Points.com Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Points International First Quarter 2016 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Garo Toomajanian. Please go ahead.

[Garo Toomajanian:]

Good afternoon and thank you for joining us today, to discuss Points International’s financial results for the first quarter of 2016. 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 are included in our first quarter 2016 financial results press release issued prior to this call as well as other documents filed with the Canadian and U.S. security regulators. Except as required by law, the company does not undertake any obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. With that said, I’ll turn the call over to Points’ Chief Executive Officer, Rob MacLean for his prepared remarks. Rob?

[Rob MacLean:]

Thanks, Garo, and thanks to those of you joining our call today. We had a strong start to 2016 making progress on numerous fronts. From a financial perspective, revenue of $73.6 million in the first quarter increased 10% from a year ago and adjusted EBITDA was $3 million. As we previously highlighted, year-over-year comparisons for the first quarter of 2016 marked the final quarter we will see the impact of American Airlines’ and US Airways’ Buy, Gift and Transfer programs wind-down. During Q1 of last year, we operated these products on an agency or net accounting basis, so while the impact on top-line revenue comparisons was muted, gross profit and adjusted EBITDA defined year over year as anticipated. It’s important to understand that our revenue continues to be a combination of principal revenue with a lower margin percentage and other partner revenue from services that now include Points Travel and the Points Loyalty Wallet, both of which are operated on a higher margin percentage agency basis. As our full-year guidance implies, we expect to show meaningful gross profit growth over the remainder of 2016. This will be driven primarily by an ongoing momentum in our principal revenue from Buy, Gift and Transfer services as well as the early traction from our newer Points Wallet and Points Travel initiatives, which we expect to ramp up over the course of the year. Progress on our current core business continues and we remained very enthusiastic about our growth prospects here. Just last week we announced the launch of Shangri-La Hotels as the Buy and Gift partner on our Loyalty Commerce Platform. This relationship expands our presence in the Asia Pacific market with Shangri-La’s Golden Circle program joining Cathay Pacific, Hainan Airlines and China Rewards as the fourth Asian loyalty program to leverage the Points Loyalty Commerce Platform. In addition to this momentum on the core business, we continue to generate traction with our new Points Travel offering. Points Travel is an important new product for us, and we expect will become a meaningful contributor to our long-term profitability. Points Travel’s value-proposition is unique in the industry. In that it generates strong economics for loyalty programs, provides consumers with the ability to either earn or redeem loyalty program points or miles, and generates healthy economics for Points. We are excited about the enthusiastic response this service has generated since it was announced just six months ago. In that time, we’ve launched Points Travel with Lufthansa Miles & More, and La Quinta Returns, as well as more recently, Air France-KLM’s Flying Blue program. Flying Blue members are now able to take advantage of all of the benefits of our differentiated hotel booking service, including earning additional Flying Blue miles for hotel stays as well as redeeming miles or a combination of cash and miles for hotel stays. Beyond these three Points Travel programs, we have a very active pipeline and you can expect to hear about additional Points Travel launches going forward. With compelling value for loyalty programs as well as members, we are very enthusiastic about the impact that Points Travel service can have on supporting our growth in non-principal revenue and increasing profitability. Our other exciting new offering is the Points Loyalty Wallet, which is set our platform capabilities accessible via APIs that allow loyalty programs, merchants and other interested businesses to embed balance tracking and fully-managed debit and credit transactions directly into their product offerings, whether they be on the web or Internet. Through the Points global network of loyalty programs, merchants and apps, the Loyalty Wallet will seamlessly integrate into everyday transactions, deliver personalized relevant value to consumers and connect programs to their members like never before. We are making progress developing new functionality and growing relationships with respective partners. During the first quarter, we completed our integration with App in the Air, the personal travel assistant and flight-tracking app, through which Points will power the app’s loyalty section, enabling users to register, track and transact between their favorite travel-loyalty programs. As a result of our innovative approach in technology, we’re also seeing significant interest from our loyalty program partners in utilizing the Loyalty Wallet to significantly improve their process of managing extensive bilateral exchange relationships with various industry partners. Our innovative solution will enable loyalty programs to much more easily add new partners to their network and also provide real-time member self-service transfers of points and miles between programs. We’re very excited about this application of our Loyalty Wallet functionality and see it as being a very clear example of how our platform continues to add strategic values to our partners. In fact, with our continued investment in advancing our core technological capabilities, we are able to broaden our reach more effectively and we’re pleased to see continuing innovation on our Loyalty Commerce Platform from third-party developers here in 2016. For example, just after the end of the first quarter, we announced the launch of an upgraded Delta SkyMiles Experiences auction website. This website was created by a third-party developer, Commerce Dynamics, by leveraging Points’ API to create a new way for Delta SkyMiles members to engage and redeem miles for unique events and experiences in entertainment, sports, food and wine within a compelling auction format. Also during the first quarter, Citibank launched its points exchange program powered by our platform which enables Citi ThankYou loyalty program members to transfer Points to 19 participating international travel loyalty programs all in real-time. Furthermore, in collaboration with Collinson Latitude, we successfully launched online earn malls for both Avios and the British Airways Executive Club programs just after the first quarter. These programs demonstrate the pace of innovation on our platform where increasing member engagement with our loyalty programs is enabled by our APIs providing fast and efficient access to our growing loyalty network, now including over 50 loyalty programs and representing over 700 million members worldwide. I’d like to now turn the call over to Christopher to tell you a bit more about our performance in the first quarter and where we’re headed.

[Christopher Barnard:]

Thanks, Rob. I think as you can see that our commitment to innovation on our platform is evident in our recent accomplishments. Principal revenue in the first quarter increased 13% year over year to $70.7 million, largely due to organic growth from our existing partners and fueled by increasingly effective marketing activities during the quarter. As Rob clarified, the year over year decline in other partner revenues to $2.8 million from $4.4 million was primarily due to the absence of the American Airlines US Airways Buy, Gift and Transfer services that we wound-down during the last year’s first quarter. We expect to see meaningful growth resumed by the second-half of the year. It’s clearly evident that we’re making progress leveraging the power of our Loyalty Commerce Platform to extend our leadership position around the world. In the first quarter, development efforts to advance our platform would focus on expanding marketing and merchandising capabilities designed to increase transaction and convergence. These ongoing enhancements support the drivers that will enable our business to scale efficiently over the years ahead. This begins with a continued organic growth of our long-term contracts for Buy, Gift and Transfer services; and will be complimented by success with our higher margin Points Travel and our multicurrency Points Loyalty Wallet offerings. At the same time, third-party developers are leveraging our APIs to gain access to the flexibility power and benefits of our Loyalty Commerce Platform to further promote loyalty transactions around the world. Rob mentioned recent examples of this progress with new value being added via Loyalty Commerce Platform to Avios, Delta and Citi loyalty programs. And we’re also excited about the launch of the Points Loyalty Wallet in the App in the Air app, the popular personal travel assistant and flight-tracking app. And we’re also looking forward to the pending launch of RBC’s new mobile wallet offering. Continued progress can also be seen with the recent addition of Air France-KLM’s Flying Blue program, as our third Points Travel launch in the past six months. While our Buy, Gift and Transfer business usually competes with in-house development, we’re extremely pleased with the transaction Points Travel is seeing as formidable industry competitors. With active discussions in a variety of stages with additional partners in our Points Travel pipeline, we’re confident we can keep our momentum going. This confidence comes from our unique position in the loyalty industry, as well as the competitive advantage of our Loyalty Commerce Platform offers. The Points Travel service is at the intersection of online travel agency industry and the loyalty industry to deliver a hotel booking service to our partners we start with a robust access to global inventory to our travel booking system, which is built off the technology we acquired in 2014 with our PointsHound acquisition. We’re able to leverage the team’s expertise and experience with multiple suppliers to access the same inventory as other third-party travelers during the years at extremely competitive wholesale rate. As evidenced by this morning’s announcement by Tirico [ph] one of our large wholesale suppliers, the OTA industry is very excited about the prospects of this new distribution channel for them. Where competitive advantage really lies though is with the embedded technology relationships and experience we have with other half of the equation, the loyalty industry. Either already connected or easily integrated each loyalty program has little to no operational responsibility in launching this valuable service for its members. They leverage the same contracts, reporting and transaction processing, that’s already generating hundreds of millions of dollars in revenue for the industry. Importantly, this capability, driven by our loyalty commerce platform, allowed us to both credit a member’s account with bonus miles for a hotel booking, or debit a member’s account in order to use miles to pay for the travel booking. Furthermore, our marketing processes are already integrated in their own to offer even more operational efficiency for the program. It’s this marketing regime that is also key for the programs. They want a branded solution that leverages their close relationship with their best customers versus the alternative of sending them to a third-party site for a smaller commission. Again, it’s this private branded solution that we have over decades of experience managing with our Buy, Gift and Transfer services. For the loyalty member, we are then able to offer a dramatic bonus for booking a hotel stay, with no additional cost compared to the rates they will pay elsewhere. And members can do all this in the proper context of the program that they are most engaged in. For example, Flying Blue/Point Travel integration allows members to earn an average of 5 to 10 miles per euro spent for their hotel bookings and all the way up to 20 miles per euro spent. In fact, a Flying Blue member recently earned 16,000 miles for €900 Las Vegas hotel stay for a value of 17 miles per euro spent. These bonus miles are instantly redeemable for a free flight or hotel stay. Additionally, a significant factor in Flying Blue’s choice of the hotel - of the Point Travel service is the ability to offer their members enhanced value by allowing them to redeem their miles in a combination of miles and cash on any hotel, a brand new reward that enhances the value of Flying Blue’s loyalty currency. By leveraging the program’s brand and distribution, we are able to allocate more margin to fund these large mileage bonuses, where that money would have otherwise been required to fund marketing. So in the end, the member gets value and a significant bonus. The programs gets more engaged member, while at the same time enjoying very attractive economics. A success out the gate with a robust pipeline indicates to us that our unique capabilities driven by the loyalty commerce platform are a formidable competitive advantage in an aggressive space with large travel industry players. As you can see, we have significant opportunity in all our key initiatives. So we remain optimistic about our top-line growth potential. From an operational perspective, we believe the long-term gross profit is an important metric in evaluating our performance. While year-over-year changes in both gross margin and gross profit this year are negatively impacted by the wind-down of American Airlines in the US Airways’ BGT products, which was recognized on an agency basis, we expect growing momentum over the next several quarters, not only in our core businesses selling miles, but also from Points Travel and the Points Loyalty Wallet to drive increases in both gross margin percentage and gross profit dollars. Therefore, while we expect gross margins to be consistent with our first quarter performance on a full-year basis during 2016, over the long-term we believe gross profit could begin growing faster the total revenue as these programs expand, as well as the positive impact on both gross margin percentage and gross profit dollars, and ultimately drive overall profitability. I’d like to reiterate that management is most focused on gross margin dollars that we are earning as a key operating metric versus the margin as a percentage over revenue. One unique aspect of our model is the vast majority of our marketing expense is borne by our loyalty partners and as such can be viewed as a factor of our gross margin percentage. In other words, the wholesale price we pay for our partner’s loyalty currency factors in a marketing expense that would otherwise have hit our income statement as our own expense. For this reason, this growth in total dollars we can earn that is most important to us and most indicative of our success going forward. In summary, we believe that our opportunity in the marketplace represented significant multiple [ph] of our current results. To arrive there, we start at our stable core business, 75% of which is supported by multi-year contracts. These contracts by the way, include Alaska Airlines, a long-time Buy, Gift and Transfer partner, who’s pending acquisition of Virgin America, we expect will further expand that program. Next, we had opportunities to grow our core business, where we have a proven track-record of continued improvements in targeted marketing activities. Then we add to these opportunities our new initiatives, Points Travel and the Points Loyalty Wallet, both of which we believe have financial performance profiles that are as large as our total gross profit last year. Looking at these factors together, we believe we have a long runway ahead of us, and are optimistically can continue to capture the leading share of the opportunity and expand our global leadership position. As we announced last month, after six months in the interim position, Michael D’Amico was named CFO of Points International. In his time with us, Michael has already become an instrumental part of our leadership team and we are very happy to have him onboard. So now let me turn the call over to Michael for a deeper look into our financial results.

[Michael D’Amico:]

Thanks, Christopher. As I review our results for the first quarter of 2016, please be reminded 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. Revenues for the first quarter totaled $73.6 million, up 10% from a year ago. Principal revenues were $70.7 million, up 13% from the first quarter of 2015. Other partner revenue was $2.8 million, a decrease of 38% from last year, as Rob and Christopher described. With an increase in lower margin principal revenue and a decrease in higher margin agency revenue, gross margin decreased to 13.9% in the first quarter, generating a gross profit of $10.2 million. From an operational perspective, we remain disciplined in managing our cost structure, while continuing to invest in scaling our business. Total operating expenses; which consists of employment expenses, marketing, technology and other operating expenses; were approximately $7.9 million in the first quarter of 2016, a modest increase from $7.7 million in the prior year period. As a reminder, while we generate the majority of our revenues in U.S. dollars, the majority of our operating expenses are incurred in Canadian dollars, and are therefore subject to currency exchange rate volatility. To minimize this volatility, we engage in foreign exchange hedging to provide certainty around future costs and are typically hedged out 12 months for approximately 50% of our total Canadian dollar based expenses. Excluding part-time and contract roles, we ended the quarter with 189 fulltime equivalent employees, up from 182 at the end of the fourth quarter and up from 175 at the end of the first quarter of 2015. Increases in personnel have centered around research and development to continue to expand our platform and products, and in other information technology personnel in order to deliver new products and services and to scale our processing capabilities. From a profitability perspective, adjusted EBITDA is an important metric for us and we consider it to be the key measure of our success in delivering ongoing profitability. As a reminder, beginning this quarter, we calculate adjusted EBITDA by taking net income and adding back the following items

[Christopher Barnard:]

Thanks very much, Michael. As you can see, we started 2016 on a solid footing. Based on our current view, we are confident in reiterating our guidance for the year. We anticipate revenue growth between 10% and 20%, and we anticipate adjusted EBITDA growth of more than 10%. In the first quarter, we made progress on our core Buy, Gift and Transfer businesses with new partnership relationships and strong marketing performance. We expanded our Points Travel with new launches and we continue to build out our ecosystem to broaden the reach of our loyalty programs and their millions of members. This clearly positions us for a strong 2016 and set the foundation for sustainable growth with increasing profitability in years ahead as we expand on our global leadership position. I’d like to ask the operator to please open the call up for questions now. Thanks very much.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Andrew D’Silva of Merriman Capital. Please go ahead.

[Andrew D’Silva:]

Hey, good afternoon. And just a couple of quick questions for everyone. As it relates to the OTA opportunity or better known as Points Travel, how do you have such certainty on the potential gross profit that can be generated through the pipeline at such an early stage? I’m just trying to understand what data points give you that clarity. And then just following up on that you signed up Air France-KLM recently, with Lufthansa signing up, a key component for you bringing them over the line, as they are essentially one of KLMs biggest competitors?

[Christopher Barnard:]

Yes. Hey, Andrew, it’s Chris. Thanks for the question. So I’ll answer the first part on our confidence in the model. It is still early days. These are all fresh out of the gate. But a few things point to that. One, the OTA business is actually pretty established over the last decade-and-a-half. So there are industry comps, comparables that we can base modeling off of. Secondly, we have a year-and-a-half now, little bit more of experience with the PointsHound consumer business that is obviously a very similar product, not a private branded product but a separate brand, but has conversion rates and average booking sizes and number of other metrics that we can base our model off of. And then, thirdly, I would point to, in our deals with these companies we do discuss and plan for marketing activity. And so, we can take traffic - we can take traffic expectations based on those marketing activities, and then in part through our modeling conversion rates in average booking sizes and whatnot. We really think the main advantage of the product is, as I mentioned earlier in the prepared remarks, the relationship we have with these loyalty programs and the fact that this is all being done in a private branded environment, where that loyalty member is being directed sort of inside of the Flying Blue, Air France-KLM experience or the Mile & More or La Quinta experience.

[Andrew D’Silva:]

Got it. And then, was - I mean, can you give a color on KLM coming on? Was that prompted at all by Lufthansa joining earlier or is this kind of a two separate situation?

[Christopher Barnard:]

I mean, we wish these are really, really fast sales cycles. But we’ve been in discussions with most of our partners now and they are much more just a coincidence of the sales process that they landed near the same time.

[Andrew D’Silva:]

Okay.

[Rob MacLean:]

It’s Rob. I’ll just add a little bit of commentary. If you recall, we announced the last quarter that we had extended our relationship with KLM-Air France. And as we provided commentary on those extensions in the past, much of those discussions lead to situations where we’re saying, hey, this is great, let’s extend the relationship and it provides us opportunities to bring in new products and new opportunities to work with our partners and this is a perfect example of that.

[Andrew D’Silva:]

Okay, great. Thanks for the color on that. And then, just lastly, as far as the pipeline for Points Travel goes, it’s been noted about $40 million in gross profit. Where does the pipeline stand today now that you have three partner wins that you’ve announced? And then, is the majority of the pipeline existing partners that you’re currently working with some capacity that are - or is it new partners that aren’t running any of your offerings, that are just interested in this particular product? I’m just really trying to get a sense of the potential customer dynamic in your pipeline right now.

[Christopher Barnard:]

Yes, just back to the pipeline, I think if you’re going off our latest IR presentation off the website. We had announced both Miles & More and La Quinta, and we’d actually announced that we had a partner signed, one of our current partners, which obviously was KLM-Air France. So our pipeline remains very robust in that same range. And to the second part of your question, Andrew, it is a combination of current partners that we’ve done business with and are already integrated into our platform, which obviously is one of the key advantages that we have in the sales process. But there is a healthy number of opportunities in there on that new partners that we’re sort of leading with that as - with the first opportunity they’re representing as the advantage of integrating into the platform.

[Andrew D’Silva:]

Is the sales cycle, I mean, just from covering the company for a while, it seems like the Points Travel sales cycle is a little quicker than your Buy, Gift, Transfer. Is that largely due to the fact that the customers that have signed up are existing customers that are familiar with you and your platform to some extent?

[Christopher Barnard:]

Yes.

[Andrew D’Silva:]

Okay. Great.

[Christopher Barnard:]

Again, that’s one of our main advantages as I mentioned, not only just from a technical point of view, but just from a systems, reporting, reconciliation and marketing processes. Marketing these hotel room opportunities is not dramatically different than the other kinds of marketing that we do with the partners, so that definitely speeds up the process.

[Andrew D’Silva:]

Got it, great. Hey, thanks for the answers, and good luck going forward, guys.

[Rob MacLean:]

Thanks, Andrew.

[Operator:]

The next question is from Drew McReynolds of RBC Capital Markets. Please go ahead.

[Drew McReynolds:]

Thanks very much. Good afternoon. Christopher, just on the - all the announcements, I think we’ve seen on Points Travel and Wallet. And I’ll just call it the loyalty currency platform related stuff. First question is, it seems as if - and I may be reading too much into this, but you guys are sounding a lot more optimistic or willing to comment more optimistically on the growth outlook here. Is that a function of things gaining traction a little ahead of maybe what you expected three and six months, or is it just a timing thing where it just took you some time to put all the pieces together and now you’re layering or loading on the platform with customers?

[Christopher Barnard:]

Yes, Drew, thanks for the question. I’d say, it’s probably the latter. We’ve been investing in the platform and building out this capability and going through our sales efforts. With more or less proof of concept out of the way on the travel side for sure, with three signed deals up and running and a robust pipeline that we have confidence in, and a model that has lots of precedent against it. I think that’s where you are seeing some of the confidence in the communication there. And on the Wallet, while it is still - it’s a newer incarnation than the Points Travel and certainly doesn’t have the industry precedent that the travel booking historically has in the loyalty industry. We just think it’s being so well received in our discussions with third-party developers and kind of non-loyalty distribution channels, as well as the loyalty programs that are integrated in the platform. And we have some proof of kind of product market fit out there, that we’re obviously getting increasingly confident in that new product as well. And I would highlight, Rob mentioned in his comments that some of that interest is coming from our loyalty program partners, as they see it as a solution to solve some of their current operational issues in dealing with their bilateral industry relationships, which again is a leading candidate for sort of some of the early opportunities with the Wallet, is to put it into our partners’ channels to help them deal with their bilateral relationships.

[Drew McReynolds:]

Yes, yes, okay, that’s helpful. And in terms of just from a reporting standpoint, presumably - where a lot of the revenue contribution from this as it ramps up, presumably, all or most of that will flow through other partner revenue overtime. Is that correct?

[Christopher Barnard:]

Correct.

[Drew McReynolds:]

Okay. And…

[Christopher Barnard:]

Both of those product lines, Drew, will be net accounted for, so relatively high margin activity for us, so one of the things that influences our margin profile going forward.

[Drew McReynolds:]

Yes, yes, now understood. Okay. And just switching gears a little bit, certainly the EBITDA in this quarter exceeded our expectation and there is obviously a little bit of quarterly volatility over timing. Just wondering at all if you can provide within your greater than 10% EBITDA growth range, do we see a couple quarters here where you may gap down in EBITDA just due to timing or is Q1 kind of indicative of kind of some year-over-year pressure at least maybe in the first-half of the year?

[Christopher Barnard:]

As we pointed out we expected - the Q1 went as we expected. We had guided some of the nuances on a year-over-year comparable basis. But we were pleased with the way Q1 went. And I think as we mentioned, we can see the performance improving over the course of the year. But we’re still confident in the guidance of greater than 10% EBITDA growth.

[Drew McReynolds:]

Okay. And maybe two final quick ones here. Just on share repurchases, just wondering - just remind us in terms of free cash flow priority, where they would currently rank. And then, on the acquisition front, just if you can provide an update on whether tuck-in acquisitions, strategic acquisitions make sense as you look around the landscape or are you pretty comfortable with what you built organically and mainly focused on leveraging that platform?

[Rob MacLean:]

Hi, Drew its Rob. From the NCIB or the share buyback, as we announced at the year-end, we have reinstituted that program for the remainder of 2016. So you will continue to see us active. We were active in the marketplace for the non-blackout periods in the first quarter. And we’ll - as soon as this blackout period ends, you will see us active in that again. So it’s a matter, of course, for us now, stock at these levels, we feel like it’s just a good return for shareholders. Turning to the second question, just remind me around acquisitions, we’ll remain opportunistic on acquisitions. As you know, with the Crew Marketing and then with PointsHound, with both of which we’ve been extremely pleased with how that integration is gone. So we’ll keep our eye out for those kinds of acquisition opportunities, but they will be as you described them, more likely tuck-in type propositions.

[Drew McReynolds:]

Okay. Okay. Thanks very much. Thank you.

[Christopher Barnard:]

Okay. Thanks, Drew.

[Operator:]

This concludes the time allocated for questions on today’s call. I would now like to turn it back over to Mr. Rob MacLean for closing remarks.

[Rob MacLean:]

Great. Thanks very much to everybody for joining us. We’ll look forward to speaking with many of you on the road over the next little while and continuing the success that we’ve started here in the first quarter. Thanks very much and goodbye.

[Operator:]

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.