Despegar.com Q3 2021 Earnings Call Transcript

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November 16, 2021

There are 6 speakers on the call.

Operator

Good morning and welcome to the Despegar Third Quarter 2021 Earnings Conference Call. A slide presentation is accompanying today's web and is available in the Investors section of the company's website, investor. Despaqard.com. There will be an opportunity for you to ask questions at the end of today's presentation. This conference call is being recorded.

Operator

As a reminder, all participants will be in listen only mode. Now I would like to turn the call over to Ms. Natalia Nierenberg, Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and thanks for joining us today for a discussion of our Q3 2019 Q1 results. To ensure that they understand them. Non GAAP financial measures and operating metrics should not be considered in isolation, effective 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 This includes, but are not limited to, expectations and assumptions related to the impact of the COVID-nineteen pandemic and This is clear to our filings with the Securities and Exchange Commission and our press release. Speaking on today's call is our CEO, Damian after the quarter's financial results. After that, we will open the call to your questions.

Speaker 1

Damian, please go ahead.

Speaker 2

Thank you, Natalia, and good morning, everyone. Thank you for joining us and for your interest in the Sky. Our 3rd quarter results demonstrates that the strategic initiatives undertaken since the start of the pandemic and the successful execution I'd like to touch on some highlights. With a strong recovery across most of our markets, 120% sequentially coming from very low level. As a result, we reported sequential increases First of all, capturing the pickup in Brazil, Argentina and Chile, countries that were impacted in the prior quarter with the 2nd wave of the virus.

Speaker 2

2nd, another strong quarter in Colombia, where we observed significant pent up demand. Mexico was not open due to the restrictions that impacted some futuristic destinations. On a positive tone, Our Mexican operations began to recover in September. This has continued into October. Our geographic diversification has allowed us We have been able to report stronger take rates than pre pandemic, reaching 12.7% as reported Our take rate benefited from the investments we have made in technology and analytics, which allowed us to price more accurately, channel, which has a higher take rate, were also key contributors.

Speaker 2

At the same time, on a quarter on quarter basis, Revenue growth was more than double the increase in cost of revenues. Lastly, operating expenses 36% up sequentially and in line with the increase in gross bookings. Our business leverages Importantly, for the March of September, we achieved positive adjusted EBITDA, excluding extraordinary charges. This was an important milestone for us. We remain well capitalized with a healthy cash position of 276 Turning to Slide 4 for a discussion on a few of our key markets.

Speaker 2

As various geographies have reopened post pandemic, consumers have shifted were up 126% sequentially and ASPs up 33% in the same period. By mid September, Several countries listed restrictions allowing fully vaccinated Brazilians to travel overseas. Furthermore, as of November 8, fully vaccinated Brazilians are now allowed to travel to the U. S. Showing proof of full vaccination.

Speaker 2

In Mexico, although borders remained open for flights, activities in main cities were particularly restricted On a positive note, gross bookings have been increasing month over month since August and international travel channel was stable on a sequential basis. Regarding the rest of LatAm, North Worthey Colombia And the significant growth trend continued in October. As we entered the 4th quarter, October continued with this positive trend across the region. Just to summarize, our geographic diversification has been key in providing a more consistent overall performance for the company. Turning to Slide 5.

Speaker 2

We have 2 really strong initiatives that we continue to deliver on and that I will discuss today. 1st, channel. We launched a co branded credit card in Mexico in partnership with Index and Mastercard. Also capitalizing on the increased travel demand, We launched our 1st offline marketing campaign since 2020. It's time to travel again and can be seen across all media in Latin America.

Speaker 2

In Brazil, we have been offering more financing options to customers. With COIN, we have further deepened penetration in the Colar, Additionally, 5.5 percent of the Colal transactions in October were paid through piece, which results in much lower cost of revenue channel given that these transactions are processed internally. We also completed implementation of risk based pricing in the travel vertical, which allows us to match the interest rate chart to the risk profile of different customers. Chat. On Korn's B2B business, we continue expanding the number of merchants in the e commerce sector, which we now provide alternative means for customers We also added 4 new markets in payments and fraud, bringing the total number of markets to 10 year to date.

Speaker 2

Possibly, by now pay later and fraud prevention, which have a total addressable market of between $15,000,000,000 $20,000,000,000 in Latin America. I will now turn the call over to Alberto to discuss this quarter's financial results.

Speaker 3

Thank you, Damian, and thank you all for joining us today. Turning to Page 6. As reported revenues increased 32% sequentially to 37% below 3rd quarter 2019 pre pandemic levels compared with 39% below 2nd quarter 2019 levels in the prior quarter. Excluding extraordinary cancellations in connection with the COVID-nineteen pandemic, Revenues would have been 32% below Q3 'nineteen levels. Note that this quarter, We also saw lower cancellations.

Speaker 3

The ratio of cancellations to gross bookings decreased 33 basis points quarter on quarter. Now please turn to Slide 7. Moving on to profitability. We achieved The best quarterly adjusted EBITDA since the start of the COVID-nineteen pandemic in Q2 2020. Note that one time charges were nearly $7,000,000 in the quarter, mainly in connection with extraordinary cancellations chat.

Speaker 3

We are confident that Despegar will be coming out of the pandemic as a more profitable company, Now please turn to Slide 8. We closed the quarter with a solid cash position of 2 $76,000,000 As travel conditions improved, use of cash during the quarter increased to nearly 40,000,000 Recall that in the Q2, we had granted a higher number of vouchers to customers whose other plans were impacted by a spike in COVID cases, channel. While this resulted in a lower use of cash of close to $10,000,000 in Q2 'twenty one, With better travel conditions in this past quarter, we saw a pickup in demand with customers renewing travel vouchers. Channel. The redemption of these vouchers added $15,000,000 to the cash burn that we have been posted recently of $25,000,000 In turn, our net payable position decreased nearly $20,000,000 in the quarter.

Speaker 3

Now please turn to Slide 9 for the key takeaways of the quarter. 1st, We delivered a strong sequential recovery, driven by better performance across our key markets, except for Mexico and this quarter. Brazil led the recovery with gross bookings up 126% sequentially, but still 60% below 'nineteen levels. Colombia also showed a strong pent up with gross bookings exceeding 3rd quarter 2019 guidance by 32%. 2nd, EBITDA, excluding cancellations, is near breakeven, channel.

Speaker 3

This positive trend in profitability channel in Argentina, Brazil and Mexico combined. As demand has picked up, we also launched our first offline marketing campaign and look forward to sharing the results in our next ESG report. Now please turn to Slide 10 for final remarks. Despite ongoing volatility and some macro marketness, our long term vision is, if anything, a sharper focus. Initiatives required to realize it are fully underway even as we work through near term market challenges and consumer behavior continues to adjust.

Speaker 3

Looking at the 4th quarter, the strong recovery observed in gross bookings in September continued into October, reaching 72% of 2019 booking levels. In addition, we expect November December channel and Black Friday in Brazil. December also marks the start of the summer season in LatAm, while carefully balancing the price financing perception. With respect to Verde, We are on track with integration of the in Destination Activity segment and expect to fully finalize the integration of this acquisition as planned In addition to adding new logos in the B2B business segment in Brazil, we're taking the first steps to launch coin in Mexico Finally, we are in conversation with several suppliers across the region We believe that while forecasting future performance still presents some challenges due to the ups and downs of the pandemic, We expect that the developments in vaccination front will generate the confidence to go back to longer travel patterns. The Q3 and year to date results reinforce our confidence in our strategy and represent focus and discipline in executing our long term strategic plan.

Speaker 3

This concludes our prepared remarks. We are ready to answer your questions. Operator, please open the line for questions. Thank you. We will

Operator

now begin the question and answer session. For pressing the And today's first question comes from Ed Yruma with KeyBanc. Please go ahead. Chat.

Speaker 4

Hey, good morning. Thanks for taking the question and nice to see the sequential improvement. I guess a couple of things from me. First, I I think you guys have done a really good job of rightsizing the business during the pandemic and making yourselves more efficient. Is there a way that we should think as bookings rebuild from an incremental margin perspective and how the shape may differ than what we've seen previously?

Speaker 4

Channel. And second, kind of as expected, you're going to draw down on the cash a bit, I guess, as people redeem vouchers. How should we think about the cash usage progression over the next couple of quarters and when will that trough? Thank you.

Speaker 3

Ed, Alberto, good morning. Thanks for your question. On cash, chat. I think we let me allow me to reiterate what we discussed in prior calls. I actually recall your question, chat.

Speaker 3

Okay. We are looking at the similar levels to what we have discussed, let's say, like a minimum cash balance for the year of around 250, Okay. In particular driven for the same reasons that you highlighted, okay. Chat. With regards to margins, okay, clearly, we are in the trajectory that we actually reach in breakeven point, okay?

Speaker 3

We already in the month of October that we are closing those figures, okay, we're seeing already blue lines when it comes at an EBITDA level that is particularly encouraging. And when you start looking at margins, let's say, top to bottom, okay, We are seeing take rate at similar levels to the ones we have been discussing, okay? Let's recall chat. We have mentioned in prior calls about having like a long term trajectory on take it at around 12%, okay, 12% plus Structural cost, what we have said is that the structural cost should actually benefit from, let's say, chat. Around 60% operating leverage, meaning that if orders were to grow around 100, okay, structural costs should be growing The company going forward that it should be in excess of what we were discussing pre pandemic in the long run.

Speaker 4

Got it. And maybe one other follow-up. You indicated you're looking to kind of rebuild inventory for packages given some of the demand signals you're seeing. I guess how quickly can that happen and do you expect that you'll be able to have enough kind of capacity for the peak travel seasons? Thank you.

Speaker 4

Channel?

Speaker 3

We currently see I think that answer has maybe 2 different ideas. Channel? Number 1 is the company continues to be, let's say, on the sidelines when it comes to, Let's say securing inventory as we have done pre pandemic, okay? Remember that we were actually at around, let's say, 5% Between 5% to 10%, no more than that of all the gross bookings we're selling were actually Secured, occupied in advance on capacity at hotels and or airlines, okay? Since the pandemic struck, We were completely on the sidelines of that and we are not thinking about starting to push into that arena as of, let's say, chat the next few quarters.

Speaker 3

And we do not see a reason to do it given, number 1, the ups and downs of the business channel? And number 2, we see capacity, so there's no need to do it, okay? Of course, we see that as a Profitable business and that will be we'll put our foot on the gas pedal We are fully recovered because we see there's opportunity to gain extra margin. But for the time being, we will not do it.

Speaker 2

In addition, Ed, and in general inventory, what we are seeing is that airlines are Increasing their network significantly in Latin America for the upcoming 2 to 3 months. So everything that's Available from the airlines and the hotels is going to be in the Spadar, and we are seeing increased levels

Speaker 4

Very good. Thanks so much.

Operator

Our next question comes from Kevin Kopelman with Cowen and Company. Please go ahead.

Speaker 5

Good morning. This is Emily on for Kevin. Thanks for taking my question. You mentioned a new marketing campaign Launching in Q4 focused on affordability. And I was just wondering if you could help us understand how that will affect Revenue take rate installments and sales and marketing expenses in the quarter.

Speaker 2

This is Damian. The new campaign was extremely effective. It's been extremely effective. The race is running. Channel.

Speaker 2

We have enhanced significantly our revenue management capabilities. So we are being much more effective than in the past in Increasing demand without having to give up significantly on the take rate. So the numbers that Alberto referred to in the previous question should be sustained over the next few months.

Speaker 5

Very clear. Thank you.

Operator

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Speaker 2

Thank you very much. Just wanted to thank all of you for your participation and interest

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Despegar.com Q3 2021
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