XpresSpa Group, Inc. (XSPA) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to XpresSpa Group's First Quarter 2021 Earnings Conference call. . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Berry, Chief Financial Officer.
James Berry: Good afternoon. Thank you for joining us today and for your interest in XpresSpa Group. Before our CEO, Doug Satzman, provides an update on our business and I briefly review our first quarter 2021 financial results, I first need to advise you of the following. Comments made on today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions that involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time to time in our SEC filings, including our report on Form 10-K for the year ended December 31, 2020, as well as our earnings release and 10-Q issued this afternoon, along with other current and periodic reports that we file with the SEC.
Douglas Satzman: Thank you, James, and good afternoon, everyone. Let me begin by sharing some of our brief thoughts on where we currently stand with respect to our airport-based XpresSpa and XpresCheck businesses. Afterwards, I'd like to introduce and share some of our thoughts on our new brand, Treat, and how we intend to capitalize on what we think is a substantial opportunity in the travel health and wellness space that can transform the way people access health care through technology and personalized services as we are entering a post-COVID world. Beginning with the spa business. We're encouraged to see that the airport traffic is recovering nicely. But even with the year-over-year and sequential increases in passengers, we are still far away from 2019 industry performance. And even with a growing proportion of people being vaccinated, it is still likely to take until next year before passenger volumes reach pre-pandemic levels. We currently have 3 XpresSpa's open, two in the United -- in U.A.E., in Dubai International Airport, where we've been providing select spa services and selling various retail products, such as neck pillows and travel blankets; and one in Austin, Texas, operated by a franchisee. They are still underperforming despite the modest increase in airport traffic. We believe this is because despite the rate of vaccination rollout, there are still some passengers who are not enthusiastic at this moment in time about having such close intimate interactions with massage therapists and cosmetologists in an airport setting. We have run analysis on moderate-volume scenarios based off of passenger traffic, and none of them project an acceptable financial outcome at this point. We will continue to reevaluate each airport on a month-by-month basis, evaluating select reopenings in the future based upon customer traffic patterns and consumer confidence. Accordingly, we are having ongoing discussions with various airports to monitor passenger traffic and recovery as some continue to extend rent relief. But fundamentally, we believe that there are -- that we are in a new environment that is in need of more relevant retail and services. Companies that can anticipate evolving consumer needs, can innovate and offer new services to meet these emerging needs will be the future winners. Therefore, we're extremely excited about our developing path and to be introducing you to our new concept, which I'll detail shortly. But first, let's discuss XpresCheck.
James Berry: Thank you, Doug. As Doug said, we were very pleased to have been able to recognize revenue during the first quarter based on reassessment of the management service agreements relative to ASC 606. Specifically, we recognized a total of $8.5 million in the first quarter compared to $7.7 million in the first quarter last year. The increase in revenue was primarily due to the recognition of revenue from 8 of the 11 XpresCheck Wellness Centers that were wholly or partially opened during the quarter, while the majority of XpresSpa locations remained closed and the ability to recognize $3.2 million of 2020 deferred revenue on underlying management services agreements, MSAs, meeting the collectibility criteria during the first quarter of 2021.
Operator: . If you would like to ask a question, please e-mail ir@xpressspagroup.com. Michelle , you may now proceed with questions.
Unidentified Company Representative: Doug, the first question we have is airport traffic is rising, but your patient volumes are still basically the same as Q4. Do you think we have maxed out on average patient volumes already given the rollout of vaccines?
Douglas Satzman: Thank you, Michelle . Let me start by answering the question. It's hard to predict patient volumes, as we know. And it certainly is going to depend on the spread of new variants and not just related to vaccination rates in the U.S. So while the U.S. is one of the leaders in the -- one of the international leaders in spreading vaccine dissemination, like the U.K. and Israel and a few other countries, most of the world is still 1 to 2 years away from being vaccinated and reaching or coming close to herd immunity. It's my opinion that countries will need to continue to protect the potentially large percentage of unvaccinated people in their communities, and that will continue to lead to demand for on-site airport COVID testing.
Unidentified Company Representative: Great. Thank you, Doug. You recognized about $5.3 million in revenue for Q1 specifically during the quarter, and yet the patient volume times average revenue per patient was about $6.2 million. Can you explain the differential? Is it reasonable to assume that if we take the same metric for April and discount them by 20%, we could reduce April revenue?
Douglas Satzman: I'm going to send this question to you, James.
James Berry: Thanks, Doug. That's actually a very good question to again describe the managed services arrangement. The non-GAAP patient services revenue presented are revenues to the professional practices. And from that amount, practice expenses, including the license providers for the services are paid, and the balances is made available for express tests for current and past provided management services. For those centers that we have assessed and meet ASC 606 revenue recognition criteria, those amounts are applied to the accounts receivable that were created from that revenue recognition. For centers that we've determined have not yet qualified to recognize revenues, primarily those due to limited operating data, those payments are booked as a deposit contract liability. So the amounts are not as straightforward as discounting by 20%.
Unidentified Company Representative: Okay. Thank you, James. The next question we received is do you plan on renewing the XpresCheck leases that are ending the soonest?
Douglas Satzman: Yes. At this point, we're planning and having the conversations with landlords for our first round of lease expirations. But in each instance, it will depend on airport approval. But so far, everyone has been very supportive of the service that we've offered and believe it should continue.
Unidentified Company Representative: Great. Thank you. I got an e-mail over the weekend offering membership to Treat. Is this the only way you're announcing a new XpresSpa business group?
Douglas Satzman: No. I'm glad someone asked. Our investors were part of an inside audience that were targeted with the first communication as we are now in the preheat phase of our soft launch. By sending those e-mails, going live with 3 social media channels and putting up a landing page at treatcare.com, we are starting a multi-week phase of audience gathering so that when we launch, it isn't with a base of 0 people. Beginning in early June, we will broaden our launch with a national digital ad campaign and in-airport marketing campaign as well as the launch of our website. And later in the summer, Phase 3 of the launch will roll out with a big earned media and press push, another campaign driving app downloads and the launch of our mobile app. Soon after the app, our first on-site location is targeted to open. These phases have been planned to start audience building early in the summer as people start to plan their travel and fall travel and then stagger throughout the season as our technology pieces land. Probably a longer answer than you wanted, but that's the plan.
Unidentified Company Representative: Thanks, Doug. When do you think we will begin to see revenue from Treat? And will you be reporting it as a separate line item? How long can you run the business with no revenue?
Douglas Satzman: We think the revenue will build each -- with each phase, Phase 1 with the website launch, Phase 2 with the app launch, Phase 3 with our on-site locations. So it will build. We will be reporting it -- we will likely report it as its own segment at a certain point. And then I think the last piece is how long term we run with that revenue. Well, fortunately, XpresCheck is providing us revenue that we can show in our P&L now as well as providing cash flow, which helps support this bridge to this additional concept.
Unidentified Company Representative: Okay. Great. Thanks, Doug. When do you think you will make the final determination as to reopen the XpresSpas or not? Surely, you do not plan on evolving every location into Treat. So does CDC's new guidelines factor anything into your decision-making process?
Douglas Satzman: Yes. So any reopenings of spas will be related to customer traffic and consumer confidence. We're watching that very closely. Hard to predict where that will land. Recent CDC guidelines will open up greater confidence in domestic travel. But as I mentioned earlier, that is not where our core of our volume is coming from today, which is -- it's coming from international travelers. And I spoke earlier as to why we think COVID testing requirements will remain in place for the near future.
Unidentified Company Representative: Great. Thank you. Will XpresSpa expand and focus in other parts of the world, other than the U.S.?
Douglas Satzman: So our XpresSpa portfolio, we do operate -- we have historically operated in the Netherlands and U.A.E.. It's something that we'll continue to keep an eye on, but the market needs to recover a little bit more like it does domestically. If we're looking at XpresCheck or Treat, frankly, there's a lot of business to be captured here domestically first with a much simpler regulatory environment, but it is something that we hope over time to address. My -- part of my background when I was at Starbucks Coffee was supporting 35 countries in Europe, Middle East, Russia and Africa, so it is an environment I'm very familiar with. I ever saw one of the businesses was the travel channel, so it's something I'd love to get back to at some point with any of these brands. But right now, our focus is domestic here in the U.S.
Unidentified Company Representative: Great. Thanks, Doug. And will we see more flexible hours of operation at XpresSpa?
Douglas Satzman: I addressed this a bit earlier during my -- during this call. We are now operating 7 days a week in all of them -- all of our existing locations. We are setting the hours based on when the terminals are the busiest. I know there were some that felt we should have been opened 7 days a week many months ago. But frankly, the weekends weren't that busy in most airports. They are busier now, so we've expanded our operating hours. We continue on a site-by-site even terminal-by-terminal basis watch this and then adjust accordingly.
Unidentified Company Representative: Okay. Great. Thank you. If you believe so much in Treat, why not convert all spas to Treat?
Douglas Satzman: Well, we have to evaluate the real estate case by case. One, it needs airport approval and as anything that happens in the airports do. But frankly, there are some sites that we do have some kiosks in our system. And Treat won't fit in a kiosk as an example. XpresCheck won't fit in a kiosk. We also have some real estate that's at the head of a terminal where it's very accessible by travelers from multiple terminals. Some are at the very end, the back end of the terminal. And that may not create a good opportunity where maybe for a spa was fine. But for XpresCheck or Treat, it doesn't work. So it requires a case-by-case analysis. We're going through our portfolio now and including this in some of our early discussions with some of our airport partners, but I don't expect 100% conversion and probably wouldn't make business sense, anyway.
Unidentified Company Representative: Great. Thanks, Doug. What will you do with the rest of the real estate? How many leases expire in the near term? And what will you have to decide shortly on the go-forward path to all these locations?
Douglas Satzman: So as I mentioned before, it's going to depend on traffic rates and consumer confidence that's returning, but they're all at different places. Some airports are granting lease extensions because of COVID. Some are working to re-merchandise. So it requires a airport-by-airport almost terminal-by-terminal analysis and negotiations, and our teams are very, very focused on that right now.
Unidentified Company Representative: Great. Thanks, Doug. Does XpresSpa see the possibility for testing for FTDs?
Douglas Satzman: FTDs are on the list of potential services for Treat. I'm not sure if we'll be launching with that service. We have started with a range of convenient care services that we think will have the most demand, and we want to launch with those, and then we can add in other services to either supplement our launch services or maybe replace ones that aren't as active. FTD testing is on the board, but I can't commit yet whether that will be part of launch or maybe after, if at all.
Unidentified Company Representative: Great. Thanks, Doug. And is XpresSpa tapping into the CBD market at all?
Douglas Satzman: Yes and no. We tried it. We did a pilot with XpresSpa before COVID, and we had mixed results. We were much more optimistic. It was probably at the height of people's interest in testing and trying out CBD products. I'm not here to say whether they work or they don't. I know that they just didn't sell very well for us before. It's not on our immediate launch plan for any of our brands, and -- but it doesn't mean it couldn't appear in the future. Also, not every state allows CBD to be sold, anyway. There's even some airports that didn't support it when we did our pilot, even though the state allowed it. So I'm not convinced it's a big opportunity.
Unidentified Company Representative: Great. Thanks, Doug. And how do you think Treat will compete with airline lounges?
Douglas Satzman: That's an interesting one. I think we're going to be more viable and an interesting alternative than some of the airport lounges. Frankly, when you -- people still get to the airport typically with a lot of time. They don't want to be rushed, especially if you're someone with anxiety when you travel. We expect to see more of that as people begin to travel post COVID. But your options are you either go sit and eat and drink somewhere for a while before you get on a plane to sit and eat and drink some more. I think less people might be doing that in the future, my conjecture. But you also -- or you can go shopping at Hudson News or CHANEL. And I can only spend so much time shopping, and I think a lot of other travelers are that way. The big gap is wellness services or you sit in an airport lounge, waiting not at the gate and tucked away a little bit with a salad bar with tongs and free drinks again. So again, that's great for some people, but there's this gap in alternative opportunities. Wellness treatments and other things we'll be offering, I think, will be a very interesting alternative to airport lounges, especially if you want to go into a private room and basically run time for a various number of services we'll be offering.
Unidentified Company Representative: Okay. Great. Thanks, Doug. Are you planning on doing a reverse stock split given where the shares are currently trading?
Douglas Satzman: So just to be clear, and I think most people are aware of this, but in order to do a stock split or a reverse stock split, we would need shareholder approval. We have not determined if we will seek it for our next shareholder meeting, and the date for that has not been determined yet. So again, anything that we do that requires shareholder approval, we always get ahead of time. And this is one of those questions that require shareholder authorization.
Unidentified Company Representative: Thanks, Doug. How much are two locations -- the two locations that are being built going to cost? Where are they located?
Douglas Satzman: Well, we're in negotiations with two airports right now. Our drawings are being developed, so I can't share the price yet. Likely, the first couple costs a little more, and then you value engineers. You roll a concept out, and you see what works and what doesn't work. But I don't have cost to share yet as it's still in the negotiation phases again with the airports and getting quotes from our GCs and finalizing the designs.
Unidentified Company Representative: Great. Thanks, Doug. And then would XpresSpa be shy to start their own beverage?
Douglas Satzman: Would XpresSpa be shy to start their own beverage, what I think is being asked. I know these are being submitted in writing as would we start our own beverage. Generally, airports have restrictions on certain items. It's not easy for us to come and open and add a lot of food and beverage. There's other operators that get protected on those services. We may have a private-labeled alkaline bottled water with benefits, we'll see. But I don't intend to put a lot of resources in developing a beverage line, especially if only -- if some leases were -- or airports would be restricted from doing it based on other food operators.
Unidentified Company Representative: Okay. Great. Just -- and then is XpresSpa strictly airport? Are you trying to branch out to waterport testing?
Douglas Satzman: Waterport, I'm guessing these are seaports, cruise line terminals, ferry terminals like airports on the water. Right now, we are purely focused with our bread-and-butter, in airports. We are very experienced airport operators. It's where we have our current relationships. And frankly, airports receive many, many more customers and much more traffic than ferry terminals or even cruise line terminals. So in the early phases, we want to fish where the most fish are. But one of the important parts about the Treat concept development is the digital footprint that we're investing in. We will have additional lines of revenue that will come in for travelers, whether they're flying or maybe taking a boat or driving somewhere. But it will expand beyond literally the airports where we have these locations with the tools and services that anyone can use pretty much anywhere.
Unidentified Company Representative: And that was our last and final question, Doug. Now turning it back to you for closing remarks.
Douglas Satzman: Okay. Well, thank you very much for calling in and your continued interest in XpresSpa Group. I hope you are as excited as our management team is on continuing to pivot again and grow our business and provide more sources and more lines of revenue over this year and as we look to 2022 and 2023. Thank you very much for your time, and we'll end here.
Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.
