Ambassadors Group Incorporation (NASDAQ:EPAX) Q3 2008 Earnings Call October 29, 2008 11:30 AM ET
Jeff Thomas - President and Chief Executive Officer
Peg Thomas - President of the Operating Subsidiary Ambassador Programs
Chadwick Byrd - Chief Financial Officer
William Bennett - Director of Strategic Planning
Greg McKinley - Dougherty & Co.
James Bellessa - DA Davidson & Co.
Terry O’Connor - Cedar Creek Management
Good day ladies and gentlemen and welcome to the Q3 2008 Ambassadors Group Incorporation earnings conference call. My name is Emmanuel and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)
I would now like to turn the call over to Mr. William Bennett, Director of Strategic Planning; please proceed sir.
Thank you, Emmanuel. Good morning. On the call with me today is Jeff Thomas, President and Chief Executive Officer of Ambassadors Group; Peg Thomas, President of the Operating Subsidiary Ambassador Programs; and Chadwick Byrd, Chief Financial Officer of Ambassadors Group.
First, before we proceed into the call, I will read the Safe Harbor statements regarding forward-looking statements. Statements contained in this press conference and related comments by Ambassadors Group’s management which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements include without limitation statements that relate to expectations concerning matters that are not historical facts.
Word such as projects, believes, anticipates, plans, expects, intends, estimates and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements reflect our beliefs or current expectations with respect to among other things, trends in the travel industry, our business and growth strategies, our ability to integrate acquired businesses, future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies such as legal proceedings, financial results and fluctuations in our results of operations.
Forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These and other risks are discussed in greater detail in the Ambassador Group’s periodic reports filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update forward-looking statements.
With that I will hand the call over to Jeff.
Good morning, thanks for joining our call. Let me start by touching upon some of the key points of our results so far this year. For 2008 year-to-date we have now traveled just under 39,000 delegates compared to just under 50,000 year-to-date one year ago.
Regarding program quality we had a very strong year. Our valuations have improved in every program in 2008 compare to 2007. Regarding program margins we incurred some unusually large fuel surcharges last summer as the price of oil reached record highs, as well as some higher than expected air costs incurred as we work to keep delegates committed to the program.
Regarding marketing in 2008 for 2009, we made a number of changes especially to our international student ambassador programs including; we reorganized last winter to create greater focus on product management, we made several key management hires, we have rationalized our product offerings within each program to improve margins, increase our return on marketing dollars and create additional focus on quality improvement opportunities.
We adjusted our current program content in length to better manage price increases. We refined the messaging in our market to better reflect today’s current global conditions. We also added additional database screening steps and measurements to ensure that we are utilizing the best databases to market our programs.
How these changes impacted are marketing efforts for 2009? First as many of you know our marketing efforts for international programs are well under way. We deploy a multi-step marketing process with the first step focused on generating indication of interest and the second step being an application to travel. So far for 2009 we are generating high levels of interests; our marketing process is working.
The second step, generated applications started strong as evidence by initial results from late August until late September. However, the introduction of the financial meltdown slowed down our applications somewhat; still over the last week to 10 days we’ve seen some resurgence in our applications.
Right now we have 29,580 enrolled to travel for next year compared to 30,700 this time last year. On an enrolled revenue basis we have $173 million in enrolled revenue, compared to $157 million one year ago. As you can imagine we are working hard to determine how our enrollments for 2009 will play out, but generating a reliable forecast in these unprecedented times is difficult. The macro environment will be a significant determinant of how our retention programs fair and even much of our remaining marketing efforts.
Our internet group BookRags continues to develop its business. In September the site had over 4 million unique users, a record and even though advertising rates are softening on the internet, demand for our content products has increased. Financially we continue to maintain a debt free balance sheet and use our income from 2008 to continue to built balance sheet strength.
At this point I will turn the call over to Peg for more details on People-to-People Ambassador Programs.
Good morning and thank you for listening in this morning. As you know the focus for the third quarter is to complete our largest travel season and begin marketing for the 2009 season. We are coming to the completion of our travel for 2008.
Year-to-date we have traveled approximately just under 39,000 passengers in comparison to just under 50,000 in the same time period one year ago. The SAGE season ran as planned in terms of delivery. Our execution improved as witnessed by our improvements in evaluation of scores from our customers.
Evaluation results are up for all four of our product lines across the board. In fact if you ask our parents’ just one question, would you recommend us to another family? 97% of the respondents replied yes. We will travel the 49 countries and all seven continents this year in comparison to 44 countries in the prior year. We continue to improve our programs with greater access around the world.
The unique components of our programs when compared to other programs what we call people-to-people moments, have also increased. For example we have a program enrolled Ireland where our students team with some Irish students and spend some time in the bog cutting peat for the elderly in their community. They have an interaction with local students while doing a service project in a foreign land.
In terms of enrolments for 2008 and what you can expect for the reminder of the year, we currently have net enrolments of 41,970. This number one year ago was 52,650. These numbers include those delegates that have already traveled year-to-date. So the 41,970, we’ve already traveled 38,930 as of the end of September. Therefore we have less than 3000 remaining to travel in this calendar year, if we don’t have any more withdrawals.
As Jeff spoke about in his opening, our 2009 campaign started off well in September as we made a number of changes from the prior year; including improving our name list and database screening techniques, performing product audit and fine tuning our marketing methods. The current financial crisis has slowed these improvements and the numbers. It is unfortunate that we got caught up in this financial meltdown because we started our campaign season very strong.
In addition for 2009 product offering, we have rationalized our product lines through a product audit that allows us to increase traffic on higher contribution programs and cut traffic on our lower return programs. In one product line we decreased our number of itinerates from 65 to 39 offerings for 2009. This focus long term will allow us to further enhance quality on the remaining itinerates while gaining further economies of scale.
Our product mix for 2009 has shifted more towards international programs as we put more of our resources towards these products. The full force of our marketing leadership programs is not yet been realized in the market place in ‘09. In 2008, we continued to market for the 2008 programs deeper into the year than we had previously. Therefore our 2009 marketing for the domestic programs began later that usual.
As our press release stated for 2009 we have 29,580 enrollments in comparison to 30,695 one year ago, a 4% decrease in enrollment. However, the enrolled revenue year-over-year has increased by 10%.
With that I’ll pass the call over to Chadwick for the financial review; thank you for your time and attention this morning.
Thank you, Peg and good morning. Today I’ll be discussing the results of the third quarter, our balance sheet and cash flows before I provide an update on our guidance for 2008. During the third quarter, we traveled 17,680 delegates compared to 24,475 delegates one year ago, a 28% decrease for the quarter while gross receipt and gross margin decreased 25% and 28% respectively.
Our gross margin as a percent of gross program receipt was 32.6% which is down from last year’s margin of 34.2%. Margins were impacted by increased international air cost as we experienced unprecedented NOPs, increased international ticket prices and fuel surcharges that we were unable to pass on to our delegates and smaller travel group sizes due to late withdraws as we worked to keep delegates committed to our programs during tough economic time. Online content and advertising sales provided by BookRag contributed 615,000 and 540,000 in gross receipt and gross margin respectively during the quarter.
Operating expenses for the quarter increased $430,000 or 3% in comparison to the third quarter of 2007 just reflecting 11% increase in sales and marketing costs for our 2009 program and a 19% decrease in general and administrative costs year-over-year as we continue to reduce personal and non-essential overhead costs.
Other income decrease approximately $333,000 or 33% due to lower average cash and investment balances held during the quarter. Our affective tax rate for the quarter was 32% for both quarters due to the amount of tax exempt investments held during the quarter.
In times like this, our balance sheet and cash flow continue to be a strength of the company. We have no outstanding debt and the majority of our balance sheet is in highly liquid cash and short term investments. Total asset of $114.7 million includes $61.8 million of cash in short term investments. The balance sheet includes $9.3 million of contents trademarks and goodwill related to BookRag.
Participant deposits would reflect amounts received from our delegates for future period travel or up 2% year-on-year. Deployable cash increased 18% or $5.8 million in the quarter after allocating $5.6 million back to our shareholders in the form of dividends and share repurchases. Over the last 12 months we have allocated over $24 million or $1.25 per share back to our shareholders through dividends and share repurchases.
During the third quarter we repurchased approximately 191,000 shares at an average purchase price of $14.14. The company has approximate $10 million remaining on our share repurchase authorization.
In providing guidance for the remainder of 2008, our current and expected earnings for 2008 have been and will be negatively impacted by the increased international air cost and increased withdrawals due to the financial crisis and deteriorating economic outlook. We anticipate 2008 earnings per share to be between $0.98 and $1.03 based upon the numbers we have traveled to date, the enrolments we have for future travel and the inclusion of BookRag in our consolidated results. As of October 26, 2008, we have 41,970 enrolled delegates for 2008 travel, just over 3000 beyond what we have traveled to date.
For 2009, we are not providing specific guidance at this time; however, we have provided further information on the enrollments we have to date and the possibly future revenues that relate to these enrollments. As of October 26 we had $173 million of enrolled revenue for 2009 programs compared to $157 million on the same date last year. This 10% in enrolled revenue is attributed to the success of our student ambassador marketing campaign coupled with program price increase. Student programs make up 72% of the enrollments we have to date compared to only 65% last year.
Although we are off to a strong start for 2009, with enrolled revenue increasing year-over-year, it is too early to tell the full impact the financial crisis and the economy will have on perspective travelers and on our 2009 revenues and earnings.
I thank you for your time today and we’ll now turn the call back over to Jeff.
Thank you, Chadwick. Emmanuel at this point we will take a few questions.
(Operator Instructions) Your first question comes from Greg McKinley - Dougherty & Co.
Greg McKinley - Dougherty & Co.
Yes thank you. In terms of giving us little more color on your ‘09 marketing campaign efforts to date and on occasion you have provided color that either your campaign started a little earlier or a little later than it did in the prior year period and may be that impacted the number of customer contacts and dollars spent, where are you at this point relative to historic norms in terms of portion of your marketing campaign that’s already been incurred and do you view that as sort of flexible. Moving forward would you see yourself putting more dollars into the program if you begin to see response rate slow a little bit.
Greg, this year we did start a little bit earlier on our campaigns, but by this point we’ve caught up to that, so we’ve been trying different things in the market place just like we do every year. So from a dollar spent prospective it’s about equally year-over-year in terms of timing and then in terms of flexibility I’d say that’s obviously a longer term goal of ours as to continue to create flexibility in our system so that when we do seen an opportunity or a higher response rate or even a lower response rate we can shift gears much faster than we’ve been able to in the past. I think that’s been part of our success over the last few years as continuing to gain flexibility from that prospective.
Your next question comes from James Bellessa – D.A. Davidson & Co.
James Bellessa – DA Davidson & Co.
Thanks for providing enrolled revenues. I don’t know that I’ve noticed that before and maybe this is the first time; that’s nice to have that metric. Would you please characterize this year’s withdrawal rate versus last year’s withdrawal rate?
Hey Jim, could you clarify the question; you are wanting us to talk about 2008 withdrawals compared to 2007?
James Bellessa – DA Davidson & Co.
Great. Jim, withdrawal rates actually this year stemmed. In the past they’ve gotten worse every year a little bit and we’ve made some improvements this year in 2008, so we’ve come back from some of those higher withdrawal rates and some of our product line and I think last year at this time we were talking about different deposit rates and trying to change some of that to see if that would impact it. So we ran some different pilot programs in there that impacted our withdrawal rate for 2008 negatively and so for the year in 2008 if you take apples-to-apples it’s very similar to what we came out with in 2007.
Your next question will come from the line Terry O’Connor – Cedar Creek Management.
Terry O’Connor – Cedar Creek Management
I was just wondering if you could talk about the maybe final analysis of your experiment in running marketing through into January last year and whether you think you’ll do that again this year or how does that depend in economic circumstances?
Terry, we ran a larger campaign last year like we talked about and it is something we’ll continue to do going forward and again, just like we talked earlier with Greg, it’s we’ll continue to try to sell differently throughout the year. Clearly our major campaigns happened in the fall, but you’ll see more of that throughout the year as we trade that flexibility that we’ve been talking about in our marketing campaigns and an ability to change on the fly a little bit as we go forward.
Your next question comes from Greg McKinley - Dougherty & Co.
Greg McKinley - Dougherty & Co.
Yes guys I’m wondering if I could run a couple of other questions while you are here. With the update you gave on your enrollments and enrolled revenue right now, it’s sort of back into may be about a 14% increase in growth program or seats per enrollee and clearly you make the comment that international programs are a higher portion of the enrollments at this point in time. Do you expect that to shift over time due to a later start because of the domestic marketing period and based on where you are today do you think that program receipt per traveler growth will be in 2009?
Thank you, Greg. The first thing I would say is obviously there is a mixed component in that and so when you say at the 14% increase, a lot of that has to do with the success of the student marketing campaign that we’ve seen so far; as I said its 72% of the enrollments that we have now versus 65% last year. We do attribute quite a bit of it going forward and the financial success of our programs and increasing the net revenue in gross receipts per delegate traveling with us and so we do expect a 6% to 7% increase on programs for 2009.
Your next question comes from James Bellessa – D.A. Davidson & Co.
James Bellessa - D. A. Davidson & Co.
This is Jim Bellessa again and I hope that you could may be tell the operator not to cut us off so quickly. Last you were talking about withdrawal rates on an apples-to-apples basis. They are about the same this year in ‘08 versus ’07; is that a 33% rate?
Actually in ‘08 Jim it is a little bit higher because of that pilot program that we ran, so you’re going to see it higher than 33% in total for the year for 2008.
And your next question comes from the line of Terry O’Conner - Cedar Creek Management.
Terry O'Connor - Cedar Creek Management
I was wondering if you could talk a little bit about any success as you might have had with BookRags and integrating that with E-Packs or getting some leads out of that and secondly let me just review the bad list we had last year and what you did to correct that and what the results look like so far this year?
The bad list, well the first thing we did is we didn’t re-mail it this fall, so that was probably the easiest part of the correction. The second number of things we did in terms of looking of lists we took a number of different steps.
I think Terry as you know we already had a pretty rigorous process in terms of list bringing in place. I think it’s shown by the fact that over the previous 13 falls we never had anything like this happen, but one of the things we did specifically add is a step or two in there were once the list is in-house, we had some additional data verification steps that weren’t in place before. We think they are pretty innovative; we think they gave us an advantage in studying name list and in fact we identified one significant name list that we did not mail this fall because we added that additional step in place there.
Then regarding BookRag and generating leads from there, right now we are focused more on I guess the what I would call the longer term strategy of integrating kind of the backend databases of the two organizations until you know how to best collect names, going for some kind of short term gains. So we’ve done some very limited testing between the two organizations and had to do some results, but the real stuff is further down the road. Thank you and Emmanuel we’re ready for the next question.
And your next question comes from the line of Greg McKinley – Dougherty & Company.
Greg McKinley - Dougherty & Company
I’m sorry guys, I don’t know if maybe you just wanted to answer one question per call, so I apologize if I’m creating problems, but I was cut off on both my prior questions. So Chadwick I just wanted to confirm, I think you said 6% to 7% would be your increase in expecting gross program receipts per traveler next year is due to mix and prices is that correct?
No that was on all program line 6% to 7%.
And let me just add to folks on the call, we’ve gotten feedback on the last couple of calls that we’ve gotten some longer dialogues with specific share owners and we wanted to make sure we had everyone to have a chance to have a voice on the call. So we are working on making sure that people get there and when people ask a question or two, we’ll do our best to answer before the operator moves on to the next question; thank you.
And at this time there are no more further questions in queue. I would now like to turn the call back over to Jeff please proceed.
Everyone thank you for being on our call. As you know we are in some challenging economic times and I think when we step back and look at how far we’ve in the year, we’ve made a lot of changes that have improved and we’ve shown progress on our most important and largest product line, International Student Ambassadors in terms of generating a year-over-year increase in enrollments and obviously then in enrolled revenue. We are looking forward to continuing some of that momentum even in the challenging times that we have out there.
Unfortunately, like many businesses out there, it’s difficult to forecast how this financial meltdown plays out over the next several months, but one of the things that we do have going on our side is we have a very strong balance sheet placed that will allow us to whether the storm, with obviously a heavy focus on cash and no debt that we have out there will continue to generate strong cash flow and as Chadwick mentioned in his narrative we returned about $1.25 to shareholders in the last 12 months.
Thank you for joining us on our call and we look forward to speaking to you next quarter.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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