Points.com Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Mar 2017

[Operator:]

Greetings and welcome to the Points International Fourth Quarter and Full-Year 2016 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’d 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 fourth quarter and full-year 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 question. 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 2016 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. 2016 continued our history of generating positive EBITDA and expanding our global footprint. It also was an important year for Points and our efforts to diversify the business as we look to the future. Starting in 2001 in partnership with the loyalty industry, we were the first Company in the world to commercialize the ability or individual consumers to purchase miles and points from their favorite loyalty programs. Over the last 15 years through prudent investments we've built a very stable global business around this innovation. Now leveraged by over 30 loyalty programs globally this expanded service generates baseline economics for us of approximately $20 million in annual adjusted EBITDA. As we will highlight today, we can continue to see tremendous opportunity to build on our industry position by expanding existing deployments and growing to new partnerships and new geographies. A couple of times over our history industry consolidation has significantly impacted our short-term economic. Most recently at the end of 2014 the merger of our long time partners, U.S. Airways and American Airlines took a significant amount of revenue and gross profit from our trajectory. Despite this we continue to grow and our ability to do so is clear proof of the value of our previous investments on our Loyalty Commerce Platform and the stability of our business. That being said, we took this dynamic cohort and made two strategic decisions. First, we locked in many of our large partnerships to longer-term relationships in a prudent effort to give us both stability and visibility while as we've discussed these came with revised per unit economics this new stable baseline of gross profit has allowed us to prudently establish our focus on strategically investing our cash flow into new services that will diversify our business. Second, we focused these investment dollars on opportunities that one, leverage our numerous company assets, two, build up our unique industry position, and three, represent significant market opportunities that we expect will enhance both our growth rates and margin profile. While these two decisions have affected our operating leverage over the past number of quarters, we are seeing these investments begin to validate the opportunities we've been focused on. To build of our stable core of currency retailing, our Company's continued growth will now be bolstered by the higher growth rates and margins of our Points Travel services and growing stable of platform partnerships. In Points Travel we've identified a large segment of the hotel booking market to which we can offer unique value. We leverage 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 and makings can do their current relationships. Points Travel enables these large players to accomplish this goal. We believe this market opportunity represents several $100 million of gross hotel bookings today and has the potential to grow to over $1 billion in annual gross bookings over the next five years. Built off our successful acquisition of PointsHound, which was entirely funded from our cash flows, we’ve developed an innovative technology platform and created a business model leveraging our knowledge and belief in the power of our partners’ loyalty program. As I look to assess our progress on this opportunity, I'm pleased with the developments on several fronts. Our success in acquiring seven new relationships over the past 18 months combined with a strong pipeline of discussions is very positive. Additionally, very early we are pleased with a recent performance trajectory of our key deployment. I am also excited that we are in advanced stages of establishing a strategic relationship with Expedia. We are finalizing an agreement and principal to tackle this exciting market with our combined product, sales and inventory assets. We believe this to be one of the best ways to accelerate our market presence and what is clearly a competitive environment and are pleased to be working towards a partnership with the travel industries leading online travel agency. While we have considerable work ahead of us to achieve our objectives related to Points Travel, these early developments provide us with compelling evidence that suggests we are on the right track with this strategy. While this business line is currently still in an investment phase, we expect Points Travel to be accretive to adjusted EBITDA by 2018 and beyond. The second newer business opportunity that we are pursuing is designed to leverage the substantial platform asset that the Company has developed in recent years. The Points Loyalty commerce platform is connected to a growing list of now over 60 leading international loyalty programs that allows us unique access to the loyalty industry and approximately one billion members in the most popular and sophisticated loyalty programs in the world. To capitalize on this asset, we’ve directed our investments towards creating integrations that encompass transaction and fraud management functionality, unique marketing and data analytics capabilities, security and privacy tools as well as leverageable legal contracts. Access to these capabilities is efficiently available through our growing portfolio as externally facing APIs. Our platform partner strategy is focused on leveraging these proprietary assets and 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 have over 15 companies accessing the loyalty industry via our LCP. In fact this portion of the business already represents a material percentage of Company gross profit and will be close to breakeven this year on an adjusted EBITDA basis. Leveraging our harden platform assets on behalf of shareholders to create value is an obvious path for Points to pursue. By making our unique access to the loyalty industry available to other smart companies and innovative offerings, we are convinced we can continue to create value for all stakeholders. So simply put our strategy is to grow our core business while continuing to diversify our revenue streams by leveraging the Company's unique and substantial asset. It's worthwhile noting that we've been able to execute this strategy while managing an appropriate balance of important, but sometimes competing shareholder interests by continuing our longstanding track record of EBITDA profitability, not burdening our balance sheet with any debt, avoiding shareholder dilution and returning capital by way of a share buyback program. Going forward, we will be giving you more detailed insight into how our performance breaks out by these lines of business. I’ll now turn the call over to Christopher to give you more insight on our recent performance.

[Christopher Barnard:]

Thanks, Rob. As Rob indicated, our core currency retailing business has been highly profitable, enabling us to use a portion of this income to invest in longer term opportunity. To provide some additional clarity on these dynamics, starting with our Q1 2017 results, we will be highlighting the results of both core loyalty currency retailing or our BGT services, and our two new initiatives, the Points Travel service and Platform Partnerships where our Loyalty Wallet plays a key role in bringing third parties onto the Loyalty Commerce Platform. We believe that will offer a clear view into both how we operate as well as opportunities we are pursuing. Since our last call, we've made progress across each of these three focused areas. First, on our currency retailing business, as Rob mentioned, this business contributes approximately $20 million of adjusted EBITDA. Furthermore, while certainly a lower margin business, we have locked in a longer term contract in order to establish a stable and economic base as possible going forward. The business however is not without a changing dynamic. For example, last week Hilton, a large partner launched a feature allowing members to book rooms with a combination of cash and Points in certain circumstances. And this may temper the need to purchase additional Points for some members in certain situations. We had extensive experience with this alternative as over a half our loyalty program partners offer verge of this feature alongside our BGT service. And while in some scenarios, we have seen a different demand. We have historically returned to growth in a relatively short period of time. Accordingly, we have built in this dynamics into our 2017 expectation. We are proud of recently launched our full BGT suite of services with Copa Airlines, Central America's leading carrier and are very pleased with initial momentum. Also new over the period with initiative with Air Canada's Altitude program that these selling a lead tier qualifying miles for them on a targeted promotional basis. Additionally, we have signed partnership agreement with Canada's WestJet to enable WestJet rewards members to get more engaged program and will be announcing details in the coming weeks as the program launches. As you can see, we continue to see opportunities in our pipeline to add new partners on to the service and these three recent wins are a good indication that our historical momentum of regular new partner edition continues. Now turning to Points Travel, as you know we have invested in the strategic area in order to appropriately tackle what we confidently consider a significant market opportunity. Efforts into 2016 were two fold. First, we focused more resources on bolstering the five deployments we have in market. Higher focus on investment in marketing and ongoing product development has enabled us to tune the appropriate mix of promotional and product levers to drive accelerated growth in this vertical. These efforts and results are continued in 2017. Furthermore, we extended the product offering by adding a car rental option to the service and this adds incremental opportunity for us going forward. Our second focus was on the business development area and we have been extremely pleased with our progress. In 2016, we were successful in launching five loyalty program partners on to the Points Travel platform and are excited to have confirmed two more partnerships heading into 2017. We feel it’s a strong indication of both the demand and the market fit for the service. Continue our track record, degreed in terms of the regional European carrier and especially excited about our most recent Points Travel partnership with all All Nippon Airways. Not only as ANA, Japan’s largest carrier, but opening up a brand new relationship in a market as complex as Japan is a clear indication of both our growing capabilities as well as the strength of our offering. We're very focused on immediately leveraging the experience we've gained from our end market deployments to ensure that ANA gets off to a strong start in 2017. We will continue this process of refinement with ANA and with future partners to ensure we have the best possible opportunity to succeed. More information on this important new partner will be available post official launch in the near future. Our pipeline of new business prospects remains deep. We continue to look for ways to enhance further. Partner relationships are a key aspect of this strategy. We already have great relationships with industry leaders like Tourico Holidays and the Expedia Affiliate Network on the wholesaler side, wholesaler supplier side and are planning on adding additional large scale inventory to this list shortly. In an effort to expand our reach and enhance our business development capabilities, we are excited to be deepening our relationship with Expedia on the business development front as Rob highlighted earlier. Our third group platform partnership where the Points Loyalty Wallet is a key enabler has also been an investment area for us over the past few years as we have leveraged the Loyalty Commerce Platform to add value to a range of external developers. Along with our option and earn them all partners our work with Chase and Citibank, newer loyalty partners also contributed to the growth in this area. Unfortunately, our newer partner RBC has recently made a decision not to proceed with enhanced functionality for mobile app and that included our loyalty services. While this is certainly disappointing for us, we continue to make progress in our efforts to attract new partners and we now have over 15 companies tapping into the unique capabilities and access offered up by our Loyalty Commerce Platform in order to drive incremental value to their programs and members. A specific note with a recent launch of Choice Hotels to leverage the Loyalty Wallet service in their own channels in order to better manage exchanges from Choice Privileges into 12 industry partners. What was previously a complex task of managing dozens of different one-to-one relationship is now streamlined efficiently through the LCP. Additionally, Alaska Airlines taking advantage of the same service to efficiently manage their integration of newly acquired Virgin America program. We continue to see more of these types of industry opportunities and are focused on the strategy ensuring that the LCP is a key element of the global loyalty industries transaction infrastructure. In addition, we are excited about our continued progress in moving other opportunities in travel, retail and the financial services verticals through our pipeline. A number of these large late stage opportunities are now in front of our loyalty partners as we progress towards finalizing launch plan. We are encouraged this line of business to expect to be almost breakeven in 2017 as a result of our investment and progress over the last number of quarters. As we've discussed on previous calls many of our new opportunities come from the international market. In this context, we believe the China is a substantial opportunity over the long-term given that size and economic growth rate. For that reason we made a minority investment in China rewards, the Shanghai based loyalty start up three years ago. In order to mitigate our risk, we co-invested with another loyalty industry leader Aimia and we're focused not only on maximizing investment, but also learning as much as possible about the Chinese market in order to benefit our own business opportunities there. While we establish partnerships with Shangri-La Hotel and Hainan Airlines over that time, unfortunately our China awards investment has not panned out as planned. Along with Aimia, we have also chosen laid off our investment at this time. Going forward China remains an important component of our international growth strategy and our intention going forward will be to leverage our early success to new partnerships and continue to investigate the appropriate operating model and perhaps operating partner needed to capitalize on the significant market opportunity. I'll now turn the call over to Michael. So you can walk through our financial results in more detail.

[Michael D’Amico:]

Thanks, Christopher. As I review our results for the fourth quarter and the full-year 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. Revenue in the fourth quarter was $82 million, an increase of 2% from the previous year. Principal revenues were $78 million up 1% from the fourth quarter of 2015. Other partner revenue primarily made up of agency revenue was $3.9 million, an increase of 23% from last year. Gross profit, which is becoming an increasingly important metric for us, was $11.9 million at 20% increase from the previous year. We believe that this once again shows the ongoing stability of our currency retailing business as our marketing and merchandising efforts continue to show results. Importantly fourth quarter growth also had a meaningful impact on gross margin defined as gross profit as a percentage of total revenue, which increased 210 basis points from a year ago to 14.5% and we anticipate approximating this level on an annualized basis in 2017. Total operating expenses, which consist of employment expenses, marketing, technology and other operating expenses were $8.8 million up an expected 14% in the fourth quarter of 2016 compared to $7.8 million in the year ago quarter much of this increase can be attributed to Points Travel initiatives that Christopher highlighted. From a profitability perspective as Rob and Christopher discussed, we consider adjusted EBITDA to be an important metric and we view it as a key measure of our success in delivering 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 loss, share based compensation expenses, and for the current year, the write-off of our investment in China rewards which is another non-cash item. On that basis adjusted EBITDA in the fourth quarter was $3.7 million, a 68% increase from $2.2 million during the prior year period. For the fourth quarter, we incurred a net loss of $3.7 million versus net income of $1 million a year ago, included in our net loss is a non-recurring non-cash expense of $5 million associated with the write-down of our investment in the China rewards retail coalition. Note that excluding this non-cash expense net income would have been $1.3 million up 38% over the prior year period. All in all, the fourth quarter of 2016 showed strong metrics, especially in terms of a record gross profit. For the full-year revenue was $321.8 million, an increase of 9% from 2015. Principal revenues were $309 million up 9% from 2015. Other partner revenue primarily made up of agency revenue was $12.9 million, an increase of 2% from last year. Gross profit of $43.3 million increase 2% from a year ago and all-time record performance representing gross margin of 13.5% compared to 14.4% a year-ago. Expense growth was managed to $33.5 million, a 6% increase and adjusted EBITDA was $12.1 million compared to $12.6 million a year ago and was consistent with the revised expectations we've provided last quarter. Excluding part time and contract roles, we ended the fourth quarter with 195 fulltime equivalent employees, up from 182 at the end of the fourth quarter of 2015. Increases in personnel have centered around partner relations, marketing and research and development personnel, as we grow our business and expand our ability to continue to scale. 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. Total operating expenses, which consist of employment expenses, marketing, technology and other operating expenses were $33.5 million in 2016, compared to $31.6 million in 2015 with the increase primarily due to investment and growth opportunities in our travel and platform partnerships lines of businesses. For the full-year we incurred a net loss of $1.5 million versus net income of $5.2 million in 2015, including the impact of the previously mentioned non-cash expenses related to the China rewards write-off. Note that excluding this non-cash expense, net income would have been $3.5 million. Turning to our balance sheet, total funds available, which is comprised of cash and cash equivalents together with short-term cash investment, security deposits, restricted cash and amounts with our payment processes totaled $67.5 million at the end of the fourth quarter. A 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 December 31, net operating cash was $14.2 million, a 51% increase from $9.4 million at the end of December 2015. 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 additions, the timing of partner and operating expense payments, and to a lesser extent our normal course issuer bid share repurchase program. During the quarter, we repurchased 293,970 shares of our common stock at an average price of $6.90 per share for a total of approximately $2 million under the normal course issuer bid. For the year our total repurchases were 428,228 shares at a weighted average price of $7.43 for a total of $3.2 million compared to repurchases of 439,094 shares at a weighted average price of $10.40 for a total of $4.6 million in 2015. Over the last two years we have repurchased and cancelled 867,322 shares at a total cost of about $7.7 million. The Board has approved the renewal of the corporation's normal course issuer bid for another year. Management will file the formal application for the renewal with the regulators and upon approval any purchases made there under will be subject to compliance with the requirements of the Toronto Stock Exchange and applicable Canadian and United States laws. Furthermore the Board is reviewing alternative that maybe available to the Company to accelerate this buyback program. I will now pass the call back to Christopher to review our 2017 guidance and to close of our prepared remarks.

[Christopher Barnard:]

Thanks very much Michael. As we've highlighted today our current strategy is highly focused on expanding our business and our profitability. In the past you provided annual guidance on revenue and adjusted EBITDA with our BGT business making up the vast majority of revenues and possibility. As you lay the foundation for much stronger growth from newer higher margin product, the contribution for these products to gross profit will be disproportionately large and their impact on total revenue. Given the different margin profiles not only of the three business lines, but also of the principal and agency transactions within the currency retailing group we believe that a focus on gross profit will serve to simplify our messaging and offer more clarity around our quarterly variances. Not only do we believe that it reflects our progress as an organization, but it's also more aligned with our focus of the management team. Therefore we will focus our guide metrics on gross profit and adjusted EBITDA. The metrics we believe ultimately drive shareholder value. For 2017 we expect both gross profit and adjusted EBITDA to grow up to 10% from 2016 level. As we highlighted, we anticipate our core currency retailing business. We will generate adjusted EBITDA approaching $20 million and contribute to fund 2017 investment in both Points Travel and Platform Partnerships. Our Platform Partners initiative approaching 20% of our gross profit is expected to be close to breakeven on an adjusted EBITDA basis in 2017 and represent a very compelling option for the Company. Finally, given our unique market position with assets in place tremendous early traction on business development going ties are strategic industry players like Expedia and a large proven high margin global market and travel booking space. We are more confident and are ongoing investments in this space is by far one of the best ways we can allocate shareholders' capital. We look forward to building on the separation of business lines and updating you on our progress this way more formally starting with our upcoming Q1 2017 result in May. I’d now like to ask the operator, please open the call for questions. Thank you very much.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Drew McReynolds with RBC. Please go ahead with your question.

[Drew McReynolds:]

Hi, thanks. Thanks very much. So I guess Rob or Christopher or Michael, so just on the revenue growth guidance and I'm not sure I fully understand why that wouldn't be provided and obviously it's formally not being provided, but can you give us a sense particularly on the BGT business? What kind of organic growth you are expecting from existing partners?

[Christopher Barnard:]

Hey, Drew, it’s Chris. Yes, as we pointed out with the new products being very high margin and within the currency retailing or the BGT business, there are mix between agency and principal. As we've talked about in the past, we really focus here on the gross profit line as the driver of the business and thought that would be the best way to provide guidance to the market going forward. And so we've chosen not to since quite a message think you can breakout our anticipated revenue by looking at the profit numbers and the gross profit numbers, the adjusted EBITDA number and the gross profit number. I think in Michael's prepared remarks, our Q4 gross profit margin and it around mid 14%, expect that to continue roughly in that level for 2017.

[Drew McReynolds:]

Okay. So far as to look at the organic growth again just in 2016, the BGT business on revenue of 9% and if historically said that's double-digit, is that not a sustainable rate in 2017? I'm just trying to gauge what’s the underlying organic growth in that core business?

[Christopher Barnard:]

Yes, again I think as we talked about it before, our average kind of same-store sales by partner, average is around that and obviously it did in 2016 given the dynamics in the industry that we've talked about. The growth may vary from there. So from the line of business perspective though, we're trying to be very clear on, we’ll be giving more granularity to that on a per line of business coming in Q1 disclosure period and there's a whole bunch of accounting principles guiding us on that side.

[Drew McReynolds:]

Okay. And just in terms of the disclosures just want to clear - just on Q1, you won’t be given both revenue and EBITDA on a segmented basis by those three segments that you pointed out?

[Robert MacLean:]

Correct.

[Drew McReynolds:]

Okay. When we shift gears here, just in terms of the ramp up on Points Travel and the Expedia - potential Expedia relationship, you have talked about in the past $40 million gross margin potential. Can you just kind of tell us if that's changed at all or how that's evolved? How the ramp up is expected to go in 2017? And then can you kind of drill into exactly what you're doing with Expedia to bolster the business?

[Robert MacLean:]

Yes. Drew, this is Rob. I'll try to break that down on a couple of fronts. I think we remain very optimistic about the potential on this business, the $40 million plus in gross profit opportunity, absolutely remains out there is anything we continue to see opportunities for that to grow, obviously a competitive marketplace and where we're pushing hard to knock that down. We're pretty pleased with the program through 2016 on that and I think in my prepared remarks, I tried to highlight a couple of key things and I think it's important in terms of how we assess the performance of Points Travel. I look at the business development process where we signed and launched five deals in 2016. And as Christopher noted, subsequently announced or in the process of announcing and launching ANA and then one more European player. So one of the things I look at in terms of potential on the Points Travel business is are we having success in the marketplace and feel very good about that based on the last 12 to 18 months as demonstrated by the success on the pipeline. Second thing as I mentioned, we're constantly assessing how are the deployments performing and seeing some pretty good results early, but good results on the deployments from key accounts that we have out in the marketplace today. And so those two things are critical to us assessing the $40 million opportunity plus/plus. And you mentioned Expedia, and mentioning Expedia at this stage is a bit atypical for us and I want to acknowledge that. We did feel that we needed to have that conversation or expose that on the call today really for two reasons. When I think about shareholders and our interactions with shareholders, I think there are question of us clarifying the profit motive or profit deliverables on the core business, which we talk about being in and around $20 million of adjusted EBITDA. And so again we're going to be as transparent as we can possibly be on where we're investing capital on things like Points Travel and therefore, we should be in a position to assess for shareholders how we're doing in those environment. So we thought mentioning where we are with Expedia, which is in later stages of a commercial agreement where we will be working on business development efforts together. I wanted to convey that really to give indication to shareholders that, it's another sign for us that we're on a rant right track, when you have the most significant online travel agency in the world in our view engaging with us to work together from a business development standpoint and this opportunity is really a very positive sign in terms of us being on the right track from a Points Travel standpoint. I think the second item there and again in relation to transparency, the nature of joint selling is that we will be out in front of partners in the not too distant future and that's obviously in public domain and we just didn't feel comfortable that that would be kind of creeping information for shareholders that we might hear from - via partner or to so. Well it's atypical for us to announce that at this stage we thought those two drivers were important in terms exposing the Expedia discussions to-date and obviously gotten their permission to do so. So that's really what I'm prepared to talk to you on Expedia, a good sign that we're on the right track and it will be out there in the market. We’re working together in the near future, so more details to come as we finalize that deal and offset all them for you.

[Drew McReynolds:]

Okay. And just I haven't gone through all the documents, but in there you talk about the “Platform Partners” initiative, 15% of gross profit breakeven on adjusted EBITDA. What exactly is that encompassing?

[Christopher Barnard:]

Yes, it’s Chris again, Drew. So Platform Partners really any group of partners that are taking advantage of the Loyalty Commerce Platform to get access to the loyalty industry through our platform. It encompass things like our earn mills and auctions that are all provided by third parties that encompasses another third parties like that we announced in this release, Choice Hotels using the Loyalty Wallet portion of that functionality to power some of their bilateral exchanges as well as Alaska Airlines integrating their new Virgin America acquisition through the platform and using the wallet technology as well. So if you think of the three kind of groups that we’re trying to simplify the message for people, the core BGT or currency retailing driving a lot of the profitability. We have this new Points Travel, which we're very obviously bullish on with some of the new industry partnerships and then other third parties accessing the loyalty industry through our platform is really where the platform partnerships comes into play.

[Drew McReynolds:]

Okay. So that third bucket is that 15% of gross profit?

[Christopher Barnard:]

Yes, it is. And as we said it will be approaching breakeven from an adjusted EBITDA this year and our current expectations.

[Drew McReynolds:]

Okay, thanks. I'll leave it there. Thank you.

[Christopher Barnard:]

Thank you.

[Operator:]

Our next question is from the line of Andrew D’Silva with B. Riley. Please proceed with your question.

[Andrew D’Silva:]

Hey. Good afternoon. Thanks for taking my questions. I got a few of them here. First of all maybe going back to that growth rate that you're seeing obviously before you're saying its plus 10% typically, what was it actually for principal revenue in 2017 on a year-over-year assuming a steady state scenario for partners that you've had for the whole year. Obviously you have some churn and I don't want to count that as one look at the growth rate, but one-year existing partners from 2015 to 2016?

[Michael D'Amico:]

Yes. I wouldn’t break it out on a kind of an agency and principal basis, it basically tracks around that 9% to 10% is what we saw in organic growth in 2016 and it was pretty stable to what we saw in 2015 and I'm looking back into 2015 numbers at this point, but generally speaking on that, Andrew you're in and around that high single-digits approximately 10%.

[Andrew D’Silva:]

Are you seeing changes in your ability to have peg visibility on that going forward? It seems like there's a lot of new shifts in the market from a technological standpoint, you mentioned the Hilton cash offering, is that kind of things that you're seeing making it more challenging right now or is that just not the right assumption.

[Robert MacLean:]

Well, a lots of moving pieces for certain and as Christopher said, I think our view is from an investor's standpoint and from a public market standpoint gross profit, one a little - we peg some of the volatility out of the accounting treatment of net versus gross ahead of the predictability on the business and I know that's been a frustration for some of our coverage. So when we think about how do we give good or better visibility for partner for the analysts and for investors focusing on gross profit, take some of that volatility out of the equation. So some of that contributes to our decision, but really it’s all based on, let's get to something that we can be a bit more predictable for the markets on. And as you've known for some time it's really how we manage the business is really against the gross profits as opposed to topline revenue.

[Andrew D’Silva:]

So what would you be disappointed in then because you said up to 10% growth that could be also 10% decline year-over-year, I mean what are you expecting as a low...?

[Michael D'Amico:]

It's a good point. Our expectation would be a positive not, so not negative.

[Andrew D’Silva:]

And when we think about your renewing contracts with principal partners going forward? Should we continue to expect that there be diminishing margins over time? So you have as of your last time you noted 75% of your contracts are multi-year contracts. Now say some of those 75% of those contracts renewed for another three, five-year term. Are you going to expect those margins to continually compress or you’ve reached a trough in some aspect?

[Robert MacLean:]

Well, look I think our expectations is that that we're getting better and better as a business in terms of driving value to the marketplace. I think you saw fourth quarter, our gross margin percentage was up about a little over 200 basis points. I think in Michael’s prepared remarks that we would expect that to be kind of ongoing 2017 gross margin levels. So rather than getting into every deal, we're certainly looking at deals all the time and saying, okay. In certain cases we will get better margins. In certain cases, we may get into a longer term deal to be able to create stability and visibility in the overall gross profit that we're generating. But overall, we think as indicated by the fourth quarter that you're starting to see our gross margin percentage get back into the levels that we saw a couple of years ago and 200 basis points up in Q4 is a good sign. We would expect that to continue into 2017.

[Andrew D’Silva:]

Yes, but that's not 100% accurate right because your gross margin line only accounts for direct cost of principal revenue, correct? So it's not an apples-to-apples comparison because other partner revenue doesn't fall into your cost of goods line. So what's the - I mean you're trending like 10% on the GM line or the principle side of the business, is that something that we should be thinking is going to continue diminish over time because back - it was 15% and then went down to 12%, 10% and now for the year I think 9.9%. I mean that’s a trend now. Is that something that you're seeing and is that why you've invested so much in ancillary opportunities because you're thinking this business is certainly diminished dramatically or not.

[Robert MacLean:]

Yes. Fair point, I think when we talk about the 14.5% that we achieved in the fourth quarter, it is reflective of what you've described that we have seen some of that that trade that we've made in terms of long-term deals for unit economic recovery from the partners. I would describe that kind of core business as being relatively stable. So I wouldn't expect to be seeing any significant deterioration in that. Your second point though was a really important one that as we mentioned diversifying the revenue streams and really investing in business line that are much higher gross margin for us and much higher growth rates we believe and has been part of our strategy over the last [indiscernible]. So you're right on both fronts. We’ve seen that core business margins deteriorate. It allowed us to kind of - we've done that cautiously in a situation where we've enabled longer term deals and we've taken some of that profitability and built up new lines of business that we're seeing great positive influence on our gross margin activities. So stable on a core business going forward and growth trajectory on the two new businesses feels like a good approach for us.

[Andrew D’Silva:]

Okay, just a couple more quick questions here. Okay, so you have the loyalty commerce platform calling it about 15% or so gross profit. I think that's what you coined in your prepared remarks, I’m going to go over that later. How much of that growth was due to initiatives that were due to the investment spending that started in 2013 like Points Travel, one and then two, being the open Platform Strategy, are you also including like Points.com revenue that's been going on for like a decade now in that number as well?

[Christopher Barnard:]

Yes. Hey, it’s Chris, Andy. Some of that is Points.com revenue, but again we've moved all that over to the new loyalty commerce platform, a lot of the investment in the platform was to upgrade our capability, scalability across the board and again the platform runs all of our business. And so the other portion of it though are some of these new relationships like some newer model relationships like the new auction relationships that are all flowing through the new functionality that we've built. The Loyalty Wallet side that has - that is now driving the choice in the Alaska Airlines partnership propositions. We announced last year, again through the loyalty commerce platform at Citibank has popped on and developing a lot of their bilateral partnerships through our backend platform as well. And we’ve been through some point of sale technologies that we talked about again last year through Delta Air Lines lounges to redeem for certain things are all going through the open APIs that we've invested over the last couple years.

[Robert MacLean:]

Just I’ll jump in on the Points Travel for a second that and I think it is important to note because we did - as we look out into 2017 and if you're looking at our fourth quarter, I think part of your question is are we seeing some of the benefits in the fourth quarter of some of that investment Points Travel being different than what Christopher just walk through on the wallet and platform activity? I think that answer covered the platform. From a fourth quarter standpoint, pretty immaterial amount of activity on Points Travel, not really a big driver of some of that margin growth that we've seen. As I look forward and as I mentioned in my prepared remarks, we like what we're seeing in these early days here in the first quarter of 2017 on Points Travel and we know that is our much higher margin business, that’s approaching 100% gross margin business for us. So the investment in that side of the business have really translated more into our successes in the marketplace in knocking down new deals and now we're moving into that phase where we're starting to see the deployment operate that we'll see more of that influence in 2017. Our expectation on both of those just to reiterate we would expect the Points Travel business to be a fully EBITDA profitable business in 2018. And from a platform standpoint, we're already in 2017 approaching breakeven and kind of growth from there. So feel like those investments are turning into the right kinds of developments from a financial standpoint.

[Andrew D’Silva:]

Okay. I guess once you start breaking it out next quarter we’re going to have a lot more clarity because I mean that doesn't make any sense because if you had Points.com in there and it was doing that same amount of other partner revenue for a long time, I mean that would be a de minimis increase in actual revenue. So if you're baking in revenue that existed before that investment into here hitting your breakeven number, I mean that just doesn't tabulate well at least when I'm looking back and [indiscernible] here, but we'll talk about that offline. Last question I wanted to ask was I thought you guys are curtailing incremental investment spending and going to start showing more operating leverage going forward. Now it seems like 10% gross profit growth, 10% adjusted EBITDA growth no operating leverage. So what's going on there? Why did you change that messaging going forward?

[Michael D'Amico:]

I think as we talked about Andy, investment spend we still have some left to do in Points Travel side to the point on the Platform side, approaching breakeven in this year, I think shows that coming to an end. Rob mentioned that we see the Travel side being positive adjusted EBITDA in 2018. So that does entail that we’re still making some investments on the Travel side especially. And some of those are in product and functionality as we talked about bring our car and some new verticals, adding new wholesale suppliers, but also to the point of getting the deployments that are in the ground now to start growing that is an investment on the marketing and promotional side through this year as well.

[Robert MacLean:]

And I think part of what we are - and again we’re going to provide as much transparency on that as possible, but to reiterate what we said earlier, we have a good positive profit being generated out of the core business and based on the opportunities we see and again not trying to take a short-term approach to this, but take two core opportunities that are really leveraging the assets that we pull together as a business to change what we believe are significant opportunities validated by some of the progress we're seeing here in market with Points Travel and with some of the early financial results on the platform. So we're going to continue to be an investment company. We don't see that having to be a negative influence on our profitability over time just there is kind of practical investment cycle on two pieces of business that we think diversifies our revenue and expands our growth and enhances our margin profile and that's for the benefit of all stakeholders.

[Andrew D’Silva:]

But you're pivoting on what you were doing before because at the end of the third quarter when we talked you specifically said you're going to curtail incremental investment spending into 2017? And now it seems like that's not going on and whenever Chris talks to people, he just highlights, we have a lot of operating leverage in the business and my definition of operating leverage is revenue and operating income and that percentage rate right there. So you have a special version of that or you are looking at gross profit, adjusted EBITDA and you still say you're an high operating leverage company and then now you're showing 10% growth on your gross profit line and 10% growth in your adjusted EBITDA line up to when [indiscernible]. So you're just not really meeting that expectation. I mean you guys are seeing there, correct that that is an actual issue?

[Christopher Barnard:]

Yes, listen at the end of the day these are some new products that are in the marketplace and we're not going to - we're going to try not to get out over our [indiscernible] in terms of providing guidance on these products deliver on them, I'm telling you what it's doing today, which we done and we believe these are businesses that are good uses of our investment dollars.

[Robert MacLean:]

The objective at the end of the day, Andy is very clear. We're looking to do those investments to drive increase growth rate and improve margins on the business.

[Andrew D’Silva:]

All right. Good luck and I'll talk to you guys offline.

[Robert MacLean:]

Great, thank you.

[Operator:]

Thank you. This concludes today's question-and-answer session and also will conclude today's teleconference. You may now disconnect your lines at this time and thank you for your participation. Have a wonderful day.