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Edited Transcript of PTS.TO earnings conference call or presentation 13-Nov-19 9:30pm GMT

Q3 2019 Points International Ltd Earnings Call

TORONTO Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Points International Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. D. Barnard

Points.com Inc. - President

* Erick James Georgiou

Points International Ltd. - CFO

* T. Robert MacLean

Points International Ltd. - Founder, CEO & Director

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Conference Call Participants

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* Drew McReynolds

RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst

* Cody Cree;Gateway Investor Relations

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Presentation

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Operator [1]

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Good afternoon, everyone. And thank you for participating in today's conference call to discuss Points International's financial results for the third quarter ended September 30, 2019. Delivering today's prepared remarks are Chief Executive Officer, Rob MacLean; President, Christopher Barnard; and Chief Financial Officer, Erick Georgiou.

After their prepared remarks, the management team will take your questions. Also, please note that the management will not separately address questions received via e-mail as they have already incorporated responses into their prepared remarks.

Before we go further, I'd like to turn the call over to Cody Cree of Gateway Investor Relations, Points International's Investor Relations adviser, as he reads the company's safe harbor that provides important cautions regarding forward-looking statements. Cody, please go ahead.

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Cody Cree;Gateway Investor Relations, [2]

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Thank you. Please be reminded that the remarks on this conference call may 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 applied in making the forward-looking statements and may not prove to be correct. Important factors that could cause actual results to differ materially in the assumptions used in making such statements were included in our third quarter financial results press release issued prior to this call as well as other documents filed with the Canadian and U.S. Securities regulators. Except as required by law, the company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I'll turn the call over to Points' Chief Executive Officer, Rob MacLean. Rob?

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T. Robert MacLean, Points International Ltd. - Founder, CEO & Director [3]

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Thanks, Cody. Coming off another strong quarter and with 6 weeks left in the year, we are confidently on track for both our 2019 plan and our longer-term goals. I'm satisfied with our progress across the board as we balance appropriate investments with our aggressive growth plans. The LCR segment continues to grow as newer partners added in recent years are experiencing rapid growth and longer-standing partners continue to demonstrate healthy year-over-year experience.

We're also seeing pipeline momentum in both Points Travel and Platform Partners with new partnerships launched and existing partnerships seeing expansion, all benefiting future performance. This progress indicates to me we are not far away from a much more consistent growth curve on both of these businesses. Christopher will highlight more of this activity later in the call.

As we have laid out in the past, our long-term plan focuses on continued growth in services currently in market coupled with cross or upselling new services to current partners plus closing new partnerships around the world. We continue to make consistent progress on all 3. We continue to invest in our marketing analytics and personalization intelligence, and we are seeing great results as we apply this experience into our network of deployments across the globe.

The vast majority of our partners are seeing year-over-year growth in the LCR segment. And normalized for some merger activity over the past year, we are seeing our top partners growing north of 20% this year. This gives us great confidence that we continue to have significant headroom to grow our existing base of business in this core segment.

With respect to cross-selling services and products and adding new partnerships onto our platform, we're very pleased with recent progress. With our Singapore and Dubai offices now in place and staffed, we're seeing momentum build in these important regions. Strong growth is coming from existing partnerships and new business development in these regions is particularly promising.

We have a number of new deployments in various stages of technical development in these regions covering new business in the LCR, Points Travel and Platform segments. We look forward to highlighting both new business and current partnership expansions in these markets in the coming quarters.

In Europe and North America, we are also seeing strong developments in the business. In Europe, we're in the late stages of development for a new Points Travel launch in Q4, and we're also in active discussions associated with a new Platform and LCR opportunities demonstrating that the European market remains ripe for expansion.

Closer to home, the recent announcement of an expansion of our AIR MILES partnership will be a significant driver of growth in our Points Travel segment and we are seeing very strong results for this partner since the launch. We're also in the advanced stages of a significant expansion of an existing partnership, which we hope to highlight in early 2020. Further, we have a number of seasonal product launches scheduled to go live shortly, and they will have a materially positive impact on our fourth quarter results.

We also continue to build on our Amadeus relationship. We've made great progress in aligning our sales teams and product development efforts and expect to sign our first new shared partnership this year. We see our planned new product introductions in conjunction with Amadeus as an exciting addition and an important element to our cross and upsell offering, which contributes to our accelerated future growth. Again, Christopher will also highlight progress on a number of these initiatives in a few moments.

All of this, obviously, indicating -- is obviously indicating a very strong end to 2019 and in credit momentum building into 2020. As we close out the year, we are very encouraged by our expectations for the fourth quarter. Services we launched in previous quarters are now benefiting from our coordinated marketing efforts, our new Points Travel launches are adding to our transaction volumes and services like selling elite status, which typically go live at the end of the year, are all contributing to our record expectations for the fourth quarter.

Finally, as is always the case at this time of the year, we are currently finalizing next year's operating plan. Our focus will be twofold: first, we'll continue to optimize our activities to focus on consistent growth in our current partnerships. We'll also be very busy early in the year launching some of the new initiatives that we're currently developing. With a view to a longer-term opportunities, continued investment in machine learning technologies will augment our marketing and operating capabilities across the entire business. We're looking forward to highlighting these plans in the months to come.

Building on a strong 3 quarters, we are accelerating growth to end the year and are reiterating our previously raised guidance of 2019 annual gross profit ranging between $58.5 million and $64.5 million with adjusted EBITDA of $20.5 million to $23.5 million or back to this year's third quarter. I'll hand it over to Erick to review our financial performance in more detail.

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Erick James Georgiou, Points International Ltd. - CFO [4]

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Thank you, Rob, and good afternoon, everyone. Unless noted otherwise, all figures on today's call are in U.S. dollars and presented in accordance with IFRS.

And now for the quarterly results. Top line revenue increased 4% to $98 million compared to $94.4 million in the year ago quarter. Gross profit increased 12% to $14 million, largely the result of strong performance and organic growth across several partnerships in the LCR segment, which grew 14% from 1 year ago, in line with our expectations for the quarter. Similar to the increase in gross profit, we saw contribution in LCR rose 13% to $8.3 million in the third quarter.

Q3 represents the last period where the effects of a prior year hotel merger with 2 of our hotel partners impacted the comps for this segment with the merger completing in August of 2018. Looking ahead to Q4, we anticipate even stronger growth in LCR for both gross profit and contribution, which will benefit from enhanced marketing campaigns combined with the impact of our elite product, which is seasonally strong in the fourth quarter and becoming a meaningful contributor for us.

In Platform Partners, gross profit was down 8% year-over-year largely due to the short-term impacts of new economics associated with a long-term partner renewal, which took effect in early 2019. This new contract structure has greater long-term benefits as our economics are more tightly tied to transaction growth. This also impacted the contribution line in the segment, which was roughly $670,000 in the third quarter, down 29% from Q3 of '18.

In Points Travel, gross profit was up 25% compared to the year ago quarter. We anticipate it coming in a bit higher in the third quarter of 2019, but experienced a small delay in the launch of our new AIR MILES redemption product, which went live at the end of September. Contribution in Points Travel was a loss of $1.2 million, 21% higher than the year ago quarter due to increased R&D costs. Looking ahead, we are optimistic about Q4 and anticipate a significant step-up in Points Travel gross profit relative to Q3 levels based on a full quarter's performance of the AIR MILES redemption product and expected organic growth from existing deployments.

Transaction metrics in October have already come in very strong, and we expect this to continue the rest of the quarter. From an expense standpoint, total adjusted operating expenses in Q3 increased 13% to $9.9 million compared to the year ago quarter. The majority of this increase was primarily driven by personnel-related expenses as we continue to add resources dedicated to growing our business segments. We ended Q3 with 262 employees, which includes contract and part-time resources, up from 239 1 year ago.

Adjusted EBITDA in Q3 increased 7% to $4.4 million compared to $4.1 million in the third quarter of 2018. Our effective margin, which we calculate as adjusted EBITDA as a percent of gross profit was 31% compared to 33% in the year ago quarter, in line with our internal expectations. And lastly, total net income decreased $1.1 million compared to $1.5 million in the prior year quarter.

Turning to our balance sheet. Total funds available were $63.4 million at the end of the third quarter compared to $67.6 million at the end of the second quarter. The expected decline in cash was primarily the result of normal ebbs and flows in our sales activity, which can fluctuate with the timing of marketing campaigns across our partner days.

And lastly, we renewed our NCIB program on August 14 with a total of approximately 679,000 shares to be repurchased. During third quarter, we repurchased approximately 213,000 shares for a total of approximately $2.5 million.

With that, I'll turn it over to Christopher to provide more color on our growth drivers. Chris?

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Christopher J. D. Barnard, Points.com Inc. - President [5]

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Thanks, Erick. As Rob and Erick both mentioned, we'll have a very strong end of the year and are excited about what's ahead in 2020 and beyond. LCR continues its strong organic growth across our dozens of partners and is clearly benefiting from our historic investments in machine learning and marketing technologies. In fact, 9 of our top 10 partners experienced growth in the third quarter.

Additionally, per our growth strategy, we have also benefited from new product enhancements and introductions. One good example of this was our recent launch of a call center application with Choice Hotels. Fully deployed in the third quarter, it now represents a meaningful uptick of LCR activity for that growing motel program. It's a strong example of our ability to cross-sell functionality within an existing partnership.

We're currently on track to close a number of new LCR relationships with both new and existing loyalty programs and many of them in conjunction with Amadeus. As we highlighted last call, a Middle Eastern flag carrier should now be launching in Q1 next year. Additionally, our new Dubai office is hard at work on 2 other pending new partner launches in that region.

Further, over the coming months, we expect an expansion of 2 important current partners with the introduction of additional LCR services. As Rob mentioned, we recently also made significant progress in Points Travel. With the launch of the hotel and car booking redemption capabilities for AIR MILES Canada, we've seen very strong growth and expect that to be reflected in our results moving forward.

As we've mentioned on previous calls, we're also in the development stage of new travel deployments with both a European retail program and a leading Asian carrier. So while there still is much to do in terms of growing our Points Travel business more aggressively, we are confident that the response and commitment from these large industry players, indicates that we continue to be on the right track.

In our Platform Partners division, we continue to build a strong base of relationship and activity by linking the loyalty industry with a growing number of third-party opportunities. As we talked about last call, in the third quarter, we launched the integration between Hilton and Lyft that enabled their shared customers to earn more Hilton points for every Lyft ride taken and are excited to soon be launching the ability for Hilton members to pay for their Lyft rides using their Hilton points. This seamless introduction of new functionality is a testament to the efficiency and flexibility of our loyalty commerce platform and the impressive customer value we can help our clients provide.

Along those same lines, we also added Alaska Airlines Mileage Plan as an option for the newly launched Home Chef initiative. And we're getting ready for a more concerted marketing of that proposition in the new year as we continue to add more currencies to the list.

One of the core services offered to our platform partnerships group is exchanging points between 2 programs. This week, we are very pleased to launch a new relationship out of Dubai with AIR MILES Middle East and its banking partner, HSBC Middle East, that will see exchanges with 2 of our current partners in the region, the Etihad and Emirates frequent flyer programs. This is another good example of the strength of our offering, our ongoing track record of new partnership launches, our continued success in expanding in new regions like the Middle East, as well as more progress in penetrating the important financial services vertical. Additionally, we recently added both Cathay Pacific's Asia Miles and Aeromexico Club Premier miles to the Citibank ThankYou Points Transfer program.

Lastly, as an important foundation to this part of our service and as we've alluded to in the past, we recently renewed our Chase Bank Ultimate Rewards partnership for an additional 5 years. This extended partnership allows Chase to take advantage of enhanced fraud and gaining mitigation services, and we continue to launch more transfer programs on their behalf while augmenting their offering with new promotional capabilities.

So our exchange offering has established itself as the industry standard, and we are confident that this will not only lead to similar opportunities down the road, but we'll also continue to expand our discussions in the financial services industry. Growing more aggressively in this important vertical is one of our key growth accelerants.

Lastly, we continue to work very closely with Amadeus to build out our partnership and as Rob mentioned, expect to sign our first shared partner by the end of the year. Our teams are busy not only on the sales side, but also on the new product development activities. These include integrating our technologies into various aspects of the Amadeus airline technology portfolio as well as co-developing new services that overlap with some of the existing Amadeus technologies in the broader travel industry. Again, this kind of strategic partnership is a key element to our accelerated growth strategy.

We're on pace to close out the year on an exceptionally strong note and are reiterating our previously raised guidance of 2019 annual gross profit ranging between $58.5 million and $64.5 million with adjusted EBITDA of $20.5 million to $23.5 million.

So with that, I'll turn the call back over to the operator for question and answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Drew McReynolds with RBC Capital Markets.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [2]

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A couple for me. First, with respect to the press release language in the pipeline being the best in history, could you kind of flesh that out a little bit, if you can kind of quantify that with a little bit more granularity? I know in your prepared remarks, you talked about a lot going on. Just wanting to get some perspective around it.

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T. Robert MacLean, Points International Ltd. - Founder, CEO & Director [3]

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Drew, yes, it's Rob. Yes, it's been really busy, I guess, is a short way to comment on it. We've got -- the prepared remarks indicated really growth in the pipeline on all 3 business segments in multiple regions and on multiple products. So we feel pretty good about what's coming out here in the fourth quarter and early in the first quarter, and just generally, both the LCR core business continues to hunt very well and we'll have some announcements there.

We've got Points Travel deployments that are not only at contract stages, but we're in the development on the technology, which is always a strong indicator for us. And then the pipeline just in terms of progressing in different regions and with different products is just very robust right now. So that's really the commentary behind that statement. So we're running pretty hard right now.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [4]

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Okay, got you. On the operating cost side, fully aware from my standpoint, you don't -- or people shouldn't look at your business quarter-to-quarter. In terms of operating leverage, you've begun to demonstrate that and certainly, your 2022 targets point to continued operating leverage. Wondering, as we look into 2020 in the order of your current cost structure, is there more investment that you need to put into it to essentially crystallize that pipeline?

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Erick James Georgiou, Points International Ltd. - CFO [5]

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Yes. Drew, it's Erick here. Yes, I mean certainly, we're not going to provide guidance on 2020 right now. I think I would say, though, we've struck historically a pretty good balance with gross profit growth against bottom line growth. So I think you should expect to see that going forward. It's going to ebb and flow on a quarterly basis. We would expect to make some investments next year. It's not something I would really want to quantify just yet, but I think you'll see us continuing to strike that balance.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [6]

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Okay, okay. And when I look at your 2022 targets, clearly, a lot of growth ahead. I've asked you this in the past, wondering if anything has really changed in terms of your growth vectors or key drivers to get you to those 2022 targets. Are you leaning a little bit more on 1 or 2 of the segments? Are there basic drivers that you want to flag in terms of bridging where we are exiting 2019 to getting to 2022?

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Christopher J. D. Barnard, Points.com Inc. - President [7]

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Drew, it's Chris. I think it's still the very same story. You have the 3 core drivers of adding new partnerships, which I think we've continued to execute on. And as Rob said, it's always hard to pick a week or a month or a quarter that we close something in, but as we're active in these deals, have them at either term sheet or actually contract or deployment stage, we're confident in a slew of new partnerships and new brands coming up as well as cross-selling and upselling current partnerships, which is our second core driver. So adding new services into the market with new and current brands is always going to be a core part of the plan.

Secondly -- or thirdly, again, a lot of performance is driven by services that are already in market, increased focus and investment on the marketing technologies and automation, and we're getting more and more focused on that as everyone is. And we are seeing the results show up in some of these discussions again, as Rob mentioned, both geographically spread out.

I think opening up our APAC office, we're seeing great opportunity there. I think you saw that we -- a little bit ahead of schedule, but to meet the market demand in the Middle East, we have a bit more bumped up presence now in the Dubai region, and there's lots of room left in the North American and European space. And that's both in the travel segment and in the financial services and retail space, which is the third expansion opportunity.

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T. Robert MacLean, Points International Ltd. - Founder, CEO & Director [8]

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I'd maybe just add, it's Rob, a little bit of commentary to that. Any kind of a long-term growth plan, I think, from our perspective, the most important part of that is to get off to the right start. It's very hard to kind of hit those 2022, 2023 numbers unless we're feeling good about where we are early in that long-term guidance.

And I think you can derive from the prepared remarks and from our reiterated guidance, we're pretty comfortable with that one. We're looking at a record quarter here in the fourth quarter, and we're obviously halfway through that today. So that gives us great confidence kind of coming out of 2020 -- sorry, 2019, where we're on track. 2020, while we're not providing guidance today, we'll look to do that before too long. I feel really good about how that is showing up.

So when we look at '22, '23, the first place I look is are we on track and trending properly towards that and I feel really good about that.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [9]

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Okay. That's great, Rob. Last question for me. On the LCR segment, I haven't addressed this one for a while, but you did speak in your prepared remarks about each of those programs, the main program partners performing quite well within that segment.

Maybe can you comment on exactly what's driving that? Are these programs still expanding in terms of membership and your penetration and your ability to do what you do within each program? Or is there other dynamics that are at play here because certainly, those top partners are growing quite well?

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T. Robert MacLean, Points International Ltd. - Founder, CEO & Director [10]

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Yes, it's Rob. That business on LCR, we sell for a very long time. There is a tremendous amount of headroom in that. When we talk about our top partners, and I think about a broad base of our partners growing very, very strongly, the vast majority of our partnerships on LCR are growing quarter-over-quarter, year-over-year, you see the big guidance in that -- or a number of those big partners north of 20% growth. So good, healthy marketplace in general that we're participating in.

Where it comes from is really that combination of the programs themselves being very healthy, I mean that's really at the core of it. Many of our big programs are adding tremendous member acquisition every month and every quarter. And the business opportunity continues to grow alongside of that. I think a lot of what you've heard us speak to over the last few years around taking our platform and continuing to add marketing and merchandising, machine learning, just better personalization, better data analytics that allows us to get into these growing bases of customers alongside of our partners and really be more targeted and more effective, drive better conversion and put those products and offers in front of members at the right time is just getting better or effectiveness on that is getting better every day.

So it's that combination of just a really healthy buoyant marketplace, us and our partners getting better at communicating to them and putting the right sizes of offers in front of them. So again, we still feel like we're in a relatively early stage of the potential, even of this -- the LCR business that we've been dominating globally for a long time.

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Operator [11]

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There are no further questions at this time. I'd like to turn the call back over to Mr. MacLean for any closing remarks.

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T. Robert MacLean, Points International Ltd. - Founder, CEO & Director [12]

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Great. Well, thanks, everyone, for listening to today's call, and we look forward to speaking with you when we report our fourth quarter and full year results. Thanks again for joining us.

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Operator [13]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a nice day.