Mondee - Q2 2024

Executive Summary

• Q2 2024 net revenues were $58.3M (+3% YoY; +0.5% QoQ) on gross bookings of $678.0M; adjusted EBITDA rose 38% YoY to $6.1M with margin expanding to 10.5%.
• Management announced a long-term refinancing expected to extend the term loan to June 30, 2028 and preferred equity to December 31, 2028, contingent on securing a $15M letter of credit; this aims to restore FinTech credit limits and working capital.
• Mix shift to non-air accelerated: non-air reached 47% of net revenue; take rate increased 20 bps to 8.6% YoY, supported by hotel/package growth and direct supplier connections.
• Near-term growth constrained by delayed refinancing and industry softening; FY24 guidance was lowered to net revenues of $240–$250M and adjusted EBITDA of $25–$30M (from $250–$260M and $30–$35M).
• Stock reaction catalysts: completion of refinancing/LOC, reinstatement of FinTech credit limits, AI rollout (ABI v2 and Infinity automation), and traction in hotel/package direct connections.

What Went Well and What Went Wrong

What Went Well

• Adjusted EBITDA growth and margin expansion: Q2 adjusted EBITDA rose to $6.1M (+38% YoY) and margin to 10.5% (from 7.8%), driven by higher-margin non-air products and cost efficiencies.
• Product and distribution initiatives: COO highlighted more traffic on airline NDC connections and direct hotel chains; North America hotel take rate increased by over 50% year-to-date, improving conversions and pricing.
• Strategic refinancing: CEO/CFO emphasized favorable refinancing terms positioning Mondee for long-term growth and improved profitability: “securing favorable terms that position Mondee for long-term growth… expected to fuel our expansion, improve profitability, and solidify our AI leadership in travel”.

What Went Wrong

• Net revenue growth constrained by working capital: Delays in refinancing reduced FinTech credit limits, materially limiting revenue growth in Q2 and expected to impact Q3; management estimates about “50/50” split of guidance impact between FinTech revenue down and market softness.
• Industry softening and regional disruptions: Management saw beginnings of travel softening into 2025, with flooding in South America and re-escalating Middle East conflict, pressuring ARPT and lodging rates.
• Higher GAAP net loss: Q2 net loss widened to $(25.5)M, including $19.1M of non-cash/non-recurring items (notably $12.0M stock-based comp), and operating cash flow used was $(7.6)M as cash reserves were deployed to offset reduced credit limits.

Transcript

Operator (participant)

Good day, and welcome to the Mondee second quarter 2024 earnings conference call. Please note this event is being recorded. I will now like to turn the conference call over to Jeff Houston, Senior Vice President. Jeff, please go ahead.

Jeff Houston (Senior VP)

Thank you Carla, and good morning to everyone. Welcome to Mondee's second quarter 2024 conference call. With me today is our Founder, Chairman, and CEO, Prasad Gundumogula, and Chief Financial Officer, Jesus Portillo, Executive Vice Chairman, Orestes Fintiklis, and Chief Operating Officer, Jim Dallum, who will present our results and be available for questions and answers. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, including statements about revenue, growth of our business, our management and governance plans, and other non-historical statements, as further described in our press release. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Mondee's growth, the evolution of our industry, our product development and success, our management performance, and general economic and business conditions. We undertake no obligation to revise any statements to reflect changes that occur after this call.

Descriptions of these and other risks that could cause actual results to have a material difference from these forward-looking statements are discussed in our reports filed with the Securities and Exchange Commission, and in our earnings press release that was issued this morning. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. Listeners are cautioned not to place undue reliance on any forward-looking statements. During this call, we also refer to non-GAAP financial measures. Reconciliations of the most comparable GAAP measures are also available in the press release, which is available at investors.mondee.com. With that, it is my pleasure to turn the call over to Prasad.

Prasad Gundumogula (CEO)

Thank you, Jeff. Good morning, good afternoon, and good evening, everyone, and welcome to Mondee's second quarter earnings call to discuss our results and significant developments. We are very pleased to report a strong second quarter with growth in net revenue, take rate, and Adjusted EBITDA, the latter by 38% year-over-year. We also announced a much-anticipated refinancing of our term loan and preferred equity at favorable terms that will position the company for long-term success. Looking more closely, we are encouraged by our improved take rate, which increased twenty basis points to 8.6%, reflecting the positive impacts of our product mix expanding into non-air. During Q2 2024, our non-air net revenue mix increased to 47% from 42% in Q2 2023.

Mondee's growth in transactions, net revenue and Adjusted EBITDA, along with our platform-driven expansion in global markets, positions us well for continued market share penetration. We are confident that the ongoing integration of acquired businesses and the growth of our international markets will contribute to faster, sustained revenue increases. We are refinancing our capital structure with favorable terms that position the company for long-term success. With a longer duration to both the term loan and preferred equity, Mondee anticipates having the flexibility and financial resources to execute on its transformative plans. These plans are expected to increase revenue, profitability, and free cash flows while continuing to lead AI innovation in travel. I now turn the floor over to Jim Dallum, Chief Operating Officer, who will discuss some business trends and Mondee initiatives underpinning our results and outlook. Jim?

Jim Dullum (COO)

Thank you, Prasad, and good day, everyone. Let's start with some market drivers. Long-term growth trend for travel remains intact. However, we did see the beginnings of industry softening by the end of the second quarter, and we expect this to continue into 2025. Furthermore, certain regions experienced disruptive events in Q2, such as catastrophic flooding in South America, affecting LATAM travel and the re-escalating Middle East conflict. While a few stronger regional markets remain from the last vestiges of the recovery, the overall moderation in demand is being accompanied by a reduction of airfares and decline in lodging rates. In addition, global inflation and economic conditions are spurring an increase in buyer bargain hunting. This to include higher income consumers. Meanwhile, suppliers who are already under service-related pressure, are expected to continue emphasizing product differentiation, packaging, and more targeted distribution as their keys to potential growth.

In light of this, we expect more emphasis to be placed on supplier-driven programs, such as their expanding NDC and direct connections. While the market softness may have a short-term impact on the remainder of this year, we believe these overall conditions significantly favor Mondee's B2B marketplace expansion and the deployment of our emerging AI platforms. Turning to the Mondee marketplace. During Q2, we capitalized on international expansion through our platform, delivering a 57% increase in transactions year-over-year. This growth could have been higher had it not been for the working capital constraints mentioned previously. Our strategy of expanding in non-air products with higher take rate and growth in transactions in international markets overcame the pricing effect on gross bookings, producing net revenue growth and solid Adjusted EBITDA.

The strong increase in transactions was accompanied by flat year-over-year gross bookings as a result of lower average transaction values. This primarily driven by our rapid growth in lower-priced international markets. We do plan to continue our penetration in international markets through deployment of our global marketplace platform. We continued to make progress during the second quarter in initiatives around boosting profitability, expanding our travel marketplace, and maintaining AI leadership. Our ongoing focus is to significantly enhance our content, accelerate our sales penetration in existing and new markets, as well as further streamline our business infrastructure and cost structure, as you note on the current slide, slide number seven. In the area of content enhancement, we continue expanding packages and product combinations while adding new features and options. This is expected to enhance the appeal of our offerings and improve sales performance across Mondee's growing transaction base.

In addition, as Jesus will cover later, we expect to ramp up the use of our fintech tools and content to further increase customer engagement, take rate, and net revenue. Further highlights of our progress include enhanced supplier connect programs, such as the airline NDC connections, direct connections with major hotel chains, and with several other connection projects in our immediate expansion pipeline. With these in place, we're seeing more traffic on our NDC connections with improved product pricing and features, as well as material improvement in our hotel take rate and conversions. By the way, a more specific example of the hotel take rate is the increase of over 50% in our North America hotel take rate so far this year.

In summary, as we look into the rest of the year, we're moving from market planning and development to continued platform deployment and business execution. Our focus initiatives include further implementation of AI tools in Mondee's operations, product expansion for greater market appeal, enhanced revenue management, and AI automation-led process improvement with further cost efficiency. In addition, as we are positioned to take full advantage of all our fintech tools and services that will no longer be capacity constrained, all of our initiatives for rapid business expansion and further operational efficiency are expected to put Mondee squarely in line with our historic growth path and profitability goals by the end of this year, despite this market softness. I will now pass the call over to Jesus, our CFO, for review of Mondee's financial performance and outlook. Jesus?

Jesus Portillo (CFO)

Thank you Jim, and hello, everyone. As I go over our Q2 results, I would like to point out that all growth rates are on a year-over-year basis, unless otherwise indicated. Let me start with our financial highlights. During this quarter, we continued to generate a strong performance around net revenue, EBITDA, and EBITDA margin. As part of our core marketplace strategy, our focus has been to diversify our product offering beyond air, which improves take rate, expand internationally, and continue to grow in existing markets. During the first half of this year, we continued to diversify our product offering, and accelerating our international air expansion will lead to a 57% increase in transactions that carry a lower average transaction price. At the same time, because of delayed refinancing and working capital constraints, we moderated the growth of our existing business that required working capital to grow.

This resulted in flat gross bookings, lower than usual net revenue growth, and improved Adjusted EBITDA. Our gross bookings were $678 million this quarter, in line with last year. Our net revenue of $58 million increased 3%. After adjusting for acquisitions and divestiture of last year, net revenue grew 11.5%. Our take rate of 8.6% was up 20 basis points. As with prior quarters, this improvement in take rate was driven mostly by the growth of higher-margin hotel and package products. It is worth mentioning that the delay in our refinancing impacted our ability to fully utilize our credit limits, resulting in lower fintech revenue, which carries the highest take rate. We expect this to be fully resolved with our refinancing.

Turning to expenses, our largest expense category, sales and marketing, kept improving and was down 5% in absolute terms, while it declined from 71%-65% as a percentage of net revenue. The main drivers for this improvement continue to be AI-driven optimization of our revenue management and reductions in performance marketing spend in our B2C business. Adjusted EBITDA increased by 38%, from $4.4 million-$6.1 million. Adjusted EBITDA margins also increased from 7.8%-10.5%, as we continue to prioritize operating efficiencies and improve profitability.

On a GAAP basis, our net loss was $25.5 million, which included $19.1 million of non-cash and or non-recurring items, such as $3.7 million of depreciation and amortization, $1 million of PIK interest, $12 million of stock-based compensation, and $2.3 million amortization of loan origination fees, among others. Looking at our balance sheet, at the end of this quarter, we had $32 million in cash and cash equivalents, and $169 million of total debt, compared to $36 million and $162 million, respectively, at the end of December 2023. We announced today a comprehensive refinancing of our capital structure with TCW and funds affiliated with Morgan Stanley, that is expected to extend the term loan to June 30, 2028, and the preferred equity to December 31, 2028.

The extended timing for the term loan beyond August 31st, 2025, and the preferred equity beyond September 30, 2026, are both subject to securing a $15 million letter of credit that the company anticipates finalizing shortly, and which could provide additional working capital. Operating cash flow was -$7.6 million for the quarter, compared to -$2.4 million in Q2 of 2023. In this quarter, we used over $10 million of cash reserves as working capital to offset credit limit reductions by certain fintech partners in the face of delays in refinancing our term loan. We are working to get some of these credit limits reinstated as the refinancing is being completed. Year to date, both operating cash flow and free cash flow were positive $11.1 million and $3.3 million, respectively. Turning now to our 2024 guidance.

As a consequence of the limitations we described, we now forecast our net revenue to be between $240 million and $250 million, representing an increase of 10% versus 2023, measured at the midpoint. Adjusted EBITDA to be between $25 million to $30 million, representing an increase of 42% versus 2023, measured at the midpoint. Let me now turn it back to Jeff for Q&A. Jeff?

Jeff Houston (Senior VP)

Thanks, Jesus. Operator Carla, we're ready for Q&A now. Thank you.

Operator (participant)

We will now begin the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is muted locally. Our first question comes from Mike Grondahl from Northland Securities.

Michael Grondahl (Managing Director and Senior Research Analyst)

Hey, thanks, guys. Congratulations on the refinancing. Two questions related to that. One, roughly how much working capital does that free up for you? And two, what are your priorities spending that working capital on to kind of reinvigorate growth? If you could just go over those priorities, I think it'd be helpful.

Jesus Portillo (CFO)

Yes, Mike, good morning. Thank you so much for your questions. So, addressing first your first question. In terms of how much working capital, obviously, we'll have a $15 million LOC, as we mentioned in the script, right? So that will be to add. We expect another $5 million that will be coming in, in terms of cash, so a total of $20 million that will help us revamp our working capital.

In terms of priorities to drive growth, I think that obviously at this point, most of that will be used in our fintech solutions because it carries the highest take rate of all of our product mix, and it's probably the portion that has been affected the most during these past few months while we were doing the refinancing.

Michael Grondahl (Managing Director and Senior Research Analyst)

Got it. And I don't know, maybe Jim, it seems like you're having pretty good success penetrating the hotel-only space. I don't know, a little more detail there might be helpful.

Jim Dullum (COO)

Yeah. Hey, Mike, we appreciate the question. Yeah, we are having good success in hotel penetration. I mean, you know, we've picked up some real expertise with some of the companies we've acquired. But it's not just pure hotel. Remember, there's also some packaging expertise there which bring more of that in. So as we get to the non-air product, a lot of that is around packaged product, which carries higher take rate. So we're picking that up. The other thing is, in the hotel program itself, I mean, I think we've mentioned previously, we've been emphasizing the hotel program, and as we've done that, we are significantly improving our agreements with certain hotels. We've added a couple of direct connections with major chains so far this year, and we have more in the pipeline before the end of the year that will come.

All of those things help, not just the pricing and the presentation of the product, but significantly the Take Rate, which is why you're seeing the nice improvement that we saw in our North American hotel Take Rate so far this year.

Michael Grondahl (Managing Director and Senior Research Analyst)

Got it. Got it. Okay, thank you.

Operator (participant)

Our next question comes from Brett Knoblauch, from Cantor Fitzgerald.

Speaker 8

Hi, guys, this is Thomas Shinsky on for Brett. Thank you for taking my questions. I guess first, how's the traction been for the AI-related products? You know, more specifically, Abhi. I guess, if you could give us an idea of how many, you know, transactions are coming through that virtual assistant. And then also, you know, internally, I know we mentioned Infinity last earnings call. I guess, how's progress been there?

Prasad Gundumogula (CEO)

So Abhi is providing good traction for us to, you know, have some great, you know, interactions and transactions. So although the numbers seem to be less than 2% of our business, however, the, you know, deployment provided us to have the knowledge to train our models, which we are currently doing, and also take the feedback in, you know, improving this product, which we are working on our second version, that is due on delivering in Q4. At the same time, we have, you know, Infinity Project. As you mentioned, Infinity Project is our project to, you know, deploy for our AI-nizing all of our internal operations. That includes, you know, operations, call center, you know, through our AI, CRM platforms being placed, and our sales and marketing, you know, revenue management, functions.

So we already deployed that at our revenue management function of Infinity, which has resulted some very good results, where, you know, we were able to reduce our, you know, marketing expenses, sales and marketing expenses, by 5%. And we expect to, you know, deploy more onto all of our facets of our business, where either we improve our take rate and, and reduce our sales and marketing expense, or reduce our cost per transaction, you know, by having an efficient operations function. So Infinity is currently under deployment by function by function in our business, and we are hoping to complete it, you know, by end of Q4 and beginning of Q1, and we are planning to reap very good results from it.

Speaker 8

Awesome. Thanks. And then one more, if I may. Very encouraging to see the strong growth in transactions, coupled with, you know, a continued pressure on ARPT. I guess, you mentioned strong growth in international contributing to this, and last quarter, obviously, we mentioned short-haul, international, hotel only. I was just wondering, have you seen a skew towards more just consumer weakness contributing to this, and just overall decreased travel spend? And, you know, any visibility into... I know you see continued weakness into 2024 and a bit into 2025. You know, is there any visibility into when we can see this ARPT start expanding again? Thank you.

Jim Dullum (COO)

Yeah. Thanks, Thomas. It's Jim. Yeah, look, I think you- we will expect to see the average transaction rate moderate here and start to recover through the rest of the year, right? You're right. The biggest influence has been the expansion internationally, right? In markets that as they recovered, they recovered in more regional short-haul first, which tends to be lower priced transactions. That will continue to expand back to more global and international travel. As it does that, we should see, even though airfares and even hotel rates will come down somewhat in our expectation for the next few quarters, you know, we will see the mix start to moderate back in our favor.

So we see the ticket price fall, the average transaction rate fall, moderating now to stabilize and then recover as we go into next year, is probably the way I would, the timing I would put on that.

Prasad Gundumogula (CEO)

So the average revenue per ticket, you know, is between $50-$55 in our business. And last year, it is high, it is, you know, mid-$70s. But we grew the transactions by 47%, and at the same time. Sorry, 57%. And at the same time, that, you know, we are maintaining a good revenue per ticket and also paying the inroads into expanding our front-end fintech and the ancillary revenues by taking this market share. So we, you know, we expect to continue to have the revenue per ticket transaction at between $50 and $55 this year. And in the following year, in 2025, we are expecting to the to grow into, you know, $60 to mid-$60s.

Orestes Fintiklis (Executive Vice Chairman)

Since this is an important point, I would like to add one more, you know, perspective here. A softening in the market is typically advantageous to the Mondee business model, because, you know, there is more, you know, desire for the consumer to hunt for bargains and also for the suppliers to provide better economics. But in Q2 and Q3, we were not able to fully capitalize on these because of working capital constraints. So we simply didn't have the working capital, even though the demand was there, to capture it.

As we look towards the end of the year and to 2025, following the completion of the refinancing, we should be able to take advantage of that market dynamic, which is typical in such times of softness, favorable to our business model.

Speaker 8

Awesome. Thank you, guys, for the color.

Jim Dullum (COO)

Thank you.

Operator (participant)

The next question comes from Darren Aftahi from Roth Capital.

Speaker 7

Hey, this is Dylan in for Darren. Thanks for taking my questions. First, with the revised guidance, could you talk a little bit about what some of the expectations are in there? Like, how much of that is driven from lower Fintech in 2Q, and then it seems like at least for a portion of 3Q, until the financing is secured, versus some of the softness that Jim was talking about?

Orestes Fintiklis (Executive Vice Chairman)

Yeah. So, you know, at this point, I would say probably around 50/50% is driven by our Fintech revenue that is down, as well as some of the opportunities that we had to let pass because of our capital, no, working capital restraints.

Speaker 7

Got it. Okay, and then-

Orestes Fintiklis (Executive Vice Chairman)

Just to add one more point here. It's almost the entire Q3 that is impacted, right? Because it's not just a matter of securing the financing, but then it takes time to open these credit limits. So this impact we expect it to be on Q2 and Q3.

Speaker 7

Okay. Got it. Thank you. And then as a follow-up, when you are going into some of these other markets and expanding, where some of the rates are lower, do all those markets have the same sort of, I guess, offerings as your more established markets? I'm talking sort of all the ancillaries, or those are some of the things you're looking to add.

Orestes Fintiklis (Executive Vice Chairman)

Yes. So that is precisely one of the opportunities. So at this point in time, we are capturing the market share, and the market share is most of the time just a low-price transaction that you mentioned with very limited, front-end revenue, right? So, so the, the strategy here is to capture this market share, which also was favorable in the last few quarters because this is business that requires less working capital. So we could take advantage of it with the constraints that we have. And then on the back of that, we can attach the ancillaries, the... Not just the Fintech, which is the easiest one to attach, but then negotiate better deals and attach better front-end revenues, attach hotels, attach other ancillary products that carries a higher take rate.

This is precisely the strategy, and that is one of the reasons you are seeing now at this point in time much higher transaction volume, not a significant growth in gross volume because it's the lower price per ticket that you mentioned, without the full capacity and capability of the additional revenue that attaches to each one of these transactions. Even with these dynamics, we are able to achieve a high EBITDA, you know, EBITDA margins.

Speaker 7

Got it. Thank you. That's it for me. I'll pass it on.

Orestes Fintiklis (Executive Vice Chairman)

Thank you, Dylan.

Operator (participant)

As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Nicholas Jones from Citizens JMP Securities.

Speaker 9

Hey, guys, it's Tim in for Nick here this morning. Just a couple from us, please. I appreciate you taking our questions. Can you just talk a little bit about what you're seeing in kind of terms of the competitive dynamic or the intensity within marketing? A lot of your key competitors have called out, like, reaching out to new channels. Just wanted to see how the competitive landscape is from you guys' point of view, and if you have any plans to change your strategy moving forward in the second half.

Jim Dullum (COO)

Nick, it's Jim, let me start. First of all, we think the strategy is working great in the current market. And again, the transaction increase is, you know, as Orestes just described, this is all, you know, we're taking share of wallet, we're taking market share, fully positioned now to both capitalize on the base transactions as we've penetrated those markets, to improve things, but also, you know, to capitalize on the deployment of our platform more and more internationally, right? And as we do that, you know, we think that allows us to continue to grow very strongly in this market. You know, we have what we certainly believe is a lead position in the deployment of AI into this space, which gives us great differentiation in the market.

So, we think we stand in a strong position to grow. We've had some, you know, we had a little bit of headwinds with this capital issue that constrained us from, you know, knocking everything out of the park. But, you know, we took advantage of everything we could. We're taking advantage of this platform and, you know, we're pretty jazzed about the position we have going forward in this market. It's, you know, sometimes the softness is actually great for the Mondee strategy and to continue to deploy it.

Speaker 9

Great. Thanks so much for all that color. Just one more if we could please. In terms of kind of airfares, kind of looking out into back half of the year in 2025, a lot of the airlines had kinda called out taking corrective action to kinda reduce capacity, which should kinda help drive stability and fares. I know you guys kinda talked about your guidance, taking down your guidance due to some of the softness you're seeing and the impact from credit limits and working capital. In terms of airfares, kinda for the back half of the year, how are you guys thinking about that? Are you guys expecting continued softness, any kind of improvement, or any kind of color on what's based out of the guide there? Thanks.

Jim Dullum (COO)

Yeah, Tim, your point's a great one, right? You're absolutely right. Airlines actually reduced capacity slightly during or didn't increase capacity, certainly not in keeping with what was the demand, the strength of the demand during the first half of the year. And they did see, you know, they did see their load factors increase, right? Which is, in general, good for the airlines. However, in the face of that, even there, because they have such service issues, because some of the constraints coming out of COVID still remain for them. With those service issues, they still struggle to continue to compete, you know, on the routes that they all work on. So they are using pricing now as a strategy going forward.

We think they will use targeted distribution channels more strongly. So, you know, we see them using several different levers. Price is gonna be one of them. So if right now, we would expect air prices to continue to be a little soft through the remainder of this year, maybe into early next year. You know, we think that little bit of inflation fares and some of the general economics globally are causing a little bit of customer sentiment to back off. So I think as the airlines look at that, you know, they make some decisions on, you know, because they're trying to price so far forward, they make some decisions that create some little softness in price.

So we think that, you know, we'll see a little bit of movement, probably still downward slightly on airfares, but a stabilization here, before it starts picking up, hopefully, in the early part of next year. But that's sort of the general trend that we would expect.

Prasad Gundumogula (CEO)

To expand that trend,

Speaker 9

Great. Thanks so much for the color.

Prasad Gundumogula (CEO)

From, you know, it changes from market to market. There are certain markets that are performing very strongly. We, being a global platform and expanding into and looking into these opportunities very closely. So we are using our platform as a vehicle for us to expand into the areas that really, you know, are growing and expected to grow. And, you know, using our platforms to receive the transactions and optimize it. At the same time, you know, managing the, you know, softness of certain segments of the business with the other markets and other product mix that we have in our plans.

So being a marketplace, you know, although there is a little stress in the market on the airline and inventory and, you know, and softness of the price, but, you know, we see some great opportunities that we fit very well in that environment. So we are working on our plans, and hopefully we are going to see that in results in the next few quarters.

Operator (participant)

So this concludes the question and answer session, and I will hand back over to Jeff Houston for any final remarks.

Jeff Houston (Senior VP)

Hey, thank you, Carla, and thanks to everyone who tuned in for our second quarter 2024 earnings call. Whether it was live, the replay, or the transcript, if you have any questions or would like to learn more about Mondee, please don't hesitate to schedule a call with us. You can get more information on our IR website, which is investors.mondee.com, or you can send us an email at [email protected]. Thank you.

Operator (participant)

This concludes Mondee's earnings conference call. Have a nice day. You may now disconnect from the call.