Points International, Ltd. (NASDAQ:PCOM)
Q4 2015 Earnings Conference Call
March 02, 2016 04:30 PM ET
Madeline Myers - Investor Relations
Rob MacLean - Chief Executive Officer
Michael D'Amico - Interim Chief Financial Officer
Christopher Barnard - President.
Andrew D’Silva - Merriman Capital
Drew McReynolds - RBC Capital Markets
Sameet Sinha - B. Riley
Greetings and welcome to the Points International Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss. Madeline Myers, Investor Relations. Thank you. You may begin.
Good afternoon everyone and thank you for joining us today to discuss Points International’s fourth quarter and full year 2015 financial results. Joining me today on the call are Rob MacLean, Chief Executive Officer; Michael D'Amico, Interim Chief Financial Officer and Christopher Barnard, President.
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. 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 guarantee of future performance or action and are subject to important risks and uncertainties that are difficult to predict. Certain material assumptions are also implied in making 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 fourth quarter and full year 2015 financial results press release as well as other documents filed with the Canadian and U.S. security regulators. Except as required by law, the Company does not undertake any obligations to update or revise any forward-looking statements, whether as a result of new information future events, or otherwise.
With that said, I’ll turn the call over to Points’ Chief Executive Officer, Rob MacLean.
Thanks, Madeline and thanks everyone for your participation today. Before I start, I would like to take a moment to welcome Michael D'Amico, Interim who has been serving as Interim Chief Financial Officer since November. Michael will review our fourth quarter and full year financial results on today’s call.
Christopher Barnard, our President, is also present today and will be discussing our prospects for 2016 and beyond. Kicking things off, we are very pleased with the 2015 financial results which were in line with our expectations and market guidance. In addition to delivering against our financial performance, we grew our loyalty partner network and made meaningful progress in developing and implementing our platform strategy. This continued progress will not only benefit our core Buy, Gift and Transfer or BGT business but also unlock future monetization opportunities.
We are committed to evolving point’s loyalty, commerce platform to facilitate growth and innovation for our loyalty partners. The point loyalty commerce platforms offers transaction level access to multiple loyalty currencies and powers innovative products and services that drive increased revenue and member engagement in loyalty programs. We will continue to leverage our platform to deliver a broad range of products and solutions that generate more revenue, broaden redemption opportunities and deepen member engagement as they transact with their valuable points and miles.
Since the start of 2015 we’ve announced or launched 21 products, five new loyalty program partnerships and two new loyalty wallet distribution partnerships. 2015 also represented the first full year of operating our new United Airline mileage Plus Partnership, a comprehensive and long term strategic partnership with one of the world leading loyalty programs.
Furthermore, we were successful in signing material contract renewals with some of our larger principal partners. As a result, we are now very well positioned for the next several years with long term contracts in place representing over 75% of our current top line revenue. This strong and stable book of business provides Points with a solid foundation from which to continue our profitable growth and significantly derisk the investments we continue to make in our open platform initiative that are focused on product and partner diversification.
We continued to advance the pace of innovation on our platform and have begun the rollout of our enhanced Buy, Gift and Transfer applications offering new functionality for our core business to the world’s largest and most successful loyalty programs.
In 2015, we also announced Points Travel, the first private label travel ecommerce platform designed specifically for the loyalty industry. We currently have three partners who have signed up for this product and are in advanced discussions with a number of additional prospects from both our existing partner base and new loyalty program partners that have expressed interest in this new offering.
We are just launching the initial deployment of Points Travel in the first half of 2016, and anticipate a more direct financial impact in the second half of the year and even more meaningfully in 2017. We also announced tangible developments on our loyalty wallet, most recently partnering with RBC, Suretap and App in the Air. With proof of concept established in the first launch of an early version of the product now lined with Suretap, we look forward to developing, enrolling out the new functionality more broadly in 2016 and have already established a strong pipeline of perspective partners.
Our focus in 2016 as we will elaborate on will expand on the functionality of our loyalty wallet and Points Travel products as well as enhanced platform flexibility to maximize outside innovation. We will highlight our investment efforts in a moment, but first let’s turn briefly to our 2015 financial results.
We finished 2015 with record revenues of $296 million and increase of 16% over 2014 and in line with our guidance despite absorbing the impacts of market consolidation in the Airline industry. Our solid growth largely reflects contribution from new products and partners launched over the last 12 months as well as increased marketing and promotional activity particularly among our larger partners.
Organic growth in our existing business which is defined as partners and products that have been in market for at least one year was approximately 10% for the full year in line with our expectation and highlight the influence of our promotional calendar and ongoing marketing efforts.
We expect further organic growth from our existing business in 2016 fuelled by the recent investments we made in our marketing and merchandizing capabilities, which we expect to generate measurable performance improvements across our partner base. With our recent contract renewals in place for our core business, we have a strong foundation from which to layer on a newer revenue streams such as the Loyalty Wallet and Points Travel.
We expect to monetize these products largely through a commission structure and thus would expect to see a more material benefit to our gross margin versus revenue later in 2016 and beyond.
Gross margin dollars for the year totaled $42.7 million or 14.4% of revenue, an increase of 8% from $39 million or 15.6% of revenue in 2014. The year-over-year compression in gross margin percentage largely reflects the addition of larger loyalty program partners to our platform, a factor we expect will continue to be reflected in our gross margin percentage in 2016.
With the majority of our first quarter behind us, I wanted to give investors an initial look in to our expectations for the first quarter of 2016 and how it relates to our 2015 in historical performance. As a reminder, the first quarter of 2016 will be the last quarter in which we absorb the wind down of the U.S. Airways Buy, Gift and Transfer products, which we operated in the first quarter of 2015 on an Agency or Net accounting basis.
To that end, while the year-over-year impact on our top line revenues will be minimal, the impact of this change will be greater on our gross margin and adjusted EBITDA level for this quarter. We expect to continue to drive solid top line growth in the first quarter of 2016 backed by the strength of our existing partners. With that said, our adjusted EBITDA for the quarter will be down year-over-year. As I’ve encouraged on previous calls, it’s important not to view our quarterly results in isolation and as a full year guidance will indicate we will return to a strong year-over-year growth for the remaining quarters in 2016.
Please keep in mind that these comments are no way intended to set an expectation for quarterly guidance going forward, however we thought it was important to call out this quarterly cadence for 2016.
Longer term, we expect the evolution of our newer revenue streams drive not only gross margin dollar growth but also improved gross margin percentages. From a profitability perspective, we generated record adjusted EBITDA of $11.1 million in 2015, an increase of 22% year-over-year coming in at the high end of our guidance range.
Overall, two thirds of incremental gross margin generated during 2015 felt at the adjusted EBITDA line which we feel strikes a nice balance between meeting short term profitability targets while continuing to invest in the future by adding scale and functionality to our platform.
In addition to driving advancements across our ancillary products including Points Travel and our Loyalty Wallet, our investments set the stage for improved efficiency within our core BGT business as well.
In 2015, we began the migration of our core BGT business to our new platform taking advantage of new capabilities and are encouraged by the early performance improvements in transactions and convergence.
We will continue to move the remainder of our partners over to the new platform in 2016 with some anticipated upside in convergence and transaction performance. Looking ahead to 2016, we will continue to invest against the scale and functionality of our platform adding greater transactional capabilities of the loyalty wallet enhancing third party access to the platform which will provide flexibility for greater outside product innovation and further enhancements to our new Points Travel offering.
Longer term, we expect this focus will manifest in greater transactional volume across all of our loyalty commerce platform.
2015 was another solid operational year for Points. We ended the year with more than 50 loyalty program partners and 13 third party product providers that are now developing on our royalty commerce platform.
Adjusted for the U.S. AA merger, total miles and Points transacted across the platform in 2016 grew almost 13% over the prior year and total transactions grew over 55%. Internationally, our platforms reach continue to grow and expand our footprint beyond North America and Europe.
In the growing Asia loyalty market, we’ve announced new partnerships with Hainan Airlines, the largest privately owned air transport company and the People’s Republic of China and Shangri-La Hotels, China’s premier hotel brand, which is expected to launch in 2016.
In our merchant channel we connected Farmax Pharmacies, the Dominican Republic’s leading pharmacy chain with JetBlue, TrueBlue frequent flyer program. We were also successful in connecting our platform partners with our international loyalty program base.
In conjunction with Iberia, Spain’s national carrier and columns and left latitude we launch the new online shopping mall where the airlines 4.5 million members member can earn bonus Avis Points when shopping for their favorite brands.
This announcement builds on a relationship established with Iberia in 2011 in which we enabled Iberia plus members the ability to co-act and share their Avis Points with our buy gift and transfer solution.
I mentioned the growing list of companies now developing under loyalty commerce platform. As an example we are happy to announce that earlier this year we launch the new partnership with Citibank to streamline Citi’s Points exchange program.
To eliminate the complexity of integrating directly with multiple travel loyalty programs Citi partnered with us to create a seamless exchange experience for its member. Citi members can now exchange their “ThankYou” Points in real time to 19 participating international travel loyalty programs.
All this activity is facilitated and now managed by Citi, developing on our loyalty platform using our robust package of APIs. Most recently we announced significant partner extensions with two of the world’s largest airline loyalty programs; Air France, KLM and Southwest Airlines.
Through our multiyear renewal agreement with Air France KLM, Points will continue to power Air France KLM Flying Blue, Buy Gifts and Transfer program. Its Flying Blue business tool and launch additional programs design to enhance the ability of Flying Blue members to transact with their Miles.
Air France KLM has been a valued partner since 2009 and as enter the next phase of our partnership we look forward to deepening our collaboration to provide a seamless innovative expense for Flying Blue members.
We’re also thrilled to continue to build on a relationship with Southwest, one of the biggest and most innovative airlines in the world. The renewal and extension of our contract is a true testament to the value Points platform and products that provides us Southwest and its millions of Rapid Rewards members.
Our relationship with Southwest has facilitated incremental Rapid Reward member engagement and we expect this trend to continue as well as drive growth for both of our businesses.
As part of the renewal, we will continue to power Southwest Airlines rapidly growing Buy, Gift and Transfer program its business incentive program and additional programs, all of which are designed to enhance Southwest’s Rapid Rewards member’s ability to collect and share their loyalty currency.
In fact, the recently announced Donate Rapid Rewards Points to Charity launched for Southwest Airlines highlights the innovation on our platform. The Notation [ph] system was developed in the loyalty commerce platform by one of our third party developers configurate digital solutions and highlights the increased pace of innovation on our platform.
As I mentioned earlier, the strength of our core business combined with the investments we made in 2015 provides a solid foundation from which to layer on our ancillary revenue streams in 2016 and beyond.
Specifically we believe the loyalty wallet and Points Travel products significantly increase our addressable market opportunity and we are excited about the pipeline development we’ve seen in these areas.
Christopher will dig deepen into the ongoing strategy in a minute, but to that end we continue to build momentum with the Points Loyalty Wallet recently finalizing a partnership with App in the Air, a travel app helping users navigate the entire flying process through which Points will power the apps loyalty section giving users the ability to register track and transact between their favorite loyalty programs.
As a reminder, the Points Loyalty Wallet offers third party developers the ability to integrate sanctioned transaction level access into dozens of loyalty programs. The API driven platform compliments the use of mobile wallet technology by working alongside existing mobile wallets and loyalty programs, enabling members to track, exchange and redeem currencies from their favorite programs.
Our partnership with App in the Air, builds upon our 2015 announcements with RBC and Suretap for the distribution of the Points Loyalty Wallet within their mobile, digital wallets. And as I highlighted earlier, we are in active discussions with several large mobile wallet participants and distributors that could materially impact the trajectory of this business in the years to come.
While the loyalty wallet is focused on multi currency activity outside our loyalty partners channels, we are also very focused on adding value to each individual currency be it their own branded channels. To that end, in 2016 we were pleased to announce the launch of our second loyalty program partner to participate in our private label hotel booking platform Points Travel.
In partnership with La Quinta Inns & Suites, we offer a luxury hotel redemption program which allows La Quinta Returns members the ability to redeem their loyalty points for bookings at thousands of luxury hotel locations across the globe.
Built on the Points Travel platform, the redemption program significantly enhances the flexibility of La Quinta return points providing participating member with even greater value and convenience.
The hotel redemption capabilities added to our hotel booking platform are a perfect complement to the earned functionality we developed late in 2015 and are putting into market with Miles & More, Europe largest frequent flyer program.
Both of these programs, both of these Points Travel products were seamlessly integrated into our partner’s web and mobile properties creating an industry leading travel ecommerce offering that leverages the capability of the Points Loyalty commerce platform.
Encouragingly, interest and engagement among both new and existing partners is very high and we are excited by the strength of our perspective partner pipeline. While we are still in the early days with our Loyalty Wallet and Points Travel products we are very bullish on the long term opportunity that these new products represent. We expect the performance of our Points Travel products specifically to ramp up over the course of the year and be a meaningful contributor to our financial performance in 2017 and beyond.
In summary, we are pleased with our performance in 2015 and are encouraged by the opportunities we see in 2016. We delivered against our financial targets, grew our Loyalty commerce network and made tangible progress in our platform strategy.
As our 2016 outlook will show, we expect to see continued growth in organic revenues and will begin to monetize our various revenue streams. Investments in advancing our Loyalty commerce platform will focus on optimization of our core Buy, Gift and Transfer product and adding functionality and engagement with our new products such as Point Travel and the Loyalty Wallet.
We believe that sets us offer a dynamic performance in 2017 and beyond. With that, I’ll hand the call over to Michael to review our fourth quarter and full year financial performance in greater detail. Michael?
Thanks Rob. As I review our results for the fourth quarter and full year 2015, please be reminded that all other numbers mentioned on our call today are in U.S. dollars and unless otherwise noted, all amounts are presented in accordance with International Financial Reporting Standards.
Revenues for the fourth quarter totaled $80.2 million up 24% compared to $64.8 million in the prior year quarter. Principal revenues totaled $77 million, up 25% as compared to the $61.8 million reported in the prior year period. Increased marketing and awareness campaign activity with many of our larger loyalty partners in the second half of the year drove this meaningful acceleration in revenue growth.
Full year revenues reached new record levels increasing 16% on a year-over-year basis from $255 million in to $296 million helped by the addition of new loyalty partner relationships over the last 12 months including the first full year of operating both our United Mileage Plus and Hilton Honors principal relationships.
In 2015, we experienced some headwinds with respect to foreign exchange as the continued weakening of the euro against the U.S. dollar adversely impacted revenues by approximately $5 million.
Gross margin dollars continue to be an important measure of our financial performance as it represents the amount of revenue retained and available to fund ongoing operating activities and strategic investments.
Gross margin dollars in the fourth quarter totaled $10 million compared to $10.4 in the year ago period. The year-over-year decline in gross margin in the quarter was due to the continued absorption of the U.S. Airways and American Airlines BGT wind down and the relative mix of marketing activity in the quarter, partially offset by the addition of United Airlines.
As a percentage of total revenue, gross margin dollars were 12% in the quarter compared to 16% in the prior year period. For the full year, gross margin dollar grew $42.7 million an improvement of 8% year-over-year or approximately 14% as a percentage of total revenue.
As Rob mentioned, the year-over-year compression in gross margin percentage largely reflects the addition of largely loyalty program partners to our platform and we expect that this will continue to be reflected in our gross margin percentage in2016.
Our track record or sustained revenue growth continues and is in turn leading to sustained gross margin dollar increases. Moving to some of our key operating expenses for the quarter, we remain very disciplined in our management of the ongoing cost structure.
Total ongoing operating expenses which consist of employment expenses, marketing, technology and other operating expenses were approximately $7.8 million in the fourth quarter of 2015 compared to $7.7 million in the prior year period.
As a reminder, while we generate the majority of our revenues in U.S. dollars the majority of our operating expenses are incurred in Canadian dollars and are therefore subject to currency exchange rate volatility.
To minimize this volatility, we engage in foreign exchange hedging to provide certainty around future costs and are typically hedged over 12 months for approximately 50% of our Canadian dollar based expenses.
Employment cost in the fourth quarter totaled $5.2 million, down slightly compared to the prior year quarter. Excluding our part time and contract staff as of December 31, 2015 we had 182 full time staff equivalents, up from 167 in the prior year period. The primary areas for growth in staff have been our marketing team and technology groups. As we look ahead to next year, we expect to increase our R&D resourcing in 2016 which would be focused on the continued expansion of our platform.
Marketing expenses were $531,000 in the quarter, up approximately $200,000 compared to the prior year period. For the full year, marketing expenses were $1.7 million or approximately 24% year-over-year. The increase was primarily attributable to increase marketing, to support both our existing core business and our Loyalty Wallet and Points Travel launches.
Technology expenses which cover the cost of protecting our environment, maintaining online redundancy capabilities, the payment card industry data security standard or PCI compliance, user application licenses, as well as general technology upkeep and enhancements were 355,000 in the fourth quarter to total 1.3 million for the full year. This was in line with our expectations.
Other operating expenses comprise rent, insurance, professional, legal, audit and public company cost. For the fourth quarter this line item was 1.7 million compared to 1.8 million in the prior year period. For the full year other operating expenses totaled $5.9 million.
In light of our recent and anticipated headcount increases, in fact at this summer we will relocate our head office, the new space will satisfy your growth expectations for the next number of years. We are fortunate to locate a well designed to build out space in close proximity to our existing location, which means we will minimize our incremental investment in leasehold and reduces the upheaval for our employees.
The incremental rental cards have been considered in our 2016 planning. Overall we expect our operating expense growth to be in the 8% to 10% range for 2016.
Now turning to our profitability metrics, adjusted EBITDA is an important metric for us and we consider it to be the key measure of our success in delivering ongoing profitability.
As a remainder in determining adjusted EBITDA in 2015 we start with net income and add back to following items, income tax expenses, interest, depreciation and amortization and foreign exchange loss.
Adjusted EBITDA for the quarter was $2.2 million compared to $2.7 million in the prior year period. For the full year we generated a record adjusted EBITDA of $11.1 million, a 22% year-over-year improvement.
As you saw in today’s press release on a go forward basis, we will change our definition of adjusted EBITDA for 2016 to adjust for the impact of share based compensation expenses.
This change puts us in line with industry standard reporting and typical analyst modeling, while also offering investor’s data to understand this specific impact of stock based compensation charges on our operating results. As a reference our 2015 adjusted EBITDA was $12.6 million based on the revise definition.
Amortization expense in the quarter was $895,000 as compared to $581,000 in the same period last year. The year-over-year increase can primarily be attributed to the amortization of new products required through acquisitions in 2014 and launch during 2015.
Annualized amortization is expected to increase from 3.5 million in 2015 in to approximately 4 million in 2016 reflecting the additional amortization relating to products currently in development that will be in use in 2016.
Finally, we report fourth quarter net income of approximately 961,000 or $0.06 per diluted share. Net income for the full year in 2015 was 5.2 million or $0.33 per diluted share, up 10% compared to 4.7 million or $0.30 per diluted share in 2014.
As of December 31, 2015 total funds available, which is comprised to cash and cash equivalents together with secure deposits, restricted cash and amounts with their payment processors totaled approximately $59 million.
Net operating cash which we define as total funds available less amounts payable to loyalty program partners was just over $9 million at the end of the fourth quarter. We’ve remained debt free.
As a reminder, we have a credit facility agreement in place with our principal banker, the Royal Bank of Canada, which provides up to $13.5 million of availability. No amounts have been drawn on any component of this facility and we intend to discuss our standby financing needs with our bank prior to expiry of the current agreement.
We were very pleased to generate sufficient cash to fund our current working capital requirements, capital expenditures and share buyback activity. During the fourth quarter, we’ve repurchase 93,384 shares of our common stock for a total of 0.9 million at an average price of $9.66 per share.
For the full year, we’ve repurchased 439,094 shares of our common stock for a total of 4.6 million at an average price of $10.40. All purchases were funded out of existing working capital.
For the three months ended December 31, 2015, the weighted average number of shares outstanding was 15, 383,635 and 15,419,207 shares on a fully diluted basis.
Thank you all for your attention. And with that I’ll hand the call over to Christopher.
Thanks very Michael. As Rob mentioned we’re very excited about progress enrolling out platform strategy. Going forward we’d like to highlight four main areas investment activity. The primary and foundational activity is a continued focus on developing our loyalty commerce platform.
Continue to make a platform more robust with increased level of functionality including automation and proprietary algorithms is a main focus of the team. Continue to expose our APIs and making them even simpler for external developers to access will create more and more opportunities for us and others to deliver real value to both loyalty and other industry partners, as well as our hundreds of millions of consumers.
On top of this robust transactional platform that enables unprecedented access to global loyalty currencies. We have proven our ability to deploy successful products in the market.
Our first focus is to continue enhance and improve our ability to retail Miles and Points via mobile apps and multiple online channels. Increase scalability and flexibility driven by our platform investments has allowed us to deploy newer version of the Buy Gift and Transfer service across our whole portfolio of loyalty program partners.
We are already seeing performance improvements based on these investments and our user experience design, customer segmentation, data analytics and increasingly automating marketing initiatives.
As Rob previously mentioned, we believe this will allow us efficiently build on a current book of business that we have now locked in for several and affords us with the significant internal funding mechanism to continue to generate both new product and corporate product.
In fact our pipeline for new BGT opportunities remains a very robust at well over $100 million of potential revenue. So we are clearly continuing to be in growth mode.
In addition to improving our Buy Gift and Transfer services, our platform investments have driven innovation leading to initiatives that we believe have equal long term prospects to our current core business of retailing Miles and Points.
We’ve made two exciting announcements on the progress of Points Travel in the past few months, enabled by the PointsHound team and technology required in 2014, we’re excited by the prospects of our recently launched hotel booking service.
Deals announced with Europe largest frequent flyer program, Lufthansa’s Miles & More and Lufthansa Hotels along with another sign deal with one of our largest partners are three opportunities that were all won after competitive bidding processes involving online industry – Travel Industry heavyweights.
The combined strength of our technology, industry experience, loyalty relationships and platform capabilities show very promising indications of an industry leading loyalty travel solution.
Highlight of this momentum and a key ingredient of our success to-date is the offer of both earn and burn functionality with strong economics for our loyalty partners, so they are able to fully engaged with their most valuable members.
I think it’s also important to point out that the dynamics of the travel industry, hotel booking in particular indicate a higher margin potential than our currency retailing products I’ve shown in the past.
We are encouraged that our Points Travel pipeline is already approach the size of our current business in terms go gross margin. The fourth of our key initiatives after the loyalty commerce development upgrading our BG’s products and capitalizing on the early success of the Points Travel initiative is expanding access to our platform by third party developers.
This is happening in two ways; first, developers of product specially suited to operate within our loyalty partner channels are able to now even more quickly and efficiently gain access to hundreds of millions of members in our partner’s database.
Some of our long standing single currency partner branded products offered by third party developers, such as online earn malls; magazine and newspaper subscription and options are now moving on to a platform.
Developers have recently success in launching new and innovative products by topping into our robust APIs as evidence by both our unique inbound redemption option at point of sale with Delta Airlines, and our charity donation offering with Southwest Airlines Rapid Rewards that Rob previously mentioned.
We envision a growing number of developers offering to add values to our loyalty program partners by introducing an increasing number of these unique transaction base products.
We make a high margin transaction fee or portion of each transaction on these products. We are very focused on ramping up both volume and the transaction offered. Another area we’re seeing encouraging growth is the merchant channel.
Building on success like the TrueBlue Farmax relationship, we continue to leverage our platform to help our loyalty partners offer their currencies as meaningful incentive rewards through various retail channel.
One recent example of this, is RBC rewards now being offered as incentive by both Saks Fifth Avenue and by Airbnb, also indicative of this trend is a launch of this month of our trial program that exceed advantage miles has been offered as an ongoing incentive by Sam’s Club to their over 1 million employees. We were instrumentally initiating these programs and by offering a scalable efficient platform that enables this kind of retail incentive program, we definitely see a lot of potential in the retail space.
The other way we’re adding value to the industry is by offering non-loyalty Company’s transactional access to the entire loyalty ecosystem integrated with our loyalty commerce platform. This is efficiently and securely done via loyalty, our Points Loyalty Wallet.
The loyalty wallet allows any developer to offer its users the ability to track and manage all their loyalty programs they participate in and to conduct unique earn and burn transaction directly in the channel that they control.
We see four main industries benefiting immediately from this functionality. First, we have deep discussions with many of our loyalty program partners to deploy the loyalty wallet as a solution to their increasingly cumbersome and inefficient internal processes of managing bilateral loyalty relationships such as transferring hotel or credit card Points into frequent flyer miles.
This is a foundational part of the loyalty industry that we believe we’re able to make more efficient as well as uncovering new opportunities by offering rapid and economical expansion to each of our participating loyalty partners.
We also see great applicability in the FinTech Travel and retail industries for the Points Loyalty Wallet. Last week we launched Suretap wallet is a great milestone for us. And we will be complemented by the pending launch of the RBC Digital Mobile Wallet. Both of these are early examples of digital wallet and another FinTech products we’ll see value and offering the Points loyalty wallet as a key component of their customer proposition.
Based on our ongoing pipeline development efforts numerous other developers in the travel and retail space are also cleanly interested and the ability to offer their users access to proven incentives like a personalized loyalty offer.
This clear the Points loyalty offer represents the unique and efficient solution for the industry to address this challenge. We’re confident that these developers will actively inject our transaction functionality into their products to the benefit not only their users but also our loyalty program partners.
Building on a current success and precedent I already discussed with large retailers, we see this kind of activity migrating to a multi-currency solution as a brands realized the power of giving their millions of customers a choice.
By offering target and distributed transactions exactly where their customers are, the Points Loyalty Wallet truly make these loyalty programs more valuable and engaging. Just like with our BGT and Travel offering, we have now shown both market acceptance and develop a robust pipeline of opportunities for the Loyalty Wallet that represent potential access to hundreds of millions of end consumers.
To summarize, we have and we’ll continue invest in our platform which opens up three robust opportunities in the short to midterm, but many more over the long haul. First, they will increase performance of our core Buy Gift and Transfer activity where we will continue to grow our current products in the market and our aggressively working on advancing robust new business pipeline.
Second, it will accelerate our Points Travel solution development where we have proof-of-concept and proof of product market fit that are now increase and we are no increasingly confident and pushing out this industry leading product which we believe has a similarly large margin opportunity as our current core business.
And third, increased platform investments will power distributed loyalty transactions through third party developers and our Points Loyalty Wallet. Again with recent successes and industry precedence we are now passed the proof-of-concept stage and are confident in the product market fit.
So we will be looking to aggressively and appropriately in giving our network of loyalty and industry partners, transactional access to hundreds of millions of customers through our unique global loyalty commerce platform.
As I’ve highlighted we are quite bullish on our product prospects and therefore we’ve allocate investment dollars against these opportunities in 2016. Last year, Points was highlighted twice by Canada’s National newspaper as one of the country’s most successful capital allocators.
In April, we were listed by Thomson Reuters as one of the 10 companies that most excel at putting capital at work based on our consistent ability to not only grow revenues but also generate increasing free operating cash and successfully reinvested with healthy returns.
Subsequently in December, we also listed as one of the best small cap performance -- performers with respect to EPI or the economic performance index which is a measure of return on capital divided by cost of capital and is indicative of company’s capacity create wealth for the shareholders.
And needless to say, we intend to continuing this impressive track record of profitability and growing our business on behalf of shareholders while maintaining a strong focus on long term potential.
I look forward to keeping our investors up today in our progress and I’ll now hand it back to Rob for some final thoughts at our 2016 outlook.
Thanks Christopher. As Christopher mentioned we are very focused on managing the balance between continuing to grow our core Buy Gift and Transfer business which now has a long track record of profitable performance and reinvesting our capital in both our operational capability and our two new initiatives Points Travel and the Points Loyalty Wallet.
With that backdrop we’re pleased to highlight our guidance for the full year 2016 as follows; based on only the current products and market and deals that we’ve announced to-date or are currently in very late stages of development, we expect revenue growth to be in the range of 10% to 20% over 2015.
As I mentioned earlier with several recent contract renewals, we now have multiyear deals in place with key loyalty partners and this gives us great confidence that we have visibility on 75% of our current revenues for several years to come.
Our job on the core business is to organically grow this base while also securing new business. With respect to our newer initiatives as was mentioned now that we have data and point in to the proof-of-concept and our higher margin profile we’re in the formative stages of our pipeline development, so we anticipate that while we are investing this year the economic impact of these products will become increasingly evident in 2017 and beyond.
To that end we anticipate 2016 gross margin percentages to be approximately 14% for the full year. More importantly, gross margin dollars will increase year-over-year particularly in the second half.
This continued growth will allow us strategically invest in our platform and new products who are still managing to grow our bottom line. While we believe our increasing clarity on products and market fit for our new initiatives merits [ph] aggressive investment, we’re also committed to maintain our eight-year track record of consistent EBITDA growth.
So while we’re increasing our total dollar amount of investments year-over-year in 2016, we’re also targeting a minimum 10% growth in adjusted EBITDA. As our platform grows so our opportunities, we expect to continue to grow the number of participants tapping in the Points loyalty commerce platform, investment in both of our Points branded and Partner branded products will continue to be our focus and will play an important role in evolving Points platform in a way that continues to facilitate growth and innovation for the loyalty industry.
Importantly, we’re appropriately capitalized to continue to fund this growth while also returning value to shareholders. Today, we are pleased to report that the Board of Directors has authorize the share repurchase program of up to 5% of the company’s shares to be executed over the next 12 months at prevailing market prices.
We are pleased that our strong financial position provides us the flexibilities to fund our growth initiative, while simultaneously returning value to shareholders, the share repurchases at levels we find very attractive given all the prospects we’ve just discussed.
With that, I’ll hand the call back over to the operator to take your questions. Operator?
Thank you. [Operator Instructions] Our first question comes from Andrew D’Silva from Merriman Capital. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my call. Just a few quick questions. First off, what was your strategic investments spending increase last year. And then, have new developments come up recently that are you’re looking at actually increasing the dollar amount you expect to spend in 2016. I was originally under impression that strategic spending increases on a dollar amount or actually going to go down slightly going forward?
Andrew, its Rob. Our spending kind of in as we think about strategic spending, our R&D spending frankly is the way we would describe it for 2016, we up slightly, we have smaller percentage of our overall earnings and overall profitability, but we slightly up from what we saw in 2016. And really for us we see an opportunity in front of us that we really want to grab as quickly as we possibly can. And I think we’re feeling very good about the progress we made in 2015 on some of these key initiatives like the Wallet and Points Travel. So, we’re continuing to invest against that. But it will be a smaller portion of our overall profitability that we reinvesting into R&D.
And a dollar amount for 2015, do you have an idea what that increase spending list?
Yes. I don’t know that we’ve disclosed that specifically how much we were spending. I think we can say, we were on kind of in and around 8 million of total R&D activity across all of the business.
But that was over several years, correct, not just increases in, obviously not increases in 2015 alone?
No. Definitely not an increase, that’s just been what we were working with in 2015.
Okay. Got it. And then just curious, what’s in your pipeline. Are you still see core products that are in your reseller related Buy Gift, Transfer products making up the bulk of your potential new customers. Or is it gravitating more towards like agency or commission partners and products, maybe little clarity on that dynamic and how things are transitioning in the pipeline?
That’s a good question. I think there’s really kind of a couple of components there. The core business and the principal model associated with that continue to be a very, very good pipeline for us. We have team of people in Asia kind of as we speak dealing with opportunities there, so, some very significant and sizeable opportunities on the core principal proposition. What hadn’t change and particularly as we get into some of the emerging markets we’ll probably enter into those markets on our core products in an agency relationship just as we understand how some of these kinds of more emerging markets behave.
Over and above that we’re starting to see with these new products like Points Travel and the Loyalty Wallet, the margin profiles of that pipeline, those pipelines are very impressive, very interesting to us. The margin percentage is much higher than on our core business, so that’s very attractive. But the size and the scale of the margin profile is comparable to what we’re seeing on our existing business. So, I think as we’ve been saying this for quite some time as we continue to grow and continue to evolve our product mix, our pipeline opportunities are growing very, very quickly. So we’re quite happy about the structure of that pipeline.
All right. And then, another thing flow of recently press releases that you been putting out. The first time you’ve started to announce renewals. Are you seeing any sort increase risks with partners leaving or do you seeing the breath of their partnerships, previously consolidation within airline and as we seeing that these are biggest risks there? Is that changed in anyway?
No. In fact I think it’s quite the opposite. It’s really something that consciously from a communication standpoint, from a transparency standpoint for shareholders we just wanted to kind of reinforce that. We have a very long term view with our partnerships. We had very good relationships really across the board, really on the couple of changes from the partner mix in one of the last ten years. And so, when we put out those announcements was recently about great relationships with Southwest and Air France KLM. I think you’ve heard in our prepared remarks that we’ve got 75% of our current revenues lock into long terms deals. It’s really just an indication of the times of relationships we have with our partners and really an opportunity for us kind of reinforce that with investors that we have a pretty sticky business and we’re going to be continuing to grow against that.
All right. And then, just a last question if you could, maybe you mentioned this, but missed it. What was organic year-over-year growth for the quarter and then for the year as well if you have that up in?
We were around 10% for the year, Andrew, what we had been signaling on. I think in the last quarter we indicated that. We have some cadences as we talked about quarter over quarter organic growth moving around dependent upon where we are with our promotion calendars. And so I think we were as high 18% in the third quarter and around just under 10% in the fourth quarter. So, we always try to look this on an annualized basis, because you get some seasonality quarter to quarter based on when we’re running our programs. But right where we would have expected it right around 10%.
But no reason, expect organic would dip much below 10% right now as you look into 2016?
No. We feel pretty comfortable with that and upside to that.
Great. All right. Thanks guys. Good luck on for this year.
Our next question is from Drew McReynolds from RBC Capital Markets. Please go ahead.
Thanks very much. Good afternoon. And thanks for walking through all of that detail. Very, very helpful. Just a couple of clarifications. Maybe for you Michael, just on the OpEx growth I think you refer to an 8% to 10% growth for 2016 on total OpEx, did I get that right?
Okay. On the adjusted EBITDA new definition for 2015, was that 12.6?
Yes. 12.6 represents the 2015 adjusted EBITDA using the new definition.
Okay. Great. And then, just lastly on the numbers here, just the FX assumption that you have in your 2016 guidance?
It was about $0.72 I think.
Yes. I think that’s a good approximation.
And we hedge that – as you know, we hedge that about 12 months on average. It’s about 50% Canadian dollars expenses that we hedged.
Okay. That’s good. That’s great. Fantastic. And then on just the macro environment, we’re seeing lot of negative sentiment certainly among Canadian investors looking globally. Just wondering if you’re seeing any negative impact from macro slowdown or is a lot of negative sentiment at least as it pertains to your business overdone?
I think for us, it’s Rob. I think for us it’s a bit overdone and again we just think of where we are in our cycle and in those international markets and they’re evolving from a loyalty perspective. There are just tremendous growth opportunities there. Having said that, we saw in Europe in the last couple of years at a macro level, it had slowed down some of growth.
Total revenues in 2015 in Europe were actually down, but when you look at FX suggested we’re up, it seem to have kind of bounce back a little bit. We’re back to growing plus or minus 3% to 5%. So, it certainly influences some of the results, but we do think generally the opportunities in markets like Asia, in Europe and the Middle East are all still pretty interesting to us and we’re working up relatively small base in those markets. So it’s pretty significant growth opportunities, when we look at our pipeline and we look at the perspective margin that can be generating at a some of these markets, particularly as we expand some of product mix beyond the BGT business to some other things we’re doing in Points Travel and with the Wallet we’re just getting interesting new discussion going on in some of those markets as well.
Okay. And thanks for -- I think is a blue sky sort of longer term guidance in terms of gross margin contribution from some of your platforms, so I think that’s very helpful. I guess from here on in with that mind we’ll have to wait until essentially 2018 – 2017, 2018 guidance to kind of see how things are progress or will you kind of strip out some of that financial progress you’re making with your platforms as we go forward?
It’s a good question. I think we’d like to be in a position to early up some of that transparency to be very frank. We’re really in the early stages of both of those new products Travel and Points Travel and the Wallet, but we would expect given what we’re seeing in the market opportunity that they will become interest segments, so that probably will be the driver where we’re providing some additional transparency going forward. And I think we’re probably trying to get these things gestated and going in the market for the first half of 2016 before we would entertain that but I think we’ll head in that direction group.
Okay. That’s great. And last from me, just in terms of obviously you alluded to Michael stepping in as Interim CFO just wondering I get this question is their formal CFO search process underway if you can just provide a little color there, that will great.
No, absolutely we’ve seen some fantastic candidates. We have some fantastic internal candidates and obviously we have been very pleased with how Michael has been doing. So we are all full to be in a closure on that process here very shortly.
Okay, fabulous. Thanks very much.
Our next question is from Sameet Sinha from B. Riley. Please go ahead.
Yes, thank you very much. I was hoping that to get some more color you made some announcements about newer products for example the one with Citibank and Sam’s Club. If you could elaborate on that, and just thinking about organic growth going forward, obviously it goes up and down. Just looking forward what sort of assumption are you making for organic growth in your guidance. And if you can remind us this time the language around revenue guidance speaks about some late stage deals which have been included in the guidance. Is this a new, is this a change in the way you give guidance or if you can elaborate on that, that will be helpful. Thank you.
Yes sure. Maybe we’ll going to work backwards on those questions. The guidance we -- I think we’ve had a reasonably consistent approach to that, that we’ve been trying to give analysts in particular from a modeling perspective some comfort that when we put these guidance numbers out it’s based on the business that we have in place today or very close on. It’s very as we said in the past, it’s very hard to have our analysts trying to model when we planned the next new deal and because frankly we are pursuing $40 billion and $50 billion Company so the timing is often difficult.
So what we’ve been trying to do is give you a view of our core business of the products that we’ve announced or launched, that that’s what we tie our guidance around which hopefully gives you an easier modeling exercise. What that means is that we knock down a new deal that as a pipeline is typically going to be incremental to the guidance that we are providing. So that’s the way we approached it. I think that’s reasonably consistent about the way we’ve done this done in the past for a while.
If I go back to the second question I think it was around organic growth. The organic growth is in and around that 10% range we were pretty comfortable with where that was playing out in 2015; we expect that to continue going forward. We think there are opportunities to enhance that as we continue to improve our marketing and merchandising some of the automation that Christopher mentioned. Some of the new functionality that we’ve developed into the Buy, Gift and Transfer platform to really allow us to enhance conversions, do a little bit better targeting and be a bit more dynamic in terms of how we leverage yield and leverage offers to consumers. We see some early evidence of that’s improving already even with some of that the early partners those are now on the new platform. So those are the kind of things that will add to the organic growth going forward but we are pretty comfortable in the range we’ve been delivering and really look to improve on that. Did that answer your question on the organic growth?
Yes, sure thank you.
And then I think you were asking about Citibank and Sam’s. Citibank is a continuation of our belief that our technology I think moving more modernly into the loyalty wallet it has just created the best [Indiscernible] in the industry and so Citibank like Chase and like American Express has come to us to help them manage all of their transfers and exchange activity that happens between the Citi Rewards Program and all of their partners. I think they are approaching 20 partners that enable, that they enable their members to trade their Thank You rewards for these various currencies.
We have the best platform on the planet in terms of facilitating that and I think it’s’ just another recognition of our big very smart organization, checking and tires and recognizing that our platform is really the best in the industry to be able to facilitate that. We really like that kind of business because it’s very in sync with our wallet strategy that suggests if we can get all of these loyalty currencies or even we are thinking about 15 to 20 trillion miles and Points sitting out there in people’s account, if we can get our infrastructure plugged in to all of these loyalty programs whether its Citi’s Thank You rewards and all of their respective partners it just continues to leverage the asset that we’ve built up over the last number of years.
We are absolutely convinced that if we can bring more and more royalty programs onto the platform via relationships like this with Citibank then it’s really the place that third party developers need to come and build on, because the next great idea in loyalty wants to be able to tap into 60, 70, 80, 90 or 100 different loyalty programs and we are at the place to come for that. So we really like some of the things that are happening. They are not less glamorous but really important to our strategy with relationships like Citi.
Lets switch quickly to Sam’s and then Christopher may have something to say on Citi as well just to add some color. On Sam’s, we talked about in the past year or so that the partner’s more and more our loyalty program partners are more and more coming to ask to help them find more ways to distribute the miles in Points. So again, we’ve developed a certain level of expertise in this globally. And so we just, we think it’s a really interesting opportunity where Sam’s Club and American Airlines and the advantage program will be working together and they will be using some of our platform and where we are doing some of the work to find more places to distribute some of our loyalty programs great currency. So another example not unlike Jet Blue and Fermax, obviously and Sachs obviously in their BMB, we are facilitating a lot of that additional distribution and that’s on strategy for us.
It’s me, it’s Chris. Just wanted to follow up on Rob’s description of the Citi. I think the other important thing that’s exciting for us is that this was built off our new platform using our ATI’s and we actually coordinated the work, but Citi IT department did most of the work as that’s enjoyed the work through using our ATIs. So really the new model we are going after traditionally when we would have done this for other financial services programs in the past we would have taken the bulk of the pick and shovel work onto our side and borne that expense. But this was fully built out by their side using our ATI. So they truly have acting as a third party developer on our platform to accomplish, upgrading their ability to interact with their bilateral partners.
We do have time for one last question. That comes from the line of Ed Wolfe from [Indiscernible] Capital. Please go ahead.
Yes thanks for taking my question. Wondering in the travel industry right now in the post wide U.S. as well as Europe and as you guys continue to announce your Point Travel how leverage are you to travel industry going forward?
I think I heard the question was how leveraged are we to travel globally given some of our Points Travel opportunities, is that right?
Okay. We think one, travel particularly in the U.S. travel has been very robust and we see a couple of things happening and regardless of how macro, how travel is performing from a macro standpoint. We are seeing a lot of our partners who today do some work with some industry heavyweights where they are using kind of affiliate marketing to take Frankfurt to New York where you may historically have and this great customer that they knew was landing in New York, inevitably they will be looking for a hotel and there was some affiliate marketing that was being done in the background to try to get a kickback or a piece of the action at the Airline level or delivering that customer to a hotel.
What we’ve really seen how into our Points Travel and our acquisition Points Sam’s we really liked the fundamental linkage between that customer that’s going to New York and the loyalty program associated with the Airlines that they are flying. And so we think we are really creating a better mouse trap that says, hey if that customer is going from Frankfurt or London into New York and they are going to stay in a hotel why not ensure that that consumer is being rewarded via the currency of that airline that they are flying. Don’t just send it often to a third party brand and get a financial kick back.
When you continue to wrap that customer with your brand and your miles and your points which we know that they are interested in collecting. The economics underpinning that model are frankly better than the kind of affiliate marketing proposition, so you get that double good guide of brand continuity to get more miles on points issued, you’d get the consumer more engaged and there’s actually more economics in the proposition for all the stakeholders. So we really think regardless of how the travel market does, our mousetrap is a better mouse trap and as a result we obviously close three deals so far, we’ll have the third one launched there early in the second quarter that we’ll be able to grow this business going forward on that basis.
Generally in travel if it’s stronger than it will even be a bigger opportunity for us, but I’m less worried about or fast about the overall travel market and more about replacing some of these older propositions with the Points Travel proposition.
And it’s Chris. Just want to point out again that all three of the new deals that we’ve announced were won through competitor for assessors. So we have very good relationships obviously with the programs that we deal with, but we were up against all the industry heavyweights in presenting our as Rob said new mousetrap, and so we are pretty excited about coming out as the winner of basically the first three instances of this kind of product in the market place out of the gate.
Back to the Citibank relationship and the commentary around linking our platform to the best loyalty currencies in the world, it’s half of the equation in that situation. So the fact that we are already integrated to these partners we have that full debit and credit functionality. It really enables us to leverage that platform for some of these new innovation and these new ideas. And again, that’s really why we went down the path of applying [ph] the Points Travel team in California a year and a half ago and we’ve been really pleased with kind of the work they have been doing in the market reception to what we are developing here.
Great. Well thank you and good luck
All right, thanks Ed.
Thank you. This does conclude today’s conference. You may disconnect your lines and have a wonderful evening. Take care.
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