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Ambassadors Group, Inc (NASDAQ:EPAX)

Q2 2010 Earnings Call

July 22, 2010 12:00 am ET

Executives

Jeff Thomas - President and CEO

Kristi Gravelle - Interim CFO and Controller

William Sennet - Director of Market Research

Peg Thomas - President, People to People Ambassador Programs

Jim Kreyenhagen - President of BookRags

Susannah Stoltz - Discovery Student Adventures.

Analysts

Mike Roarke - McAdams Wright Ragen

Greg McKinley - Dougherty & Co

James Bellessa - DA Davidson

Operator

Good morning ladies and gentlemen and welcome to the Q2 2010 Ambassadors Group Inc. Earnings Call. My name is Christine, and I'll be your coordinator for today.

I would like to turn the call over to William Sennet, Director of Market Research. Please proceed sir.

William Sennet

Thank you, Christine. Good morning. On the call with me today is Jeff Thomas, President and Chief Executive Officer of Ambassadors Group; Peg Thomas, President of the Operating Subsidiary Ambassador Programs; Kristi Gravelle, Interim Chief Financial Officer of Ambassadors Group; Jim Kreyenhagen, President of BookRags; and Susannah Stoltz representing Discovery Student Adventures.

First, before we proceed into the call, I will read the Safe Harbor statements regarding forward-looking statements. 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, Section 27-A of the Securities Act of 1933 as amended, and Section 21-E of the Securities Exchange Act of 1934 as amended.

These forward-looking statements include without limitation, statements that relate to expectations concerning matters that are not historical facts. Word 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, use of technology, 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 results of operations.

These risks and uncertainties are set forth in Ambassadors Group's most recent report filed with the SEC on Form 10-K, as it may be updated in our subsequent Form 10-Q and 8-K reports. 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 Jeff.

Jeff Thomas

Thank you, William. Good morning. Thank you for joining our call this morning.

We are planning to follow our regular call outline, starting with a brief overview of the company results, and Peg Thomas, will discuss our core People to People Ambassador Program results and Kristi Gravelle, interim CFO, will discuss our financial results for the Q2 2010.

As mentioned we have two other officers on the Jim Kreyenhagen, President of BookRags and Susannah Stoltz with Discovery Student Adventures. They are in the call to field questions about these respective business units should the need arise.

From our perspective there's not been much movement up or down in our business since our last conference call. We travelled approximately the number of delegates that we expected. We are realizing approximately the margin that we expected and the summer travel season has been relatively benign so far.

More specifically for the second quarter we travelled 13,400 delegates compared to 16,000 one year earlier. The decrease is 16%. We have been able to maintain our margin expansion from last year, which enabled us to post a 14% year-over-year net revenue decrease.

Earnings per share came in $0.78 for the quarter and $0.40 for the year. These numbers compared to $0. 99 and the $0.72 for the quarter and for the year one year ago. Cash remains the strength of the company with $108 million in cash and short-term investments on the balance sheet at the end of the quarter, compared to $109 million one year ago.

At the end of the quarter we reactivated our share buyback and purchased approximately $1.8 million worth of our shares, which represents 162,000 shares.

Our Discovery Student Adventure Programs are underway. Although the number of traveler is small we are disappointed in the number. We can say that the quality of the programs is outstanding. At roughly half way point in their travel season, our net promoters score for these programs in the 90s. To provide some perspective, a score of 65 is considered world-class.

Looking ahead to 2011 for Discovery Student Adventures, we believe that there are reasons to expect better sales results for this program, although we are obviously too early to say anything definitive. We made changes that should help our sales and marketing efforts. First, we started our selling efforts earlier than last year. Second, we hired a national sales manager with eight years of experience in [Ad back] sales channel.

We also improved our lead generation flow both in terms of quantity and quality with BookRags, the BookRags operating unit, which provides book summaries, notes and teaching materials to students and teachers through the same website. BookRags experienced a slight decline in financial performance.

As I mentioned last quarter this decrease was expected due to a renegotiated agreement with an Ad partner vide 2009. While this has a short-term impact in Ad revenues this year, long-term we're investing in direct Ad sales, which will offset this decline and result in Ad sales growth in the next year.

During the same period receipts for the sale of content on the site were up 13% over the second quarter of last year, and 11% over the first half of last year. For BookRags the monthly unique user number increased 5% of the same period last year. This modest growth was expected and in spite of turning off unprofitable marketing in Google AdWords, which drove traffic but not revenue during the same period last year.

Our revenue per 1000 unique users, which is a measurement that shows our efficiency in generating revenue from one side traffic was down 11%, from a comparable period last year. This decrease is also expected and was result of the prior mentioned Ad partner contract renegotiation.

As mentioned we expect to reverse this trend increase and the next year, would be gross and direct to Ad sales.

At this point I would like to turn call over to Peg Thomas to review the People to People Ambassador Programs here.

Peg Thomas

Good morning and Thank you to joining us today. For the second quarter of 2010, we travelled 13,396 delegates, in comparison to 15,995 delegates in the second quarter of 2009. Year-to-date we have travelled 14,199 delegates, in comparison to 19,487 one year ago for the same period.

For 2010, we have enrolled revenue growth, at a $160.2 million in comparison to a $192.6 million one year ago. This number includes students already travelled year-to-date.

Our withdrawal rates for the summer season so far is an improvement over last years summer withdrawal rates. In fact at this point we are doing better than we were doing two years ago. June and July are our busiest travel months for the year, as we deliver on our promise of high quality, impactful educational travel. We have two main focus areas this time of the year, completing summer travel and preparing to launch the 2011 marketing campaign.

Our summer travel season began May 31st and will be completed on August 19th, all four of our People to People product lines travel during this time period.

Here are few of the headlines from our summer season so far. We continued to deliver high quality programs which by year end will explore 47 countries and all seven continents. We are travelling students on our programs from almost 100 other countries.

We continue to be recognized as a leader in health and safety in our industry. In fact our Senior Director of Health and Safety has asked to speak at a number of conferences on student travel as an expert in the field. For example how we managed the H1N1 products in Asia.

This will allow almost 85,000 service travels this year, changing the globe with their [on to hands], rebuilding HandsOn schools in New Orleans, visiting orphanages and delivering mail to the elderly are a just a few examples.

As usual traveling teenagers around the world present some challenges. This summer has gone better than recent summers. Last year we were pressed by issues regarding the H1NI virus. This year we have had not had this level other than occurred.

We anticipated this year to be the year of volcano. We tracked, prepared and had contingencies in place, but fortunately the volcanic activity subsided. We have had some normal teenage behavior and some minor medical issues but in general it has been a relatively calm summer to-date.

Our net promoter scores have continued to increase year-over-year as we continually strive to improve product quality and service to our customers. For the second quarter we posted a margin of 41.5% in comparison to 14.6% one year ago for the same period.

Our program prices are down to flat in comparison to one year ago, but our teams were still able to negotiate better rates as the demands for travel decreased due to the world economic situation.

We believe this higher margin is an anomaly due to the buying opportunities available in the past 18 months.

Our second focus this time of the year is our marketing campaigns for 2011. We are in the process of launching this campaign. Our focus is turning from the delivery of our product to fall marketing and sales season.

We believe our product is more relevant than ever and in the transit globalization.

With that, I will pass the call to Kristi for the financial review. Thank you for your time and attention this morning.

Kristi Gravelle

Thank you Peg and good morning everyone. Today, I will discuss second quarter results, our balance sheet and cash flows, and close with an estimated outlook for 2010.

During the second quarter 2010, we traveled 13,396 delegates and recorded $83.1 million in gross receipts as compared to 15,995 delegates and $99.3 million in gross receipts for second quarter of 2009. This difference represents a 16% decline, which is slightly higher than the 14% decline in gross margin of $34.5 million down from $40.3 million for the same period in 2009. These results combined with first quarter gave rise to year-to-date delegates traveled of 14,199 and gross receipts of $86.2 million.

Gross margin as a percent of gross receipts for the six-month period increased to 41.9% in 2010 from 41.5% in 2009. This small improvement is primarily attributable to the continued benefit achieved in air and land cost as well as the ongoing leverage from BookRags' gross margin on the consolidated results in 2010 as compared to last year.

Total operating expenses decreased 1% or $0.2 million for the quarter and increased 3% or $0.7 million for the six-months of 2010 in comparison to 2009. This increase is driven by slightly higher sales and marketing costs related to strategic new hires made in all subsidiaries, promotional activities targeted at driving enrolments for both 2010 and 2011 travel, and expenses related to closing our print facility. In contrast, general and administrative costs for the first six-months of 2010 are flat to 2009.

Other income increased $0.7 million due to the absence of the realized foreign currency loss of $1 million taken in the first quarter of 2009, offset by lower prevailing interest rates on an average invested balance of approximately $143 million in 2010.

All things combined, net income after tax was $15.2 million, and the fully diluted earnings per share was $0.78 for Q2 2010, a 21% decline from $19.2 million and $0.99 per share in Q2 2009.

Moving on to the balance sheet. Cash and short-term investments decreased $1.7 million or 2% to $107.8 million, while prepaid expenses and participants funds are both down 20% as compared to the same period one year ago. Goodwill related to the BookRags acquisition increased $2.9 million during the quarter due to the removal of the two year restriction placed on stock issued to the previous owner at the time of acquisition.

We remain debt free, and 60% of our $179.2 million asset balance resides in cash and short-term investments. During the first six months for 2010, we generated $30.5 million in free cash flow and allocated $4.1 million back to our shareholders in the form of dividends of $2.3 million and share repurchases of $1.8 million.

Deployable cash increased 21% from $43.4 million in Q2 2009 to $52.5 million in Q2 2010. Total cash and investments per share was $5.64, while deployable cash was $2.75 per share.

As we look ahead for the rest of 2010 there are fewer moving parts and fewer delegates left to travel, which allows us to provide an estimated EPS range. This range is based upon the following assumptions.

Our summer travel season continues through August with no major changes. We continue to invest in sales and marketing for 2011 for the remainder of this year. There are no surprises related to 2010 travel, positive or negative, regarding additional enrollments or expected withdrawal rate.

We are able to complete the closing of our print facility prior to year end and we are able to maintain our gross margins on the remaining 2010 delegates, which we expect to be less than we traveled in Q2.

Considering all these factors, we are looking for an EPS range of $0.48 to $0.52 in full year terms. Of course, we are pushing to meet and exceed the top end of this range. We are also working to optimize our cash flows as we look ahead to the future years.

Thank you for your time and attention. I will turn the call back over to Jeff.

Jeff Thomas

Thank you, Kristi. With that I'd like to ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) We will first to Mike Roarke with McAdams Wright Ragen.

Mike Roarke - McAdams Wright Ragen

Hi, guys. Jeff, good morning. First question is can you give us your view on how the marketing season is shaping up or how you anticipate it shaping up please?

Jeff Thomas

When you say marketing season, you're talking about our efforts thus far for 2011?

Mike Roarke - McAdams Wright Ragen

Exactly.

Jeff Thomas

Obviously right now it's too early to make any calls about 2011. Naturally here we studied the results from last year and looked for opportunities to grow and enhance what we are doing, and we are in formatting some of those, we are trying some new tests. Broadly speaking we are try to build more value into the product. We try to get better, continue to get better target demographically and also add this, as we have done in the past couple of years follow up sales capability. Because in times like these, people have a harder time getting over the decision making, and maybe lock in more [touches] or possibly more questioned answered.

Mike Roarke - McAdams Wright Ragen

Okay, so do you think that the kind of the impediments that were in place last year to make in a purchase decision in large are still in tact as you cycle in the current period here?

Jeff Thomas

You know, it is really hard to tell, I'd probably be reading all the same things you are, and where our trade economies going or not going, and you look at those macro issues, but each family is making a micro decision about whether or not it makes sense for them to send their son or daughter overseas this year. Surveys would indicate that people have great feelings about the product which is really very important to do, but we don't really know, until we get this follow up on what their decision making would be like.

Mike Roarke - McAdams Wright Ragen

Okay, thanks, a quick, if I could, you, on the called here, you expressed optimism here about the long-term outlook for the company, the business is overcapitalized, I think there is a good argument to hear, that your stock is cheap down here and is there any consideration that it would be more aggressive with the share repurchases going forward or issuing special dividend?

Jeff Thomas

Those are something we look at on a regular basis with the Board of Directors. Right now, we have been pretty content with the share buyback we have in place.

Operator

(Operators Instructions) We will go next to Greg McKinley with Dougherty.

Greg McKinley - Dougherty & Company

When you are looking at the second half of the year you talked about the higher margins in the June quarter being an anomaly. Could you give a sense for the order of magnitude that you are thinking about their first of all?

Secondly it looks like your gross program or seats per travel have been relatively flat here in the June quarter, but you know looking back to your prior year data, your enrolled revenue as of this point time actually ended up being less than the gross program seat you ended up recording for fiscal year '09. I am just trying to figure out what caused that and if that really makes sense for that to be a recurring theme in this second half?

Peg Thomas

Greg, I just wanted to make sure that I am I understanding your question. Are you asking that for the rest of the year in prior years we had, our enrolled revenue as compared to our gross margin as has not been a relation, I am just trying to make sure, on that.

Greg McKinley - Dougherty & Company

Yes, the second part of my question was last year you reported a $192.7 million in enrolled revenue as of this date, but then for 2009 you ended up by close to $204 million for the year and maybe hopefully my number is not wrong there, but I don't understand why that would increase with the main challenge there to maintain the enrollments and maintain that level in.

Would it make sense, that we would actually see a second half increase relative to enrolled revenue here in 2010 and then secondly I guess just asking about does it create a [accretive] margins in the second half, would come down from your June quarter level?

Peg Thomas

Okay. So the first part of that, them I will respond on the enrolled revenue. So one of the things that's happening with enrolled revenue this year is that our core products and the Student Ambassador program, this is down less than the other products and we talked about that on the last call where that particular product seems to be maintaining it's attractiveness to the consumer.

Greg McKinley - Dougherty & Company

Okay.

Peg Thomas

So from a mixed perspective, Q3 and Q4, we are continuing to sell our other product line. So there is some movement in terms of enrolments and withdrawal rates, but it doesn't have major impact because the largest portion of our mix and the largest portion of our travelers happen in Q2.

Greg McKinley - Dougherty & Company

Yes. I am just wondering how did your gross program receipts for all of 2009 end up $10 million higher than they were enrolled for as of July 2009. Is that a normal scene that we could expect to recur in the second half of 2010?

Kristi Gravelle

I would say it's not a normal theme.

Greg McKinley - Dougherty & Company

Okay.

Peg Thomas

Our marketing campaign now Greg are completed for this year. It's not a normal pattern.

Greg McKinley - Dougherty & Company

Okay. Then the other issue is the gross margin rate. To what degree would you expect those margins to moderate in the second half if we are at 41.5 here in the second quarter?

Kristi Gravelle

So, I think they might come down a little bit for Q3, but it won't be a significant decrease this year. I was more talking about 2011.

Greg McKinley - Dougherty & Company

Okay.

Kristi Gravelle

We aren't anticipating to hold that margin into 2011. We are anticipating to hold some sum version of that margin for the quarter for the third quarter, but it won't be as high as Q2, it won't be a significant decrease.

Greg McKinley - Dougherty & Company

Thank you.

Jeff Thomas

Greg, let me just add. I think it's an important point, the last couple of years we've been able to buy the travel components better than we thought this last fall, basically because of the slowdown in world travel market and we are just not sure looking at how long that gap will happen between when we plan when we actually buy.

Greg McKinley - Dougherty & Company

You are not getting anything back in terms of weakness of the Euro, I mean that hasn't help you at all?

Jeff Thomas

Remember the way we hedge so far. The program this summer we would have hedged the Euro roughly in April, May maybe early June 2009. Right now for 2011 programs we are hedging the Euro. So to the extent it's in that window at that time we are going to get advantage and one of these questions were as it is $1.29 today which is little bit lower I think than we actually hedged, we would have like to bought it but then we can't maintain our hedging policy becomes speculation as well.

Greg McKinley - Dougherty & Company

Okay.

Jeff Thomas

Other thing that's happening is we buy a lot of Aussie dollars and that's driving cost up in that part of the world.

Operator

We will take our next question from James Bellessa with DA Davidson & Co.

James Bellessa - DA Davidson & Co

It appears from your cash flow statement that you had write-down of property and equipment. Could you explain that?

Kristi Gravelle

In Q1, we did write-down some equipment with the marketing production facility in terms of closing that facility down. There is not a significant change from a cash flow perspective on anything else in PP&E.

James Bellessa - DA Davidson & Co

Then that was a first quarter event not a second quarter event?

Kristi Gravelle

Correct. Jim write-down, we talked about in the last quarter call that we had in the direct marketing industry we found some great opportunities from a price perspective out there and it was actually cheaper to send some of our direct marketing campaign out of house and to continue to do our print production here in-house.

James Bellessa - DA Davidson & Co

On the enrolled revenue figure it's down 17%. Last quarter you indicated that the enrolled revenues were the company's mainstay, International Student Travel programs were down less than that. Is that remaining the case in the June quarter or up to July 19th I guess it is?

Kristi Gravelle

Yes, I mean, the enrolled revenue percentage is, we are expecting to hold because those are based also on withdrawal rates and as Peg mentioned in her script we are continuing to hold on our withdrawal rates and we have seen improvement there.

Jeff Thomas

Jim, our strongest program continues to be our strongest program.

James Bellessa - DA Davidson & Co

Then during the first quarter you said that the enrollment revenues for the international programs are only down 12% versus a larger overall picture. Is that the same number for the second quarter or the July 19th data point?

Peg Thomas

It's closed Jim. The international student programs are held better in this market than the domestic student program. So, they're similar number on that, we've been down on international than we were in the first quarter as we are in the second quarter.

James Bellessa - DA Davidson & Co

Then in the buyers market that found from your vendors during the last 12 months, I will suppose that continued into the July and August travel season period, is that fair?

Peg Thomas

It is continuing into the July and August season. We are not seen it into the fall season yet but its still lout better, its still an opportunity.

James Bellessa - DA Davidson & Co

Then did you find that there were inefficiencies due to tight traffic or airline capacity when you missed flights or airline delays occur, whether as to cancel of flights?

Peg Thomas

So, we have had some inefficiencies this summer, because of the full flight schedules that are out there. I shift now downwards, but we haven't had the significant weather issues that some seasons come but because the flights are so oversold by most of the airlines, when a group does miss a flight, there is a number of inefficiencies in there, but as you can see on the margin, our team has worked pretty incredibly hard to make those come around the right way. Whether or not we can maintain that through the rest of this year, is still open.

James Bellessa - DA Davidson & Co

What can you tell us about the two suits, the class action, journalist suit and the, I think investigation by the SEC?

Kristi Gravelle

Jim, as we mentioned in the past, it's our policy not to comment or where we really can't give any additional color to that one.

Operator

We will take a follow up question from Greg McKinley, with Dougherty.

Greg McKinley - Dougherty & Company

Yeah, thanks, I just wanted to clarify my understanding on a few things, I thought in the prepared remarks, there was a comment that gross program receipts per delegates were down slightly or will be down slightly year over year, but it seems like enrolled revenue is down 17%, or on roll delegates are down 23%. So may be I misinterpreted that, but that seems to me like you are receiving the average price of your delegate travel has increased.

I am just having trouble getting down to $0.48 to $0.52, if we are really only looking at a call it a 17% reduction in gross program receipts and only slight moderation in the gross margin in the second half of the year. So I am wondering if you could may be help me understand whether I am in consistent with your view?

William Sennet

Greg, hi this is William. A couple of things on that, the overall gross program receipts per delegate when the mix is taken in to effect account is slightly higher. It's up about 3% year on year.

Greg McKinley - Dougherty & Company

Okay.

William Sennet

On a, on segment by segment basis which was what Peg was referring to the price have remained flat or gone down.

Greg McKinley - Dougherty & Company

Okay.

William Sennet

If you listen to the comment Kristi was making about our Student International Programs being closer to par than the rest, that's was driving the next towards that.

Greg McKinley - Dougherty & Company

Okay, yes great. Then in that context, so if we have a 17% decline in gross program receipt, it seems to me in order to get down to that $0.48 to $0.52 range are operating expenses in the second half the year, there were more or less flat, may be slightly down in the first half year. They would have to a fair amount in the second half, year-over-year and is that due to more aggressive marketing preparation for 2011 travel or what's sort of implied in that feel?

Peg Thomas

I think from an operating expense, standpoint, we are expecting it be flat to slightly up and that's really related to the marketing initiative and bringing those, keep working it out to drive the strategic plans for the company over the of course of the next several of years.

Greg McKinley - Dougherty & Company

Okay and when you say that's flat to slightly, you would be talking for the full fiscal year just for the second half?

Peg Thomas

For the full fiscal year.

Operator

(Operator Instruction). At this time we have no further questions

Jeff Thomas

We will go ahead and wrap up the call then. So thank you for joining us on our call this quarter. We look forward this speaking to you in October and will provide an update on the enrollment to that point for our 2011 campaign. Thank you and a have a good rest of the summer

Operator

That does conclude today's conference. Thank you for your participation.

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