eDreams ODIGEO S.A. (EDR) Earnings Call Transcript & Summary

Good morning, everyone, and thank you all for joining us today for our first quarter fiscal year 2023 result presentation for the 3 months ending 30th of June 2022. I'm David de Roz, the Director of Investor Relations and Division [indiscernible] . As always, you can find the resource materials, including the presentation and our results report, on the Investor Relations section of our website. I will now pass you to Dana Dunne, our CEO, who will take you through the first part of the presentation. Thank you.

Thank you, David, and good morning, everyone, and thank you for joining us today. Throughout the first quarter of this new fiscal year, FY '23 for us, we have seen that the travel market continues to improve and recover significantly. Even with the Ukraine war, high inflationary pressures, flight disruptions, COVID, et cetera, people have shown that they want to travel and they are willing to spend money on travel. Within this context, our strong trading has demonstrated best-in-class performance, substantially outperforming the market and its competitors. In fact, we have set all-time records in terms of bookings and revenues, and we have had the largest quarterly increase in subscribers ever, over 560,000 in just 3 months. Now, we have 3.5 million subscribers in August and growing, and this translates into a far higher quality business than what we used to have, and that what others have. In today's presentation, I will take you through the key points of our outstanding set of results, which will include key highlights of why eDO continues to perform strongly and gain market share, more details on our outperformance versus the market, and then I'll hand you over to David Elizaga, our CFO, who will take you through our strong first quarter FY '23 performance in detail as outlined in our financial statements, and then I will conclude today's presentation with some closing remarks. Please turn to Slide 4, which is a summary to our performance of the first quarter of our fiscal year 2023 results. In the first quarter of FY '23, we achieved a new record in bookings, the highest in the company's history. We continue to gain market share. We are on track to exceed our FY '23 -- sorry, our FY '25 guidance. Some of the key highlights for today's presentation are: first, we have again achieved strong bookings growth. In the first quarter of FY '23, bookings were up 98% year [indiscernible] and 50% above pre-COVID-19 levels. This is with the Ukraine war, high inflationary pressures, recent air industry disruptions and a travel market that is yet to fully recover to pre-COVID levels. Despite these macro issues, we still have seen a real resurgence in travel, with our bookings in July up 38% versus 2019 pre-COVID levels. And in August, from the first to the 28th of August, were up 55% versus 2019 levels. There's no doubt consumers want to travel. There is a reason why travel is the largest single category online. Travel provides a unique experience that people cherish, want and are willing to spend on this. Second, both Prime and eDO continue to outperform. eDO's bookings performance is outstanding, materially better than the market. While the market is still below pre-Covid levels, we continue to be significantly above pre-COVID levels, now having achieved our fourth quarter in a row being above pre-COVID levels in bookings. Above all, our business has increased its quality with the pivot to subscription, has higher repeat rates and becomes more profitable year by year as customers renew. In the first quarter FY '23, we reached 3.2 million Prime subscribers. This is an additional 2 million new subscribers versus the same period last year. And in the first quarter FY '23 alone, we added 560,000 new subscribers. This too is a record number of new subscribers added in a single quarter. Total Prime subscribers at August now total 3.5 million, well on our way towards the 7.25 million target set for 2025. Third, in the first quarter of FY '23, revenue margin as well as cash revenue margin moved above pre-COVID levels for the first time since April 2020. First quarter FY '23, revenue margin and cash revenue margin exceeded pre-COVID-19 levels by 3% and 11%, respectively. Cash revenue margin in the first quarter FY '23 increased 117% versus the same period last year, with bookings up 98%. And the increase in revenue margin per booking of 8% was driven by the increased quality of our business following the pivot to subscription and strong growth in diversification revenues. Overall, the first quarter of FY '23 has seen the improving trends we saw in FY '22, and a return to profitability. Cash marginal profit stood at EUR 33.5 million. That's 2x the amount we achieved in FY '22. And a strong cash EBITDA growth up 349% versus the same period last year. As guided previously, the strong growth in first year Prime members puts a drag on the growth and profitability. This jumps in the second year. As Prime matures, we expect improvements in profitability as proportion of Prime members beyond their second year increases. Fourth, the company is on track to meet or exceed its self-imposed FY '25 target, and is well financed and has solid cash flows. Why? Because our free cash flow in the first quarter FY '23 amounted to EUR 29.4 million and cash and cash equivalents at the end of the period, net of facilities and overdrafts, were EUR 30.8 million, and that's including the reimbursement of the remaining EUR 30 million of the Super Senior Revolving Credit Facility. The results of this is that at the end of June, the group only had EUR 17 million drawn under the super senior revolving credit facility. We have a very strong balance sheet as we do not have any short-term needs to refinance any of our debt. The earliest maturity is September 2027, and we are on track to meet our self-imposed 3-year guidance, which is first, Prime members greater than 7.25 million. Second, ARPU of approximately EUR 80, and third, cash EBITDA in excess of EUR 180 million. In all, we believe we've got the right model, right people, right structure to seize and deliver on exciting opportunities ahead of us. Now, I'll take you through more details. Please turn to Slide 6, where I'll take you through eDO's outperformance. As you can see on our booking data, eDO achieved record booking growth in the first quarter FY '23, reaching 4.4 million bookings in the quarter, 50% greater than pre-COVID. And if we look at July and August, we have continued to experience strong growth, with July and August bookings growing 38% and 55% above pre-COVID-19, respectively. All of this has been realized under the Ukraine war, COVID, high inflationary pressure, flight disruptions, et cetera. Also, I would like to add one additional comment about the excellent performance in August. The August year-on-year has higher growth than July this year. August is seasonally a less busy month than July, and therefore in absolute bookings, will likely be lower. As we move away from COVID, we do expect to return to a more normal automate winter seasonality pattern which did not occur during COVID. This means we will likely have a lower number of absolute bookings in the months leading up to Christmas. Please turn to Slide 7. eDreams ODIGEO has consistently outperformed against peers, as evidenced by IATA public data and recent results from low-cost carriers, and this translates into market share gains and highlight our superior proposition to customers as well as the strength and adaptability of our business model. The company has again outperformed versus regular airlines by 71 percentage points and versus the LCCs by 49 percentage points in the first quarter of FY '23. This is despite a market that is yet to return to pre-COVID-19 levels. Put another way, while the market continues to recover and is yet to achieve pre-COVID levels, eDO has been above pre-COVID levels now for 4 consecutive quarters. Please turn to Slide 8, in which we will discuss the continued strong growth in Prime members. Prime continues to grow very quickly. It's up 164% versus the same period last year in members, and adding 2 million members in the 12 months to June 2022. In August, we reached 3.5 million members, a remarkable achievement since COVID variance disrupted the travel market for large parts of FY '22 and in FY '23. Overall, eDO has become a much higher quality business with a pivot to our subscription model which delivers loyal and repeating customers, resulting in a more profitable business after the first year. And it moves us from a transactional business to one of long-term, more predictable and sustainable relationships with customers and the associated financial benefits as well. Please turn to Slide 9, in which we will talk about our diversification KPI. Overall diversification revenue continues to grow. It is already above pre-COVID-19 levels and the largest contributor to revenues. Revenue diversification ratio has continued to improve. It increased from 54% in FY '21 to 74% in FY '23, a 20 percentage point improvement over 2 years. If you could please now turn to Slide 10. I'd like to reemphasize that we believe, regardless of the current macroeconomic uncertainties, our business model and track record positioned us to outperform the industry. We have demonstrated that we are the place in which customers prefer to book their travels. This is driven by, one, thanks to Prime, we offer the best prices, best value and customer experience. Two, because we meet the customer needs even more than competitors from depth of choice, speed of our work experience, after sales service and so many other things that we have taken years for us to relentlessly focus on and perfect. In total, we have higher customer satisfaction scores than our competitors. Three, also, our customers will focus on price even more in the context of discretionary income coming under pressure, which again plays to our strengths. Four, in addition to all that, we have resilience via Prime with 3.5 million plus subscribers, who give us a much higher share of wallet of their travel that they continue to consume. Now I'll pass you to David, who will discuss in more detail our financial results.

Thank you, Dana. If you can all please turn to Slide 12 of the presentation, I will take you through the financial results in more detail. In the first quarter of fiscal '23, revenue margin and cash revenue margin reached levels already above pre-COVID-19 levels by 3% and 11% respectively, despite the macroeconomic headwinds and recent industry disruptions. The revenue margin in the first quarter of fiscal '23 increased 113% versus the same period last year due to higher bookings, up 98%, and the increase in revenue margin per booking of 8%, which was driven by the increased quality of our business with a pivot to subscription and strong growth in our revenue diversification. Variable costs increased by 128%. The increase was caused by the rise in bookings and an increase in variable cost per booking of 16%, from 24.7% in the first quarter of fiscal '22 to 28.5% in the first quarter of fiscal '23. The cost of booking increased because of higher acquisition costs to acquire Prime members and a rise in merchant costs associated to higher gross sales. These increases were partially offset by lower call center costs, the reward for the automation we implemented during the pandemic. Overall, in the first quarter of fiscal '23, we have seen the steadily improving trends we saw in fiscal '22 and the return to profitability. Cash margin and profit stood at EUR 33.5 million, that's twice the amount we achieved in fiscal '22. And cash EBITDA grew 349% versus the same period last year. As guided previously, the strong growth in Prime members in their initial year delays growth in profitability, with that profitability rising in the second year. Over the next few quarters, we expect improvements in profitability as a proportion of Prime members in the second year and beyond increases. Fixed costs increased by EUR 4.2 million, mainly driven by higher personnel costs and external fees, both related to the recruitment of new employees as well some negative impact of FX. I would like to remind you that we do not expect an increase in fixed costs from EUR 63.3 million in fiscal '22 to the EUR 100 million that we've guided in the fiscal '25 target to be linear, because recruitment to deliver on our business plan are front-end loaded. If you look at the Note 8.2 of our financial statements, we have increased the workforce by 147 employees year-on-year, with 107 of those employees being since March to June of '22, which is 20% of our target headcount in less than 10% of the time. As a reminder, in total, we plan to add 500 new employees by March '25, with much of this front load. As a result, adjusted EBITDA was slightly positive at EUR 0.6 million, and that is EUR 40 million including the full contribution of Prime from a profit of 3.1% in the first quarter '22, also including bank contribution. Adjusted net income was an EUR 11.5 million loss in the first quarter of '23. If you all please turn to Slide 13 of the presentation. New KPIs showed the strong growth in Prime cash revenue margin and marginal profit in the last 12 months due to the exponential growth in Prime members and corresponding ARPU. Our Average Revenue Per User, ARPU, grew by 24% versus fiscal '22 and stood at EUR 86 per member, which is above our '25 target of EUR 80. However, we do not expect this current level to be sustainable, and we maintain our long-term guidance of EUR 80 per user. Current level is influenced by the significant increase in Prime members during last year and the gap between Prime members at the end of period driving the subscription fee portion of ARPU and average Prime members used for the denominator in the calculation. The strong growth in cash revenue margin and cash margin profit has led to 41% and 53% over last 12 months. Cash over margin and cash margin profit, respectively, now coming from Prime members, versus 34% and 45% respectively just 1 year ago. I would like to remind you that profitability from Prime members increases substantially from the second year on as acquisition costs reduced very significantly. Once we have a larger proportion of our Prime members in the second year cohort and subsequent years of membership, the profitability of the front side of the business will improve. Please turn to Slide 14 of the presentation. During the pandemic, we have continued to invest and innovate in our subscription offering and have seen remarkable results. Cash revenue margin is already above pre-COVID-19 levels by 11%, and cash margin or profit and cash EBITDA will improve due to the large increase of Prime members in the year. Which, as highlighted before, profitability of Prime jumps in the second year. In the first quarter of '23, deferred revenue growth as driven with Prime has accelerated, following the subscription of 2 million more new members over the course of the year. This amounts to EUR 13.4 million, that is up 166% year-on-year. Cash EBITDA with the full Prime contribution was EUR 14 million in the first quarter of '23, an improvement of 349% in just 1 year. Turning now to Slide 25, I will take you through the cash flow statement. Sorry, that's Slide 15. First quarter of '23, despite the macroeconomic uncertainty and recent air industry disruptions which affected a good portion of the quarter, we reported very stable net cash from operating activities. We have ended the quarter with a positive cash flow from operations of EUR 36.2 million mainly due to a working capital inflow of EUR 28.9 million. The inflow during the first quarter of '23 is smaller than the first quarter of '22. Since then, we had a more rapid return of volumes than anticipated as many of the travel restrictions were eased between March '21 and June '21. Whereas during the first quarter of '23, our last quarter, the increase in volumes between March and June '22 was smaller, though still strong. This is partly offset by a higher increase in Prime deferred revenue than in the first quarter of '22. We have managed our liquidity position well, a consequence of our strong business model and active management and the strong bookings performance on the company. Liquidity at the end of June stood at EUR 199 million, and I'm pleased to say that at the end of June 22, we only have EUR 17 million left in our Super Senior Revolving Credit Facility as drawn. We have used EUR 6.9 million of cash in the first quarter of '23 for investment, that's EUR 1.2 million higher than the previous year, as we're increasing our development capacity and therefore, higher capitalization of software development. Cash used in financing amounted to EUR 34.8 million compared to an inflow of EUR 17.4 million from financing activities in previous year. The variation by 52.2% predominantly relates to a repayment of EUR 30 million that we've done under the revolver and some outstanding payments associated with the refinancing we did in January. Our free cash flow in the first quarter of 23 amounted to EUR 29.4 million, and cash and cash equivalents at the end of period net of facilities and overdrafts was EUR 30 million, which including the remaining reimbursement of the revolver. Excluding this, our cash position would have been next to 60%, which compares with 45% in the same period last and underlying a strong cash generation performance. I will now turn the presentation back to Dana to do the closing remarks.

Thank you, David. Let me ask everyone to turn to Slide 17. I will conclude by giving you some final remarks. We strongly believe that we are positioned for future success due to our innovative approach in travel that has been proven in other industries. The reasons for this are, one, we're in the pole position in an attractive market. The e-market is sizable, growing and attractive, and eDO is positioned in the right segments, Online and Leisure. eDO Market is one of the largest in the world. It's growing is attractive. It is still in the recovery phase coming from an all-time low, and is growing now. Moreover, time and time again, leisure consumers have proven that they want to travel and will prioritize travel versus other things, and leisure travel is not substitutable. In our year-end results, we shared data from surveys showing consumers would give up other discretionary spending versus travel. The results we have seen published in the last few weeks by some retail companies in comparison with our results and those of other travel companies already show this in the actual data. eDO is positioned at the heart of this, Online and Leisure. You have seen our bookings over the past year have been above pre-COVID levels for 4 quarters. And ever since the start of the Ukraine war, high inflation and flight disruptions, we continue to be significantly above pre-COVID levels. Please turn to Slide 18 of the presentation, the second reason. Within travel, eDO is the global flight leader excluding China, and over 3x the size of the second player in Europe. Please turn to Slide 19 of the presentation, which covers the third reason. eDO has demonstrated the ability to capture new customers through the Prime program while converting existing customers. Prime is the #1 travel subscription program in the world, and over 60% of our Prime customers are new customers and have not used an eDreams digital product during the last 3 years. This endorses that the Prime proposition is attractive not only for existing customers, such as our 24 million-plus customer base which book with us over the last several years, but it's also attractive for new members too, all of which helps explain why we are capturing and building market share. Again, I have to stress, even with Ukraine war, high inflation, site disruptions, et cetera, Prime attracts lots of new members. In fact, over 1 million just in the last 6 months. Whatever way you look at it, Prime is successful, delight customers, grows a market share, and it is mutually beneficial for our customers, the company and our shareholders. Please turn to Slide 20 of the presentation. In summary, we're well positioned, well financed and on our way to meeting our self-imposed FY '25 targets. Which are, Prime members over 7.25 million, an ARPU of around EUR 80 and cash EBITDA in excess of EUR 180 million. We believe eDO has huge potential which will drive superior returns for shareholders, excellent service for customers, while at the same time transforming and revolutionizing the industry. With that, we would now like to take your questions. [Operator Instructions] Operator, if you could please open the conference for questions.

So I'm going to start reading the questions that we have in the webcast. The first group of questions comes from Carlos Trevino, the analyst of Santander. The first one says, could you give us an indication on how do you expect your EBITDA to evolve once renewals of bank subscribers would weigh more on the mix?

So thank you for your question, Carlos. The -- as you're saying, that is the biggest driver. That there is, for the interest in the profitability, and I think that we've repeated that several times across our speech today that we will not get tired of repeating it. To put everyone into perspective, we have just published a quarter with an increased level of profitability, reaching 9% cash EBITDA margin, and that compares to 21% for the same quarter pre-COVID. At the same time, we have given a specific guidance that we have reiterated yet again today, that in fiscal '25, we will reach a cash EBITDA margin of 22% for the aggregate business, and that is broken down between 29% for the subscription part and 10% for the transactional side part. And there are 3 drivers for the increase in profitability. But the most important one, and this is by far, in proportion, is as we have been saying, the increased proportion of Prime members in the second and subsequent years of membership. That's the biggest driver by far, and that's going to happen gradually. A lot less important is the improvement in the travel patterns with more passengers per booking, more long-haul flights, more nights in destination. This in our plans is something that will happen very gradually until the end of fiscal '24, beginning of fiscal '25, but it is a lot less important than the maturity of the Prime members. The third one is the improvements that we keep doing to our products and services. But we intend to give back the vast majority of additional revenue and profit back to Prime members in the form of additional discount. And that is why we expect, we've also said to date, the ARPU is now expected to trend down to 80%, because we're going to give back this in the form of discounts to Prime. We want our prime numbers to have our wonderful value proposition and to repeat every date with us. So the more important lever being the first one, we expect that already in the next few quarters, there will be meaningful improvements in the profit margins. The second question is, have seen any change in your churn rate due to a worsened macroeconomic environment? And the response is no. The same way that we haven't seen a deceleration in our volumes or we have not seen a deceleration in the increase in the net adds, we have also not seen an increase in the churn rate. Our offer continues to be very competitive to our customers. The second block of questions comes from Francisco Ruiz, the analyst of Exane. The first one says, you have commented that margins should improve throughout the year, thanks to lower acquisition costs from Prime subscribers. Could you give us an idea of your marginal profit for fiscal '23? We're not disclosing a specific guidance for fiscal '23, but I refer to what I just said on the questions by the analyst at Santander. We do expect interesting improvements in profitability, sorry, throughout the remaining 3 quarters of the fiscal '23. The second question is, could you give us an idea of the churn levels in Prime? Nice try, Francisco, but we have disclosed this metric and we are not changing that. And the third question says, any light on the Prime subscriber by geography? We also don't disclose that information specifically. But like we have said in previous instances, we do not see a material difference among countries in terms of the speed of take-up of Prime. So there are 2 main factors that determine the amount of subscribers that we have across our different geographies. The first one is how big the country is. And naturally, in bigger countries, you're going to get bigger amount of subscribers. And the second one is for how long has our prime offer being around in the country, and we tend to have a lot more subscribers in those countries where we've been offering Prime for a bigger number of years. The third set of questions comes from [indiscernible] from Barclays. I'm actually going to read them together because they are quite similar. The first one says, why did the diversification revenue take rate declined from 7.6% in the first -- in the fourth quarter of '22 to 6.4% in the first quarter of '23. And the second one is, why did the classic supplier revenue take rate declined from 1.4% to 1.1% in the first quarter of '23? So for those of you who are not familiar with the packet terminology in the travel industry, take rate refers to the revenue divided by the total basket size of the booking. We don't really use it as an internal metric that we really track because it doesn't determine the amount of revenues that we do on our booking. The amount of revenues that we do in our booking depends on the actual amount of products and services that the customer purchases, which is a function of the complexity of the booking. So the more passengers to booking that there is, the more further away the decline, the larger amount of night destination. Then they take all of those factors of complexity and they allow us to provide more products and services. What we have been seeing in the industry in the last few months has been an increase in air fares. Even though they're still, for Western Europe, slightly below where they were pre-pandemic, they have been increasing in a meaningful way for the last, let's say, 6 months. So with the airfares increasing, naturally, the basket size increases, and just mathematically, the take rate as defined by this investor decreases. But it's says really nothing about our business. The more important thing is how complex are the bookings that customers take. The next set of questions come from Chadd Garcia, Schwartz Investment Counsel. It's a long list, so let me take them one by one. The first one says, are you seeing any changes in the percent of repeat Prime bookings coming through cheap channels? And the answer to that is no, they have remained stable. The second question says, it looks like Prime cash revenue margin from new Prime transcriptions exceeds that of Prime subs that had anniversaries in the quarter. Is this true? And if so, what were your earnings throughout the rest of the year? So it is true. I just want you to understand, when we have a new subscriber, you have a subscription fee. And by definition, you always have a first booking with that subscription fee. When you have a renewal during the quarter, some of those renewals will be with customers that also in that quarter, they make a booking, and some of those renewals will not have a booking in the first quarter just because it's not the time of the year in which the customer makes a booking. And therefore, the revenue margin for those renewing Prime subs is lower because we don't have the revenue associated with the booking. So yes, it is true. Now, as to how does it bode for the earnings, I go back to the explanation that I've given already a few times, which is the more than the Prime member base matures, the higher our margins are going to be done. The third question says, are you seeing any changes in your Prime subscription retention levels? And the answer is no. They continue to remain roughly the same, so this is the few side of the third question, and so the answer is the same one. The fourth question says, what are your plans to retire your government debt? The government sponsored debt, we have repaid half of that. So it was originally a EUR 15 million loan of which as, of today, not at the close of June but as of today, we have given back half of it, so there's EUR 7.5 million remaining. The next EUR 7.5 million will be repaid in less than 12 months. So it's reasonably short term until after that debt is repaid. The fifth one, I think this one is for you, Dana. It says, any updates on hotels and U.S. expansion?

Certainly. So let me put in context again for people that are newer to us. We talked about a number of very attractive growth opportunities that we have in front of us, and I would refer you to probably our November 2021 presentation to investors at the Investor Day. And we said that there is a number of ones, 2 of which Chadd has mentioned, one was around hotels, the second one's around the U.S. We continue to progress very well. In that, we said that there were multiyear type of initiatives for it in which we wanted to improve what we call a minimum viable product to a much, much better level because the results are ready, we're showing to be extremely positive in that. And so we continue to make progress on them. We also talked about our headcount increase, and part of those people would be allocated to those opportunities. We've mentioned just recently that we've hired 130 new people, and the bulk of them have actually gone on to these two opportunities, and so we continue to. As part of our results that you see actually for this quarter alone, we start to see some effects from the things that we have been doing. The U.S. improvements continue to be little by little, incremental types of improvements that we continue to roll out, if I can say, every month to every year, to every month, every quarter. There are some more fundamental structural ones, and those will come really into the next financial year related to the U.S. And then for the hotel, similarly, we continue to improve on that. And the more fundamental ones, I think we said we're really much more 1 to 2 years from now in terms of impact. But overall, very good progressing.

Okay. The next question from this investor says, what should cash EBITDA margins look like a year from now? And said another way, how are customer acquisition costs impacting cash EBITDA margins? I think I've replied to this one already. And yes, the investor points very well that the biggest driver on the margins will be the reduction in the customer acquisition cost, and that reduction comes from Prime members getting to the second and third year in which there isn't an acquisition cost for those. And the last question from this investor says, if you return to normalized seasonality, it should be less of an issue now, given the increase in percentage of revenues coming from Prime subscription, correct? Yes, that is absolutely correct. The subscription revenue increases as a percentage of the total. The swings in the amount of bookings on a quarterly basis coming from seasonality affect less the overall description of, let's say, the overall evolution of the business. That's why we always say that the subscription business model is one that has more predictability than the pure transaction business. The next set of questions comes from Guilherme Macedo Sampaio, the analyst at CaixaBank. The first one says, can you comment on the current average basket size gap versus 2019? Sure. The basket size in 2019 was around EUR 450. That basket size decreased during the pandemic to a level of around EUR 300. The last quarter that we have published, the average basket size was EUR 400. As you can see, there has been, as I was saying before, quite a steep increase of the EUR 300 in which we were, although the majority of that has been driven by increases in the air fares and not increases in the complexity of the bookings. So there's still another EUR 50 to go to get to the EUR 450 that we used to have pre-pandemic. Which is also in line with the comment that, at least, that I said, which is that the average pure [indiscernible] prices are still a bit below 2019, and then the rest of the road to get to the EUR 450 should come from the increased complexity of the bookings. The second question says, aside from the bookings data disclosed, is there any additional color that you could provide regarding the most recent demand trends or expectations towards year-end? Maybe you want to respond to that?