Mondee Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Manti Second Quarter 20 24 Earnings Conference Call. Please note this event is being recorded.

Operator

I would now like to turn the conference call over to Jeff Houston, Senior Vice President. Jeff, please go ahead.

Speaker 1

Thank you, Carla, and good morning to everyone. Welcome to Mondi's Q2 2024 conference call. With me today is our Founder, Chairman and CEO, Prasad Gundamundala and Chief Financial Officer, Jesus Portillo Executive Vice Chairman, Aristis Venticulis and Chief Operating Officer, Jim Dullum, who will present our results and be available for questions and answers. Before we begin, I'd like to remind everyone that this call may contain forward looking statements, including statements about revenue, growth of our business, our management and governance plans and other non historical statements as further described in our press release. These forward looking statements are subject to certain risks, uncertainties and assumptions, including those related to Mondi's growth, the evolution of our industry, our product development and success, our management performance and general economic and business conditions.

Speaker 1

We undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to have a material difference from these forward looking statements are discussed in our reports filed with the Securities and Exchange Commission and in our earnings press release that was issued this morning. Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward looking statements. During this call, we also refer to non GAAP financial measures.

Speaker 1

Reconciliations of the most comparable GAAP measures are also available in the press release, which is available at investors. Mandy.com. With that, it is my pleasure to turn the call over to Prasad.

Speaker 2

Thank you, Jeff. Good morning, good afternoon and good evening, everyone, and welcome to Mondi's Q2 earnings call to discuss our results and significant developments. We are very pleased to report a strong second quarter with growth in net revenue, take rate and adjusted EBITDA, the later by 38% year over year. We also announced the much anticipated refinancing of our term loan and preferred equity at favorable terms that will position the company for long term success. Looking more closely, we are encouraged by our improved take rate, which increased 20 bps to 8.6%, reflecting the positive impacts of our product mix expanding into non air.

Speaker 2

During Q2 2024, our non air net revenue mix increased to 47% from 42% in Q2 2023. Mondis growth in transactions, net revenue and adjusted EBITDA, along with our platform driven expansion in global markets, positions us well for continued market share penetration. We are confident that the ongoing integration of acquired businesses and the growth of our international markets will contribute to faster sustained revenue increases. We are refinancing our capital structure with favorable terms that position the company for long term success. With the longer duration to both the term loan and preferred equity, Mondi anticipates having the flexibility and financial resources to execute on its transformative plans.

Speaker 2

These plans are expected to increase revenue, profitability and free cash flows while continuing to lead AI innovation in travel. I now turn the floor over to Jim Dullum, Chief Operating Officer, who will discuss some business trends and Mondi initiatives underpinning our results and outlook.

Speaker 3

Thank you, Prasad, and good day, everyone. Let's start with some market drivers. Long term growth trend for travel remains intact. However, we did see the beginnings of industry softening by the end of the Q2 and we expect this to continue into 2025. Furthermore, certain regions experienced disruptive events in Q2, such as catastrophic flooding in South America affecting LatAm travel and the re escalating Middle East conflict.

Speaker 3

While a few stronger regional markets remain from the last vestiges of the recovery, the overall moderation in demand is being accompanied by a reduction of air fares and decline in lodging rates. In addition, global inflation and economic conditions are spurring an increase in buyer bargain hunting, just to include higher income consumers. Meanwhile, suppliers who are already under service related pressure are expected to continue emphasizing product differentiation, packaging and more targeted distribution as their keys to potential growth. In light of this, we expect more emphasis to be placed on supplier driven programs such as their expanding NDC and direct connections. While the market softness may have a short term impact on the remainder of this year, we believe these overall conditions significantly favor Mondi's B2B marketplace expansion and the deployment of our emerging AI platforms.

Speaker 3

Turning to the Mondi marketplace. During Q2, we capitalized on international expansion through our platform, delivering a 57% increase in transactions year over year. This growth could have been higher had it not been for the working capital constraints mentioned previously. Our strategy of expanding in non air products with higher take rate and growth in transactions in international markets overcame the pricing effect on gross bookings, producing net revenue growth and solid adjusted EBITDA. The strong increase in transactions was accompanied by flat year over year gross bookings as a result of lower average We do plan to continue our penetration in international markets through deployment of our global marketplace platform.

Speaker 3

We continued to make progress during the Q2 in initiatives around boosting profitability, expanding our travel marketplace and maintaining AI leadership. Our ongoing focus is to significantly enhance our content, accelerate our sales penetration in existing and new markets, as well as further streamline our business infrastructure and cost structure as you note on the current slide, Slide 7. In the area of content enhancement, we continue expanding packages and product combinations while adding new features and options. This is expected to enhance the appeal of our offerings and improve sales performance across Mondi's growing transaction base. In addition in content, in addition, as Jesus will cover later, we expect to ramp up the use of our FinTech tools and content to further increase customer engagement, take rate and net revenue.

Speaker 3

Further highlights of our progress include enhanced supplier connect programs such as the airline NDC connections, direct connections with major hotel chains and with several other connection projects in our immediate expansion pipeline. With these in place, we're seeing more traffic on our MDC connections with improved product pricing and features as well as material improvement in our hotel take rate and conversions. By the way, a more specific example of the hotel take rate is the increase in increase of over 50% in our North America hotel take rate so far this year. In summary, as we look into the rest of the year, we're moving from market planning and development to continued platform deployment and business execution. Our focus initiatives include further implementation of AI tools in Mondi's operations, product expansion for greater market appeal, enhanced revenue management and AI automation led process improvement with further cost efficiency.

Speaker 3

In addition, as we position as we are positioned to take full advantage of all our FinTech tools and services that will no longer be capacity constrained. All of our initiatives for rapid business expansion or further operational efficiency are expected to put Mondi squarely in line with our historic growth path and profitability goals by the end of this year despite this market softness. I will now pass the call over to Jesus, our CFO, for a review of Mondi's financial performance and outlook. Jesus?

Speaker 4

Thank you, Jim, and hello, everyone. As I go our Q2 results, I would like to point out that all growth rates are on a year over year basis unless otherwise indicated. Let me start with our financial highlights. During this quarter, we continue to generate a strong performance around net revenue, EBITDA and EBITDA margin. As part of our core marketplace strategy, our focus has been to diversify our product offering beyond air, which improves take rate, expand internationally and continue to grow in existing markets.

Speaker 4

During the first half of this year, we continue to diversify our product offering and accelerating our international air expansion, which led to a 57% increase in transactions that carry a lower average transaction price. At the same time, because of delayed refinancing and working capital constraints, we moderated the growth of our existing business that required working capital to grow. This resulted in flat gross bookings, lower than usual net revenue growth and improved adjusted EBITDA. Our gross bookings were 6 $78,000,000 in this quarter, in line with last year. Our net revenue of $58,000,000 increased 3%.

Speaker 4

After adjusting for acquisitions and divestiture of last year, net revenue grew 11.5%. Our take rate of 8.6% was up 20 basis points. As with prior quarters, this improvement in take rate was driven mostly by the growth of higher margin hotel and packaged products. It is worth mentioning that the delay in our refinancing impacted our ability to fully utilize our credit limits, resulting in lower FinTech revenue, which carries the highest take rate. We expect these to be fully resolved with our refinancing.

Speaker 4

Turning to expenses. Our largest expense category, sales and marketing, keep improving and was down 5% in absolute terms, while it declined from 71% to 65% as a percentage of net revenue. The main drivers for this improvement continue to be AI driven optimization of our revenue management and reductions in performance marketing spend in our B2C business. Adjusted EBITDA increased by 38% from $4,400,000 to 6,100,000 dollars Adjusted EBITDA margin also increased from 7.8% to 10.5% as we continue to prioritize operating efficiencies and improve profitability. On a GAAP basis, our net loss was $25,500,000 which included $19,100,000 of non cash and or non recurring items such as $3,700,000 of depreciation and amortization, $1,000,000 of peaked interest, dollars 12,000,000 of stock based compensation and $2,300,000 amortization of loan origination fees among others.

Speaker 4

Looking at our balance sheet, at the end of this quarter, we had $32,000,000 in cash and cash equivalents and $169,000,000 of total debt, compared to $36,000,000 $162,000,000 respectively, at the end of December 2023. We announced today a comprehensive refinancing of our capital structure with TCW and funds affiliated with Morgan Stanley that is expected to extend the term loan to June 30, 2028 and the preferred equity to December 31, 2028. The extended timing for the term loan beyond August 31, 2025 and the preferred equity beyond September 30, 2026 are both subject to securing a $15,000,000 letter of credit that the company anticipates finalizing shortly and which would provide additional working capital. Operating cash flow was negative $7,600,000 for the quarter compared to negative $2,400,000 in Q2 of 2023. In this quarter, we used our $10,000,000 of cash reserves as working capital to offset credit limit reductions by certain FinTech partners in the face of delays in refinancing our term loan.

Speaker 4

We are working to get some of these credit limits reinstated as the refinancing is being completed. Year to date, both operating cash flow and free cash flow were positive, $11,100,000 $3,300,000 respectively. Turning now to our 2024 guidance. As a consequence of the limitation we described, we now forecast our net revenue to be between $240,000,000 $250,000,000 representing an increase of 10% versus 2023 measured at the midpoint and adjusted EBITDA to be between $25,000,000 to $30,000,000 representing an increase of 42% versus 2023 measured at the midpoint. Let me now turn it back to Jeff for Q and A.

Speaker 4

Jeff?

Speaker 1

Thanks, Jesus. Operator, Carla, we're ready for Q and A now. Thank you.

Operator

We will now begin the question and answer session. And our first question comes from Mike Granda from Northland Securities.

Speaker 5

Hey, thanks guys and congratulations on the refinancing. Two questions related to that. One, roughly how much working capital does that free up for you? And 2, what are your priorities spending that working capital on to kind of reinvigorate growth? If you could

Speaker 3

just go over those priorities, I think it would be helpful.

Speaker 4

Yes. Mike, good morning. Thank you so much for your question. So addressing first your first question, in terms of how much working capital, obviously, we'll have a 15,000,000 dollars LOC as we mentioned in the script, right? So that will be to add.

Speaker 4

We expect another $5,000,000 that will be coming in terms of cash or a total of $20,000,000 that will help us revamp our working capital. In terms of priorities to drive growth, I think that obviously at this point most of that will be used in our FinTech solutions because it carries the highest take rate of all of our product mix. And it's probably the portion that has been affected most during these past few months while we were doing the refinancing.

Speaker 5

Got it. And I don't know, maybe Jim, it seems like you're having pretty good success penetrating the hotel only space. I don't know, a little more detail there might be helpful.

Speaker 3

Hey, Mike. I appreciate the question. We are having good success in hotel penetration. I mean, we've picked up some real expertise with some of the companies we've acquired. But it's not just pure hotel.

Speaker 3

Remember, there's also some packaging expertise there, which bring more of that in. So as we get to the non air product, a lot of that is around packaged product which carries higher take rate. So we're picking that up. The other thing is in the hotel program itself. I mean, I think we've mentioned previously, we've been emphasizing the hotel program.

Speaker 3

And as we've done that, we are significantly improving our agreements with certain hotels. We've added a couple of direct connections with major chains so far this year and we have more in the pipeline before the end of the year that will come all of those things help not just the pricing and the presentation of the product, but significantly the take rate, which is why you've seen the nice improvement that we saw in our North American hotel take rate so far this year.

Operator

Our next question comes from Brett Knoblauch from Cantor Fitzgerald.

Speaker 6

Hi, guys. This is Thomas Shinske on for Brett. Thank you for taking my questions. I guess first, how's the traction been for the AI related products? More specifically, Abhi,

Speaker 7

I guess if you could give us

Speaker 6

an idea of how many transactions are coming through that virtual assistant? And then also internally, I know we mentioned Infinity last earnings call, I guess how's progress been there?

Speaker 2

So Abhi is providing good traction for us to have some great interactions and transactions. So although the numbers seem to be less than 2% of our business, However, the employment provided us to have the knowledge to train our models, which we are currently doing and also take the feedback in improving this product, which we are working on our 2nd version that is you on delivering in Q4. At the same time, we have Infinity project, as you mentioned, Infinity project is our project to deploy for our yes, AI nizing all of our internal operations that includes operations, call center through our AI CRM platforms being placed and our sales and marketing revenue management functions. So we already deployed that at our revenue management function of Infinity, which has resulted some very good results where we reduce you are able to reduce our marketing expenses sales and marketing expenses by 5%, and we expect to deploy more onto all of our facets of our business, where either we improve our take rate and reduce our sales and marketing expense or reduce our cost per transaction by having an efficient operations function. So Infinity is currently under deployment by function by function in our business and we are hoping to complete it by end of Q4 and beginning of Q1 and we are going to we are planning to reap very good results from it.

Speaker 6

Awesome. Thanks. And then one more, if I may. Very encouraging to see the strong growth in transactions, coupled with a continued pressure on ARPT, I guess. You mentioned strong growth in international contributing to this.

Speaker 6

And last quarter, obviously, we mentioned short haul international hotel only. I

Speaker 5

was just wondering, have you seen

Speaker 6

a skew towards more just consumer weakness contributing to this, and just overall decreased travel spend? And, any visibility to I know you see continued weakness into 2024 and a bit into 2025. Is there any visibility into when we can see this ARPT start expanding again? Thank you.

Speaker 3

Thanks, Thomas. It's Jim. Yes, look, I think you we will expect to see the that average transaction rate moderate here and start to recover through the rest of the year, right? You're right. The biggest influence has been the expansion internationally, right, in markets that as they recovered, they recovered in more regional short haul first, which tends to be lower priced transactions.

Speaker 3

That will continue to expand back to more global and international travel as it does that, that we should see even though airfares and even hotel rates will come down somewhat in our expectations for the next few quarters, we will see the mix start to moderate back in our favor. So we see the ticket price fall, the average transaction rate fall moderating now to stabilize and then recover as we go into next year is probably the way I would the timing I would put on that.

Speaker 2

So the average revenue per ticket is between 50% to 55% in our business. And we and this year last year, it is high. It is mid-70s. But we grew the transactions by 47% and at the same time sorry, 57%. And at the same time that we are maintaining a good revenue per ticket and also paying the inroads into expanding our front end FinTech and the ancillary revenues by taking this market share.

Speaker 2

So we expect to continue to have the revenue per ticket transaction at between $50,000,000 $55,000,000 this year. And in the following year, in 2025, we are expecting to grow into 60 to mid-60s.

Speaker 8

And since this is an important point, I would like to add one more perspective here. The softening in the market is typically advantageous to the Mondi business model because there is more desire for the consumer to hunt for bargains and also for the suppliers to provide better economics. But in Q2 and Q3, we were not able to fully capitalize on these because of working capital constraints. So we simply didn't have the working capital even though the demand was there to capture it. So as we look towards the end of the year and 2025, following the completion of the refinancing, we should be able to take advantage of that market dynamic, which is typical in such times of softness favorable to our business model.

Speaker 7

Awesome. Thank you guys for the color. Thank you.

Operator

The next question comes from Darrin Aftahi from ROTH Capital.

Speaker 9

Hey, this is Dylan on for Darrin. Thanks for taking my questions. First, with the revised guidance, could you talk a little bit about what some of the expectations are in there? Like how much of that is driven from lower FinTech in 2Q? And then it seems like at least for a portion of 3Q until the financing is secured versus

Speaker 5

some

Speaker 9

of the softness that Jim was talking about?

Speaker 4

Yes. So at this point, I would say probably around 50%, 50% is driven by our FinTech revenue that is down as well as some of the opportunities that we had to let pass because of our capital working capital restraints.

Speaker 9

Got it. Okay.

Speaker 8

And just one more point here. The entire Q3 that is impacted, right, because it's not just a matter of securing the financing, but then it takes time to open these credit limits. So this impact, we expect it to be on Q2 and Q3.

Speaker 9

Okay. Got it. Thank you. And then as a follow-up, when you are going into some of these other markets and expanding where some of the rates are lower, do all those markets have the same sort of, I guess, offerings as your more established markets? I'm talking sort of all the ancillaries or those are some of the things you're looking to add?

Speaker 8

Yes. So that is precisely one of the opportunities. So at this point in time, we are capturing the market share. And the market share is most of the time just a low price transaction that you mentioned with very limited front end revenue, right? So the strategy here is to capture this market share, which also was favorable in the last few quarters because this is business that requires less working capital.

Speaker 8

We could take advantage of it with the constraints that we have. And then on the back of that, we can attach the ancillaries, not just the fintech, which is the easiest one to attach, but then negotiate better deals and attach better front end revenues, attach hotels, attach other ancillary product that carries a higher take rate. So this is precisely the strategy. And that is one of the reasons you are seeing now at this point in time much higher transaction volume, not a significant growth in gross volume because it's the lower price per ticket that you mentioned without the full capacity and capability of the additional revenue that attaches to each one of these transactions.

Speaker 2

And even with this dynamics, we are able to see a high EBITDA margins.

Speaker 4

Thank you, Dylan.

Operator

And our next question comes from Nick John from Citivant JMP Securities.

Speaker 7

Hey guys, it's Tim on for Nick here this morning. Just a couple from us please. I appreciate you taking our questions. Can you just talk a little bit about what you're seeing kind of in terms of the competitive dynamic or the intensity within marketing? A lot of your cutting competitors have called out like reaching out to new channels.

Speaker 7

Just wanted to see how the competitive landscape is from your guys' point of view and if you have any plans to change your strategy moving forward in the second half?

Speaker 3

Nick, it's Jim. Let me start. First of all, we think the strategy is working great in the current market. Again, the transaction increase, as Oreste has just described, this is all we're taking share of wallet, we're taking market share, fully positioned now to both capitalize on the base transactions as we've penetrated those markets to improve things, but also to capitalize on the deployment of our platform more and more internationally, right? And as we do that, we think that allows us to continue to grow very strongly in this market.

Speaker 3

We have what we certainly believe is a lead position in the deployment of AI into this space, which gives us great differentiation in the market. So we think we stand in a strong position to grow. We've had some we had a little bit of headwinds with this capital issue that constrained us from knocking everything out of the park. But we took advantage of everything we could. We've taken advantage of this platform and we're pretty jazzed about the position we have going forward in this market.

Speaker 3

It's sometimes the softness is actually great for the Mondi strategy and to continue to deploy it.

Speaker 7

Great. Thanks so much for all that color. Just one more if we could please. In terms of kind of airfares kind of looking out into back half of the year in 2025, a lot of the airlines had kind of called out taking corrective action to kind of reduce capacity, which should kind of help drive stability and fares. I know you guys kind of talked about your guidance, taking down your guidance due to some of the softness you're seeing and the impact from kind of on this working capital.

Speaker 7

In terms of airfares kind of for the back half of the year, how are you guys thinking about that? Are you guys expecting continued softness, any kind of improvement or any kind of color on what's baked into the guide there? Thanks.

Speaker 3

Tim, your point is a great one, right? You're absolutely right. Airlines actually reduced capacity slightly during the or didn't increase capacity, certainly not in keeping with what was the demand, the strength of the demand during the first half of the year. And they did see their load factors increase, right, which is in general good for the airlines. However, in the face of that, even there because they have such service issues, because some of the constraints coming out of COVID still remain for them, With those service issues, they still struggle to continue to compete on the routes that they all work on.

Speaker 3

So they are using pricing now as they appear to be using pricing as a strategy going forward. We think they will use targeted distribution channels more strongly. So we see them using several different levers. Price is going to be one of them. So right now, we would expect air prices to continue to be a little soft through the remainder of this year, maybe into early next year.

Speaker 3

We think that a little bit of inflation fares and some of the general economics globally are causing a little bit of customer sentiment to back off. So I think as the airlines look at that, they make some decisions on because they're trying to price so far forward, they make some decisions that create some little softness in price. So we think that we see a little bit of movement, probably still downward slightly on airfares, but a stabilization here before it starts picking up hopefully in the early part of next year. But that's sort of the general trend that we would expect.

Speaker 2

To expand that trend? From it changes from market to market. There are certain markets that are performing very strongly. We being a global platform and expanding into and looking into these opportunities very closely. So we are using our platform as a vehicle for us to expand into the areas that really are growing and expected to grow and using our platforms to receive the transactions and optimize it, At the same time, managing the softness of certain segments of the business with the other markets and other product mix that we have in our plans.

Speaker 2

So being a marketplace, although there is a little stress in the market on the airline and inventory and softness of the price, but we see some great opportunities that we fit very well in that environment. So we are working on our plans and hopefully that's all going to see we are going to see that in results in the next few

Operator

So this does conclude the question and answer session. And I will hand back over to Jeff Houston for any final remarks.

Speaker 1

Thank you, Carla, and thanks to everyone who tuned in for our Q2 2024 earnings call. Whether it was live, the replay or the transcript, you have any questions or would like to learn more about Mondi, please don't hesitate to schedule a call with us. You can get more information on our IR website, which is investors. Mandi.com or you can send us an email at irmandy.com. Thank you.

Operator

Then this concludes Mondi's earnings conference call. Have a nice day. You may now disconnect on the call.

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Mondee Q2 2024
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