Seeking Alpha, Corp. (DESP) CEO Damián Scokin on Q3 2019 Results - Earnings Call Transcript

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Earning Call Audio, Corp. (NYSE:DESP) Q3 2019 Earnings Conference Call November 7, 2019 8:00 AM ET

Company Participants

Natalia Nirenberg - Investor Relations

Damián Scokin - Chief Executive Officer

Alberto López Gaffney - Chief Financial Officer

Conference Call Participants

Edward Yruma - KeyBanc Capital Markets

Eric Sheridan - UBS

Brian Nowak - Morgan Stanley

Rodrigo Nistor - Itaú

Emily DiNovo - Cowen & Company


Good morning, and welcome to the Despegar Third Quarter 2019 Earnings Call. The slide presentation is accompanying today's webcast and is available in the Investor Relations section of the company's website, There will be an opportunity for you to ask questions at the end of today's presentation. This conference call is being recorded. As a reminder, all participants will be in listen-only mode.

Now I'd like to turn the call over to Ms. Natalia Nirenberg, Investor Relations. Please go ahead.

Natalia Nirenberg

Good morning, everyone and thanks for joining us for the discussion of our third quarter 2019 results.

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, we discuss certain non-GAAP financial measures and operating metrics including foreign exchange neutral calculations. Investors should read the definition of these measures and metrics included in our press release carefully to ensure that they understand them. Non-GAAP financial measures and operating metrics should not be considered in isolation as substitute for or superior to GAAP financial measures and are provided as supplemental information only.

Before we begin our formal remarks, allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. For a description of these risks, please refer to our filings with the Security Exchange Commission and our press release.

Speaking on today's call is our CEO, Damián Scokin who will provide an overview of the third quarter and update you on our strategic priorities. Alberto Lopez Gaffney, our CFO will afterwards discuss the quarter's financials and our outlook for the next quarter. After that we will open the call to your questions.

Damian, please go ahead.

Damián Scokin

Thank you, Natalia. Good morning, everyone and thank you all for joining us. On today's call, I would like to provide an update on our actions supporting the company's strategic near-term priorities that are positioning the company for long-term growth. Following my comments, I will turn the call over to Alberto for a review of our financial and operational highlights of the quarter as well as our outlook for the year. Then we will take your questions.

We are encouraged with our third quarter performance, which reflects continued progress on the strategic initiatives we began rolling out more than two years ago. Our third quarter financial and operational metrics represent solid results in view of the current environment. Argentina remains challenging, but with the passage of pension reform in Brazil, we have seen a more positive environment and our results reflect that.

We saw a recovery in our key metrics in the quarter. To put this into perspective, we outperformed the industry. We gained market share. We went back to positive adjusted EBITDA as in 10 out of 11 quarters since IPO. Operating cash flow was stronger than prior quarters.

We also repurchased $39.3 million of our shares. And we are well on our way with our key strategic initiatives as well as the integration of the Viajes Falabella acquisition. We are pleased with the progress we have made in our business over the last several months and with our financial results for the quarter.

Moving on to slide 4, I will provide some key data points for the quarter. Our core business is healthy and our team's executing well. Additionally, we are gaining confidence in Brazil which represents 39% of total company transactions. Following the recent approval of the pension reform in Brazil, we are seeing signs of recovery. By contrast, we continue to experience volatility in Argentina.

Total packages hotels and other travel products accounted for 42% of total transactions. This was flat when compared with the same period of the prior year, but up 20 basis points when compared to the second quarter of 2019. We continue to get better at meeting our customers where and how they want to book their travel.

We're investing in both our customer-facing digital interface through improvements to a certain recommendations of travel products as well as the back-end functionality of our site and mobile app. These enhancements are aimed at further improving the customer experience.

We are also working to increase the frequency of interactions with our customers throughout their travel journey to foster not only cross-selling opportunities, but also to guarantee high service levels. We will describe it in more detail the new developments of Q3 in the following slides.

Our mobile app continues to be a significant tech development providing our customer’s with a newer more convenient and personalized travel shopping experience while reducing our direct marketing costs. As a result, mobile now accounts for 39% of total transactions up 100 basis points from the prior quarter and 418 basis points from the same period last year.

We closely monitor net promoter scores as the most relevant sign of customer satisfaction. And in turn we saw 150 basis point improvement in our net promoter score during the quarter. Room nights were up 5% year-on-year and up 10% ex-Argentina. While this space is lower than prior quarters, we are taking steps to get back to stronger growth levels. Our recent agreement with Ctrip is part of this initiative.

Moving next to a discussion of transactions and gross bookings on page 5. Before getting into details for the quarter, I want to mention that the contribution from Viajes Falabella is including the business in Argentina, Chile and Peru for the whole quarter, while the contribution from Colombia was only for the month of August and September. Both transactions and gross bookings rebound in quarter-over-quarter and year-over-year.

Total transactions were up 5% in the quarter with both air transactions and packages hotels and other travel products each increasing 5% year-over-year. We have been focusing on standalone packages as a key strategic initiative and the acquisition of Viajes Falabella was another step in that direction.

As a result of this effort in the third quarter, standalone package transactions increased 26% year-on-year remaining our fastest growing product. Gross bookings increased 26% on an FX-neutral basis, an acceleration from prior quarters. As reported, gross bookings were up 8%. Excluding Argentina, as reported gross bookings increased 14%. These better-than-industry performance is reflective of all the initiatives we have rolled out over the past year including the acquisition of Viajes Falabella.

Importantly, we saw a 21% year-on-year increase in FX-neutral ASPs. Factors contributing to this include strong ASPs in Air Brazil and product mix shift towards higher-priced packages partially driven by the contribution from Viajes Falabella. The macro environment has not improved significantly and the political situation has gotten a bit more volatile in many of the countries in which we operate.

Argentina remains challenging. Brazil continues to slowly recover having recently passed the pension reform, while Mexico's economic growth is slowing. All these factors contributed to a single-digit contraction in the industry gross bookings across the region. However, reflecting the success of the initiatives, we implemented in the second quarter we once again performed better than the industry and gained 30 basis points of market share. Excluding Avianca Brasil our market share grew by 110 basis points.

Moving next to page 6 where I will discuss some of our recent business initiatives. Products services and tech innovation remains a key priority for us. And we strive to make each step of the travel experience across all platforms, easy and enjoyable for our customers. Our clients already know Despegar. And our associated brand Decolar.

And beyond that, they trust our brands to give them innovative products quality, services and expert advice. As shown on this slide, I want to highlight some of the recent developments we have been carrying out, to continue building the direct relationship that we have with our customers.

On October 31st, we launched our loyalty program Despegar Passport to 100% of our traffic in Brazil, our most important market. After having introduced and tested it, with 50% of Despegar visitors, in that market on September 9th.

Despegar Passport allows travelers to earn points when booking flights hotels and other travel products, with non-air products accumulating a higher number of points. Additionally, travelers can continue earning points in our loyalty program, such as credit cards and frequent flyers, in the same transaction.

Despegar Passport has a three-tier earning structure, Traveler, Explorer or Global, we don't see the Global category having access to exclusive customer care to assist in travel planning and in-trip support.

We are extremely excited about this new program, which since launch has already accumulated 120,000 members, in Brazil. In sum, with this loyalty program, we are further enhancing our value proposition and giving customers an additional incentive to purchase through Despegar, while driving cross-selling and boosting customer lifetime value.

Next, I would like to briefly discuss our recent acquisition and two new partnerships. Enhancing customer service is a major focus in our business. This is not only enabled by technology, but also by working with new partners.

As a result of all the actions we have undertaken to become the leading OTA in Latin America, we are the partners of choice, for other leading companies looking to provide additional products of benefit to their own customer base.

The first initiative this year on this front was launched with the acquisition with Viajes Falabella, which we have already discussed, along with the longer-term strategic alliances with, Falabella Financiero.

We expect to complete the integration of Viajes Falabella, during the first half of next year. And obtain significant synergies from this process, which Alberto will describe shortly.

Second, last month we announced an API connectivity agreement with Ctrip, which allows for the integration of Despegar's direct accommodation portfolio in Latin America, with Ctrip's platform.

This also enables us to expand our potential customer base, beyond our core geographic region, into the fastest-growing Chinese market. And third, last week we announced a 10-year exclusive co-branded credit card agreement, with ICBC in Argentina, in partnership with Mastercard.

Now, a brief comment about two new services. We continue to invest in enhancing the customer travel booking experience, by providing different channels and opportunities to interact with Despegar.

To that end, we upgraded the technological systems of our call centers to aid in the pre-travel stage, while reducing the cost of each interaction, by bringing automation to the process.

We also launched bundles, which is a dynamic bundling package technology that compensates every product that is available at Despegar, creating a personalized and complete experience to our customers.

Additionally, by leveraging data insight by directing demand, towards the suppliers that are not only the ones with whom we have the best commercial agreement but also the ones that our customers like the most. We believe all these initiatives lay the foundation for consistent long-term growth.

I will now turn the call over to, Alberto to discuss our financial results.

Alberto López Gaffney

Thank you, Damián, and good morning everyone. Please turn to slide six for a review of our operations on a regional basis. Overall, gross bookings growth rates recovered across our key markets, both as reported, and on an FX-neutral basis.

Starting with Brazil, our largest market we accounted for 39% of total transactions. Transactions in this market increased 3%, a reversal from the 14% year-on-year decline in second quarter 2019, when we reduced our exposure to Avianca Brasil.

Gross bookings also performed well, up 15% as reported, and 19% on an FX-neutral basis. ASPs were up 16% on an FX-neutral basis and 11% as reported, benefiting from higher domestic tariffs and sustained mix shift from domestic to international travel.

In Argentina, transactions declined 4%, year-on-year mainly driven by lower international travel, as demand for discretionary spending remains impacted by the recessionary environment.

This however, was an improvement from the 14% drop, experienced in the prior quarter, when we shifted our marketing expenditures to the rebranding campaign. We also believe customers in Argentina advanced the purchase of their summer holidays, in anticipation of potential FX volatility, across primary, presidential elections last August.

FX-neutral gross bookings increased 47% and ASPs 51%. As reported gross bookings and ASPs however, were down 11% and 8%, respectively impacted by the 36% peso depreciation.

Finally, transaction growth also stepped up in the rest of Latin America, up 12%, a pickup from an 8% increase in second quarter 2019. FX-neutral gross bookings performed quite well, up 21% with ASPs up 8%. Reported gross bookings this quarter were up, 13% with ASPs up 1%.

Now turning to the P&L on slide 8, improved performance across key markets, contributed to a pickup in the consolidated top line growth rate and revenue margin this quarter.

We accomplished this, despite ongoing market contraction which was high-single digits this quarter. FX-neutral revenues were up 19% year-on-year. And up from the 5% posted in the second quarter, as we continue to make progress on our growth strategy.

We also saw strong recovery in as reported revenues which posted a 9% year-on-year increase, a turnaround from the decline we reported in second quarter 2019. This good performance was mainly driven by higher margin packages, hotels and other travel products which posted revenue growth of 14%.

Air revenue growth also improved year-on-year, showing moderate growth of 1% this quarter, an improvement from the 11% decline last quarter. As a result, packages, hotels and other travel products, accounted for 61% of total revenues, up from 59% in the same quarter last year, 290 basis points increase.

Several factors contributed to the pickup in revenue growth. First, the initial benefit from the rebranding initiative and new product launches implemented in second quarter 2019.

Second, the positive impact from Viajes Falabella which has a significant share of packages, and third and last, we saw a positive mix shift from domestic to higher-margin international transactions.

This more than compensated for the reduction in customer fees and discounts in package transactions that we implemented to support market share growth, lower air supplier volume bonuses and the FX translation impact.

Revenue margin in turn, was up, 11 basis points year-on-year to 11.2%. Now please turn to slide 9. Gross profit increased 9% year-on-year to $92 million on an FX-neutral basis and 6% as reported.

Taking advantage of market conditions, to drive further share gains, in this quarter, we continued investing in lower fees and customer discounts on packages. We also stepped up customer financing and installment plans in Argentina, a key tool in driving conversion rates.

This together with higher interest rates resulted in higher installment plan costs. This quarter we also had a higher mix of transactions where Despegar was the merchant of record instead of the airline suppliers, allowing us to offer more attractive customer financing options.

As you know being merchant of record, also has a negative impact on our cost of revenue. This quarter, we are also including $2 million impact in cost of revenue from Viajes Falabella. While this was partly mitigated by efficiency gains in fulfillment, combined these factors resulted in a 210 basis points year-on-year contraction in gross margin to 67.7%.

In the near term, as we invest in our business to drive future growth, we are experiencing an increase in our cost base. However, we do expect over time to generate synergies and leverage our cost base over higher revenue.

Selling and marketing expenses, excluding Viajes Falabella would have been nearly $43 million, which represent an increase of 3%, this increase was related to telesales and affiliates, and were partially offset by efficiencies gained in direct marketing.

On a per transaction basis and excluding Viajes Falabella, selling and marketing expenses were flat at $16 per transaction, and as a percentage of revenues increased 74 basis points to 35%. Viajes Falabella's contribution to sales and marketing expenses accounted for $3.8 million, which includes the operational cost of its stores and telesales operation.

Comparable G&A expenses excluding a one-time severance charge in third quarter 2018 and also excluding Viajes Falabella, were up 35% year-on-year. Higher costs include export right tax on services in Argentina introduced in January this year; higher depreciation and amortization driven by a higher capitalization of our tech and development investments and higher stock-based compensation. This was partially offset by the FX translation impact from currency depreciation in Argentina where we have the majority of our G&A expenses.

As a percentage of revenues and excluding Viajes Falabella, comparable G&A expenses in third quarter 2019 were up 457 basis points accounting for 18% of revenues. Technology and product development, excluding Viajes Falabella declined 1%, which reflects additional cloud sourcing expenses as well as an 11% increase in headcount as we introduce new services and functionalities to our platforms. These increases have been largely offset by high capitalization of these costs aligned to industry standards.

As a percentage of revenue and excluding Viajes Falabella, technology and product expenses declined by 23 basis points year-on-year to 13.6%, reflecting higher cost dilution in the quarter. Some of these initiatives include adding automation in our customer care operations, which will contribute to lower cost and enhance customer satisfaction. And we are also in the final stages of developing a loyalty program.

Integration of Viajes Falabella, a process we expect to complete during the first half of 2020 is also expected to drive additional cost efficiencies. As we have just begun integration process, we are not generating synergies. In fact, Viajes Falabella cost per transaction is about 5 times higher than Despegar's standalone. As we finalize the integration of the two platforms, we will be better positioned to achieve operating leverage.

Looking ahead, we remain focused on streamlining the cost structure to maximize efficiencies and execution. Along these lines, last month, we downsized our cost structure as we completed the development of several strategic projects, which we expect will contribute to reducing operation costs. This measure, however, is anticipated to impact fourth quarter 2019 results as we absorbed several costs in the range of $2 million.

Turning to profitability on slide 10, we reported positive adjusted EBITDA this quarter of $9.4 million, more than reversing the $7.3 million loss reported in the prior quarter, which had been impacted by a specific one-time internal and external events. Comparable EBITDA, however, declined 39% year-on-year with a margin of 7% against 12.6% a year ago.

Lower year-on-year profitability, reflects the challenging economic environment in Argentina impacted by our strategy of prioritizing top line growth, together with macro disruption in the quarter. In this context, we stepped up package discounts, reduced lodging and car rental fees and incurred higher installment expenses to drive demand and capture share gains. Higher operating costs and the FX translation impact also negatively impacted profitability in the quarter.

Moving on to the balance sheet and cash flow items on slide 11, maintaining a healthy financial position is one of our key strategic priorities, as it has enabled us to invest in the business at a time when others don't have the same flexibility. And at the same time, we can enhance shareholder value as evidenced by a share buyback program that is in place and that we have been executing on.

The execution of the buyback, underscores the Board's view on the depressed valuation of the Despegar shares. We keep a strong balance sheet with unrestricted cash and cash equivalents of $300 million at the close of the third quarter. This was further supported by strong cash flow from operations of nearly $26 million in the third quarter, compared to an outlay of close to $27 million in the same quarter last year.

This good performance was mainly driven by a decline in the receivable balance from better collection terms, higher tourist payables due to higher sales, together with a decline in other assets and prepaid expenses reflecting lower advances to suppliers. We made capital investments of near $6 million this quarter, mainly in software and platform development.

We also purchased 3.25 million shares in third quarter 2019 for a total cost of $39.3 million. In total, we repurchased 3.46 million shares during the first nine months of the year at a total cost of $42.2 million.

Coming up, let's move to page 12. Third quarter results were particularly strong in light of the macro volatility and consequent high single-digit industry contraction. Although volatility calls for caution in our remarks, our performance allows us to reiterate our Q2 outlook, which pointed towards a cycle upturn. In Q3, which was marked by our clients' advanced purchases in Argentina, we managed to opportunistically capture additional profitability.

FX fluctuations and market discontinuities such as the ones taking place in Chile today get counterbalanced by positive signs of traction on key investments in certain areas and geographies. These levers point us to a Q4 level of activity broadly in line with last year's.

We remain focused on our long-term strategy. This perspective which drives strong investment is not precluding us from capturing operational efficiencies when possible. As such, Q4 will be marked by some restructuring charges as we lighten up the operations when resources get freed up as initiatives are deployed.

In addition, in the upcoming quarter, our take rate will be impacted by the success of the loyalty program in Brazil. Plus, we continue making progress in the integration of Viajes Falabella with synergies expected to be materially captured in second half 2020 as we merge our operations.

In summary, while we still face external challenges during the third quarter, we continue to see plenty of opportunity for long-term growth. As you heard from our remarks today, we are making good progress across multiple fronts. Our teams are operating with urgency and focus, and I'm grateful for the hard work, commitment and support.

In conclusion, we continue to work towards executing on our long-term key business initiatives, and we remain confident that our strategic investments are establishing a solid foundation, creating further differentiation and positioning us to deliver improving financial results in better economic environments.

Lastly, let me remind you, we will be hosting our first Analyst Investor Day in New York City on December 10. I look forward to seeing you there. As a reminder, December 10.

This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

Question-and-Answer Session


Please go ahead, Mr. Yruma.

Edward Yruma

Hey, guys. Thanks for taking the questions. I guess, first, I know last quarter as part of the rebranding and the app relaunch you guys had some conversion issues as maybe your more habituated customers are less familiar with the new navigation. I guess I know you had some positive data points on mobile. But do you think that the customer's fully attuned to the changes you made?

And then second, I know that you guys are starting to pass along some discounts particularly on the package side. I guess, are you seeing the kind of elasticity and demand? Does a discount help with conversion? Thank you.

Damián Scokin

Hi, Ed, This is Damián. First part of your question, yes, we -- as you know we track conversion rates in prices very closely and we are very happy with the evolution of the conversion rates of the third quarter. We are up in all three main platforms and that makes us certain that the new rebranding effort has been successful and widely accepted by consumers. Can you repeat the second portion of your question?

Edward Yruma

Yeah. It sounds like you're starting to invest a little bit in price. I think you said you were offering I think more package discounts and that was one of the margin drivers. I guess, does -- have you noticed that the discounts improved conversion materially? Is it a competitive response?

Alberto López Gaffney


Damián Scokin

So, yeah. As you probably know, we have been very aggressive on price strategy over the last several quarters. We decided on our pricing tactics on a daily basis product-by-product, geography-by-geography not only in response to competitive moves, but also in response to our elasticity models and how we see demand evolving.

Our strategy as we've been stating over the last quarter is to continue being very aggressive on price to gain market share in all products, in all geographies as far as this attains a minimum profitability level that we set. So this is not the reaction to any competitive move, but rather an explicit strategy that we've been following over the last several quarters. And the reflection of that it's our market share improvements.

Edward Yruma

Great. And one final follow-up if I may. Credit extension to consumers. Are you guys seeing any change in trends from some of your partners? And given kind of what interest rates have done has it caused you to change maybe the payment terms that you're offering? Thanks so much.

Damián Scokin

Yes. As you know the volatility of some of our markets particularly in Argentina has significant increased interest rates on consumer loans and credit cards. Therefore we adjusted our offer and that's a major headwind to our value proposition, since we are the most -- we have the most comprehensive payments and financing offer in Latin America.

In spite of that, we achieved significant growth in a very peculiar context. An additional data point that may give you some color is that we continue to grow in our payment methods in all geographies and we are particularly happy on how Boleto Bancário has been performing in Brazil. As you probably know, we are the only online company that transacts online with Boleto Bancário, which is a widely used means of payments in Brazil.

Edward Yruma

Great. Thanks so much.


Thank you. And the next question comes from Eric Sheridan with UBS.

Eric Sheridan

Thanks for taking the question. Maybe two if I can. You showed good progress on mobile and on selling packages. Could you just reframe for us what are some of the investments you're making in terms of driving greater level of penetration in both of those, maybe think through like what we might see as a long-term goal in terms of percentages of packages or transactions via mobile and how that could improve the overall cost structure and conversion on the platform longer-term? Thanks so much.

Damián Scokin

Yes. Eric, thanks for your question. We are extremely happy on how mobile is performing. As you all know this is key not only in terms of a closer relationship with the consumer, but also for developing lower cost sources of traffic. We not only increased our installed base on the app, but we are also very happy on the metrics of in-travel use of our app. We are seeing that going up significantly.

We as in many of the success story, there are a lot of responsibility for that. The product team has done a great job upgrading our app. We're offering more features and services and our traffic sourcing strategy has been evolving and obtaining a lot of efficiencies in directing traffic towards our app.

It's not only mobile, but if you also look at the mix in between app and responsive, our app share within the mobile spectrum is much higher than in the past. So that's another reason to be significantly happy about that.

We -- in terms of long-term targets at current levels was in the mid-30s. As we mentioned we believe there's ample room for growth in Latin America perhaps even more than in developed markets given the higher penetration of mobile devices as access points to web services. That is more than in developed markets.

As per packages, that also we believe a strong success story, because that has shown strong growth and still there's ample room for further potential growth. It doesn't represent a significant portion of the overall gross bookings of Despegar. We believe we can even double the current volume of packages we sell in the next couple of years, if we get things run right that's going to continue the trend we've done over the last few quarters.

And I forgot to give you some color, the stories behind the success in packaging is again plenty of different efforts. Sourcing has been doing a great job. Also, our ability to steer traffic towards the most promotional packages, and our ability to steer and acquire traffic towards those type of products has improved over the last, I would say two quarters.

Alberto López Gaffney

Eric, Alberto joining here. The only thing that I would add is within packages. Also we are nicely growing the packages that we actually have that pose some inventory risk, okay? And I think we believe that that's it's still at very low levels, but as you know that as we have mentioned in prior calls that has much higher and attractive profitability.

And we continue running those products with a particularly high occupancy factor, okay? Let's recall what we did last summer in Latin American summer with 99% occupancy factors we run some also some packages to from Brazil to Chile – sorry, to Argentina in the summer in the winter period, and that had also occupancy factors above 90%.

So I think that's not only when it comes to crop inventory that it's growing nicely, but from a very small base, but also packages as a whole I think that progress has been noteworthy.


Thank you. And the next question comes from Brian Nowak with Morgan Stanley.

Brian Nowak

Okay. Thanks for taking my question. I have two. The first one understanding Google is always a dynamic animal. Your sales and marketing trends -- your sales and marketing per transaction in the quarter ex Falabella was really strong at flat. Were there any changes or adjustments that the team had to make from an SEO or SCM perspective in the quarter to kind of keep it flat? I know there's always sort of a lot of noise as to what's going on. The Google ecosystem compared to where you are at this point.

And then the second one on the loyalty program. 120,000 sign-ups in a month is a pretty good number. I'd be curious to hear, are you seeing new people and new customers come to the platform? Or is it mostly sort of your existing base? And how should we think about sort of sizing the take rate impact as we go into 4Q and 2020 from that?

Damián Scokin

Good. Let me take the – Brian – this is Damián. Let me take the first part of the question. Yes, we are facing the best challenges our other colleagues have referred to recently. And as you put it mildly and lightly Google is evolving constantly and so we are in reaction to that. Our marketing team has been extremely effective in leading with the new SEO challenges that Google poses to all of us in terms of how they display the results.

And our team has been extremely effective in increasing other sources of unpaid traffic particularly direct. And our effectiveness of our e-mail and push notification has significantly grown. We know that we operate in a very dynamic environment and that every quarter poses new challenges ahead of us. And I'm really happy on how the team reacted to this. And also, we are happy because I think that this ability to rely more on other non-paid sources of traffic is a reflection of the strength of the brand in Latin America. Keep in mind that more than 50% of our traffic is coming from the traction of – that our brand generates. And I will leave to Alberto the second part of your question.

Alberto López Gaffney

Sure, Brian. In order to address your question on take rate and immediate outlook on that,. what we stated is number one we're in the cycle et cetera I think it's very promising where we are. I think we reiterated that Q2 was the bottom of the cycle. I think Q3 performance was particularly good. If you actually look at take rate what has been the performance during the full 2019 we were actually at 60 basis points take rate loss vis-à-vis 2018. Okay? That was the case in the first quarter. That was the case in second quarter as well. And we actually had a particularly strong take rate this Q3 even beating what was the take rate in Q3 2018 by 10 basis points. As we look into Q4, okay? I think one thing is that we mentioned it on the opening remarks is that we have very successfully launched the loyalty program in Brazil. As you well know based on the accounting for the loyalty program, okay? We expect to have let's say a loyalty deferred revenues in the ballpark of around $2 million for the – in Q4. And that already hits your take rate in approximately 20 basis points or slightly higher than that.

So we believe that including that impact from loyalty I think we should be better than what we actually achieved in Q1 and Q2 that we actually saw those 60 basis points loss vis-à-vis last year, okay? Q3 again was particularly strong as in some geographies, we actually saw particularly in Argentina. We saw our clients advancing some purchases and we were able to opportunistically adjust our pricing. As Damián pointed out we look at elasticities on a weekly basis. We look at our transaction volume and gross bookings on a daily one. So we – hat's part of the revenue management team and that allows us to capture our very attractive take rate in Q3. So hopefully, with this I gave you a bit of a – even though we do not – as you know we do not provide specific guidance. Certainly in these volatile times in the region I think it merits to provide some additional color on Q4.

Brian Nowak

Great. Thanks guys.


Thank you. And the next question comes from Rodrigo Nistor with Itaú.

Rodrigo Nistor

Well, actually Alberto just answered my question. I was just wondering, if you're seeing any kind of short-term positive impact on demand in Argentina after the restrictions to access the FX market. And then, I wanted to know if you could give us how much it was the impact from Falabella Viajes in your revenue and growth.

Alberto López Gaffney

Rodrigo, Alberto here. Good morning and thanks for your question. And with regards to the breakdown of Falabella we tried to be particularly accurate on our statements as we actually analyze the cost structure from sales and marketing G&A and tech and content. Just to so that the investors and the analyst community would actually have a very good read about – on how the cost structure of the company and the potential for operating leverage in the future was actually performing. The idea would be that actually going forward. Okay? I think you actually will use this base in order to forecast our model. So I think we would rather just given that we are – we believe that we share a lot of information with the market I think we will fall short Rodrigo on actually looking at the specific contribution for Viajes Falabella. What I think that overall in -- just in relative terms and not to get into specific numbers. You see a company that has an attractive take rate in Viajes Falabella. And as you know, like two-third, 65% approximately of the overall gross bookings of Viajes Falabella are those packages and that was one of the key reasons, we actually drove our decision to acquire such a great platform.

However, the counter side of that is clearly, that we actually have a much heavier cost structure and that is going through the whole integration of Viajes Falabella that we're making material progress and we expect to capture in the second half of the year, a relevant synergies on this front. It cements our view that the online business is by far the best operating model as we start capturing all the operating leverage, so that when it comes to Viajes Falabella. Would you please remind me of the first part of the question because, it's not the same that I've already addressed it based on the response to Brian or anything specific that you would like me to address? I mean the first part of the question, sorry.

Rodrigo Nistor

Yes. Sure. If you relate that purchase of traveling packages in Argentina to the restrictions to access the FX market and if that's what's driving the short-term positive impact there? In your opinion.

Alberto Gaffney

I think the -- I'm sorry I now recall you also asked about capital controls et cetera. And so first and foremost on capital control, I think it's important that -- important to highlight as you mentioned the topic as a whole for the investment communities. Understand that, today Despegar is facing no restriction whatsoever to access the FX market. And so far all the communications by the Central Bank okay are actually -- if anything you have an indirect incentive to travel because through your credit card, you can actually do all your purchases. That's one way to access the dollar market by buying goods and services.

So from that perspective, I think we feel -- we feel okay. Certainly, the name -- when it comes to Argentina on buying patterns in Argentina. Clearly, we see in the region. But particularly, we've seen in some market discontinuities, clear the election. It has been a discontinuity. And I think Argentineans are very avid on looking at what would be the quotation for dollars today vis-à-vis in the future on how they can actually exercise or actually increased their purchasing power.

Today, the name of the game I would say is volatility Rodrigo. It's very hard. Even though we do acknowledge that particularly in the month of October there was some advanced purchases, a little bit we also found that during the month following the August election. But I think it's -- I think maybe I'm tempted to say maybe too soon to tell. Okay? What would be the consumer behavior in Q4 and Q1 in next year. And I think that's pretty much all of you. I think that it's very hard to predict. We actually see -- I don't think that the strength of Q3 was just based on advanced purchases by Argentina because overall the company had a very strong performance despite an industry again in Q3, the industry contracted as a whole.

Rodrigo Nistor

Okay. Thank you.


Thank you. [Operator Instructions] And the next question comes from Kevin Kopelman with Cowen & Company.

Emily DiNovo

Hi, thanks for taking my questions. This is Emily on for Kevin. I think a lot of my questions have been answered. But could you give us some more color on this -- your inventory sharing agreement that you entered into with Ctrip?

Damián Scokin

Yes. Basically the agreement allows Despegar to put on Ctrip's platform all of our inventory. We are currently online as to our understanding the online -- the only travel agency in Latin America offering that to the Chinese market. This will be gradual. Because obviously we have to translate all our inventory into Mandarin. But we're extremely excited about the potential of this agreement.

Emily DiNovo

Thank you.


Thank you. And at this time, I would like to return the floor to Damián Scokin for any closing comments.

Damián Scokin

Thank you, operator, and thanks everyone for joining the call today. As usual, if you have any further questions, please do not hesitate to reach to us. We'll be happy to follow-up. Thank you very much. I'm looking forward to seeing you again in our next call. Take care.


Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.