Points International, Ltd. (NASDAQ:PCOM)
Q2 2016 Earnings Conference Call
August 10, 2016 4:30 PM ET
Garo Toomajanian - Investor Relations, ICR
Robert MacLean - Chief Executive Officer
Christopher Barnard - President
Michael D’Amico - Chief Financial Officer
Drew McReynolds - RBC Capital Markets
Andrew D’Silva - Merriman Capital, Inc.
Greetings and welcome to the Points International Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Garo Toomajanian, Investor Relations. Please go ahead, sir.
Good afternoon and thank you for joining us today, to discuss Points International’s financial results for the second quarter of 2016. Joining me on the call are Rob MacLean, Chief Executive Officer; Christopher Barnard, President; and Michael D’Amico, Chief Financial Officer.
Before we begin, let me 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 guarantees of future performance or action 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 differ materially and the assumptions used in making such statements are included in our second quarter 2016 financial results press release issued prior to this call as well as other documents filed with the Canadian and U.S. securities 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’ll turn the call over to Points’ Chief Executive Officer, Rob MacLean for his prepared remarks. Rob?
Thanks, Garo, and thanks to those of you for joining our call today. We delivered strong revenue growth of 24% to $83.9 million in the second quarter and we are tracking to deliver full-year growth within our guidance range, adjusted EBITDA of $3.2 million was down 16% year-over-year.
However, we expect a stronger year-over-year comparison in the second half of the year to more than offset declines in the first half to produce increase in adjusted EBITDA on a full-year basis. Our strategy to invest in building an open, flexible Loyalty Commerce Platform is enabling us to bring innovative services to loyalty program operators as they look for ways to increase engagement with their members and create new revenue opportunities for their businesses.
Our core Buy, Gift and Transfer business continues to contribute to our growth through the organic expansion of our customers loyalty programs driving solid annual growth. Furthermore, we are in the later stage of the finalizing a number of new partnerships, details of which will be announced as we launch their services. However, this continued momentum should highlight for investors our robust pipeline of opportunities.
Complementing this consistent growth in our core business, during the second quarter, we also extended our success with our new Points Travel service. During the second quarter, we signed two new programs and we will be enabling their loyalty programs to generate additional revenue while also providing members with unique ways to earn or use program currency. As a result, in a short period of time, five loyalty programs up by two from our last call have signed on to our Points Travel service, increasing member engagement while enabling a new revenue stream.
Additionally, we continue to have a very active pipeline and look forward to sharing news of additional Points Travel launches going forward. Our other new service is the Points Loyalty Wallet which allows users to track, manage, and interact between multiple loyalty rewards programs via multiple distribution channels. Points Loyalty Wallet benefits from network effects whereby the service gets even more valuable as new members leverage our Loyalty Wallet APIs to enable their users to interact with their myriad of programs.
On the heels of our successful launch with App in the Air during the second quarter, we are pleased to announce that Choice Hotels will be levering our Loyalty Wallet service to improve their members ability, to exchange their points into a portfolio of partner currencies.
Christopher will go into more details here, but I am confident that we’ve also made further progress in expanding our pipeline appoints wallet opportunities with a number of these now in the late stages. In short, our business momentum continued in the second quarter for both our core and newer services and we remain well positioned to further build on our accomplishments in the second half of the year and beyond.
I would like to now turn the call over to Christopher to tell you a bit more about our performance during the second quarter and where we are headed.
Thanks, Rob. I will provide some more color on our performance in the quarter and the momentum that’s driving our continued enthusiasm. Principal revenue in the second quarter was $80.5 million, up 24% year-over-year, primarily due to organic growth in existing customer programs.
Marketing activities increased from the first quarter and we expect to see further increases in the second half of the year. Other partner revenue which includes revenues from Points Travel and Points Loyalty Wallet was $3.3 million, an increase of 11% from a year-ago. We expect our business momentum will continue in the second half of the year. And as we have indicated in the past it sets us up for continued strong growth into 2017 and beyond.
Our leadership and commitment to the loyalty industry is increasingly evident in our performance, as well as the robust pipeline activity we see in all lines of our business. During the second quarter, we saw continued organic growth from our Buy, Gift and Transfer services as we continue to deliver value to our multiple BGT partners.
Additionally as Rob mentioned, we are in the later stages of finalizing new partnerships with both North American and international loyalty programs. And we look forward to updating you on this progress in the coming months. Our continued BGT growth is complemented by further success with our new higher margin services, Points Travel and our multi-currency Points Loyalty Wallet.
At the intersection of online travel agency industry and the loyalty industry the Points Travel service accesses the same inventory as other third-party travel distributors at an extremely competitive wholesale rates. With these, we are then able to leverage our Points Loyalty Commerce Platform to either offer customers significant booking bonuses and additional loyalty points and miles or the ability to use their miles as a form of payment to make their hotel booking.
We are proud to announce two new partners that will be leveraging our Points Travel service bringing the total number of programs launched or in development to five. First off this quarter we will launch our hotel redemption service for Hawaiian Airlines or members of the HawaiianMiles program will be able to book hotel stays using miles.
This will be a strong addition to an already valuable frequent flyer program and there is another example of our ability to manage unique redemptions is a strong competitive differentiator for the Points Travel service.
We are also excited to announce the imminent full launch of our newest Points Travel deployment and a new and important partner for us, one of North Americas most successful retail coalition program with more than 100 sponsors and 10 million active members. Leveraging the Points Travel service, programs members will be able to earn rich bonuses when making hotel bookings across the globe. We look forward to sharing more details in a separate release upon launch.
These two partners were both launched their competitive bit processes and now join Lufthansa Miles & More’s, La Quinta Returns and Air France-KLM’s Flying Blue program in adopting the Points Travel service. We’ve discussed our strong pipeline for Points Travel previously and we are encouraged by ongoing progress, we are having the programs in the pipeline were also adding to new opportunities.
As we discussed in prior calls, it is very much an early days for after this new and competitive travel space. With these two new wins added to our three recent launches, we continue to anticipate a small contribution from Points Travel this year. However, as with only launches there is a ramp up period as our marketing and product development efforts gain traction over the remainder of the year.
We anticipate these higher margin transactions have a more meaningful impact on our performance in 2017 and beyond. Following on the launch of our App in the Air partnership, we are encouraged to announce that later this year we will deploy our Points Loyalty Wallet service into the Choice Hotel web channels. Via this service, Choice Privileges program members will be to more easily, quickly and securely exchange their hotel points for a dozen different frequent flyer miles in participating partner programs.
Deploying the Loyalty Wallet service allows Choice to not only offers members a more robust and efficient experience, a key to increase engagement, but also seamlessly expands its available partner programs by leveraging our myriad of relationships and a Loyalty Commerce Platform unique capabilities, thereby also helping to make their program more valuable.
As a reminder, both Citibank and Chase already relay on Points and our Loyalty Commerce Platform to process millions of points of currency transactions with partner programs annually. By consolidating this kind of industry activity via Loyalty Wallet service, we believe that we can quickly and efficiently give industry players a much more efficient way to manage their numerous and currently very cumbersome by lateral relationships.
We are pleased our Choice Hotel for their first partner to take advantage of this world leading solution and are working hard to bring more of the industry on Board in the near-term. The last two activities I’d like to highlight is our continued success in the retail space. As we discussed in our Q4, 2015 call we are instrumental in initiating partnerships between the RBC Rewards program and leading retailers like Saks Fifth Avenue and Airbnb where customers can own bonus points for activity.
We continue to work diligently to expand on the success and are pleased by the recent launch of a Home Depot Canada partnership and the pending launch of a similar program with Apple Canada. So it will initially be pilot programs with the intention of full rule that’s based on anticipated success. The value of our experience, knowledge and unique industry position is clearly evident in this ongoing success in the retail incentive space.
So as you can see, we are making solid progress in all of our key initiatives and are developing and capitalizing on opportunities that our leadership position in the Loyalty industry affords. Investments that we are making in expanding our technology footprint or achieving the intended result of extending our reach within the industry and to those interested in leveraging the power of the world’s loyalty programs.
Now let me turn the call over to Michael for a deeper look into our financial results.
Thanks, Christopher. As I review our results for the second quarter of 2016, please be reminded that all of the numbers mentioned in 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 second quarter totaled $83.9 million, up 24% from a year ago. Principal revenues were $80.5 million, also up 24% from the second quarter of 2015. Other partner revenue primarily made up of agency revenue was $3.3 million, an increase of 11% from last year.
With principal revenue growing faster then higher margin agency revenue during the quarter, gross margin decreased to 13.3% in the second quarter from 16.7% a year ago. This generated a gross profit of $11.2 million in line with gross profit of $11.3 million a year ago.
From an operational perspective, we continue to invest in scaling our business over the longer-term, while managing our cost structure with a goal of continued profitable growth. We are pleased to host this call from our new head office location which offers us the opportunity to grow and further scale our business. Our move which included all Toronto based personnel and technology occurred seamlessly with no interruption of service for our Loyalty Partners.
Total operating expenses which consist of employment expenses, marketing, technology and other operating expenses were $8.6 million in the second quarter of 2016, an increase from $8.0 million in the prior year period. From a profitability perspective 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 reminder we now calculate adjusted EBITDA by taking net income and adding back the following items. Income tax expense, interest, depreciation and amortization, foreign exchange and share based compensation expenses. On that basis adjusted EBITDA in the second quarter was $3.2 million compared to $3.9 million in the prior year period with a decrease primarily due to higher operating expenses.
Despite a year-over-year decline in adjusted EBITDA in the first half of the year we believe sequentially increasing revenues and moderated expense growth will move adjusted EBITDA toward our anticipated fiscal year levels in the second half of the year.
Excluding part-time and contract roles we ended the quarter with 191 fulltime equivalent employees, up from 189 at the end of the first quarter and up from 175 at the end of the second quarter of 2015. Increases in personnel have centered around research and development to continue to expand our platform and products, including our Points Travel and Loyalty Wallet services and in other information technology personnel in order to deliver new products and services and to scale our operations.
As a reminder while we generate the majority of our revenues in U.S. dollars. The majority of our operating expenses are denominated 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 out 12 months for approximately 50% of our total Canadian dollar based expenses.
That said given recent trends we believe foreign exchange could be more of a headwind in the second half of the year. Therefore, while I mentioned that we expect adjusted EBITDA growth to improve in the second half of the year. One factor that could mute that growth would be a negative currency exchange impact on expenses. Net income in the second quarter was $931,000 or $0.06 per diluted share based on $15.3 million diluted weighted average shares outstanding, compared to $1.7 million or $0.11 per share a year ago.
Turning to our balance sheet, total funds available, which is comprised of cash and cash equivalents together with security deposits, restricted cash and amounts with our payment processes totaled $61.7 million at the end of the second quarter, compared to $52.8 million at the end of the first quarter. A primary importance to us is our net operating cash, which we defined as total funds available, less amounts payable to loyalty program partners. At June 30, net operating cash was $10.8 million compared to $8.3 million at the end of the first quarter.
These anticipated changes in total funds available and net operating cash reflect the quarterly variations in revenue and the timing of certain cyclical expenditures including outlays for capital and intangible asset additions, the timing of partner and operating expense payments, the deposit on our new premises during Q1, and to a lesser extent our share repurchase program. During the quarter, we repurchased 43,682 shares of our common stock at an average price of $9.27 per share for a total of approximately $405,000.
I will now pass the call back to Christopher to summarize and review our guidance.
Thanks very much, Michael. As you can see, we delivered solid performance during the first half of 2016. While we maybe challenged to beat our first half revenue growth to the second half of the year we do anticipate sequential growth in revenue for Q3 and Q4 and a return to year-over-year adjusted EBITDA growth.
Based on our current view, we are reiterating our guidance for the full-year and we anticipate revenue growth between 10% and 20% and a minimum adjusted EBITDA growth of 10% or higher. We are pleased with our performance during the second quarter and our advancement of previously announced programs.
In addition, we made progress with new opportunities that expanded our pipelines ranging from our core Buy, Gift and Transfer business to our newer Points Travel and Points Loyalty Wallet services. We believe we are well positioned to leverage ongoing investments in our Loyalty Commerce Platform to further expand our leadership position in the market, while continuing to deliver a profitable growth for the remainder of 2016 and beyond.
I’d like to ask the operator to please open the call for questions now. Thanks very much.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Drew McReynolds with RBC Capital Markets. Please proceed.
Yes. Thanks very much. Good afternoon. Maybe the first question just in terms of – I think you provided some fairly good kind of quarter sequential guidance on modeling. But it still seemed as if Q2 came in a little stronger certainly than what we’re looking for. I’m just wondering Rob or Christopher if you can kind of highlight just whether that’s true versus what you are expecting and then just maybe a couple of the key drivers or sources of that fairly strong revenue growth?
Yes. Drew, it’s Christopher. As I think we’ve talked about in lots of these quarterly calls, the reason why we give annual guidance is, our business is very much affected by promotional activity with some really large partners and it depends on how that calendar plays out between the whole portfolio of our partners on where some of the higher revenue quarters come in and some of – obviously the higher expenses to drive that revenue in terms of driving margin.
So it just turned out that the way those calendars matched up this year especially versus Q2 last year which was a lower promotional period, but a higher kind of profit period. This year turned out to be the reverse much higher promotions and resulting expenses to drive that topline in the quarter as well.
So I wouldn’t read too much into it as an anomaly, but really just normal course of the business. And again, we look to sort of not averaged it out, but when we look at our past Q1 performance, this quarter’s performance and then looking forward to the next two that’s where we’re obviously reiterating our guidance range and comfortable as those percentages even themselves out over the four quarters.
It’s Rob. If I could just add a – just a hair of color to that Chris’s summary of the financials is very good. What I would say, I’ve been particularly pleased with here and the last quarter is the continued progress in terms of events in the pipeline, advancing deals, knocking deals down, some of which Chris commented on in his prepared remarks. I think that I’m spending a lot more time thinking about it and being active on and we had a very – I’d say very good quarter behind the scenes in terms of progressing some of our pipeline and our net new business ideas, so we’ve been pretty pleased with the start of this year.
Okay. That’s helpful. And just in terms of recent events in Europe. I think I recall maybe 15% of your business being over there and I know you actually disclosed that. But just any thoughts on the implications for you over in Europe just what we’ve seen from Brexit, I certainly think that Europe was on its path to recovery. Do you see any disruption to that trajectory?
No. We’re seeing actually pretty good and again same theme driven by active calendar on the promotion side with our European partners. And so we’re seeing good growth in the first half of the year and we are happy with the prospect there. I think again across the board in some cases when economy slowdown a little bit, program start feeling that in their business in general and then look to some of the promotional activities that we can provide to generate some economics in the short and mid-term. So I wouldn’t say we’re countercyclical in anyway, but we are confident in the European activity right now.
Again, I’ll add a little bit of extra color on top of that. We disclosed some of the European results and you’ll see you we’re north of 30% growth on a year-over-year basis in Europe and as Christopher describe that that’s largely driven by healthy promotional campaigns with some of our core partners. So good solid quarter at Europe, we’d be much more muted than that from a growth perspective for the full-year as we would expect that – we feel like we rebounded a fair bit – low point a couple of years ago. There are good, courageous and aggressive group over there which is encouraging.
That’s great. Just two last one for me, in terms of free cash flow priorities, you bought back some stock which is great. You’ve done a few tuck-ins over the last few years; can you just provide us an update on what those would be if there’s any changes going forward on that front?
I don’t think there’s any dramatic changes Drew. I think obviously you are continuing the buyback process. We’re happy with the cash we are generating and it shows some good health in the business obviously. And I may remind you that some of our previous discussions is with these new product launching.
We want to get that kind of operational experience settled in and before we really dig deep on where we might be able to invest other than the new products and then even then if they start growing, we see there might be opportunities continue to more aggressively invest in either market share or driving performance in each of those new products in the travel space or the wallet space as we line up more partnerships and get a little bit more of these products in the market.
Okay. And just my last one to follow-up on that, actually Christopher just on – Michael alluded to some moderate expense growth in the back half of 2016, is that just kind of implying that you’ve invested to date. What you think is going to support kind of that next leg of growth and understandably you’re still investing on a go forward basis looking at the next year and the year after, but if we’ve seen kind of the bulk of the bump up in operating costs for this year?
Yes. I think, again moderate growth and part of it is we’re reserving some of that power so to speak to capitalize opportunities as we start seeing some of these new deals come into market. Again, as Rob mentioned we have a very robust pipeline, we’re very happy about the progress we made in the first half of this year. We are confident that will – you guys will be seeing some of the results of that effort in the second half and then that lays the groundwork for more activity next year and beyond.
So that’s where some of the increased expense might come in. And I think Michael also mentioned the impact of foreign exchange on that side, obviously bulk of our expenses in Canadian dollar, so it does have an effect the Forex swings does have an effect on the expense line.
Yes. I understood. That’s great. Thanks very much.
[Operator Instructions] Our next question comes from Andrew D’Silva with Merriman & Capital. Please proceed.
Good afternoon. Thanks for taking my call guys. Just a few quick questions here. First off, could you maybe provide a quick update on how things are progressing with MasterCard in that funnel? Couple quarters ago it was implied that we might be seeing land here in the next couple of months and I’m kind of interested in how that’s progressing and any data there would be useful?
Okay. It’s Rob, Andrew. I think as I said in the last quarter, we continue to work on that, but it is a very slow process. I mean as simple of that I think we’ve got the technology work done, we’ve got the structure in place, we have not been successful in finding ways to really move that forward, so we’ll continue to work on it, but so far pretty slow.
Sorry. I’d just add to that that outside of the MasterCard relation, we are seeing lots of opportunity in the financial services sort of FinTech world. So as we’ve talked about that is where quite a bit of our focus on pipeline development is and so we’re excited and encouraged about the momentum in that space in general. There is still work to do on the MasterCard relation for sure, but work to do.
Got it. You still see that as maybe a viable opportunity in out years or has that kind of gone by the wayside in your opinion at this point?
It’s Rob again. It’s viable, one of the – parts about the business when you’re dealing with multi-billion dollar shops, sometimes things don’t move as quickly as you’d like, but Christopher and I were in MasterCard’s head office not that long ago and lots of kind – still lots of increasing opportunities, that’s really an execution challenge with an organization of that size that we’re really working through. So absolutely there is opportunities downstream. We have to keep banging our business to try to find a way to release those. We tend not to give guidance.
Got it. And I’m sorry if you already mentioned it I might have missed it. But you previously stated you’ve competed with some of the larger competitor space such as Expedia and Priceline and a couple of these Points Travel deals. Have they won any of the deals that you’ve competed with them against in the market? And then second part of that question is, are they offering a loyalty solution like you’re providing or is there of a more really like a cash savings to consumers.
Yes. It’s Rob. I think our view on what we’ve done in Points Travel and we’re just really, really pleased with the way that has gone. I think as Chris mentioned, we’ve got five deals up in operating, we just launched one again yesterday, we will announce the details behind that here in the next few days.
So we feel very good about how we are competing in that space. Our product offering when you think about the technology component which is we are getting just fantastic feedback on the innovation and what we were able to bring to the table, the understanding and kind of unique elements of our loyalty offering is proven to be very, very effective. That coupled with the preexisting marketplaces. We feel like we’ve kind of changed the landscape, but that is not happening as a result of that is there a lot of effective conversations on the go.
So we’re doing some thinking and choosing, obviously we’re in conversations, we’re in competitive situations and we’re in conversations where some of our partners are really leading on us. So we’ll see situations where I would expect that we will see situations where – we’re in a very competitive situation for any number of reasons, incumbent type reasons I suspect.
Certain opportunities will go in other directions, but we like where we are today and we like the success rate so far and we like the prospects of the RFP’s and pipeline as we look at it right now. We are very much in a situation where the loyalty side is a unique proposition for us. So we’re going to continue to build on that.
So just to recap, your competitors aren’t really utilizing a loyalty aspect in their offerings when they’re going to some of your partners.
Yes. Some are not, some are starting to put some of that in, but there’s nobody else there that has kind of exposure in regional office space and you would expect them to start moving in this direction to some extent, because we’re winning business from a preexisting portfolio.
All right. And did you – could you mention if they’re actually able to win any of these deals in a apples-to-apples situation where you both don’t have existing relationships or you have an existing relationship and they don’t - they’re not, no one has really won a contract from you guys in a situation like that. Have they?
Yes, we have situations in international markets where either we didn’t have the reach in that local market where they’ve gone another direction. We probably won’t get in the habit of announcing losses we’ll stay in the habit of giving our shareholders an opportunity to see where we’re growing the business and where we’re expanding our footprint.
Fair enough. Yes, I’m just trying to get a sense of how that markets evolving right now and where you see the impact. That’s good color. Thank you very much and good luck going forward this year.
Great. Thanks Andrew.
End of Q&A
[Operator Instructions] There are no further questions. I would like to turn the floor back over to Rob MacLean for closing comments.
Great. And thank you all for joining us again today. During the first half of 2016 we showed solid progress and advancing our position as a leading Loyalty Commerce Platform. We remain confident about our prospects for the full-year and look forward to speaking with you all again soon. Thank you and good bye.
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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