Points International (PTS.TO) Q1 Results: Concedes More Margin; Bullish Outlook

Revenue for Q1 2009 was reported at $21.1 million, a 30% increase over previous year Q1. Principle revenue represented $19.8 million or 94% of total revenues. The company reported a 48% increase for this revenue stream over previous year Q1.

Sequentially from Q4, revenues were down approximately 3% from Q4, 2008. There is typically some seasonality in revenues, so the sequential decline is not unexpected.

The Company lost $1.1 million or $0.01 loss per share for Q1 2009 versus $0.9 net income, or $0.01 EPS during Q1, 2009.

Management still maintains revenue guidance of between $85 million and $95 million for FY 2009 with positive annual EBITDA. Guidance would suggest that management is anticipating significantly better quarterly performance for the remainder of 2009. Since revenue is over 90% recurring, the company has historically had pretty good visibility on future performance.

The company continues to provide margin concessions to its biggest clients (in particular Delta Airlines (DAL.NYSE)) in order to drive more transactions, and more revenue. As its clients continue to grind Points International on margins, investors should begin to wonder if the shift to the principal model has delivered the margin leverage that was originally expected.

The company has finally signed Continental Airlines as a client (Global Points Exchange). This is good news, although the potential for GPX continues to be speculative. Today the service is still in beta and there are 134 trades posted on the website, up by a dozen or so from earlier this year. The company does not publish results for this program, so the daily volume of trades is not known. Also, Management signalled that it was about to ramp investment into the points.com consumer portal. Transactions on the consumer site represent 11% of the total volume of reported total transactions for the quarter. There are approximately 2.1 million registered users, up 15% from Q1 2008. However, the website is not perceived by consumers to be a destination, and traffic levels have averaged in the 100k - 200k range per month for some time.

Investors may like the bullish outlook for the remainder of 2009, however there should continue to be some concerns regarding the 3 quarters of reported declining margins on the principal revenue. The aggressive investment focus on the consumer portal may concern some investors since that line of business has remained (over many quarters) a small contributor to total sales and profits.

What will the analysts think? Expectations for this company have declined significantly since the beginning of 2008. The margin performance should continue to be a concern to some, and the GPX story may begin to lose its lustre. As a result, today investors should expect mixed opinions from analysts that cover the story and it is unlikely that there would be upward adjustment to forecasts and targets.

Disclosure: I do not own shares of PTS or DAL.

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