Despegar.com, Corp. (NYSE:DESP) Q2 2023 Earnings Call Transcript
Despegar.com, Corp. (NYSE:DESP) Q2 2023 Earnings Call Transcript August 20, 2023
Operator: Good morning, and welcome to Despegar's Second Quarter 2023 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investors section of the company's website www.investor.despegar.com. [Operator Instructions] This conference call is being recorded. And as a reminder, all participants will be in a listen-only mode. Now, I'd like to turn the call over to Mr. Luca Pfeifer, Investor Relations. Please go ahead.
Luca Pfeifer: Good morning, everyone, and thanks for joining us today. In addition to reporting unaudited financial results in accordance with U.S. Generally Accepted Accounting Principles, we discuss certain non-GAAP financial measures and operating metrics, including foreign exchange and neutral calculations. Investors should read the definitions of these measures and metrics included in our press release carefully to ensure that they understand them. Non-GAAP financial measures and operating metrics should not be considered in isolation as a substitute for or superior to GAAP financial measures and are provided as a supplemental information only. Before we begin our prepared remarks, please turn to Slide 2 and allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties which could cause actual results to materially differ, including factors that may be beyond the company's control.
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These include, but are not limited to, expectations and assumptions related to the integration and performance of the business we acquire, including Best Day, Stays, Viajanet and Koin. For a description of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and our press release. Speaking on today's call is our CEO, Damian Scokin, who will provide an overview of Despegar's second quarter performance as well as an update on our strategic initiatives. I will then discuss the quarter's financial results in more detail, after which Damian will end our prepared remarks and provide an update on our annual guidance. We will then open the call for your questions. Damian will begin his remarks on Slide 3. Damian, please go ahead.
Damian Scokin: Thanks, Luca, and good day, everyone. Thank you for joining our results call and for your interest in Despegar. As the quarter's excellent results show, our strategy to drive earnings power continues gaining traction. In addition to the ongoing recovery in travel demand, our improving product mix and higher ASPs drove a 23% increase in revenues, which reached yet another quarterly record of $165 million. Keep in mind that we achieved this in our seasonally weakest quarter. We also maintained our cost discipline during the quarter. OpEx decreased 18 basis points as a percentage of gross bookings when excluding one-time impacts and was even lower on a reported basis as we benefit from the reversal of the tax provisions that we explained in the morning's earnings release.
The quarter's top-line growth, coupled with our underlying operational leverage, drove adjusted EBITDA 71% higher to just over $20 million when excluding one-time impact. That's the highest second quarter EBITDA that we generated since the company's IPO. Further, Koin continues progressing well towards the breakeven point, improving $3.9 million year-over-year and posting only a negative $600,000 of EBITDA in the quarter as our take rate versus expected losses margin continues to expand. With respect to our many strategic initiatives, we are deepening our omnichannel strategy by employing generative AI and also deploying our successful asset-light and tech-enabled offline strategy in new markets. I'll explain both later in our presentation.
On this slide, we show the steady progress we have been making across our core strategic initiatives to improve profitability and further diversify our revenue streams. Starting with revenue diversification, higher-margin travel packages continue to grow reaching 33% of our gross bookings in the second quarter. That's an almost 600 basis points increase versus last year and has been a key component in our non-air revenue reaching 62% of total revenue. And as we continue to grow in Brazil and Mexico, these massive markets now account for 60% of our gross bookings. Moving to omnichannel in the middle of the slide, we continue to effectively leverage our B2B channels in combination with our white-label solution to increase our market penetration generating 15% of our gross bookings in the quarter, compared to last year's quarter, that was also roughly 600 basis point increase.
In addition, we continue to leverage our technology platform for our app-first approach, which helps drive customer growth and loyalty, while also giving us the opportunity to further cross-sell additional travel products to our clients. As shown on this slide, our portfolio of branded apps accounted for nearly 38% of our online B2C transactions in the quarter. At the bottom of the slide, we can see how we continue strengthening the customer relationship with our brands. Today, we have nearly 17 million loyalty program members while points redemptions doubled over the last year reaching 8%. Our Net Promoter Score also continues rising as we recover from the impact the pandemic had on customers' travel plans. We are nearing our pre-pandemic score, but we don't plan to stop there.
The brand loyalty that customer centricity fosters remain an integral part of our strategy. With that, I will turn the call over to Luca for a more detailed review of our second quarter performance.
Luca Pfeifer: Thanks, Damian. My review begins with the first chart on Slide 5. Also behind our record second quarter revenue of $165 million was a take rate that was maintained slightly above the range that we presented during the Investor Day last year. The 12.9% rate in the quarter reflects our disciplined approach and emphasis on profitable growth, particularly in Mexico, Chile and Argentina. Moving to the second chart on the slide. Our cost of revenue increased 33% versus last year's quarter, partly due to onetime expenses. When excluding these one-offs, shown at the right of the chart, cost of revenue would have increased only 23%, in line with our sales growth. Also, on this basis, our gross profit would have increased 23% to $110 million, another record high.
Let's turn to Slide 6. As Damian noted, we have maintained our cost discipline, which is driving operating leverage as our revenues continue growing. As the chart on the left indicates, our fixed costs only increased 1% versus last year's quarter to just over $49 million when excluding one-time impacts. This was mostly due to higher technology and product development costs related to expanding our developer team as well as to FX and inflation. Also, keep in mind that $14.3 million of this amount was the one-time benefit that we detailed in the earnings release. The line chart in the middle of the slide illustrates the operating leverage we've been pointing to. As a percentage of revenue, our G&A costs fell 640 basis points, while technology and product development costs ticked up slightly.
And when excluding the $14.3 million one-time impact, G&A decreased 15 percentage points. Lastly, on costs, our sales and marketing expenses increased 22% year-on-year. The increase reflects offline investments in Brazil as well as ongoing growth investments, particularly in our B2B and white label channels, which increased third-party commission expenses. On a sequential basis, selling and marketing expenses were flat. Let's move to Slide 7. The ongoing recovery in travel demand and our improving revenue mix, combined with our underlying operating leverage continue driving profitability. Our adjusted EBITDA increased 183% to $30 million on an as-reported basis, which nets the reversal of the tax provision and the onetime costs incurred under cost of revenues or $9.8 million.
The corresponding margin was 18%, our highest since 2018. When excluding the one-time reversal and costs, adjusted EBITDA increased 71% to $20.2 million, our highest second quarter EBITDA since the IPO. And on this basis, our margin expanded 340 basis points to 12%. Turning to Slide 8. Our profitability also improved with respect to Koin, which is nearing the breakeven point. The $600,000 EBITDA loss in the quarter represents a nearly $4 million year-on-year improvement. In the chart on the left, you can see that total payment volume was 29% lower than last year's quarter. This is because we have maintained a conservative approach to lending as Brazil's credit market remains challenging. Lastly, as shown in the chart on the right, the spread between take rate and Koin's expected losses continue to widen, which reflects both our prudence and effective pricing.
Back over to Damian, who would like to share our latest strategic initiatives before summarizing the quarter, and we begin the Q&A session. So, please turn to Slide 9.
Damian Scokin: Thanks, Luca. We continually invest in innovation to reinforce our substantial technology moat and to enhance the customer experience. Most recently, that has including the application of generative AI, which we are doing in three primary ways. First, on the product development front, we are further leveraging Despegar's large customer base by applying machine learning models to customer preferences. During the third quarter, we plan to launch a better version of an AI trip planner to further enhance our product offering and the user experience. Our developer teams have also been assessing various ways to employee AI to optimize the automated cold writing. The main objective here is to increase the overall efficiency of our technology teams, where in addition, employing AI to customer care in a way that significantly speed the resolution.
This helps lower cost to serve and increase customer satisfaction. Let's move to Slide 10. Building on our success in Mexico and in Argentina region, we will deploy our asset-light tech-enabled offline model in Brazil and Argentina. There are two main objectives here. One, to further increase our margins; and two, to increase our market penetration of these two key geographies. As some of you might recall from our Investor Day a little over a year ago, offline bookings are roughly 50% of Latin America's travel market. The two bar charts in the bottom left of this slide also show that Despegar's core segment, the online travel market, will grow at 13% and 15% in Brazil and Argentina, respectively. The offline segment in both countries will be growing at a CAGR of 12%.
It's also important to highlight that this is a very profitable market segment as well. On the right of this slide, we outlined the timing, cities and store types under our rollout strategies for Brazil and Argentina. Keep in mind that these mostly asset-light retail outlets will [indiscernible] our market-leading brands, Despegar in Argentina and Decolar in Brazil. Our stores will prioritize providing an exceptional customer experience, where our knowledgeable staff will assist our clients with planning their tailor-made holiday travel. Given the size, growth rates and profitability of the offline segment and considering the seasonable cash economies within these countries, we expect our doors to enhance our omnichannel's offering and to further strengthens our earnings power.
This strategic initiative is particularly efficient because of the scalability of our technology platform, and it will help further consolidate Despegar's market leadership in the region. Let's now turn to Slide 11. I would like to leave everyone with a few key takeaways from our second quarter results. The strong recovery in travel demand that continues across Latin America, particularly in Brazil and Chile, coupled with our still improving revenue mix, yielded record revenues for the quarter. Our cost discipline has built significant operating leverage, which combined with a strong top-line growth led to a $20.2 million in adjusted EBITDA. Again, that was the strongest second quarter EBITDA post IPO, even when excluding the one-time benefits in the quarter.
We are also particularly pleased with the performance of our Buy Now Pay Later business unit, Koin, as it nears the EBITDA breakeven point and is well on its way to become EBITDA accretive towards the end of this year, as we outlined at last year's Investor Day. Looking ahead, we expect the recovery in travel demand to continue during the seasonally stronger second half of the year. Specifically, we expect revenue and adjusted EBITDA to increase in the mid- to high single digits in the third quarter. In addition to reiterating our full year revenue guidance of $640 million to $700 million and adjusted EBITDA between $80 million and $100 million, we are confident that we can reach the mid to upper end of our guidance range for the year, assuming the demand recovery continues.
In summary, Despegar's operational strength, combined with the still strong resurgence in travel demand and our focus on improving revenue mix, continue driving our profitable growth trajectory. Our record-breaking revenues and consistent delivery of increasing adjusted EBITDA over the past six quarters are a testament to the dedication of our team and the strength of our growth strategy and business model. Before taking your questions, we would like to publicly welcome Despegar's new CFO, Amit Singh. Our senior management team looks forward to working with Amit to seize the many profitable growth opportunities that we are pursuing and extend our leadership position in Latin America's growing travel market. With that, let's open the call for questions.
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