Points International ( Nasdaq - PCOM ) -- Slower Deal Flow

Points International (PCOM $10.00) appears on track to report somewhat reduced growth in upcoming periods.  We have reduced our financial estimates, accordingly.  The company is the leading provider of loyalty programs for airlines, retailers, banks, and other consumer oriented companies.  Growth has been explosive over the past several years.  Further gains are likely as more companies implement the technology and additional features are introduced. 

Competition is becoming more intense.  Points has several potential deals in the pipeline.  Most of the prospects are large corporations that run their own loyalty programs.  In many cases they employ large consulting companies to help out.  Points's technology is superior.  But it's getting more difficult to dislodge the entrenched consulting companies.  Those firms provide a wide range of services beyond loyalty programs and are using discounts and bundled pricing to retain the business.

Organic growth is being sustained at a 15%-20% pace.  Existing customers are broadening their programs.  And smaller accounts continue to be added.  Growth is poised to moderate somewhat, though, due to the slowdown in landing larger accounts.  The long term outlook remains positive.  Gains are likely to be maintained in the near term but at a reduced rate.

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Points International ( Nasdaq - PCOM ) -- Gears Up

Points International (PCOM $13.00) reported excellent on target Q2 results.  Earnings advanced 233% to $.10 a share (fully taxed).  Revenues improved 11% to $36.4 million.  All of the revenue increase was provided by existing customers.  Points is the leading independent provider of loyalty program services used by airlines, hotels, car rental companies, banks, and retailers.  The company's software enables customers to manage their loyalty accounts with a variety of features, like purchasing or exchanging miles and points.  Several large new deals are in the pipeline.  Implementation work is underway.  Formal roll outs are slated for the December quarter. 

Our estimates assume only a $5 million revenue contribution from those contracts in 2012.  If they all come to fruition next year the incremental revenue boost could be in the $50 million range.  The company is actively pursuing additional partners, moreover.  It thinks about 25%-30% of the potential market has been penetrated to date.  And direct competition is incidental.  Most alternatives entail in-house computer systems.  Product enhancements are being developed to lift revenues at existing accounts.  Points International revamped its technology platform in 2011 to facilitate the creation of new features.  It also makes it easy to take ideas that are working with some customers and roll them out to the rest of the base.  A move into mobile applications promises further leverage over the long haul.  Our estimates are unchanged.

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Points International ( Nasdaq - PCOM ) -- Improving Pipeline

Points International (PCOM $12.50) reported good Q1 results.  The company is the leading provider of loyalty and rewards programs for the travel and hotel industries.  That segment generates 70% of revenues.  New markets like retailing, financial services, and gambling provide 25%.  Points also operates its own on-line exchange where consumers can swap points from different programs, i.e., Lufthansa miles for American Air miles.  That business delivers the remaining 5% of sales.  Promotional activity by airlines and hotels tends to increase in Q2 and Q4, which in turn drives additional volume the company's way.  The period just ended was typically slow due to that seasonal influence.  Points didn't start any major new programs in the quarter, either.  So comparisons were relatively muted.  Sales actually declined 2% to $28.0 million.  Non-GAAP earnings doubled to $.06 a share.

Points has more than $50 million of new annualized business in its sales pipeline.  The company has a high degree of confidence the contracts will be signed this year.  But if most are implemented late in 2012 the revenue contribution probably won't become meaningful until the year following.  We have reduced our full year sales estimate by $10 million to $150 million, which reflects the amount of volume Points expects to generate with its existing book of contracts.  We also have lowered our earnings estimate by a nickel to $.45 a share.  Sales could accelerate in 2013 as the new contracts come on line and existing accounts keep expanding.  New Internet products launched in mid 2011 could yield further leverage.  We estimate sales will hit $200 million to provide income of $.75 a share. 

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Points International ( Nasdaq - PCOM ) -- Loyalty Program Leader Expands its Pipeline

Points International (PCOM $9.25) reported excellent on target Q4 results.  Sales were at the low end of the range at $32.9 million (+22%).  Earnings were a little above our target at $.10 a share (+100%).  The company added six new partners during the year, bringing the total to 25.  Existing partners added more loyalty programs, as well.  Margins improved in Q4 because several programs achieved key thresholds, triggering bonus payments.  Points International's new Internet offering elicited growing interest but didn't generate material sales.  That effort holds substantial potential but probably will take a few years to produce big numbers.  A large number of prospective customers are in the pipeline.  Results in 2012 will depend on when those deals take effect.  For now we are maintaining our estimates at sales of $160 million (+30%) and earnings of $.50 a share (+85%).  Growth could sustained at above average rates well into the decade.

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Points International ( Nasdaq - PCOM ) -- Fourth Quarter on Track

Point International (PCOM $8.35) appears on track to report excellent on target Q4 results.  The company is based in Canada but presents its financial statements in U.S. Dollars.  We estimate revenues advanced 30%-45% to $35-$40 million, producing fully taxed income of $.10-$.15 a share (+100% to +150%).  Points is the leading provider of loyalty program services.  Major airlines and retailers subcontract with the company to operate those programs under their own names.  Each deal is structured differently, but most include volume sensitive pricing.  December quarter income typically benefits as thresholds are achieved, generating bonus payments.  Our full year estimates assume Points hit the high end of the range.  We estimate revenues climbed 36% to $130 million to provide fully taxed earnings of $.25 a share.

Margins are poised to expand in 2012.  New partners continue to be added.  Existing customers are continuing to expand the scope of their loyalty programs.  New Internet based products were rolled out last year and could yield an incremental boost.  Additional products are likely to be developed.  Points already operates its own website where individuals can swap miles and loyalty points, convert them to different programs, and jointly accumulate them for wedding gifts and other purposes.  That segment still represents just 5% of total sales.  Significant growth might be achieved if the technology is relocated onto social media sites like Facebook.  Interconnections with mobile phones and tablets could yield additional leverage.  We estimate revenues will improve 23% in 2012 to $160 million to provide a 100% income gain to $.50 a share.  Superior growth could be sustained well into the decade.

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Points International ( Nasdaq - PCOM ) -- Margin Leverage on Tap

Points International (PCOM $9.00) reported excellent on target Q3 results.  The company is the leading provider of loyalty program services.  Consumer oriented companies that issue miles and reward points hire Points to provide ancillary services like "topping off" and moving credits from one account to another.  Most partners embed a link to the company's servers on their own websites, making it look like their own operation.  Points actually performs the work and updates all the related databases.  The company also operates its own portal, "Points.com."  Consumers can trade directly with other users on a computer based exchange system to get rid of unwanted miles for a carrier they can use. 

Margins tend to increase as volume expands.  Part of that relates to typical economies of scale.  Performance also benefits from rising commission rates after quotas are achieved.  Fully taxed earnings advanced 17% in Q3 to $.07 a share.  Revenues improved 23% to $28.8 million.  Two new products were introduced in the period, impacting profitability.  Those costs are slated to fall in Q4.  Better commission rates are poised to kick in, as well.  And while the summer is usually a slow period for promotional activity, most of Points's partners ramp up those efforts in Q4.  So revenues should expand sequentially.  Earnings are likely to accelerate on the rising volume and expanding margins.

We estimate income will finish at $.25-$.30 a share (+79% to +114%) on sales of $130 million (+36%).  Next year $.50 a share represents a realistic target.  Sales could advance 23% to $160 million.  The long term outlook is bright.  Above average gains could be realized well into the decade.  Points faces little direct competition.  And the loyalty program industry is continuing to expand as new companies enter the fray and existing participants figure additional ways of printing their own money.

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Points International ( Nasdaq - PCOM ) - Just Rewards

Points International (PCOM $9.35) is the leading provider of loyalty program services for the travel and retail industries.  The company offers a family of specialized products that airlines and other types of customers embed into their own websites.  Those features give users more options with respect to their miles and reward points.  Points invented the "top up" more than a decade ago in conjunction with American Airlines, allowing travelers to purchase extra points so they'd qualify for free flights, hotel rooms, rental cars, or other services and merchandise.  Users are diverted from the main website when making those requests to Points's specialized system, where the transactions occur.  Results automatically are fed back to the airline's computer system to keep its records up to date.  Points earns a share of the extra revenue generated.  Margins usually improve as volume thresholds are achieved throughout the year, although every contract is different.  Other products include the ability to combine multiple accounts into a single stack of reward points; and a vehicle to move points from one person's account to another's, usually a relative or business partner.  Points has deals with approximately 50 companies.  A majority of revenue still is provided by the airline industry.  But large new accounts are being added on a regular basis.  Recent additions include Best Buy and Pay Pal.

Points.com is a stand alone website that allows users to manage multiple reward programs.  People can swap Delta miles for American miles, for instance.  Those transactions can be performed directly, usually at a steep discount; or on the company's trading platform, straight up with another user.  The Points.com website now represents just 5% of total revenue.  Awareness is starting to build, though, and some other Internet services the company is introducing could stimulate volume further in future periods.

The company launched a versatile rewards program for Internet retailers at the end of September.  The Incentify program sells generic points backed by the company to any online retailer that wants to establish a loyalty program.  Customers earn those points according to whatever formula the retailer wants.  Instead of be required to use the points with the same retailer customers can select from a list of partners that work with Points.com.  (For example, a customer might purchase $200 worth of running shoes from an online store, and turn the generic points earned into 200 miles on Lufthansa.)  More retailer networks and partners are being recruited, laying the foundation for a possible Christmas surge in activity.

Meantime, the core business continues to grow rapidly.  Rewards programs have expanded under all kinds of economic conditions over the past two decades.  That trend is continuing in the current malaise.  Airlines earn billions each year from the programs.  Other industries now are catching onto the benefits of printing their own money, too.  Points earns a share of the transactions it participates in.  The company is enjoying enjoys organic growth in the 20%-30% range.  New customers continue to be added.  A computer system upgrade in 2010 expanded capacity and facilitated the development of new services.  The company faces no direct competition, moreover.  While margins will be constrained somewhat by the sheer economic pressure of dealing with huge corporate customers, earnings are likely to expand faster than sales well into the future as volume builds, the company's own Internet activities gain momentum, and additional services are created.

We estimate 2011 sales will advance 31% to $125 million.  Earnings promise to accelerate in the second half of the year as volume thresholds are exceeded on most contracts, providing a boost in margins.  We estimate fully taxed earnings will climb 114% to $.30 a share for the entire year.  Next year income could rise another 67% to $.50 a share on sales of $160 million (+28%).  A stronger showing is possible if the general economy doesn't experience a recession.  In 2-3 years income could attain $1.25 a share on sales of $250 million.  Applying a P/E multiple of 20x suggests a target price of $25 a share, potential appreciation of 165% from the current quote.

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