Points.com Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Greetings and welcome to the Points International Second Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin, Investor Relations. Thank you. You may begin.

[Kimberly Esterkin:]

Good afternoon and thank you for joining us to discuss Points International’s second quarter 2015 financial results. Joining me today on the call are Rob MacLean, Point’s 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. 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 implied 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 2015 financial results press release as well as on other documents filed with the Canadian and U.S. security regulators. Except as required by law, the Company does not undertake any obligations 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.

[Rob MacLean:]

Thank you, Kimberly. Good afternoon and thanks for your participation today as we review our second quarter results. I’ll start today’s call with a high level review of our performance for the quarter, as well as update you on a number of recent business developments. Anthony will then discuss our financial performance in greater detail before I wrap up with our expectations for the remainder of the year. Let me begin today’s call by saying that it is an exciting time for the Loyalty industry. Loyalty now more than ever has become an essential component of the consumer experience. The average American is a member of 20 plus loyalty programs. And many of our loyalty partners are adding tens of thousands of new members every month. We are seeing more companies than ever in a variety of sectors and geographies looking at ways to leverage the growing power of loyalty programs. This increasing interest in loyalty is a positive sign for Points further validating our own vision to help make the world’s loyalty programs more valuable and engaging. With this as a backdrop, let me dive into the financial highlights for the quarter. Our second quarter financial performance reflects continued growth in our profitability metrics in a period where we absorbed the impact of industry consolidation on our partner mix. Second quarter revenues totaled approximately $68 million or year-to-date revenue of growth of about 5% over the previous year period. Growth in gross margin dollars was more significant as we delivered $11.3 million in gross margin dollars for the second quarter and year to date growth of 19%. As I had mentioned on previous calls, the level and type of promotional activity we put into market, can add significant variability to our short-term financial results. And it is important not to view our quarterly performance in isolation. In the second quarter in order to maximize the effectiveness of certain partner campaigns, we shifted a number of these activities to the second half of 2015, particularly among our larger partners. Our resulting revenue and gross margin profile reflected a promotional calendar that was heavily weighted towards our higher margin, but smaller reseller partnerships, which delivered a lower revenue contribution but significantly higher gross margins and profitability. The net effect of all of this is we saw more moderate topline revenue growth in the first half of the year but now expect to see revenue growth accelerate fairly significantly in the second half of 2015. The second quarter promotional mix is also reflected in our gross margin percentage; which was 16.7% in the quarter, an increase from 15.3% in the prior year quarter. Similarly, on a year-to-date basis, gross margin percentage increased significantly from 14.8% in the prior year period to 16.8% in 2015. Digging a little deeper into our revenue mix, I’ll touch on the performance of our European partner base and the organic growth from our existing business. Performance of our European partnerships largely follows our promotional timing and this variability was reflected in the second quarter performance of the region. As a reminder, we saw this region up approximately 45% in the first quarter of 2015. And for the second quarter, with promotional activity reduced, we saw revenues from this region move back to more expected levels. In addition, foreign exchange did have an impact of the region as a whole with the weakening of the euro against the U.S. dollar; which was down approximately 20% year-over-year, impacting topline revenue performance by $3 million in the first half. With that said, we’re really encouraged by the year-to-date performance in Europe with year-over-year increases in both transactional activity and gross margin performance. But we remain cautious on our outlook given the continued economic concerns in the region. Organic growth from our existing business, which is defined as partners and products that have been in market for at least one year, with a solid 6% to date, only to the mix of promotional activity we put in the market during the first half of the year. Had FX rates remained at their 2014 levels, organic growth would have been approximately 300 basis points higher on a year-to-date basis. As previously discussed, we expect this metric to be approximately 10% for the full year. Overall, we are pleased with the balance of revenues and gross margin we achieved in the first half of the year, particularly, during the period where the transition of the American U.S. Airways and United relationships adversely impacted revenue growth in the short-term. Given our planned and in-market campaigns for the second half of 2015; which will be focused on some of our larger reseller partners as well as the positive topline impact of the growing United relationship in the second half of the year. We expect to see accelerated revenue growth in the third and fourth quarters, and a return to more historical gross margin levels around 15% for the full year. From a profitability perspective, we delivered strong bottom line performance in the quarter despite absorbing the impact of industry consolidations. For the second quarter, adjusted EBITDA totaled $3.3 million, up 28% year-over-year, and up over 80% year to date. Adjusted EBITDA as a percentage of gross margin, an internal measure we used to assess operating efficiency was 29% for the quarter, up from 24% in the prior year quarter, and 30% year-to-date. Net income for the quarter totaled $1.7 million, or $0.11 per diluted share, up 41% for the second quarter of 2014. Through the first six months, EPS and net income has doubled versus 2014. Turning now to operational developments for the quarter. During the quarter, we expanded our presence in Asia, further built out our consumer offerings, and saw continued progress associated with our loyalty wallet development. Let’s begin with an update on PointsHound. As you know, we acquired PointsHound, the loyalty-based points-centric booking engine designed for frequent travelers in the second quarter of 2014. Connecting loyalty with hospitality bookings via the PointsHound platform is proving to be a strong offering and fits very well into our global platform strategy. During the second quarter, we made solid progress in broadening the appeal of the PointsHound platform, and announced new strategic partnerships with Alitalia, Virgin Atlantic Flying Club, and Finnair Plus. These new partnerships have helped to accelerate our expanding EMEA presence. This geographic region will remain a key focus area as we continue to see significant opportunities to expand our reach. Also, as previously announced, we’re in the final development stages of our white label PointsHound product branded as Points Hotels, which we are on target to launch with the large European partner in late 2015. We believe that there are substantial opportunities for this product within our partner base and we are actively working that pipeline. In addition to strong interest from our European partner base, we also launched both LAN Airlines and Spirit Airlines on the PointsHound site during the second quarter. We continue to make progress in Asia, as well. At the beginning of the second quarter, we launched an agency partnership with Hainan Airlines, China’s fourth largest airline. Although we currently work with Hainan’s International loyalty program members only, our partnership with the airline is an excellent opportunity for us to leverage our presence in Asia. Additionally, we are pleased to announce today, a new partnership with Shangri-La Hotels, a premier hotel network that operates 92 hotels across North America, Asia-Pacific, Europe, Australia, China, and the Middle East. Through our partnership with Shangri-La’s Golden Circle loyalty program, loyalty program members are now able to buy and get their points for the first time in the program’s history. Expected to launch in the fourth quarter of 2015, we’re very pleased to bring Shangri-La Hotels, a globally recognized, luxury hospitality brand with a strong foothold in Asia on to our Points loyalty commerce platform further underscoring the growing importance of loyalty in Asia. In addition to these new relationships, we’re in advanced discussions with a number of loyalty programs in Asia, and look forward to further announcements in the future. No sign of our core buying gift and transfer business, we’re making headway against a number of deals in our new business pipeline, which continues to grow and expand. As we develop our pipeline, we are particularly excited about the opportunities on the merchant side of our business, as well as with our new consumer products. Recent launches such as the American Express backed Plenti Card not only speak to the increasing demand for loyalty but have also generated increased interest from new merchants and existing loyalty program partners in our B2B platform. This business has been seeing significant progress, and we’ve generated a number of new relationships whereby large retail organizations are now beginning to use our loyalty commerce platform to access our loyalty program partners valuable currencies. As a result of this success, we’re seeing expanded relationships with a number of our loyalty programs such as United, American, and Jet Blue to name a few. We’ve always been impressed with the power of our partners’ loyalty currencies to drive consumer behavior. I’m particularly pleased that our partners are tasking us to help grow the distribution of these currencies into the broader retail market. We also continue to develop our loyalty wallet. We are in active discussions with several digital wallet providers who will be able to benefit from the functionality our loyalty wallet will bring. We now sign two loyalty wallet deals to date where Points will power the loyalty component of these third party digital wallets. Based on the third party launch timelines, we expect to see those wallets in market by the end of 2015. As you would expect, we believe there will be many success digital wallets emerging in the coming years. Therefore, we are actively developing this pipeline of opportunity with advanced discussions underway with a number of wallet providers. In support of our loyalty wallet efforts, we’re relaunching Points.com, our consumer portal in the coming days with a new mobile-enabled experience for our growing membership base. Points.com provides consumers the ability to track balances on multiple programs, as well as to exchange and redeem loyalty currencies. In the future, Points.com will also be the one place consumers can go to manage their participation across all of our wallet partners. The relaunch of Points.com is just a small step in our broader consumer strategy. We will continue to update you as we progress on this side of our business. Before discussing our outlook for the remainder of the year, I’d now like to turn the call over to Anthony to speak further about the second quarter results. Anthony?

[Anthony Lam:]

Thanks Rob. As I review the results for the second quarter 2015, please be reminded that all of the numbers mentioned on our call today are in U.S. dollars. All of the figures are presented in accordance with international financial reporting standards. Revenues for the second quarter totaled $67.9 million compared to $70.4 million in the prior year quarter. Principal revenues totaled $64.9 million in the second quarter as compared to $67.9 million in the prior year period. As Rob noted, marketing campaigns in the first half of the year had a larger impact on partners with higher margin profiles at a lower overall revenue impact. Combined with the rapidly weakening of the euro, this contributed to the softness of our revenues in the second quarter. Year to date, through the second quarter, the euro has weakened 19% against the U.S. dollar adversely impacting topline revenues by approximately $3 million for the first half of 2015. However, this FX move has had minimal impact on our gross margins as we hedge our European base gross margins 12 months in advance. While European revenue streams are exposed to large foreign exchange movement, the gross margin generated has been largely protected. Gross margin dollars continue to be an important measure of our financial performance as it represents the amount of revenue retained and available to fund the ongoing operating activity and strategic investments in the Company. In the second quarter, gross margins totaled $11.3, up from 6% on a year-over-year basis. As a percentage of total revenue, gross margin dollars were 16.7% in the quarter. We continue to expect full year gross margin percentage will moderate over the coming quarters to be at or around 15% of revenues on a full year basis. We also anticipate that more of our incremental gross margin dollars in 2015 won’t fall to the bottom line, demonstrating the inherent leverage in our business model. I’ll now move on to a discussion of our key operating expenses in the quarter. Total ongoing operating expenses which consist of employment expenses, marketing, technology, and other operating expenses were approximately $8 million, which is down from $8.2 million in Q2 of 2014. We continue to be very disciplined in our management of ongoing cost structure. This along with the weakening of the Canadian dollar versus the U.S. dollar has contributed to the decline in our operating expenses for the second quarter. Employment costs on the quarter totaled $5.8 million, a decrease of approximately 5% compared to $6.2 million in the prior year quarter. To a large extent, the year-over-year statings are a result of movement in the FX, and employee incentive payments that were incurred in 2014 but not in 2015. As of June 30, 2015, we have grown the Points team to 205 staff from 175 staff in the same period last year. This increase is largely due to absorbing the growth in our PointsHound San Francisco office, which we acquired in April of 2014 as well as select hires in our Toronto office in the marketing and technology areas. While we continue to invest in key areas and increase the size of our team, the weakening Canadian dollar as well as lower variable based competition in the current resulted in a slight decrease in our employment spend year-over-year. Since our last call, the Canadian dollars continue to weaken against the U.S. dollar. The current rates are maintained throughout the year. We expect our employment costs to increase approximately 5% over the 2014 level on a full year basis. In the third and fourth quarters, we anticipate employment costs to range between $6 million and $6.25 million in each of those quarters. Marketing expenses for the second quarter were $399,000, up from $328,000 in the prior year period. As mentioned on our previous call, we expect marketing expenses will grow in 2015 with costs in this line on approximating $600,000 to $700,000 in each of our remaining quarters as we grow marketing activity in the second half of the year to drive ongoing growth in our core business. Technology expenses, which cover the cost of protecting our production environment, maintaining online redundancy capabilities, PCI compliance, user application licenses, as well as general technology upkeep and enhancements were $361,000, up from $280,000 in the second quarter of 2014. We continue to expect to see this line item grow to the $1.5 million range on a full year basis. Other operating expenses comprise rent, insurance, professional, legal, and accounting fees, as well as the public company costs. For the second quarter, this line item was $1.5 million consistent with the prior year period. I have mentioned in our previous call, we expect this line item to be in line with the full year 2014, growing at approximately the same levels per quarter for the balance of 2015. Now turning to our profitability measures. Before I speak profitability in the quarter, I wanted to take a moment to reiterate what we consider in determining adjusted EBITDA. We start with net income and add back the following items; income tax expense, interest, depreciation and amortization, and foreign exchange loss. This measure is an important measure for us as we consider this to be a key measure of our success in delivering ongoing profitability. With that said, adjusted EBITDA for the quarter totaled $3.3 million, up significantly from $2.6 million in the prior year period. This year-over-year interest was largely due to incremental margin added from new partner launches in the second half of 2014, which include Hilton HHonors and United Mileage Plus programs; and, to a lesser extent, the impact of the weakening Canadian dollar, which lowered Canadian denominated expenditures. As a reminder over 70% of the Company’s operating expenses are currently denominated in Canadian dollars of which we hedge approximately 50% of it. As previously communicated, we expect year-over-year growth rates for gross margin and adjusted EBITDA will be higher in the first half of 2015, than in the second half of the year as we lack significant new partner additions in the second half of last year as well as we begin to absorb the impact of the airline industry consolidation. As I mentioned in our last earnings call, beginning in the second quarter we started to absorb restructuring of the American Airlines and U.S. Airways relationships, the impact of which has been contemplated in our full year guidance. Amortization expenses in the second quarter were $838,000 as compared to $544,000 in the year ago period. The year-over-year increase can be attributed to the amortization of new products launched in the second quarter as well as the amortization of assets acquired in the Crew Marketing acquisition. We expect amortization expense to be in the $3.5 million to $4 million dollar range on an annualized basis in 2015. Finally, the Company recorded a second quarter net income of approximately $1.7 million or $0.11 per diluted share, up 41% compared to $1.2 million or $0.08 per share in 2014. As of June 30, 2015, total funds available comprised of cash and cash equivalents together with security deposits, restricted cash, and amounts with our payment processors totaled approximately $47 million. We ended the quarter debt free. I will point out that just after the quarter-end on July 2, we entered into a bank credit facility agreement with the Royal Bank of Canada in which two credit facilities will be made available. The first is a revolving operating term facility in the amount of $6 million U.S. and available until July 2 of 2016. The second facility is a multi-draw term loan facility to be used for financing the cash component of a business acquisition until July 2 of 2016 of up to $7.5 million, or to fund the corporation’s current and normal course issue of bid share repurchase program until March 8 of 2016, of up to $7 million. This gives us a total potential facility of between $13 million and $13.5 million. To date, we have not drawn on any of these facilities and will do so only as the need arises. Net operating cash, which we define as total funds available. That’s amounts payable to Loyalty program partners was just over $8 million at the end of the second quarter as compared to $17.4 million in the prior year quarter. We’re very pleased to continue to generate sufficient cash to fund our current working capital requirements, the anticipated capital expenditures, and share buyback activity. During the second quarter, we repurchased 92,718 shares of our common stock for a total of $1.1 million at an average price of $11.81 per share. On a year to date basis, we have repurchased $182,015 shares of our common stocks for a total of $2 million at an average price of $10.78. For the three months ended June 30, 2015, with the weighted average shares outstanding, 15,614,542 shares and 15,665,994 shares on a fully diluted basis. Thank you all for your attention. With that, I’ll hand the call back over to Rob.

[Rob MacLean:]

Thanks Anthony. It was with the first half of 2015 behind us, I want to take a minute and update you on our expectations for the second half of 2015. Through the first six months of 2015, we’ve delivered revenue growth of 5% and adjusted EBITDA growth of 82%, both over the comparable prior year period. Looking ahead and despite the moderate revenue growth in the first half of 2015, we remain on track to deliver against our full year guidance which contemplates revenue growth in the range of 15% to 20% over 2014, and adjusted EBITDA growth in the range of 15% to 25% over 2014. These guidance ranges take into consideration contributions from partners and products that have been announced or are currently in market today. This guidance also reflects the impact of a restructured American Airlines and U.S. Airways relationship as well as our principal partnership with United. Given our performance in the first half of the year, our revenue growth guidance implies a fairly meaningful ramp in revenue in the second half of the year. Supporting this revenue assumption is a robust calendar of marketing and promotional activity among many of our larger loyalty partners, which will bring our gross margin percentage in line with our full year expectations of approximately 15%. On the profitability side, we will continue to show discipline in both our investments and operating expenses to deliver a continued positive cash flow, profitability, and improved leverage going forward. As you have heard me speak to many times before, we remain highly committed to investing in growth and innovation as we capture the vast opportunity ahead of us in the rapidly growing loyalty industry. We are appropriately resourced to make these investments in our platform. We will continue to focus our allocation of capital on activities designed to drive shareholder returns. That concludes our prepared remarks for today. Thank you again for your time as well as your continued support of Points. We’re excited about the opportunities that lie ahead of us and are actively working to continue to add value to the ever growing loyalty space. With that, we hope to see many of you next week at the Canaccord Genuity conference in Boston. We will now open up the call to your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] One moment please while we poll for questions. Our first question is from Drew McReynolds from RBC.

[Drew McReynolds:]

Yes, thanks very much. Rob, just a couple of questions around obviously the revenue side. When you look at the Q2 performance and you kind of compare that to your outlook that you thought would be the case when you reported in May, were there any kind of changes to that outlook? Or, did you kind of meet what you expected internally?

[Rob MacLean:]

Yes, I’d say the revenues were slightly below our expectations. We’re not uncomfortable with that. Because we had a good handle on why we saw that kind of an outcome. Fairly simply, we did migrate and move some of our partner programs and campaigns, and promotional activity out of the second quarter and into the third and the fourth quarter; really in an effort and based on our analysis and our partner’s objectives to increasing the efficiency and profitability of some of that campaign activity. We have a pretty good sense of what that did to the first quarter and importantly what it means for the – sorry, the second quarter – and what it means for Q3 and Q4, which obviously had some pretty significant revenue increases in the back half of the year. I would say that we also, in doing that, and in moving some of the incentive campaigns or promotional campaigns out into the second half of the year, we saw some pretty interesting retail price points move up in our partners. Particularly when we talk about some of our larger program partners. As we tested some of this increased retail pricing, you saw that slow down of our profitability metrics. While it slow downed some of the revenue growth, we saw a really good improvement in the flow through to our margins and profitability. Really, I like the way those two marketing and merchandising efforts connected with our profitability metrics. I’m pretty comfortable with the way those dynamics played out. It is certainly, when we think about in May. We were looking at a bit more of an even cadence in terms of topline revenue in Q2, Q3, and Q4. I think when we saw opportunities to move some of these campaigns into a more efficient and profitability cadence, it did bring some of that topline revenue down. But it moves it really aggressively into Q2 and Q3, which is really why we’re comfortable in reiterating the guidance that we will have both at the topline as well at the topline as well as bottom line. Based on what we have in the market today and how that’s performing, the second half looks really interesting at a topline level. The last comment I would make on that, and this is really more a year-over-year piece of comparisons. When you think about Q2, it’s really the first quarter where we have seen some of that impact, the American Airlines and U.S. Airways coming out into the restructured environment, and United coming in. That has an adverse impact on topline revenues in the short-term. What I mean by that is basically in the second quarter. That tends to change into Q3 and Q4 where that trade, if you will is pretty net positive to us in the business, which is obviously contributing to the growth we’re displaying in 2015. Hopefully that gives you kind of just as broad color set as possible. I’m really pleased with the profitability metrics in the first half as we reduce some marketing incentives and move those marketing incentives into the back half of the year where we improved profitability. That will in fact – we see some pretty rapid growth. We do have a higher growth trajectory in the second half than we would have anticipated.

[Drew McReynolds:]

Just so I understand here Rob; in terms of the decision to shift the kind of promotions into the back half. Is that just based on what the partner wants to do? Is that based on if it’s United related, and just kind of the ramp up? I’m just trying to better understand the decision to shift into the back half versus what you would have expected early May, for example.

[Rob MacLean:]

Mostly around linking up with our partners’ objectives; and any potential conflicts that are in terms of hitting the database where there may be a bunch of activities going on in the loyalty programs in that database where we see opportunities to move away from that. Get more direct access and more exclusive access into that database effectively at times when we’re going to be kind of a higher profile story to that database and consumers; which we’re pretty convinced based on historicals. That allows us to generate better returns on some of the promotional campaign that we’ve put into place. It’s done very much in sync with how our partners are hitting their own database and doing different parts of their business into their membership. That becomes the primary driver.

[Drew McReynolds:]

Thanks for that, and just clarification. I think in your opening remarks you essentially said organic revenue growth should be at that 10% level for 2015. Did I interpret that right?

[Rob MacLean:]

Yes, that’s exactly right, and right above where we would have expected. I would say that’s a bit of the scenario here is we’re managing the relationships in the business and the objectives really on an annual basis as we’ve said many times. We’ll have some ebbing and flowing on the quarters as we see opportunities to move some campaigns into sweet spots that we believe have higher returns and better margins. Some of that will move in and around quarters; which has always made the business difficult for you guys to project on a quarter-by-quarter basis. For us, for that matter where we see opportunities to move as you’ve seen here in the second half of 2015. When we look at some of these changes, we’re really always looking at it in the context of where are we going to be on that annual commitment and annual expectations for us and our partners?

[Drew McReynolds:]

That’s great. The last one from me and just in terms of Europe. Can you provide a little context on kind of, and kind of give back in Q2? Just you remain cautious. I think your comments last quarter were hopefully bottoming. Is it at kind of one step forward or two steps back? Or, is it two steps forward and one step back in Europe, for example?

[Rob MacLean:]

Yes, I think more in the latter. It’s a good analogy frankly. As we said, very good responses to marketing and merchandising activity that we had in the market in the first quarter. We saw very kind of solid growth attached to that; to be very frank, probably a little better than we were expecting. The second quarter as we move into a cadence of a little, and significantly less marketing and merchandising in Q2, it moved back to where we would have expected it to be. When we look at the first half of the year, we’re pretty comfortable with how the business is performing. I would say, the core things we look at there in terms of transactions and gross margins in pretty good shape. Revenues impacted a bit by the continued deterioration of the euro as Anthony said. It’s kind of averaging around 20% down year-over-year. Fundamentally, we like the transactional behavior. We’ll continue to see our expectations. We’ll continue to see growth out of that area for the rest of the year. What’s interesting also in Europe as we talked about it in the first quarter. There is a fair amount of interest in net new business opportunities particularly around the PointsHound proposition. Whether it’s the PointsHound branded or our newly private branded Points Hotel product. We’ve had a – I obviously announced a large deal with a significant European partner. We’re really advancing pipeline on those products in Europe; and very receptive to some of these kind of innovative and new opportunities we’re putting into the market. We liked, and I think we’re consistent with where we were in the first quarter. We think we’re on the uptick in Europe. But again, let’s continue to be cautious on seeing it a few quarters layup.

[Drew McReynolds:]

Okay, understood, thanks very much.

[Operator:]

Our next question is from Sameet Sinha from B. Riley.

[Sameet Sinha:]

Yes, thank you, a couple of questions. Can you give us an example of some of these marketing programs and what percent? You mentioned the motivation that there’d be more profitable in the second half. That’s why you decided to move it. Can you give us some examples of that? Secondly, in terms of the line of the credit and the revolver that term loan that you put through, can you talk about what was the motivation behind it? Is very [ph], as you mentioned acquisitions? Is that something that you could be potentially be looking at? I’m sorry. If you can shed more light on the consumer portal at Points.com? I mean, that’s been there. Can you talk about how active – or how activity had progressed over the last couple of years and certain improvements that you’re making? Is that something that we can expect could be a good driver going forward?

[Rob MacLean:]

Sure, so why I don’t take question one and three? Then I will hand it over to Anthony to speak to the credit facility. In terms of our marketing as an example, some of what we saw in the second quarter and think about it as performance on rack rate pricing or lighter incentives, smaller bonuses. We were seeing some interesting results on that. That was driving good profitability and margin growth. We would look at that kind of data and say okay, do we want to follow-up some of those campaigns that in-market and maybe early in the second quarter with a more traditional deeper incentive to drive topline growth? Or, do we wait and move that in? Let us digest some of the rack rate pricing growth that we’re seeing, which is positive to margin. Push some of that more aggressive marketing and merchandising, or campaigns into the second half. We think there’s opportunities to be able to do that where we can maximize the reach and sales activity at the rack rate. Then give enough of a breathing room whereas we introduce some of these more aggressive and targeted tactics where we’re really expanding the penetration of these products into the database where we’re seeing more and more of our first time buyers; which typically will take a little more incentive to get them to do that first transaction. We want to have a bit of separation on some of that activity. That will have us evaluating kind of data points on a daily and weekly basis to try to optimize when do we put some of these campaigns into the market so as to give you a bit of a sense. It also gives us additional data really every kind of week we go along to determine how do we set those thresholds in terms of discounts, and, or incentives? Do we want to have a 30%, 40%, and 50% discount and, or bonus? How do we make sure we match that up to maximize the returns for our partners and Points? When I think about the second point around consumer portal, we’re pretty pleased. We’ll relaunch the new look and feel of core elements of Points.com here in the next couple of days. Part of what we’re doing around that, our significant reason behind that relaunch is really to give all of the underlying technology. It is enabling us to move in all of those product functionalities into the mobile wallet environments. If you think about how we’re looking at a consumer proposition. Where we believe taking distribution and making it much more widely available to consumers. Being able to take those core Points.com type functions and allow them to exist in third party digital wallets, or OTAs, or any other potential distribution channel. Revamping the underlying technology of the Points.com website is one of the first steps towards that. We’re very pleased about how the technology has evolved. How it’s tracked to the point where we’ll be able to launch that here in the next few days. That then has enabled us to open up the platform to our second now digital wallet provider who signed on with us. We have those guys now in developing on our platform to be able to take that loyalty functionality, exchanges, and redemptions, and balance tracking, et cetera – incorporate that into their digital wallet development. That’s really two key steps that we’ve been working on through 2015, in particular to ensure that our consumer proposition, previously focused on Points.com and that website has the capacity to now be distributed into a much more mobile and open environment. We’re pretty pleased with the way that’s all tracked out here over the last six months or so. Stay tuned, as they say. That will relaunch here over the next few days. We’re announcing today that we signed a second digital wallet deal. We’re obviously watching and working with our digital wallet partners that we’ll be able to announce and launch those services in their wallet when they go public and go live. Right now, that looks like we’ll have both of those digital wallets planning to be live here in 2015, which is great. The third point I’ll put back over to Anthony in regards to the loan communication.

[Anthony Lam:]

Yes. The credit facility really was an opportunity for us to take advantage of the ability to kind of put some dry powder away at a time when rates are quite attractive. From that standpoint, we’ve got an operating line facility that we can use for pretty much anything we need, and another line that we can either use for the normal course issue Ebid [ph] and the buyback, or for an acquisition. Really, for us an opportunity to kind of just reload at very attractive levels. We haven’t used anything yet. We really have that at our disposal for something down the road should we need it.

[Sameet Sinha:]

One follow-up question; one of the issues I guess we have seen with the estimates out there and just kind of modeling it through the year. Thinking about the balance of the year, well how should we think about allocation [in the premiums you’ve had] in the fourth quarter? Are we talking about more balanced revenue levels between the two, and basically marketing programs or the fourth quarter, which is seasonally a stronger quarter that should be materially higher than the third quarter?

[Rob MacLean:]

An entirely expected question. I have to be honest. This is a good quarter as Drew asked about. We just have a number of moving pieces as we think about the full year objectives that we’re hitting with for ourselves and with our partners. It just seems like every time we try to get – or we get dragged into providing quarterly details, it becomes more difficult to be really accurate on that. We’re not particularly worried about that. But we know that makes it difficult for the analyst to be able to model things out. I am reluctant to get into too much detail around the quarters. I think that you certainly see in our guidance. You can model against low, high, and midpoint obviously. In any case, you’re looking at a pretty significant lift in the back half of the year. My preference would be not to get into too much detail one quarter versus the next. Because it’s just – there’s enough moving pieces that we’re going to respond to the marketplace and with our partners to ensure we drive the maximum amount of profitability and the maximum amount of topline revenue against our plan. That may vary quarter over quarter. As I thought, it’s a long way away. A long way perhaps for me of saying I want to really stay at the annual level rather than the quarterly detail.

[Sameet Sinha:]

Okay, thank you.

[Rob MacLean:]

That’s all right.

[Operator:]

Our next question is from Andrew DSilva from Merriman Capital.

[Andrew DSilva:]

Hey guys, thanks for taking my call. I’ve got a couple of quick questions for you. First off, as it relates to membership penetration, what was it for the quarter? I mean, historically it’s been around that slightly above 2% level for a while. Can you give us a sense of what it was like this quarter? Then if it as that 2% level, what do you think the catalysts are for you to increase that particularly with some of your core products like buy, gift, and transfers?

[Rob MacLean:]

Yes, it would be in the same neighborhood. We would have, and we typically are looking at that really on an annual basis, Andrew. Less of a kind of week to week, and quarter to quarter; just our members or our programs continue to be staggering. Lots of noise out there in terms of loyalty. We just see our big partners are adding tens of thousands of new members every, literally every month. We’ve got some partners that are adding well over 100,000 new members into their program every month. It’s not really a metric that we would look to calculate on a daily, weekly, or even monthly basis. As soon as – it’s still right in and around that 2% range particularly as we bring on new relationships and so many new members coming into the mix. The kind of things that we do to kind of move that forward are obviously around the marketing and merchandising campaign as I mentioned earlier. We see a very interesting strategies and results as we go and attack first time buyers on the products and services, particularly buy, gift, and transfer. We have a variety of tactics that we use to pursue those consumers that haven’t yet tried the product. We see very different tactics being effective and very different results for those second, and third, and fourth time buyers that tend to buy much larger chunks of miles at a time. Because they understand the value. They are familiar with the product flows. They’re familiar with the availability of these products. A lot of what we do in that first time buyers’ strategy and the marketing and merchandising is really designed to broaden the penetration and get to more of those active members. Then a second set of campaigns that are really designed to give up and getting that repeat buy. It’s pretty kind of basic blocking and tackling when you’ve got 75, and 85, and 95 million membership basis, there’s a lot of those first time buyers out there that we’re pursuing on a regular basis. Most of our campaigns are really designed around that.

[Andrew DSilva:]

Is there a way when you report third quarter or year-end results that you can maybe give us a trailing 12 month or just year to date scenario of how it looks from your legacy partners? We can get a sense of the progress in penetration. I know you keep adding new partners. Those new partners are likely going to be below the average. Then the established partners are going to be above the average. It’s probably always going to be trending around 2%. But something we can see that it’s going in a direction where adoption is actually happening. Because that’s been one of the primary catalysts the industry has been looking for, for awhile.

[Rob MacLean:]

Yes. Certainly and the short answer to that is let us take out our way and those are the kinds of things we obviously track around here. It’s something we could consider for sure. When you think about the 25, 35, and 45 percent growth that we’ve been driving over the last few years. A good chunk of that comes from progress against the first time buyer or getting deeper and broader into the databases. We’ve see and we continue to see progress against that. There’s still lots of upside and opportunity ahead of us. But let us take that away and see if there is an ARPU [ph] way for us to provide that on a trailing 12 months basis.

[Andrew DSilva:]

Yes, I think that would be very useful. Then just kind of moving over a little bit. I have noticed there’s somewhat of a trend, which is resulting in your maybe smaller and localized apps popping up. Originally a couple of years ago, when you originally launched that Magento and Shop Buy [ph] applications, the assumption was that maybe established loyalty brands would be utilized by SMBs a little bit more. Now, how do you feel the smaller regional loyalty plan impact or benefited your business? Then just quickly on mobile wallet partners. You mentioned you have two now. Can you maybe elaborate on that as far as have they already established loyalty wallets that are in the market? Or, are the ones that are in development with some financial institutions that are yet to hit the market?

[Rob MacLean:]

The first question on regional plans, just a quick reminder. We’re absolutely convinced that we’ve been lucky enough and privileged enough in the industry to have connected our platform to 60 plus loyalty programs around the world, and an increasing number of kind of third party product partners. Our vision as we’ve been articulating is to ensure that our platform does two – I guess, three things you could think about. One, it has as much functionality as possible in the platform. As much ability to help e-commerce transactions; and in particular loyalty e-commerce transactions happen with the industry as broadly as possible. You’re seeing us do things that would enable our platform to be usable by many different companies. Then when I say those many companies, it really cut and then targets two different groups. One, it would be we believe any and all loyalty programs that have a currency based aspect to their loyalty play should be connecting to the Points.com loyalty e-commerce platform. There’s just – in our view, if we can take the 60 loyalty programs to 160, to 260 loyalty programs, and plugged into our platform; we know we can use that platform to deliver some really interesting new ideas to our loyalty program partners. That may very well be smaller regional players. The technology enhancements we’re making is making it much easier for programs to engage with our platform. We can be onboarding new loyalty programs in a matter of days if not weeks; 99 times out of a 100, it is the partner’s time frame that dictates that. We can really add partners now in a very timely and efficient manner. Our objective would be ensure our platform is plugged into as many of these loyalty programs and loyalty currencies as possible, whether they’re smaller or regional. They’re apps. We’re really indifferent to that. If it’s a good idea and it has members that are interested in interacting with that currency, we want them plugged into the platform. I think the second part of that is the more of those loyalty programs that we have engaged with the platform. We’re seeing more and more of these third party companies come to us and say hey, if you’re an efficient way to access 60 loyalty programs and 800 million consumers today, you’re probably going to be a more efficient way to access that industry if you’re adding another 20, or 30, or 40 different loyalty programs over time. We think that access to the industry attracts some of these loyalty wallets as an example. Interesting third party companies that have products that we believe will be interesting and are interesting to our loyalty program partners, the more loyalty programs we have connected to the platform, it’s more likely that we’ll see interesting product partners connect to the platform as well. So this idea of smaller regional plans, while they wouldn’t have necessarily been on our radar screen five, six, or seven years ago, the technology work we’ve done and the strategy to open up the platform makes them very interesting to us. The second question on wallet partners. For us, we’re very pleased that we have executed the second deal now giving us good confidence that we’re on the right track here of being able to deliver value to innovative and new categories that are trying to tap into loyalty. There’s not a lot I can say about that yet, because for obvious reasons they’re launching their digital wallet. These will be, these loyalty components will be innovative and important aspects to heir digital wallet. They want to manage that communication as well as the launch profile on it. What I think I can say is its financial institutions. One is the financial institution, and one is not. One has a pre-existing wallet and application. One will be net new. Both have very significant consumer bases attached to them. We really like kind of the variety that we’re starting to see here in these early adopters of our model.

[Andrew DSilva:]

Which one is the NetNew? Which one is the…

[Rob MacLean:]

The second one is the NetNew.

[Andrew DSilva:]

Okay. [Indiscernible]

[Rob MacLean:]

I should say there are a number of other conversations that are at various stages with other digital wallets of all shapes and sizes. I think as I’ve previously communicated, we believe there is going to be a multitude of successful digital wallets in the marketplace. Our approach is to provide a kind of common approach to delivering loyalties to those digital wallets. We’re of the mindset that if we can deliver many loyalty currencies; and keep in mind, the average American is in 20 to 30 different loyalty programs. To be able to satisfy any of that consumer demand, you have to have broad reach in terms of your loyalty offering. We think we are the absolute only game in town to be able to deliver it. We believe we can deliver that product and service to a multitude of digital wallets that are emerging. They are all over the place. They’re TOCOs [ph]. They’re dot coms. They’re financial institutions. They’re standalone businesses. There’s a whole bunch of different flavors of digital wallets. For us, because we believe we’ve gotten the onboarding and adoption costs into a very manageable level, we want to deal with as many of them as possible going forward.

[Andrew DSilva:]

I have got it. The last question for you guys and just moving over to your new partners. Is Shangri-La a principal or an agency partner? Then I believe Hainan, which came on last quarter is an agency partner. Then is that agency partner a trend we should expect in China? Is there a reason they wouldn’t be a principal partner? If so, what is the rationale behind that?

[Rob MacLean:]

Yes. Shangri-La in fact, it will be a principal partner. Notwithstanding as I said when we announced Hainan that in most cases we see the kind of Mainland China opportunity will likely, at least in the early stages follow the agency pack as we learn some of the nuances of the domestic and Chinese market. I think Shangri-La is a very different animal, a big multinational global player. A big part of their membership base would be in markets that we’re quite familiar with. That one will follow our more traditional principal approach.

[Andrew DSilva:]

I mean, is there a rationale for China being agency typically going at least in early days? Or, is it just circumstantial?

[Rob MacLean:]

Yes. There’s rationale behind it for sure, if you think about core components of our principle approach. It’s taking ownership of marketing and merchandising; and providing revenue guarantees; and investing in, our capital into technology enhancements, et cetera. We really see some of the complexity in these very early days. Some of the complexity associated with entering the Chinese market. We just want to be prudent that we learn a little bit about how that domestic market is working before we expose our businesses to some of the complexities of the principle model.

[Andrew DSilva:]

It’s you guys that are deciding that. It’s you want to be agency partner and not principal partners. I thought it was the loyalty provider themselves that were making that call.

[Rob MacLean:]

No. We want to make sure we can do a great job in those markets first and foremost. Then we’ll take on more and more responsibility.

[Andrew DSilva:]

I got it. All right guys, hey thanks for the time. Good luck going forward.

[Rob MacLean:]

Thanks.

[Operator:]

Our next question is from Pardeep Sangha from PI Financial.

[Pardeep Sangha:]

Hi. Good afternoon. Thank you for taking my call.

[Rob MacLean:]

Great.

[Pardeep Sangha:]

You haven’t provided any update with regards to your MasterCard relationship, and the banks, and where your pipeline is on that.

[Rob MacLean:]

Yes, I think just in general, the pipeline, we’re feeling very good about where the pipeline is. It continues to be very deep, and fairly broad. I have tried to provide a little more detail on that. If you think about Asia, obviously going well. Today’s Shangri-La announcement is a good indication of us continuing to lean into that market and seeing results. I’d say we had some fairly advanced discussions with a number of other partners in the Asia region. I should comment, the relationship we announced in the second quarter with the Collinson Group is really working very well. We’re seeing the teams work well together. Some of the linkages and relationships that they’ve had with some of their products and services leading to great kind of progress in terms of the pipeline in the Asia market. We’re very kind of pleased with the way that’s going. I would expect to be making additional announcements out of Asia here in the not too distant future. If you think about Europe, as I mentioned in my prepared remarks, a very strong demand for particularly the hotel products under the banner of either PointsHound and that’s in that brand. Or, our newly branded Points Hotel product. Good existing partners and new partners that are either signed or in advanced discussions. We just think it’s interesting in that European marketplace that they’re early adopters of some of this innovation that we’re doing in the hotel space. As I think I have broadened that, and I really think about that as the Europe EMEA market. Then I think in that area as well, that’s where we’re seeing some progress maybe finally on some of the MasterCard relationship. We’re not quite prepared to announce anything firm yet. But I would say we’ve made more progress here in the second quarter in terms of leveraging that MasterCard partnership. We are very optimistic that we’ll be out of the gate with some relationships there in the not too distant future. Finally seeing some of the expected opportunity manifest itself with the MasterCard relationship here in the second quarter; so pleased with the way that’s going in early. But we’ll continue to pursue that opportunity around the MasterCard partnership. Then, when I think about North America, much more variety. We’re seeing some pretty advanced discussions with a multiple of verticals. We’re seeing financial services obviously as we move into the wallet space. We’ve got additional airlines that are well along the way to news, hotels, and retail where particularly on our PBS business or our corporate mileage sale business. We’re seeing some really interesting developments there that are benefiting our partners as I mentioned in my prepared remarks; but also giving us new opportunities to leverage our platform in all of these loyalty e-commerce transactions and access to our loyalty program partners with big retailers that haven’t historically used these miles and points as part of their overall marketing strategy. I really like some of the things that are happening on the North America front as well. Lots of balls in the air, and lots of kind of variety in terms of the kinds of verticals and geographies that we’re having some success on. We’ll keep knocking these down.

[Pardeep Sangha:]

Okay, it sounds good. As for the second quarter, I mean, can we sort of assume basically that your United Airline and U.S. Air revenue loss was greater than the new revenue that you gained. I’m sorry. The American Airlines and U.S. Air revenue loss was greater than the new revenue gained from United Airlines in Q2. Whereas in Q3 and Q4, you’re expecting United Airlines will be greater than the loss than American and U.S. Is that some good way for us to think about this or no?

[Rob MacLean:]

I think that’s a good way to think about it.

[Pardeep Sangha:]

Okay. Then finally on the digital wallet side. Can we assume basically that for 2015 it’s really a minimal revenue, zero pretty much? For 2016, digital wallet will still be a pretty small revenue?

[Rob MacLean:]

Yes, I mean, we certainly haven’t gone down a product level guidance as you know, Pardeep. But the way we’re thinking about ‘15 is we want to demonstrate that the product and the platform is usable for some of these big categories. Categories that historically never tapped into loyalty. Certainly categories that have a dramatically bigger footprint and broader reach of financial services and payments being the example. That we can build a platform and leverage the assets that we’ve pulled together for shareholders over the last number of years to give ourselves an opportunity to participate in what we believe to be a massive space around payments and financial services. For us, the metrics that we’re evaluating are far less about near-term economics and much more about can we demonstrate buyers or the product and the offering in active participation with our partners and our consumers? That to me will be indicative of success here in ‘15 and ‘16. There’s no question in our mind as those metrics move forward, the economics will follow pretty closely.

[Pardeep Sangha:]

Okay, thank you very much.

[Rob MacLean:]

You’re welcome.

[Operator:]

Our next question comes from Ed Woo from Ascendiant Capital.

[Edward Woo:]

Yes, thanks for taking my question. I know you guys said in the back half, you expect a March acceleration of revenue. But at the same time based on the math, you expect like a declines in your profitability. How do you balance between growing revenue versus focusing on what you saw in this quarter and growing profitability?

[Rob MacLean:]

Yes, that’s a good question. It’s something that we work with our partners on a partner specific basis literally all of the time. When we sit down and we’ll layout the annual plan with our partners, it’s that combination and that discussion is held pretty directly. We have a mix with different partners. Some have more of a revenue driver. Some have more of a profitability driver. We balance that all up through our guidance and our planning for the year. That’s what you see reflected in our annual guidances is kind of the aggregate of all of that activity. We will when we think about 2015, we saw Q2 be a bit more activities that led to higher profit margins and gross margins; maybe a little bit slower topline growth. That’s done as one quarter as part of a full year approach. Overall, we’re looking at 15 to 20% growth in revenues; and 15% to 25% growth in margins. That’s really the aggregate of the approach with all of our different partners. We do try to lay that plan out and then meet or meet or exceed it. It will vary quarter to quarter. But that’s kind of the decision making for the annual plan.

[Edward Woo:]

How much flexibility do you have in that annual plan? If you were to take a look out now and it’s the middle of the year. Can you make adjustments and say hey, you know what? We like the profitability now. Let’s just adjust the revenue and have our lower outlook? Or, is it pretty much set I guess when you do your annual budgeting?

[Rob MacLean:]

Well, as you would appreciate as a public company when we put the guidance out, we want to be pretty sure that we’re in a situation with our partners that we can meet or exceed the guidance on an annual basis. We certainly have flexibility where we see opportunities to enhance the performance, either topline or a profitability. That’s in concert with our and in sync with our partners. We have opportunities to kind of throw more fuel on that fire so to speak. But we really keep an eye on the aggregate as it relates to the Points to make sure that the ebb, and flow with all of our different partners is still going to end up in a spot where we’re driving the kind of growth that we would expect for our shareholders and the markets.

[Edward Woo:]

Great, well thank you and good luck.

[Rob MacLean:]

Great, thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and are out of time for today’s call. Points International thanks you for your time and your participation. You may disconnect your lines at this time. Have a good evening.