Points.com Inc.

Thank you. Please be reminded that the remarks on this conference call may contain or refer to forward-looking statements within the meaning of Canadian and U.S.

securities laws. Management may also make additional forward-looking statements in response to your questions.

Although, management believes these forward-looking statements are reasonable, such statements are not guarantees of future performance or action and are subject to important risks and uncertainties that are difficult to predict. Certain material assumptions are applied in making forward-looking statements and may not prove to be correct.

Important factors that could cause actual results to differ materially and the assumptions used in making such statements were included in our third quarter financial results press release issued prior to this call, as well as other documents filed with the Canadian and U.S. securities regulators.

Except as required by law, the company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I'll turn the call over to Points' Chief Executive Officer, Rob MacLean.

Rob?

Thanks, Cody, and good afternoon, everyone. We continued to navigate a challenging market environment in the third quarter.

As we've often stated, the timing of launching new partnerships and programs fluctuates quarter-to-quarter, as does the promotional activity with current partners. These fluctuations have only been exacerbated by the pandemic.

As you might expect, our transaction volumes remain down from pre-COVID levels across the business. And while they were also down from Q2, we are seeing a strengthening in Q4.

Notwithstanding the progress we were seeing in the near term, we still have limited visibility on the timing for recovery of our business and industry. However, our teams remained very active with business development, to drive new program launches and partnerships and our pipeline continues to be very strong.

To this point, in 2020, we've launched four new partners such as Air Canada and Qatar and have expanded our partnerships with 11 existing partners with 12 new products or channel expansions. The remainder of the year and early 2021 continues to be very busy on this front, as partners continue to leverage our products and services to drive critical revenue growth and member engagement.

We continue to expect positive adjusted EBITDA for fiscal year and full year 2020 and we will continue to prudently manage our costs and liquidity, while supporting our partners throughout this difficult time. To that point, I want to take a moment to share how incredibly proud I am of our team members' dedication and tireless work on behalf of Points and our partners.

Thank you. To provide broader context on the industry, our airline and hospitality partners' revenue streams continue to be impacted by the pandemic.

As many of you have likely seen, without the passage of a new federal relief package in recent months, most airlines have face layoffs and more furloughs, which means their immediate focus and priorities have been to manage their operations and workforce. Within this environment, the value of loyalty programs has remained resilient and for some even crucial.

We've continued to see operators leverage their loyalty assets to help their business re-stabilize in the near term and prepare for the return of strong consumer travel demand in the long term. Similar to what United did with its MileagePlus program last quarter, both Delta and American Airlines have recently announced plans to leverage their frequent flyer program assets as collateral for their respective $9 billion and nearly $5 billion debt financings.

We continue to believe that announcements like these signal the enduring importance of loyalty programs around the globe. These program size and profitability make them crucial sources of liquidity for airlines and they play a key role in sustaining member engagement among our partners' customer bases.

Loyalty programs also help operators prepare for changing travel patterns and pent-up consumer demand. Recent research from Skyscanner has revealed increasing levels of one-way domestic and regional travel across the globe, with customers using shorter-term planning horizons to search and book these trips.

In situations like these travelers can use their accumulated points and miles to book last minute trips. Many hospitality and travel operators have already extended their loyalty programs, member status through 2021, in order to prolong this opportunity and in some cases even lower the redemption requirements to further encourage near-term travel.

Although, miles flown continue to be markedly lower from historic levels, we don't believe the desire to travel has gone anywhere, and neither will the loyalty programs that help facilitate consumers' travel plans. As we continue to monitor the industry landscape, we have focused on both establishing new partners and deepening existing relationships, as reflected by the launch of our extensive multiyear partnership with Qatar Airways, in the second quarter and the recent deployment of our enhanced customer service program with Delta.

These and other recent initiatives, demonstrate that we are continuing to execute on the strategy we laid out, in early 2019. As we look to the months ahead, we remain dedicated to supporting our partners and our team members throughout this difficult time.

Points have built a strong and resilient foundation over the past 20 years, and we owe much of this to the strength of our partner network and the dedication of our team. While we cannot predict exactly how the journey ahead of us will unfold over the coming quarters, we are financially and strategically well positioned for the recovery.

We continue to believe the success we've had in bringing new partners and products to market, coupled with the revenue and profit-generating nature of our products and services will position us at the very earliest part of travel inevitable recovery. I will now hand it over to Erick, to review our financial performance for the third quarter.

And then Christopher will provide some additional highlights and perspective on our partner activity. Erick?

Thanks Rob and afternoon everyone. Unless noted otherwise, all figures on today's call are in U.S.

dollars and presented in accordance with IFRS. Top line revenue in the third quarter of 2020 was $37.4 million, compared to $40.9 million in Q2 and $98 million in the year ago quarter.

Gross profit to a more appropriate proxy for our top line was $5.7 million, compared to $7 million in Q2 2020 and $14 million last year. The sequential decrease reflects changes in the timing and strength of our promotional activity, which is most prominent in our loyalty currency retailing segment.

As a reminder, before the COVID-19 pandemic, our monthly and quarterly results could fluctuate period-to-period depending on, the timing, richness, and number of marketing campaigns. As a proportion of total revenue and gross profit mix generated from these marketing campaigns has increased during COVID-19, the fluctuations in revenue and gross profit generated by this activity has been exacerbated by the COVID-19 pandemic.

While our monthly performance throughout the third quarter remained well above the lows of the pandemic in April, activity across all three lines of business is well below our pre-COVID levels. Adjusted operating expenses in the third quarter came in at $6.9 million, compared to $6.7 million in Q2 and $9.9 million in Q3 2019, as we aggressively manage and reduce expenses.

This quarter, we recognized approximately $1.8 million related to the Canadian Emergency Wage Subsidy program, compared to $2.3 million, in the second quarter of 2020. These subsidies were recorded as an offset to employment costs, with the Q3 funds collected after the quarter end.

At present, funding under the subsidy program has been extended to December 19. We expect to remain eligible for funding up to this date, but anticipate recording a lower subsidy amount in the fourth quarter, compared to Q3 levels based on the current funding formula.

In addition, the Canadian government has indicated their intent to extend the subsidy program until June 2021. While details of this extension are still not known, we are monitoring it closely.

Looking to the fourth quarter, we expect our monthly adjusted operating expenses to be in line with Q3 levels, excluding the benefit of any wage subsidies. Based on that run rate and after factoring in expected subsidies in the fourth quarter, we would expect to generate positive cash flow, when transaction volumes and gross profit are approximately 50% to 2019 levels.

For perspective, monthly gross profit was as high as 70% during the second quarter, but averaged approximately 40% for the third quarter. Adjusted EBITDA for the third quarter came in at minus $1.1 million, compared to $300,000 in Q2, and $4.4 million in the year ago quarter.

The sequential decrease was due to the aforementioned changes in the strength and timing of our promotions, which negatively impacted gross profit and to a lesser extent lower subsidies recorded in the third quarter. As Rob mentioned earlier, we are still on track to be adjusted EBITDA positive for the full year.

Total funds available, which include borrowings on our credit facility were $68.2 million at the end of the third quarter, compared to approximately $107 million at the end of the second quarter and $86.8 million at the end of 2019. We elected to repay $5 million on our credit facility during the third quarter, bringing our outstanding balance down to approximately $30 million as of September 30 2020.

This sequential decrease in our overall cash and liquidity position predominantly reflects changes in the timing of our promotional activity and the resulting impact on gross sales activity relative to last quarter. All said, we remain comfortable with our strong balance sheet as we continue to navigate the effects of the pandemic.

With that, I'll turn it over to Chris. Chris?

Thanks Erick. Over the last number of years, we've consistently communicated three core growth drivers for Points.

Our first driver is consistently establishing relationships with new loyalty programs or merchants around the world; second, is launching net new services with our pre-existing partners; and third, is consistently improving or expanding services currently in market through enhanced and automated merchandising efforts. While these are clearly very challenging times for everyone in the travel-related industries, the last seven months have highlighted the resilience of our business model.

And all these three drivers have contributed to both our current performance as well as establish strong opportunities for accelerated growth once the global environment improves. It's the third driver that's pulling a lot of the load today.

Our consistent investments in marketing automation coupled with ever increasing data flows across our loyalty commerce platform has allowed us to drive promotional volume over the past many months and offer much needed revenue to our partners. As Rob mentioned earlier, despite some month-to-month variability, we're confident that the rest of the year will show increased strength heading into 2021.

Our first growth driver is bringing new loyalty programs onto the platform. Last quarter, we announced our partnership with Qatar Airways' Privilege Club in August deploying services to our LCR platform and it began to ramp up during the last few months.

Privilege Club members can now buy gift and transfer their Qmiles through our platform to receive the rewards faster with dynamic personalized promotions driven across our loyalty commerce platform. While we're still in the early days of this partnership, it does represent another key win for us in the Middle East with a premium program.

This region has been growing aggressively in recent years and we look forward to capitalizing on this inertia by deploying new and additional services with Qatar in the near future. In addition we are pleased to launch Caribbean Airlines and a new partnership with a broad suite of LCR services and we're excited to continue to add leading North American brands to our partner roster.

This was another opportunity to drive our strategic relationship with Amadeus and represents another step in a more fulsome integration of our loyalty commerce platform with a number of Amadeus' airline reservation and loyalty systems. Next up with Amadeus is launching our LCR suite with Ethiopian Airlines, we signed to a new contract during the third quarter.

We'll be offering more details on this upcoming deployment as they go live. While adding new programs to our partner universe remains a mainstay of our growth profile, expanding current relationships is just as important to laying a foundation for community growth.

We've also been very active here over the last number of months. We recently launched a new capability in our partnership with Chase Bank Ultimate Rewards program, which allow cardholders to receive double their original amount of points when they transfer their bank branded points into travel program reward currencies.

Throughout our long standing relationship Chase has been able to increase its member engagement by leveraging our exchange services. This newest capability allows us to expand that partnership and further deepen our presence in the financial services industry.

In August, we've deployed a program between GetYourGuide, a leading tours and activity website and Alaska Airlines Mileage Plan, allowing users to earn miles when they shop at GetYourGuide site. We expect to be adding more new merchants to our network in an effort to drive both revenue and member engagement to our loyalty program partners during the period of reduced travel.

Our Alaska Airline teams have been busy with the mileage plan program for the first partner to launch on our Accelerate Anything Service that allows members to boost almost any of their prior earnings, opening up more non-airways for members to earn their favorite miles. With this service, members are targeted with special offers for additional miles based on their previous month -- mileage activity.

This creates a targeted contextual non-travel transaction that is efficiently driven off our loyalty commerce platform and we're confident that we'll be extending this new revenue generating service to other partnerships in the near future. Last month, we are encouraged to further expand our long-term partnership with Delta Airlines and the SkyMiles loyalty program by launching a state of the art customer service program called Delta Choice.

This new program will enhance the ways in which passengers are compensated for travel issues and streamline the internal customer service experience. The launch phase of Delta Choice provides Delta customer service teams with a more efficient loyalty platform by consolidating the tools processes and capabilities used in concession offerings for Delta customers.

Delta customer service agents can now compensate customers for travel issues with gift cards and the upcoming Phase 2 will add the option to compensate customers of SkyMiles. This expansion is the latest of many solutions Points has powered for Delta Airlines over a partnership spanning nearly 20 years, including currency exchange and redemption programs for SkyMiles members and an incentive program that enables merchants and businesses to directly reward their customers or employees with SkyMiles.

Lastly, we recently launched a new service with United Airlines for select members to add a monthly subscription to their mileage earning options. This premium service is a first for us and represents another new revenue stream we're confident will be attractive to our global loyalty program customers as they seek to add more value to their programs as a linchpin for their recovery strategy.

We remain confident in the value of loyalty programs to represent both to their members as well as corporately and believe they will play a significant role in how our industry recovers from the pandemic driven setback the industry has suffered. Putting new programs in market will add to our performance throughout this time and fuel long-term value, even if they cannot initially perform at historical levels.

As we launch new services and add new partners to our roster, our long-term growth drivers remain at the core of our strategy. We are committed to maximizing the performance of our end market services, cross-selling to existing partners and signing new partnerships across new verticals and geographies, all while carefully managing our operating costs.

As we work to both strengthen our current partnerships and establish new ones, we are encouraged by the pipeline we have built for the road ahead. These opportunities and relationships, remain key to capitalizing on the travel and hospitality industry's inevitable recovery, and signal both the importance of loyalty programs as a key engine for this recovery as well as the resiliency of our business model.

We're looking forward to updating you along the way as we announce more industry successes. With that, I'll turn the call back to the operator.

Thanks.

Great. Good afternoon, Robert and Chris.

Thanks for taking the questions. In Q2, I think it was pretty clear nearly all of the LCR revenue was derived from future travel use.

So I guess I was just wondering maybe how you saw near-term travel use pick up in Q3 maybe in terms of the breakdown between revenue and gross profit between future and near-term use relative to last quarter?

Yes sure. Greg, it's Rob.

I think when we assess how the mileage purchases are -- the intention of the mileage purchases and how they'll be used I think, it's still very much for future travel. And I'd really point to not a significant lift yet in overall air travel performance.

We're seeing our partners still down 60%, 70%, 80% in terms of volumes certainly in the U.S. and in some cases even more than that in the international markets.

So, I think the activity that's happening now would be consistent with what we saw in the second quarter where members are collecting that currency for future travel not so much for the next couple of weeks so to speak.

Okay, got it. And then, I know that you typically have a 60 to 90-day window kind of visibility in terms of upcoming promotional campaign activity in the market.

So I was just wondering, if anything you can share there relating to partners that will be ramping their promotional activity in the foreseeable future?

Yes. I think the fourth quarter, as I indicated in my prepared remarks, it's fairly looking much stronger.

I think we've got a fairly robust marketing, promotional campaign running really across the board with a number of our partners. So that part of our business historically ebbs and flows, as Erick mentioned in his update.

But we do – when we look at October and then how the fourth quarter is playing out, it's a pretty strong suite of campaign activity that we have in front of us here through the end of the year which is very positive.

Okay. Great.

Thanks, guys.

Hi. Good afternoon, everyone.

A couple of questions here. And hoping I'm going to sound intelligent, because I'm not that familiar with the story as others.

First of all, just that wage subsidy was booked in the adjusted operating expenses this quarter, right? Even though it was paid thereafter.

Is that correct, Erick?

That's correct, Gary.

Okay. Thank you.

And then I guess, just as I'm reading through my notes here, you kind of said that – or I think you said that Q3 was above Q2 in a sense or it was above the April level? And obviously probably May and June improved from April, which was the bottom.

But – so with Q3, it looks like you were basically almost flattish with Q2. Is that a function of that the promotions that you thought were going to come on or promotions didn't come on that would have driven revenue growth sequentially a little bit higher than where it was in Q2?

I'm just trying to understand what's going on here.

Yes. Hey, it's Erick here again.

The way I would think about it and perhaps starting with Q2 I mean obviously, we were happy with the sequential growth, we saw in that quarter. Normal times for our LCR segment, we normally see an ebb and flow on marketing campaigns and what's out in market and the consumer response to that.

So April being the trough at roughly 20% of 2019 levels, certainly we're well ahead of that now. What you're seeing really in Q3 is within the margin of our expectations for what we would have expected for Q3, which again is just how the loyalty currency retailing effectively works pre-COVID or post-COVID for me variability standpoint.

I would add on there Gary, as we reported in the second quarter, June was a very kind of robust marketing campaign in place with a variety of our large partners and we saw some really good results on that. There tends to be a little bit of kind of up and down as we migrate between partners.

We don't typically run aggressive campaigns back-to-back with partners. And so some of that that was finishing in the end of Q2, starts to move in back into play here early in the fourth quarter.

And so I think some of that is what's driving what we're seeing positive result-wise in Q4. And so you had some – a little bit of a gap there in terms of how the campaigns ran through parts of the third quarter.

Okay. Thank you.

Thanks very much. Good afternoon.

Maybe for you, Erick. Just two points of clarification.

I missed the gross profit commentary and I think it was alluding to maybe Q4 in your opening remarks. If you could just clarify that.

And then on the government subsidies, can you just remind us – I missed the number for Q2 and I can't seem to find in my notes, if you could just kind of give me that one as well?

Yes, sure. So maybe starting from the back.

So the subsidy amounts in the second quarter was $2.3 million and that dropped to $1.8 million in the third quarter. With respect to Q4 gross profit, I didn't have any comments on that in my prepared speech.

So I – maybe you simply misheard there. Rob spoke about it being generally a stronger promotional calendar, which we're seeing play out in October so far.

But that's about as much as we've spoken to Q4.

Yes. We expect – it's Rob.

We expect the fourth quarter to be improved across all metrics. And I think Erick conveyed, as I did as well that we expect to quarter -- sorry the full year to be a positive adjusted EBITDA for the full year period as well.

Okay. Yes.

No that's fine. Sorry for that confusion.

And on the kind of month-over-month trend and the sequential improvement you're seeing into Q4, I guess, for you Rob. You probably don't want to give a year-over-year, kind of, decline range for Q4.

But are you able to I guess just kind of being midway through the quarter?

Yes. You know us pretty well with that opening statement there Drew.

We probably -- we wouldn't go to that level of detail at this stage. And again, I think, we've said since the inception of COVID our visibility isn't what we would like it to be.

And so I'm not trying to jump the question, but what we do see at a kind of a day-to-day level in the fourth quarter is running in line with the activity. So we're seeing more activity with partners.

We're seeing more partners engaged as we get here through the fourth quarter. We're seeing performance on the campaign activity improving.

And as we get kind of some spacing between some promotional activity that was very effective in the second quarter. So we're comfortable in looking ahead to the rest of the year particularly this late in the stage and seeing a much improved fourth quarter of what we saw in the third quarter.

But in terms of kind of year-over-year numbers, I think, I'd probably be comfortable just leaving it at a continued improvement. And look for us figuring out when the recovery really starts in earnest is a bit tricky.

I mean we're optimistic about what we're seeing here in the fourth quarter. There's some positive signs out there in terms of 2021, but it's still very, very early.

So we're going to be fairly pretty focused on just the next couple of weeks next couple of months for a while until we get more visibility and we get to more traction in just a broad travel recovery. We're seeing pockets of recovery, but the scale that we want to see is not there quite yet.

Hey, Drew, it's Chris. Just to add to that as well.

I mean there are two parts to the business. Obviously it's the transactional performance that's driving current financial performance, but also as we've talked about pretty consistent deployment of new partners and new services.

And again we don't see that slowing down in the fourth quarter either. We'll be punching out some more stuff for the rest of this year and into next year.

And so that's -- to Rob's point so that's one thing that we can somewhat control in laying as much opportunity out there for us as the recovery starts picking up into next year.

It's a great point. We have a -- we use a term around here pretty regularly lately.

Our business development and commercial team are really very focused on a spring loaded concept. And the pipeline activity I think we've got four or five new partners that we've launched.

We've got a dozen or more expansions with existing partners. And as Chris indicated, a number of new propositions coming on here in the remaining six weeks or seven weeks of the year.

That -- those are that kind of foundational work now while it's not producing big numbers today given COVID activities, we feel really good about that spring loading us and giving us a bigger footprint as the recovery -- inevitably as that recovery comes forward we'll just be able to accelerate forward with that. I do think -- and we believe we spend a lot of time with our partners through this process as you might expect.

We fully expect our products and services early to put us at the forefront of that recovery. We fully expect to be at the early stages of the travel recovery largely because of the nature of our products and services.

They tend to be engagement products. They tend to be revenue-generating and profit-generating products for our partners.

And so as we start to see some recovery, we think that accelerates relatively quickly. So we're pleased with that business development and pipeline development over the last seven months for certain.

Yes, you actually addressed my final question on where you would be on the ramp-up that makes sense. Maybe as a kind of follow-up on that is it -- I guess kind of two things I'm curious about is from your perspective and let's just generically say, kind of the airline or hotel vertical, do you have any sense of kind of milestones that these industries are looking for to be able to have the confidence that turning on the promotional tap and really pushing to load up volume in these industries is good bang for the buck?

Or is the mindset, we've got to spend a lot over quarters or years to kind of convince folks to climb back on board? Like, do you have any sense talking to your partners where they are on that nature of the ramp-up?

Probably not quite to those specifics, I'd convey this. I think we're watching and seeing a lot of the commentary much like you would be in terms of where the airlines and hotels in particular see the time frame for recovery.

And that ranges from typically two to four years from CEOs from airlines and hotels and seem to be kind of laying that kind of a framework out. It does vary by geography.

It varies a little bit by the business segment. Leisure was an expectation, leisure comes back a little bit sooner and business travel a little bit later.

So I think that's been consistent over the last three or four months in terms of time frame. Each of the partners are looking at different – certainly, are feeding back to us different metrics and different things that are important to them.

We're seeing partners like United add some capacity back into markets like JFK and areas that they haven't been in – in some time. We see some of the Middle Eastern carriers being more aggressive as they see pockets of opportunity.

We certainly have partners in the U.K. that have said to us that as some of these quarantine rules kind of morph over time, they'll put inventory and capacity into markets where there aren't in the – or quarantine restrictions and that capacity gets eaten up very, very quickly.

So there's a bunch of kind of anecdotal activity out there that we stay pretty close to with our partners. But it is anecdotal at this point.

So we'll stay close to the market. We'll stay close to our partners.

We're pretty confident that, they're still very interested in driving revenues from these low-cost high-margin opportunities like our products and services, putting a plane in the air, or a daily trip to a new market is a very expensive proposition where driving a lot of the activity that we support is a very profitable transaction, low-cost transaction for them. So we again, feel like we'll be on the early side of that recovery.

But it's not particularly consistent in terms of how the hotels and airlines are metric – or managing those metrics.

Yeah. Hey, Drew, it's Chris.

I'd just add one point there is that, pretty much guaranteed that as they start putting more effort into the marketing and getting people back, they'll be focused on that database that they already own of their best flyers or best stayers. So it will be that loyalty database that will be the first, second, and third stop on the promotional side to get people reengaged.

It won't be a broad-based brand building reach out for sure. So we're – we feel we're going to be in a very good spot to benefit from that kind of focus on the upswing.

Okay. Got it.

Thank you, Rob and Chris. It's great.

Thanks, Drew.

Yes. Thanks for taking my question.

Did you notice any significant differences in regions in terms of your performance in the third quarter?

In the third quarter?

Yes.

Not really. I think the mix from what we saw in the second quarter was pretty consistent in Q3 as well.

I think maybe we are seeing a little more strength in North America versus Europe, Middle East in Q3 versus Q2 just a little bit of a slip, but pretty similar Ed to what we had been experiencing early in pandemic as well.

All right. And then you mentioned that you feel more confident about your performance in the fourth quarter.

It's a little bit stronger. Is that even including the fact that most of Europe is lockdown right now?

And we're getting resurgence cases back in North America? Or do you think that people are looking to take a longer-term view in terms of getting these miles now for like you said future travel and not necessarily near-term travel?

Yes. It's a great question because it's -- we make those statements largely on the basis of what we see campaign-wise kind of booked in flight so to speak.

We have a pretty good sense of how the campaigns are performing here in the early part of the first quarter as well as what the schedule looks like through the end of the year. But you raised a good point that this -- everything is changing very quickly.

That's just a fact that we're seeing lockdowns being reinstated in certain markets. We're seeing certain markets open up a little bit more.

And so it is a more fluid environment than we've experienced in our 20 years for sure. But based on what we see campaign-wise schedule-wise engagement and plans with our loyalty program partners as we sit here today, it feels like pretty comfortably that we're in an improving quarter.

All right. And my last question is you mentioned earlier about how obviously the travel industry in the U.S.

or airline industry in the U.S. had to do massive layoffs because their subsidies ran out in October.

Has that affected your business at all in terms of the people that you deal with at your airline partners? Or has it not really been a big factor?

Yes it's a great question. It certainly has impacted.

We have -- we work with some fantastic people throughout the industry, throughout the world. And unfortunately the size and scale of some of the furlough activity in some of the big hotel chains as well as airlines has impacted some of those contacts and relationships.

We're hopeful that in many cases those are short-term. But there's no question that some people on the other side have been doing some great work are not there when we're picking up the phone these days.

So we've seen a number of those situations improve where people have been called back from furlough and were kind of getting rolling. But like any business dealing with those kinds of interactions there's certainly been a bit of turbulence on that front.

All right. Definitely, thanks for information and I wish you guys, good luck.

Thanks, Ed.

Thanks, Ed.

Great. We'd like to thank everyone for listening to today's call and we look forward to speaking with you all when we report our fourth quarter and full year results.

Thanks again for joining us this evening.