Good morning, ladies and gentlemen, and welcome to the Ambassadors Group, Fourth Quarter 2012 Earnings Conference Call. My name is Jessica and I will be your coordinator for today. I would like to turn the call over to Ms. Stacy Feit. Please proceed.
Thank you, Jessica. Good morning. Joining us on the call today with some prepared remarks is Jeff Thomas, President and Chief Executive Officer of Ambassadors Group, and Anthony Dombrowik Chief Financial Officer of Ambassadors Group; Peg Thomas, President of the Operating Subsidiary, Ambassador Programs is also with us for a question period.
Lastly both Jim Kreyenhagen, President of BookRags and James Burdine, Vice President of Operations for Discovery Student Adventures have also joined us to cover any questions that may come up about those program. Before we proceed into our prepared remarks, I want to highlight that as mentioned in previous calls and our GAAP financial statements we report revenue from non-directly delivered programs known as pass-through expenses from third party operators. The remaining revenue streams are reported on a growth basis. For clarity, our comments today about all of our activities will focus on growth revenues and the related costs associated with those revenues, whether they are from directly delivered or non-directly delivered program.
For your convenience, we’ve included a footnote in our earnings release that separately discloses growth revenue and associated costs for these non-directly delivered programs for you to better understand how they relate to our reported revenue. In addition, I would like to make clear our Safe Harbor statement regarding forward-looking statement. Statements contained in this press conference and related comments by Ambassadors Group's Management, which are not historical in nature, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward looking statements include without limitation, statements that relate to expectations concerning matters that are not historical facts. Words such as projects, believes, anticipates, plans, expects, intends, estimates, and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements reflect our beliefs or current expectations with respect to among other things, trends in the travel industry, our business and growth strategies, our ability to integrate acquired businesses, future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies such as legal proceedings, financial results and fluctuations in our current results of operations.
Forward looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These and other risks are discussed in greater detail in the Ambassadors Group's periodic reports filed with the SEC. All forward looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward-looking statements.
With that, I will hand the call over to our CEO, Jeff Thomas.
Jeffrey D. Thomas
Thank you. Good morning. Thanks for joining our fourth quarter and full year 2012 earnings call. I am going to provide a brief review of our results as well as an update on our sales and marketing initiatives, and enrollments for the 2013 travel season. I will then turn the call over to Tony to review our full year financial results some more detail and to provide our 2013 outlook.
Following, we will open the call for questions. During 2012 we focused our efforts on executing our strategic plan to continually evolve our multi-channel marketing approach to secure travelers, right size our cost structure, and return value to share owners. We made significant progress in all three of these areas. We continue to strengthen our sales and marketing team with an emphasis on augmenting our in-house social and digital marketing expertise. We reallocated resources from direct mail to digital will also adding a new VP of sales with specific expertise and lead management as well as senior level digital strategists. And we are also implementing ongoing training development for our sales and marketing staff in areas of social media marketing, SCO, digital sales partnership sales and telesales.
Even with the resource realignment new hires we met our cost reduction target, which protected our profitability in the phase of 11% decline in total delegates traveled. At the time, we returned capital to our share owners in the form of $8.8 million special dividend in the accelerated share repurchase program during the fourth quarter. During 2012, we traveled about 21,250 delegates across programs compared to about 23,900 delegates in the prior year. This comparison refelcts anticipated decline for the Student Leadership and Citizen Ambassador programs, as well as a 10% decline in our core Student Ambassadors programs. We did see significant year-over-year growth in our Discovery and China inbound programs albeit both off small basis.
As a result, we generated total gross revenue just under $140 million compared to about $155 million last year. These results reflect a 10% decline in travel revenue partially offset by a 4% increase in Internet content advertising, revenue of BookRags which totaled $4.2 million in 2012. We posted net income of $1.7 million or $0.10 per diluted share. And net income before special items totaled $3.2 million or $0.18 per diluted share.
Now I would like to update you on our sales and marketing strategies, we continue to evolve our practices to adapt to the needs and behaviors of our target audience. We have made and are continuing to make significant strides on our multi-channel strategies, we refine the right mix of digital and direct mail. We continue to rollout market specific coordination direct mail and digital, and also continue to test higher touch conversion channels including webinars and telesales, both of which have performed well thus far in generating incremental enrollments for the 2013 programs.
In our early tests, which were primarily aimed at a population of leads that responded to initial outreach, but do not attend an information mailing, we saw an 8 percentage point improvement in attendance rates for our webinars versus our in-person meetings. This is further evidence that webinars are based upon which can build especially for heavily scheduled families looking for efficient layers to engage with us.
We are now also offering webinars in market that do not offer an in-person meeting and we plan to provide all digitally source leads with an upfront webinar option in addition to a local in-person meeting. We have also driven a significant increase in social media engagement. We are experienced substantial growth in more established channels like Facebook and YouTube. Within YouTube for example, we have seen an engagement increase by 150%. At the same time, we are building the presence and are ahead of our competitors in new channels like Instagram and Pinterest.
Going back to Facebook’s, we have over 80,000 likes on Facebook and have engaged almost 43,000 students and activities related to our programs on Facebook. More importantly, our level of fan engagement on Facebook, which is a measure of how often our fans share our content with others, now surpasses our primary competitors for instance post from our inauguration program were shared nearly 800 times in just 7 hours. We’ve recognized that one of our key assets is our installed base of travelers that were focused on developing avenues to make it easier for this valuable base to interact with us both during and after the program.
For example, we are developing a mobile application design to enhance the sharing of social content by our delegates, while on program, while increasing the reach of our exceptional program experience. We feel strongly that sustained authentic social engagement coupled with the strength of our programs and positive word of mouth among our established customer base represented important long-term competitive advantage.
Facebook, in particular serves as a very powerful channel to keep delegates engaged from enrollment through travel by building a sense of community and pre-travel excitement. We’re also emphasizing the importance of early engagement between delegation leaders and the perspective travelers to establish and maintain pre-travel momentum. We believe enhanced social media engagement coupled with higher touch customer service driven tools where significant contributors to the improvement and our withdraw rate that we have seen thus far in the 2013 travel season, it’s improved by nearly 11%.
Looking ahead, we’ll be testing the selling cycle shift this spring to accelerate the timing of our early enrollment efforts and increase the overall engagement retention and target population. Establishing the significant spring campaign will serve multiple purposes. First, it will provide a small last enrollment opportunity for the 2013 travel season. And second, we’ll kick off the selling season for our 2014 programs much earlier than we have historically. We know that perspective student travelers are now in the market year around.
By opening up our 2014 programs for early enrollment, we provide perspective bandwidth, additional time to save or fund raise for the trip. And for those that are not ready to enroll at this time, we have the digital tools to keep these leads warm as we move to the summer and to the traditional fall enrollment period. So the changes we have made to our business as well as improved information for our database suppliers are enabling us to evolve to year around marketing strategy that better lines us with consumer behavior, while mitigating some of the risk associated with such a strong emphasis on the fall marketing campaign.
This year, we’ll also continue to reduce the direct mail component of our marketing effort to further increase the productivity of the campaign by focusing on the highest quality leads. We are targeting the 33% reduction in mail volume this year. And we will continue to shift a larger proportion of our direct marketing budget to digital initiatives as we continue to focus on synchronization of the direct and digital channels.
Turning to our enrollment for the 2013 travel season, as of February 3, we have 20,846 enrollments, delegates across all programs, which is down 16%, compared to the same point 2012. Trends in our core Student Ambassador Programs are still trailing our programs in aggregate down 21% to 16,886, compared to 21,476 at the same point last year.
As a result, enrolled revenue for all of our 2013 programs is down 19% year-over-year. Student Ambassador Programs enrolled revenue is down about 22%. As a reminder, program mix impacts earlier enrolled revenue. These results reflect the success we’ve had in retooling our non-core Student Leadership program, which for 2013 is on pace for meaningful delegate growth compared to 2012.
Enrollments for Discovery Student Adventures in China inbound programs are also up year-over-year that these programs are still small relative to our core Student Ambassador Programs where we have not yet been able to stem the decline. We are confident the changes we are making to our business and believe we will see tangible results once we move to the current experimentation phase to optimize our channel mix.
As we move towards the 2013 travel season, retention in incremental sales remain our top priorities and we’re working hard to maintain the solid retention rates we’ve seen so far.
Through our spring sales and marketing efforts, we’ve also taken another path to generate incremental enrollments among the respond, not attend audience that are referenced earlier as well as the population that attended the meeting, but haven’t enrolled yet.
I’ll now turn the call over to Tony for a full review of our financial results. Tony?
Anthony F. Dombrowik
Thank you, Jeff and good morning. Let me start by recapping our 2012 results, and then I want to build on Jeff’s comments, specifically about some of our strategic actions in the outlook for 2013. As previously mentioned in 2012, we traveled 21,252 delegates across all of our programs in 2012, compared to 23,928 delegates in 2011. Our core Student Ambassadors Program contributed 17,354 of these delegates or just over 80% of our travelers compared to 19,179 in 2011.
In aggregate, gross revenue from all sources declined by 9.8% to $139.9 million in 2012 compared to $155.1 million in the prior year. 2012 gross revenue from all travel programs declined 10.1% to $135.7 million, driven primarily by fewer delegates on our Student Ambassadors Program and to a lesser degree, reductions in our Student Leadership and Citizen Ambassadors Programs as we retooled the marking for those two operations.
Both our China operation and the Discovery product showed increases in revenues as they continue to grow in their markets. Also, revenue from BookRags segment increased 4% year-over-year to $4.2 million driven by content sales. Our 2012 gross margin was $51.4 billion, down from $59 million in 2011. Gross margin percentage was 36.7%, compared to 38.1% in 2011, reflecting the higher international air cost and higher in country land costs for our programs. As we discussed on our last earnings call, relative to current airline markets and the ever-changing foreign exchange environment, we are pleased with this performance despite the year-over-year decline.
Moving down the income statement, our operating expenses comprise of both sales and marketing activities and general and administrative expenses declined by $5.9 million or 10% compared to 2011. As disclosed in the release, over the last few years, our results have been impacted by certain manners that we considered to be special items. We believe these items impact the comparability of our year-on-year results. And then it’s important to understand their impact in addition to the GAAP measures we provided in the release. They primarily include certain legal and professional fees associated with our now closed SEC inquiry to settle class action lawsuit, a proxy contest, and severance payments related to the reduction in force.
Without these costs, 2012 operating expenses would have been $49.4 million compared to $54.8 million in 2011, a difference of $5.4 million. We had targeted $4.5 million to $5.5 million in expense reductions and we are pleased with these results. These expense management initiatives protected our profitability in the phase of 11% decline in total delegates traveled and a $7.6 million decrease in direct margin. The savings were across the Company and it included employee costs, administrative costs and marketing costs.
At the same time, we refocused our efforts on our multichannel strategy, reinvesting some of the savings from less direct mail into digital lead generation, social media and partnerships.
Looking at 2012’s bottom line, net income totaled $1.7 million or $0.10 per diluted share, compared to $3 million or $0.17 per diluted share in 2011. Without the special items, 2012 net income would have been $3.2 million compared to $4.6 million in the prior year.
Turning to cash flows, we generated $2.2 million in operating cash flow in 2012, compared to the use of $6.7 million last year. The change in cash flow from operations between periods was driven primarily by the timing of working capital cash flows, especially prepaid program costs and the decrease in participant deposits in the 2011 period.
During 2012, we funded $5.1 million in CapEx, primarily related to sales and marketing related systems and website improvements. We expect 2013 capital expenditures to be more in line with 2011 levels or approximately $3 million. As most of you are aware, we committed to retain the total of $25 million of capital to our shareholders. During the fourth quarter, we completed approximately half of this commitment with our $0.50 per share special dividend to $8.8 million and $3.1 million in share buybacks.
Taking our regular dividends into account, we paid a total of $13 million in dividends in 2012. We remain dedicated to completing the balance of our 13.1 million share repurchase authorization in 2013.
Turning to our balance sheet and liquidity position, even after the significant return of capital, our balance sheet remains strong with $38.3 million in cash and available for sale securities and no debt outstanding. Deployable cash defined in our earnings release ended 2012 by just over $25 million.
also our Spokane headquarters building remains listed for sale and our broker have seen some recent activity from interested parties. We will continue to keep you apprise the progress on this front.
Now I’d like to take a look at our guidance for 2013. As of February 3, 2012, enrolled revenue for 2013 travel programs was $127.2 million, down 19.2% from the same point last year based on enrolled travelers of 20,846, compared to 24,881 at the same point in time in the prior year.
Enrolled revenue for our core Student Ambassadors Program is down 21.7% to $115.7 million compared to $147.9 million at the same date last year. This is based on enrolled travelers of 16,886 compared to 21,476 last year. Based on current visibility for 2013, we are providing guidance as follows: consolidated gross revenues for all programs and operations to be between $125 million and $135 million; consolidated gross margin as a percentage of gross revenue for all programs and operations of 36% and 37%, and net income before any special items of between zero and $2 million. We are confident in our operating plan and this guidance. we’re also ready to take further necessary expense management measures to preserve our profitability, adjusting our cost structure to match our revenue basis fundamental. However, this must be balanced with the need to support the 2014 campaign average later this year.
The multichannel strategy Jeff and our team outlined over the last year or so continues to transform the business. We remain focused on adapting our marketing, operating efficiently, and growing our business, support of our efforts to create shareholder value.
Thank you for your continued interest in Ambassadors Group. And with that, I’ll ask the operator to open the call for questions. Jessica?
Thank you. (Operator Instructions)
Jeffrey D. Thomas
Jessica, assemble for the Q&A, I’ll conclude with the few thoughts. We expect 2013 travel to be less than in 2012. We remain focused on adapting our marketing ways that will support our long-term success or at the same time continue to provide meaningful returns to shareholders. Our strong balance sheet with over $38 million cash and cash equivalents and available for sale securities, no debt outstanding continues to give us financial flexibility to advance our strategy while returning capital to our shareholders. Jessica, is there anyone in the queue at this point?
At this time, there is no one that is queued up to ask a question. I'm sorry, actually we do have a question, we have Ron (inaudible).
Hey, Jeff. I have one quick question for you. Can you talk through the dividends and the return of capital? If we’re paying out $13 million in dividends and you’re kind of implying paying out $12 million in capital, how do you see that play out with the amount of deployable cash you have?
Anthony F. Dombrowik
So Ron, this is Tony. We paid $8.8 million in the special dividend. we’ve maintained our normal $0.06 per quarter dividend, so far and the Board reserves the right to review that each quarter. But we’ve also committed to basically another $13.1 million. we think that’s going to be focused on share buybacks during the year. That will reduce our deployable cash number. And that number ebbs and flows during the year as we’ve taken deposits and things like that, but it will reduce it over next 12 months, but that was the decision that the Board made that we felt was appropriate at the time in the fall to make that commitment, and we’re going to fall through on it. Did that answer your question?
I think but some, how low do you think or how do you think about that deployable cash, I mean, what margin of safety do you want there?
Anthony F. Dombrowik
Yeah. So traditionally, that number has been anywhere from $25 million to $40 million depending on what year and what time of year you ask the question, I could see it going as lower than the sort of the $20 million that we would end up with at the end of the buyback period, that could go a little bit of lower than that. We have the line of credit that is unused. so we have some safety in that there. Two, I do want to keep some cash on hand, but it could go lower in 20, I wouldn’t say it’s substantially lower than that?
Okay. And I guess I just have trouble seeing, why it wouldn’t go substantially lower than that? I mean if you have $25 million now, and you’re going to do another $12 million in buybacks.
Anthony F. Dombrowik
So let’s say, I’d take this down to $18 million, $20 million in deployable cash. we could do more work if the Board chooses to. we could rely on our line of credit, but without borrowing line of credit, I’d like to keep simple as from $5 million and $10 million of deployable cash available to us. Just to help us manage the operations, anything that might come up.
Okay, all right, that sounds good. So I’m understanding that you guys are continuing to move forward with that share buyback.
Anthony F. Dombrowik
Okay, all right. Thank you.
Jeffrey D. Thomas
Thank you, Ron.
Jeffrey D. Thomas
Jessica, at this point, I’m seeing no further questions. Is that correct?
Yes. That is correct. There are no further questions.
Jeffrey D. Thomas
Why don’t we go and wrap up the call then. I appreciate everyone calling in and we look forward to speaking to you again in April. Thank you.
This does conclude today’s conference. Thank you for your participation.
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