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Edited Transcript of DESP.N earnings conference call or presentation 16-Aug-18 12:00pm GMT

Q2 2018 Despegar.com Corp Earnings Call

BUENOS AIRES Sep 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Despegar.com Corp earnings conference call or presentation Thursday, August 16, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Damián Scokin

Despegar.com, Corp. - CEO & Director

* Javier Kelly

* Michael James Doyle

Despegar.com, Corp. - CFO

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Conference Call Participants

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* Bradley D. Erickson

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Brian Thomas Nowak

Morgan Stanley, Research Division - Research Analyst

* Eric James Sheridan

UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst

* Kevin Campbell Kopelman

Cowen and Company, LLC, Research Division - Director and Senior Research Analyst

* Manoj Shroff

* Rodrigo Nistor

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Despegar's Second Quarter 2018 Earnings Call.

A slide presentation is accompanying today's webcast, which is available in the Investors section of the company's website, www.investor.despegar.com. (Operator Instructions) This conference call is being recorded. (Operator Instructions)

Now I will turn the call over to Mr. Javier Kelly, Investor Relations. Please go ahead.

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Javier Kelly, [2]

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Good morning, everyone, and thanks for joining us today for a discussion of our second quarter 2018 results.

In addition to reporting financial results in accordance to U.S. generally accepted accounting principles, we'll discuss certain non-GAAP financial measures. Investors are encouraged to review the reconciliation of these non-GAAP financial results, which can be found in the press release.

I will now like to turn the call over to our CEO, Damián Scokin.

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Damián Scokin, Despegar.com, Corp. - CEO & Director [3]

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Thank you, Javier. Let me add my welcome to all of you on the call today. We appreciate you taking the time to join us.

As you are all aware and probably heard from other companies as well, it was a challenging quarter on many fronts. Latin America faced more difficult macro conditions in most of the countries in which we operate, which curbed consumer and leisure travel demand. And we also faced currency devaluation and a contraction in the air booking market in some of our key markets.

Competition remains strong online with continued high levels of investment, but we did see some signs of pullback in off-line marketing channels in the quarter. Against this backdrop, we remained focused on our strategic priorities of driving nonair revenues, share of mobile and improving our customer experience.

We leveraged our leading market position and lowest cost operating structure to improve our customer value proposition in order to gain share and put pressure on some of our competitors who struggled to match our offers. In fact, we gained share at a faster pace than prior quarters.

We further reduced customer fees in air transactions, introduced higher package discounts and absorbed the higher cost of installments passed on by our bank partners. We believe this is the right focus for our long-term strategy and performance of the business. This strategy led us to take more than 1 percentage points of share in our largest market.

We grew gross bookings by 13% in Brazil in U.S. dollar terms and 26% in local currency, several times faster than our largest competitor. Through all of these events, we never lost focus on improving our customer service as well as executing on our long-term strategic initiatives.

In summary, in a much more complex market environment, we significantly outgrew the market and maintained profitability levels similar to last year. We believe we can continue to grow profitably.

Let me now talk about the few key metrics from the quarter. Overall, we performed well with transactions up 18%, and gross bookings in dollar terms up 12%.

We were particularly pleased that 3 key components of our strategy continued to play out. First, the share of Packages, Hotels and Other Travel Products within our total mix increased 700 basis points in the quarter year-on-year and accounted for 59% of total revenues.

Second, the share of transactions via mobile devices was up 400 basis points, accounting for 1/3 of sales. Mobile growth is being fueled by enhancements that were introduced to our platform. Third, customer service quality continues to improve as we saw significant increase in NPS of 400 basis points.

On the financial side, revenue growth was slower than past quarters as initiatives we undertook to increase our market share, such as fee reductions, negatively impacted revenue. We were also hurt by weaker local currencies. EBITDA was down year-on-year, primarily due to the investments we've made in the business during the quarter and the currency devaluation. We are confident we can see a return to margin expansion once macro conditions improve.

Let's move to Slide 4. Our results in the quarter benefited from a reduction in fees and higher package discounts. Our focus on driving sales of higher-margin Packages, Hotels and Other Products and more efficient marketing to better balance growth and profitability also contributed to this performance. As a reminder, in the second quarter of 2017, we had the benefit of Easter travel, which was a Q1 event this year.

Cross-selling of packages is a key initiative for us and continues to perform well, with transactions in packages growing 41% year-over-year. Growth is being driven by the reduction in air fees, higher package discounts as well as more attractive finance options for installment sales.

Packages, Hotels and Other Travel Products now account for 59% of total revenue, and we believe there is room for further growth.

Let me make a brief comment about nonair. Over the past year, we have been adding more directly contracted hotels to our portfolio, which grew by 22% year-on-year. And we're gaining traction in terms of growth in room night. Room night growth in Q2 was 24%. While this is not one of the KPIs we share on an ongoing basis, it is indicative of the success we are having executing our strategy. And we have done so in a period of overall slower macro growth environment.

Gross bookings in dollar terms increased 12% in the quarter and 16% year-on-year for the first 6 months of 2018, slower than transaction growth, reflecting lower ASPs from mix shift to domestic, lower purchasing power and weaker supplier pricing capabilities. This was due to the softer travel market and currency depreciation impact on domestic travel markets, particularly Argentina. On a local currency basis, gross bookings grew 29% year-on-year.

As we have stated in previous communications, our international business is typically based on U.S. dollar prices and adjusted in local currency terms very quickly in periods of devaluation. However, suppliers to our domestic business have less ability to increase prices based purely on devaluation. We estimate that devaluation reduced [to] gross bookings growth by approximately 5 percentage points in the quarter.

Of course, devaluation has a negative impact on overall demand as well, especially in discretionary purchases such as leisure travel. It also impacts destination mix, shifting demand from international to domestic destinations, where ASPs and margins are lower. International order mix declined by 95 basis points year-on-year in the second quarter.

Moving on to Slide 5. We continue to identify opportunities to enhance the customer experience, whether it is through product innovation, interaction with our customer service centers or providing attractive promotions.

Last quarter, we mentioned that we had recently launched call center operations in several LatAm countries as a means to drive additional sales. Today, we are pleased with customer response. For example, gross bookings generated by these call centers were up almost 50% quarter-over-quarter, with ASPs significantly above those of online bookings.

We pride ourselves at excelling at customer service, and our NPS scores have been a testament to that. NPS after-trip experience improved by 400 basis points in the second quarter of 2018, but you can never be good enough and this is an area of our business where we have been actively investing.

Some of the recent steps that we took include taking a more proactive approach working with airlines and hotels to better address customer issues. We also expanded phone coverage, easing customers' ability to reach Despegar and introduced chat and WhatsApp to further enhance our customer service.

Good customer service also creates loyalty, and we have a very loyal customer base. We want to reward them for their loyalty. We are currently working on developing a loyalty program to be launched in 2019. We have already signed an agreement to co-brand credit cards with Visa and MasterCard. We will provide more details over time, but these 2 partnerships are aimed at codeveloping products and services to improve the traveler experience.

Let me end my presentation by discussing enhancements we have undertaken on the technology front to improve the booking experience. New product features recently introduced include a faster checkout on our mobile and web platforms with passenger information fields auto completed to reduce friction while purchasing; and redesigned My Trips section in our app to improve post-sales reservations and allow for self-management; we also welcomed and integrated 2 new low-cost carriers to our system, Viva Colombia and Wingo; introduced an automatic notification of super deals on flight tickets.

I will now turn the call over to Mike to discuss the second quarter financial results.

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Michael James Doyle, Despegar.com, Corp. - CFO [4]

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Thank you, Damián, and thank you all for joining us today.

Moving on to Slide 6. As evidenced by third-party GDS data, we continue to drive market share gains across each of our 4 key markets: Argentina, Brazil, Colombia and Mexico. This came about despite travel industry contraction in some segments of the travel industry due to tougher macro conditions in many of our markets.

Brazil, our largest market, delivered a robust performance as we continue to drive growth in higher-margin packages and hotels, both domestic and international. We also experienced a recovery in lower-margin domestic air, which historically has represented a sizable share of transactions. As a result, transaction growth accelerated to 21% year-on-year, with gross bookings in U.S. dollars increasing 13% despite the 15% depreciation of the Brazilian real in the period.

In Argentina, transactions were up 11% year-on-year despite the overall market contraction. Against a challenging macro backdrop and 30% currency depreciation, growth was mainly driven by the lower-margin domestic travel market.

Transactions in Mexico rose 15% year-on-year despite slower market conditions and currency depreciation in anticipation of the presidential elections last month, a complex external environment and the soccer World Cup. This good performance was mainly led by a strong expansion in higher-margin packages, further supported by broad growth across all products.

In our smaller market, we saw Colombia post a solid recovery with transactions up 20%, the highest rate of growth in the past 5 quarters, mainly driven by strong growth in international packages along with higher growth in domestic air passenger traffic. Peru and Ecuador also performed well, posting our highest rates of growth across the portfolio.

Now turning to the P&L on Slide 7. Revenues were up 4% year-on-year, reaching $128 million, impacted by several factors. First, in addition to the reduction in air customer fees driving cross-selling of higher-margin packages, we took the strategy one step further in Q2 and introduced customer discounts and packages to accelerate market share gains.

To put this into context, overall customer fees, including discounts as a percentage of total revenue, decreased year-on-year by 700 basis points, and we gained market share at a faster pace than prior quarters.

Second, we experienced a mix shift from international to lower-margin domestic travel in Argentina of 148 basis points, reflecting a challenging macro environment as travelers opted for shorter, less-expensive trips.

And third was the impact of the overall currency depreciation on domestic travel, mainly in Argentina and Brazil. This was due to both the mix shift from international to domestic travel and domestic suppliers having limited ability to increase prices solely based on devaluation in both the Argentina and Brazil domestic markets.

The combination of these factors resulted in a 4% decline in revenues per transaction in the Packages, Hotels and Other Travel Products segment and a drop of 22% in the air segment, driving an 80 basis point contraction in revenue margin to 10.8% in the quarter.

However, the continued strategy of lower fees has allowed us to gain market share at a faster pace than in the past as well as increase the share of higher-margin packages and hotel transactions. These products now account for 59% of total revenues, up from 51% in the year-ago quarter.

Turning to Slide 8. Currently, we are achieving better returns on our marketing investments by investing in financing installments, lowering air fees and offering discounts on packages and an incremental investment in traditional marketing.

In this context, we are taking a more efficient approach to marketing spend, which remains relatively flat year-on-year and declined 120 basis points as a percentage of revenue to 33.9%. And importantly, we achieved this improvement on a lower revenue base. By contrast, we've amplified other strategic initiatives to accelerate market share growth and drive customer satisfaction levels.

Let me highlight a few. First, we reduced customer fees in air transactions and increased discounts offered in packages supported by higher supplier margins. Second, we continue to offer travelers an attractive selection of customer financing and installment plans, a key tool -- key marketing tool in driving conversion. Note that we also experienced higher installment plan cost, primarily in Argentina, from the sharp increase in the interest rates in the quarter.

Third, in line with our goal of improving customer satisfaction, we continue to introduce enhancements to our fulfillment center this quarter, hiring customer service agents both internally and through a third-party service provider, driving up NPS.

As in the prior quarter, we also had a higher mix of transactions where we were the credit card merchant of record instead of the airline suppliers, allowing us to offer more attractive customer financing options. These costs were partially offset by lower fraud and charge-backs.

While these initiatives are allowing us to further strengthen our competitive position for the long term, gross profit declined 2% year-on-year, with gross margin contracting almost 440 basis points to slightly over 67%.

Moving on to profitability. As you can see on Slide 9, our strategy to prioritize top line growth and strengthen our market position resulted in a 9% year-on-year decline in adjusted EBITDA and 130 basis point contraction in adjusted EBITDA margin to 9.3% in the quarter. To reiterate what Damián said, we are confident we will see a return to margin expansion when the macro environment improves.

Financial expenses for the quarter increased to $5 million from close to $2 million a year ago. Higher credit card receivable factoring expenses in Brazil driven by growth in gross bookings, together with higher FX losses from currency fluctuations, more than offset higher interest income from invested cash balances.

Income taxes declined almost 90% year-on-year, reflecting a lower effective tax rate from the full recognition of deferred tax assets in certain subsidiaries that were reduced by a valuation allowance in previous years.

Finally, we generated operating cash flow of $300,000 compared to $7.3 million reported a year ago, impacted by reduced earnings, an increase in prepaid expenses, higher CapEx and higher VAT tax credits related to a technology incentive program.

Moving on to Slide 10. We are currently facing a difficult macro environment. We've been operating in the region for over 2 decades and have faced similar challenges and have emerged each time as the leading OTA in the region.

Although we are facing near-term external challenges, we are moving ahead with the execution of our strategic initiatives, driving nonair revenue, mobile bookings and improving customer service levels. We believe these are the right actions to take to further strengthen our position in the market.

Additionally, as we continue to grow our already large and loyal customer base, we will be better positioned to negotiate with suppliers. Together with our fixed operating cost base, this should lead to better cost leverage and improved margins.

As we look to the current quarter, we are not seeing any significant changes to the macro environment and currency volatility. As a result, we anticipate the third quarter order and gross bookings growth could be slightly lower than Q2, given that the sharp peso devaluation did not begin until early May, while in the third quarter, the year-on-year FX translation headwind will impact the entire quarter.

We are continuing in Q3 to compete aggressively through lower air fees and price discounts and packages while offering attractive installment financing options that we plan to do so profitably.

Our team remains optimistic about the secular shifts happening in the market, the shift from off-line to online and to mobile as well. And we see attractive long-term growth opportunities ahead in the online travel market across Latin America.

Finally, 2 additional items of note. We disclosed today in our release that our board has authorized a share repurchase program of up to $75 million to be executed over the next 12 months. We believe that repurchasing our shares represents a compelling return opportunity for our shareholders. At the current share price, this represents approximately 5% of the company's outstanding common shares.

Repurchases of common stock may be executed by management during the open trading window and through a rule 10b5-1 plan outside the trading window. The repurchase program may be suspended or discontinued at any time based on valuation as well as other opportunities for investment, such as acquisitions.

In addition, we are filing a registration statement to register shares held by affiliates of Tiger Global. The primary purpose of this registration statement is to enable Tiger to distribute its shares to its limited partners as one of its funds nears its end of life. We expect the majority of the shares being registered will be distributed to Tiger's LPs.

That ends our prepared remarks. We'll be happy to take your questions. Operator, please open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Brad Erickson with KeyBanc Capital Markets.

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Bradley D. Erickson, KeyBanc Capital Markets Inc., Research Division - Research Analyst [2]

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Mike, I think you called out some better efficiencies or return on investment. Maybe I missed it, but was that a reference at all to marketing spending? And then how should we take the comments around eventual margin expansion in the context of, I think, some ongoing sales and marketing deleverage? Just help us with that, if you can.

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Michael James Doyle, Despegar.com, Corp. - CFO [3]

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Sure. Our comments on marketing efficiency do represent some improvements we've made in marketing spend in online and off-line channels in the quarter. What we have decided strategically, given some of the current macro headwinds, was to focus our investments on conversion of shoppers to customers and providing lower fees on transactions and more attractive installment plans instead of deeper investments in more traditional marketing channels driving traffic to the site. So this is a temporary shift in strategy, where we've done heavy testing to know that this is yielding the best results on conversion. But with more attractive market growth and increase in traffic and shoppers available, we plan to be very aggressive in marketing, including additional investments in off-line and online channels. So when that happens, you can expect some margin deleverage in marketing as we invest more heavily in the future.

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Bradley D. Erickson, KeyBanc Capital Markets Inc., Research Division - Research Analyst [4]

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Got it. And then just any help with the mix of brand versus performance as you lean into these channels going forward. Is one going to be a heavier focus than the other?

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Michael James Doyle, Despegar.com, Corp. - CFO [5]

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The mix of spend has not shifted significantly. So we spend about 1/3 of our marketing investments off-line, the remaining investments in paid performance channels. And we have seen some change in the composition of spend in the marketplace in the quarter where -- with some peers pulling back notably in off-line spend. That's true with at least one of the global players and several of our regional OTA peers.

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Bradley D. Erickson, KeyBanc Capital Markets Inc., Research Division - Research Analyst [6]

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Got it. And then finally, just any update you're able to provide on the CFO search would be great.

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Damián Scokin, Despegar.com, Corp. - CEO & Director [7]

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Yes. The board has hired a global executive search firm, and the process is well underway. And hopefully, we'll have good news relatively soon.

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Operator [8]

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And the next question comes from Eric Sheridan with UBS.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [9]

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Two if I can. One on the hotel inventory side. Any sense you can give us on how much progress you continue to make on adding inventory on a country-by-country basis to augment your reference on the hotel side, and whether the current macro volatility might be enabling some of those conversations as people to look to fill yield in hotels and look for alternatives maybe with online platforms like yourself? And then around the loyalty program, just wanted to understand what some of the investments are that might need to be made in the loyalty program before you launch in 2019? And what do you think it would do for conversion over the medium to long term in the platform?

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Damián Scokin, Despegar.com, Corp. - CEO & Director [10]

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Okay. Eric, on the first question on hotels inventory, we continue to add hotels through our different sourcing streams. We increased the number of hotels that we source directly. We -- and also we did that through our affiliate networks, being Expedia outside Latin America, and the other wholesalers or providers of room inventories that we also source from. So that's continuous growth on that front. As for the current macro conditions, the hotels obviously are looking for more ways to expand their revenue streams. So that's a good context for us to continue growing on that front. But keep in mind, Eric, as we always say, we don't go for quantity here. We would like to keep a strategy that is focused on a limited number of hotels being sourced directly with whom we can generate enough revenue for them, and we can expect very good conditions. In the long term, we will continue sorting through third-party providers. The second question, if I recall correctly, was about loyalty programs and investment needed. Is that correct? We -- sorry.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [11]

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Yes, just the investments needed and what it might do to conversions long term having such a loyalty program in place.

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Damián Scokin, Despegar.com, Corp. - CEO & Director [12]

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Yes. Well, we perceive -- our approach to the loyalty program is exactly that one. It's not a program that has the aim to generate profits by itself, but rather to support and enhance the relationship between clients and Despegar. So the absolute focus of our loyalty program is to increase conversion and to increase repeat rate of purchases. As for the investments and the amount of that impact on conversion, obviously, we have a business case that's very preliminary. And we're going to test and learn from the real impact of that loyalty program on our conversion rate. We -- as for in the -- specific investments, we have reached agreements with [creditor flags] and are working on agreements with banks that we expect that will completely finance and pay for all the investments required.

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Operator [13]

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And the next question comes from Brian Nowak with Morgan Stanley.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [14]

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I have 2. Just can you maybe talk to -- I know the macro environment is still a little bit unstable. Can you talk to sort of what you're seeing in hotel and other transaction growth at this point as we kind of get into mid-August? And then what signs are you sort of looking for as evidence that it's time to sort of step on the performance marketing spend again to sort of focus more on traffic growth? How should we think about timing of when you'll look to reaccelerate that growth?

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Damián Scokin, Despegar.com, Corp. - CEO & Director [15]

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Well, as for the macro context, Brian, as you see, the macro is impacting overall travel demand in 2 ways. One is for a few of our largest markets, like Brazil and Argentina, GDP growth expectations have been lowered significantly since we last talked. In March, when we talked, expectation for Argentine GDP growth were over 2%, and now people are expecting an actual GDP contraction for this year. And in the case of Brazil, a full 1 percentage point was reduced in terms of GDP growth expectations. So there's an overall demand change of scenario. And on top of that, you have the foreign exchange effect in which makes international travel more expensive for Latin America, which not only affects overall demand but a mix shift in between international and domestic, which is obviously affecting not only demand but ASP for us. So as we always say, we assess the context. And in that context, we balance growth and profitability, trying to maximize the long-term value of the company. And in that balance, obviously, marketing investment are a key part of that. As Mike mentioned before, we focus more this quarter on the efforts of driving a higher conversion rather than attracting traffic because we don't believe we can, in this context, stimulate further demand but rather ensure that people are on the site end up buying. What we see going forward, it's -- that for a few more months, we will remain in this context of much lower demand than we expected. But having said that, we all live in Latin America, and Despegar has gone through this processes of ups and downs before. So having said that, the timetable of when we're going to have to get back to normal is hard for me to tell. But we've experienced this before, and demand will come back hopefully sooner than later.

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Operator [16]

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And the next question comes from Rodrigo Nistor with Itaú.

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Rodrigo Nistor, Itaú Corretora de Valores S.A., Research Division - Research Analyst [17]

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It's -- if you could comment on how the elimination of the price floors on domestic flights in Argentina affects your strategy going forward, and how it will impact the margins?

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Damián Scokin, Despegar.com, Corp. - CEO & Director [18]

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Yes, just for everyone on the call, to clarify, like a month ago, the Argentinian authority authorized airlines to charge whatever they want. For a few of them. maybe it's surprising, but there was a floor limit to lower air prices. That's exactly a great news for us because, as we always say, the more people travel, the more Despegar will capture new businesses. And within a very adverse macro scenario, this was a good relief. Just to give you an idea on the week that, that measure took effect, sales shoot up significantly. On that week, we sold perhaps domestic tickets 80% more than the same week last year.

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Operator [19]

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And the next question comes from Kevin Kopelman with Cowen and Company.

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Kevin Campbell Kopelman, Cowen and Company, LLC, Research Division - Director and Senior Research Analyst [20]

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I had a question on the take rate. So your actions to reduce fees and introduce discounts drove that down in the second quarter 700 basis points. To what extent were those fully implemented in the second quarter? Or should we see a bigger impact going forward?

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Michael James Doyle, Despegar.com, Corp. - CFO [21]

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Kevin, this is Mike. I'll take that. So we haven't made any quarter-on-quarter changes in that strategy. So we have -- there's 2 impacts impacting revenue margin. One is the reduction in fees, most typically on air transactions to drive conversion of air-only customers into the packaged booking path. And then the other has been on packages themselves. So in this environment, we've been able to negotiate for larger discounts from suppliers on package inventory, given greater availability of inventory. And we are passing on a higher level of those margins -- of those savings to the customer. And so those both are headwinds to revenue margin, but we think are driving conversion. Part of our strategy here as well is to put some pressure on our competitors in the region, and we believe that over the longer term, that these are -- it's a difficult strategy to be followed. And that's true also on more attractive installment offers. We have seen some pullback from some of our regional peers and their strategies of reducing fees and increasing installments. And we've been able then also to recover some portion of the fee reduction in the quarter. So quarter-to-quarter, we don't expect additional headwind.

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Kevin Campbell Kopelman, Cowen and Company, LLC, Research Division - Director and Senior Research Analyst [22]

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Okay, great. And then one other one. Could you give us an update on M&A, your appetite and the outlook in the current environment?

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Damián Scokin, Despegar.com, Corp. - CEO & Director [23]

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Yes. As we said in previous calls, Kevin, we remain in active conversations with several potential targets. Our appetite in this context is even stronger than before. But we're cautious, we want to make sure we add value through this type of activities.

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Operator [24]

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(Operator Instructions) And the next question comes from [Lukas Okedia] with [Copernico].

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Unidentified Analyst, [25]

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Given the high volatility of the different currencies in the countries you operate, are you doing any currency hedging to match your current assets and current liabilities? I mean, the accounts receivables in local currency versus the accounts payables, which I presume are in U.S. dollars, right?

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Michael James Doyle, Despegar.com, Corp. - CFO [26]

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This is Mike. So we are very closely monitoring our currency exposure, and we do use hedging instruments when needed. In our business, which is almost entirely prepaid transactions, we are continually collecting from our customers, and then we maintain payables due to our travel suppliers. Given our portfolio of markets that we operate in, there is very complex flows across quarters based on travel patterns, so collecting from customers in Argentina that may check into hotels in Brazil. So we are always monitoring our balance of credit card receivables from customers and supplier payables to our travel suppliers. We are, in many cases, able to naturally hedge given those flows. And where we are out of alignment for whatever reason, given demand in an individual market or change in travel patterns, we use hedging instruments to make sure that we're not taking currency exposure on our working capital.

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Operator [27]

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And the next question comes from Manoj Shroff with Barings.

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Manoj Shroff, [28]

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What will be the revenue margin impact of the mix as you continue to improve? Or should we take the current take rate going forward?

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Michael James Doyle, Despegar.com, Corp. - CFO [29]

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So as we mentioned on the call, we had some pressure on revenue margin in the quarter though we don't expect additional headwinds on margin in Q3. We're continuing our strategy of fee reductions to drive conversion and also package discounts for the same reason, but are not expecting additional headwinds on margin.

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Manoj Shroff, [30]

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Right. So in the -- for the next few quarters and years, can we assume the same thing?

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Michael James Doyle, Despegar.com, Corp. - CFO [31]

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So our strategy on fee reduction and package discounts is very much in response to the current environment. So we'll evaluate that as we go and how effective it is on continuing to drive conversion. Structurally, longer term, as the business continues to shift to packages and hotels, those 2 products are higher margin than our average and should provide some lift or tailwind to the revenue margin.

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Manoj Shroff, [32]

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Right. And then -- sorry.

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Damián Scokin, Despegar.com, Corp. - CEO & Director [33]

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I think in my view of -- no, just wanted to add that remember that, in the past, we mentioned that we adjust fees very dynamically on an overall market-by-market basis. And in the context like we are facing now, it makes perfect sense to reduce our fees to encourage conversion. But as the context changes, we will [permanently] update that strategy, hopefully leading to higher fees, and particularly with increase of higher-margin products that will be the case.

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Manoj Shroff, [34]

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Right. And as you said that the currency impact only happened in May. So therefore, the full impact of the weak macro is probably not being felt. So can you see that, from the beginning of the quarter to the end of the quarter, so we can see a substantial change in the good numbers you've seen in Q2 going into Q3?

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Damián Scokin, Despegar.com, Corp. - CEO & Director [35]

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Yes. To be clear, the change of context took place through half of Q2. As Mike mentioned, the FX particular impact was -- has already taken place. The remaining of Q3, what we assume in Q3 is similar to the last portion of Q2 in terms of macro context.

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Manoj Shroff, [36]

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Right. And also the technology product development spend, we managed to bring it down sharply quarter-on-quarter. So has there been some shift into the balance sheet?

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Michael James Doyle, Despegar.com, Corp. - CFO [37]

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No. So the change there -- we're actually continuing to invest in our technology team, and we increased headcount in the quarter. But all of our technology headcount is located in Argentina, where, given the currency devaluation, the U.S. dollar translation effect resulted in some quarter-on-quarter difference and a smaller rate of growth year-on-year. But it is an area of the business that we continue to invest in and we have grown headcount.

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Manoj Shroff, [38]

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Right. And that should change because you'll have to do salary hikes there. So quarter-on-quarter, that will increase eventually?

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Michael James Doyle, Despegar.com, Corp. - CFO [39]

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Over the medium term, the plan is to continue to invest in technology. We think it's a core competence and a big differentiator versus our competitors in the region given the scale of our business and our ability to invest. So we plan to continue to add headcount at the pace the business can afford. So we're not looking for leverage in this area but continuing to expand.

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Operator [40]

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(Operator Instructions) And at this time, we would like to turn the call to Damián Scokin for any closing comments.

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Damián Scokin, Despegar.com, Corp. - CEO & Director [41]

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Sure. Thanks. Before ending the call, I also want to acknowledge and thank Mike for his many years of service to the company. This was, as you all know, Mike's last earnings call, but we will still benefit from his insights, commitment when he shifts his role as a new board member of the company. I sincerely want to thank Mike for all these years and the value he has brought into Despegar.

And to you again, thanks for joining the call today, and we look forward to speaking to you again at the end of the next quarter. Thanks.

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Operator [42]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.