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Points International Ltd. (NASDAQ:PCOM)

Q1 2013 Earnings Call

May 2, 2013 5:00 p.m. ET

Executives

Laura Bainbridge - Investor Relations

Rob MacLean - Chief Executive Officer

Anthony Lam - Chief Financial Officer

Analysts

Ross Licero - Craig-Hallum

Pardeep Sangha - PI Financial

Joel Achramowicz - Merriman Capital

Edward Woo - Ascendiant Capital

Operator

Greetings and welcome to the Points International first quarter 2013 earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Bainbridge with Investor Relations. Thank you. Ms. Bainbridge, you may begin.

Laura Bainbridge

Thank you. Good evening everyone and thank you for joining us today to discuss Points International's first quarter 2013 financial results. Joining me today on the call are Rob MacLean, Chief Executive Officer, and Anthony Lam, Chief Financial Officer.

Before we begin, we would like to remind you that the statements on this conference call 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 actions, and are subject to important risks and uncertainties that are difficult to predict. Certain material assumptions are applied in making these forward-looking statements and may not prove to be correct. Important factors that could cause actual results to differ materially and the assumptions used in making such statements are included in our first quarter 2013 financial press release as well as other documents filed with the Canadian and U.S. security regulator. 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 will turn the call to Rob MacLean.

Rob MacLean

Good afternoon, everyone, and thank you all for your participation on today's call. Since we last spoke just two months ago, I will keep today's remarks relatively brief. As will be evidenced, Points continues to make progress against its financial and operational objectives, delivering a strong quarter slightly ahead of our expectations while on-boarding new partners and executing against our robust pipeline.

Total revenues of approximately $37 million increased 32% over the prior year period, led by strong organic growth as well as contribution from new partners and products launched over the course of the last 12 months. Consistent with what we discussed on our year-end call, we also saw a rebound in certain partner's promotions launched last quarter, as well as strong activity associated with partners that have joined us recently. This growth offsets some slower performance amongst several of our European partners.

As top line revenues increased, so too did transactions across the platform. For the quarter, points and miles transacted across the entire platform total 4.4 billion, an increase of 18% year-over-year and reflects strong marketing and merchandizing efforts, particularly late in the quarter. As we outlined in our year-end conference call, while revenue growth is strong and will accelerate dramatically in the second half of the year consistent with the timing of our product and partner launches, our investment spend is more evenly distributed throughout the year.

Therefore, we are deferring some short term EBITDA profitability and earnings in the first half of 2013 as we build towards a much stronger second half and year-end run rate. As a result, while slightly ahead of expectations, both EBITDA and net income as anticipated were down on a year-over-year basis. I will elaborate on our specific investments in a moment, but will reiterate that we will continue to make both near and longer term investments to execute against our previously outlined long-term strategic plan.

Of course the development and execution of our new business pipeline remains top of mind and we are pleased to report progress on this front. Following the 2012 partnership announcement with Speedway, one of America's largest company-owned and operated gasoline and convenience stores, as a participant in our Corporate Mileage Sales program. I am pleased to report the program is now successfully in market.

This quarter we also launched a partnership with Finnair, a leading European airlines responsible for carrying more than 8 million annually. Through our partnership, Finnair Plus members now have the ability to buy and gift Finnair Plus points through Points' white labeled platform. And just last week we launched SVM Fuel Links, a leader in gasoline and retail gift cards on our platform. To date in 2013, we have launched three of our previously announced new partners and deployed six new products into the marketplace.

Although we are pleased with the early progress made to date in 2013, we are even more excited about what's to come. While we announced to launch 25 products with 8 new partners since the beginning of 2012, the anticipated financial impact of these new product launches is heavily weighted towards the second half of 2013. With respect to Southwest Airlines, our teams are both hard at work tracking towards our upcoming product appointments. We are extremely excited for the anticipated launch of Southwest, which is running ahead of schedule and is expected to be a material contributor to revenue once in market. Furthermore, Southwest is one of the largest, most honored and innovative airlines in the world, and adding them to our partner platform is a strong testament to Points' growing importance within the loyalty program ecosystem.

As such, we expect our momentum to accelerate through the year with our new partners and products contributing significantly to the second half of '13 and even more meaningfully into 2014. As a result, we are on track to deliver against our 2013 financial guidance which calls for revenues of $200 million to $220 million, or year-over-year growth in the 42% to 57% range. Given the anticipated timing of a new partner and product launches, we continue to expect significant acceleration in revenue growth in the second half of the year as the new business comes on line during that time period.

Notwithstanding the strong progress we have made against our business pipeline to date, our new partner pipeline remains robust and we are currently in active conversations with several leading loyalty programs across a number of different verticals and geographies. We will look forward to updating the market on continued progress on this front in the coming months.

On our fourth quarter call we discussed our plans to invest in the continued innovation and expansion of our core business, as well as advancing our open platform strategy. I would like to update on our progress against these initiatives, but before doing so I would turn the call over to Anthony to discuss our first quarter financial results in more detail. Anthony?

Anthony Lam

Thanks, Rob. As I review our results for the first quarter 2013, please be reminded that all the numbers mentioned on our call today are in U.S. dollars and all the figures are presented in accordance with International Financial Reporting Standards.

Total revenue for the quarter was $36.9 million, up 32% year-over-year, led by strong transactional growth from our reseller partners. Principal revenues accounted for all of this change, increasing 37% year-over-year. This increase more than offset a marginal $385,000 in other partner revenue on a year-over-year basis. Gross margin dollars for the quarter totaled a firm $6.7 million, up from $6.4 million in the prior year period. Growth in the margin dollars was largely driven by our larger principal partners which typically have an overall lower gross margin percentage.

Also, we finished the first quarter of 2013 with a gross margin percentage of 18%. As we mentioned on our Q4 2012 call, with the addition of larger partnerships throughout the year, we can expect to see meaningful growth in margin dollars coupled with larger percentages in the discussed 20% range. I will now move on to discuss some of our key operating expenses for the quarter.

Total ongoing operating expenses, which consist of employment expenses, marketing, technology and other expenses, were $6.1 million. While this was up from $5.3 million in the prior year period, it reflects the continuation of the investments we started to make towards the end of 2012 in key roles and skill sets that Rob will discuss further. Employment cost totaled roughly $4.5 million. This was up 25% from $3.6 million in the first quarter of 2012 and reflective of the hiring of key full time roles within our marketing, technology and product management teams.

We ended the quarter with approximately 128 full time equivalents, up from 112 in the year ago period. We are committed to executing on our long-term strategy and attracting key talent for the organization will continue to be a focus throughout this year. Marketing expenses totaled $269,000 for the first quarter of 2013. While this was down 27% from the prior year period, this expense line is largely related to the timing of marketing and promotional activities that vary from year to year. For the balance of 2013, we can expect to see this expense line range between $400,000 and $600,000 a quarter.

Technology expenses totaled $235,000 in the first quarter. While this is up from the $173,000 in the first quarter of 2012, spend in this area reflects a continuation of the investments we started to make at the end of 2012. As we continue to invest in people and our platform, you can expect to see some growth in this line item to a quarterly level of approximately $300,000 for the balance of the year. Continued strength in our base line business has allowed us to advance spend on key areas in support of our long term strategic plan. In light of this, EBITDA for the quarter was $529,000, while this is lower than the $1.1 million posted in the prior year period, we are very pleased with our ability to generate profitability at the EBITDA level, while continuing to make meaningful investments in our growth opportunities.

Amortization expense in Q1 includes a onetime adjustment as we move from declining balance to straight line methodologies for 2013. This change in estimate has no material impact on our overall expense for the life of our assets. We expect amortization to approximate $800,000 a quarter for the balance of the year. Finally, the company reported first quarter 2013 income just below breakeven with a net loss of approximately $48,000, while breakeven on a per share basis. This compares to net income of $574,000 or $0.04 per share in the prior year period.

As of March 31, 2013, total funds available, comprised of cash and cash equivalents together with security deposits, restricted cash and amounts with our payment processors, totaled approximately $55.6 million, and we remain debt free. Net operating cash which we define as total funds available, that’s amounts payable to loyalty program partners, totaled $14.7 million at the end of the first quarter. This was lower by approximately $1.6 million from December 31, 2012, primarily due to the timing of variable compensation and annual insurance premium payments.

We are very pleased to continue to generate sufficient cash to fund our current and working capital requirements, as well as anticipated capital expenditures. Finally, we finished the quarter with shares outstanding of 15,193,594 and 15,386,989 on a fully diluted basis. Thank you all for your attention. I will now turn the call over to Rob for his concluding remarks.

Rob MacLean

Thanks, Anthony. As I outlined in our Q4 conference call, with our anticipate improved base line performance in 2013, we have made the strategic decision to reinvest a portion of our incremental profitability in the range of $2 million to $3 million on a net basis to continue to drive innovation and expansion of our core business, as well as advance our open platform strategy.

Specifically, we are enhancing our mobile capabilities and expanding the payment functionality of our platform. Two areas of increasing important within the loyalty space that will certainly contribute to our strong growth trajectory. Through the first quarter, we have expanded payment functionality and are operationalizing alternate payment solutions on a number of our products with current partners. Enhancing our mobile capabilities is also well underway and we expect to rollout this effort in the second half of the year.

In addition, we continue to advance our points business solutions reach by increasing our sales and marketing resources and related efforts around our merchant offerings. This is a segment of the loyalty space we have often discussed as being particularly attractive with huge on-tap potential and we are tracking as expected on this opportunity. We are also making a concerted effort to enhance our data analytics strength. Through the evolution of our business model, we are gaining additional insight into our partners' loyalty program databases, which offer unparalleled knowledge into the transacting activities of our partners' members.

We see compelling opportunities to use data science to drive increased penetration for our products and services across the platform. We have made strategic hires in this area recently and will continue to invest in better using our data to drive [upside] and profitable growth in our business. And lastly, we continue to invest in aggressively advancing our open platform strategy that I spoke to at length in our recent Q4 call. Most of the recent work on our open platform strategy has evolved beyond the initial concept and has transitioned into development.

A number of the APIs that power our internal platform are being modified to enable external developers to utilize their functionality, and we expect third party testing to take place over the summer. In this effort, we have a strong pipeline of product partners that we are working with and look forward to commercialize in these relationships over the course of the next few quarters. Continuing to evolve our platform to be an even more ubiquitous loyalty commerce tool for partners across many verticals, will certainly lend itself to bring additional partners and programs on to our network.

We are excited about this vision for the future and are actively and aggressively pursuing this path for our business. Looking ahead, we expect to continue to meaningfully invest against this innovation in the quarters to come. We are confident that the progress and investments we are making today will continue to position Points for a long term leadership in the loyalty ecosystem.

To wrap up, we are extremely pleased with our start to the year and our continued ability to deliver against our financial and operational objectives. This is a very exciting time for points and we expect the leverage inherent in our model will be increasingly evident in the second half of 2013 and even more so into '14. In the meantime, our entire team will continue to work diligently against our strategic plan adding even more partners to our platform and deploying new products to our existing partners. We have also remained very active with the Street and look forward to attending several upcoming sell-side conferences this May.

We look forward to keeping you abreast of our progress, and with that we will open up the call for questions and answers. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mike Malouf from Craig-Hallum. Please proceed with your question.

Ross Licero - Craig-Hallum

Great question by the way. This is Ross Licero on for Mike. Just had a quick question about Southwest. Can we get a little bit more color on the rollout and what that involves and who far ahead of schedule are you? Do you think we could actually see some revenue contribution in the first half?

Rob MacLean

It's Rob, Ross. You know we are pretty pleased with the way the offer has been going. As many investors know our ability to integrate partners like Southwest and others has really improved a fair amount over the last number of years. So that’s well in hand. And really a lot of what we are spending time and energy on right now is in the commercialization. Making sure that the marketing and merchandizing is up and ready to go when we launch that product. So I will give you a sense of the kinds of things we have been working on with our partner Southwest over the last little while.

We have indicated to that market that we are expecting to launch that mid-summer. We are feeling optimistic about that. Perhaps being a little bit early and what I will commit to is letting the world know as soon as we launch it. I think that’s probably the best answer today.

Operator

Our next question comes from the line of Pardeep Sangha from PI Financial. Please proceed with your question.

Pardeep Sangha - PI Financial

Just with regards to last quarter you have mentioned this with regards to your pipeline. You mentioned that you are expecting to be at least $50 million sort of a pipeline, new activities. So I was wondering if you can bit of an update on that. How the pipeline looks like kind of going forward here?

Rob MacLean

Yeah. I think pipeline continues to be very solid for us. I think as you know Pardeep, we think of this business opportunity really being on the retailing and merchandizing the miles, as an example to be in the $2.5 million to $3.5 million opportunity. So we will expect our pipeline to be fairly robust for quite some time. You know I think we have advanced conversations with a number of players, variety of verticals. The kind of usual suspects in terms of hospitality and travel, financial services, and also in multiple geographies. So I think as I said in the first -- or the call back in March, you know we feel very good about where the pipeline is and that's really just strengthened over the last couple of months. So one could spot.

Pardeep Sangha - PI Financial

So it's greater than $50 million?

Rob MacLean

Yeah. I mean when we look at the value of the relationships, pipeline, much as I said a year ago, we were working on well over $50 million worth of value or revenue on an annualized basis and that certainly holds true again today.

Pardeep Sangha - PI Financial

Okay. Just with regards to, if you can just elaborate a little bit more in terms of margin. You mentioned that sub-20% kind of range. And we know that in the past when you get into the fourth quarter and you tend to have a lot better margin there as well. So we are not expecting margins to increase at all for the seasonally [wise] or should I continue to know that some points [have] already begun?

Rob MacLean

Yeah, I think as we indicated in our guidance and as we came into the year, as we bring on more of these larger partners, we would start to see that overall gross margin percentage come down. Total gross margin dollars obviously increasing during the course of the year. A lot of that really is impacted in the second half of the year as we bring on some larger partners. So that is offset a little bit by our margins on pricing as we move through thresholds and hit our milestones in terms of guarantees etcetera. So that’s some positive pressure. But we would reiterate again, we would expect it to be sub-20% as we kind of grow on the scale that we have delivered in our guidance. And it will be in that kind of 15% to 20% range by the end of the year.

Pardeep Sangha - PI Financial

And finally, just wanted to know, you have sort of said this $300 million run rate kind of number exiting the end of the year with December. Can you just of help me understand some of the risks again in terms of -- it looks Southwest is on schedule so that’s not risks, but are there other large ones that could happen to be delayed and therefore sort of your $300 million, the number that you have thrown out there is delayed of sort or how confident do you feel that you are on track with all the other ones that you are working on as well?

Rob MacLean

Yeah. If you recall in the structure of that guidance, we identified that run rate number, the guidance itself, at $200 million to $220 million. And then an exit run rate of $300 million as we exit '13. Remember that only comes from deals that we have either launched or announced. So reiterate that point. So for us, I feel very very good about that ongoing run rate. Now, obviously the issue that impacts that numbers is just overall how is the performance of our existing and deployed products. And that’s something we wake up every day working on so we feel very good about how that's performing. And I think we saw better than expected behavior in the first quarter so we feel very good about where that’s heading. But again, just to reiterate, that was really on deals that we have announced or launched. And really the only one outstanding to launch at this stage is Southwest. So, obviously we feel good about the timing on that. So we feel pretty good about overall that guidance.

Operator

Our next question comes from the line of Joel Achramowicz from Merriman Capital. Please proceed with your question.

Joel Achramowicz - Merriman Capital

Rob, I was interest to know, I think the last quarter there seem to be a weakness -- you talk about the promotional programs but it didn’t seem to really come through in a big way in Europe, and I think we all know what's going on there. It sounds like you are kind of saying that Europe is still kind of struggling a bit but yet some of these promotions in other areas, perhaps domestically, have done pretty well. I mean, obviously, the revenue line is pretty solid this quarter. Any comments to that effect?

Rob MacLean

No, I think your assessment is bang on. You know the promotion lines we indicated in March, we were seeing the first quarter promotional activity perform nicely and that’s kind of proven itself out in the numbers. So no surprises for us there. If anything, probably a little bit stronger than we were seeing in early March when we last spoke, European partners are continuing to grow and they are obviously an important part of our overall financials in a quarter. So they're continuing to grow. But we certainly saw a number of European partners still dealing with some of the economic malaise in that market place for sure. But overall, I think, you have got that right. Real good, strong domestic North America growth. A little bit slower growth but still certainly growth on the European front.

Joel Achramowicz - Merriman Capital

Good stuff. I wanted ask Anthony. Anthony, I think we all probably just get a feeling for -- it's pretty obviously based on our modeling that gross margins dollars, it looks like they are really going to accelerate, which we are all excited about. When we try to get a handle on this gross margin thing, does it make sense maybe to -- I mean once we are looking out into 2014, looking at midpoint of maybe 15% or somewhere. If with an 18% quarter this quarter and considering that you are going to bring on Southwest which is probably lower margin but high gross margin account. I mean it's hard for us to believe you are going to be at 18%-19% in 2014. So it makes sense maybe we can close to the 15% than 18%?

Anthony Lam

(Inaudible) Yeah, with the bigger deals we are certainly moving in that direction, Joel. So that would be the right way to think about it.

Joel Achramowicz - Merriman Capital

Okay. And I had a question -- you got this, Rob, these verticals which is exciting here. Hospitality, airlines, financial, what about retail? How about some of these large internet retailers? I mean we all know the name, the big names. I mean do you think that somewhere along the line they would consider, in their prime program, in their purchasing program, to offer points. Have you been in discussions with any of the big -- both big box and also internet retailers?

Rob MacLean

Yeah, we certainly are. And we obviously work with Best Buy in that we have Rewards on program today. We have a number of conversations going on with other retail players. (Inaudible) The retail environment is interesting for us so our less standalone independent currency is in the retail space than you might expect. And so while there are some that we are in conversation with, there are other interesting opportunities for other products that we operate in the retail space. And that I think is one of the things that overtime will become very interesting as a shareholder (inaudible) on that, that really means some of these established currencies that we have great relationships with and are in the business of distributing those currencies, we see them as having a great opportunity to move into the retail environment that historically hasn’t used these very successful loyalty currencies as an incentive. And when you think of these big airline, hotel reward zone tied programs while very successful, big customer bases following those currencies, we think we are well positioned to actually start delivering those consumers into a broader retail environment. And you will see us kind of continue to make strides on that in the next several quarters. We like were retail is going and how we fit into the retail opportunities.

Joel Achramowicz - Merriman Capital

Good. One final, quick question. You always talk about, you have introduced these products. When you define that, how can we think about that? I mean, we understand that like client, like Southwest Airlines is huge client, but you might have multiple products. How do you define that so that we can understand that functionally?

Rob MacLean

Define products?

Joel Achramowicz - Merriman Capital

Yeah. Like a particular type product that you say has gone online?

Rob MacLean

Yeah, you know we have -- I have been accused that this isn’t a very simple story, so we tried to narrow the commentary down to kind of the larger core products. But we actually operate with the industry in 19 different, what we would define as products. And they range anywhere from the buy, gift and transfer products that are core to our economics, but we also run auction programs. We run business to business corporate platform that allows us to distribute miles and points to other bit third party companies. We do a lot of loyalty commerce activity around selling sales data, as an example. So there are a variety of products. Most of what we communicate and what we focus on are launches of programs like buy, gift and transfer, which we have announced with Southwest. But we are always putting some of our other products into the marketplace as well.

Operator

Our next question comes from the line of Ed Woo from Ascendiant Capital. Please proceed with your question.

Edward Woo - Ascendiant Capital

You have mentioned that there was some softness in Europe or at least slowing growth. Do you think that’s going to change anytime soon?

Rob MacLean

Yeah. You know our sense is, more so in the first quarter than we saw in the fourth quarter, we are starting some of the partners programs come back more robustly. And some promotional activity we ran in the first quarter, the response was very positive. So I would say, [hard to] that crystal ball is a little bit cloudy for sure in terms of Europe. But we are seeing signals that the growth is getting back to those levels that we would have expected.

Edward Woo - Ascendiant Capital

Then I wanted to ask about international expansion. I know you guys are very focused on North America and Europe. Is there any update in terms of [broadening] out to other geographies.

Rob MacLean

Yeah. We were big believers that this loyalty opportunity when we think of the broader opportunity, there is tremendous growth ahead of us in the international markets. We are very happy with the way things have evolved and rolled out in the European marketplace. I would say we are very active in two markets in specific. Brazil in Latin America is a market where our business development teams are spending a fair amount of time here in last little while. Really a robust marketplace of all [same] markets from a loyalty standpoint, some, I would say very good conversations now. But timelines on some of these international deals are a little bit harder to predict than what we have seen here in North America. But I would say that’s a marketplace that we are quite encouraged by and are very active in.

The other is really, what we talked about a little bit in the March call, around Asia and China in particular. If you recall, we have made in investment in the Chinese market here in late 2012. And one of the primary reasons we made that investment alongside EMEA was to improve our -- I believe that this would improve our prospects in terms of doing business in that region by having a presence in the form of the investment that we made. I would say, relatively early days, that’s just rolling out now. But the early signals we are seeing in terms of our ability now to get an audience with the right kinds of players in the Chinese market is very positive. So those are two markets when I think about internationally, that we are active in right now and harder to predict timing on it but like the upside that those markets provide for us.

Operator

(Operator Instructions) Our next question comes from the line of [Brian Freckman from OS Capital] Please proceed with your question.

Unidentified Analyst

Just a quick reminder on, you know not on the early investments, but let's just say kind of looking out in 2014ish. You guys have always talked about roughly a 50% fall through from gross margin dollars. Is there any reason to think that that changes at all, or is that still your expectation?

Rob MacLean

Look, we think there is great leverage in the business on a go forward basis. We are coming some decision near term to invest in that profile of the business that we talked about at length at the year-end call. And so that will impact some of the quarterly timing on it. But when we think about moving out into '14 and '15 etcetera, those are flow-throughs that we would certainly expect. That and better that would be forming through to the EBITDA line for sure.

Unidentified Analyst

Okay. And the next question I will take offline. Regarding your open platform, I was kind of interested in what you guys are doing related to the mobile wallet. I know I have asked you that in the past and I am just kind of curious -- I will take it offline, but what you guys are doing and kind of where you see your place in that and where you see that going from a timeline standpoint?

Rob MacLean

You know, I could talk for hours on that, so I will give you the very short version and happy to speak offline (inaudible). But generally our point of view on that is, that today when we look out on the landscape of digital wallets and where they are evolving. Your dozen plus big players looking at digital wallets, we think and we know talking to the industry, the loyalty industry, there is a significant connection between where the digital wallets going and loyalty is going to fit into it. And a very concise way of describing it, we believe for those digital wallets and for the industry, we are simply the absolute, only and best platform to allow those digital wallets to really access a broad base of the loyalty industry in an efficient manner. Just simple as that.

We have got 50 plus partners attached to our platform. As we open up our platform to allow product partners like digital wallets to participate, they get access too. Not necessarily guaranteed participation but access to all of our partners in a very simple exercise we. We think that’s immensely valuable. Immensely important to the evolution of the digital wallet space. And we love that position that we find ourselves in. We will be active in these discussions that are happening right now. We are presenting and participating in the Wallet Wars Conference, I think next week in New York. We are on a couple of panels there. We just think loyalty is critical to that success of digital wallets going forward and we are absolutely the best solution to access loyalties through our platform. So that’s the short attempt to telling you where I think we are.

Operator

Our next question comes from the line of [Peter Homings from Arthur Wood] Please proceed with your question.

Unidentified Analyst

Anthony, I had -- I was writing rapidly so I missed three things and I wondered if you could just recap what you said about primary cost, marketing and communications and tax services for the balance of the year?

Anthony Lam

So marketing expenses, we are expecting that to run between $400,000 and $600,000 a year -- I am sorry, a quarter for the balance of the year. And then we have technology expenses that will be running around $300,000 a quarter from the balance of the year.

Unidentified Analyst

Per quarter, okay. Okay. And employment costs, did you say anything about that?

Anthony Lam

Well, we have been making marginal increases as you would....

Unidentified Analyst

Yes, I mean it's gotten out of average out of that in the past so sort of similar hiring kind of...?

Rob MacLean

Yes, that’s right. Similar type of pattern.

Unidentified Analyst

Okay. Then the two substandard questions are, in the cash flow statement there is something called a non-cash charge related to operating activities, there is $5.569 million or something of that nature. I wondered what that was. Even with that you increased year-over-year but I was wondering what that non-cash charge was?

Anthony Lam

Let me get back to you on that. Peter, I don’t have the statements upon me.

Unidentified Analyst

Okay. And, because obviously this is non-cash, so that means that EBITDA was not -- you didn’t increase cash by $2 million, you increased it by $7 million. And just final question is, isn’t the retail market that you talked about an answered to one of the questions a minute ago. The market to be addressed with PayPal, who just finalized their deal with Discover and expect to go from a 100,000 numbers to 1 million numbers by year-end.

Rob MacLean

Peter, it's Rob. I think PayPal is a part of that and certainly enhancing our payments and such with companies like PayPal, is very part. Now it was more oriented towards, look there are retail loyalty programs out there that have gotten standalone currency and so we would be in conversation with them. I also think that our products around our B2B solutions, our business solutions, where we are distributing existing currencies. The retail market place is obviously vast, it's a significant marketplace. And they historically have not used established existing currencies because of complexity around technology etcetera. So we think there is some very interesting opportunities to go to some of these large retailers and offer them miles and points from a variety of different loyalty programs as an incentive rather than kind of discounting and other incentive marketing that they have done as a massive economy over the last 20 years. We think it's just a great opportunity to use the most powerful incentive currency in the last 35 years that we can deliver uniquely to them. So that was really more of my thinking on retail.

Unidentified Analyst

And one final question is, there was a very nice increase in number of transactions. I think it was 18% year-over-year, I guess. Do you have any sense of -- to what you would ascribe that?

Rob MacLean

You know I think it's just -- again, as we improve our marketing and merchandizing efforts across the platform, we just simply will continue to drive additional growth in transaction activity. It's as simple as that. Remember, right now, as we talk to investors, we have less than 2% penetration into the databases of the partners that we work with today. We think that opportunity is dramatically larger. So our opportunity from 1% to 2% penetration up to that 7% to 8%, to 10%, 12% penetration is what we work on every day. So I will expect to see continued growth on transactions for a very long time into the future.

Unidentified Analyst

If you just sort of were, sort of sitting in your front porch and just wondering about that growth, that penetration I should say, is that 2% something that can go to 4% over the course of 5 years or 2 years or sort of -- I mean do you see anything internally that we can't see from the outside that gives you a sense of that ramp?

Rob MacLean

Yeah, obviously we see a lot of data, and we wouldn’t be talking about that kind of penetration number if we didn’t have a high degree of confidence that it was achievable. Timing is obviously a little bit -- I am wary to do any of that kind of timing projections, but we do know today that some of our partners are already in the north of 4% penetration. And so we have got great templates out there. Great marketing and merchandizing plans that we have developed in conjunction with some of our partners that we are trying and believe we will be able to replicate with all of our partners. And so we can see some that are well north of 4% already. And in my opinion everybody should be at that level. So....

Unidentified Analyst

I would agree. I mean it's just a question of working. Any congratulations, very good stuff.

Anthony Lam

Before you go, I do have an answer for your question, your question on the cash flow piece. It's really the movement in our tables, primarily in our loyalty program table.

Unidentified Analyst

Yeah, I saw that changed by that amount, and why did that change? Was there some, like accounting, like regulation that made you move that or some decision you made?

Anthony Lam

Not at all. That’s really type and the timing of the payment. So we typically end our fourth quarter with strong results and depending on when the payments are falling due we will see ebbs and flows when we actually remit those points to the partners. It's typically a 30-day timeframe, so what you are seeing is just a natural flow of those funds going through in terms of cash payments.

Unidentified Analyst

So we shouldn’t see anything of that magnitude. I mean in the past it's been maybe $.05 million or $1 million or a $1.25 million. It would be more like that in the future?

Anthony Lam

It will ebb and flow with the flow of our activity with our partners.

Operator

There are no further questions in the queue. This does conclude today's call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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