Mondee Holdings, Inc. (NASDAQ:MOND) 19th Annual Needham Technology, Media, & Consumer Conference May 16, 2024 3:45 PM ET
Corporate Participants
Orestes Fintiklis – Executive Vice Chairman
Conference Call Participants
Bernie McTernan – Needham & Company
[Transcript provided to Seeking Alpha by the Company]
Bernie McTernan
Great. Good afternoon, everyone. Thanks so much for joining. My name is Bernie McTernan. I’m the Internet Analyst here at Needham & Company. And my pleasure to introduce Mondee.
Mondee is a leader in AI travel technology. Presenting today, we have Orestes Fintiklis, who’s Mondee’s Chief – sorry, Executive Vice Chairman. Hell provide a 10 minute overview of the company and then well hop into Q&A. So if anyone has any questions, please type them into the portal.
But without further ado, I’ll turn it over and I will hop back after the presentation.
Orestes Fintiklis
Thank you. Thank you very much for your time. So, Mondee is an AI technology company and a travel marketplace which is connecting nearly all the airlines and hotels and cruise companies in the world with 125 million end users through 65,000 travel experts, travel intermediaries. These travel intermediaries who are the users of our technology; they can be anything from traditional travel agents, all the way to modern era distribution, such as concierge, freelancers, or even social media influencers.
Our marketplace is very different from the traditional online travel agents in a number of ways. First, we sell discounted travel as opposed to full priced flights and hotels. Number two, we have advanced AI power technology versus a 90s Internet based website kind of technology, which most of the online travel agents are driven by. And then number three, were not competing with airlines and the hotels. We are the original suppliers of travel content. Instead, we are helping them sell their excess capacity at a discount without cannibalizing their own B2C, direct-to- consumer channels.
Were a high growth company. Weve been growing 40% organically in the decade leading to the pandemic, 60% if you add our inorganic activities, 70% from 2021 to 2022 and 40% from 2022 to 2023. In addition to being a high growth player, we are profitable. We are EBITDA positive. With our EBITDA increasing year-over-year, and also this quarter, we have been free cash flow positive. We have about 1,300 employees around the world and were headquartered in Austin, Texas.
This is a picture of the entire travel market in flights and hotels, globally about 2.1 trillion. Most of investors are aware of the left hand side, what we call the self-service. This is when you go on your own, either on the website of a supplier like American Airlines or Marriott, et cetera, or you go on an OTA, or you go on a metasearch to basically book travel on your own, hence, self-service.
What people don’t appreciate is that there is another part of the market, which is actually not only bigger, its 1.1 trillion. You see it here on the right hand side, but it’s also growing faster. This is when you are booking travel either through assistance of a travel expert, a travel agent, or an affiliation, a program of your employer, points on your credit card. This segment of the market is where Mondee operates. We have become the market leader in a 70 billion subsegment of this 1.1 trillion market, and now were introducing products and technologies to attack the entire 1.1 trillion TAM.
What problems and for whom did we solve? Our original customers were the travel agents 15 years ago. That has changed a lot, but I’ll give you kind of a bit of a historical perspective. When Mondee was founded in 2011, if you were a travel agent, you had two problems. The first one was the technology available to you, the blue screen command system, command based systems.
They were not up to speed with modern technology interfaces. You could only pay by credit card. You didn’t have a mobile app. So Mondee invested about $200 million and created the first graphics based interface for this segment of the market.
You can see the picture; the difference here is akin to the move from MS-DOS to Windows in a way. And then secondly, the second problem that you had at the time was that if you are a travel intermediary and you are buying flights or hotels, you are buying them at the same price as the online travel agents. So you couldn’t compete on the pricing. You could only offer a better service to your customers. So what Mondee did, it acquired seven of the largest wholesalers at the time. So it started offering also discounted content, a better technology and discounted content. So by doing that, it became the market leader in this segment of the market, from a few thousand customers to 65,000 customers today.
Now why are the airlines and the hotels giving us their inventory at a discount if were not taking any inventory risk, as opposed to the full price that they have on their own website or Expedia or Booking or any of the online travel agents, right. The reason is that in the hotel and air industry, there is always excess capacity. So in the air, between 20%, 30%; in hotel, between 30% and 40% so the suppliers that can let that inventory perish, not sell it, in other words, or they can sell it at a discount. They are not going to sell it at a discount on their own website because they would be cannibalizing their own pricing, right.
So if you go on aa.com and you find the cheap ticket and the expensive ticket, nobody would buy the expensive ticket. In the same way, they wouldn’t give it to the B2C players because if you can find your flight cheaper on another website other than delta.com, then nobody would be buying their flights from delta.com.
So what the airlines and the hotels are looking for is an opaque channel, which is not competing, which is selling through intermediaries to channel this excess capacity without cannibalizing their own yield. And this is why Mondee is solving that problem as well for the airlines and the hotels, and at the same time resolving the issues of both its customers and its suppliers.
How do we make money? We have a variety of revenue streams. We are a marketplace. So take an example, $1,000 flight, we buy it for $850, we would mark it up to $900, then sell it to the travel intermediary. The travel intermediary, the travel agent would buy for $900 and sell it to the consumer for $920. Everybody wins. The consumer bought it for less than $1,000, the travel agent made $20, Mondee made $50, the markup from $850 to $900. We also make money from the suppliers themselves, so they give us volume based incentives. We make money by selling fintech solutions, travel insurance, ancillaries like check-in baggage, like seat selection.
So the net revenues that we make, divided by the gross transaction volume that flows through our marketplace is called the take rate. So, in 2023, we had $223 million of net revenues. We sold 2.6 billion hotels and flights. The ratio between the two is the take rate which is 8.7%, which as you can see, has been increasing over time.
And the reason that this has been increasing, almost doubling from the pre-pandemic levels is because we are diversifying our mix of revenues. We were selling only air before only flights, which is the lowest margin product. And we leveraged on our leadership in flights, to add hotels, to add packages, to add cruises, to add fintech solutions. So these additional solutions now are much higher margin business. And that is why our take rate is increasing. As you can see now air and non-air is approximately 50/50 in our mix.
Now that we are the market leader in this segment of the market, we also started charging subscriptions for the use of our technology, which until now was used only on a transaction basis. Were only making money for every transaction. Now we have a component, as you can see here, a fairly small component for now that is SaaS revenue, which is subscriptions for the use of our technology.
We have talked how our distribution has also changed. We talked how we started 15 years ago by resolving the issues of the travel agency community. Today, less than half of our customers are travel agents. The other half are freelancers, concierge, travel experts, even social media influencers. And in that regard, we are providing a technology which is very much in line with the way that modern content is consumed.
So the biggest disruption that happened in travel was in the 90s, when the boomers realized that they could just go on their own and book on the Internet. Now the majority of travel is consumed by the millennials at the Gen Z, for whom the Internet is no longer an innovation. It’s all about social media. It’s all about AI. It’s all about conversational commerce. And then in that regard, we have been creating the technology to drive this innovation.
We now have a two version app, just like Uber has a version for the passenger and one for the driver. We have one version for the intermediary, be it a travel agency, an influencer, concierge, and another one for the end traveler and then two are linked. And whenever the traveler is booking, the intermediary that introduce them to the network is making economics, right.
This is powered by AI, so I just want to switch and show you a short demo of our technology. So this is what you would see if you are a user that enters into our ecosystem. You can book in the normal ways that anybody can make a search on a bar, for hotels, for flights, for cars, et cetera. Or you can use the AI, which is called Abhi, something that we have been developing for many years now. So you can ask Abhi which cities in Europe have the largest museums, for example, right.
So, basically, Abhi will respond and I’m having an issue with my Internet connection, apologies for that. So I will have to log in again. So, I hope my screen is still visible. So, going back to Abhi, well ask Abhi to book a trip to London, for example, please book a four-day trip to London. So Abhi will basically remember my location. Thats the whole point about AI. It’s all about customization. It knows that I live in Miami, so it wouldn’t even ask me again where I live from. If you’re a new user, they would ask you, where do you live, the dates et cetera, of the trip. So now I’ll be knowing my location and my prior bookings is customizing a trip for me. The second level of customization is what you would like to do on this particular trip. And you can choose attractions, you can choose museums, you can choose theater, you can choose whatever you would like.
So Abhi takes your own preferences from the past, plus what you have chosen in this particular trip and is creating a trip for you. It’s creating a trip that you can actually experience. So you can see now real time – we’re doing a real time demo now, it’s creating a customized itinerary for you which includes the four day trip to Paris from Miami that it knows I live. It goes from Miami to London four days every day. It has your packages, your experiences. You don’t even need to buy a map. You don’t even need to buy a travel guide.
There are 50 million searches on our platform, so there are plenty of tips there. For example, if you are entering the Buckingham Palace, it will tell you what time of the day to go. It would tell you from which entrance, et cetera. So this is a comprehensive solution to the trip. And then, of course, you can book your flights, you can book your hotels; you can even book the activities. You can click here and get your activities. It’s asking you to confirm that it’s London to prevent hallucinations, which, as you know, it’s an issue in AI.
So what kind of activities would you like? You say I like tours. So now Abhi is bringing all the tours that are available in London. And you can actually scroll through them. You can book them again at the discount. You can book restaurants; you can just click on best restaurants. It will ask you what kind of cuisine you like. And you like Italian. So Abhi will now find all the Italian restaurants for you in London. Give you the menu, give you the location, give you the rating, as you can see from our various customers, et cetera. So, very powerful technology.
I just want to showcase a bit the pricing, right? We discussed before, how we sell discounted flights and discounted hotels. So I’ll just do a simple search for a few days in, I mean, London, for example, right? Just for the sake of the search. So now what our system is doing is comparing two things, it’s comparing the pricing that you get on our platform, on all the hotels that are on our system, together with all the hotels that one can find anywhere on the internet, right?
So you can see here two prices. The market price is the lowest price that you can find in any of the online travel agents, the website of the hotel itself. And then here is the price that is applicable in our network, which basically already includes the profit of the intermediary and Mondee, right? Of course, you can choose for five star hotels only if you would like. You can see here only the five star hotels, $100 out of $600, so 15% discount. Here more like 20% discount. So real discounts that range anything from 10% to 50% in flights, hotels, even super luxury hotels, at this case, the Shangri-La, you can get it for almost $200 less. So these are just some of the features of our evolutionary technology. I can’t be showcasing that for a long period of time. But in the interest of time, let’s return to our presentation.
So we discussed how our distribution network has been expanding. Another element of our strategy is M&A. So we have acquired 19 companies in the last 15 years. This is not the roll up strategy, because even though we do acquire these companies very accretively, 3x, 4x, 5x EBITDA, since they are much smaller companies, the main reason for the M&A strategy is to accelerate the organic growth.
So, we are not looking at ourselves as buying companies. We are buying pieces, say we need more hotel content or customers in Brazil, we buy a company in Brazil, we get their customers, we get their discounted contracts and then we plug them into one unified hub. So now all of our 65,000 customers can benefit from the newly acquired contracts. And then the new customers that came into our ecosystem can benefit from the many contracts and many relationships that we have brought from before. So very accretive, very synergistic cross-selling opportunities in our M&A strategy.
The management team, I’m not going to bore you, other than to say a wealth of experience in travel and technology. And also the management team owns approximately 50% of the company, which creates alignment of incentives. Here you can see the numbers of last year that we mentioned briefly of 2023, $2.6 billion of transactions, $223 million of net revenue, take rate of 8.7% and EBITDA of $20 million.
First quarter this year, even stronger, $708 million of gross bookings, $58 million of net revenues on track to get our guidance and exceeded of this year. And again, a very important milestone this quarter was that we were not just EBITDA positive, but also free cash flow positive, which is important in today’s environment.
Here you can see our exponential growth in bookings, which translates into an even bigger pro rata growth in the bottom line, given that our overheads are fixed and given that the sales and marketing, which is our biggest expense, is reducing over time as a percentage of net revenues, which means that the impact on the bottom line is disproportionately higher, right? We are increasing the growth revenues, we are increasing the take rate, we are increasing – we are becoming more efficient in sales and marketing and the overheads are fixed. So this creates an exponentially positive impact on EBITDA and free cash flows every time that our net revenues increase.
Well, our balance sheet here, fairly robust balance sheet, $50 million of cash and $165 million of debt. We have two classes of shares, the common stock that is outstanding and also preferred stock that accumulates dividend. And overall we feel that we are a revolutionary high growth, but also profitable player in travel and we also have very high barriers to entry.
To replicate what we have achieved, you need to go and sign agreements with 500 airlines, hundreds of thousands of hotels. So you will need to get the contracts. Even if you get the content, you would need to build the technology, which cost us more than $200 million. And even if you are able to get the contracts and build the technology, you still have to build the distribution. Over 15 years we signed up 65,000 customers. So, in short, to replicate what Mondee does, it would cost you multiple of times of what our market cap is today, which creates high barriers to entry. And also we should be commanding an acquisition premium if you look at it from that perspective.
So if you would like to hear more about our company, you can send us an email and we’re happy to arrange a follow-up call. And with that in mind, we can go into the Q&A part of the presentation.
Bernie McTernan
Awesome. Great. Orestes, thank you very much for the comprehensive presentation. Maybe just to start high level, the peak travel thesis is one that investors have been focused on really for the past 18 months calling for it. What’s your view in terms of comping these like post- pandemic travel patterns and the outlook for the broader travel industry?
Orestes Fintiklis
Yes. This year, in some segments of the market, in some geography, we are seeing some moderation of the exponential growth during the pandemic. But I would make a number of points here. First of all, tickets and hotels are at record highs by the pricing, and so the suppliers, the airlines and the hotels, they have the capacity to reduce pricing in order to sustain the demand, which is what is happening at this point in time.
I would like to highlight here that whether the price is not affecting in any way our profitability or our revenues, because we are not the airline or the hotel ourselves, we just get a piece of that business for facilitating the transaction. So whether a flight is $1,000 or $900, it doesn’t really affect our bottom line.
The other point that is relevant to understand about Mondee, and this is a misconception that few are appreciating is that we sell not directly to the consumer, like we discussed, but through intermediaries. And what we typically sell is the excess capacity of the airlines and the hotels at a discount. So if the market softens, so our model thrives in both environments.
If travel is booming, then we just have more transaction volume, but less discounts, because the airlines have less access capacity in the hotel. So they give us less economics, right? Now, if the market softens, then even if our volume gets reduced, we get much better economics from the airlines and hotels because now they have more excess capacity to fill up. So we get even bigger discounts. So for Mondee, Mondee can thrive in both a booming and a soft environment. And in that regard it’s a very differentiated player in the travel space.
Bernie McTernan
Understood. In your slides mentioned 40% net revenue growth in 2023. It seems like roughly half of that is organic, half is through M&A. What do you attribute that growth to and how sustainable is it?
Orestes Fintiklis
Yes. Mondee has been growing, like I said in the beginning at 60% going into the pandemic, 40% of that being organic. And the reason that this is sustainable and continuing is because there is not just one lever to our growth, but multiple. We discussed, for example, how in the beginning we were only flights and after the pandemic, we added hotels, we added packages, which now make about half of our business. We added cruises and we continue to increase the percentage of high margin kind of hotels and packages, like we said has a higher margin. But on top of that, we are adding more content, we are adding theme parks, we are adding events.
The objective and the vision here is to have all travel content in one hub. So this is one of the areas that is driving the growth, experiential content and growth of more content. We discussed the monetization strategies, right? We are now making fintech revenues. We are making subscription revenues, which are growing with time. We discussed how we are the market leader in North America. But we just went into Brazil and Latin America last year, now 30% of our revenues are coming from Latin America. And we have plans to grow both organically and inorganically in places like Europe, Asia, et cetera.
And then on our distribution, we have gone beyond the travel agency community. Now more than half of our customers are experts, are basically freelancers, influencers and we continue to grow that social commerce angle of our business? So, all these multiple levers together they sustain this growth that the company has been having for the last 15 years.
Bernie McTernan
Thats great. And so I think you were the first company that at least I saw to launch some sort of AI travel assistant with Abhi. Now, it seems like that’s a much more consistent theme in the industry. Do you think that there are barriers or what can give you to maintain a leadership position in terms of this technology as competition heats up?
Orestes Fintiklis
So, AI for us is not just a hype but this is something that we have been working for the last four years. And the reason for that is we have discussed how our distribution is growing into modern era players, right? So in the beginning we offered a comprehensive solution to the travel agency community. Then we saw freelancers, semi professionals, gig economy entering into this space. Say for example, you are a ski instructor, you have your customers, now you’re using this platform and you also sell travel, right? So what we started doing just like Uber, basically made up new taxi drivers. We created more travel agents for lack of a better word, right? So we realized early on that we gave them a comprehensive solution.
We gave them the booking engine, we gave them discounted content, we gave them a CRM to manage their customers. We gave them the payment platform to receive and make payments. The only thing that we couldn’t give them was the expertise itself. And that’s why we started developing AI four years ago because that was the missing piece of the puzzle that could provide instant expertise to anybody, right?
So, AI is not about the skilled and the educated. AI is leveling the playing field for people that are basically do not have skills, right? So the reason were so advanced is because we started four years ago, like you mentioned we brought the first AI travel planner in the market. And now we believe that were going to be ahead for a number of reasons, at least three reasons.
Number one, we are applying AI not just at the front end of our business, but also in every aspect of our business. And we are applying it in a way that we are quantifying the monetization benefits. So, for example, we are already using AI in our marketing campaigns. And by doing that, we are becoming more efficient. As you can see in the first quarter of this year, our marketing spend went from 75% of our net revenues to 69% of our net revenues and this is attributed in part to the advances in AI.
Number two, unlike most of the solutions that you see now in travel relating to AI, we are not just a plug into ChatGPT or Googlebot on another generic platform. We have our own AI platform, our own private LLM, which sets us apart in the sense that you have a customized solution which is built only for travel and not a generic platform which can be used in every part of business and consumer.
And then the third reason, AI is all about data. It’s the technology and the data. So we have 50 million searches every day on our platform. But it’s not just the quantum of the data, because there are conceivably other, especially B2C or consumer kind of platforms like OTAs that have more searches and more data. However, our data is more relevant to training an AI travel assistant because our data is travel intermediaries, travel agents booking travel.
So the most relevant data to train a machine travel agent is that coming from a real travel agent. So in that regard, we believe that not only we have a first mover advantage, not only we have the most advanced technology in AI in travel, but also we have the most relevant data to keep advancing and staying ahead.
Bernie McTernan
And I know that you guys have been going at this for a while, but how difficult or how long would it take to sign up all these partnerships? It feels like that’s a big barrier. Maybe not airlines, just because there aren’t as many airlines, but when you start thinking about hotels and then you start thinking about experiences where you really have to go city-by-city, I don’t know, if you were creating this product from a standing start, how difficult would that be?
Orestes Fintiklis
So there are a number of reasons why it’s very difficult. The first one is that the suppliers, airlines and hotels, they wouldn’t give to anybody just discounted content, right? So, you have to bring the distribution in order to get the contract. So, if you go to American Airlines and tell them, please give me a discounted contract, they’re going to tell you show me how many flights you are selling, right?
So it’s like the chicken and the egg. So, unless you have the distribution, there is no way that you’re going to get that content. And if you have the distribution, and its B2C distribution, so say you are a big online travel agent and you go to an airline and you say, okay, give me discounted content they’re going to say no because you are competing with me, you are selling directly to the consumer.
So it’s very difficult to find the appropriate type of distribution to start with that airlines and hotels would give you a discount, would give you access to discounted content, right? So it’s a combination of having the right distribution, having the right technology and, I mean, there is a lot about our technology which the airlines and the hotels like because its real time, it allows them, its linked to the revenue management systems.
So – and on the top of that, you have to have the contracts that you have to go and sign the contract. So it’s basically a barrier, which is very high. Now, if you spend billions and a few years you will be able to do it, but if you want to spend billions and a few years you can by right, 10 times our current market cap. So that’s kind of the reason why these barriers are very relevant.
Bernie McTernan
I got you. Okay. You mentioned that you reached a pretty important milestone this past quarter, getting the free cash flow positive. What was the ultimate driver or what would you attribute this to?
Orestes Fintiklis
Yeah. I mean, we are improving, like I said in every respect. This quarter there are also certain anticipation of receivables. We improved some supplier terms in anticipation of refinancing our term loan. We have also peak the component. So the guidance we give to the market that is extremely important that we have reached the cash flow positive status. It will be varying in the different quarters of this year, but overall the whole year we have guided to be free cash flow positive.
Bernie McTernan
Okay, understood. And then just last one for me. Last two quarters seems like you guys have been beating consensus on revenue and EBITDA, free cash flow positive but the stock really – just looking at the chart, it looks like it’s on the lows; anything to attribute this to?
Orestes Fintiklis
Yeah. I mean, you are absolutely right. Were a high growth player, profitable free cash flow and if you see the comps of what we’re trading at, I mean, were trading 1.7 times our net revenue, 13 times our EBITDA. You can see were growing higher than the average or in line with the average of the high growth companies, which have 9 times on average revenue multiple, 33 EBITDA. So I would attribute that to a number of reasons. The first one is the general inefficiency that you have in micro caps and small caps, right, due to the interest rate environment, which we hope that during the second part of the year we start changing.
The second thing is the misconception that Mondee is a travel play, which will slow down its growth if the market softens. I already explained that we sell discounted content and more excess capacity. So softening of the market could even be beneficial to our business. And number three; if you look at the short interest, it has increased a lot in the last few quarters presumably some people are betting on the refinancing. We have a milestone, we have a term loan that is maturing and there is some speculation there about the inability to refinance, et cetera, which we believe is a fiction.
We have communicated to the market that we are in the process of refinancing to obtain a long- term facility with better terms. And you can look at the, I mean, we will only announce the details when that is concluded. But in the meantime you can see the signals. For example, we already extended our current loan to June 2025. The extension was done very recently without having to pay any additional economics or increase the interest rate. So, there are all the signals that indicate that there are no issues at all with the capital structure. So, we hope that soon the market will start reflecting the true value of the company.
Bernie McTernan
Now that you mentioned, I think last time you were on, we were talking about the same – like a same debt issue. Was that – is this the same issue that’s been going on for this year?
Orestes Fintiklis
Correct. Correct. So basically, what happened? We had the refinancing deadline, which was extended, right. So last time when we spoke it was before extending the current loan, right?
Bernie McTernan
I got you.
Orestes Fintiklis
So now we completed already the first step, which is extending the current loan. So now we have 14 months more on the current facility. So that in the meantime, we can finalize a long- term and better facility, which we have already committed to the market that we are in discussions and advancing on that front. But there are a number of more traditional, more conservative investors that are waiting for that second milestone to be completed before investing in our company.
Bernie McTernan
Good. Orestes, let’s leave it there. Thank you so much for joining the Needham Conference, and keep in touch, and well talk soon.
Orestes Fintiklis
Thank you. Thank you. Thank you for the opportunity. Bye-bye.
Question-and-Answer Session
End of Q&A
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