Despegar.com Announces 2Q18 Year-over-Year Growth of 18% in Transactions and 12% in Gross Bookings

Despegar.com, Corp. (NYSE: DESP), (“Despegar” or the “Company”) a leading online travel company in Latin America, today announced unaudited results for the three- and six-month periods ended June 30, 2018. Financial results are expressed in U.S. dollars and are presented in accordance with U.S. generally accepted accounting principles.

Second Quarter 2018 Key Highlights

• Transactions up 18% year-over-year
• Gross bookings up 12% year-over-year
• Revenue up 4% year-over-year
• Packages, Hotels and Other Travel Products accounted for 59% of total revenue in 2Q18, up 704 basis points from second quarter 2017
• Mobile transactions up 37% year-over-year, accounting for 33% of total transactions in 2Q18
• Over 43 million cumulative mobile application downloads as of June 30, 2018, up 32% year-over-year
• Adjusted EBITDA decreased 9% year-over-year
• Operating cash flow of $0.3 million in 2Q18, compared to $7.3 million in 2Q17

Message from CEO

Commenting on the Company’s results, Damian Scokin, CEO stated, “Against a challenging macro backdrop, we reported solid second quarter 2018 results, with gross bookings up 12% year-on-year. Although a good performance, currency volatility in Latin America hurt overall industry demand, and caused a mix-shift from international to domestic travel and impacted FX translation on gross bookings. In this context, we took advantage of our leading market position and financial strength, including lowest cost operating structure, to gain market share at an accelerated pace compared with past quarters. We also grew twice as fast as our main competitors in some markets. Additionally, we continued investing in enhancing customer satisfaction and in technology to provide new products and services for our customers. In the near-term, these actions put pressure on margins, but will drive benefits in the future, further differentiating us from the competition and expanding our market share.”

Mr. Scokin further commented, “With over two decades experience operating in the region, we have the expertise and resources to navigate through various economic cycles and a business model that provides flexibility. We are already well positioned with a large and stable customer base as we continue to see consumers shift their travel expenditures online and to mobile and believe we will be generating improved margins when macro conditions improve. We remain focused on our long-term strategic priorities. To that end, we have made significant progress as higher margin Packages, Hotels and Other Travel Products now account for 59% of revenue, over one-third of transactions are now via mobile and NPS after trip experience scores have improved 400 basis points year over year”.

Overview of Second Quarter 2018 Results

Operating Metrics

Transactions rose 18% to 2.6 million in 2Q18 from 2.2 million in the year-ago period, while gross bookings increased 12% to $1,184.4 million in 2Q18, from $1,061.0 million in the second quarter of 2017. Across key markets in which it operates, particularly Argentina, Despegar faced slower travel market growth and currency depreciation. Against this backdrop, the Company was focused on leveraging its strong competitive position and lowest cost operating structure to accelerate market share gains at a faster pace than historical, in the $100 billion Latin American travel market, and improve customer satisfaction levels, which contributed to higher transaction growth.

The Company’s business is organized into two segments: (1) Air, which consists of the sale of airline tickets, and (2) Packages, Hotels and Other Travel Products, which consists of travel packages (the bundling of two or more products together which can include airline tickets and hotel rooms), as well as stand-alone sales of accommodations (including hotels and vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services.

Despegar’s focus on driving growth in the higher-margin Packages, Hotels and Other Travel Products segment maintains momentum, reaching 42% of transactions up from 40% in 2Q17. The average selling price (“ASP”) in 2Q18 decreased 5% year-over-year to $454 per transaction, mainly reflecting a mix-shift from international to domestic travel in Argentina impacted by the challenging economic environment, along with the effect from overall local currency depreciation, specifically, 30% in Argentina and 15% in Brazil. This more than offset the continued mix-shift to higher ASP packages and higher supplier local currency price increases within similar product segments.

Brazil remains the largest market by transactions for Despegar, accounting for 42% of total transactions and grew 21% year-over-year in 2Q18. Transactions increased 11% year-over-year in Argentina and 15% year-over-year in Mexico in the second quarter of 2018.

Despegar continues to make solid progress in driving mobile transaction growth. During 2Q18, the number of transactions via mobile rose 37% year-over-year, with 33% of all transactions completed on the mobile platform, up from 28% in 2Q17.

Revenue

Total revenue increased 4% to $128.3 million in 2Q18, from pro forma $123.4 million in the year-ago period, reflecting solid growth in Packages, Hotels & Other Travel Products. Total revenue margin declined 80 basis points year-on-year, to 10.8% in 2Q18, due to reductions in customer fees and discounts in package transactions to gain market share during the current weaker demand environment and mix-shift from international to lower-margin domestic destinations.

• Air segment revenue was $53.2 million in 2Q18, decreasing 11% year-over-year from pro forma $59.9 million in the year-ago period. Transactions were up 14% year-on-year resulting in market share gains despite increased competition, particularly from the supplier direct channel, and slower overall market growth. Higher volumes were offset by a 22% decrease in average revenue per transaction resulting from the Company’s strategy of lowering air customer fees in several markets to drive market share gains and provide additional cross-selling opportunities, along with a mix-shift from international to lower-margin domestic travel driven by local currency depreciation, particularly in Argentina.
• Packages, Hotels & Other Travel Products segment revenue rose 18% in the second quarter of 2018 in 2Q18 to $75.1 million, from pro forma $63.6 million in 2Q17, driven by a 23% increase in the number of transactions, partially offset by a 4% decline in revenue per transaction resulting mainly from the slower macro backdrop and currency depreciation along with price discounts. The Packages, Hotels and Other Travel Products segment accounted for 59% of total revenue in 2Q18, up from 52% in the same period of the prior year.

Cost of Revenue and Gross Profit

Cost of revenue, which mainly consists of credit card processing fees, bank fees related to customer financing installment plans offered and fulfillment center expenses, was $42.1 million in 2Q18 compared to $35.1 million in 2Q17, an increase of 20%. As a percentage of revenue, cost of revenue rose by 438 basis points to 32.8% from 28.4% in the comparable period a year ago. The increase in cost of revenue was primarily driven by a higher mix of transactions completed on an installment plan, a marketing tool the Company uses to drive conversion, along with higher installment plan costs from the sharp interest rate hike primarily in Argentina. Incremental costs to operate the fulfillment center reflecting the Company’s increased focus on customer service also contributed to higher cost of revenues, partially offset by continued reduction in fraud and efficiency improvements in the fulfillment center.

Additionally, credit card merchant fee expense increased reflecting a higher mix of transactions where the Company was the credit card merchant of record rather than airline suppliers which allowed Despegar to offer more attractive customer financing options.

Gross Profit decreased 2% year-on-year to $86.2 million in 2Q18, reflecting lower revenue margins as a result of the Company’s initiatives to accelerate market share growth and investments in support of improving customer satisfaction levels.

Operating Expenses

Total operating expenses in 2Q18 decreased 0.5% to $79.2 million, from $79.6 million in 2Q17 mainly benefiting from the regional currency depreciation, principally in Argentina which accounts for approximately half of total operating expenses. As a percentage of revenue, total operating expenses declined 274 basis points to 61.7%, from 64.5% in the comparable period a year ago. Year-over-year declines of 120 basis points in selling and marketing as a percentage of revenue and 184 basis points in general and administrative, more than offset a 31 basis point increase in technology and product development expenses.

• Selling and marketing expenses of $43.5 million were basically flat as compared to 2Q17. As a percentage of revenue, selling and marketing expenses in 2Q18 decreased to 33.9% from 35.1% in 2Q17, benefiting from the regional currency depreciation, a lower level of marketing investment and improving efficiencies.
• General and administrative (G&A) expenses declined 9% year-over-year to $17.0 million, from $18.6 million in the second quarter of 2017, driven by currency depreciation in Argentina during the period and reduced bonus expense. Consequently, G&A as a percentage of revenues declined 184 basis points to 13.2% in 2Q18 from 15.1% in 2Q17.
• Technology and product development expenses increased 6% year-over-year to $18.7 million in 2Q18, compared to $17.6 million in 2Q17 reflecting increased technology headcount partially offset by lower expenses from currency depreciation in Argentina where the majority of headcount is based. As a percentage of revenue, technology and product expenses increased by 31 basis points year-over-year to 14.6% as the Company continues to invest in its technology and product development platform.

Financial Income/Expenses

In 2Q18, the Company reported a net financial expense of $5.3 million compared to a net financial expense of $1.6 million in 2Q17. The increase was mainly due to higher foreign exchange losses from currency fluctuations across the region and higher credit card receivable factoring expenses in Brazil as a result of the increase in gross bookings. This was partially offset by higher interest income from invested cash balances.

Income Taxes

The Company reported an income tax expense of $0.5 million in 2Q18, compared to $3.8 million in 2Q17. The effective tax rate in 2Q18 was 28%, compared to 59% in 2Q17. The lower rate in 2Q18 is primarily driven by the full recognition of deferred tax assets in certain subsidiaries that were reduced by a valuation allowance in previous years.

Adjusted EBITDA & Margin

Adjusted EBITDA was $12.0 million in 2Q18 compared to pro-forma $13.1 million in the comparable year-ago period, with the margin contracting 128 basis points to 9.3% from 10.6% in the prior year period. The reduction in margin is primarily related to lower customer fees in air and price discounts in packages, together with higher installment expense to support top line growth.

Balance Sheet and Cash Flow

Unrestricted cash and cash equivalents at June 30, 2018 was $390.7 million, compared to $371.0 million at December 31, 2017, reflecting cash flow generated during the six-months ended June 30, 2018.

Despegar generated positive cash flow from operating activities of $0.3 million compared to $7.3 million in 2Q17. This reduction was mainly due to an increase in VAT credits, other tax credits related to a technology incentive program and a reduction in travel supplier payables.

During 2Q18, the Company’s capital expenditures were $7.8 million compared to $5.4 million during 2Q17. Funds were primarily used for technology hardware and office expansion.

Subsequent Events

Board of Directors Approves Share Repurchase Program

On August 9, 2018, the Company’s board of directors approved a share repurchase program that enables the Company to repurchase up to $75 million of its shares effective immediately and expiring in one year. Share repurchases may be made through a variety of methods, including in the open market, a 10b5-1 program and through privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities.

The Company is not obligated to acquire any specific number of shares and the repurchase program may be suspended, terminated or modified at any time for any reason.

Files Registration Statement

We expect to file this week a registration statement with the Securities and Exchange Commission to register shares held by affiliates of Tiger Global. The primary purpose of this registration statement is to enable Tiger Global to distribute its shares to its limited partners as one of its funds nears its end of life. We expect a majority of the shares being registered will be distributed to Tiger’s LPs.

Argentina Considered Hyperinflationary Market

As of July 1, 2018, as a result of a three-year cumulative inflation rate greater than 100% and following the guidance of ASC 830 the U.S. dollar became the functional currency of the Company’s Argentine subsidiary. This change in functional currency is to be recognized prospectively in the financial statements. As a result, the impact of any change in currency exchange rate on the Company’s balance sheet accounts will be reported in the Net financial income/(expense) line of the income statement instead of Other comprehensive income.

2Q18 Earnings Conference Call

Use of Non-GAAP Financial Measures

This announcement includes certain references to Adjusted EBITDA and non-GAAP financial measures. The Company defines:

Adjusted EBITDA is defined as net income/(loss) exclusive of financial income/(expense), income tax, depreciation, amortization and share-based compensation expense.

Free cash flow is defined as cash flow from operating activities less capital expenditures including capitalized software.

Adjusted EBITDA and Free cash flow are not measures recognized under U.S. GAAP. Accordingly, readers are cautioned not to place undue reliance on this information and should note that these measures as calculated by the Company, may differ materially from similarly titled measures reported by other companies, including its competitors. Adjusted EBITDA margin refers to Adjusted EBITDA as defined above divided by revenue.

Definitions and concepts

Average Selling Price (ASP): reflects gross bookings divided by the total number of transactions.

Gross Bookings: Gross bookings is an operating measure that represents the aggregate purchase price of all travel products booked by the Company’s customers through its platform during a given period. The Company generates substantially all of its revenue from commissions and other incentive payments paid by its suppliers and service fees paid by its customers for transactions through its platform, and, as a result, it monitors gross bookings as an important indicator of its ability to generate revenue.

Number of Transactions: The number of transactions for a period is an operating measure that represents the total number of customer orders completed on our platform in such period. The number of transactions is an important metric because it is an indicator of the level of engagement with the Company’s customers and the scale of its business from period to period but, unlike gross bookings, the number of transactions is independent of the average selling price of each transaction, which can be influenced by fluctuations in currency exchange rates among other factors.

Revenue: The Company reports its revenue on a net basis, deducting cancellations and amounts that it collects as sales taxes. Despegar derives substantially all of its revenue from commissions and other incentive payments paid by its suppliers and service fees paid by its customers for transactions through its platform. To a lesser extent, Despegar also derives revenue from the sale of third-party advertisements on its websites and from certain suppliers when their brands appears in the Company advertisements in mass media.

Revenue Margin: calculated as revenue divided by gross bookings.

Seasonality: Despegar’s financial results experience fluctuations due to seasonal variations in demand for travel services. Bookings for vacation and leisure travel are generally higher during the fourth quarter, although to date and prior to the revenue recognition change beginning in the second quarter of 2018, the Company has recognized more revenue associated with those bookings in the second quarter of each year. Latin American travelers, particularly leisure travelers, who are Despegar’s primary customers, tend to travel most frequently at the end of the fourth quarter and during the second quarter of each year.

About Despegar.com

Despegar is the leading online travel company in Latin America. Operating across 20 countries, Despegar provides a broad suite of travel products, including airline tickets, travel packages, hotel bookings and other travel products to over 17 million customers. With a mission “to make travel possible”, the Company’s one-stop marketplace enables millions of users to find, compare, plan and easily purchase travel services and products. Through Despegar’s websites and leading mobile apps, it offers products from over 300 airlines, more than 450,000 accommodation options, as well as approximately 1,000 car rental agencies and approximately 240 destination services suppliers with more than 7,700 activities throughout Latin America. The Company owns and operates two well-recognized brands, Despegar, its global brand, and Decolar, its Brazilian brand. Despegar is traded on the New York Stock Exchange (NYSE: DESP). For more information, please visit www.despegar.com.

Forward-Looking Statements

This press release may include forward-looking statements. We base these forward-looking statements on our current beliefs, expectations and projections about future events and financial trends affecting our business and our market. Many important factors could cause our actual results to differ substantially from those anticipated in our forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements.

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