GUESTLOGIX INC. Moderator: Brett Proud May 15, :30 p.m. ET

Transcription

1 Page 1 GUESTLOGIX INC May 15, :30 p.m. ET Operator: Good afternoon, ladies and gentlemen. Welcome to the Guestlogix Fiscal 2013 First Quarter conference call. I would like to remind you that listeners are cautioned that today s call and the responses to questions may contain forward looking statements within the meaning of the provisions of Canadian Provincial Securities laws. Forward looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward looking statements and actual results may different materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to different materially from expectations, and about this period and other filings excuse me and about material factors or assumptions applied in making forward looking statements, please consult Guestlogix s MDNA for material factors in this period and other filings with Canadian securities regulators. Guestlogix does not undertake to update any forward looking statements except as required. Such statements speak only as of the date made. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time to queue for questions. If anyone has difficulties hearing the conference call, please press star 0 for operator assistance at any

2 Page 2 time. I would like to remind everyone that this conference call is being recorded Wednesday May 15th, 2013 at 4:30 pm. I would now like to turn the meeting over to Mr. Brett Proud, President and Chief Executive Officer. Please go ahead, Mr. Proud. Thank you, (Sarah). And thank you everyone for joining us this afternoon. With me today is Guestlogix s Chief Financial Officer and Chief Operating Officer Brian Reddy. Earlier this afternoon, we released our fiscal 2013 first quarter results. The news release and other materials are available on our website at guestlogix.com and will be available on (CDAR). I m pleased to report that we drove revenue to a 24 percent increase over the same quarter last year. Our results reflect both the solid foundation Guestlogix has built, as well as the value of the acquisition of Initium Onboard that we completed last September. During the quarter, we also saw sustainable growth performance in our EBITDA results and we are confident that this trend will continue in the coming quarters. During the previous two earnings calls, we stressed that as a company we were focused on resetting ourselves as an organization. We are now starting to see the results of that work illustrated in today s release. We closed the quarter with revenues of $7 million, and recognized positive EBITDA of $.3 million, which was a 54 percent increase over the same quarter last year. In the quarter, we had a net loss of $1.2 million. And a significant factor towards

3 Page 3 this net loss was a $678,000 non-cash charge that is the result of the derivative warrant liability stemming from our debt financing transaction last fall. Based on IFRS accounting principles, we are required to report these warrants in relation to their current value on the open market. This non-cash charge will continue to be reflected, either as a gain or a loss, based on current share value until either the warrants are exercised or the end of the term is reached. Brian will provide additional information regarding the derivative warrant liability and all the all other non-cash charges during his upcoming discussion. But before handing it off to Brian to discuss the financial results in more detail, let me take a moment and reiterate our key growth drivers for Our key growth drivers are increasing the number of transactions that we process, increasing the average value of the transactions that we process and increasing the fees we earn for each transaction we process. Within the quarter, we have had success performing against each of these growth drivers. For growth driver number one, increasing the number of transactions that we process, our channel partnership with Talus, one of the top inflight entertainment and connectivity providers in the world was solidified within the quarter with the signing of a 10 year contract. I ve spoken at great length about the magnitude of both the agreement with Talus and our agreement with Panasonic Avionics, and we re excited that both are well underway. After the March 11th announcement about our partnership with Talus, we began the integration of our transaction processing engine, or as we refer to it, our TPE, with Talus onboard systems, and we have successfully completed this integration effort. We are on track for a summer launch with a major US carrier. And we have a strong pipeline within Talus customer base of more than 35 airlines.

4 Page 4 This summer, we will also be launching our payments solution through Panasonic on a major Canadian airline s new IFE systems. These new deals and those within both Talus and Panasonic s deployment pipelines will significantly drive the number of transactions that we process through out platform, and will play a significant role in driving rapid revenue growth over the next several quarters for Guestlogix. We also announced the signing of European carrier and it s West African subsidiary Gambia Bird, which continues to reinforce the requirement for our standard onboard retail technology platform in the marketplace. We expect to be live on these two airlines by the end of the summer. Also, and subsequent to quarter end, we announced that we secured a four year agreement with one of the leading Asia Pacific airlines, Cathay Pacific, and also with it s regional airline Dragonair. This is a major win for Guestlogix and our channel partner Inflight Sales Group, as Cathay Pacific represents one of the strongest duty free carriers in the industry. The Asia Pacific region continues to be the top duty free and travel retail market in the world, and Cathay Pacific is currently ranked as one of the top three carriers in the region for onboard sales. It is also the start of what we believe will be major inroads for Guestlogix within Asia Pacific. As I shared with you on the previous call, we have had several successful trials in this region, and we are moving these trials to contract stage during Q2. For growth drive number two, increasing the average value of transactions, within the quarter, we successfully went live with our customer Sun Country Airlines with a comprehensive destination based merchandising program. Currently Sun Country is selling multi city entertainment and ground transportation offerings. These programs have a significant lift in the significant lift in the average transaction value that we process, and also speaks to enhancing passenger

5 Page 5 experience, which is a powerful combination. And we believe this is the future of ancillary revenues within the passenger travel industry. We continue to see interest in this area throughout our customer base, including also with our rail customers. And we believe that the success we are having with Sun Country will translate into new destination based content deals, both in North America and throughout other regions. For growth driver number three, increasing the fees earned per transaction, one of the key areas for growth for us will be to continue to expand the services we offer within our customer base. We have a number of service offerings that have been identified for use within our current accounts, which ll deepen our relationship with these carriers, as well as generate net new revenue streams for Guestlogix. One such example was the announcement of a new service offering enhanced logistics management services, which positions us to take over the management of POS device care, providing a truly end to end technology offering. This is a service that is a very simple extension of our relationship with the airlines, and we will be seeing positive impact on revenues within the year as a result. Another example is with our analytics platform. Our team has built the complete business intelligence platform that rivals those used at many of the top retailers in the world. As we mentioned in our announcement about Cathay Pacific, Cathay will be using this solution component from the time they go live with your technology platform. We also have four more airlines currently trialing the analytics platform, and we will see great ramp up in this area throughout the year and into In addition, we are now transitioning a major European rail carrier over to our global payment gateway to begin processing payments for them, another natural extension of our services. We plan to have additional operators also transition to our global payment gateway throughout the next several quarters.

6 Page 6 These types of services simply go towards us being able to leverage our current market share, as well as ensure that we continue to succeed on new deal signings. In a moment, I will discuss our expectations for the coming quarters, but right now I want to hand it over to Brian Reddy, our CFO and Chief Operating Officer to discuss this quarter s financial results in a little bit more depth. Brian? Brian Reddy: Thank you, Brett. Good afternoon everybody. The unaudited condensed interim consolidated statements are prepared under international financial reporting standards or IFRS. They are also presented in United States dollars, which is our functional currency. The company changed it s year end to December 31st from November the 30th effective with the year ended December 31st, Consequently for Q1, the comparable quarters are March 31st, 2013 and the three month ended February the 29th, Revenue was $7 million for the quarter, compared to $5.6 million for the comparable quarter in As Brett mentioned, this was an increase of 24 percent quarter over quarter. Solid growth in revenues was seen over the quarter in three areas of our primary growth focus for 2013 and 2014, those being Asia Pacific, AMEA and the global rail. These three areas, on a combined basis, added over 10 percent to our revenues in the quarter over the comparable quarter in Our recurring revenues

7 Page 7 were 69 percent of total revenues in the in the quarter, compared to 73 percent in Q This performance falls within our historical range for recurring revenues. Total operating expenses increased $1.6 million from $5.7 million to $7.3 million, an increase of 28 percent. The increase is a result of our general business growth over the past year, and the acquisition of Initium Onboard in the fall of But there are some areas of particular note that we will comment on (in) a little later. In addition, we were capitalizing certain development costs during During Q we capitalized a total of $541,000 to deferred development costs, which was spread amongst the various functional line items. As part of the restructuring undertaken over the past six months, there have been a number of expense reclassifications, which makes a line by line comparison of operating expenses difficult. We noted on our last call that we had established an internal target of $2 million per month for (Rpex), excluding cost of equipment sales and amortization of intangible assets. Removing cost of equipment sales and the amortization of intangibles from (Rpex) for Q shows that we are tracking slightly above our internal target of $2 million per month. The reasons for tracking slightly higher than our internal target are primarily related to the following expenses, legal and investment banking charges for the special committee, third party consultant fees and related expenses to support our global payment gateway and merchandising solutions, and legal fees related to specific commercial contracts. These costs, totaling some $500,000 in the quarter and carried within general and administrative expenses, will continue over a relatively short duration, and we do expect them to start dropping away by mid year Research and development expenses increased $120,000. These expenses are primarily personnel and travel costs, and are related to the development of core products. In the prior year, these types of expenses were capitalized and became subject to amortization when the products were commercialized.

8 Page 8 Customer delivery and support expenses increased to $1.2 million from $866,000. The primary driver of this increase is related to the acquisition last fall and the additional customers added to our portfolio. We are working towards, and are optimistic, that we will be able to generate further synergies as we move the European clients to our North American hosting environment and introduce a global communications platform. Sales and marketing expenses increased $161,000 in the quarter from the year ago quarter. This increase was a result of additional personnel and travel costs incurred, primarily in Asia Pacific region. General and administrative expenses increased from $1.1 million to $2.4 million in the quarter, an increase of $1.3 million. Since quarter we have added offices in Hong Kong and Bristol England and personnel in the United Kingdom and Asia Pacific, in particular. These added continuing costs to our general and administrative expenses of some $300,000. Also included in general and administrative expenses are the one time costs of $500,000 noted above and the amortization of intangible assets totaling $280,000. Other income and expenses, Brett s already mentioned the derivative warrant liability charge in the quarter of $678,000. Bear in mind it is a non-cash charge and is required accounting under IFRS. Because we have outstanding warrants that are denominated in US dollars, but our underlying common stock is Canadian dollars, we are deemed under IFRS to have a derivative financial instrument that must be marked to market at each reporting period. As a result of our stock price appreciation over the quarter, we reported charge to income, which places a greater value on the warrants for the warrant holder. This is disclosed as a derivative warrant liability on our statement of financial position or balance sheet. To reiterate, this current liability of some $2 million is purely a bookkeeping exercise and is a non-cash liability.

9 Page 9 Loans and borrowing interest and fees include quarterly interest on the promissory notes issues in November (inaudible) November 2012 and the quarterly accretion of the discount (booked) at the issue date of some $158,000. It is important to remember the non-cash items that are working their way through the statement of financial position, operations and cash flows currently. I ll take a moment to recap them. They are depreciation and amortization of $343,000, share based payment expense of $188,000, mark to market of the derivative warrant $678,000, accretion expense of $159,000 totaling $1.368 million. Cash and cash equivalents are $4.7 compared to $5.6 million at December 31st, The change in cash is mainly a result of settling old outstanding payables. Accounts receivable was some $6 million compared to $4.9 million at December 31st, Day sales however, have improved in the quarter from 70.8 days to 67.8 days. Since March 31st, the company has collected to date, $2.4 million of the outstanding receivables at the quarter end. Working capital at the quarter end was negative $6 million. Without the movement of the November 2012 promissory notes to current liability, which are due May 31st, 2014 an the impact of the derivative warrant revaluation, working capital would have improved from a negative $.1 million at December 31st, 2012 to a positive $1.2 million at March 31st, We will continue to take advantage of leasing opportunities in situations where we are providing hand held devices as part of the overall solution. We will also continue to closely monitor opportunities to strengthen our balance sheet and cash position in the coming quarters. And management is confident (that the) current pipeline of business begins to contribute to revenues, those opportunities will unfold. EBITDA for the quarter was $267,000 compared to $173,000 for the comparable quarter in As we expand our leverage capability in coming

10 Page 10 quarters across our footprint, we do anticipate seeing a growth in EBITDA performance. Thank you, and I ll hand it back to Brett. Thank you, Brian. One area that I also want to speak to before we get to Q&A is one of the byproducts of the market positioning of our transaction processing engine. Since the announcement of our agreement with Talus, we have received several requests from travel companies outside of the onboard space to discuss our transaction processing engine. At Guestlogix, we realized that our major differentiator is our deep knowledge about the complexities of capturing and processing payments throughout the travel world in a variety of mediums. As a result, these travel companies are seeking to license our transaction processing engine for use in a variety of travel touch points in offboard environments. These companies represent great synergies with our overall offering, and we have been successful in generating many new and lucrative leads without Guestlogix having to actively go to market with an offboard solution of our own. In total, these new transaction channel partnerships could drive an additional 1 billion plus passengers to access our transaction transaction processing engine offboard on a per annum basis. Before we open up the call for questions, I want to point out that we believe we re approaching a major inflection point within the company s financial performance in the coming quarters. As we transition into lines of into new lines or business, in particular with our inflight entertainment and conductivity partners, we will see our revenues begin to significantly outpace our operating expenses. We have reached a point, as a company, where we have integrated our technology into multiple access points, thereby allowing the volume of transactions we process to increase at a substantially faster rate.

11 Page 11 (Panning) this with our strong baseline business, drives significant revenue growth moving forward. It is important to stress that we are now able to drive net new transactions in an exceedingly cost effective manner, vastly improving our gross margin results. We are excited that our financial projections for the company, over the next several quarters, will illustrate this improvement. Finally, I want to (reiterate) the following key points, we closed the quarter with a 24 percent increase in revenue, as compared to the same quarter last year. The foundation we have created remains strong, and we are now executing well against our growth drivers. Our partnerships with Talus and Panasonic are progressing very well, and we are on schedule for deployments with a strong group of airlines, including one major US airline and one major Canadian airline set to go live this summer. We are also successfully growing our transitional business with new customers in Europe and in Asia Pacific. The agreement with Cathay Pacific and Dragonair is a major win for Guestlogix and is a sign of great momentum in the Asia Pacific region. As we continue to successfully advance our business in the ways I have discussed today, we are nearing an inflection point, by which we will begin to see growth in revenues significantly outpace any growth in our in our expenses. In that light, I can personally say that I m very pleased with our first quarter performance, and we and we remain firmly committed to driving much improved shareholder value over the coming quarters. The trajectory for Guestlogix continues to improve. (On) behalf of all of us, I could say we are acutely focused on capitalizing on the moment we have created over the past several months. With that, I want to thank you all for taking the time to join us for the call today. And now, I ll turn it back to (Sarah) to open the call for any questions.

12 Page 12 Operator: At this time, if you would like to ask a question over the phone, please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Your first question comes from the line of (Ben Venatelli). Your line is open. (Ben Venatelli): Good afternoon. Hey, (Ben). How are you? (Ben Venatelli): Good thank you. I just wanted to see if you could address or discuss how your overall revenues were up 24 percent, but yet your GTVs were up significantly more than that. Can you can you shed some light on what the dynamic is behind that? The biggest thing that s happening for us is is sometimes there is a bit of a delay in timing from when initial revenues come in for a deployment until we see the revenues coming through on actual GTV. So, it really is just a timing issue. (Ben Venatelli): OK. So, we should expect that to catch up in Q2? Well, it s going to catch up over quarters, because it doesn t come from one deployment. So, it might not all catch up in one quarter. But it will catch up over there's always going to be a timing issue, (Ben). It will catch up over quarters. (Ben Venatelli): OK. And from a topline perspective can you discuss what portion of the revenue increase came from acquisition vis a vis organic growth?

13 Page 13 From Initium, it was keeping in line pretty much flat for what we what we recorded in Q4. So, we really didn t see any real growth in that area for Q1. But we do expect again, as we turn the 27 customers we picked up from Initium Onboard into more of our model, in terms of being recurring revenue model, not a hardware software model, we do expect to see growth from those accounts, again slower in Q2, but picking up in Q3, Q4. So, the biggest issue with those accounts is again the commercial model that we picked up across those accounts is a lot different than the commercial model that Guestlogix is used to, so. (Ben Venatelli): OK. Perfect. Thank you very much. Thanks, (Ben). Operator: Your next question comes from the line of (Ron Shutleworth). Your line is open. (Ron Shutleworth): Oh, thanks for taking my call. (Inaudible) Hi, (Ron). (Ron Shutleworth): Hi. Just real quickly on the process that you re in, didn t hear the very beginning of the conference call, but can you just give us an idea of how things are progressing there? And it looks like you ve spent few hundred thousand dollars on legal and committee fees, and I m just wondering where we stand on the process? Yes, we don t have a any definitive time. There's no definitive end point. You know, we may be announcing something between now and May 31, however we may be announcing something between now and or the AGM on June 19th, but we may not. So, the strategic review process continues.

14 Page 14 The only thing I can say is that at this point is that we believe that the outcome will be beneficial to all shareholders. So timing wise, I the process is continuing. And you know, perhaps compared to what we said three, four, five, six months ago, in terms of timeline there you know, there again, (inaudible) there's no specific end point. There's no hard deadline. We re in a process, but we do believe that the outcome will be beneficial to all shareholders. (Ron Shutleworth): (Inaudible) (a lot less definitive than it was previous in the previous) conference call you had last quarter, I think, where you were providing some timeline. So basically, what you re saying is the timelines are now sort of up in the air? No, they're not up in the air. They're in the process (of) continuing. The process is moving along just can't there's no specific end timeline. So, it s not a concrete there's nothing concrete in terms of the timeline. The process is moving along. Is it moving along as fast as everybody would want it to? No. But the process is moving. And again, like I said, we believe the outcome will be beneficial for all shareholders. (Ron Shutleworth): OK. So, related to those extra costs, I think Brian, you mentioned that they will be ending sort of mid-year, in terms of the committee and legal expenses related to the strategic process, is that correct? No, no. No, no. Brian is saying that that is our view of the world at the moment. That s not a definitive end. (Ron Shutleworth): OK, so right now, based on what you re seeing, you expect that those costs will decline or it would be eliminated sometime middle of the year? Correct.

15 Page 15 (Correct). That s what we believe at the moment, (Ron), in terms of where we are with the process. (Ron Shutleworth): OK, and so and Brian, what percentage of your total SG&A do those represent? Brian Reddy: Oh as a total as a percentage, it s fairly small of total G&A. (Ron Shutleworth): OK, like probably what, 10 percent? Brian Reddy: Oh, no. Less than that. (Ron Shutleworth): OK. Brian Reddy: Yes, I d say probably you re looking at 2 to 3 percent. (Ron Shutleworth): Two to 3 percent, OK. OK, I ll pass the line, thanks. Thanks, (Ron). Brian Reddy: Thanks, (Ron). Take care. Operator: And once again, in order to ask a question over the phone, please press star then the number 1 on your telephone keypad. Your next question comes from the line of (Doug Cooper). Your line is open. Good afternoon guys. Just talk a little bit more about the pipeline, so we saw I guess essentially flat revenue sequentially, presumably because a lot of these

16 Page 16 new programs haven t kicked in with either Panasonic or Cathay or some of the others. You know, we talked Talus I think it s 4200 planes, and Panasonic is 50 airlines, can you give any indication of (on) those two to start with, when we start seeing and when they should really start ramping up? Well, we re going to see some revenue in Q2 for sure. I wouldn t call that a major ramp up, but we ll see some revenue. You know, we re still on track to have 10 IFE 10 airlines from those two IFE providers live by the end of the year. That hasn t changed. So, you know, the real ramp up will start more in more in Q3 and in Q4, in terms of what you re seeing in revenue. But you ll see some revenue into Q2. Can you put a number on (it) (inaudible) $10,000 (bucks) a plane on Talus. (Inaudible) any idea how many planes is in the their budget or they're forecasted right now for 2013? I don t have the exact number. The best way to think of it, I think, is to take average sized airline, we said three airlines would be deployed via the Talus partnership by the end of the year. We said seven would be deployed via Panasonic by the end of the year. So, unfortunately (the) mix of the three one is new aircraft, the other two are going to be you know, already installed gear, so you know, the best way to think of it is a percentage of that 4,200. So (inaudible) it s a medium sized carrier, let's just say, right, now many planes would a medium sized carrier have? (Inaudible). Medium sized carrier would probably have somewhere in the range of 200 aircraft. OK. And just (inaudible) comment on the base business, you know, the accident rate 28 million (inaudible) saw in Q1 here, the new business (inaudible) Cathay will kick in later this year, you indicated how many

17 Page 17 how many more (pacs) do you think you ll add you know, in airline and rail by year end? What's do you have a target on that? We re targeting about 450 million additional passenger trips contract executed by the end of the year. Does that include Cathay? Yes. OK. And that'll be you know, what (inaudible) if you can sort of think about these things as 2 or 3 cents a (pacs) or something like that? Is that sort of (inaudible) I think that number s actually going up now, to tell you the truth. Historically, some of those some of that those percentages were based on older deals. We re seeing the new deals being you know, more into the 50 to 60 percent higher range in terms of what we re getting either for a transaction fee or percentage of transaction value. So, we should definitely be more in the in the 3.5 percent range for sure on these new deals. And I would just I would just (inaudible) (to the envelope), I mean that s 450 million at 3 cents that s $13 million of incremental revenue, is that is that math right? Annualized, yes. Annualized, yes. (Yes, yes).

18 Page 18 Is that right? Well, I would do percentage of GTV. You re now mixing the Yes. (inaudible). I just (inaudible), yes I just went for (pacs) because I guess (inaudible) let me put it another way But I (inaudible) 3.5, my 3.5 is 3.5 percent on GTV so And the 3 then the GTV you know, potential on those 450 million (pacs) would be? I don t have it off the top of my head, (Doug), sorry. OK. (Inaudible) maybe go the other way, that 450 million, how much is (it) rail versus how much is airline? How much is rail is about 75 million is rail. Seventy-five mill. OK perfect. Thank you. OK. Operator: And once again, if you would like to ask a question over the phone, please press star then the number 1 on your telephone keypad.

19 Page 19 And we have no further questions over the phone at this time. I turn the call back over to the presenters. Thank you, (Sarah). And thank you everyone for joining us on today s call. Please feel free to contact either myself or Brian Reddy directly if you have any further questions. Otherwise, we look forward to the next update with each of you. Thank you. Operator: This concludes today s conference call. You may now disconnect. END