Ambassadors Group, Inc. (NASDAQ:EPAX)
Q1 2013 Earnings Call
May, 02, 2013, 11:30 am ET
Stacy Feit - Financial Relations Board
Anthony Dombrowik - Interim CEO
Good morning, ladies and gentlemen, and welcome to the Ambassadors Group Quarter One 2013 Earnings Conference Call. As a reminder, today’s call is being recorded. My name is Nicole and I will be your coordinator for today.
I would like to turn the conference over to Stacy Feit. Please proceed.
Thank you, Nicole. Good morning, everyone. Joining us on the call today with some prepared remarks is Anthony Dombrowik, Interim Chief Executive Officer of Ambassadors Group, and other members of management.
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 net 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 programs.
For your convenience, we’ve included a footnote in our earnings release that separately discloses gross 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.
And with that, I’ll hand the call over to our Interim CEO, Tony Dombrowik.
Good morning and thank you for joining our first quarter 2013 earnings call. I want to provide an update on our sales and marketing initiatives and our enrolments for the 2013 travel season, as well as a initial look at our first 2014 sales efforts. I will then review our first quarter financial results and provide an update on our 2013 outlook. Following that we will open the call for questions.
As usual James Burdine, Vice President of Discovery Student Adventures and Jim Kreyenhagen, President of BookRags are here to cover their operations as needed. In addition, Eric Anderson, Vice President of Marketing and Lisa Rowe, Senior Director of Finance and our Corporate Controller will also be available for our Q&A session.
Before we begin the operational and financial review, I would like to take moment to update you on the leadership transition here at Ambassadors Group. As I am sure most of you are aware in February Jeff Thomas and Peg Thomas both step down from the respective positions of CEO and President and COO of our operating subsidiary. First, I want to thank them both for the years of service to the company. This the first time since their departure that I have had a chance to speak to you about the transition. They both had a long and important tenure at Ambassadors over 17 years each; Jeff’s vision and efforts guided Ambassadors from a small family run travel organization to a public company and a major player in the travel industry. Peg quickly became the heart of the operations moulding the People-to-People experience into a world-class program. They will be missed and we wish them well.
It is that a new date Ambassadors, we are executing our strategy to evolve to a multi channel marketing approach integrating direct mail and digit channels. With a strong bends across all facets of the business, marketing, operations, customer experience, finance, technology, the transition has gone very smoothly and we’ve had no issues. And our near term focus is a very clear, first we will deliver best-in-class programs and see if we complete the coming travel seasons. Second, we will continue the critical transformations of our marketing activities including improved lead generation, accessing new conversion channels, maximizing return on social media and digital spend, leveraging in partnerships and optimizing traditional mail and meeting channels. Third we will focus on protecting our profitability and financial position. We are right size our cost structure to current revenue levels and look to engineer our operations to both maximize profitability and shareholder value.
Together this team work hard to make this company successful, and I want to personally thank you employees, shareholders and all of our stakeholders for their support over the last few months. One other segment before I talked about the quarter, in terms of the plan to permanently feel the CEO post, the Board is engaged the search from (inaudible) and is actively looking with the sense of urgency. Of course it’s difficult to put a timeline on something of this nature, but I would anticipate the Board making a decision in the next three to four months. And just to preemptively answer the question, I am pleased to be in consideration for the permanent position. Of course the Board will facilitate their duty to find the best person for the role and I fully support that effort.
Now I am turning to our first quarter update. Our efforts during the seasonally [sold] first quarter we are focused on solidifying our 2013 (inaudible) accounts; first through securing late enrollment and second through strengthening retentions as we prepare for our peak summer travel season. Through enhanced family engagement we are dedicated to preserving our delegate base and where possible growing it. Our increased social media presence, digital engagement and high touch customer service have all contributed to an improvement in retention rates relative to prior year levels. In February, we saw the transforming and today we are still tracking about 9% better than in 2012. But keeping what we have is not enough. Our selling efforts will run right up until June in an effort to capture incremental enrolments for our remaining inventory from last minute demand. As we mentioned in the release, our commitment is to be able to sell 365 days a year not just during the peak season for particular travel periods. It only makes sense if we have the store opened we have an opportunity to sell more and give the customer more choice. So consistent with that strategy, we began selling 2014 travel in February and lost our first ever spring campaign in March. Thus far the results have been encouraging as we have generated close to 1900 enrollments for the 2014 travel season, the most ever this (inaudible) advance of the travel season.
By opening up our 2014 programs for early enrolment and spreading up the marketing cycle, we are able to provide perspective families additional time to pay for the trip. We improve our engagement interactions with them and we have more time to work on retention efforts with little incremental costs. And for those that are not ready to enroll at this time, we have digital tool to keep these leads warm as we move through the summer and into the traditional fall enrolment period. At these spring meetings we have also seen an improvement in meeting attendance rates. While it’s very early in our efforts far too early to call anything a trend, this is a reversal of what we saw last fall when you may recall attendance was challenging. At the very least, its one individual positive indicator. We believe the increased exposure that we are generating from our multi-channel strategy with an emphasis on cross channel coordination of direct mail and digital is playing a significant role in these initial results.
That being said, we continue to be realistic about our expectations and are mindful that we are still operating in an environment in which the mid-market consumer interest in traveling is significantly below the peak levels we saw in 2007. The key is learning from what is working and continuing to capitalize on our strong social media presence and digital engagements. These actions are transforming our business. On the social media front, we have continued to generate substantial growth in engagement. Our Facebook likes increased over 60% since our last update call with 135,000 likes. We have now surpassed our largest competitor in the student travel space. Day after day we are hearing stories about families that receive an invitation in the mail which prompted them to check us out on Facebook, where they encountered us directly on Facebook, and when they see the size of the population engaged with us and the level of interaction we have with our audience it further legitimizes the brand encouraging them to take the next step with us.
We are also continuing to develop and optimize the Webinar and telesales channels which we continue to believe will ultimately drive improvement in our overall conversion rates. To further support the 365-day year marketing effort we are focused on expanding our offer to different audiences. We are launching a slate of new programs this year to meet a demand for select destinations that favor winter travel season. We believe these programs will contribute to our 2013 enrolments and revenue and are excited to offer the market new products of shorter duration to new destinations. We also announced the launch of people to people college programs. We have a very strong alumni base that often wants to continue to travel with us. By creating these programs we can meet the demand from those that would be ageing out of the traditional 5th through 12th grade program offerings.
Traveling to highly desired but slightly offbeat destinations including the Vietnam and Cambodia, India, Antarctica, these programs focused on volunteerism and service, cultural emergent and adventure. In an effort to further develop the cultural intelligence for our young leaders. These programs may also contribute to our 2013 enrolments in revenue and our natural extensions from our alumni relationship. These new efforts are very small at this point, but we're excited about potential organic growth opportunity. These efforts have together in the last few months from a team with great creativity and drives.
Now I want to turn to our review of the first quarter financial results. We traveled 572 delegates during the first quarter compared to 747 delegates in the prior year period. As you may recall, our Student Leadership program saw a boost in 2012 from the timing of school spring breaks which fell in the first quarter. This year however, we're running a few of those short low margins programs. Accordingly, we saw a year-over-year decline in delegates in Q1, partially offset by the addition of travelers on our Presidential inauguration program in Washington D.C. this past January. That event included both US students and several groups from our China (inaudible) program. In spite of the net delegate decline compared to Q1, 2012, gross revenue from all travel program increased 27% to 1.9 million. This was driven by a more favorable product mix of higher price points programs.
Gross revenue from all sources increased 8% to 2.9 million. The improvement in travel related revenue was partially offset by a $200,000 decline in revenue from BookRags primarily related to a slight decline in traffic to the website driven by the Google algorithm changes. We're making some website architecture adjustments and expect traffic growth by the end of the year. Our overall margin was 48.1% compared to 52.4% in the first quarter of 2012. Looking at just the travel related programs, the margin was 27.6% compared to 25.6% in the same period last year driving a $140,000 increase in gross margins. On the BookRags side, our gross margin decreased to 158,000. As a result, the gross margin was approximately 1.4 million for both periods.
Moving down the income statement, our operating expenses comprised of both sales and marketing activities and general and administrative expenses totaled $14.2 million compared to $12.9 million. However, it's important to know as we disclosed in the release, over the last few years our results have been impacted by certain matters that we considered to be special items.
We believe these items impact comparability of our year-on-year operating results and that it’s important to understand their impact in addition to the GAAP measures we provided in the release. There are details on the table in the release, but in the first quarter of 2013, the special items consist of $2.7 million of separation payments and other expenses associated with the management departures I mentioned, partially offset by $550,000 recovery from insurance carriers related to certain legal and professional fees associated with our now settled class-action lawsuit.
In the first quarter of 2012, special items totaled $730,000 and were comprised of legal costs related to the class-action lawsuit and SEC inquiry costs related to the 2012 proxy contest and severance payments due to the reduction in force in February 2012.
Without these costs, the first quarter 2013 operating expenses would have been $12 million, compared to $12.2 million in the first quarter of 2012 or down about $200,000 year-over-year. This decline reflects planned cost reductions to protect profitability, partially offset by expenditures related to the modification of our marketing approach.
Looking at the bottom line, we reported net loss of $8.1 million or $0.47 per diluted share, compared to a net loss of $7.9 million, $0.45 per diluted share in the prior year period. Without the special items and our impact on income taxes, net loss for the quarter would have been $6.7 million, compared to a $7.4 million loss in 2012, an improvement of $700,000 or about 10%.
Turning to the cash flows, we generated $20.1 million in operating cash flow during the first quarter, compared to $26.9 million in the prior year period. The change in cash flows from operations between periods was driven primarily by decline in participant deposits due to a lower number of enrollments for future travel periods. During the quarter, we funded about $700,000 in CapEx primarily related to technology supporting, marketing and sales efforts.
We continue to expect to invest approximately $3 million in CapEx this year. In the quarter, we repurchased common stock both on the open market and through tax withholdings on vested employee grants totaling about $500,000. We also returned just over $1 million to shareholders through our dividend during the first quarter.
As previously announced in April, our board elected to spend the quarterly dividend. The dividend suspension was a proactive prudent measure to increase our financial flexibility and preserve liquidity in a year when we expect lower earnings. This will result in a cash savings of approximately $4 million on an annual basis.
Our remaining shares repurchase authorization remains in place. However, we do not expect to be active in the near term. The board will consider dividend policy periodically and we will inform you of any changes.
In terms of our balance sheet, as of March 31, we had $55.9 million in cash and short-term available for sale securities compared to $83.7 million at this point in 2012. The change was driven by lower deposits as well as dividends and buybacks totaling $15.7 million in the last 12 months. At March 31, 2013 we also had no debt outstanding and still maintain our unused line of credit. Deployable cash defined in our earning release was $14.1 million.
Now I would like to discuss our updated outlook for 2013. As of April 28, enrolled revenues of 2013 travel group programs was $113.1 million, down 19.4% from the same point last year based on enrolled travelers of 18,911 compared to 22,537 at the same point in time in the prior year.
Enrolled revenue for our core Student Ambassadors program is down 21.5% to $100.6 million compared to $128.3 million at this same date last year. This is based on enrolled travelers of 14,637 compared to 18,627 last year.
Based on current visibility for 2013, we are updating our guidance as follows; lowering expectations for consolidated gross revenues from all programs and operations to now be between $115 million to $125 million, maintaining consolidated gross margin as a percentage of gross revenue for all programs and operations of 36% to 37%, and maintaining the net income before any special items of between 0 and $2 million.
For the balance of 2013, we will continue to focus on our core business. We are executing and refining our multi-channel marketing approach while right sizing our cost structure. Most importantly, we are carrying out our mission to deliver our unique people to people experiences while preparing the next generation of globally aware citizens. We look forward to another rewarding and safe summer travel season.
Thank you for your continued interest in Ambassadors Group. And with that, I will ask the operator to open the call for questions. Nicole?
Okay. I guess with that, Nicole, we will thank everybody for their attendance at this conference call and we look forward to talking to you at our next call. Thank you.
Thank you. With that, we will conclude our conference call for today. Thank you all for your participation. You may now disconnect. Have a wonderful day.
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