as we continue pursuing this path towards accelerating both our corporate growth rate and our long term profitability. That will conclude our prepared remarks. Thanks for your time today. Operator, please open the call up for questions.

[Operator:]

[Operator Instructions] Thank you. Our first question comes from the line of Drew McReynolds with RBC Capital Markets.

[Drew McReynolds:]

Thanks very much. Good afternoon. Just a couple of questions. Just with respect to the outlook, maybe starting with Points Travel on the profitability side. Chris, you just alluded to or Rob you alluded to a delay in Points Travel profitability. Can you get into a little bit more granularity in terms of what has changed versus your previous kind of breakeven guidance by the end of 2018, just walking through kind of the revenue trajectory versus those expectations and obviously given the numbers you're investing in the business and expected kind of return on that investment, that would be great? Thanks.

[Rob MacLean:]

Yeah. Drew, it's Rob. I'd say kind of what we talked about in the last quarter is pretty much what we've been dealing with here in the last kind of 90 days, very, very pleased with the sales success of the product. I think we indicated in our guidance that we are launching four or five new programs that we had been successful in landing over the back half of 2017. So we're pretty focused on that at this stage. I think as I indicated in the past, that part of the business is probably tracking a little bit further ahead of where we expect it to be at this stage and so much is knocking down deals and winning that business. I think, where we deploy Etihad un December, we just launched Amtrak, we've got two or three more of these coming out here in the first half of 2018. So, it has been a bit of an all hands-on deck as we won these businesses and focus all our energy in getting those in to market. I think the individual performance as we enter into these new market is varying. We've got some of these programs that are doing really well and we're starting to hit some pretty interesting curves and we're at earlier stages on some of the other propositions or other launches and then really as we move into new markets, I think we're probably going to continue to see some of that. As I mentioned a little bit, kind of rolling these new deals out, we're probably going to see a bit of delayed profitability in the near term. I think, our sense is, nailing those deals, getting them in to market and getting them into generating revenue and profitability is really in the best interest of the medium to long term profitability of the proposition. But it means we're probably delaying a little bit on the near term profitability. So it's one of those, one of those kind of issues, if we think back to early in 2017, we're really focused on adding new partners, growing existing deployments and adding functionality. I would say adding new partners has been overweighed in our execution against and as a result, we feel good about that that we'll probably push it off a couple of quarters.

[Drew McReynolds:]

So from a profitability standpoint for Points Travel, would it be reasonable to say that kind of breakeven threshold is 2019?

[Rob MacLean:]

Yeah. We would certainly expect that. We got to be a bit careful on this because as I say, we're pretty varied in launching these programs, but we have - as we think about internally here, we're approaching breakeven in '18 at the end of the year on a quarter by quarter basis. So that will be our objective going forward. Again keeping here, getting them all launched, getting them up and operating, keep knocking down new deals, we just like the potential and trajectory of the business when we land these deals.

[Drew McReynolds:]

Shifting gears on the platform partners side, just obviously approaching breakeven exiting this year, just what are your expectations for profitability into 2018 and I just noticed on a year over year basis some deceleration in that segment year over year, just can you kind of provide some granularity on that dynamic.

[Christopher Barnard:]

Hey Drew, it's Chris. It's a bit of a similar story to what Rob just said and just quickly I'll address your second question first. As you know, we are just very focused on promotions by partner and different partner dynamics that show up in a quarter by quarter. So I wouldn't read anything into one quarter over quarter comp. We were up fairly helpfully year-over-year on a whole year basis and that's how we view the business and are focused on the annual performance versus the quarter by quarter. And as we pointed out in the January 17 press release, on indicating 2018 expectations, we launched a lot in 20 - the back part of 2017 and have a bunch in the pipeline. Groupon is just getting in the market for a month or a couple of months now, launching at the end of last year. Speaking of Groupon in particular, quite satisfied with the way they deployed our solution and again they're responsible for kind of doing work and pushing out the marketing in this part of the business and so the results have been on an individual transaction conversion basket size, although it's kind of important operating metrics have met or exceeded expectations. Now, it's about Groupon kind of rolling it into their marketing plans and triggering out what channels best inside of their strategy, so that we work closely with them with what they're responsible for driving it out. As we talked about in the prepared remarks and in the press release, we're excited about the launch of the fuel retailer and a couple of our partners in the next month or so. And that would be an online and offline proposition. And the airline side has been looking at the fuel industry for quite a while. So that's been a focus of ours, getting that up and into the market and getting those metrics out to deploy into the pipeline and being able to use those metrics to jettison that performance. So again similarly, we've got a good traction on the pipeline in closing some of these deals and now it's really just about executing individual programs in parallel to knocking down some of these pipeline deals.

[Drew McReynolds:]

And Christopher, just a follow up there, with respect to the deals that you rolled out in Q4 and the ones that are pending for 2018, that pipeline relative to what you communicated at the end of Q3, did you essentially land everything you intended to land or did some slip through or did you add some, just trying to keep track of the progress on that front.

[Christopher Barnard:]

Yeah. It's a varied pipeline. I'd say we're very comfortable with what we launched and where we are. It's always hard to pin down exact weeks and months that a deal might close, but we're satisfied with what we closed in the back part of last year and there is a full pipeline across a bunch of different industries that we're working on to launch this year.

[Operator:]

At this time, I will turn the floor back to Rob MacLean for closing comments.

[Rob MacLean:]

Great. Well, thank you for joining our call today. We look forward to updating you on our progress throughout the year. Thank you and good bye.

[Operator:]

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