XWELL, Inc.
Q4 2016 Earnings Call Transcript

Published: 30 Mar 2017

[Executives:]

Andrew Perlman - CEO Ed Jankowski - CEO, XpresSpa Cliff Weinstein - EVP and President of FLI Charge

[Analysts:]

Josh Gottlieb - Cedarview Capital Management

[Operator:]

Thank you for joining us for today’s call. Before I turn the call over to the company, we need to advise you of the following; comments made on today’s call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time-time in the company’s SEC filings including the company’s report on Form 10-K for the year ended December 31, 2016 and other current and periodic reports the company files with SEC. At this time I’d like to introduce Andrew Perlman, the Chief Executive Officer of FORM Holdings.

[Andrew Perlman:]

Good afternoon, and thank you all for taking the time to join us for an investor update and earnings call. I would like to update our shareholders on our full year results, expand upon the update we provided in January and review some of the near term growth opportunities we see in our business segments, that should drive revenues and results and enhance profitability. Joining me today on the call are members of FORM Holdings, XpresSpa, Group Mobile and FLI Charge management. We have Anastasia Nyrkovskaya, FORM Holdings, Chief Financial Officer, Ed Jankowski, XpresSpa's, Chief Executive Officer, Darin White, the President of Group Mobile, and from FLI Charge, we have Cliff Weinstein, the President of FLI Charge and FORM's Executive Vice President. To summarize 2016 we made several important strategic changes that establish a presence in the travel, health and wellness industries and deepened our presence in the technology industry. I appreciate the feedback and support of our shareholders that we have received. Today FORM has two key revenue drivers, XpresSpa, which was acquired in December 2016, and is the leading airport spa company in the world, and Group Mobile, which we transitioned into a rugged computing full service integrated solutions provider, who aims for self-sustaining growth. XpresSpa is the company's largest acquisition to-date and generated annual revenues in 2016 of $43.8 million. XpresSpa has approximately 50% market share in the United States, as measured by the number of airport spas. It provides premium health and wellness services through its 53 locations within 22 of the largest and most desirable airport hubs in the United States, Amsterdam, and Dubai. Of the company's 53 spas, 49 are located in the United States. Concurrent with our due diligence, a management change was initiated in June of 2016, when luxury and airport retail industry veteran, Ed Jankowski joined the company. Ed has been instrumental in streamlining XpresSpa's operations, which resulted in an immediate increase in same-store comparable sales from negative 1.6% in the first half of 2016 to 12% in the second half of 2016, and that momentum has continued into 2017. We see several opportunities in the near term to continue enhancing XpresSpa's growth and operations which I'll expand upon later in my remarks. Our next largest contributor to FORM's revenue is Group Mobile. Prior to FORM's acquisition Group Mobile was a reseller of rugged mobile and field use computing products, with limited resources, flat revenue and no competitive differentiation. Upon adding key hires, completing system level enhancements and making a strategic bolt-on acquisition of a value-added reseller and services business, called Excalibur Integrated Systems, Group Mobile has now completed its evolution from a reseller to a full service integrated solutions provider. With that I'd like to dive into our segments and provide some updates on financial performance as well as our strategic outlook for each, starting with XpresSpa. XpresSpa will be the platform by which the company will accelerate its growth in the travel health and wellness space. XpresSpa provides air travelers with premium health and wellness services as well as branded line of luxury travel products and accessories, at its 53 locations. Counter to the instability of traditional retail, which has been exacerbated by shifting shopping preferences and the proliferation of eCommerce offerings, the airport retail market continues to grow, due to increased travel security and screening requirements that are creating a captive environment within airport terminals globally. In response to these changes airport consumers are demanding greater access to innovative and upscale retail food and services options. In fact the North American airport retail market is on pace to grow at a 19% compounded annual growth rate to $9.9 billion annually in 2020, according to New Market Research and Maker [ph] Market Monitor. XpresSpa's flexible operating model, with compelling store economics is the perfect partner for airport operations looking to stay on trend with the powerful health and wellness movement. Within airport retail XpresSpa is the market leader in its category, with 49 locations domestically, a number we believe we can grow to over 100 locations over the course of the next three years, with the increased penetration of existing airports, deployment of its mobile kiosks and expansion into airports not presently served by XpresSpa. From a global perspective we believe that XpresSpa's unit opportunity can exceed 250 company owned spa's over the long term of which 150 would be domestic and 100 international. This does not include franchise opportunities which we are in the early stages of developing for secondary and tertiary airports. To accomplish this growth we are currently participating in 13 RFPs for new spa locations that are being offered by airport retail authorities and we expect in excess of 20 RFPs to become available this year. Traditionally XpresSpa has successfully won approximately 80% of the RFPs it has entered, giving management confidence that the improvement they are making to the XpresSpa format and operations will only further solidify its leadership position in the future. We just recently opened our fifth location at New York JFK International Airport Terminal 4, with another location at JFK coming shortly and expect to open two locations this spring at Phoenix's Sky Harbor International Airport and one location in the fall at Charlotte's Douglas Airport. We are already executing on these four scheduled openings for 2017 and importantly this does not include the potential for several others which will be dictated by the various RFPs processes that we are currently engaged in. JFK is an excellent example of the store density we can achieve within airports. In fact once the additional JFK build out is complete we will have nine spas operating within JFK, which speaks to the unique dynamic of consistent demand in the airport environment. As I mentioned XpresSpa spa's have strong store level economics with modest CapEx requirements, which deliver strong cash on cash returns. The cash on cash returns are expected to generate a full payback in 2 to 2.5 years with a typical lease term of seven years. Moving forward we expect the build out of new spa locations to cost less than $500,000 per spa and produce in excess of a $1 million in revenue, with store level contribution margins of 20%. We are comfortable that we can maintain and improve upon the store profitability over time. As attractive as the store economics are there are considerable opportunities for improvement that will enhance revenues and margins. XpresSpa's management has been instrumental in effecting immediate change in areas such as spa layout and labor management. These changes alone generated pronounced increase in same-store comparable sales. To provide some further context on our labor opportunity XpresSpa offers a product where demand outstrips supply. By simply executing on our work force expansion initiatives of improving recruitment and retention of employees, the company should be able to better address this demand, improve customer service and ultimately allow us to drive revenue growth. There is also a significant opportunity for XpresSpa to improve operating strategies through optimization and price elasticity analyses which will ensure that we are maximizing returns on investment at each individual location. As I alluded to the company is still early in its operational advancement. Management has commenced upgrades to its legacy IT infrastructure and point of sales systems which will roll out in the fourth quarter of 2017. These systems will enable management to better understand the demands on each spa, pricing opportunities and optimize labor needs in conjunction with employments, so we can bring a level of consistency to our customers and allow us to execute on our promise of timeliness, which is inherent in our efforts to put the express back in XpresSpa. These systems will allow a more complete solution for the company's travelling customers permitting reservations and opening up targeted digital marketing to approximately 150,000 affinity members already in our system. Shifting towards the financials, we are confident in our original forecast of generating annual same-store sales increases of approximately 10% for the full year 2017. Our experience in the first quarter of 2017 validates this forecast as we expect to generate preliminary revenues of approximately $10.6 million to $10.9 million during the quarter, despite the difficult comparison to the prior year caused by the shift of the Easter holiday out of the first quarter and into the second quarter, which we estimate shifted approximately $0.5 million of revenue from the first quarter to the second quarter. In an effort to assist investors with modeling our XpresSpa business we think it's important that you have a better understanding of our seasonality given the lack of comparable financials. The historical seasonal cadence of XpresSpa sales progress throughout the year, all else equal is as follows; the first quarter typically represents approximately 21% of annual revenue, the second quarter 26%, the third quarter 27% and the fourth quarter 26%. This seasonality is largely correlated to the variations in employments based on our spa's geographical footprint. For the full year 2016, XpresSpa generated $43.8 million of revenue which represents a 13% increase as compared to the prior year. In the fourth quarter it generated 11.4 million of revenue, which represents a 19% increase. As a reminder our consolidated financials only reflect this structure following the closing of the acquisition on December 23, 2016 through the end of the year. Now I'd like to transition and speak about our additional segments. For the full year 2016, Group Mobile generated $6.7 million of revenue. Bookings and customer commitments in the fourth quarter were $6.4 million, an increase of more than 450% versus the prior year period. These bookings support strong pipeline of revenue that will be recognized throughout 2017. Based on preliminary figures, for the first quarter of 2017, management estimates that the company will recognize approximately $3.4 million to $3.7 million of revenue in the quarter, which puts Group Mobile on pace to achieve 2017 target revenues in excess of $20 million. Similar to other technology solutions providers Group Mobile's business is impacted by seasonality. The historical seasonal cadence of Group Mobile's sales progression throughout the year, all else equal is as follows; first quarter typically represents approximately 19% of annual revenue; second quarter, 37%; third quarter 26% and fourth quarter 18%. This seasonality is largely correlated to the variations in capital budget spending for IT resources. We are comfortable that with its larger and more complete platform Group Mobile should enjoy considerable gross margin expansion in 2017 and to that end we are targeting a 300% plus basis point increase to over 15% of revenues which will put Group Mobile on a path to profitability for the full year 2017. Group Mobile has the leadership team in place to further penetrate its markets following the recent addition of Excalibur Integrated Systems, which brings an important and complementary services business. This solidifies Group Mobile's evolution from a reseller to a full service integrated solutions provider and is expected to better align the company with its consumers going forward, while adding a higher margin mix of business to drive profitability. I will now touch on our cutting edge charging technology company, FLI Charge. Last summer FLI Charge launched its consumer product line in an effort to support existing and future partners. These orders were fulfilled towards the end of 2017 and the team has since launched an eCommerce presence on its website and through partnerships with online retailers. FLI Charge's consumer product line has been on the market for approximately 90 days and the response thus far has been positive. While our direct to consumer business has potential FLI Charge's management team focuses the vast majority of its time on further developing their partnerships with many of the leading global brands, in verticals such as power tools, automotive, aerospace, education, hospitality, office and conventions. It is our belief that the most effective way to gain traction and increase feasibility is to leverage our partners distribution channels and let FLI Charge's convenience be curtailed [ph]. People that appreciate the technology will create organic demand for our consumer products. Simply put B2B will drive demand to B2C. I will now touch briefly on our IP portfolio. On December 5, 2016 the company assigned the majority of its telecom patent portfolio, which totals approximately 500 patents and patent applications back to Nokia. This effectively completes the company's licensing campaign as it relates to monetizing telecommunication patents. Moving forward it will continue to extract as much value as possible from its remaining intellectual property assets, being ever conscious at maximizing return on investment. The company's intellectual property segment generated full year 2016 revenue of $11.2 million. This was due to a one time licensing agreement of $8.9 million on the portfolio it has since assigned back to Nokia. The firm's capital structure remains sound with current assets of $23.5 million, a cash balance of $17.9 million and $6.5 million of long term debt as of the end of 2016. In 2017 the company expects to improve its cash flows through extracting synergies from our acquisitions, which will be primarily focused in the areas of corporate functions. We also expect to realize improved cash flow due to expected revenue growth and the resultant leverage of our fixed cost base which will provide the foundation for expanding our operating margins as we realize scale. In closing, I would like to reiterate how excited we are about our operating businesses. XpresSpa takes us to the epicenter of the fast growing travel, health and wellness industry, with the highly productive store economics. And Group Mobile has made significant improvements in 2016 and is positioned to attain profitability. These two core businesses are expected to generate in excess of $70 million of revenue in 2017. Our immediate focus is on building these core businesses, seeking strategic alternatives for FORMs remaining non-core assets. We see an immediate opportunity to leverage our platform, begin extracting synergies and drive our culture of operational excellence. We look forward to updating FORMs shareholders on our pursuit to enhance shareholder value. Operator you can now open the call for Q&A.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Okay, and our first question comes from Josh Gottlieb. Please state your question.

[Josh Gottlieb:]

Hi, it's Josh Gottlieb from Cedarview Capital. Hi, Andrew, congrats on a good quarter. I had a question on your leasing program, how does it work exactly when you enter a new airport, how the lease terms work?

[Andrew Perlman:]

Yeah, Andrew Perlman here. The general term of the lease is approximately seven years and again quarter-to-quarter you will see in our financials that generally speaking leases are a greater of 7 years [ph]. So we get a minimum guarantee and a revenue share. So as a percentage of revenue we are normally paying 12% of our revenue to the airport because in almost every case we are operating above the minimum guarantee. So the top line terms would be approximately seven years and I think as an expectation paying about 12% of revenue.

[Josh Gottlieb:]

Got it, okay. And what are the upfront costs in getting a store up and running?

[Andrew Perlman:]

So, a lot of it depends on the square footage of the store, but generally what we work for it is a situation where the revenue generated in that 20% profit coming from the store will pay back the CapEx required to build out a store within the first 2 to 2.5 years, at this point and overtime we are working to be more efficient about our build out costs and obviously you look at same-store sale the amount of time in which we get paid back for our CapEx will be compressed.

[Josh Gottlieb:]

Great. Very helpful. Final question, XpresSpa seems to be the crown jewel of the company currently. Can you just talk about timing on some of your other business segments, when you think you may do something strategically whether it's an add-on or a sale?

[Andrew Perlman:]

Sure. As I said before we are constantly try to maximize value of everything that we own. I wouldn’t forecast anything around an exit. I don't think it would be proper to do so, but I think that the way to think about where we are is XpresSpa will be approximately 70% of the company's revenue for this year. And in terms of Group Mobile, it's a growing business and we look forward to building both overtime, obviously we are in the business of maximizing its business value to shareholders as possible. So if a strategic were to come along and make a bid for one of those assets we of course would look at it seriously.

[Josh Gottlieb:]

Great. Thank you, very helpful and look forward to following [ph].

[Andrew Perlman:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Greg Russo [ph]. Please state your question.

[Unidentified Analyst:]

Hi, Andrew. Congratulations on the quarter and the outlook. I actually had a few questions around XpresSpa, the addressable market. I think you mentioned that over time you can get the store count of over 150. I know you mentioned that RFP, you are seeing that like 80% run rate and there seem to be 20 or so years. So the 150 goal, how do you think of the pace of how you going to get there, and just from RFPs or are the other ways to do it and then I’ll follow-up as well. Thanks.

[Ed Jankowski:]

Well, it's actually Ed Jankowski, I'll answer that. Especially having just come back from the ARN Convention in New Orleans which is the largest airport conference in the U.S., obviously there is three different ways that we can do that. Not every single opportunity comes through an RFP. There are more and more -- there is a prime concessionaire that actually does the RFP and it's awarded a certain amount of square footage in the airport. So we have some really great conversations with people like Hudson, [indiscernible] and OTG, that are -- literally have space available today without having to gone through the RFP process. So that's number one. Number two, the airports [indiscernible] to our new kiosks and top-up program and many of them have opportunities of -- for holding areas or old phone banks or different positioning throughout the tunnels [ph] where it's not necessary to do an RFP, and even though these might be shorter the cost of the build out is much less in a kiosk or a top up or a temporary location. A great example of that, that Andrew brought up was that we currently have -- we're operating four [indiscernible]. They were given back to us and we are able to do temp location in a matter of weeks. So that will be another vehicle for growth. Currently there is 53 airports in North America that have more than 3 million enplanements a year and that's hugely the cut off that we book at, anything more 3 million enplanements. Out of the 53 we're currently in close to 20. So there is a number of secondary and tertiary airports that still have very healthy enplanements that we spoke to at the ARN that are very, very interested in sitting down with XpresSpa to talk about a temporary or kiosk locations and more importantly RFPs that might be coming down the pipe.

[Andrew Perlman:]

So I think just to pull out one of the statements that I've made, out of those 53 locations if you're seeing that we're in a little bit over 20 of them, that leaves a lot of white space. And so as a result if you actually do the analysis on those 53 airports that's how you quickly get to a addressable market at a 150 company-owned stores and kiosk locations. And then as I've mentioned and as I mentioned in my remarks earlier, beyond that 150 we think that there is a franchise opportunity.

[Unidentified Analyst:]

Great, thanks. And with XpresSpa are there other like adjacencies, new products and services that you've contemplated branching into, moving on to expand TAM a bit.

[Andrew Perlman:]

Sure. So, the answer is yes, absolutely. The relationships that we have with the airports are key to that. And what we've seen is that the airports are increasingly focusing on one, services, and two, on wellness. And while we're not prepared to make public statements about what adjacencies we may go into overtime it's something that we're definitely looking at. In addition to that one of the things that is presently possible to exploit is that we do have approximately 50 outlets in airports with upper demographics travelers going through them. So we do have shelf space to sell additional products and services and that's something that we're looking at very closely right now. And then you can expect to see us doing some things this year.

[Unidentified Analyst:]

Great, thanks a lot. Good luck.

[Andrew Perlman:]

Thanks.

[Operator:]

Okay. Our next question comes from [indiscernible].

[Unidentified Analyst:]

Yeah, hi Andrew. Congratulations on the quarter and I'm an individual investor, excited about the outlook too. I was wondering if you could comment on any of the synergy that you might be working on between product lines. I know I can think of a lot?

[Andrew Perlman:]

Sure. So just in terms of one of the key things that we're rolling out, that we're looking at right now is upgrading the technology across the XpresSpa. And that's actually something that we have our team from Group Mobile actively working on. So there definitely is some crossover there. In terms of products we really focused on selling through XpresSpa the products that work and then adding to that line overtime. But the real synergy that we see is the synergy that occurs at corporate level which is the synergy that happens through our accounting team and XpresSpa's accounting team and also the synergies between our various people and just streamlining and being more cost efficient as an organization.

[Unidentified Analyst:]

Okay. Have you considered putting FLI Charge in an XpresSpa to sort to advertise to customers?

[Cliff Weinstein:]

Yeah, this is Cliff Weinstein. The answer is yes, charging at the airport is major challenge for airports, we have all been there. The answer is yes, and I'm sitting next to Ed now, and as the XpresSpa teams moved laying the groundwork and the foundation in getting all our ducks in a row is -- it is a big priority for us to offer charging in XpresSpa and just see it rollout shortly.

[Unidentified Analyst:]

Okay, great. That's all the questions I have, appreciate you taking them.

[Andrew Perlman:]

Sure.

[Operator:]

And there are no further questions. Thank you. This concludes today's webcast. We thank you for your participation. You may disconnect your lines at this time. And have a great day.