SOURCE: Rewards Network

Rewards Network

February 19, 2009 08:30 ET

Rewards Network Inc. Reports 8.8% Increase in Sales for 2008 and Full Year Operating Profitability

CHICAGO, IL--(Marketwire - February 19, 2009) - Rewards Network Inc. (NASDAQ: DINE), a leading provider of marketing services and frequent dining programs to the restaurant industry, today reported its financial results for the year and fourth quarter ended December 31, 2008.

Rewards Network reported total sales of $244.9 million and net revenues of $74.2 million for 2008, an increase of 8.8% and 15.0%, respectively as compared to 2007. Rewards Network ended 2008 with 9,888 merchants, a 3.6% increase over the prior year. Operating expenses decreased in 2008 as compared to 2007, excluding the favorable impact of litigation expense adjustments. During 2008, the Company generated $32.4 million of cash from operations and also funded approximately $140 million of new dining credits. The net dining credits usage period declined to 7.5 months at the end of 2008, as compared to 9.8 months at the end of 2007 as the Company sought to increase cash flow and manage the risk profile of the dining credits portfolio. The Company ended 2008 free of debt, with $9.0 million of cash on hand and $25.0 million available under its revolving line of credit.

The following table presents financial highlights of the Company's operations for the full year and fourth quarter ended December 31, 2008 and 2007 (in millions, except per share amounts and merchant count).

                                      YTD'08   YTD'07      4Q'08    4Q'07
                                     -------- --------   -------- --------
Sales                                $  244.9 $  225.1   $   57.7 $   58.2
Net revenues                         $   74.2 $   64.5   $   17.1 $   16.9
Operating expenses                   $   67.1 $   56.4** $   17.0 $   16.5*
Net income                           $    4.8 $    7.0** $    0.3 $    0.7*
Diluted earnings per share           $   0.18 $   0.26** $   0.01 $   0.02*

Total merchants                                             9,888    9,542
Dining Credits portfolio, net of
 reserves                                                $   75.7 $   94.9
Net Dining Credits Usage Period
 (Months)                                                     7.5      9.8

* Includes the favorable impact of a pre-tax credit of $1.6 million ($0.04 per diluted share) during the fourth quarter of 2007 that reversed a portion of the reserve related to the settlement of the Bistro Executive class action litigation.

** Includes the favorable impact of a pre-tax credit of $13.2 million ($0.33 per diluted share) during 2007 that reversed a portion of the reserve related to the settlement of the Bistro Executive class action litigation.



"During 2008, in anticipation of the economic challenges facing the restaurant industry and our own liquidity needs, we reduced operating expenses where appropriate and took actions to manage the risk profile of our dining credits portfolio," said Ron Blake, CEO of Rewards Network. "We believe these actions served us well during a year marked by economic uncertainty. We increased the number of merchants in our programs by 3.6% during 2008, which contributed to an 8.8% increase in sales while lowering our overall dining credits exposure. Our focus on maximizing operating cash flow allowed us to retire our outstanding convertible debt and finish 2008 debt-free, with $9 million of cash on hand and $25 million of availability on our revolving line of credit."

Full Year 2008 Results

Sales for 2008 were 8.8% higher as compared to 2007. Net revenues for 2008 were 15.0% higher than 2007. Net revenues were positively impacted by increased sales and a $7.2 million or 19.6% decrease in member benefits expense, partially offset by a $16.6 million or 14.7% increase in cost of sales and a $0.7 million or 6.6% increase in the provision for losses. The increase in cost of sales was due to the decline in usage period of the dining credits portfolio.

Excluding the litigation reserve adjustments, operating expenses for the year ended December 31, 2008 were $2.5 million lower than the prior year due to the Company's efforts to migrate from higher cost print marketing to more effective internet marketing and reduce non-sales headcount and general operating expenses in light of the challenging economy.

Fourth Quarter 2008 Results

Sales for the fourth quarter of 2008 were 0.9% lower as compared to the fourth quarter of 2007 while total merchant count increased 3.6% between the two periods. Despite an increase in merchant count, sales were impacted by lower consumer spending in the fourth quarter of 2008 as compared to the fourth quarter of 2007.

Net revenues for the fourth quarter of 2008 were 1.2% higher than the fourth quarter of 2007. Net revenues were positively impacted by a $2.3 million or 25.8% decrease in member benefits expense, partially offset by a $1.3 million or 4.4% increase in cost of sales.

Excluding the litigation reserve adjustment in 2007, operating expenses for the fourth quarter of 2008 were $1.1 million lower than the prior year due to the Company's continued migration from print to more cost-effective internet marketing and operating expense management.

"Although sales were down slightly in the fourth quarter of 2008, we largely offset the decline in consumer spending by increasing the number of merchants in our program," said Chris Locke, CFO of Rewards Network.

Cash

During 2008, the Company generated $32.4 million of cash from operations and also funded approximately $140 million of new dining credits. The Company lowered the average amount of capital at risk by reducing the net dining credits usage period year over year from 9.8 months at the end of 2007 to 7.5 months at the end of 2008. The Company generated higher sales on a lower net dining credits portfolio.

Cash used in investing and financing activities for the year ended December 31, 2008 was $58.7 million. Included in the cash used in 2008 were the following expenditures:

--  $54.7 million to purchase the remaining $55.0 million (par) of our
    convertible subordinated debentures.
--  $4.2 million to purchase information technology tools and for the
    development of new websites.
    

"In 2008 we repurchased all of our outstanding convertible debentures and we ended the year with $9 million in cash on hand," said Locke. "Our cash reserves where enhanced by our strong cash flows as a result of the reduction in our dining credits portfolio due to the shorter usage period, increased sales and the reduction in operating expenses we implemented throughout the year."

Conclusion

"Rewards Network's unique position in the restaurant industry gives us a birds-eye perspective on developing trends and shifts in consumer dining preferences. We have well over 9,000 restaurants in our program and a sales force spread across the country that is talking with restaurant owners every day. This comprehensive view allowed us in late 2007 to anticipate a decline in consumer spending and a period of economic uncertainty in the restaurant industry. In response, we implemented more conservative dining credits purchasing policies, and aggressively managed our operating expenses," concluded Blake. "These actions served us well as the economic environment became more challenging throughout 2008. Our results for 2008, including our strong cash flows, our debt-free position, our reduction in operating expenses, and the more conservative risk profile of our dining credits portfolio, reflect the positive impact of our disciplined approach. Although our expectation is that 2009 will be a very challenging year, we believe we are positioned competitively to take advantage of current market conditions in a prudent and disciplined way."

Webcast Information

Management will host a conference call at 10:00 a.m. Eastern Time on Thursday, February 19, 2009. Participants are invited to join a live webcast of the call, which may be accessed by visiting the Investor Relations section of the Rewards Network website at http://investor.rewardsnetwork.com. The webcast is also available at www.streetevents.com and www.earnings.com. Participants should log on at least 10 minutes prior to the webcast to register and download any necessary software. If you are unable to participate during the live webcast, a replay of the call will be archived on the Company's website. Alternatively, a dial-in replay is available through March 21, 2009, by dialing 1-888-843-8996 or 1-630-652-3044, using the conference ID number, 23829139.

About Rewards Network

Rewards Network (NASDAQ: DINE), headquartered in Chicago, Illinois, operates the leading frequent dining programs in North America. Thousands of participating restaurants and other merchants benefit from the Company's extensive email, internet and print marketing efforts; member ratings, feedback and reporting; and access to capital. In conjunction with leading airline frequent flyer programs and other affinity organizations, Rewards Network provides millions of members with incentives to dine at participating restaurants, including airline miles, college savings rewards, reward program points, and Cashback Rewards(SM) savings. Additional details about Rewards Network can be found at www.rewardsnetwork.com or by calling 1-877-491-3463.

Safe Harbor Statement

Statements in this release that are not strictly historical are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectation or beliefs, and are subject to risks, trends and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied by the statements herein due to factors that include, but are not limited to, the following: (i) the impact of lower consumer spending and overall economic conditions on the restaurant industry, (ii) our inability to attract and retain merchants, (iii) our dependence upon our relationships with payment card issuers, transaction processors, presenters and aggregators, (iv) changes to payment card association rules and practices, (v) our susceptibility to restaurant credit risk and the risk that our allowance for losses related to restaurant credit risk in connection with dining credits may prove inadequate, (vi) our dependence on our relationships with airlines and other reward program partners for a significant number of members, (vii) the concentration of a significant amount of our rewards currency in one industry group, the airline industry, (viii) our inability to attract and retain active members, (ix) changes in our programs that affect the rate of rewards, (x) our inability to maintain an adequately-staffed sales force, (xi) our inability to maintain an appropriate balance between the number of members and the number of participating merchants in each market, (xii) our minimum purchase obligations and performance requirements, (xiii) network interruptions, processing interruptions or processing errors, (xiv) susceptibility to a changing regulatory environment, (xv) increased operating costs or loss of members due to privacy concerns of our program partners, payment card processors and the public, (xvi) the failure of our security measures, (xvii) the loss of key personnel, (xviii) increasing competition, and (xix) a shift toward Marketing Services Program that may cause revenues to decline. A more detailed description of the factors that, among others, should be considered in evaluating our outlook can be found in the company's annual report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission. We undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise, except as required by law.

                Rewards Network Inc. and Subsidiaries
                             -unaudited-
     (amounts in thousands, except per share data, restaurants in
    the program, average transaction amount and estimated months to
                 consume dining credits portfolio)

                                      Three Months Ended December 31,
                                ------------------------------------------
                                  2008         %        2007         %
                                ---------  ---------  ---------  ---------

Sales                              57,685     100.00% $  58,189     100.00%

      Cost of sales                30,689      53.20%    29,390      50.51%
      Provision for losses          3,181       5.51%     2,876       4.94%
      Member benefits               6,666      11.56%     8,980      15.43%
                                ---------  ---------  ---------  ---------

Net revenues                       17,149      29.73%    16,943      29.12%

Membership fees and other
 income                               294       0.51%       384       0.66%
                                ---------  ---------  ---------  ---------

         Total operating
          revenues                 17,443      30.24%    17,327      29.78%
                                ---------  ---------  ---------  ---------

Operating expenses:
      Salaries and benefits         5,812      10.08%     5,054       8.69%
      Sales commission and
       expenses                     5,078       8.80%     5,016       8.62%
      Professional fees               673       1.17%       901       1.55%
      Member and merchant
       marketing                      564       0.98%     1,494       2.57%
      General and
       administrative               4,885       8.47%     5,657       9.72%
      Litigation and related
       expenses                       (43)     -0.07%    (1,611)     -2.77%
                                ---------  ---------  ---------  ---------

      Total operating expenses     16,969      29.42%    16,511      28.37%
                                ---------  ---------  ---------  ---------

         Operating income             474       0.82%       816       1.40%

Other (expenses) income, net          (93)      0.16%      (137)      0.24%
                                ---------  ---------  ---------  ---------

         Income before income
          tax provision               381       0.66%       679       1.17%

Income tax provision                  131       0.23%        (3)     -0.01%
                                ---------  ---------  ---------  ---------

         Net income                   250       0.43%       682       1.17%
                                =========  =========  =========  =========

Earnings per share
      Basic                     $    0.01             $    0.03
      Diluted                   $    0.01             $    0.02
Weighted average number of
 common and common equivalent
 shares
      Basic                        27,226                27,052
      Diluted                      27,513                27,313




                                          Year Ended December 31,
                                ------------------------------------------
                                  2008         %        2007         %
                                ---------  ---------  ---------  ---------
                                                      (Audited)
Sales                             244,913     100.00% $ 225,107     100.00%

      Cost of sales               129,430      52.85%   112,829      50.12%
      Provision for losses         11,614       4.74%    10,896       4.84%
      Member benefits              29,660      12.11%    36,869      16.38%
                                ---------  ---------  ---------  ---------

Net revenues                       74,209      30.30%    64,513      28.66%

Membership fees and other
 income                             1,271       0.52%     1,712       0.76%
                                ---------  ---------  ---------  ---------

         Total operating
          revenues                 75,480      30.82%    66,225      29.42%
                                ---------  ---------  ---------  ---------

Operating expenses:
      Salaries and benefits        22,090       9.02%    20,393       9.06%
      Sales commission and
       expenses                    19,862       8.11%    20,557       9.13%
      Professional fees             3,022       1.23%     2,618       1.16%
      Member and merchant
       marketing                    3,567       1.46%     6,919       3.07%
      General and
       administrative              18,605       7.60%    19,121       8.49%
      Litigation and related
       expenses                       (43)     -0.02%   (13,242)     -5.88%
                                ---------  ---------  ---------  ---------

      Total operating expenses     67,103      27.40%    56,366      25.04%
                                ---------  ---------  ---------  ---------

         Operating income           8,377       3.42%     9,859       4.38%

Other (expenses) income, net         (802)      0.33%       360      -0.16%
                                ---------  ---------  ---------  ---------

         Income before income
          tax provision             7,575       3.09%    10,219       4.54%

Income tax provision                2,766       1.13%     3,254       1.45%
                                ---------  ---------  ---------  ---------

         Net income                 4,809       1.96%     6,965       3.09%
                                =========  =========  =========  =========

Earnings per share
      Basic                     $    0.18             $    0.26
      Diluted                   $    0.18             $    0.26
Weighted average number of
 common and common equivalent
 shares
      Basic                        27,175                26,990
      Diluted                      27,475                27,163






                Rewards Network Inc. and Subsidiaries
                            -unaudited-
      (amounts in thousands, except per share data, restaurants
  in the program, average transaction amount and estimated months to
                 consume dining credits portfolio)


                     Three months ended            Three months ended
                      December 31, 2008             December 31, 2007
                ----------------------------  ----------------------------
                Marketing Marketing           Marketing Marketing
                Credits   Services            Credits   Services
                Program   Program     Total   Program   Program     Total
                --------  --------  --------  --------  --------  --------

Number of
 qualified
 transactions      1,504       801     2,305     1,433       749     2,182
Average
 transaction
 amount         $  44.33  $  46.80  $  45.19  $  48.18  $  47.17  $  47.84

Qualified
 transaction
 amount         $ 66,673  $ 37,485  $104,158  $ 69,046  $ 35,330  $104,376
Sales yield         77.7%     15.7%     55.4%     75.5%     17.1%     55.8%
Sales           $ 51,795  $  5,890  $ 57,685  $ 52,152  $  6,037  $ 58,189

Cost of dining
 credits        $ 30,411         -  $ 30,411  $ 29,002         -  $ 29,002
Processing fees $    183  $     95  $    278  $    243  $    145  $    388
                --------  --------  --------  --------  --------  --------
Total cost of
 sales          $ 30,594  $     95  $ 30,689  $ 29,245  $    145  $ 29,390
                --------  --------  --------  --------  --------  --------

Provision for
 losses         $  3,181         -  $  3,181  $  2,876         -  $  2,876

Member benefits $  4,317  $  2,349  $  6,666  $  6,157  $  2,823  $  8,980

                --------  --------  --------  --------  --------  --------
Net revenues    $ 13,703  $  3,446  $ 17,149  $ 13,874  $  3,069  $ 16,943
                ========  ========  ========  ========  ========  ========



                         Year ended                    Year ended
                      December 31, 2008             December 31, 2007
                ----------------------------  ----------------------------
                Marketing Marketing           Marketing Marketing
                Credits   Services            Credits   Services
                Program   Program     Total   Program   Program     Total
                --------  --------  --------  --------  --------  --------

Number of
 qualified
 transactions      6,419     3,178     9,597     5,704     2,900     8,604
Average
 transaction
 amount         $  45.18  $  46.32  $  45.55  $  47.66  $  47.99  $  47.77

Qualified
 transaction
 amount         $289,979  $147,192  $437,171  $271,879  $139,172  $411,051
Sales yield         76.3%     16.1%     56.0%     74.0%     17.2%     54.8%
Sales           $221,155  $ 23,758  $244,913  $201,133  $ 23,974  $225,107

Cost of dining
 credits        $128,271         -  $128,271  $111,617         -  $111,617
Processing fees $    750  $    409  $  1,159  $    794  $    418  $  1,212
                --------  --------  --------  --------  --------  --------
Total cost of
 sales          $129,021  $    409  $129,430  $112,411  $    418  $112,829
                --------  --------  --------  --------  --------  --------

Provision for
 losses         $ 11,614         -  $ 11,614  $ 10,896         -  $ 10,896

Member benefits $ 20,457  $  9,203  $ 29,660  $ 24,695  $ 12,174  $ 36,869

                --------  --------  --------  --------  --------  --------
Net revenues    $ 60,063  $ 14,146  $ 74,209  $ 53,131  $ 11,382  $ 64,513
                ========  ========  ========  ========  ========  ========





                Rewards Network Inc. and Subsidiaries
                            -unaudited-
      (amounts in thousands, except per share data, restaurants
  in the program, average transaction amount and estimated months to
                 consume dining credits portfolio)



Definitions:

Qualified transaction amounts: Represents the total dollar value of all
                               member dining transactions at participating
                               merchants when a benefit is offered.
                               Qualified transaction amounts are divided
                               by the number of qualified transactions to
                               arrive at the average transaction amount.

Sales yield:                   Represents the percentage of qualified
                               transaction amounts that Rewards Network
                               reports as revenue. The percentage is based
                               on each agreement between the merchant and
                               Rewards Network.

Cost of dining credits:        Represents the amount of dining credits, at
                               cost, redeemed by members when transacting
                               at participating merchants when a benefit
                               is offered. Under the Company's Marketing
                               Services Program, no dining credits are
                               purchased by Rewards Network.

Provision for losses:          Represents the current period expense
                               necessary to maintain an appropriate reserve
                               against the Company's dining credits
                               portfolio. No provision applies to the
                               Marketing Services Program, as the Company
                               does not purchase dining credits under that
                               program.

Total member benefits:         Represents the dollar value of benefits paid
                               to members in Cashback Rewards(SM) savings,
                               airline miles, or other benefit currencies,
                               for dining at participating merchants.






Selected Balance Sheet and Cash Flow
 Information                                    December 31,  December 31,
                                                    2008          2007
                                                ------------  ------------
                                                               (Audited)
Cash and cash equivalents                       $      9,008  $     35,517
Dining credits                                  $     95,727  $    116,137
Allowance for doubtful dining credits accounts  $    (20,064) $    (21,257)
Goodwill                                        $      8,117  $      8,117
Total assets                                    $    123,816  $    176,544

Accounts payable - dining credits               $      5,081  $      7,080
Litigation and related accruals (short and
 long-term)                                     $      3,164  $      6,110
Convertible subordinated debentures             $          0  $     55,000
Stockholders' equity                            $     99,319  $     92,842

                                                        Year Ended
                                                        December 31,
                                                --------------------------
                                                    2008          2007
                                                ------------  ------------
Net cash provided by (used in):                                  (Audited)
         Operations                             $     32,406  $    (27,611)
         Investing                              $     (4,186) $     24,434
         Financing                              $    (54,546) $    (13,874)







                Rewards Network Inc. and Subsidiaries
                            -unaudited-
      (amounts in thousands, except per share data, restaurants
  in the program, average transaction amount and estimated months to
                 consume dining credits portfolio)


                     ---------  ---------  ---------  ---------  ---------
                         Q4         Q3         Q2         Q1         Q4
                        2008       2008       2008       2008       2007
                     ---------  ---------  ---------  ---------  ---------
Sales Statistic
 Trends:
Marketing Credits
 Program sales       $  51,795  $  56,402  $  59,723  $  53,235  $  52,152
Marketing Services
 Program sales           5,890      6,040      6,000      5,828      6,037
                     ---------  ---------  ---------  ---------  ---------
Total sales          $  57,685  $  62,442  $  65,723  $  59,063  $  58,189
Sequential
 Percentage Change
Marketing Credits
 Program sales            -8.2%      -5.6%      12.2%       2.1%       1.7%
Marketing Services
 Program sales            -2.5%       0.7%       3.0%      -3.5%       2.1%
Total sales               -7.6%      -5.0%      11.3%       1.5%       1.8%

Merchant Count
 Trends (period
 ended):
Marketing Credits
 Program merchants       6,293      6,449      6,646      6,644      6,488
Marketing Services
 Program merchants       3,595      3,306      3,123      2,942      3,054
                     ---------  ---------  ---------  ---------  ---------
Total merchants          9,888      9,755      9,769      9,586      9,542
Sequential
 Percentage Change
Marketing Credits
 Program merchants        -2.4%      -3.0%       0.0%       2.4%       4.8%
Marketing Services
 Program merchants         8.7%       5.9%       6.2%      -3.7%       0.3%
Total merchants            1.4%      -0.1%       1.9%       0.5%       3.3%

Qualified
 Transaction
 Amounts Trends:
Marketing Credits
 Program             $  66,673  $  73,780  $  78,039  $  71,487  $  69,046
Marketing Services
 Program             $  37,485     37,574     36,702     35,431     35,330
                     ---------  ---------  ---------  ---------  ---------
Total qualified
 transaction
 amounts             $ 104,158  $ 111,354  $ 114,741  $ 106,918  $ 104,376
Sequential
 Percentage Change
Marketing Credits
 Program                  -9.6%      -5.5%       9.2%       3.5%       1.9%
Marketing Services
 Program                  -0.2%       2.4%       3.6%       0.3%       2.9%
Total qualified
 transaction amounts      -6.5%      -3.0%       7.3%       2.4%       2.2%

Sales Yield Trends:
Marketing Credits
 Program sales yield      77.7%      76.4%      76.5%      74.5%      75.5%
Marketing Services
 Program sales yield      15.7%      16.1%      16.3%      16.5%      17.1%
Total sales yield         55.4%      56.1%      57.3%      55.2%      55.8%

Member Activity Trends:
Member accounts
 active last 12
 months                  3,146      3,130      3,103      3,057      3,007
Number of qualified
 transactions during
 quarter                 2,305      2,486      2,509      2,297      2,182

Cost of Dining
 Credits Trends:
Cost of dining
 credits             $  30,411  $  32,994  $  34,528  $  30,338  $  29,002
Cost as % of
 Marketing Credits
 Program sales            58.7%      58.5%      57.8%      57.0%      55.6%

Dining Credits
 Portfolio and
 Allowance Trends:
Ending gross dining
 credits portfolio   $  95,727  $ 103,265  $ 107,815  $ 113,831  $ 116,137
Ending net dining
 credits portfolio   $  75,663  $  82,389  $  87,547  $  94,750  $  94,880
Net write-offs -
 gross write-offs
 less recoveries     $   3,563  $   2,106  $   2,681  $   4,743  $   1,631
Ending allowance for
 dining credits
 losses              $  20,064  $  20,876  $  20,268  $  19,081  $  21,257
Allowance as % of
 gross dining
 credits                  21.0%      20.2%      18.8%      16.8%      18.3%
Estimated months to
 consume gross
 dining credits *          9.4        9.4        9.4       11.3       12.0
Estimated months to
 consume net dining
 credits *                 7.5        7.5        7.6        9.4        9.8

* Calculated as Ending Dining Credits Portfolio / (Quarterly Cost of Dining
Credits / 3)


Contact Information

  • CONTACT:
    Christopher Locke
    Chief Financial Officer
    Rewards Network Inc.
    (312) 521-6741