Despegar.com 4Q17 earnings conference call transcript

Transcription

1 Despegar.com 4Q17 earnings conference call transcript CORPORATE PARTICIPANTS Damián Scokin, Chief Executive Officer Michael Doyle, Chief Financial Officer Inés Lanusse, Investor Relations Officer CONFERENCE CALL PARTICIPANTS Kevin Kopelman, Cowen and Company Brian Nowak, Morgan Stanley Eric Sheridan, UBS Brad Erickson, KeyBanc Capital Markets James Anderson, R. F. Lafferty PRESENTATION Good morning, and welcome to the Despegar Fourth Quarter 2017 Earnings Call. A slide presentation is accompanying today s webcast, which is available in the investor 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 would like to turn the call over to Ms. Inés Lanusse, Investor Relations. Please go ahead. Inés Lanusse: Good morning everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 2017 results. In addition to reporting financial results in accordance with U.S. Generally Accepted Accounting Principles, we discuss certain non-gaap financial measures. Investors are encouraged to review the reconciliation of these non-gaap financial results, which can be found in the press release. I would now like to turn the call over to our CEO, Damián Scokin. Thank you Inés. Let me add my welcome to all of you on the Call today. 1 of 12

2 Let me begin by making a comment about the overall travel industry. The travel market was a bit softer when compared with the first half of the year, which benefited from stronger than expected currencies in our largest markets and pent-up demand after a slow Nevertheless, we reported solid results in the quarter, and continued to gain market share, despite a more competitive environment was a pivotal year for the Company, as we made significant progress against our strategic plan that strengthened our financial position and laid the foundation for future growth. We achieved several key milestones. Among them, we achieved US$1 billion in mobile gross bookings, generating more than half of our revenue from higher-margin packages, hotels and other travel products, and the successful completion for our initial public offering. We are extremely proud of the market position we have built as Latin America s leading online travel agency. Now for some highlights. Gross bookings year on year increased 26%, partially driven by the strong execution of our Black Friday and Cyber Monday promotional events, where we saw gross bookings increase over 40% in our key markets. We are also gaining new customers, up 15% in the quarter, and saw an increase in repeat customer purchasing activity. Revenues in turn expanded 30% year on year, with growth mainly driven by a robust performance in packages, hotels and other travel product transactions, up 28% in the quarter. We saw increasing success in demonstrating to our customers the savings benefits of bundling their air ticket purchases with other products, namely hotels. Focused marketing efforts have helped to drive sales of these higher-margin products, which accounted for 54% of total revenue in the fourth quarter of This was up 700 basis points from the fourth quarter of Throughout the year, we were challenged to balance the investments needed to enhance our competitiveness, while at the same time continuing efforts to improve profitability. These efforts are beginning to pay off, as there are signs of improvement as the initiatives we rolled out throughout the year are gaining traction. As a result, Adjusted EBITDA, excluding one-time items, increased 29% in the quarter. Now please turn to Slide 4. Transactions increased 19% in the quarter to 2.4 million, with gross bookings up 26% to $1.3 billion. This good performance was supported by the strong execution of our Black Friday and Cyber Monday promotional events, where we saw gross bookings increase over 40% in our key markets. Gross bookings continued to grow at a faster pace than transactions, reflecting the success of our strategy to drive mix shifts to higher average selling price products, packed as packages. Mix shift toward higher ASP international destinations also contributed to this good performance, with ASP increasing 6% year on year. The selective reductions in air customer fees implemented in the third quarter of 2017, along with other more attractive financing options, continued to drive cross-selling of packages, hotels, and other travel products with transactions in this segment growing 28% year on year in the quarter, well above the 13% growth in air transactions. 2 of 12

3 As we moved through 2017, our growth rate returned to more normalized levels as compared to the early 2017 growth rate, which to a large extent was driven by pent-up demand following the weaker macro economic environment in Brazil and Argentina during Additionally, as the environment gets more competitive, it is important for us to continue investing in building brand awareness in both our core markets and newer markets. As we do so, we are cognizant of the need to balance growth with profitability. Let s move to Slide 5. In today s highly connected world, we need to be accessible on whatever device or wherever our customers choose to shop. Mobile is a key strategic growth pillar for us. Importantly, we are seeing the success of this, as mobile is our fastest-growing channel. Over the past year, we have been enhancing our mobile app to make the shopping experience even easier. Reflective of this was the more than 38 million cumulative app downloads by year end This was an increase of 39% over the prior year period. Our customers are quickly embracing the enhancements made to our app as mobile transactions were up 45% in the quarter, and as a percentage of our total transactions increased over 500 basis points year on year to 30%. This also represented a 100 basis point improvement for the third quarter of Generally, we do not discuss mobile gross bookings, but we achieve a record milestone of $1 billion in mobile gross bookings by year end 2017, an accomplishment we are all very proud of. Moving to Slide 6. We re in a customer service business and one that is also very competitive. Thus it is incumbent upon us to consistently invest in our business, whether it is new products or services, to improve our customers purchase experience and drive operational enhancements. Investments in mobile and packages are two important focus items, but we are also undertaking other investment initiatives that I would like to touch on. During the quarter, we added and implemented new payment methods in Argentina and Colombia. This included Pago Fácil and Rapipago in Argentina and introducing cash payment options for last-minute flights and nonrefundable products in Colombia, to maintain the lead we have in breadth of payment options for our customers. We are investing in further developing our accommodation sourcing capabilities in order to build our vacation rentals inventory and improve the competitiveness of our hotel product. In the quarter, we increased the number of directly contracted hotels in Latin America by 24% year on year. Our customers want to know in real time the status of their flights and other relevant travel info. Currently we are the only Latin American OTA enabling customers to use WhatsApp Business to receive automatic notifications. We are focused on consistently enhancing the customer experience, and along with this, continue to invest in expanding the size and capabilities of our IT development team. Finally, fraud is both an issue for customers and for us. As more customers have increased confidence in our ability to minimize fraud, the more likely they will return to our site to purchase, driving increased sales and better profitability. We continue to invest in fraud prevention tools and processes. I will now turn the call over to Mike to discuss our financials in detail. 3 of 12

4 Thank you Damián, and thank you all for joining us today. Turning to Slide 7, let me begin by discussing our business by region. Overall, we continue to drive share gains in our largest markets, despite increased competition. Brazil, our largest market by transactions, posted an 18% increase in transactions, while Argentina was up 22%. We are also gaining share in Mexico and Colombia, even after we faced a more competitive environment. Transactions in Mexico were up 30% year on year, while Colombia was impacted by a local pilot strike at an international carrier. Moving on to the P&L on Slide 8. We posted robust revenues, up 30% year on year, reaching $144 million in the quarter. Our strategic initiatives to increase the share of higher-margin packages, hotels and other travel products are yielding good results, and this segment represented 54% of total revenues in the fourth quarter, compared with 47% a year ago. Overall, revenue margin was 11.4%, up 30 basis points from fourth quarter 2016, due to mix shift to packages and hotels. While the air segment remains a core product for us, during the quarter we benefited from the air fee reduction implemented the previous quarter in select markets and routes, to drive customer acquisition and market share gains and to further support cross-selling of higher-margin products. Fee levels were similar to third quarter. The prior commissions and GDS incentives remained stable. This strategy has allowed us to drive higher sales of packages to international destinations, and achieve a 17% increase in revenues per transaction in the packages, hotels and other travel products segment, to almost $76 per transaction up from $64 in the year-ago quarter. Finally as disclosed in our earnings release, we plan to adopt Accounting Standards Update in connection with revenue recognition starting with the first quarter of Under the new standard, we will now recognize revenue from transactions such as hotel bookings at the time of booking, rather than at check-out, which for us could fall in a separate quarter. For example, our peak travel booking period is Q4, due to the holidays and summer travel. Travel is typically booked in the fourth quarter, but a large portion of the trips take place in the first quarter. As a result, some revenue booked in the fourth quarter would have been recognized in the first quarter. Going forward, we will recognize such revenue in the quarter in which the travel is booked by our customers. The primary rationale behind this revenue recognition change is to report results in a manner consistent with how management analyzes and manages business performance. Management reviews the business by booking date and takes decisions based on that view. As a result of this change in accounting methodology, the P&L will reflect the same criteria. Additionally, management believes that this change will result in improved predictability of margins for investors analyzing the business, as well as better alignment between our GAAP and non-gaap reporting measures, such as gross bookings and transactions, which have always been reported on a booked basis, and revenue per transaction and revenue margin, which have historically represented a mix between a booked and a checked-out basis. We estimate that this will have a positive impact on full year 2018 revenue of approximately 2%. On a quarterly basis, the impact may be higher, with a negative impact in the first quarter offset by a positive impact in the fourth quarter. We estimate that the quarterly effects of adopting the new standard will impact revenue in a similar scale and pattern as We have shared the adjusted 2017 revenue data for comparative purposes in the release. We will not be restating 2017 results, and there will not be any impact to cash flow. Turning to Slide 9, we are implementing several strategic initiatives to drive market share growth. First, we maintained our selectively reduced customer air fees implemented during the third quarter of 2017 to drive crossselling of higher-margin packages and hotels as well as customer acquisition. Second, our wide range of financing 4 of 12

5 alternatives are a key driver of customer acquisition, and year-on-year performance benefited from enhanced customer financing options, which resulted in a higher cost of installments impacting cost of revenue. This however was more than offset by our continued investment in reducing fraud and improving efficiency in the fulfillment center. Importantly, cost of revenue as a percentage of revenues was down 328 basis points year on year, reaching 26.7% in the quarter. The combination of these factors allowed us to achieve a 36% year-on-year increase in gross profit during the quarter, with gross margin expanding 328 basis points to 73.3%. We also stepped up direct marketing spend, with selling and marketing up 43% year on year, as we continue to invest in enhancing our brand awareness. Moving on to our Adjusted EBITDA performance on Slide 10, fourth quarter Adjusted EBITDA increased 125% year over year. Fourth quarter 2017 G&A results included a non recurring $800,000 tax recovery gain, while in fourth quarter 2016 we recorded $7.7 million in extraordinary severance costs. Excluding the one-time items in both quarters, Adjusted EBITDA increased 29%, while Adjusted EBITDA margin was similar year on year. Financial expenses in the quarter were higher than the year-ago period, primarily due to higher FX losses from currency fluctuations in our inter-company payments, which we do not hedge, and higher credit card receivable factoring expenses in Brazil as a result of the increase in gross bookings and use of installments. The effective tax rate was lower in the quarter when compared to the prior year, which is primarily due to the recognition of deferred tax assets and the reversal of a tax contingency due to the expiration of a statute of limitations. We delivered positive cash flow in the fourth quarter of 2017 of approximately $15 million, up from $9 million a year ago. Full year 2017 cash flow was $295 million, or $42 million excluding the net IPO proceeds. This was our first full year of positive cash flow. Looking ahead, the online travel market in Latin America continues to present attractive growth opportunities, supported by expectations of the positive macro economic conditions along with the on-going migration from the offline to the online channel. During the first quarter of 2018, the LatAm market for air travel has continued to grow at a similar rate as that experienced in the second half of 2017, which was mid single digits. We are continuing to invest the upside from the non-air revenue mix shift and operating leverage in the business and marketing initiatives. We will continue to pursue mix shift to higher-margin hotels, packages and other travel products, while we also maintain a strong focus on driving loyalty, continued local adoption, and improving our customer experience. That ends our prepared remarks. We will be happy to take your questions. Operator, please open the lines for Q&A. 5 of 12

6 Yes. Thank you. We will now begin the question-and-answer session. To ask a question, you can press star, then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We ask that at this time you limit yourself to one question and to a follow-up. If you have additional questions you may re-enter the question queue, to allow time for others. Thank you, and at this time we will pause momentarily to assemble our roster. The first question comes from Kevin Kopelman with Cowen and Company. Kevin Kopelman: Great. Thanks a lot. Could you give us any more color on what you re seeing quarter to date as we re here in early March, particularly on a gross bookings basis? Within that, what do you see as a more normalized growth level as you were discussing it? Lastly on that point, can you talk about the impact of currency in Argentina and the recent change there? Thanks. Kevin, this is Damián. Thanks for your question. As you know, we do not provide guidance. As we mentioned in our initial remarks, the growth rate of 2017 had gradually returned to more normal levels, recovering from a base of 2016, which was a very bad year for our markets. We are seeing a slower growth in the market compared to 2017, as a result of exactly that, though we continue gaining market share, and it s hard to tell in Latin America exactly what s a normalized growth rate. I mean, you know that the exchange rate, as you mention, I m going to get into that in a minute, travel preferences and economics in general are more volatile. So, normalized growth rate, I understand the reason for your question where you re coming from, but if I know that I ll be making millions in a magical way personally. No one does, I think, know that. Getting back to the impact of the FX exchange, I would say Argentinians are used to some volatility in the exchange rate, as in our experience from past devaluations, the impact is in the short term, people stop making decisions for flights, and then they gradually return to a normal way. So that s exactly what happened with the recent evolution of the Argentine exchange rate, we saw the market slowing down for a couple of weeks, but then returning to normal. Kevin Kopelman: Okay, great. Thanks, Damián. If I can just ask a couple more, you talked about building out your brand investment or building and building it, continuing to build your brand in Can you give more color on your marketing strategies, both what you did in the fourth quarter and also how you re thinking about 2018? Sure. So as we mentioned in our prepared remarks, we are planning to remain aggressive on marketing initiatives, by reinvesting upside from revenue mix shift in our higher-margin non-air business, and also from operating leverage. We have seen a pick-up in offline brand investment by some competitors in the region, which makes it even more important for us to remain aggressive in our own brand-building efforts. We are continuing the same strategy of a mix of both offline branding and spend in the online performance channels. As we mentioned before, that mix is about one third off line, two-thirds on line, and that is something that we continue to pursue today. 6 of 12

7 As a result of the brand investment that we ve made, we continue to have more than half of our traffic coming direct to the site through non-paid channels, and that s an important measure for us to gauge the effectiveness and strength of the brand. Kevin Kopelman: Great. Thanks Mike. Thank you. Thank you. The next question comes from Brian Nowak with Morgan Stanley. Brian Nowak: Thanks for taking my questions. Just to go back to some of your comments about the softer demand and the increased competition, could you just talk us through a little bit, what gives you confidence or what are some of the main strategies that you see playing out in 2018 to ensure that transactions continue to grow in the mid to high teens as comps become more difficult? What should we be watching for? Thanks. As we talked extensively during the road show, I mean, there are several trends that make us confident on our median outcome growth perspective. One is obviously the growth of online in Latin America, which still has ample room to further develop, and an evidence of that is us continue growing market share. Then there s the continued fragmentation of the suppliers market, we see every time more airlines coming in, more option for the traveler, therefore content aggregators like us, where people can come either to do one-stop shopping or to just to check what s available for them, it s becoming even more valuable. Finally, our push to non-air products, in particular packages, is something that as you saw in 2017 we re extremely confident that will help us foster growth, not necessarily so much in transactions but on aggregate bookings. Remember that the more packages we sell, the less number of transactions that a package represents, since there are more items we sell in a package, and it s more than compensated by growth in our ASP. So, those are, I would say, the three main drivers that make us confident that we will continue growing in the median and long term, despite competition. Brian Nowak: Great, thanks. Thank you. The next question comes from Eric Sheridan with UBS. Eric Sheridan: Thanks. Maybe two if I can. First, on the consumer fee, there was a big debate among investors coming out of the last earnings report on whether lowering the consumer fee was sort of an offensive or a defensive move. Can you frame how you re thinking about lowering consumer fees over time, and maybe what you ve seen in terms of 7 of 12

8 elasticity of demand as consumer fees have been lowered? That s number one; and number two, going back to the competition question, can you just highlight ways in which you re seeing the competition take form in some of the key markets, just so we have a better understanding of the competitive forum. Thanks. Eric, this is Mike. I will take this, the question on customer fees. So as we shared in last quarter s call, we had done a lot of testing about the impact of reductions in fees and our ability to drive cross-sell of package transactions. We notably reduced fees in Mexico and Colombia, though we did it very strategically on a fixed number of routes and destinations, based on many different variables including the competitiveness of the fares and what we saw on conversion rates or customer elasticity. We reduced fees in general across the business by about 10%, and saw a big pick-up in our ability to drive package transactions and that is demonstrated in the difference in growth rates that we delivered this quarter. So we know that that strategy is working and it is something that we continued in the fourth quarter and have continued quarter to date as well. We have not continued to reduce fees from the first wave of reductions in the third quarter. There is a reduction year on year, there has not been from the prior quarter. We will continue to monitor and observe the impact on conversion rates and our ability to cross-sell. But we re seeing a good response there. The actions of our competitors vary by market. Most of our competitors are also charging fees. There are a small number that do not, and it does vary, their aggressiveness varies by market, and so we take that into consideration in setting our own fee levels. More broadly on your question on competition, we haven t seen any new entrants in the market, but certainly there has been, as you mentioned, an increase in some level of marketing investments, notably off line, so we monitor that quite closely, and its impact on our level of traffic growth and brand awareness, and clearly we benchmark our product and service offering versus the competitors and continue to invest, making sure that we can maintain our position. Eric Sheridan: Great. Thanks for the color. Thank you. Thank you. Once again, as a reminder, please press star then one if you would like to ask a question. The next question comes from Brad Erickson with KeyBanc Capital Markets. Brad Erickson: Hi guys. Thanks for taking the questions. Just wanted to follow on to Eric s question. I guess, as we level set on these fee reductions in Mexico and Colombia, can you remind us where else you ve implemented that kind of a strategy, and I guess, sort of how pervasive that is across the region and what other countries where that might make sense in the future given your learnings with it to date? 8 of 12

9 Sure. So, we ve been most aggressive in Mexico and Colombia, and that is both in response to the reaction we re seeing from our own customers and our ability to drive the cross-sale, and certainly in response to competitive landscape as well. We are willing to test and try fee reductions in any market though, where we see a net benefit of driving improved conversion or cross-sell into package transactions. So, we have tested fee reductions in other markets, when I mentioned before the 10% fee reduction that we ve made, that is basically across the portfolio of businesses, with it being a bit more aggressive in Colombia and Mexico. But, we have the ability to measure the immediate impact on conversion and are always testing to see where this can be an incremental benefit to the growth. Just to clarify, Our unit of analysis is not a country. The teams work on a route-by-route, even day-by-day basis to decide what s the best fee. So, it s extremely opportunistic. There s not overall policy across that. Brad Erickson: Got it, that s helpful. Then, just following up, can you remind us where you are on your amount of direct hotel inventory, and then of this growth you re seeing on the packages, what portion of that is coming from either direct supply versus your Expedia partnership? Thanks. Sure. So, we have seen an increase in our hotel counts, in the hotels that we directly contract in the region. We increased the total count, year on year, by about 24%, adding about 5,000 properties that we directly contract. We continue to maintain the same strategy of focusing our demand in a smaller number of suppliers, to make sure that we have strong relevance and negotiating power with those suppliers, and so that hasn t changed. But we have added additional inventory. Expedia s inventory that we use outside the region is still an important part of the business, it s a little less than 10% of our total gross bookings, and we continue to see out-bounds as a big portion of the total mix of business, particularly as the economies strengthen in the region. Brad Erickson: Got it. Thanks. Thank you. The next question comes from James Anderson with R. F. Lafferty. James Anderson: Hi guys. Congratulations on a strong quarter. Just a couple quick questions here. You guys mentioned you had pretty strong growth in both Mexico and Colombia as well as in your core markets of Argentina and Brazil, and I was wondering if you had sort of looked at expansion into any other Latin American countries, perhaps Chile or surrounding countries? Yes. This is Damián. Remember we operate in almost all countries south of Rio Grande. So geographic expansion is not the great avenue of growth. In Chile we ve been there for about 18 years, it s a very strong market for us, we are number one in market share in Chile, and so we are focused on our strategy of further penetration each of the 9 of 12

10 markets we are in. There is a few, I would say, Central American markets in which we are not present, and we ll be there in We are working on those. But those are not big markets. James Anderson: Okay. With respect to the proceeds from the IPO, I mean obviously you guys are cash flow positive at this point, and the cash enables you to be sort of opportunistic with regards to acquisitions or investment in development. Do you guys have any updates on any plans for that, or have you been looking at potential acquisitions? Yes. You are absolutely right that there s a great opportunity ahead of us in that field, and as what we said during last call: we are having conversations with several players in the region, but there are no relevant news at this stage to share with you. Obviously as soon as we have any progress in that, we will let you know. James Anderson: Okay. Great. Then just one last one. Obviously bookings growth and revenue growth is subject to a number of factors, the macro economic conditions in Latin America, the shift from off line to on line, and then your share growth of that on line transaction. Of the sort of the three, which do you think is most crucial to your continued strong growth? I mean, I guess how sensitive to the macro economic conditions are you relative to the other growth factors? Obviously all those factors plus others play a role, according to each moment. I mean, it is not that easy, that impact is fixed over time. Right now, the macro economic factor is playing less of a relevant role, given that our main countries and Latin America in general has rebounded from 2016 during the previous year. So, that s less of a factor now. That is why we say we re getting back to more normalized growth rates. So, on a level playing field on macro economic terms now, the factors affecting more are obviously competition and the elasticity we find in consumers willing to spend more, a larger portion of their income, in travel. That is what the factors are now. It is how big the market or how fast can the market grow in the normalized macro situation, and how fast can we continue growing market share. James Anderson: Okay. Great. Thanks guys. Thank you for taking my questions. Thank you. Once again, please press star, then one if you would like to ask a question. Okay, as there are no more questions at the present time, I would like to return the call to Damián Scokin for any closing comments. Yes, just to restate what I mentioned in the past, this is a talent-driven organization and the results we achieve, not only in the fourth quarter and in 2017, which we are all proud of, are the result of the efforts of all our team. So I want to thank all of the Despegar teams for a wonderful job, and their passion and dedication to our Company. Thanks to all of you joining, and looking forward to speaking to you again next quarter. 10 of 12

11 Thank you. The conference call has concluded. Thank you for attending today s presentation. You may now disconnect. 11 of 12