Despegar.com Announces 2Q20 Financial Results

Delivered Cost Reduction Targets

Successful Cash Preservation Strategy – New Financing in August

Positive Improving Trend in Bookings since April Lows

BRITISH VIRGIN ISLANDS–(BUSINESS WIRE)–Despegar.com, Corp. (NYSE: DESP), (“Despegar” or the “Company”) a leading online travel company in Latin America, today announced unaudited results for the three-months ended June 30, 2020 (2Q20). Financial results are expressed in U.S. dollars and are presented in accordance with U.S. generally accepted accounting principles.

Second Quarter 2020 Key Financial and Operating Highlights

(For definitions, see page 15)

• Results reflect global travel disruption brought about by the COVID-19 pandemic – restrictions more severe in Latin America
• Gross bookings on an FX neutral basis declined 94% year-over-year (YoY) and as reported declined 96% YoY to $48.9 million
• Revenues as reported were negative $9.7 million, which include the impact of cancellations due to COVID-19. Excluding this, as reported revenues would have declined 96% to $4.2 million
• Transactions and Room Nights down 92% and 91% YoY, respectively
• Excluding Extraordinary Charges, Adjusted EBITDA loss was $32.0 million. Reported Adjusted EBITDA loss was $65.8 and $7.3 million in 2Q20 and 2Q19, respectively
• Non-recurring charges that impact Net Income were $35.6 million in 2Q20, of which $27.4 million are non-cash and $7.2 million reflect severance charges as well as $1.1 million in M&A expenses & professional charges. Non-cash charges consist of: i) provisions for customer refunds, ii) impairment charges, and iii) provisions for bad debt associated with Chapter 11 proceedings of several Latin American airlines, as well as Judicial Recovery Proceedings of Avianca Brasil
• Structural Costs declined 32% YoY and 23% quarter-over-quarter (QoQ) reflecting measures implemented during 2Q20
  • Exceeded run-rate goal for 2Q20 Structural Costs by 3%, achieving Structural Costs of $33.1 million and remain on track to meet goal of $28 million in Structural Costs for 3Q20
• Operating cash flow was $20.0 million in 2Q20, up from $9.5 million in 2Q19
• Solid balance sheet – Unrestricted cash and cash equivalents of $224 million at quarter end, essentially flat when compared with March 31, 2020. Secured $40 million 1-year term committed credit facility
• Best Day acquisition terms renegotiated and on track to close in second half 2020

Subsequent Events

• Financing – On August 20, 2020 the Company entered into two financing transactions, for a total of $200 million with the following key terms: i) with L Catterton, issuance and sale of preferred stock plus warrants for an aggregate purchase price of $150 million, ii) with Waha Capital, issuance and sale of series B preferred shares convertible into ordinary shares for an aggregate purchase price of $50 million. The Company intends to use the proceeds from these transactions for general corporate purposes, including potential acquisitions.
• Koin – On August 20, 2020, Despegar acquired an 84% equity stake in Koin, a proven Brazilian online payment platform. The acquisition of Koin will enhance customer financing options provided by Despegar. The Company has been offering the Koin online boleto parcelado solution to its customers in Brazil since early 2019. The acquisition was settled through the capitalization of Despegar’s receivables for a total of R$ 20 million (approximately $4 million).

Message from CEO

Commenting on the Company’s performance, Damian Scokin, CEO stated, “This past quarter, we were impacted not only by the natural fall off in travel demand but also by the travel restrictions imposed by the different governments in the region which, in some countries, were rather severe. Encouragingly, we have seen a positive trend in bookings both in June and July that has continued during the first two weeks of August.

With respect to the variables that are within our control, we have delivered against the objectives we had previously disclosed, including; i) reducing our cost structure and achieving a 32% reduction in our structural costs on a year over year basis, surpassing the targets outlined in the first quarter and taking this opportunity to become an even leaner organization going forward, ii) taking care of our customers by adding flexibility to our refund policy to those bookings impacted by the pandemic, iii) strengthening our balance sheet with new financings including a $40 million revolving facility and subsequent to quarter-end raising an additional $200 million via two private placement transactions, iv) executing against our M&A strategy. We renegotiated the terms of the Best Day acquisition which includes the deferral of the payment of the purchase price for 36 months. Additionally, the acquisition of Koin expands our technological platform through the addition of a payment solution serving the attractive Brazilian market.

While the outlook remains uncertain, we have taken appropriate action to mitigate the effects of the pandemic while continuing to protect our business and laying the foundation for an even stronger competitive position when travel once again resumes. I have been impressed and inspired by how the Despegar team has come together and how our employees responded to this crisis. I would like to thank all of our stakeholders, employees and investors for their support.”

Business Update on COVID-19

Governmental Flight Restrictions

The COVID-19 virus outbreak has caused a disruption both in the aviation and in the accommodation industries resulting in drastic reductions in passenger traffic and hotel bookings. Several governments in LatAm implemented severe measures to contain the spread, including the closing of borders and prohibition of travel, domestic lockdowns and quarantine measures. Although LatAm governments were quick to shut down, the pandemic took longer to spread in the region, thus the travel industry is taking longer to recover.

In Brazil, while flights have not been restrained for local residents throughout 2Q20, accommodations have been limited in accordance with the regulation of each Brazilian state. Mexico’s commercial aviation remained open throughout the period, but hotels had to close both in April and in May. In Argentina, both hotels and flights remained unavailable during the quarter, with restrictions in place to-date. In Colombia, international flights are expected to resume on September 1, 2020 while domestic flights were allowed to resume on July 1, 2020 subject to requests for approval by local municipalities where the airports are located. Given the complexity to date domestic flights have not resumed. In Peru, domestic flights resumed on July 14 ,2020 to be interrupted again one month later, while international air travel is expected to restart on September 1, 2020.

Impact of COVID-19 on Travel Trends

As expected, the minimum levels in new travel bookings observed in March continued throughout the second quarter. The Company’s as reported gross bookings were down over 96% in the quarter reflecting the restrictions to travel imposed by the different governments in the region due to COVID-19 and the natural fall off in travel demand due to the pandemic and the reduction in air capacity.

Throughout the months of June and July, Despegar’s transactions and gross bookings were higher than the low levels of previous months. This trend has continued throughout the first two weeks of August.

Cost Control Initiatives

The Company outperformed on its Cost Savings Program, achieving a $33.1 million run-rate for Structural Costs, 32% lower on a YoY basis and in line with the previously announced goal of $34 million for the quarter (excluding one-time items such as restructuring costs and other Extraordinary Charges and assuming a zero revenue environment). Included in this cost saving, were sequential declines of 25% in total payroll and 19% in non-payroll expenses.

Despegar is committed to significantly streamline operations and remains on track to meet its objective of achieving its target of a $28 million run rate for Structural Costs as defined above for 3Q20. More details are discussed further on in this press release.

Solid Financial Position:

The Company’s balance sheet remains solid with unrestricted cash and cash equivalents of $224 million at quarter end, essentially flat when compared with March 31, 2020.

• Additionally, on June 23, 2020, the Company secured a $40 million committed revolving credit facility with a 1-year term. To date the Company has not drawn down on this credit facility.
• As disclosed on June 11, 2020, Despegar amended its agreement to acquire Best Day in Mexico, including changes to valuation and timing of payments as well as minimizing or eliminating near-term cash outlays associated with the purchase price, non scheduled for 36 months following the closing date.
• Aggregate Net Operational Short-term Obligations (comprised of travel accounts payable plus related party payables and accounts payable and accrued expenses, minus trade accounts receivable net of credit expected loss and related party receivables) were $118.4 million as of June 30, 2020, compared to Aggregate Net Operational Short-Term Obligations of $52.9 million as of March 31, 2020.
• Subsequent to quarter end, Despegar obtained a total of $200 million through two financing transactions, i) the private placement of preferred stock plus warrants, and ii) the private placement of series B preferred shares convertible into ordinary shares.

Non-cash Impact of Chapter 11 Proceedings of Avianca Holdings, Aeromexico and LATAM Airlines and Update on Judicial Recovery Proceedings of Avianca Brasil

In line with the prudence principle of accounting, during 2Q20, Despegar made provisions for bad debt charges in the amount of $7.3 million in connection with the Chapter 11 proceedings entered into by Avianca Holdings, Aeromexico and LATAM Airlines during the quarter. These amounts include both receivables of uncollected incentives and refunds arising from flight cancelations in connection with COVID-19. While Despegar is provisioning these amounts as bad debt charges, it remains in proactive conversations with these airlines to collect funds owed.

In connection with the Judicial Recovery Proceeding (Recuperacao Judicial) for amounts owed by Avianca Brasil initiated in December 2018, the Company has taken a charge of $4.4 million in 2Q20, which represents the total amount owed as it has been unable to enforce collection of the guaranteed amounts over the past year. However, the Company continues to pursue legal actions to recover the disputed amounts from the guarantor. As of June 30, 2020, Despegar has eliminated its exposure to Avianca Brasil.

Impairment

During 2Q20, following accounting guidance due to the extraordinary Covid-19 related circumstances, Despegar recorded:

• an impairment charge of $0.3 million due to the prolonged deterioration of the Company’s long-lived assets, and
• a $1.1 million adjustment to the retail client portfolio from Viajes Falabella, due to the extended closure of the offline stores.

Overview of Second Quarter 2020 Results

Second quarter 2020 results include three-months of operations from Viajes Falabella in Chile, Argentina, Colombia and Peru. By comparison, 2Q19 results include only one month of operations of Viajes Falabella operations in Chile, Peru and Argentina. When discussing Viajes Falabella’s contribution to this quarter’s performance, only the net difference between 2Q20 and 2Q19 figures is considered. This consideration applies throughout this release.

Transactions declined 92% YoY to $0.2 million in 2Q20, while FX neutral gross bookings declined 94%. As reported gross bookings decreased 96% YoY to $48.9 million in 2Q20 reflecting travel restrictions across the region to contain the spread of COVID-19 and its corresponding impact on demand.

The average selling price (“ASP”) in 2Q20 decreased 33% YoY on an FX neutral basis and 48% as reported to $236 per transaction. On an as reported basis, the decrease was largely driven by: i) the effects of the pandemic on the product mix with a significant shift towards domestic products, and ii) the depreciation of the currencies across the region.

Geographical Breakdown

During 2Q20, Brazil, Despegar´s largest market, accounting for 66% of total orders, reported an 86% YoY decrease in transactions reflecting travel limitations due to the reduction in air routes along with restrictions implemented by several Brazilian states. Gross bookings decreased 95% YoY driven by the abovementioned industry contraction, a 37% depreciation of the Brazilian Real and an almost complete shift to domestic travel. These factors led to YoY decreases of 62% in as reported ASPs and 48% on an FX neutral basis. On an FX neutral basis, gross bookings decreased 93%.

In Argentina, transactions and gross bookings decreased 99% and 98%, respectively due to the COVID-19 related lockdown imposed by the government, which restricts all commercial air travel until September 1, 2020. On an FX neutral basis, gross bookings declined YoY by 97% and ASPs increased 111%.

Across the Rest of Latin America, Despegar reported decreases of 94% in transactions and 96% in gross bookings. While the Mexican government has not established travel bans to-date, other countries in the region have imposed restrictions on domestic and/or international travel. ASPs decreased 29% year-over-year to $317. On an FX neutral basis, gross bookings decreased 95%, while ASPs decreased 18%.

Revenue

As reported revenues, inverted to a negative $9.7 million in 2Q20, compared to $114.1 million in 2Q19, reflecting the effect of COVID-19 on travel demand and extraordinary cancellations that resulted in: i) customer refunds that took place throughout 2Q20, ii) provisioning of refunds in 2Q20 for the months of July, August and September, and iii) provisioning of new refunds due to the relaxation of the Company’s refund policy. Excluding the extraordinary cancellations and related provisions due to COVID-19, revenues would have decreased 96% to $4.2 million, in line with the reduction in transactions and gross bookings.

These effects were partially offset by the net contribution of two months of Viajes Falabella. Revenue margin, excluding the above-mentioned extraordinary cancellations decreased 171 basis points YoY, to 8.5% in the quarter.

Cost of Revenue and Gross Profit / (Loss)

Cost of revenue, which mainly consists of credit card processing fees, bank fees related to customer financing installment plans offered and fulfillment center expenses, decreased 66% YoY to $13.8 million in 2Q20 from $40.3 million in 2Q19.

The absolute year-on-year decrease in cost of revenue was primarily driven by a reduction in variable costs, including cost of installments and credit card processing fees in line with the 92% YoY decline in transactions. Lower fulfillment center expenses, following the outsourcing of the call center operations as of 1Q20 and reduced fraud and errors also contributed to this decline.

In 2Q20, Despegar reported a gross loss of $23.5 million compared with gross profit of $73.7 million in 2Q19. Excluding the impact from customers’ extraordinary cancellations due to COVID-19 and severance in connection with the outsourcing of the call center operations, the Company would have reported a comparable gross loss of $7.9 million in 2Q20.

Operating Expenses

Operating Expenses declined 43% YoY to $51.0 million in 2Q20, reflecting the effort to reduce Structural Costs together with Despegar´s overall leaner cost structure.

Excluding the Extraordinary Charges described below in both 2Q20 and 2Q19 and the net increase in Viajes Falabella’s expenses due to the inclusion of three months of the four subsidiaries in 2Q20, total operating expenses decreased 69% YoY to $24.2 million in 2Q20. This reflects a combination of cost savings implemented last year and in early 2020, as well as mitigation measures introduced in 1Q20 in connection with Covid-19 which continued during 2Q20.

Despegar achieved a 32% YoY reduction in Structural Costs reaching a $33.1 million run-rate in 2Q20, 3% better than its previously announced goal of $34 million run-rate for the quarter. This included sequential reductions of 25% in total payroll and 19% in non-payroll expenses.

The Company is committed to significantly streamlining operations and remains on track to meet its target $28 million run-rate for Structural Costs for 3Q20.

Selling and marketing (S&M) expenses declined 86% YoY and would have decreased 97% YoY to $1.2 million, when excluding Viajes Falabella and severance in connection with the cost savings program implemented in response to COVID-19. Note that the latter comparison also excludes extraordinary costs in 2Q19 associated with the Company’s rebranding campaign. This decrease is mostly due to the elimination of direct marketing spend since the COVID-19 outbreak in LatAm, with only a small portion of the structural marketing costs remaining. Net operational costs from Viajes Falabella stores and telesales operations added $1.6 million to S&M expenses in 2Q20.

General and administrative (G&A) expense increased 15% YoY as reported and would have declined 59% YoY to $8.2 million, excluding the following non-comparable items in both quarters:

• $13.5 million in extraordinary charges in 2Q20 as follows:
  • $11.7 million in non-cash provisions for bad debt in connection with the bankruptcies of four airlines,
  • $1.1 million in connection with M&A expenses and professional charges;
  • $0.5 million in accelerated amortization of Viajes Falabella’s entire non-core client portfolio, and
  • $0.4 million in severance charges in connection with the cost savings program implemented following the COVID-19 outbreak.
• Net $1.7 million in G&A expenses at Viajes Falabella in 2Q20.
• $0.4 million in charges during 2Q19 associated with the provisions for bad debt resulting from Avianca Brasil’s cessation of operations.

Technology and product development expenses increased 2% YoY as reported and would have decreased 16% when excluding $1.0 million in connection with Viajes Falabella’s operations and $2.2 million associated with extraordinary severance charges.

Financial Income/Expenses

In the second quarter of 2020, the Company reported a net financial gain of $9.4 million compared to a net financial expense of $1.7 million in 2Q19. In 2Q20, Despegar reported foreign exchange gains and lower credit card factoring expenses. These were partially offset by a decrease in interest income as a result of lower amounts invested.

Income Taxes

The Company reported an income tax gain of $8.0 million in 2Q20, compared to $1.5 million in 2Q19. The effective tax rate in 2Q20 was 12.32%, compared to 8.26% in 2Q19.

The variation in the effective rate is driven by the combination of geographical mix of profits and losses due to COVID-19 and deferred tax assets valuation gains in 2Q19.

Despegar’s effective tax rate is based on forecasted annual results which may fluctuate throughout the rest of the year, particularly due to the uncertainty in the Company’s annual forecasts resulting from the impact of COVID-19 on the Company’s operating results.

Adjusted EBITDA & Margin

Contacts

IR Contact

Natalia Nirenberg

Investor Relations

Phone: (+54911) 26684490

E-mail: [email protected]

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