David D. Cathcart – Chief Financial Officer and Treasurer
Norwood H. Davis, III – President and Chief Executive Officer
J. D. [Arbitrar] – GRT Capital
TRX, Inc. (OTC:TRXI) Q2 2008 Earnings Call August 15, 2008 9:00 AM ET
Welcome to TRX's second quarter earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to David Cathcart.
Welcome to the TRX quarterly conference call. I'm David Cathcart, CFO. Our earnings release and 10-Q were distributed yesterday over the wire and are also available at TRX.com.
Joining me on our call today is Trip Davis, our President and CEO. Trip will begin with his comments on TRX, and I will cover our financial results for the quarter and provide our updated outlook for 2008. We'll then be happy to take questions from analysts and investors.
This call is being broadcast at TRX.com and a replay of the call is available for 90 days.
Our comments and discussion today include forward-looking statements relating to our estimates and expectations. Additional information concerning factors that could cause our actual results to differ materially from these forward-looking statements is included in our most recent annual and quarterly filings with the SEC. We caution that written or oral forward-looking statements speak only as of the date they are made and our actual results may differ materially from today's expectations or projections.
TRX provides financial measures and terms not calculated in accordance with U.S. GAAP. We believe that the presentation of non-GAAP measures, such as adjusted revenue, EBITDA and adjusted EBITDA, provides an alternative that enables investors to more thoroughly evaluate our performance. We also believe non-GAAP measures provide investors with a better baseline for assessing the company's future earnings expectations. We use these non-GAAP measures for the same purpose. The non-GAAP measures included in this webcast are provided to give our investors access to the types of measures that we use in analyzing our results.
Norwood H. Davis, III
I'll begin by confirming our financial guidance for this year as we're on track for adjusted revenue of $92 to $95 million and adjusted EBITDA of $8 to $10 million. While we've had a solid first half of 2008, we predict that the second half of the year will be quite challenging based on the overall economic conditions and the impacts on the travel industry and our clients, both corporate and leisure.
I'll now comment on our relationships with a number of clients as well as our priorities to broaden our client base, drive product innovation and grow the company.
First, Citibank. We've successfully completed the license sale of our data reporting technology to Citi during the second quarter and we maintain a services contract with them for support of the data integration and reporting systems used in concert with their commercial credit card business.
Second, American Airlines. Yesterday we were pleased to announce a three-year renewal with American that will extend our relationship through its eighth anniversary.
Third, BCD Travel. As announced at the end of June, we continue our discussions and progress toward a long-term multi-product renewal with this corporate travel agency.
Fourth, MasterCard. We have a productive and growing relationship with MasterCard as a provider of travel data integration in dashboards for their use with issuing banks and corporate accounts. They exemplify the focus of the card companies on travel data, aggregation, book-to-build data, spending dashboards and supplier data enhancement.
Fifth, the U.S. federal government General Services Administration or GSA. As previously disclosed, we renewed this relationship for corporate travel data reporting and we're working in earnest with the staff of the GSA and the government agencies to improve the accuracy, scope and timeliness of travel data and supplier analytics.
And sixth, Expedia. As we commented in our Form 10-Q filed yesterday, we have recently been informed by Expedia that they expect to diversify a substantial portion of their business with TRX in 2009. They have made certain decisions about their technology strategy and global vendor framework that will affect the configuration of their relationship with us.
We continue to have an effective working relationship with Expedia and their teams in multiple countries, and we expect to continue to be a significant vendor for them in the future. The service levels and quality measures of the technologies and services provided by us to Expedia and its travelers are at their best in history. While the extent and timing of the changes cannot be precisely quantified at this time, we expect a 2009 reduction in the range of $10 to $20 million in revenue and a proportionate impact on earnings as a result. Clearly, this will be another major transition and challenge for us. Let me take a moment to provide some additional perspective here.
Major clients like the six just mentioned have historically generated the majority of our revenue. At the beginning of 2007, Dave and I described the transformational process for TRX, including the transition of the call center business and the focus on our core business of hosted software for online booking, reservation processing, and data intelligence. We outlined our priorities for new sales and innovations to broaden our client base and diversify the dependence on the large relationships.
We've made good progress in adding over 100 clients to our roster. Our sales and technology innovation priorities are focused on growth with RESX and online booking, CORREX and reservation processing, and TRAVELTRAX in data intelligence. These are hosted technologies with less reliance on large scale outsourced processes and services. As previously discussed, our objective is to shorten sales cycles, add more clients, and scale the business.
With RESX we believe that over time the marketplace will favor the booking solution that is independent of the GDSs and that does not require vertical integration to a given expense reporting tool. During the second quarter we released RESX 8.1 and announced a number of new partnerships, including developed integration with ExpenseWire and Booking Builder. Our clients can integrate if they choose and purchasing RESX provides more independence, greater functionality and future flexibility than either of today's market leaders.
In addition, we offer one of the best online booking tools for the U.S. federal government agencies based on our superior policy administration toolset and supplier contract management capabilities. More importantly, RESX can be seamlessly coupled with our automated ticketing software CORREX and our data reporting product TRAVELTRAX to provide efficiency, interoperability and flexibility to the corporate agencies and buyers.
With CORREX we're the market leader in corporate travel and corporate travel arena for automated reservation processing. We continue to see opportunities to grow this business, especially outside of the U.S. We are in the midst of several implementations in Europe and Asia that we will have the liberty to disclose in due course.
With TRAVELTRAX and Travel Analytics the momentum is positive, including new sales and renewals closed with brand name corporate buyers, features released such as hotel name normalization and data scorecard, a patent issued for our algorithms for buyers to analyze airline spending, and new product introduction with Hotel Analytics.
The Hotel Analytics offering is complementary to our airline sourcing tools and services. For the annual hotel RSP cycle, it offers corporate buyers the benefits of pre-bid diagnostics to optimize the hotel bid lists, identify savings opportunities, and reduce costs. This solution provides a unique approach to the industry's challenge of consolidating multiple data sources, numerous destinations, and various hotel service levels. In this data intelligence arena, we're seeing sequential revenue growth in the low double digits and a very healthy sales pipeline still to convert.
While the progress with the product set, the client base, and the sales pipeline is encouraging, the general market conditions energy costs, financial market turmoil, and airline capacity reductions have created a gravely difficult and more complicated environment for travel suppliers, travel agencies, and corporate buyers.
Based on the economic conditions and our transitions with clients like Citi and Expedia, we expect the timing of our strategic transformation to extend into 2009 and 2010. We are responding internally with a sense of urgency to control costs and allocate innovation dollars wisely, and we will continue to make investment decisions to ensure the success of our strategic focus on processing travel data and delivering value for our clients through automation and analytics.
Lastly, before I turn the call back over to Dave, I'm pleased to welcome Bill Clement to our Board of Directors. He will serve as a member of both the Audit Committee and the Compensation, Corporate Governance, and Nominating Committee. Bill is the president and CEO of the Atlanta Life Financial Group. During his 40-year career, he has served in various key roles in public and private sectors and a number of corporate and non-profit boards. He is considered to be an independent director as defined by the rules of NASDAQ and an audit committee financial expert as defined by the SEC. We're excited to have Bill join our board. He brings strong leadership skills, financial background, and great experience.
Dave, back over to you for the financials.
David D. Cathcart
Our performance for the quarter was consistent with our expectations, delivering adjusted revenue of $27.6 million and adjusted EBITDA of $6 million. These values and our guidance for the year include the one-time DATATRAX license sale, which contributed $4.5 million to both revenue and earnings.
Our transaction processing revenue fell 7% to $16.5 million, reflecting degradation in both corporate and leisure volumes that accelerated as the quarter evolved, primarily in the U.S. Also, ongoing shifts in our volume mix toward more highly automated lower revenue per transaction offerings lowered our average transaction price by 8%.
Adjusted data reporting revenue grew 63% during the quarter to $11 million, including the license sale to Citi, which contributed $4.5 million. Excluding both the one-time Citi license sale as well as recurring Citi revenue, data reporting revenue grew by 34% year-over-year.
Let me recap the revenue accounting for Citibank. We completed the license sale and transition to Citi at the start of May. This license sale generated $4.5 million of revenue in the second quarter. A portion of the cash proceeds was received in the second quarter, with the remainder received in early July. When we agreed to sell the license to Citi in July of last year, U.S. GAAP required that we defer recognizing routine data reporting revenues until the license was sold. These services generated $6.5 million in 2007 and $3.5 million in Q1 '08, all of which has now been recognized as revenue in Q2 '08 under U.S. GAAP. The services were all billed and collected as normal.
Since U.S. GAAP required the deferral of this routine $10 million in revenues but did not allow the deferral of the costs associated with earning that revenue, we felt it was important to provide investors with a comprehensive view of both the revenue and EBITDA lines and have been doing so since the third quarter of last year. What you're seeing in GAAP results for Q2 of this year is not only the U.S. GAAP recognition of the license sale, but also the recognition of the $10 million of deferred revenues. In our non-GAAP adjustments for the quarter, we've reversed out this $10 million, naturally, since we've been including it since last summer through our adjusted revenue and the EBITDA metrics.
We believe that by providing these alternative measures, our stakeholders have comparable metrics to analyze the business from 2006 to 2007, from '07 to '08, and ultimately from '08 to '09. It is a bit complicated but in the end we are providing revenue and EBITDA metrics that we believe are indicative of the underlying business performance.
We will continue to report adjusted revenues to allow comparability through 2009.
With that, I'll turn to the cost side of Q2.
Operating expenses this quarter were roughly steady at 58% of adjusted revenue - excluding the Citi license sale and related deferred revenue recognition - compared to 56% last year. SG&A is essentially flat year-over-year, as is technology development expense.
We continue to carefully manage the number and extent of innovation projects and expect tech debt expenses to be roughly flat in '08 versus '07.
Adjusted EBITDA was $6 million versus $2.7 million a year ago, primarily driven by the Citi license sale.
Our pre-tax income on a GAAP basis was $13.1 million versus $0.4 million of pre-tax loss a year ago. Based on our net operating loss carry forwards, we have not recorded a tax provision, resulting in net income of $13.1 million this quarter.
Turning to our guidance, in our release we reiterated our '08 guidance for adjusted revenues of $92 to $95 million, of which adjusted data reporting revenues are now expected to be $23 to $26 million, up from $20 to $23 million in our prior guidance. These figures include the DATATRAX license sale to Citi.
Our adjusted EBITDA expectation for 2008 continues to be in the range of $8 to $10 million. Our year-to-date revenue and EBITDA results have been fairly solid relative to this annual guidance. However, as we've indicated on the call this morning, we are seeing deteriorating volume conditions this summer in the transaction processing business, which accounts for the change in revenue mix in the guidance without a change in EBITDA expectations.
On the cost side, we are continuing to remove expenses in the normal course of business as a hedge against the revenue and volatile economic environment we see on the horizon.
As Trip commented a moment ago, we have been informed of a reduction in the business volumes by our largest client, Expedia. We expect this to materially affect our outlook for 2009. While we are pursuing new business opportunities to offset these anticipated shifts, every employee is also focused on rationalizing our cost structure in preparation for what we expect could be a difficult revenue environment in 2009.
A few comments on the balance sheet before I wrap up.
Cash and short term investments are $11.6 million, up $2.8 million from year end. We generated $4.6 million of cash in our operations in the first half and invested $3.9 million in Capex net of asset sale proceeds received from Citi. All in, we expect '08 Capex to be in the $7 to $8 million dollar range. We're comfortable that our existing cash, together with our credit facility and our anticipated business performance, will provide sufficient capital to execute on the '08 guidance we've outlined.
That concludes our prepared comments this morning. Trip and I are now ready to take questions.
(Operator Instructions) Your first question comes from J. D. [Arbitrar] – GRT Capital.
J. D. Arbitrar – GRT Capital
So maybe you could give us a little more detail on your guidance. Given the six months to date, you've done $9 million in EBITDA, you're guiding to $8 to $10. I understand that the business is going away from Expedia, but that's a drastic reduction in what your normalized quarterly EBITDA has been. What steps are you taking to cut expenses? Because $11 million isn't a lot of money and basically you're signaling you're going to lose money for a considerable period of time.
David D. Cathcart
The guidance in the back is really driven by two things. The earnings will be pretty low for two primary reasons. You can see that we're guiding lower in the back half on revenues because of the macro conditions that we've discussed and that, obviously, will have some impact on the earnings.
And then, naturally, we are removing costs in the business, really in preparation for '09. And typically, when you're removing costs, it takes some money to remove that cost. So we do expect to make some investments in that regard in the back half of '08, again, in preparation for '09.
J. D. Arbitrar – GRT Capital
And you're seeing, on the non-transaction side, customers pulling back from committing to new software purchases?
Norwood H. Davis, III
No, that's not necessarily the case. What we're commenting on is the general environment for transactions where, surprisingly, for the first half of the year - and we were not alone with, I think, this pleasant surprise - that the leisure volumes held up and the corporate volumes held up. And what we're predicting now that we've seen July, we've seen basically the first half of August, that, you know, corporate volumes are tightening, leisure volumes are tightening, and we still haven't yet hit the planned airline capacity reductions later in Q3 and in Q4. So that's sort of the volume side of it.
And in terms of the subscriptions or sales of our software for booking, processing and data reporting, we haven't seen any pulling back. That's not necessarily the case. And in fact, we've seen a keener interest by the corporate buyers and the analytics so their hotel spend and their air spend and, sure, we would like for these things to move faster and for us to convert the prospects in the pipeline, but I'm encouraged by what we have seen. I'm encouraged by the relationships with a number of the bigger players.
And I'd love to be able to fill up both the volume degradation as well as some of these client transitions faster. That's certainly what we're up to, is to grow the company through the, you know, through the data capabilities and the data products. Obviously, given the market conditions and given the transitions with Citi and Expedia, the transition is deeper and broader and longer than we had predicted at the beginning of the year.
J. D. Arbitrar – GRT Capital
You said you renewed the GSA contract. Does that in any way expand it, because it was sort of was a toe in the water by the government and there was hope that, once you got them up and running, you know, you could sort of proliferate into other aspects of the U.S. government. Can you give us an update there?
Norwood H. Davis, III
I sure will. And I'm sensitive to comment on specific clients - and I know that you've heard that before. You know, we're careful not to talk about our clients' business and our clients' plans. But that being said, you've accurately described the relationship, where we have a contract with the GSA, we have built or configured a base level data reporting platform for them, they pay us for that on an annual basis, and that's exactly right.
And, what I'm indicating in my comments is that we have made progress with specific government agencies toward having them use the data integration and dashboarding technology. And in concert, we've had good progress and looking at and working on the analytics models that we use for air and hotels. So that's incremental to that base level platform, as well as the online booking with RESX - very positive discussions with not only the actual GSA but also a number of the other general contractors in this arena, the e-travel arena, about RESX and the growth for RESX in the government arena.
So that's a little bit more commentary about that client, which we call corporate account number one. If you look at the Fortune 500, the government travel spending is by far more than anybody else, so we take it very seriously and look at it as a great opportunity.
It appears there are no further questions.
Norwood H. Davis, III
I'll conclude with two comments. First, I remain encouraged by our day-to-day operating performance and financial discipline year-to-date. We have a good handle on the business in an extremely volatile down cycle for the travel industry.
Second, I'd like to personally thank the employees of TRX for their hard work and great work during the second quarter. Despite the tough economy and the client transitions, we have the passion and positive attitude to effect the transformation of TRX into a growth company as a global leader in travel data processing, reporting, and analytics.
Thanks for listening to our call this morning. Have a nice weekend.
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