Points.com Inc.
Q2 2013 Earnings Call Transcript

Published: 10 Aug 2013

[Operator:]

Greetings and welcome to the Points International First Quarter 2013 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Laura Bainbridge of Investor Relations. Thank you. Ms. Bainbridge, you may begin.

[Laura Bainbridge:]

Good afternoon, everyone and thank you for joining us today to discuss Points International's second quarter 2013 financial results. Joining me today on the call are Rob MacLean, Chief Executive Officer, and Anthony Lam, Chief Financial Officer. Before we begin, we would like to remind you that remarks on this conference call contain or refer to forward-looking statements within the meaning of Canadian and U.S. security 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 actions, 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 second quarter 2013 financial press release as well as other documents filed with the Canadian and U.S. security regulator. 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 will turn the call to Rob MacLean.

[Rob MacLean:]

Thanks Laura. Good afternoon, everyone, and thank you all for your participation on today's call. We are pleased to report that Points delivered another strong quarter, both financially and operationally. During the quarter, we continued to drive ongoing platform expansion, increasing transactional activity among existing partners as well as successfully on-boarding new products and partners, most notably welcoming Southwest Rapid Rewards. In addition, as I will discuss in further detail, we remain on track to meet our financial objectives for the year with 2013 revenues estimated to be in the range of $200 million to $220 million. Revenues of $42 million grew 15% over the prior year period, led once again by an increase in transactional activity among existing partners as well as the launch of new products and partners on our platform over the past 12 months. The result is strong 22% year-over-year growth in the first half of 2013. Total points and miles transacted across the entire platform total 3.9 billion, an increase of 12% year-over-year. This growth reflects strength in partner promotions during the quarter as well as strong activity associated with partners that have joined us recently. In particular, we continue to see solid performance with our core buy, gift and transfer products as well as traction with our newer Points Connect and select products. However, consistent with the trend highlighted in Q1, we continue to see slower performance amongst several of our European partners. Over the course of the second quarter and year to date, we've launched 12 new products and added three new partners, growing our platform to just under 200 products deployed across 60 partners. Most notably, we were thrilled to announce the launch of Southwest on our platform with the introduction of buy, gift and transfer to its millions of rapid reward members and even more recently the addition of Southwest to our Points Connect service. With buy, gift, transfer now successfully in market, we are fully engaged with driving that business, which we expect to be a material contributor to our financials and now as a participant in our points connect service, Southwest can offer an incentive program for small merchants and businesses, at which these businesses can directly reward their customers or employees with the airlines rapid rewards points. As you know, Points is committed to not only growing revenues for the loyalty industry, but also fostering increased loyalty program engagement and we continue to do so through the introduction of innovative products. Our Points Connect service is one such example of this. Southwest can now expand the reach of its program by building up building customer network under the rapid rewards umbrella. In turn by partnering with an established loyalty brand, merchants and businesses can attend to bias customers with rapid rewards points to drive their own revenues and customer engagement. We are thrilled with that the Points platform can be leveraged in such a way to deliver value for our participating program partners, merchants and businesses and their respective consumes. In addition to the launch of buy and gift and the SVM Fuel Links launch of Points Connect, which we discussed on last quarter’s call, we are pleased to announced that Malia Hotels now participates in the points.com loyalty, which enables it's members to exchange, trade and redeem their points online. This marks an extension of our previous partnership announced last year, offering its members the ability to buy and gift Malia Rewards points. We are pleased that the success of this partnership prompted Malia to further enhance its loyalty program with more of the unique products offered by Points. As is evident, the first half of the year is off to a strong start and as we look to the second half of the year, we are focused on executing our marketing and merchandising activities to drive the accelerated growth plan for this period. Our new partner pipeline remains robust with Points engaged in several active conversations with leading loyalty programs across a number of different verticals and geographies. We continue to see increased interest across the hospitality financial services and payment verticals as well as in fast growing international markets for consumer loyalty including South America and Asia. Given our performance to date and our expectations for the balance of the year we remain on track to meet our revenue guidance of $200 million to $220 million. This contemplates a meaningful ramp in the back half of the year and reflects the successful execution of our plans associated with recently added and existing partners. Importantly, prior to making investments against our strategic plan, we continue to anticipate EBITDA in the range of $10 million to $13 million. As we've discussed previously, over the course of the year, we expect to invest in the range of $2 million to $3 million in the continued innovation and expansion of our core business as well as advancing our open platform strategy. Before wrapping up, I will turn the call over to Anthony to discuss our [first] quarter financial results in more detail. Anthony?

[Anthony Lam:]

Thanks, Rob. As I review our results for the second quarter of 2013, please be reminded that all the numbers mentioned on our call today are in U.S. dollars and all the figures are presented in accordance with International Financial Reporting Standards. Total revenue for the quarter was $41.9 million, up 15% year-over-year, led by strong transactional growth from our reseller partners. Principal revenues accounted for all of this change, increasing 17% year-over-year. This increase more than offset a marginal decline of $89,000 in other partner revenue on a year-over-year basis. As we've seen in previous periods, the timing of promotional activity will impact quarterly performance. In the first quarter of 2013, we saw promotional activity drive strong principal revenue growth. In the second quarter of 2013, new partner launches were the primary drivers of growth. Gross margin dollars totalled $7.4 million, up from $7.1 million in the prior year period. Growth in the margin dollars was largely driven by revenue mix coming from our larger principal partners along with our recent product launches, which have an overall gross margin that is lower than the average. As a result, we finished the second quarter of 2013 with a gross margin percentage of 18%. As we've mentioned this on our first quarter call, with the addition of larger partnerships throughout the year, we can expect to see meaningful growth in gross margin dollars coupled with margin percentages in the discussed 15% to 20% range. I will now move on to discuss some of our key operating expenses for the second quarter. Total ongoing operating expenses, which consist of employment expenses, marketing, technology and other expenses, were $6.2 million. This was up from $5 million in the prior year period and reflects the continuation of the investments we started to make towards the end of 2012 in key roles and technologies as we advance our open platform strategy. Employment cost totalled roughly $4.4 million. This was up 21% from $3.6 million in the second quarter of 2012 and is reflective of the hiring of our key full time roles within our marketing, technology and product management teams. We ended the quarter with approximately 131 full time equivalents, up from 116 in the year ago period. We are committed to executing on our long-term strategy and attracting key talent for the organization will continue to be a focus throughout this year. Marketing expenses totalled $307,000, which was down from $334,000 in the prior year period. This expense line is largely related to the timing of marketing, public relations and promotional activities that vary from year to year. For the balance of 2013, we can expect to see this expense line range from $400,000 and $600,000 a quarter. Technology expenses totalled $323,000, which is up from $157,000 in the second quarter of 2012. The increase reflects a continuation of the investments we started to make at the end of 2012. As we continue to invest in people and our platform, you can expect to see this line item remain the same quarterly level of approximately $300,000 to $360,000 for the balance of the year. Combined with our recent partner and product launches, continued strength in our base line business has allowed us to advance spend on key areas in support of our long term strategic plan. In light of this, EBITDA for the quarter was $1.2 million, while this is lower than the $2.1 million posted in the prior year period; we are very pleased with our ability to generate profitability at the EBITDA level, while continuing to make meaningful investments in our growth opportunities. Amortization expense totalled $848,000 compared to $699,000 in the second quarter of 2012. This expense line includes a onetime adjustment as we move to declining balance -- as we move from a declining balance to straight line methodologies in 2013. This change in estimate has no material impact on our overall expense for the life of our assets. We expect amortization to approximate $800,000 a quarter for the balance of the year. Finally, the company reported net income of approximately $218,000 or $0.01 per share. This compares to net income of $1.3 million or $0.09 per share in the prior year period. As of June 30, 2013, total funds available, comprised of cash and cash equivalents together with security deposits, restricted cash and amounts with our payment processors, totalled $54.3 million, and we remain debt free. Net operating cash which we define as total funds available less the amounts payable to the loyalty program partners, totalled $13.4 million at the end of the second quarter and this was lower by approximately $2.8 million from the $16.2 million we saw at December 31, 2012, primarily due to the company's first [time] of its investment in China rewards. We are very pleased to continue to generate sufficient cash to fund our current and working capital requirements, as well as anticipated capital expenditures. Finally, we finished the quarter with shares outstanding of 15,202,067 and 15,502,189 on a fully diluted basis. Thank you all for your attention. I will now turn the call over back to Rob for his concluding remarks.

[Rob MacLean:]

Thanks, Anthony. As I outlined in our Q1 conference call, with our improved and record base line performance in 2013, and strong anticipated run rate exiting 2013, we've made the strategic decision to reinvest a portion of our incremental profitability in the range of $2 million to $3 million on a net basis to continue to drive innovation and expansion of our core business, as well as to advance our open platform strategy. Throughout the first half of the year, we've been successfully expanding the payment functionality of our platform with the introduction of PayPal being broadly integrated into many of our global product deployments. In addition, we continue to expand the distribution channels associated with our core products and have introduced additional offline access points to our products from many of our partners in recent months. We will also be launching our second mobile web optimized product, buy miles product in Q4. Visibility to have consumers engaged with our products via multiple touch points continues to contribute to our strong growth trajectory. We've also been very focused on evolving our platform to be an even more ubiquitous, loyalty commerce tool for partners across many verticals. Advancing our open and secure platform has been progressing as planned and ongoing development of our technologies designed to allow multiple third parties to connect and to operate on our platform in an efficient and secure manner is well underway. In fact, we are currently engaged with several third party product partners to participate in data programs in the third and fourth quarters. The second half of the year will see accelerated development of our open platform strategy and will continue to work alongside both our loyalty program and product partners to build a platform which creates value for all participants. Another area of progress during the second quarter was our investment in China. Undoubtedly, Asia as a whole and China in particular represents one of the most exciting markets for the loyalty industry over the next decade. As you will recall, late last year, we announced the co-investment with EMEA in China rewards, a start-up retail coalition loyalty platform based in Shanghai. While still early days, we continue to be excited by China rewards progress and prospects as both a robust business and as the key component of our China growth plans. China rewards continues to build on its relationship with China Union Pay, the world’s largest card issuer and we expect that this will be a key factor in attracting merchants to the platform. The ubiquitous brand presence that Union Pay also offers could enable a very quick ramp in consumer's option, once the program efficiently launches later this year. As a reminder we account for this investment as an equity holding. We continue to believe that spending focused time on the China market will open us significant opportunities. There are dozens of large and established loyalty programs across all sectors that we believe will benefit from Points' suite of offerings and having a growing local presence will be vital to our success there. While we will be appropriately flexible in our investment profile as opportunities arise, we view China as an important long term opportunity and are taking a prudently long term view. To wrap things up, the first half of 2013 is off to a strong start with Points delivering against its operational and financial plan. Over the first half of the year, we've successfully on-boarded several new partners, which are expected to be material contributors to our financial performance. At the same time, our pipeline of potential new partners remains robust. Through continued platform expansion in combination with product innovation, we are driving growth for both Points and the industry as a whole. We are confident, continued investments in both expanding our core business and advancing our open platform will further reinforce Points' position as a leader and enabler within the broader loyalty industry. We look forward to keeping you abreast of our progress and with that in mind, next week Points will be participating in the upcoming Canaccord Growth Conference in Boston. We hope to see many of you there. That concludes our prepared remarks, operator please open the call to questions.

[Operator:]

Thank you. (Operator Instructions) And our first question is coming from the line of Mike Malouf with Craig-Hallum. Sir your line is now open. You may proceed with your question.

[Mike Malouf:]

Great. Thanks guys for taking my question.

[Rob MacLean:]

Hey Mike.

[Anthony Lam:]

Hey Mike.

[Mike Malouf:]

I wanted to talk a little bit about the pipeline. I know you've talked about it being robust and I am just wondering is the close rate in the pipeline at the rate that you thought it was, you know may be a quarter or two ago when you continue to talk about how robust it was and now you are getting -- is the pipeline growing to the extent that you can talk about that, that would be helpful, thanks?

[Rob MacLean:]

Yes sure. I mean, I think the short answer to both of those questions is yes. In terms of close rates as we've said for a long time is increasingly the bigger account that we are chasing, the bigger opportunities that are out there really difficult to pin down exactly when these multibillion dollar organizations are able to pull the trigger by tracking very much where we would have expected it. Second point -- part of the question, in terms of size of the pipeline, we've indicated I think in the past that continues to be very strong. I would say it is -- when I look at the value of active conversations that we are in right now, I am seeing a bigger opportunity than we've ever had in front of us, no question about that. The kinds of deals, the reach of those deals, the scale of the deals and the number of deals are all -- we are very, very pleased with where that sits. So when I look at the pipeline, we've always been very optimistic in terms of the business. As you would know, we've talked publicly -- we think this is $2.5 billion to $3.5 billion market opportunity. So by definition, our pipeline needs to be very deep. Our active participation in those opportunities are greater today than they've ever been.

[Mike Malouf:]

Great. Thanks and then just one quick question on Points Connect, what is the -- how is the penetration of that product been, actually pleasantly surprised to see Southwest pick that up, but there are others -- is that part -- I know you've obviously have three part growth strategy, expanded the penetration of products as one of those. How is that particular penetration going on the Connect side?

[Rob MacLean:]

Yes, that's a great question. That product which we branded Points Connect really is our historically our corporate B2B platform. The demand for that product with partners -- new partners like Southwest and existing partners has been very strong over the last couple of years. I think we've got a dozen or more of those platforms in place -- those products in place from companies like Delta and American and Southwest and international players like [Air France] and others. So real good demand and again fundamentally their product is an extension of our ability to issue and sell more miles and points on behalf of the industry. It really provides a great platform to extend that from a retail standpoint all into a third party B2B environment. So it gives us and our -- and the industry a great opportunity to generate incremental revenues, engage more consumers, sell more currency, which we know is right in the sweet spot of what we are the best in the world at and so we quite like the prospects of that suite of products as well as quite frankly the penetration and the ability to get those in the market, lots of active conversations underway with that product today as well. So as you mentioned it's not only a product that we see being very attractive to net new partners, but it's also a number of conversations with existing partners that are interested in that platform/

[Mike Malouf:]

Great. Thanks a lot for the color. I appreciate it.

[Rob MacLean:]

Okay. Operator

[Pardeep Sangha:]

Hi. Thank you.

[Rob MacLean:]

Hey Pardeep.

[Pardeep Sangha:]

In the past, you mentioned that $300 million revenue run rate by the end of 2013, I didn't hear any of that mentioned today, is that still holding true?

[Anthony Lam:]

Yes, we are still right on track with that.

[Pardeep Sangha:]

Okay. Just with regards to the pipeline then, just a follow-on question on that, would you say that this -- like if can break it up, is there some percentage of existing customers versus new customers in your pipeline? I mean, existing customers meaning customers that you have that are perhaps adding on and bringing on newer services as opposed to just one or two products or services they are trying to add on additional services or is it just brand new customers that you don’t have previously? I mean just you can sort of characterise a bit of your pipeline in that sense existing customers versus brand new customers, that would be helpful.

[Rob MacLean:]

Yeah, I can’t provide -- I wouldn’t break it up percentage wise. What I would say certainly deep opportunities in both cases. So we see again a pretty decent footprint. As you know our business and it was Mike had mentioned earlier, when we think about growing that core business today is adding new partners into the network. It's having more of our successful products deployed, which is really the -- those are the two clutches to your question and we are seeing great progress on the pipeline standpoint on both of those. We know -- we've got about 200 products deployed across 45 loyalty programs. That gives you a sense that we've got on average three to four, four to five of our products deployed. We think the opportunity is to increase that penetration when those conversations are ongoing with our account management, relation management team, relation management teams all the time. And then a net new pipeline, as we extend particularly geographically we see good opportunities in Brazil that really have manifested themselves over the last 6 to 12 months. So we like what's happening there. The investment in China is opening up a market that we knew was going to take some time to develop, but we are seeing very good progress there, since the investment in China reward which was an important part of that strategy. And then just kind of our sweet spot with airlines, hotels payment systems, financial services, good conversations in all of those fronts. So again as I said earlier, I feel like when I speak with our business development relationship management teams, the active files and the value of those active files and the amount of economics that we think we can bring to the industry to those relationships is stronger today than it's ever been. So it's great.

[Pardeep Sangha:]

Okay. It sounds like you guys are firing on a lot of cylinders and things are going extremely well, what's sort of the risk with regards to timing of I mean some of these partnerships are very large contracts and what's the risk of timing of some of this stuff and not coming in on the timing that you are anticipating perhaps or like how do you feel about the risk of that impacting sales $300 million revenue run rate by the end of the year or do you feel the $300 million revenue run rate by the end of the year is pretty solid?

[Rob MacLean:]

Yes, I think if you recall how we've talked about guidance in 2013 and kind of what that does in terms of run rate exiting, the timing risk is more around to be frank -- more around the 2012 numbers right, because that is calendar driven whereas essentially sorry '13, essentially whenever we knock down deals and get them to market, as long as it happens in years and it's not dependent upon which months or which quarter when we talk about that $300 million approximately $300 million run rate. So there is always -- always risk and timing. We've known that for 10 years that we've been doing this, that it is hard to predict exactly when these big multibillion dollar businesses are able to martial their resources to launch. So that hasn’t changed at all in the last four or five years and as a result, we've tried to guide to the market in ways that took that risk out of the numbers that we put out into the public. So we are not dependent upon somebody landing exactly the day we would hope to be able to make sure we are filling progress on the growth of the business. So it's very hard to predict those guys I don’t want to repeat myself, but that's not new which is partly why we really stay active and keeping the pipeline very full and very robust and what we do have a good track record that is eventually we knock down a lot of deals and I don’t see that changing for a long time going forward.

[Pardeep Sangha:]

Okay. Thanks, that's it for me.

[Rob MacLean:]

Okay. Operator

[Joel Achramowicz:]

Thank you very much. Thanks for taking my question. Rob and Anthony I've really intrigued about the -- and was really excited about the program that you established with Southwest in the loyalty area. You call it the business incentive program and particularly because of the -- what seem to be the broad distribution of the opportunity for providing loyalty points to smaller businesses around the country and I think being in California we recognize that was certainly as being a very valuable currency, so I was wondering how that program is developing and how do you see Southwest airline is distributing that program and making people -- making merchants aware of that, so that in order to leverage the distribution and the gifting of points going forward.

[Rob MacLean:]

Yes, and that's really the Points Connect product that you are referencing there, that we've announced recently. At Southwest and I don’t want to speak too much in terms of their specific strategy but maybe I would respond to that question more around how that product works and how it's being used by many of our partners globally and it really is a platform that enables these big loyalty programs to bring on more third party businesses that are interested in issuing their currencies. I agree with you 100% that Rapid Rewards currency is extremely powerful. Very engaged customer base, a lot of members in that Rapid Rewards and I think what they recognize is that asset is something they can monetize but using a platform like our Points Connect platform, which would enable any number of businesses to be able to go in and use that currency on a self service basis, l use that currency of Rapid Rewards as an incentive to drive traffic into their respective businesses and whether that our car dealership or it's a carpet store or it's a big closing retailer any number of businesses and use these very powerful incentive currencies to drive their own business. We know that works because we operate that platform for a dozen other programs around the world and we know these programs are selling billions of dollars worth of miles to individual companies whether it's American Airlines selling miles to Citibank or examples like us. So for us, it's a great -- we've always thought the opportunity to distribute more miles and more points is right up on our alley, is what we are best in the world at. This is a platform that just allows companies like Southwest and American and others to really utilize that in a very efficient manner, so that they can generate great economics against their loyalty programs. So I anticipate Southwest using it very much the way like many of these other programs do. The only other last comment I made on our platform is we have modified it over the years and enhanced its ability to have kind of ongoing permanent programs participating in using the platform. So we see a platform being used for promotional opportunities where a car dealership in fact may use miles and points as a short term promotion. We also see that platform being used as a venue to have an ongoing relationship with the loyalty program where a program may be buying miles on a very regular basis. They are buying miles every month, every quarter and they use that platform because of its self-service nature and it's very easy to work with and connect to, so lots of flexibility around that platform.

[Joel Achramowicz:]

And Rob, just may be a follow-up on that I mean do you see I mean just as an example these sound like daily deal organizations like LivingSocial and Groupon, I mean there is -- they cater mainly to the smaller merchants that may be not might not be aware of these programs, do you see some opportunities for operating leverage there as well on the marketing side?

[Rob MacLean:]

Yes, I am a bit of a believer obviously that the power of these currencies in the tens of millions of consumers that are behind them and chasing them. Companies like the ones you mentioned should absolutely be using these kinds of currencies as an incentive. I have absolutely no doubt in my mind that they could drive more and more incremental business to their own operations by incanting customers appropriately. We know loyalty currencies are either day miles or points etcetera, consumers chase that stuff like crazy. So I think you are exactly right that companies like that could benefit by using these currencies.

[Joel Achramowicz:]

Fantastic and then final question, you've been investing a little bit in the infrastructure I think Ant you had mentioned $2 million or $3 million of additional capital expenditures, I mean how is your -- I mean you are cloud company, so it's very important that your platform be resilient and that also be scalable and powerful and could be on track with building our infrastructure and making sure that it's reliable and backed up and also provide scalability going forward.

[Anthony Lam:]

Absolutely yes and we've conveyed to the market place, we've been growing the business, as you've seen pretty -- with pretty good consistency over the last while we believe that platform that we are operating on today can scale pretty dramatically. We are investing in opening up that platform which is much of what we talked about here in the last couple of quarters to allow you know really smart companies and third party product developers to tap into that very robust platform that we have today. So we are very pleased with the progress we are making on that. I think we've continued to try to indicate to the market what we expect to accomplish over the long term and then really report on are we making progress. We are very excited about having some beta third party development opportunities, some beta examples of that here in the third and fourth quarter operating on a platform. So we are pretty pleased with the way that progress is going there.

[Joel Achramowicz:]

Great. That's all I have. Thanks very much. Operator

[Edward Woo:]

Yes. Thank you. I had a question about the Southwest rewards, how much of that was contributed to the second quarter results?

[Rob MacLean:]

Yes, we launched it in -- I mean it really came online, kind of 1st June, it was there for one month of the -- the initial launch was one month of the quarter.

[Edward Woo:]

Great. And you did -- I know it's very early, but it is on track with your expectations there?

[Rob MacLean:]

Yes, we would as you would expect, we don’t comment on any individual program or partner's performance, but I think when we look at the quarter, the quarter was where we would have expected it to be and as we reiterate the guidance that should give you a bit of a sense that we are pretty comfortable with where things are performing.

[Edward Woo:]

Great. And then you mentioned some weakness again in Europe, do you see that change anytime soon or do you think that that's just going to be the environment for a while?

[Rob MacLean:]

Yes, you know, constantly I am kind of clarifying my comments there. We know, it's a bit market, we've had good success there, it continues to grow. I think year to date that the European businesses are just under 10%. So we are continuing to see growth in that market. We do know that the economic environment there is exhibiting that growth, we are seeing faster and higher growth rates in other parts of the world, particularly in North America and my sense is they are starting to rebound at least in our lines of business and comment on the broader economic realities in Europe, but we know that there is additional upside if this was a little bit healthier economy, but look, at the end of the day we are still seeing growth approaching 10% year to date. So I want to be careful with that commentary. We are doing well there. It's just I know there certainly was more opportunity prior to some of the trouble that, that economy has been going through.

[Edward Woo:]

Great. And then you mentioned that Brazil and China are some of your key focus areas, are there other areas that you are particularly excited about?

[Rob MacLean:]

Well those two are keeping us busy. Those are both relatively new markets and as you would know in your business in some ways explosive markets for us there are lots of targets. We had rather very good conversations. I think you will see some announcements both of those markets in the not too distant future. So we are pretty pleased with the way those are going. I said this for a number of years the concept and phenomenon of loyalty programs and the monetization of loyalty programs is not unique for the two North American market place. We see many international markets moving more to follow that U.S. model. So there is certainly in many cases a few years behind the U.S. model and we are really monetizing these data basis, but the U.S. has provided a real solid template and so we see big opportunities in many markets, but those two I call it specifically on this, in this quarter because we are making pretty good progress in both cases.

[Edward Woo:]

Great. Well thank you and good luck.

[Rob MacLean:]

Thanks. Operator

[Brian Freckmann:]

Hey guys, how are you?

[Rob MacLean:]

Hey Brian.

[Brian Freckmann:]

Just quick question for you guys. Your current guidance has about a 10% variance, $200 million or $220 million I know the street is about 6% variance in the third quarter and up to about 17% in the fourth quarter. Can you potentially help us may be a scenario where $200 million a scenario where it's $220 million, just so we can get a better feel for that variance and how you guys sort of come to those high end of low at least just so we can get a little more comfort?

[Anthony Lam:]

Any of you that have spoken with me over the years know, I am not particularly fine with guidance at all. So I am probably going to resist that temptation to try to get too detailed into all those calculations Brian. I know that's not the answer you want, but we think about the full year guidance of $200 million to $220 million. I think we talked about, it's largely current business that is in market and performing and how we drive that and how the ongoing business responds to the marketing and merchandizing activity, that's really the driver in that range. We want to keep it -- we want to keep it in that kind of a $200 million to $220 million range. It was a pretty high growth business, so trying to get more specific there is not really in anybody's best interest.

[Brian Freckmann:]

Okay. And then just -- I know you had clarified this in the cost slightly but there was a question at one point you had talked about $300 million being I think it was the run rate of current business on a go forward basis, is that correct?

[Anthony Lam:]

Yes, I think we've talked about that as -- the deals that we've announced or launched, we see that really driving approximately $300 million run rate as we exit '13 yes.

[Brian Freckmann:]

Okay. And so that does not include anything you are currently working on at all.

[Anthony Lam:]

That's correct.

[Brian Freckmann:]

Okay. Great guys. Thank you very much. Operator

[Peter Homans:]

Hello folks, nice to talk to you.

[Rob MacLean:]

Hi there.

[Peter Homans:]

I apologize I got on the call at 5

[Anthony Lam:]

It was also largely around our accounts payable to our multi program partners and so we are going to have movements in those accounts on a quarter-on-quarter basis. It really is just a timing impact.

[Peter Homans:]

But how do I see them, if I look at your accounts payable, they went from sequentially from 2784 to 3191, I just don’t see that change of that magnitude being reflected in the balance sheet itself or maybe I am – maybe I have a month of balance sheet just for the...

[Anthony Lam:]

Yes, so I would direct you to looking at our December 2012 balance sheet. We hope you had -- the majority of that swing is coming from our payable to loyalty program partners, it was at $44 million, almost $45 million, that is $40 million now, so that's the majority we can do.

[Peter Homans:]

Okay. So that's close to $4 million and the cash flow the number -- the cash flow statement, wasn’t that more like $8 million or what...

[Anthony Lam:]

It's really just the timing of the payables around the million that we buy on a wholesale basis.

[Peter Homans:]

Okay. I know it is. Secondly, the guidance that will be subsequently revised five versus three in 24,000, that was bigger than it has been in the past, what are those things, I know it's mentioned FX I guess but is there any reason why it was somewhat larger than it has been historically.

[Anthony Lam:]

So Peter, could you repeat your question?

[Peter Homans:]

In the -- in the statement it says under -- after net income it says items that will be subsequently reclassified and it amounts to $324,000.

[Anthony Lam:]

So that actually is in relation to our hedges. So we enter into hedges on a rolling 12-month basis and that allows us with the one that are effective and they've all been effective that we basically -- they get recorded under comprehensive income outside of the main income calculation.

[Peter Homans:]

And is the cash -- is the cash expenditure a loss or profit depending on other swings.

[Anthony Lam:]

That's correct.

[Peter Homans:]

Okay. Thank you. And then the only other question I had was PayPal I am just sort of curious if you can give us an update on that? Am I correct in assuming that point functionality is included in every or some percentage of Magenta Store front that they install and it's a function of the end user to starting turn on various aspects of that functionality. So what are doing and how [easy] it is for you to incant either the end user because of the value to them or Magenta to explain the values to them and then how -- what's the uptake of that like?

[Rob MacLean:]

So I am not -- so the reference of PayPal in this call today really was as we take our core retailing and merchandizing business that's driving the vast majority overall economics, we've continued to broaden our payment capacity and so we've introduced PayPal across all of our platforms, so that we are now able to accept PayPal with all of our various deployments globally and that really is -- we are just seeing upticks associated with making that ease of payment important -- an important improvement for many of our end consumers. In terms of the B2B products that have that not really are PayPal reference points there, so I am not sure...

[Peter Homans:]

On Magenta I guess it's didn't I understand correctly that in the early stages it was explained that there will be a functionality allowable where small to medium sized retailers could provide plans to their customers based on expenditures and/or...

[Rob MacLean:]

Not PayPal related at all. If you think the reality that we work with PayPal is on as we talked about as a payment source. We also even redeem miles and points into PayPal to use as cash. So that really would be the...

[Peter Homans:]

That's the principal functionality.

[Rob MacLean:]

Yes exactly.

[Peter Homans:]

Okay. That's fine. I just was curious. Thanks very much. Good quarter.

[Rob MacLean:]

Thank you. Operator