Despegar.com Corp (DESP) 2022 Q3 法說會逐字稿

Good morning, and welcome to the Despegar Third Quarter 2022 Earnings Call. A slide presentation is accompanying today's webcast and is available in the Investors section of the company's website, www.investor.despegar.com. (Operator Instructions) Now I'd like to turn the call over to Mr. Luca Pfeifer, Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us today. 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 definitions 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 prepared remarks, please turn to Slide 2 and 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.

These include, but are not limited to, expectations and assumptions related to the impact of the COVID-19 pandemic and the integration and performance of the businesses we acquired, including Best Day, Stays, Viajanet and Koin. For a description of these risks, please refer to our filings with the U.S. Securities and Exchange Commission and our press release. Speaking on today's call is our CEO, Damian Scokin, who will provide an overview of Despegar's third quarter performance as well as an update on our strategic initiatives. Alberto Lopez Gaffney, our CFO, will then discuss the quarter's financial results in more detail.

After that, we'll open the call for your questions. Damian will begin his remarks on Slide 3. Damian, please go ahead.

Thanks, Luca, and good day, everyone. Thank you for joining our earnings call and for your interest in the Despegar. A focus on balancing growth and profitability across the geographic markets allowed us to deliver our highest EBITDA since the onset of COVID-19 on strong revenues and higher operating leverage. Gross bookings increased nearly 70% to just see 7% below what we booked in the third quarter of 2019 as demand for travel continues to recover.

The strength of our bookings, coupled with a take rate 60 basis points above the upper range of our long-term guidance drove revenues 75% above the third quarter of 2021. Operating expenses increased 39% year-on-year, well below our 75% top-line growth. OpEx stood at 8.5% of GBs compared to 10.3% in the third quarter of last year. At the same time, we start to take advantage of higher demand levels to expand our share in certain markets, including Brazil, where we continue to make market inroads.

The net result, the Despegar reduced cost structure, combined with strong revenue growth, enabled us to deliver our fourth consecutive quarter of positive EBITDA. At Koin, we stepped up our conservative approach to create approvals and have slowed down loan origination, predominantly with respect to third-party transactions. At the same time, we have been effectively pricing credit risk. A word about innovation on Slide 4. We always put the customer at the center of all our efforts as we continue to innovate and accompany them on each step of their journey from researching vestroptions to making their final purchase. With the aim of continuously improving the customer experience, we're always implementing various initiatives to drive innovation across several of our brands and product categories.

To mention a few, we are customizing the landing page and tailoring my sections of our site in order to reflect each of our customers' purchase history and travel needs. This quarter, we also launched a pilot tables channel and our best day plant, and it's already showing very promising results. In an effort to provide customers with the most competitive prices we are currently working on the launch of killer packs in selected markets, which allows customers to access banker products, operating travel retail such as allies and hotel names that will be revealed 1 month prior to the barter. This allows for aggressive sourcing options.

Turning to our loyalty program. We are excited to report that membership growth accelerated 63% quarter-on-quarter, reaching a total of 9.3 million members. This allows us to establish an even closer connection to our customer base and is another way we are able to tailor travel solutions to their specific preferences. Today, already 5% of all transactions across our platforms include point redemptions.

Let's look at gross bookings by region on the next slide. In Brazil, our largest market, gross bookings rose 9% sequentially as we capitalize on a recovery in international traffic to build on our market position. Industry International Passenger Traffic in Brazil reached 68% of the third quarter of 2011, continuing to recover sequentially. Year-over-year, gross bookings more than doubled driven by transactions and average selling price, ASPs both of which increased in the high qualities.

In Mexico, gross bookings posted a 13% sequential decline due to seasonal effect has recovered 9% from September to October. ASPs increased 25% year-on-year as we continue to increase sales of higher-margin packages, hotels and other travel products, while the relative mix of lower-margin domestic air sales continue to decline. This drove a 24% increase in bookings year-on-year. Compared to third quarter 2018, ASPs increased 28% as we continue to focus on driving higher profitability. Across our other markets, gross bookings were flat quarter-on-quarter. Although international traffic continues to gradually recover at a slower pace than other markets, ASPs increased 45% year-on-year, exceeding pre-pandemic levels by 17%.

To summarize this slide, we continue to effectively respond to and tactically exploit the recovery in international traffic in Brazil in order to capture a greater share of this market. And as Mexico, our second-largest market entered its high travel season, our mix of higher-margin travel products continues to improve. The quarter substantially higher ASPs reflect this as well as our focus on prioritizing profitability over growth in Mexico during the quarter.

Our discipline combined with a much lower cost structure are driving the earning power and building on the profitable growth trajectory we have established. With this, I will turn the call over to Alberto.

Thanks, Damian. Great to be with you all once again. As we can see in the chart in the upper left of Slide 6, the 75% increase in revenue put up 10% above the level we reported in third quarter 2019. The year-on-year increase was even more pronounced on an FX-neutral basis at 94%, nearly doubling during the period. In addition to strong demand levels that drove gross bookings, we benefited from a higher take rate of just over 13%. Benefiting from normal travel conditions driving fewer cancellations and higher rates in Mexico and Argentina, where we focus more on profitability over growth.

As you can also see in this chart, our take rate improved 191 basis points compared to third quarter 2019 when it was at 11.2%. Cost of revenue rose 33%, but this was well below the 75% increase in our revenue. And as a percentage of gross bookings, it decreased 124 basis points to 4.5%, thanks to improved operating leverage, together with lower costs related to customer care, which had ballooned during the pandemic. As a result, gross profit more than doubled year-on-year, with gross margins expanding almost 170 basis points to 8.6% and over 100 basis points when compared to third quarter 2019.

Let's move to operating costs on Slide 7. We are very pleased with how our fixed cost structure has evolved, specifically general and administrative and technology and product development expenses. In absolute terms, fixed costs only grew 15% year-on-year and 13% since 2019 after successfully integrating several companies. This favorable trend becomes more evident when analyzing our fixed cost as a percentage of gross bookings as shown in the second half of the slide.

Our technology and product development expenses declined 90 basis points, while our G&A expenses decreased 113 basis points. Sequentially, we see a slight increase in tech and product development expenses as we brought on the IT team from Viajanet. You can also appreciate how our operating leverage has been kicking in when comparing our fixed cost as a percentage of revenues.

Moving to the third graph, you see an absolute increase in selling and marketing expenses, which are more tactical in nature. The increase was mainly driven by our decision to favor market share gains in other geographies, particularly Brazil, as we sought to take advantage of rising travel demand in this regard. On Slide 8, we present our EBITDA evolution. The operating leverage we have built into the business drove a 28% increase in adjusted EBITDA when compared to third quarter 2019, which is also its highest level since then. Year-on-year, adjusted EBITDA improved by $22.4 million.

In summary, our earnings power continues to strengthen. In addition, thanks to the gradual recovery in travel demand, we generated $10.3 million in operating cash flow and closed the quarter with a strong cash position of $263 million. This allows us to maintain our financial flexibility to make strategic acquisitions such as our recent investments in Viajanet states, which not only expand the Despegar travel ecosystem, but also reinforce the core competencies behind our market-leading value proposition and best-in-class technology platform, both of which serve as a strong and sustainable competitive advantages.

This quarter, we would also like to provide an update on Koin as well as share some additional information about this business on Slide 9. Koin have maintained a strict focus on asset quality remains vigilant given the complex and volatile economic environment in Brazil. On this slide, we share a number of key operating metrics that reflect our prudent approach. As you can see in the bar chart on the left, we took an even more conservative approach to origination with stricter credit approvals, resulting in a 25% sequential decline in total purchase volume.

In the chart on the right, you can see that we are sustaining high levels of take rate while expected losses have been declining, another indicator of our cautious approach to origination. Also, it's important to remember that most of Koin's portfolio is comprised of short duration loans of approximately 5 months on average, which allows us to make rapid adjustments to effectively price risk.

In addition, most of the consumer verticals that Koin serves a relatively low-risk light travel. For the quarter, Koin produced an EBITDA loss of $5.2 million. For those of you on this call who are new to Despegar's growth strategy. Let me remind you that we acquired Koin as it expands our addressable market and increases conversion rates, take rates as well as average tickets among other distinct advantages. That concludes my review of the quarter back to Damian for some closing remarks.

Thanks, Alberto. We'd like to wrap up our comments with a few key takeaways. First, there continue to be a gradual recovery in travel demand in last time, generating sustained growth in gross bookings, which finished the quarter just 7% below the third quarter of 2019. The strong growth in bookings and a higher take rate drove revenue 75% higher and finished the quarter 10% above third quarter 2019.

Our top-line growth, combined with greater cost efficiencies, continue increasing arenas power and drove EBITDA substantially higher versus last year, making it our fourth consecutive positive quarter. As Alberto discussed, we also finished the quarter with a strong cash position, generating $10.3 million in operating cash flow, we're executing our strategic investments in the Viajanet state with the Viajanet now fully integrated into our technology platform, we expect to further benefit from the cost and revenue synergies that we are achieving with this business. As an example, we're already seeing significant improvements in conversion rates and average take rates across all the Viajanet transactions.

We're also very encouraged with the success we are having in cross-selling higher-margin packages through Viajanet which have been predominantly focused on selling our transactions. With respect to stay, it is now expanding beyond Brazil, its home market as we seek to increase our presence in the vacation rental segment. We hope the additional information about Koin is helpful to your analysis. More importantly, you can expect us to remain disciplined with the Kate approvals and continued pricing risk effectively to improve the margin of this business over time.

Looking ahead, we expect travel demand to gradually approach pre-pandemic levels based on current market trends. Therefore, we expect to maintain our positive momentum in EBITDA in the fourth quarter of this year. However, we cannot predict how inflation will trend, not its impact on our businesses in the terms of travel demand and cost. Notwithstanding near-term uncertainties, we remain optimistic about the long-term potential of our business.

This concludes our third quarter review. Operator, please open the call for questions.

(Operator Instructions) First question comes from Kevin Kopelman from Cowen.

Great. Just a couple of questions. The first one is you gave a lot of helpful color on kind of how things are trending into the fourth quarter. Could you summarize those and maybe give us a better idea of what to expect in terms of bookings recovery, revenue recovery and a little more clarity there on the fourth quarter and where it stands today?

With regard to the fourth quarter, okay, we're actually receiving travel demand to be very stable and similar to third quarter levels. In addition, we also see that profitability will follow the same course, okay? And so what we're seeing is, at the end of the day, is a business that's pretty stable. We have gained in past quarters from advanced purchases in the case of Argentina for the private program that was a program incentivizes local customers to advance purchases, particularly in on air transactions. So that's how we see the fourth quarter shaping up.

Sequential quarter-over-quarter, Kevin.

Okay. Got it. Got it. So kind of volume and booking and revenue dollars similar Q-over-Q?

You’re right.

Okay. Perfect. Perfect. And then one other one. Could you talk about you had a share repurchase program earlier in the year. Can you give us an update on how you're thinking about share repurchases and whether you would consider instituting a new program?

So as you pointed out, we finalized the program in mid-August, ended up purchasing the equivalent of $10 million worth of shares, okay? With regard to additional capital allocation, okay, we are certainly very pleased with our liquidity position that actually provides us with financial flexibility to actually reinvest in the business or to pursue inorganic growth. Today, we want to preserve that flexibility as we are evaluating different opportunities that may require the payment or funding to grow such operations. So at this stage, we continue advancing our agenda, and we are not planning on restarting our share buyback program despite the fact that we do appreciate that our shares are grossly undervalued.

Okay. Understood. And then just a follow-up. Could you give a little -- maybe a little bit more color on how you see the macro environment right now in your key markets, particularly Brazil and Mexico? Just what's the latest that you're seeing there?

Hi Kevin, this is Damian. Thanks for your question. As we've been pointing out over the last few months, we see the macro situation in Latin America slightly different as the one in the U.S. or Europe, although inflation has picked up in the early stages of the year. If you see Brazil, there's been deflation in the last couple of months and Mexico remains more stable. So our view is more optimistic on the macro in the region in general when compared to what we see for the U.S. and Europe. Keep in mind that we always say that Latin America has been used to dealing with inflationary situations very effectively. So we remain more optimistic on these markets than what we are for the U.S. and Europe.

Okay. Got it. Thanks, Damian.

(Operator Instructions). It appears to be of no further questions at this time. So I'm going to hand it back to Damian for any final remarks.

Thanks to all of you for your interest in Despegar and your participation on the call. We look forward to seeing you on our next earnings release. Thank you very much, and stay safe. Bye.

This concludes today's call. Thank you everyone for joining, and have a new rest of your day.