Despegar.com Corp (DESP) 2017 Q4 法說會逐字稿

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, www.investor.Despegar.com. (Operator Instructions) This conference call is being recorded. And, as a remainder, all participants will be in listen-only mode.

Now I would like to turn the call over to Ms. Ines Lanusse, Investor Relations. Please go ahead.

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 US 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, Ines, and let me add my welcome to all of you on the call today. 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 2016. Nevertheless, we reported solid results in the quarter, and continue to gain market share despite a more competitive environment.

2017 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, reaching USD1 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 of 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, while 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 purchase activity. Revenues, in turn, (technical difficulty) 30% year-on-year, with growth mainly driven by a robust performance in packages, hotels, and other travel products transactions, up 28% in the quarter. We saw increasing success in demonstrating to our customers the savings benefits of bundling their air ticker purchases with other products, mainly 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 2017. This was up 700 basis points from the fourth quarter of 2016.

Throughout the year, we were challenged to balance the investments needed to enhance our competitiveness; while, at the same time, continued 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 continue to grow at a faster pace than transactions, reflecting the success of our strategy to drive mix shift to higher average sale price products [packed] as packages. Mix shift towards higher [SAP] international destinations also contributed to this good performance, with ASP increasing 6% year on year.

The selective reductions in our customer fees implemented in the third quarter of 2017, along with our 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. As we move 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 macroeconomic environment in Brazil and Argentina during 2016.

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. And mobile is the 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 2017. 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 2017.

Generally, we will not discuss mobile's gross bookings, but we achieved a record milestones of $1 billion in mobile gross bookings by year-end 2017, an accomplishment we are all very proud of.

Moving to slide six. We are in a customer service business, and one that is also very competitive. Thus, it is incumbent upon us to consistently embed in our business, whether it is new products or services, to improve our customers' purchase experience and drive operational enhancement. 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.

Through 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 rental inventory and improve the competitiveness of our hotel product. During 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 flight 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 the 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 side 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.

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 continued 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 as 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 to 47% a year ago. Overall revenue margin was 11.4%, up 30 basis points from fourth-quarter 2016 due to mix shift at packages and hotels.

While the air segment remains a core product for us, during the quarter we benefited from the air fee reduction implemented in 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 remain stable. This strategy has allowed us to drive higher sales of packages to international destinations, and see the 17% increase in revenues per transaction in a packages, hotels, and other travel products segment to almost $76 per transaction from $64 in the year-ago quarter.

Finally, as disclosed in our earnings release, we plan to adopt Accounting Standards Update 2014-09 in connection with revenue recognition, starting with the first quarter of 2018. Under the new standard, we will now recognize revenue from transactions, such as hotel bookings, at the time of booking rather than at checkout, which for us could fall in a separate quarter.

For example, our key 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 are 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 2017. 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 a third quarter of 2017 to drive cross-selling of higher-margin packages and hotels, as well as customer acquisition.

Second, our wide range of financing 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, this 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 320 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 onto our adjusted EBITDA performance on slide 10, fourth-quarter adjusted EBITDA increased 125% year-over-year. Fourth-quarter 2017 G&A results included a nonrecurring $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 intercompany 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 a reversal of a tax contingency, due to the expiration of the 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 is 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 macroeconomic condition along with the ongoing migration from the off-line 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 on 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 mobile 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.

(Operator Instructions) Kevin Kopelman, Cowen and Company.

Thanks a lot. Could you give us any more color on what you are seeing quarter-to-date, as we are here in early March, particularly on a gross bookings basis? And within that, what do you see as a more normalized growth level as you were discussing it? And 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 market. We are seeing slower than 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 are normalized growth rates. You know that the exchange rates, as you mentioned -- I'm going to get into that in a minute. Travel preferences and economies in general are more volatile. So a normalized growth rate; I understand the reason for your question and where it comes from. But if I know that, I will make millions in a [material] way personally. No one does, I think, know that.

Getting back to the impact of the FX exchange, I would say Argentineans are used to some volatility in the exchange rate. As in our experience from past devaluation, the impact is in the short term. People stop making decisions for flights, and then they gradually return to a normal view. 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.

Okay, great. Thanks, Damián. And then if I can just ask a couple more. You talked about building out your brand investment and continuing to build your brand in 2018. 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. 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 pickup in off-line 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 with the same strategy of a mix of both off-line branding and spend in the online performance channels. As we mentioned before, that mix is about one third off-line, two-thirds online. And that's something that we continue to pursue today. As a result of the brand investment that we have made, we continue to have more than half of our traffic coming direct to the site through non-pay channels. And that's an important measure for us to gauge the effectiveness and strength of the brand.

Great. Thanks, Mike.

Brian Nowak, Morgan Stanley.

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.

Yes, as we talked extensively during the roadshow, there are several trends that make us confident on our medium- and long-term 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 is the continued fragmentation of the suppliers market. We see every time, more airlines coming in, more options for the traveler. Therefore, content aggregators like us -- where people can come either to the one-stop shopping or to just check what's available for them -- it's becoming even more valuable.

And, finally, our push to non-air products in particular, or packages. It's something that as you saw during 2017, we are extremely confident that it 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 in selling a package, and it's more than compensated by growth in our SAP. So those are, I would say, the three main drivers that make us confident that we will continue growing in the medium- and long-term, despite competition.

Okay. Great, thanks.

Eric Sheridan, UBS.

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 an offenses or a defensive move. Can you frame how you are thinking about lowering consumer fees over time, and maybe what you have seen in terms of elasticity of demand as consumer fees have been lowered? That's number one.

And number two, going back to the competition question, can you highlight ways in which you are seeing the competition take form in some of the key markets, just so we have a better understanding of the competitive form? Thanks.

I'll take the question on customer fees. So as we shared on 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 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 pickup in our ability to drive package transactions. And that's demonstrated in the difference in growth rates that we delivered this quarter. So we know that that strategy is working; and it's something that we continued in the fourth quarter, and have continued quarter-to-date as well.

We haven't continued to reduce fees from the first wave of reductions in the third quarter. There is a reduction year-on-year there hasn't been from the prior quarter. And we will continue to monitor and observe the impact on conversion rates and our ability to cross-sell. But we are 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 products and service offering, versus the competitors, and continue to invest in making sure that we can maintain our position.

Great. Thanks for the color.

(Operator Instructions) Brad Erickson, KeyBanc Capital Markets.

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 how pervasive that is across the region, and what other countries where that might make sense in the future, given your learnings with it today?

Sure. So we have been most aggressive in Mexico and Colombia. And that is both in response to the reaction we are seeing from our own customers and our ability to drive the cross-sell, 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 enough benefit of driving improved conversion or cross-sell into the 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 impact, the immediate impact on conversion, and are always testing to see where this can be an incremental benefit to the growth.

And just to clarify. This is probably not the type of answer you would like to hear, but our unit of analysis is not a country. It is work on a route-by-route, even day-by-day basis, to decide what is the best fee. So it's extremely opportunistic. There's not an overt policy across that.

Got it. That's helpful. And then just following up: can you remind us where you are on your amount of direct hotel inventory? And then, of this growth you are seeing on the packages, what portion of that is coming from either direct supply versus your Expedia partnership? Thanks.

Sure. So we had 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 -- it's inventory that we use outside of the region. It's still an important part of the business. It's a little less than 10% of our total gross bookings. And we continue to see outbound as a big portion of the total mix of business, particularly as the economies strengthen in the region.

Got it. Thanks.

James Anderson, R.F. Lafferty.

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 the Rio Grande. So geographic expansion, it's very -- not a great avenue of growth. And in Chile, we have been for like 18 years. It's a very strong market for us. We are number-one in market share in Chile. So we are focused on our strategies further penetration each of the markets we are in. There's a few, I would say, Central American markets in which we are not present, and we will be there in -- along 2018. We're working on those. But those are not big markets whatsoever.

Okay. And with respect to the proceeds from the IPO, I mean obviously you guys are cash flow positive at this point. And cash enables you to be sort of opportunistic with regards to acquisitions or investment and 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 is a great opportunity ahead of us in that field. And unfortunately what I have to say is 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. And obviously as soon as there is any progress in that, we will let you know.

Okay, great. And then just one last one. Obviously bookings growth and revenue growth is subject to a number of factors: the macroeconomic conditions in Latin America, the shift from off-line to online, and then your share growth of that online transaction. Of the sort of the three, which do you think is most crucial to your continued strong growth? I guess how sensitive to the macroeconomic conditions are you, relative to the other growth factors?

So, obviously, all those factors (inaudible) plus others; they are all according to each moment. It's not that easy that their impact peaks over time. Right now the macroeconomic 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's why we say we are getting back to more normalized growth rates.

So on a level playing field or on macroeconomic terms now, the factors affecting more are obviously competition and the elasticity. We are finding consumers willing to spend more, a larger portion of their income, in travel. That's what are the factors now. It's 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?

Okay, great. Thanks, guys. Thank you for taking my questions.

(Operator Instructions) 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 achieved -- not only in the fourth quarter and in 2017, which we're all proud of -- are the result of the efforts of all our team. So I want to thank all of the Despegar team for a wonderful job and their passion and dedication to our company.

Thanks to all of you for joining, and looking forward to speaking to you again next quarter.

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