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Earnings Transcript for DESP - Q3 Fiscal Year 2023

Operator: Good afternoon, and welcome to Despegar's Third Quarter 2023 Earnings Call. My name is Audra, and I will be your operator for today's call. [Operator Instructions] This conference call is being recorded. Now I would like to turn the call over to Mr. Luca Pfeifer, Investor Relations. Please go ahead.
Luca Pfeifer: Good morning, everyone, and thanks for joining us today. In addition to reporting unaudited 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. Investor should carefully read the definitions of these measures and metrics included in our press release 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 allow me to remind you that certain statements made during the course of the discussion may constitute forward-looking information, 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 integration and performance of the businesses we acquire. For 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, Damián Scokin, who will provide an overview of Despegar's third quarter performance, as well as an update on our strategic initiatives. Amit Singh, our newly appointed CFO will then discuss the quarters financial results in more detail, and our annual guidance, after which Damián will end our prepared remarks with a wrap up before opening the call for your questions. Damián, Please go ahead.
Damián Scokin: Thank you, Luca, and thank you everyone for joining this call. Before delving into our financial performance for the quarter, I would like to extend a warm welcome to Amit Singh, our newly appointed Chief Financial Officer, as we kick off this earning call. Amit, we're thrilled to have you on board. Shifting our focus to the result. We're very excited to share yet another quarter of strong revenue growth and profitability. Revenues for the quarter were $178 million, a new record for the company and representing an industry leading growth rate of 22% year-over-year in dollars, and 43% year-over-year in constant currency. This growth was completely organic, driven by strong commercial execution and supported by robust demand trends, primarily in our core markets of Mexico and Brazil. Additionally, gross bookings for the quarter were up solidly at 25% year-over-year in dollars, a 44% year-over-year in constant currency. The strong top line growth and improving revenue mix, combined with our ongoing initiatives to gain additional operational efficiencies, drove operating leverage and resulted in adjusted EBITDA of $24.7 million in the quarter, an impressive 106% increase year-over-year. As we set our sights on the final weeks of the year, our optimism remain high. Our strong financial performance, particularly with regards to revenue and EBITDA, reflect the combination of several factors
Amit Singh: Thank you, Damián. I'm really glad to be here, and thank you, everyone, for joining our call today. I would like to start by thanking the Board and Damián for giving me the opportunity to join the company's executive team. It is my privilege to join Despegar at this time in its life cycle, when the company has established itself as a leading travel technology company in Latin America and has many opportunities to continue growing far above industry rates in the coming years. In addition, I see tremendous opportunities to further improve the company's margins and cash conversion and to help investors better understand the massive investment opportunity in the company. Now to discuss this quarter's results. The strengthening revenue trends that drove our business in the first half of the year continued in the third quarter. Our accelerating momentum can be attributed to the effectiveness of our growth strategy and to the strong demand trends we are witnessing across Latin America, particularly in Brazil and Mexico, our two largest markets. As a result, we reported $1.4 billion in gross bookings and achieved an all-time quarterly high for revenues, which totaled $178 million. This equates to a year-over-year revenue growth of 22%, which we believe is industry-leading globally. Our revenue growth rate in constant currencies is even more robust, up 43% year-over-year. Our take rate also remained healthy at 12.9%, reflecting our unwavering focus on profitable growth. I'm particularly pleased with the outstanding 106% year-over-year increase in our adjusted EBITDA, which reached $24.7 million for the quarter. This substantial improvement in profitability can be attributed to our underlying operating leverage and three key factors. First, the very strong growth trend in our bookings, revenues and product mix; second, enhanced efficiencies at our fulfillment center operations primarily driven by productivity improvements. And third, greater efficiencies with regard to general and administrative expenses, along with efficiency gains related to our technology and content costs. Now let's delve deeper into the markets where we operate to provide a better understanding of our improving performance. We continue driving better results in our Brazilian operations with year-over-year bookings growth reaching 44% on an as-reported basis and 34% in constant currency, resulting in total gross bookings of $561 million, a record since the company's initial public offering back in 2017. These outstanding results are due to three primary factors
Damián Scokin: Thanks, Amit. I'd like to share a few key takeaways from our third quarter review. Our most recent results have proven to be exceptional once again, thanks to the consistent and successful execution of our strategic initiatives and our unwavering commitment to achieving profitable growth. Notably, our revenue mix continued improving, while our results in Brazil and Mexico were outstanding, propelling Despegar to new record highs. Our progress is most evident in adjusted EBITDA, our strongest third quarter EBITDA since the IPO. As we approach the end of the year, we are encouraged by a still robust search in travel demand. Longer term, we anticipate that the strong secular tailwinds that have helped drive our success will persist. However, we are not resting on our laurels. We're continually finding new ways to better capitalize on these tailwinds as well as further strengthening Despegar competitive mode. We are, therefore, committed to leading with innovation to continually enhance our technological capabilities and offer the best user experience to fully leveraging our technology platform and local market expertise and always reinforcing our strong relationships with our partners. These strategic measures will further propel our top line growth, while we continue increasing operational efficiencies to drive additional earnings power. What's equally important is our focus on carefully reinvesting these efficiencies back into the business, which we believe is the most effective way to sustainably drive shareholders' value. This approach will enable us to foster sustained organic growth, diversify our offering and further solidify our position as an industry leader. In summary, we are poised to finish the fiscal year on a high note, thanks to the strong execution on our proven growth strategies and sustained demand growth. We remain focused on continuous improvement, aiming to maximize our potential while delivering superior value to our customers and stakeholders for the foreseeable future. With that, let's open the call for questions.
Operator: [Operator Instructions] We'll take our first question from Naved Khan at B. Riley Securities.
Naved Khan: Good evening, everyone. Congrats on a good quarter. A few questions from me. Just maybe one high level. So Damián, I think when we started out in 2023, you talked about recovery in international as kind of one of the drivers. So now that we are in November, where do you see international recovery, do you think there's still legs from here? And then on mobile app, it's great to see that 40% of your bookings are coming through - 40% of the transactions are mobile app. Does it mean that the - that you're getting higher mix of direct traffic today? And when should we expect that to kind of yield some leverage on marketing lines?
Damián Scokin: Naved, thanks for your question. In terms of international traffic, as we mentioned, it's been recovering, but it's still below 2018 levels. Our estimate for the quarter were in between minus 10% and minus 15% when compared to pre-pandemic levels. As per the mobile app, yes, we are focusing on increasing the share of organic nonpaid traffic but also the profitability levels that we are achieving also allow us to invest heavily in acquiring traffic with very good returns. So the increased penetration in app is a good news that will not necessarily reflect in a much larger penetration or not paid traffic.
Naved Khan: And are you seeing good repeat there where people who download the app are coming back with higher frequency? Can you just comment on that?
Damián Scokin: Yes. We track not only app transactions or app downloads, but we also track engagement. And the beauty of the app is that it's a very effective tool to keep customers coming back. So yes, we are seeing that effect.
Naved Khan: Okay. And one question for Amit. I mean, welcome to Despegar earnings. And you spoke about operational efficiencies. Can you give us some more color on the kinds of things that you've been able to do to kind of achieve these?
Amit Singh: Sure. Thank you, Naved. It's - I'm glad to be here. To your point on operational efficiencies, I mean, it's true if you look at year-over-year, we have increased not just our top line, but our overall EBITDA margin significantly, increasing it by close to 6%, and we expect that trend to continue going forward. And if you're looking at operational efficiencies per se, literally in every line item through our P&L. Obviously, we have a focus on take rate and all that. But below that, when you look at the expenses that we have in sales and marketing, tech and content, G&A [technical difficulty] Hey guys I think we lost the audio there. Hello can you hear? Sorry about that. I think we lost the audio over there. But just to - I don't know where I got cut off, but to give you some ideas we're making for your question, Naved, we're making very strong progress on driving operating efficiencies, as you saw that our adjusted EBITDA margin has increased almost 600 basis points year-over-year and cost of revenue is even better. And you should expect us to keep driving these efficiencies going forward in multiple in all the line items in our P&L. If you look at our sales and marketing expense, if you look at our G&A expense, if you look at our tech and content expense we have internally obviously identified a ton of efficiency that we can generate in all of those areas, and we will keep driving going forward. The goal is to drive EBITDA margins to our long-term target that we have provided, and we expect to achieve those targets, hopefully much before what we have previously guided to.
Naved Khan: Great. Thank you.
Operator: We'll move to our next question from Andrew Ruben at Morgan Stanley.
Andrew Ruben: Hi, thanks very much taking the question. Echoing back congratulations on the quarter. I'd be curious, first, if you could provide an update on the competitive backdrop in Brazil, specifically in light of one of your larger competitors filing for bankruptcy protection. I'm curious what kind of opportunities that affords for Despegar, any notable changes in the market structure on the back of that would be very curious to start. Thank you.
Damián Scokin: Andrew, thanks for your question. I just reiterate the fact that being last two to three weeks of Q3, a large company in Brazil, one to three might files for bankruptcy. Basically, that was a ponzi scheme that has been hurting the travel market significantly over the last couple of years. And we - by selling tickets that they were not able to deliver. That has two impacts, I would say. One is something you start to see on a marginal basis in Q3 versus - and it's only in Q4. So obviously, we are starting to gain share in the Brazilian market, but also the competitive dynamic of having such an irrational player in the market has changed dramatically. So we expect that situation to continue providing ample room for growth of our brands in Brazil.
Andrew Ruben: Great. It makes a lot of sense. And then just honing in on another topic, you mentioned the opportunity to expand the B2B footprint beyond LATAM. I'm curious how you think about that opportunity and maybe within the framing of what part of your kind of tech stack, competitive advantages you think are specific to the region versus what have the opportunity to be exported to other parts of the world?
Damián Scokin: Yes. And look, keep in mind, as a background that since the acquisition of Best Day, we've been heavily investing in developing our B2B technological platform. And we see our performance both in - between general, and particularly white labels in the B2B2C arena, and we compete with some of the largest OTAs and software companies, even in that arena. Our technology platform is on par, even better than most. That's why we've been gaining such a significant number of clients over the last few years. And even we've been approached by some companies outside the Latin American space. So far, we haven't put any focus on that. But certainly, we feel that based on our technology platform and our capabilities in terms of strong inventory, that's an avenue of growth and can be extremely efficient for the company.
Andrew Ruben: Great. Very interesting. I appreciate the color.
Operator: Now we'll move to our next question from Jacob Seed at Cowen.
Kevin Kopelman: Hi, thanks for taking my question. I'm in for Kevin. Can you provide an update on store openings that you mentioned in the last call in Brazil and Argentina? Are those plans still on track? Thanks.
Damián Scokin: Yes. Thank you for the question. Yes, the plans are on track, and we are making progress accordingly to reach our target of five stores in Argentina and 10 in Brazil.
Amit Singh: This is Amit. Just to add to what Damián is saying. While all the store openings and all remain on track, I just wanted to highlight again our broader strategy there. We're using - we're tapping into a B2B and separately through the store strategy into the offline market. And the broader goal is to slowly, slowly further enable the transition or the faster transition of the off-line to online. And we're seeing very strong success, of course, to our stores and also through our B2B channel as well.
Kevin Kopelman: Great. And I was wondering now that you're integrating with VRBO, are you guys considering taking part in vacation rental search on Google?
Damián Scokin: Can you repeat the question? You got somehow cut off.
Kevin Kopelman: Yes. Are you considering taking part in the vacation rental search option for Google? They released this recently. It's free option?
Damián Scokin: So we look at all the traffic channels, we explore them and we use them based on the return on investment, and we certainly are looking to that as additional source of traffic.
Kevin Kopelman: All right. Thanks.
Operator: Next, we'll move to Joao Soares at Citi.
Joao Soares: Thank you, and congrats. Congratulations on the results. I've got a couple of questions. The first one, I just want to explore a little bit of the transaction growth in Brazil. If - I mean, if that comes from - in fact, you know that there is a capacity increase, of course --
Amit Singh: Joao, this is Amit. We're having a very hard time hearing you, if you don't mind, just speaking up a little bit. I appreciate it.
Joao Soares: Sure. . Can you hear me better now?
Amit Singh: Yes. Much better.
Joao Soares: Okay. Perfect. Okay, so I just had a couple of questions. The first one, I just wanted to understand a little bit the transaction increase in Brazil. Is there - I mean, are you guys offering new products, new services, new destinations? Or is it simply - I mean, of course, you're gaining market share, there's faster increase, but I just wanted to dig a little bit deeper in terms of the service and product level that you're offering in Brazil. That's the first question. Second one, I just wanted to understand now if there's room to potentially revise the medium-term guidance? And then I'll follow up on another question.
Damián Scokin: In terms of the growth in Brazil, that remains a pure organic growth. And we have not introduced any additional products or services. It is just our growth on top of the natural growth of the market. That means we're gaining there. It's - as I said, there's a very limited effect of the demise of one of our competitors that is our organic growth trajectory in Brazil, nothing else than that.
Amit Singh: And I will answer your question on medium-term guidance. Obviously, as you are seeing our trends since the time the company provided a medium-term guidance a year or so ago, the trends have been extremely positive relative to that guidance. When we come on the fourth quarter earnings call early next year, we can provide a little bit more color. But broadly, what I can say right now is you should expect us to grow above market growth rate in the coming years, given not just in Brazil, but across Latin America, the strengthened position that we have established, a leading position we have established. And then not just on bookings and revenue, like we were discussing earlier, there's still a ton of opportunities for operational efficiency. So you should continue expecting us on top line to grow above market, but then for our EBITDA growth to be faster than top line growth in the coming years. As we come on - as I mentioned earlier, as we come on the fourth quarter earnings call, we will be able to provide a little bit more concrete guidance, but we feel very good about the coming years.
Joao Soares: Perfect. That’s great. I just want you to explain the income tax this quarter, can you just clarify what happened - the last quarter had a big tax credit and this quarter was pretty robust, almost 100% of EBT. So I just wanted to understand what's happening there? Thank you.
Amit Singh: It's largely related to the profit in a few entities, which were very solid, especially in Argentina that led to a little higher tax there. And also, we have exhausted the NOLs that we had in Argentina in the prior quarter. So higher tax largely related to very strong bookings trend that we are seeing in a few entities, particularly in Argentina.
Joao Soares: Very clear. Thank you.
Operator: We do have a couple of questions from our webcast. I would like to go first to [Alexander Ma from Singular Guf]. His question is, how did coin perform in the quarter? Was it - what was its EBITDA?
Amit Singh: Sure. So coin business, again, in line with the other guidances that we have provided previously, coin continues to do much better than the medium-term sort of guidance that we had provided in the past, where the margins for the overall business continue to accelerate very strongly. For this quarter, it was very close to flat line EBITDA, and we expect slightly negative this quarter. We expect flattish EBITDA next quarter and then in the coming years in 2024 and beyond, we should expect positive EBITDA contribution from coin.
Operator: And our next question comes from Andrew Carreon with Emeth Value Capital. He says hello, congratulations on the very strong results. Could you give an update on coin and how the team is doing the opportunity to scale in the coming years, particularly as interest rates potentially fall? Is there still an opportunity to scale this product outside the Despegar platform?
Damián Scokin: Yes. Thank you, Andrew, for your question. As we've been reiterating over the last few quarters, in coin, so far in the prevailing market context, I think, we follow a strategy of preserving the quality of our portfolio. As the situation in the Brazilian credit market improves and we're seeing some indications of turning around. We'll certainly increase the growth rate by always being very cautious on the quality of our portfolio. So certainly, we see an opportunity in the future, but we're going to act on that very prudently, I would say.
Operator: [Operator Instructions] And there appear to be no further questions at this time. I would like to turn the floor back over to Mr. Scokin for any closing remarks.
Damián Scokin: I just want to thank all of you for your interest in Despegar and your participation in this call, and we are looking forward to seeing you on our next call to discuss our fourth quarter results. Thank you very much.
Operator: This does conclude today's conference call. Thank you for your participation. You may now disconnect.