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Points International Ltd. (NASDAQ:PCOM)

Q1 2014 Earnings Conference Call

May 8, 2014 04:30 p.m. ET

Executives

Laura Bainbridge - Investor Relations

Rob MacLean - CEO

Anthony Lam - CFO

Analysts

Mike Malouf - Craig Hallum

Andrew De Silva - Merriman Capital

Pardeep Sangha - PI Financial Corp.

Ed Woo - Ascendiant Capital

Operator

Greetings and welcome to the Points International First Quarter 2014 Earnings Conference 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. I would now like to turn the conference over to your host, Laura Bainbridge, Investor Relations.

You may begin.

Laura Bainbridge

Good evening everyone and thank you for joining us today to discuss Points International's first quarter 2014 financial results. Joining me today on the call are Rob MacLean, Point's Chief Executive Officer; and Anthony Lam, Chief Financial Officer.

Before we begin, we would like to remind you that the remarks on this conference call contain or refer to forward-looking statements within the meaning of Canadian and U.S. security laws. Management may 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 forward-looking statements and may not prove to be correct. Important factors that could cause actual results to different materially and the assumptions used in making such statements are included in our first quarter 2014 financial results press release as well as other documents filed with the Canadian U.S. security regulators. Except as required by law, the company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I will turn the call over to Rob MacLean.

Rob Maclean

Thank you, Laura. Good afternoon everyone, and thank you for your participation today.

I'm pleased to report that the year is off to a strong start. Revenues were up nearly 60% year-over-year driven by the successful on boarding of several new loyalty partners over the past 12 months as well as the continued expansion of our existing loyalty network through new product launches and strong marketing and merchandising efforts. As a result, total points and miles transacted across the Points' platform was 4.7 billion of 7% from the prior year period.

Importantly, with approximately 200 products and 50 loyalty program partners worldwide, Points business has never been more diversified than it is today. Since the start of the year, Points has already announced relationships with four new partners expanding multiple verticals, including airlines, hospitality and financial services. And our products, including business solutions continue to gain momentum.

Turning to profitability, despite continued strategic investments in our future growth opportunities, adjusted EBITDA more than doubled over the previous year periods led by our robust revenue and gross margin growth. Investment will continue to be a prevailing theme throughout 2014 and we're especially pleased that our strong financial position is evidenced by approximately $60 million in cash and cash equivalence as quarter end provides us the flexibility to advance our strategic initiatives.

I'll discuss the investments in greater detail momentarily.

As this evidence, we're encouraged by our early progress in 2014 and even more so when we consider the accomplishments of the prior year. In addition to delivering solid growth within our existing partner network, we have several notable partners join the network throughout the course of 2013. The successes of 2013 in a prior year have established a strong foundation for which we can further and strengthen and diversify our platform. This momentum has continued into the year highlighted by the additions of MasterCard, Hilton, Spirit Airlines, and most recently, Etihad Airlines to the Points partner network.

With respect of MasterCard, we remain very excited about the long-term opportunity. As a reminder, through our relationship, participating banks on MasterCard's loyalty platform will not only gain access to our worldwide network of loyalty program partners in order to offer their members unique exchange and trades functionality, but also to be able to leverage our other loyalty commerce service, such as buying and gifts, in order to further enhance their offerings.

The recent MasterCard is truly spectacular, offering us the ability to interact with dozens of issuing banks worldwide. That said, these early days, we do not expect any material financial impact in 2014. We're currently in process of integrating our respective platforms providing us the ability to interact seamlessly with the MasterCard team and their various issuing banks.

Once complete, we will then position to initiate our sales outreach in the second half of the year. We look forward to keeping you abreast on our discussions as they progress. With respect to Hilton, we continue to view them as a very significant partner and look forward to getting them on boarded in the coming months.

Turning to new partner announcements, we're excited to announce the new partnership with Etihad Airlines. Etihad, based in United Arab Emirates, will become the first Middle Eastern airline partner on our business solutions or Connect platform. The new partnership will give businesses and merchants in the U.K., Europe, Middle East and Africa regions access the miles from Etihad Airways well established and globally recognize Etihad Guest frequent flyer program to incentivize customers and grow their respective revenues.

As you may recall, our Connect platform allows businesses of any size to buy and distribute points and miles for major loyalty programs as an incentive to interact with their business. With Connect, the on-boarding process is reduced to days compared to direct integration with many loyalty programs which can take months or even years.

Notably, the addition of Etihad to our corporate services platform follows on the hills of our PointsHound acquisition announced late last month. Launch in early 2013, PointsHound is a loyalty-based point centered cooking engine design for frequent travellers.

A unique alternative to OTAs, PointsHound users and earn points and miles in loyalty currency of their choice by looking with one of over 150,000 hotels around the world featured on PointsHound. Etihad is also one of 15 loyalty programs, which include new programs like Turkish Air Miles and Smiles in Europe, Jet Airways, jet privileges in India and Brazil's Multiplus coalition which partner with PointsHound today.

In addition to acquiring these relationships through PointsHound, we're gaining a great team with a strong consumer online travel and loyalty experience and a California presence that we intend to build upon. Leveraging their track record of innovative, consumer-focused loyalty solutions, we expect that our new West Coast team will become an important contributor to the continued progress of our loyalty commerce platform and our efforts to open up third party access.

Given the performance of PointsHound, we do not expect the material impact of our 2014 financial results and anticipate a slight increase of our on-going operating expense structure. Specifically, we'll modestly add to the headcount in the San Francisco office adding resources, primarily in research and development.

We currently expect PointsHound to be accretive beginning in 2015 given the acquisition as a longer term investment in our broader loyalty commerce platform offering. In a very short timeframe, the PointsHound team has made tremendous progress in developing leading edge technology, strong loyalty program relationships and impressive consumer adoption. We believe with the additional resources Points can provide, we can leverage their learnings to build out our loyalty commerce platform offering.

With that, I'll turn the call over to Anthony to discuss our first quarter financial results in more detail. Anthony?

Thanks, Rob.

As I review the results of our first quarter of 2014, 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.

We are very pleased to report revenues of $58.3 million which is an increase of 58% from $36.9 million in the first quarter of 2013. Our strong revenue growth can be attributed to the incremental transactional activity from our new loyalty partners launched over the course of 2013 and the increase response to our marketing and promotion activity as we continue to leverage our growing insights and understanding of the loyalty membership based.

Principal revenues accounted for nearly all of this change, increasing 62% to $56.2 million from $34.6 million in the prior year period. While most of our transactions both came from new partners launched for the last 12 months, organic growth and existing partners also contributed to the growth in this line.

We expect meaningful revenue contribution from new partner and product positions in 2014 in the back half of the year. However, given our strong revenue growth in the back half of 2013, we would expect our 2014 revenue growth rate to be lower the second half of 2014 versus the second half of 2013.

Gross margin dollars totalled $8.3 million, up 24% from $6.7 million in the prior year period. As previously mentioned, growth and margin dollars reflects the impact of new transaction activity coming from partners launched over the last 12 months and grows in an activity from our existing base over the prior year period.

As of percentage of sales, gross margin was 14.2% down from 18% in the prior year period reflecting the relative mix of partner and product activity during the quarter as well as the on boarding of larger partners, which typically carriers a gross margin profile that is lower average.

As well, from a revenue mix perspective, in the first quarter, we saw our mix of transaction activity comes largely from partner activity when we start the fiscal year with a lower gross margin profile and end in a higher gross margin profile, as we realized volume-based incentives throughout the course of the year.

I'll now move to discuss some of our key operating expenses for the first quarter. Total on-going expenses which consist of employment expenses, marketing, technology and other expenses were $7.1 million, an increase of $938,000 or 15% in the first quarter of 2013. Growth in our headcount was a primary driver. This increases on a year-over-year basis. Employment cost in the quarter totalled $5.5 million, up 22% from $4.5 million in the first quarter of 2013.

We currently have approximately 150 full-time equivalence in the company, up from 125 in a year ago period. Headcount additions made over the last 12 months were primarily focused on additional technology and marketing resources in advancing our open platform strategy as well as improving data and transactional capabilities.

We continue to make strategic headcount investments for the balance of 2014 in these areas as we execute on expanding core products and evolving the open platform strategy. Marketing expenses were $198,000, down from $269,000 in the prior year period. This line item is comprised as loyalty program marketing initiatives, public relations and placements on contracted loyalty program websites.

Looking ahead, you can expect this slide item to vary between 400,000 and 600,000 quarterly for the balance of the year. Technology expenses, which comes across of maintaining or protecting our production environment, user application licenses, as well as general technology upkeep enhancements remain largely in line with our first quarter 2013.

These technology expenses were 219,000 in the quarter and in line with the 235,000 that we saw in the prior year period. We expect to see this expense line incurred marginal growth to the $300,000 to $400,000 per quarter range for the balance of the year.

Adjusted EBITDA from $1.2 million increased 127% from 529,000 in the first quarter of 2013. This is driven with largely due to the growth in transaction activity from our new partner launch over the last 12 months and organic growth in existing partnerships offset by increases in our employment cost.

Amortization expenses decreased 375,000 or 42% to 544,000 in the first quarter compared to 919,000 in the first quarter of 2013. This is the decrease that can be attributed to certain assets being fully advertised at the end of 2013 along with a change that we made in the prior year quarter to move from declining balance to straight line amortization.

Finally, the company reported first quarter net income of approximately $443,000 or $0.3 per diluted share compared to a net loss of $48,000 in the first quarter 2013. As of March 31, 2014, total funds available comprised with cash and cash equivalence together with security deposits, restricted cash and announce with our payment processors totalled approximately $66.2 million. We remain debt free.

Net operating cash was redefined with total funds available less amounts payable to loyalty program partners, totalled $18.3 million at the end of the first quarter compared to $14.7 million as of March 31st, 2013. We are very pleased to continue to generate sufficient cash to fund our current and working capital requirements as well as any anticipated capital expenditures.

As of March 31st, 2014, we have weighted average shares outstanding of $15, 367,681 shares and $15,662,534 million shares on a fully diluted basis.

Thank you all for your attention. With that, I'll hand the call back to Rob.

Rob MacLean

Thanks, Anthony. To summarize, the year is up to a strong start and we look forward to building on this positive momentum throughout the course of the year. While the first half of the year will demonstrate stronger year-over-year growth rates, we expect robust full-year growth in revenues, increasing in the range of 25% to 40% over 2013. Adjusted EBITDA is still forecasted to be in the range of $16 million to $20 million for 2014 with more meaningful contribution in the back half of the year.

I'll note, this is prior to a strategic investment which is following on the (indiscernible) acquisition is expected to be in the range of $5 million to $7 million. We look forward to continuing to deliver dramatically improved adjusted EBITDA even while making investments that will better position us for growth over the long term. Smart investments and core product development, improving data and transaction capabilities and expanding and enhancing our platform strategy will continue to be an area of focus throughout 2014.

By doing so, we expect to continue to facilitate growth and innovation in the world's largest continuing market, loyalty, for years to come. With that, we'll open it up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Mike Malouf with Craig Hallum. Please proceed.

Mike Malouf - Craig Hallum

Hey, thanks a lot for taking my question.

Rob MacLean

Hey, Mike.

Mike Malouf - Craig Hallum

I'm wondering if you can give us a little bit of sense of the organic growth of the existing programs that we're in place before the on-boarding? Just trying to get a sense to that.

Rob MacLean

Yeah. I mean the existing business continues to grow as we expect. As you know well, our business model and the existing foundational operations that we put in place are then kind of operating on our three to five-year basis with our contracts. So on basis, it's growing very well.

Let's say if anybody has any comment, I would be consistent with kind of previous quarters. The European marketplace continues to be a bit of a challenge in terms of getting back to which robust growth that we saw in '11 and '12. But the rest of the business is actually doing quite nicely at an organic level. And then obviously, on top of that, we're putting in net new product deployment for their existing partners as well as for Points, new partner relationship that's striving a significant piece of this growth as well. And again, that kind of activity is a nice long-term growth profile for us as well.

Mike Malouf - Craig Hallum

And then with regards to the gross profit, I know that the beginning of the program, obviously, you have those lowest gross profit margins. And then as you get into the averages, your gross profits rise. But would you characterize the first quarter sort of the lowest part based on sort of the on-boarding? Just to kind of looking at the 11.1% gross profit on the principal side. We used that well before.

Rob MacLean

Yeah. First quarter is obviously our lowest margin percentage quarter. We go back to kind of reset those threshold pricing models. What I would say is -- and so we do, as you've seen in previous years, we've seen kind of subsequent quarter expansion as we hit the federal wholesale rate on our miles.

I would say given the growth of extremes pretty much 60% growth here in the first quarter, we are moving through those threshold levels much more quickly that we've ever done in the past. So we're pretty pleased with the way that's got.

Mike Malouf - Craig Hallum

Great. Thanks a lot of for taking my questions.

Rob MacLean

Sure.

Operator

Thank you. Our next question comes from (indiscernible) with B. Riley. Please proceed.

Unidentified Analyst

Yes. Thank you very much. When it comes to doing the size of year accounts, our customers continues to increase, can you give us a sense of the level of guarantees that you have to provide to them? Is that still in kind of the all range that you need to know guarantee larger percentages of the transactions?

Secondly, if you can talk about the investments that you're making considering that it's a fairly significant chunk of your bottom line. If you can give us some more concrete ideas how that is progressing and whether you expect to see any benefits from it even if it's out in 2015 so that it would be headful. Thank you.

Rob MacLean

Yeah. So first question on the guarantees, we're following a pretty consistent pattern that we've done in the past where we'll model out for our partners and prospects what we think the potential opportunity is to drive economics to them and to ourselves in anytime given period.

And what typically guarantee in and around that 50% to 60% of anticipated activity, and I think it was -- we really are doing that for a couple of reasons One, to help drive our activities up to the priority list and then many of these partners that we're working with, potentially large companies, lots of opportunities and priorities that they're dealing with. When we can go in and demonstrate $20 million, $30 million, $40 million, $50 million, $60 million worth of incremental business associated with some of the things we're doing. It's proven to be quite helpful in getting our proposition of the internal priority list.

And so that's one of the primary reasons we continue to pursue the guarantee side of the business. The other is it gives us a great opportunity to really take, like I said, a much more active role in the participation and operations of our products and services. And as you've seen since we've taken this kind of a pack, our ability to actually drive successful significant profitable growth has been pretty good.

So we really want to be doing more and more of this principal or reseller type model and the guarantee gives us an opportunity to really put some skin in the game, so to speak, so that we're driving the active -- that’s proven out to be a good driver of our growth and certainly been rewarding for our partners.

And second question around investments, we continue to think about our investment strategy, as I mentioned, at the end of the last call. First thing we do is really to see that kind of foundational growth in the business. So we're seeing good solid growth moving from 200 to -- anywhere from 250 to 280 as our guidance on revenue growth. So we first check the boxes, is our core business doing well, is that taking out to prove margins and improve profitability. We feel comfortable about that moving from $6 million or $7 million of EBITDA in 2013 for $16 million to $20 million in 2014.

So with those two pieces of information, we didn't really look forward to say is there a big market to pursue here? Are we still in a situation where we believe we could grow the company profitably in a significant way? And we continue to see this market as an opportunity of $2.5 billion to $3.5 billion. So when we look at those three characteristics, we are continuing to grow the top line nicely. We're improving our overall gross margins and profitability on the business.

We have a really big opportunity that we're pursuing. We then come back and say, "Okay, how much of that profitability do we feel comfortable investing in that pursuit of growth for our shareholders?" And that's really decision making. Until we get that $5 million to $6 million, which is anywhere from 25% to 30% of our profitability that we want to put back into the business to enable us to really pursue that to $3.5 billion opportunity. So for us, we do get into conversations with investors that would like to see us more, improve more rapidly, invest more heavily to capture that big opportunity. We think practically the balance were striking out on investing appropriately to pursue the growth, but not investing all of our profitability is really the place we want to be.

So that's really the way we think about the investment profile. And so far, each year, we do that. It's been providing pretty significant growth in the years as we would continue to expect in 2013, '14 to '15.

Unidentified Analyst

So a quick follow up on both the questions, so that 50% to 60% guarantee that you provide, that’s about the same level that's been there in the past or has that changed either from the--

Rob MacLean

No, it's pretty consistent to where we've been. We will go higher. In certain cases, if we think that by going higher, do I have to speed up the sales cycle or give us kind of additional impetus and contribution to operating the product or better economics for us. We would consider going higher, but particularly we end up in around at 50% to 60% range and that really has been the case for a number of years.

Unidentified Analyst

And then actually, just to follow up just on the second question about investments, $5 million to $7 million of expenses, I'm just thinking about the core business. That's not the investment that you're making that they offer to become two, three several years down the line, differently good for the long-term prospect. But if you look at the core business, and I don't know what the exact numbers, but you've kind of indicated that you currently interact 2% of the total membership based that you do and your goal is to increase that conversion or engagement phase. Considering that the following software, the kind of things we're seeing right now, especially out here Innovation Silicon Valley, could that create -- I mean could investment be better by investing there from 2% -- not 2.5% but 3%?

Rob MacLean

Absolutely.

It's a good part of what we invest in it. How do we get better at that marketing and merchandising? How do we use data science and data analytics to be able to expedite that penetration that we see is such a fantastic opportunity to expand the business for us and our partners. So those are the kinds when we talk about data and transaction capabilities. That's very much in sync with what you're saying.

We see very good opportunities to get further into the data to be able to take some of these investments to actually make ourselves just more efficient in terms of pursuing this big opportunity. So we have seen good progress with a number of our partners where we move those penetration rates significantly up from the 1.5% to 2%. And really, the game is that how do we get all of our partners moving in that direction so that we can capture a big piece of this $2.5 million to $3.5 million opportunity.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from Andrew De Silva with Merriman Capital. Please proceed.

Andrew De Silva - Merriman Capital

Hey guys. Thanks for taking my call. I have a few questions for you. First off, your gross margin, last quarter on your conference call, you didn't expect them to be fairly flat year over year for the full year. Is that true by 16% to 16.5% range?

Rob MacLean

Yes.

Andrew De Silva - Merriman Capital

Okay. Good. I mean should we expect the expansion to take place in the third quarter or fourth quarter primarily or do you think it's going to be gradual in second, third and fourth?

Rob MacLean

Yeah. I think our expectation, again, as I mentioned earlier, given that the rapid growth that we've seen here in the first quarter of getting through some of this threshold pricing. We think we'll see some of that positive market pressure happening, really, as we speak for seeing that with some of the threshold already.

So we would expect to see improvements in gross margin in Q2 and continuing on it, and we still feel, as we mention at the yearend, that the full year should be right around the same range as we saw in the back half of 2013.

Andrew De Silva - Merriman Capital

Okay. Good. And then, you know, this first quarter, there seems to be a little bit of a seasonal decline as compared to previous quarters. Last year was 10% and then end up 11 over 12 in the first quarter. It was a 15% decline when compared to the fourth quarter. Is there a reason for that or is it just typical business cycle?

Rob MacLean

I think some of it comes with just the scale of the business. We had, obviously, a record quarter. In the fourth quarter of 2013, we follow that up with a record first quarter here or this year. And just the seasonality, I think, as you know, you follow this for some time. Q1 was typically the smallest ever quarter and then we kind of filled up through Q4, just a lot more marketing and merchandising activity. We tend to have more of our partners kind of engage in place. So, yeah, we would expect that kind of seasonality to continue here in 2014.

But we're very pleased with the way we come out of the gate. That kind of growth obviously, 58% to 60% is significantly higher than what we're calling for an annual rate. So we're pretty pleased with how we started the year.

Andrew De Silva - Merriman Capital

The past emotional activities are fixed at this point. I mean last year, you had some promotional problems of your nearly on boarded partners. It has all those -- I guess issues have been resolved lately or are they still some of them not allowing you to take more control yet.

Rob MacLean

No, we feel pretty good about the marketing and merchandising plan, and obviously putting the kind of guidance that we have. We're pretty comfortable with the marketing and merchandising plans that are in place. I think there's always opportunities for us to demonstrate the kinds of returns that we are -- that potentially increases our marketing and merchandising penetration. And we're always working towards that. But I feel very good of where we are at the beginning of the year.

Andrew De Silva - Merriman Capital

Okay. Great. A couple more questions for you guys. Have you seen an increase in point of sales transactions now that the mobile ready website is up and running? And has mobile become a meaningful percent of the overall transactions today?

Rob MacLean

That's a great question. I will characterize it fairly early right now as we're moving a lot of our different partners on our products on to the mobile a new mobile enabled platform. What we have seen on a number of those, less of point of sale activity and more of conversions. So if you think fundamentally what was underpinning, our thinking on that was obviously just the overall movement to mobile.

But we were seeing conversion rates on our PC activity versus our mobile activity being quite different. And we've seen very significant improvements in the mobile conversions and that's what we would have anticipated. So that's kind of where we expected. I'm pleased with the kind of early days start of that now rolling out across the rest of the businesses is what we're doing right now.

Andrew De Silva - Merriman Capital

Is it more of a cannibalization of your PC transactions or is it just actually growing the overall transaction per users?

Rob MacLean

It would be the latter would be our perspective at this stage, and I think it's part of what contributed to the 58% to 60% growth in the quarter. This pie is a big pie and we're growing that.

Andrew De Silva - Merriman Capital

Got it. Great. And then [Bing] (ph), I noticed they started offering award conversion (indiscernible) platform. Can you provide some color on that and let us know how that initiatives were progressing at your consumer -- or sorry, your corporate platform is seeing a lot of promise going forward?

Rob MacLean

Yeah, from a standpoint, it's a great addition to that connect platform or select platform. I guess they're participating in it. And again, just a reminder for folks on the call, it really gives -- the product that gives big operations like [Bing] (ph) who are doing business frankly all over the world, certainly all over America, an opportunity to one connection with Points, they now have the ability to award as an incentive or reward multiple currencies.

I think we have a dozen or more some of the great loyalty currencies on that platform. So a company like and a product like Bing can go in and offer that as an incentive to promote their business. And it really (indiscernible) throughout the country. So whether you're in the southeast or the Midwest or the northwest variety of different currencies that really are relevant to the consumer.

So when we see those guys plugging in, we're really pleased. And obviously, that's great economics for our partners. They get to participate in distributing more of their miles Points to some of these large organizations. And that's right on strategy for us.

Andrew De Silva - Merriman Capital

Great. Last question, kind of a pipeline question. Do you still view it as a large as ever before and then have you seen any new loyalty providers approach you since the massive announcement or are you still primarily working at the same company as you had before? MasterCard came out with announcing you guys as partners.

Rob MacLean

Certainly both. We've been in different buildings and different offices. Subsequent to that than perhaps we were prior to that announcement. But the remaining kind of pipeline that we've been working for some time and have good success in kind of bringing on to our platform continues to be very robust as good mix of different geographies, good mix that seems kind of successful companies like Etihad at the Gulf region to -- we have seen in Asia right now that are responding to some fairly significant interest that we've been working on for some time. So we see good geographic expansion and diversity in that pipeline. And then again, continue to see different verticals interested in loyalty and the kinds of products and services in our loyalty commerce platform would enable.

The MasterCard relationship is obviously cord to our financial services opportunity in the near term, but we've seen hospitality, we see financial retail, we see airline programs all being very well represented in our pipeline.

Andrew De Silva - Merriman Capital

Got it. But the pipeline is as large as ever before?

Rob MacLean

Yea, absolutely.

Andrew De Silva - Merriman Capital

Great. Thanks a lot. That's all I have right now.

Rob MacLean

All right. Thanks, Andrew.

Operator

Thank you. Our next question comes from Pardeep Sangha with PI Financial Corp. Please proceed.

Pardeep Sangha - PI Financial Corp.

Thank you. It's with regards to the MasterCard relationship, how do we kind of track -- help them track sort of the progress and how things are coming along then? Are you guys sort of 25% integration done or 50% or -- how do you look at that? And when in completion data of integration in August and September or October, give us some feeling on that.

Rob MacLean

Yeah. I think you -- a bit of chance of how we're attacking it, as I mentioned, in my prepared remarks. Right now, obviously, we've completed the contract and the strategy in terms of why this is an interesting opportunity for MasterCard and vice versa.

The initial and key element right now is completing the integration, I would say, where well down the path. Certainly well path of 25% of the way through that. So we would expect to complete that fairly shortly and have the MasterCard mostly platform connected to our (indiscernible) relatively short orders.

The next phase then is really working alongside MasterCard as we engage their various bank customers on the various proposition. But I would say, we had initially viewed that to be a bit of a (indiscernible) proposition where we would complete the integration. These contracts versus complete the integration and then begin the engagement. We are doing some overlaps. So we are in front of some of the bank customers today. Perhaps a little bit earlier that I would have expected, feedback is very positive. Still are today, but that's essentially how we're progressing it. You'll see it's really being much more active on that sales process in the back half of 2014.

And we'll see, we'll be very transparent with the marketplace in terms of as we make progress, it will be evident in our announcement and in our activities. So we feel pretty good about where we are and what the identified next steps are.

Pardeep Sangha - PI Financial Corp.

So in the back half of -- when you're out there sort of doing the selling process with MasterCard, is there additional sort of sales and marketing kind of expenses, like do you need to ramp up to go and talk to all of these and meet with all of these and have -- have the sales marketing team together to go and target the whole banks in the banking protocol?

Rob MacLean

Well, certainly, the banks are no different than our large programs that we work with today. They have very good sense of their customers, a very good information and access to the members of their respective loyalty programs. So it really is an opportunity to take advantage of that. Those relationships actually communicate our products and services in conjunction with MasterCard and the bank in question. So I think your question is that that’s going to be difficult.

We don't think it's going to be difficult at all. In fact, that model is exactly the way we've done it with other partners. And secondly, is it going to be expensive? Not at all in marketing and merchandising that we do on the back of the existing relationships rather than have a big marketing spend on cash. I think Anthony, in his prepared remarks indicated that our marketing spent in the back half of 2014 is still pretty moderate.

Pardeep Sangha - PI Financial Corp.

Okay. Thanks. And I mean I understand your comments with regards the tight back half of the year, you sort of have lower year-over-year gross compared to, for this quarter, for example, to see potentially your growth. I'm kind of wondering with regards to Hilton and Etihad being -- those being launched, doesn't that help the year-over-year growth numbers for the second half of the year? I'm sort of wondering on that aspect.

Rob MacLean

Absolutely. We've seen growth in every quarter this year. No question about that. But just really kind of reconcile for you that if we're at 58% to 60% in the first quarter and will go on 25% to 40% for the year, then this is just not. So we definitely view that we've got quarterly growth for a long time to come.

Pardeep Sangha - PI Financial Corp.

I mean does the Hilton revenues partaking the second half, is that correct?

Rob MacLean

Right, (indiscernible) expectation.

Pardeep Sangha - PI Financial Corp.

And same thing with Etihad revenue from that second half?

Rob MacLean

Right.

Pardeep Sangha - PI Financial Corp.

Okay. Right. Thanks. That's it for me.

Rob MacLean

Thanks.

Operator

Our next question comes from Ed Woo with Ascendiant Capital. Please proceed.

Ed Woo - Ascendiant Capital

Yeah, thanks for taking my question and congratulations. In terms of the pipeline, do you see possibly seen more international deals going forward?

Rob MacLean

Yeah. When we look at the loyalty marketplace, it's one of the things that's really attractive for us is that it is very much a global proposition. We've done a very good footprint in the North American marketplace, although we see significant opportunities here in North America that will continue to grow.

But the international footprint is pretty interesting. Loyalty and certainly the way we think of loyalty and where we can be helpful in terms of the monetization and creates profit and economics stuff of loyalty programs for them and their members, is really somewhat earlier stages in some of these other markets. It's been growing very, very quickly.

We've talked in the past around the market like Asia, China in specific, the Middle East, Latin America, all very, very aggressively growing markets from a loyalty monetization standpoint. So we like what's happening in the international marketplace. We're able to kind of participate in that in a very efficient manner.

Many of the partnerships that we brought on, and as you know, we have a dozen or more international partnerships. We're able to bring those partners on. Very much of the similar cost structure investment as we do here with North American program, and that really comes with the technology and some of the innovation and investment we made in the platform over the years. So a big opportunity for us.

In multiple verticals as well. We see retails. We see financial services, hospitality and aviation, obviously, all kind of evolving in the international market. So we're quite excited about that.

Ed Woo - Ascendiant Capital

Is there any market of yours particular are you more excited about that you think is -- can be a little bit more involved like North America or do you think this is going to be generally throughout the world?

Rob MacLean

Yeah. It's pretty broad. I think we, like, many businesses get pretty excited about what's happening. And it's just that overall growth, the success and health of a lot of those programs, the penetration of some of those programs in the Asian marketplace, very, very strong.

So that one is particularly exciting. It doesn't come with those challenges in terms of pace and sales cycle timelines, et cetera. But nothing easy is worth as much as -- it's hard on this one. This one is hard, but it's a big opportunity for us.

Ed Woo - Ascendiant Capital

That sounds good. Do you notice any difference between your international operations and your domestic operations this quarter?

Rob MacLean

Not sure I follow. I mean the only thing I would comment maybe on that is maybe a reference to the Europe business. The North American marketplace, I think, kind of in sync with what we're seeing in some of the economy. We're doing very, very well. That certainly bounced back nicely from the last few years. So a very strong -- the European proposition and those programs doing well, just not growing as -- certainly as strong as the North American marketplace.

So we that would be kind of single thing I would point out, but nothing really materially on that.

Ed Woo - Ascendiant Capital

Great. Well, thank you and good luck.

Rob MacLean

Thanks.

Operator

Thank you. Our final question is a follow up from Pardeep Sangha. Please proceed.

Pardeep Sangha - PI Financial Corp.

Hi. Thanks again. I just wanted to dive in a little bit more with the international side of things. Would you mind sort of three specific markets commenting sort of give us some color, Brazil, China and Japan, in terms of what is happening in those kinds of markets in the (indiscernible) markets.

Rob MacLean

Sure. And when I think about Brazil, a couple of things. One, through the PointsHound relationship or acquisition, we do acquire a relationship that they had with Multiplus, which would be probably the most successful loyalty program in the Brazilian marketplace.

So it will build on that. So we have established that relationship through this acquisition. We'll certainly build on that. We have a couple of conversations as it fairly well evolved in the Brazilian marketplace. So we're quite interested in what's happening there. We like how loyalty is evolving in the Brazilian marketplace. So, no question in that marketplace. There's no question that that market understands the ability to generate economics in our loyalty program in an airline level and kind of a collision level.

So good fit for us. Big challenge, obviously in that marketplace is just operations in terms of getting money out, being able to do transactions. And that's kind of activity in Brazil that we're working our way through that. So we feel good about the opportunity there.

Think about China, you well know that we've made a small investment in a Chinese startup alongside of a large company in a loyalty called [EMIA] (ph). That is advancing and progression as we would have expected. It's giving us an opportunity to take that presence in China and use that as a jumping off one to get into conversations with airlines, payment companies, hospitality, et cetera, in that marketplace. Again, as I've said in the past, we are quite excited about the potential on the Chinese marketplace very early days in the monetization concepts around loyalty programs. Not particularly early days in the loyalty in general, many, many very large programs in the Chinese marketplace. But just starting now to think about how do we start to leverage the economics associated with it the way North American airlines and North American hotels have, much like Europe was a number of years ago.

So big, big potential, great foundational membership basis, good templates that they're following. And we feel like we're in a really interesting spot and China is being able to take advantage of that market as it evolves and moves to a more economic driven loyalty play.

And Japan is somewhere in between. And certainly, we don't have any existing business in Japan. It is from an airline standpoint, et cetera, a much mature loyalty marketplace. They have been in the game for a long time. We're fairly complex regulatory environment perhaps more so there than we've seen in most other markets. Not something that we don't feel we can overcome alongside a number of our partners, but they are dealing with some more complex regulatory issues around the issuance of currency.

And we do see in certain markets the banking regulators try to kind of get their hands in and around loyalty currencies, perhaps in Japan. And that's a bit more advance than we've seen in any other parts of the world. So we're again working with some of those programs to try and help them think through how they can work inside that regulatory regime and still participate in the kinds of very strong economic models that we can deliver.

Pardeep Sangha - PI Financial Corp.

Thank you very much.

Rob MacLean

Great.

Operator

There are no further questions. This will conclude today's teleconference. Thank you for your participation.

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Source: Points International's (PCOM) CEO Rob MacLean on Q1 2014 Results - Earnings Call Transcript

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