5 Questions with Tom Douramakos of GuestLogix (TSX:GXI)

The trajectory of Toronto’s GuestLogix (TSX:GXI), which has grown its revenue to more than $25 million in fiscal 2010, from just over $5 million in 2007, has been much like an airliner at takeoff.

In a business that can have razor thin margins, Guestlogix provides onboard store retailing technology and merchandising platform, that helps airlines and other travel operators create, manage, and control their onboard retail environments. With 116 employees, the Company is maintains sales and support facilities in the US, UK, Singapore, and South Korea. Guestlogix now serves approximately 40% of the global airline passenger traffic.

Cantech Letter talked to Tom Douramakos, President and CEO of Guestlogix.

Tell us a bit about your business. How do you make money?

We provide our OnTouch® onboard retailing technology and merchandising platform to travel operators–predominantly airlines– globally. With our offering, we enable travel operators to maximize their onboard retailing programs and best capitalize on the ancillary revenue opportunities onboard retailing provides. Our solution includes point-of-sale devices and secure transaction processing and onboard retail management software.

In terms of making money, rather than asking our clients to pay up-front fees, we generate revenue four different ways.
The first is a transaction processing on behalf of travel operators. This is a transaction fee-based pay-as-you-use model where our customers have contractual minimums. The second is distribution of merchandising content where we earn revenue based on the retail sale value. Third, we provide access for advertisers, and lastly we make money from the supply of data analytics. To date, almost 100% of our revenue is derived from transaction processing, with a small amount from merchandising and advertising.

Is your space growing? How are you positioned to benefit?

Absolutely; in particular as it relates to the airline industry, which has been our main focus to date. Ancillary revenue has become a core component of the airline industry’s growth strategy. In fact, the global airline industry generated more than US$58 billion in ancillary revenue in 2010. The major challenge now though is that airlines have already monetized all of the “low hanging fruit”, for example baggage fees and seat selection, so they are looking to establish new ancillary revenue streams. This is where onboard retailing comes into play.

Airlines’ captive audience represents a significant buying group, and that isn’t limited to basic food and beverages. It applies to destination-based products and services too. Primarily, that includes tickets for transportation and entertainment, such as train, live theater or theme park entry, as well as merchandising such as catalogue shopping, all of which airlines can sell through our platform.

GuestLogix is the only company that provides a technology platform that includes hardware, software and analytics tools that is also integrated with a selection of destination-based products and services that enable airlines to maximize their onboard retailing programs and establish new and sustainable ancillary revenue streams, be it for retailing on or even off board. We are seeing the beginning signs of airlines looking to extend their onboard retailing activities off board to areas such as the gate and lounge, and we believe there is the potential for that to expand even further to airport kiosks and mobile devices in the future.

What is the most common misconception about your company or its business?

Passengers aren’t really buying onboard. While it is a departure from what we once knew – free food and drinks onboard – the airline industry isn’t turning back, and passengers are accepting the shift. In fact, passengers would like more available for sale onboard.
Based on our research study conducted by Cossette and Ipsos on our behalf, 50% of people surveyed said that they would likely buy destination related items onboard a flight, and most agreed that an onboard service that sells destination related items would be beneficial in terms of convenience. Travelers are predominantly interested in tickets for entertainment and transportation.

We are working with a selection of our client airlines to launch various merchandising programs at different touch points, from onboard, at the gate and lounge, for items such as ground connections, theatre tickets and onboard catalogue shopping. We have numerous trial programs underway, and we have 13 programs committed to go live by the end of fiscal 2011.

What’s your financial situation like?

Since 2006, we have been in a high growth phase, winning business and deploying our solution onboard numerous major airlines worldwide. In fiscal 2010, we delivered year-over-year revenue growth of 38%, recording revenue of $25.7 million compared to $18.6 million in fiscal 2009. Our most recent results, Q1 fiscal 2011, revenue was $6.4 million, up from $6.0 million for the same period in 2010, and we delivered our ninth consecutive quarter of positive EBITDA.

We have increased our investment in the business to support our long-term growth initiatives, in particular to drive customer adoption of our merchandising platform. However, we continue to maintain strong EBITDA margins (~27% – Q1 F2011), generate cash from operations and had cash and cash equivalents including restricted cash of $10.6 million as at February 28, 2011, our last reported quarter.

We believe our merchandising platform offers strong incremental revenue growth potential over the long-term. Based on a Q1 run rate, we are processing $144 million in gross transaction value per quarter, or $576 million annually. For the 13 merchandising programs we have set to go live by year end, assuming a 1% take-up rate, in our estimation we are positioned to process an additional $287 million in gross transaction value a year.

What is your key competitive advantage?

Our competitive advantages are that we have the most innovative technology platform, the best commercial model and that content integrated with our platform that covers more than 200 destinations around the globe.

This has enabled us to create the leading solution that aligns incredibly well with the airline industry’s emphasis on increasing ancillary revenue. Our platform is the only combination of hardware, software, analytics tools and a selection of destination-based products and services designed specifically to meet the needs of travel operators worldwide. With 90% of North American airlines and 40% of airlines globally as customers already, we’ve got a dominant share of the market. In addition, our relationships are sticky, with initial contracts running on average from three to five years, and we are consistently working to further enhance our premier onboard retail technology and merchandising platform to meet our customers’ evolving onboard retailing needs to become further embedded.